The peer estate risk rating
The Peer Estate rating is an easy way for you to compare one transaction to another. It uses a rating, from A to E, that measures the relative risk of our projects. You should expect to receive a greater return from an investment with higher risk rating.
We do not use this rating to decide whether or not to approve a transaction. There is significantly more that goes into our risk analysis and approval process than a simple deal categorisation.
What goes into our rating system
When comparing one transaction to another; these are some of the key items to consider:
A first mortgage (senior debt) loan is generally less risky than a second mortgage (mezzanine) loan which, in turn, benefits from security that an equity loan or share does not.
The lower the gearing of a loan, the more equity there is as a loss buffer and therefore the less risky the loan generally is.
While we believe that project sponsors have the skill and acumen to create “sweat equity”, we also value real cash commitment as this improves the rating of an investment.
Given inherent supply and demand factors related to population, those investments located in capital cities are rated higher than those in regional or rural locations.
Interest Coverage and Weighted Lease term
For tenanted or income producing investment properties we like to see to key items:
- Interest Coverage
The relative portion of free cash flow from the property as a ratio of the interest to be paid to lenders. The higher this ratio, the more secure the investment.
- The longer the Weighted Average Lease Expiry (WALE), the more certain the cash flow is from the asset. The WALE measures the average time period in which all leases in a property will expire.
The Builder and the Presales
For construction loans, we also look for two key items:
- We need to ensure that the Builder has a strong track record, a good financial position and, where possible, is unrelated to the borrower to ensure a lack of conflict.
- For development and construction loans, we are very focused on ensuring repayment. The best measure of this is the number and value of pre-sales or pre-commitments of the end product (whether residential apartments, land lots, large office leases, etc). The higher this ratio is to total debt, the less the risk.
We always ensure we are dealing with good quality counterparties. We evaluate our borrowers based on their track record, their financial position and the type of security they are providing.
How the rating is calculated
We assign a value to all these categories, and more, to determine a total score within our A to E letter rating system.
As you can see in the chart below, we have mapped a selection of the most recent investments undertaken by Peer Estate. Our rating model shows that as the risk increases, so does the pricing.
The peer estate risk rating
The Peer Estate risk rating should not be used as a guide to measure which projects are better or worse for an individual or in general.