As we slowly climb out of our year in the bunker and get back to work there are a lot of reasons to be hopeful. Hospitalizations are down, vaccinations are up, businesses are open. We need this positive energy. Some of it seems a little exuberant (the stock market for instance, or the numerous offerings of great opportunities to buy empty office building at 4.5% cap rates) but it is a sign to all of us that no matter what Fauci says, the worst may in fact be behind us. No offense to Dr. Fauci, but I am sure most of us would be very happy if he became irrelevant again.
Lenders, business owners, and borrowers across all platforms are feeling a lot more relaxed. Values are quickly climbing back to ‘almost’ pre-COVID levels and due to excess funds chasing deals and historically low interest rates, some are significantly above. Loan portfolios look promisingly stable and if transactions across many industries are any indication, discounts are not at all dramatic on most traded assets.
Are we forgetting anything?
In commercial real estate, I suggest that many buyers and lenders across many product classes are forgetting to factor in liquidity. Both current well as needed liquidity until occupancy or revenue returns to adequate levels to not only return the enterprise to profitability, but to ensure reserves are adequate to meet future needs. In May of last year we began offering runway capital to businesses that needed that extra cushion.
As of now, lenders are surprised and relieved at how well they’ve survived — and who would blame them? The tsunami of defaults seems to have very narrowly missed them. Most borrowers and business owners can’t believe their luck. Many still have a building, business, restaurant or hotel.
Tell that to the unemployed, the underemployed, the family restaurants and businesses that closed after generations in business. The small businesses, restaurants and the many independent hotel owners (contrary to popular belief, not 1 percenters, but families who worked 12–16 hour days, 7 days a week and now have nothing to show for it, except for a lease obligation on a business that can’t be saved).
So where is the problem?
Many are not paying enough attention to liquidity. Sure, the value may be there (based on what investors seem to be paying) but can the cash flow support the operation of the business until the enterprise achieves break-even? Does it have the war chest necessary to ensure property and equipment is maintained? Do the mom and pop owners of rental properties have the cash flow to support expenses and mortgage payments without losing their pension? (more than 50% of rental properties are owned by individuals — not large institutional investors with war chests of cash. unfortunately this fact is lost on bureaucrats who believe that these small investors can easily shoulder the burden of the rest).
Although we need to celebrate the positive news, it is still early to jump for joy. Lenders, business owners and borrowers all need to be honest about cash needs. Your borrowers may need additional assistance, and now is the time to give it — or ask for it. If you wait until you are completely out of money, it may be much too late to save you, the loan, the business, your employees.
Liquidity is a key source of financial risk. Liquidity refers to liquid assets (cash) or how quickly assets can be converted to cash. This is in addition to credit, financing and stock sales. Without liquidity, the firm will fail even though it appears solvent (more assets then debt and other liabilities). If a business doesn’t have adequate liquidity, can it get it (financing, lines of credit, securitization)? Macerich didn’t take any chances. Macerich Dilutes Shareholders to Strengthen Balance Sheet | The Motley Fool
Although there is no single measure of liquidity risk, the analysis usually begins with a review of the daily cash needs (inflows vs. outflows), then assessing access to savings, funding sources, guarantors, and their willingness to fund more dollars, if necessary.
Longer term, you should review maturities of debt and other obligations to assess if there is a need to raise additional liquidity to cover those events before they become due.
What are your thoughts?
Bert Haboucha, CRE | Atlas Capital Advisors, Los Angeles, CA