Introducing GeoPhy’s Tenant Credit Profile

How aggregated credit data will transform multifamily risk management

October 13, 2020 | by James Frasche

The release of GeoPhy’s Tenant Credit Profile (TCP) marks a significant improvement in the commercial real estate (CRE) industry’s ability to objectively measure multifamily credit and operating risk.

For decades, CRE lenders and investors have primarily relied on historical or trailing operating statements to forecast asset performance and value multifamily properties. The operative word here is “trailing.” The industry has primarily been making investment and underwriting decisions based on what happened in the past as opposed to what is likely to happen in the future.

These underwriting practices have typically resulted in favorable returns and low delinquency rates during stable economic times. However, they are insufficient for making multimillion-dollar decisions during times of heightened uncertainty such as the COVID-19 pandemic.

Changing the Multifamily Risk Management Paradigm

When an individual expresses interest in renting an apartment, property managers typically conduct a background check and pull their credit report prior to approving the application. The current and historical information that is received via this “screening” process is ideal for determining if the prospective tenant is likely to pay rent on time based on their current financial health. Over time, however, that information becomes stale as the tenant’s financial situation changes. Until now, there hasn’t been an easy way for CRE lenders and investors to monitor the financial health of their tenants after the initial screening has been conducted.

What lenders and investors would love to have, of course, is a crystal ball to glimpse into the future. GeoPhy hasn’t trapped Aladdin in a jar, but it has created a new data-driven solution to give lenders and investors a forward-looking view into multifamily asset performance.

TCP is the first aggregated1 consumer credit solution designed specifically for the multifamily industry. In essence, GeoPhy has developed a tool that enables CRE practitioners to quickly evaluate the financial health of the multifamily tenants that reside in a given building or market.

Lenders and investors can use TCP to more accurately forecast key metrics such as rent collections, vacancy rates, net operating income (NOI), turnover expense, and debt-service-coverage ratios (DSCR).

TCP Insights

TCP includes four categories of leading indicators to assess future multifamily performance:

  • Aggregated Consumer Credit Scores: Lenders use credit scores to forecast the likelihood that consumers will pay their credit cards, auto loans, and other debt obligations on time. TCP aggregates those same scores on a building-by-building basis to evaluate a property’s overall tenant financial health. Multifamily lenders and investors can now monitor building-level tenant credit scores over time, model future rent collection rates, and benchmark assets against the broader market.
  • Consumer Distress Indicators: The Coronavirus Aid, Relief and Economic Security (CARES) Act includes a number of consumer protections. Among these protections is a requirement for lenders to offer certain temporary accommodations to individuals that have been impacted by COVID-19. TCP helps multifamily stakeholders understand which buildings have the highest concentration of tenants that have entered into such forbearance, deferment, or “payment holiday” agreements with their lenders.

    These tenants may be currently paying monthly rent as agreed. The accommodations provided to them under the CARES Act, however, are temporary. Lenders and investors will need to monitor their financial health closely in the months ahead.
  • Credit Delinquency Rates: When renters have fallen on hard economic times, they have historically defaulted on credit cards prior to defaulting on their auto loans and rent payments. This is because, in general, people prioritize keeping a roof over their head and maintaining a reliable mode of transportation over making their monthly credit card payment. TCP provides incredible insight into where tenants are in the credit cycle by reporting 30, 60, and 90+ day delinquency rates by loan type (credit card, auto, installment, etc.).
  • Credit Utilization: Many multifamily landlords have begun allowing their tenants to pay rent via credit card during the COVID-19 pandemic. While this change in policy has maximized rent collections, it has also caused some groups of tenants to overextend themselves. TCP’s credit utilization metrics enable lenders and investors to identify multifamily assets that are occupied by distressed tenants that have “maxed out” their credit cards or other loans.

Putting TCP into Practice

How can lenders and investors use TCP to mitigate risk during this time of economic contraction? At a high-level, we believe TCP will have the greatest impact and help answer critical questions in the following functional areas:

Investors: Asset Acquisitions
  • Evaluate and prioritize deals in the acquisition pipeline. Which of the assets in my pipeline are the most likely to perform and deliver on financial expectations?
  • Build investment thesis and support key assumptions pertaining to NOI, occupancy, rent growth, etc. How can I give my investment committee more comfort that the assumptions in my case are sound?
Investors: Asset Management
  • Optimize rent rates and collections. Is my rent strategy appropriate based on tenant credit behavior?
  • Continuously monitor portfolio for changes in tenant financial health. Are the assets in my portfolio still consistent with my investment strategy or should some of them be prioritized for disposition?
Lenders: Underwriting
  • Leverage TCP to make better and faster underwriting decisions. How can I meet my organization’s production and profitability objectives and effectively manage risk at the same time?
Lenders: Portfolio Risk Management
  • Continuously monitor portfolio for changes in tenant financial health. Which borrowers should I proactively contact to discuss workout options before the loan goes into default?
  • Executive reporting. How is my portfolio trending? How do my assets compare to what is happening in the broader market?
Lenders: Loss Forecasting
  • Refine multifamily loss forecasting. Is there anything I can do to improve and take some of the subjectivity out of my organization’s CECL models?

GeoPhy’s Suite of Offerings

GeoPhy’s release of TCP enables the CRE industry to measure multifamily risk more objectively. It joins our automated valuation model (AVM) for multifamily properties, our collection of scores of individual benchmarks for use in modeling, and our proprietary GeoPhy Neighborhoods that break down submarkets in more granular detail. Collectively or separately, these features are available on our Evra platform. Reach out to us for a demo and free trial.

1 Note: TCP does not include any credit data at the level of the individual consumer. All of the credit data contained within TCP has been aggregated to preserve consumer anonymity and comply with the Fair Credit Reporting Act.

Read all of our five-part series about GeoPhy’s Tenant Credit Profile:

  • Introducing GeoPhy’s Tenant Credit Profile
    How aggregated credit data will transform multifamily risk management
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