How do you benchmark and compare DSCR sensitivity across different CRE portfolios and strategies?

DSCR sensitivity measures how alterations in your Net Operating Income (NOI) or debt service affect your Debt Service Coverage Ratio (DSCR). For instance, if your NOI declines by 10% or your debt service increases by 10%, it calculates the resulting change in your DSCR. This sensitivity analysis is a valuable tool for evaluating how market fluctuations, interest rate shifts, or operational challenges may impact your loan performance and cash flow. Additionally, it enables you to make informed comparisons between various loan options and scenarios.

To perform a DSCR sensitivity analysis, you'll need NOI, debt service, and DSCR. Then, you can apply a +/- percentage change to either your NOI or debt service to observe how it impacts your DSCR. If your NOI stands at $10,000, debt service at $9,000, you have a DSCR of 1.11. Often expressed as 1.11x. There are formulas to calculate DSCR sensitivity to NOI and debt service: 1. DSCR sensitivity to NOI = DSCR / (1 - (NOI / Debt Service)) 2. DSCR sensitivity to debt service = DSCR / (1 + (Debt Service / NOI)) These formulas provide a structured way to quantify the sensitivity of your DSCR to changes in NOI and debt service, aiding in better financial planning and risk assessment.

Choose a stress-test scenario(s) that are relevant to the portfolio/strategy and then run those scenarios on each portfolio. This will allow you to compare the performance of each portfolio and strategy under the same set of conditions. The stresses on the asset could be changes in interest rates, changes in economic vacancy, mix of tenants (concentration), economic downturns, lease durations, cap rate changes, etc. Then, analyze the results of the stress-test scenarios to identify which portfolios and strategies are most sensitive to changes in DSCR.

Recent events have once again demonstrated the timeless value of diversification – it remains the only "free lunch" in investing. Regardless of the specific circumstances, diversification consistently proves its worth. By diversifying your tenant base, spreading investments across various geographical locations, and even diversifying your pool of lenders, you can positively impact your DSCR sensitivity and create a more resilient investment portfolio.

Today's chopping interest rate environment have made sizing loans more challenging. DSCR has become the limiting constraint on the vast majority of transactions. We work with our clients throughout the process to evaluate how potential loan proceeds might change as a result of the movement in the market. Another important factor when choosing a lender is how quickly can they rate lock (full rate or index lock)? That will mitigate most of the market risk during the underwriting process as you proceed towards closing.

Here are a few things to keep in mind with DSCR: Different lenders and loan products have different DSCR requirements. They might require a minimum DSCR of 1.2 or higher, depending on the type of loan and risk profile. Lenders often use DSCR to evaluate loan applications, ensuring that the property can generate enough income to repay the loan. DSCR sensitivity analysis helps assess how changes in income or debt payments may impact the ability to service the debt. Investors should always runs stress tests on their deals. For real estate investors, DSCR is a valuable tool for evaluating the profitability and risk of an investment. It helps assess if the property will generate enough income to cover financing costs.