[Webinar Recap] Data We Use in Our Due Diligence Analysis

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Posted Aug 29, 2022

Delaware Statutory Trusts, or DSTs, can offer passive income without the hassle of managing a property full-time. But how can you be confident you’re investing with a reliable Sponsor? Before you commit to a DST, it’s important to thoroughly evaluate potential offers. To help you better understand the different variables to analyze before making a decision, such as risk factors and economic trends, we’re breaking down the data we use in our due diligence analysis.

Examining Our Evaluation Process

Realized uses a hybrid due diligence model to evaluate potential offers from top to bottom and from bottom to top. This means we look at macro and micro attributes. For example, we examine macro-level data like the property type and metro market analytics as well as micro-level information like the individual Sponsor’s track record.

During our due diligence process, Realized harnesses information from several sources to analyze a property’s potential performance projections and geographical risk. We do this to determine if an offer is viable for our clients. We also rely on the property’s appraisal as well as Moody’s Analytics’ CRE, a tool that supplies financial intelligence and analytical tools to aid in business decision making.

Understanding Our Information Sources

While Moody’s Analytics CRE delivers data about historical rent volatility, occupancy rates, and construction trends, property appraisals supply information about demographic trends, demand drivers, and the property’s area. We use this collective data to determine the DST’s potential risks and whether or not the property’s performance has the potential to meet the Sponsor’s projections.

For instance, if a Sponsor projects an annual rent growth of 5% annually but the submarket historically shows rent growths of only 3% annually, this may indicate the Sponsor is projecting unrealistic rents, thus jeopardizing investor returns.

Evaluating the Sponsor

In addition to the analysis of the property, we believe third-party data is critical in determining the strength of the Sponsor. It allows us to dig deeper into the specific entities as well as the parent company. It also helps us determine if there is a guarantor, or an individual who will repay the debt should a Sponsor default. This allows us to understand the Sponsor’s credit profile, no matter if they’re a subsidiary of a larger company or a private credit tenant:

  • Private credit tenants tend to be smaller companies. It is important for us to fully understand their credit profiles so we can accurately gauge client suitability and Sponsor risk. To evaluate a private credit tenant, we obtain their financial statements. We also use Expansive Credit Rating Applications from Moody’s Analytics to generate what is known as an “expected default frequency.” This is essentially the short- and long-term evaluation of whether or not a tenant may default on their debt obligations, which includes the lease.
  • For larger entities, we examine the previously mentioned attributes; however, we also delve deeper than just Moody’s Expansive Credit Rating Applications. Even though these Sponsors feature investment-grade credit, they can still be a risk. To determine that risk, we conduct a more detailed analysis on their information as well as market data to unearth potential pitfalls and the Sponsor’s expected default frequency.

Even though your Realized representative will guide you through this process, it’s important for you to understand our due diligence analysis. That way you can stay in the know about your investments and feel confident in your path.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities. No public market currently exists and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment. There is no guarantee that the investment objectives of any particular program will be achieved. The actual amount and timing of distributions paid by programs is not guaranteed and may vary. There is no guarantee that investors will receive distributions or a return of their capital. These programs can give no assurance that it will be able to pay or maintain distributions, or that distributions will increase over time.

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