12 KPIs for Analyzing the Financial Health of BTR Companies

Build to Rent (BTR) is an emerging sector in the UK’s property market that has gained significant momentum over the last few years. BTR companies need to maintain a strong financial position to remain competitive in the market. Evaluating their financial health involves analyzing key metrics and indicators to understand their profitability, liquidity, solvency, and efficiency.

Are you looking for ways to assess the financial health of your BTR company? Well, you’re in luck because in this article, we’ve got you covered. We’ll take a deep dive into the key metrics and indicators that you should be monitoring and explain how they can provide valuable insights into your company’s financial performance. And to make things even clearer, we’ll provide examples of how you can use these metrics and indicators to assess the financial health of BTR companies. So, let’s get started.

1. Gross Rental Yield

Gross rental yield is a vital metric that BTR companies use to evaluate their financial health. Essentially, it shows the percentage of a property’s value that is generated as annual rent.

For example, if a property is valued at £1 million and generates an annual rent of £100,000, the gross rental yield would be 10%. Typically, a BTR company with a gross rental yield of 6% or more is considered to be financially healthy.

BTR companies & investors use this metric to gauge the appeal of their properties to potential investors. A higher yield suggests that the company is generating more rental income compared to the property’s value, making it more appealing to investors seeking a good return on investment. Furthermore, a higher gross rental yield can be an indicator that the company is effective at managing its properties and attracting quality tenants. It’s worth noting that rental yields can fluctuate based on various factors, including market conditions and location.

2. Occupancy Rate

Occupancy rate is a crucial metric that BTR companies use to evaluate their properties’ performance. It represents the percentage of rented units in a BTR company’s portfolio.

For example, if a BTR company has 100 units in its portfolio and 90 of them are rented out, the occupancy rate would be 90%. A high occupancy rate of 95% or above is considered to be a good indicator of financial health for a BTR company.

A higher occupancy rate indicates that the BTR company is successful in attracting and retaining tenants, generating stable rental income and cash flow. It can also mean that the company has a strong brand and reputation, which can make it more attractive to potential investors.

RELATED BLOG: Given the current delicate global situation and potential economic downturn, maintaining high occupancy rates for properties is crucial for steady income and attracting investors or tenants. Read this blog to know the top strategies for property managers and owners to achieve this.

3. Net Operating Income (NOI)

When it comes to measuring the profitability of a BTR company, Net Operating Income (NOI) is a critical indicator. Essentially, it represents the rental income minus the operating expenses.

For instance, a BTR company may have a property with an annual rental income of £2 million and operating expenses of £500,000, resulting in a NOI of £1.5 million.

A higher NOI can signal that the company is managing its properties efficiently and keeping operating expenses in check. This can lead to higher profits, which can make the company more appealing to potential investors. Moreover, a higher NOI can provide the company with more financial flexibility to invest in new properties or enhance existing ones. It’s worth noting that maintaining a healthy NOI requires careful attention to both rental income and operating expenses.

Additionally, the NOI can be used to calculate the capitalization rate, which is the annual return on the property relative to its market value. A high capitalization rate indicates that the property is generating a strong return relative to its value, while a low capitalization rate may suggest that the property is overvalued or not generating sufficient income. BTR companies may use NOI and other financial metrics to evaluate the profitability of their properties and make informed decisions about their portfolio.

4. Debt-to-Equity Ratio

When evaluating the financial health of a BTR company, the Debt-to-Equity Ratio is a key metric that can provide valuable insights into the company’s leverage and solvency. Put simply, this metric represents the total debt of the company in relation to its total equity. A lower debt-to-equity ratio indicates a lower risk of default and a stronger financial position. Lenders and investors may use the debt-to-equity ratio as a key metric when evaluating the creditworthiness of BTR companies.

For example, let’s say a BTR company has a total debt of £2 million and total equity of £5 million, resulting in a debt-to-equity ratio of 0.4. Generally, a debt-to-equity ratio of 0.5 or lower is considered to be a positive sign of financial health for a BTR company. This suggests that the company is utilizing more equity to finance its operations, which means that it has a lower risk of defaulting on its debts.

A lower debt-to-equity ratio can make a BTR company more appealing to potential investors, as it indicates a lower level of financial risk. Moreover, it can provide the company with more flexibility in terms of accessing additional funding or investments to support its growth plans. At the same time, it’s important to note that the ideal debt-to-equity ratio can vary depending on the industry and the specific circumstances and strategy of the BTR company.

5. Current Ratio

The current ratio is a financial metric that measures a company’s ability to pay off its short-term debts with its current assets. This ratio is especially important for businesses that need to manage their working capital efficiently, such as Build-to-Rent (BTR) companies. A high current ratio indicates that a company has enough short-term assets to cover its short-term liabilities, which suggests that it is financially healthy and less likely to face liquidity problems.

To calculate the current ratio, one must divide current assets by current liabilities. For instance, if a BTR company has current assets of $1 million and current liabilities of $500,000, its current ratio would be 2. This indicates that the company has twice as many current assets as current liabilities, suggesting that it’s in a good financial position to meet its short-term obligations.

This metric helps BTR businesses determine their financial health and ability to manage their short-term liabilities, making it a key metric for investors and stakeholders to assess the company’s financial stability and future growth potential.

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6. Cash flow

Cash flow measures the amount of cash generated or used by a company over a certain period of time. Positive cash flow indicates that a company is generating enough cash to cover its expenses and investments, while negative cash flow suggests that a company may struggle to meet its financial obligations. BTR companies typically have high upfront costs, and cash flow is a critical metric for evaluating their financial health.

For example, a BTR company that has recently completed a new development may have high upfront costs, such as land acquisition, construction, and marketing expenses. If the company is generating positive cash flow, it indicates that they are able to cover these expenses and have enough cash on hand to meet their ongoing financial obligations, such as loan payments and property maintenance. On the other hand, if the company is experiencing negative cash flow, they may need to secure additional financing to cover these costs, which could put their financial health at risk.

7. Return on investment (ROI)

ROI measures the return generated by a company relative to its investment in a particular project or asset. For BTR companies, ROI can be used to evaluate the profitability of their property investments. A high ROI indicates that a company is generating a significant return on its investments, while a low ROI may suggest that a company’s investments are not generating sufficient returns.

For example, a BTR company may invest in a new property development that generates rental income of £1 million per year, while the total investment in the property was £10 million. In this case, the ROI would be 10%, which indicates that the investment is generating a healthy return.

If the ROI is lower, it may suggest that the property is not generating sufficient rental income, or that the initial investment was too high. By tracking ROI over time, BTR companies can evaluate the profitability of their investments and make informed decisions about future property developments.

8. Average Daily Rate (ADR)

ADR is a metric commonly used in the hospitality industry to calculate the average rental income earned per occupied room per day. In the BTR sector, some finance departments use this metric to evaluate the rental income generated by each unit or apartment. This metric can help finance leaders determine if the rental rates for BTR properties are competitive and generating sufficient revenue.

For example, let’s say a BTR company owns a property with 100 units and the total monthly rental income is $200,000. The ADR can be calculated as follows:

The company’s average occupancy rate is 85%

The average rental income earned per occupied unit per month is $2,000

The number of days in the month is 30

Therefore, the ADR would be $67 ($2,000 divided by 30)

By comparing this ADR to the market average, finance leaders can determine if their rental rates are competitive and generating sufficient revenue. If the ADR is significantly lower than the market average, it may indicate a need to adjust rental rates or improve property amenities to attract more tenants.

9. Cap Rate

Cap rate, or capitalization rate, is a measure of a property’s potential return on investment. It is calculated by dividing a property’s net operating income by its market value. Cap rate can be used to compare the value of different properties or to evaluate the potential return on a property investment. In the BTR sector, cap rate is a key metric for evaluating the profitability of properties and determining the feasibility of future investments.

Cap Rate As an example, suppose a BTR property has a net operating income of $1 million and a market value of $10 million. The cap rate would be 10% ($1 million divided by $10 million).

By comparing the cap rate to market averages, finance leaders can assess the potential return on investment of the property and evaluate the feasibility of future investments. A higher cap rate suggests that the property is generating a greater return on investment.

10. Debt service coverage ratio (DSCR)

DSCR measures a company’s ability to meet its debt obligations by comparing its operating income to its debt service payments. A high DSCR indicates that a company is generating enough income to cover its debt payments, while a low DSCR suggests that a company may struggle to meet its financial obligations. In the BTR sector, DSCR is an important metric for evaluating a company’s financial health and its ability to repay debt.

As an example, imagine a BTR company has a debt service obligation of $100,000 per year and an operating income of $300,000 per year. The DSCR would be 3 ($300,000 divided by $100,000).

A DSCR of less than 1 suggests that the company is generating insufficient income to meet its debt obligations, which could lead to financial distress and potentially bankruptcy. By contrast, a DSCR of 2 or higher indicates that the company has a comfortable margin of safety and can manage its debt obligations effectively.

RELATED BLOG: In order to stay ahead in the PBSA industry, it is crucial for property managers and owners to monitor essential metrics that can optimize their operations and fuel revenue growth. Discover the 8 most valuable KPIs by reading our blog, and stay competitive in the student accommodation market.

11. Operating expenses per unit

Operating expenses per unit measures the cost of operating and maintaining each unit or apartment in a BTR property. This metric can help finance leaders evaluate the efficiency of a company’s operations and identify areas where cost reductions can be made. By reducing operating expenses per unit, companies can improve profitability and generate higher returns.

As an example, let’s say a BTR property has total operating expenses of $500,000 per year and 100 units. The operating expenses per unit would be $5,000 ($500,000 divided by 100).

By analyzing this metric, finance leaders can identify areas where cost reductions can be made. For instance, if the property has high utility costs, the company could invest in energy-efficient appliances and systems to reduce expenses per unit and improve profitability.

12. Debt maturity schedule

The debt maturity schedule is a timeline that outlines when a company’s debt obligations are due. It is an important metric for evaluating a company’s financial health and its ability to manage debt. In the BTR sector, companies typically have large debt obligations due to the high upfront costs of property investments. By analyzing the debt maturity schedule, finance leaders can identify potential risks and opportunities for refinancing or restructuring debt.

As an example, let’s say a BTR company has a debt maturity schedule that shows it has $10 million in debt due in the next 3 years. By analyzing the debt maturity schedule, finance leaders can identify potential risks and opportunities for refinancing or restructuring debt. If interest rates are expected to rise significantly in the coming years, it may be beneficial to refinance the debt now to lock in a lower rate. Alternatively, if the company has excess cash flow, it may be able to pay down the debt early to reduce interest expenses and improve its financial health.

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By partnering with QX Global Group, your company can also benefit from our industry-leading expertise and cutting-edge technology solutions. We can help you unlock the full potential of your financial operations, so that you can focus on what matters most – growing your business.

So, if you’re looking for a trusted partner who can help you transform your finance operations, improve visibility, and reduce operational costs, look no further than QX Global Group. Get in touch with us today to learn how we can help your company achieve its full potential.

Originally published Apr 04, 2023 07:04:23, updated Apr 05 2023

Topics: BTR, Insights, KPIs, QX Insights