credit considerations for the 5 most-researched industries on estatement studies

Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending

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CREDIT CONSIDERATIONS FOR THE 5 MOST-RESEARCHED INDUSTRIESThe Top 5 Industries Researched on RMA’s eStatement Studies


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THE 5 MOST-RESEARCHED INDUSTRIES ON STATEMENT STUDIES

• Hotels (except Casino Hotels) and Motels1

• Full-Service Restaurants 2

• Lessors of Nonresidential Buildings (except Miniwarehouses)3

• Offices of Dentists4

• Commercial and Institutional Building Construction5


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1. HOTELS

(EXCEPT CASINO HOTELS) AND MOTELS


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CREDIT CONSIDERATIONS FORHOTELS AND MOTELS : ADVANTAGES

Improved demand-side drivers and a spike in

leisure and business travel.

Improved consumer confidence in the economy has increased travel and

tourism.

This demand enhances opportunities for this sector to grow both domestically and internationally.

With limited supply and stronger demand, room

rates are increasing, driving up revenue.

Hotel/Motel


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CREDIT CONSIDERATIONS FORHOTELS AND MOTELS: RISKS

Higher costs and expenses related to renovation erode profits.

The ubiquitous daily room rate change indicates income is highly volatile and affects cash flow and adds pressure to operating margins.

Labor costs, including union versus non-union employees, and healthcare costs influence profitability in this sector.

As demand increases, it is likely that there will be a new supply of rooms added to inventory, which will affect occupancy rates in high tourist areas.

For those exploring growth opportunities overseas, lingering uncertainty, such as macroeconomic issues in Europe and political turmoil in South America, is a concern.


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HOTELS AND MOTELS: FUNDING NEEDS

Typically need funds for: Purchasing a property.Remodeling.New construction.Debt consolidation.Working capital for ongoing financing needs.


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CREDIT RISK ISSUES TO CONSIDER FOR HOTELS AND MOTELS

To make the smartest lending

decisions, rely on

eStatement Studies.

• The consumer confidence index data that influences profitability in this sector.

• The critical staffing and employment factors that indicate a good business model.

• How the adoption of new technologies can show that a hotel or motel is poised for continued growth in its market.

• What might indicate the threat of rate compression in the local sector?

• Which type of hotels and motels are poised for the strongest expansion?


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2. FULL SERVICE RESTAURANTS


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CREDIT CONSIDERATIONS FORFULL-SERVICE RESTAURANTS: ADVANTAGES

1Sales have increased recently.

3Dining out is one of America’s most popular recreational activities and is likely to increase.

Economic forecasts show that growth will continue thanks to a strengthening economy.

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CREDIT CONSIDERATIONS FOR FULL-SERVICE RESTAURANTS: ADVANTAGES (CONT.)

4In surveys, almost half of all consumers say they’d like to eat out more often.

6There is renewed interest in upscale dining by younger consumers and business travelers. For Millennials, restaurants are important social hubs as well as places to eat.

Data indicate that as the economy strengthens, consumer demand for the convenience of eating out will grow.

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CREDIT CONSIDERATIONS FOR FULL-SERVICE RESTAURANTS: ADVANTAGES (CONT.)

7There’s been an increase in international travel to the United States which is expected to continue.

Full-service restaurants, particularly in tourist areas, should see increased business generated by those travelers.

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CREDIT CONSIDERATIONS FORFULL-SERVICE RESTAURANTS: RISKS

Sales are increasing, but are modest compared to pre-

recession levels.

Some analysts say consumers are still in a

“recession mindset.” They are cautious and continue to look for ways to reduce their spending, including eating

out.

Businesses are reducing expenses by cutting down

on business lunches.

The industry faces a challenge from rising

wholesale food costs—there have been record-shattering

prices in the commodities markets.


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CREDIT CONSIDERATIONS FORFULL-SERVICE RESTAURANTS: RISKS (CONT.)

Restaurants see intensifying competition for employees. As

the economy continues to improve, the industry will likely

see a higher employee turnover rate, which could

drive up labor costs.

Consumers are focusing more on healthy eating, food quality, and local

sources of food. They are more conscious about

weight and obesity issues.

The Healthy Eating Index—the USDA’s measurement

of the quality of Americans’ food choices—is expected to grow in coming years.

These trends pose potential threats to full-service

restaurants that have not adequately adapted their

menus to the farm-to-table movement or the Healthy

Eating Index.


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FULL-SERVICE RESTAURANTS: FUNDING NEEDS

Typically need funds for: Equipment.New construction or renovation of existing building.Rent.Promotion.Employee wages.Licensing.Working capital.


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CREDIT RISK ISSUES TO CONSIDER FOR FULL-SERVICE RESTAURANTS


decisions, rely on

eStatement Studies.

• How the trends in “casualization” of restaurants and the Healthy Eating Index can impact full-service restaurants.

• How consumer-confidence level changes influence a household’s eating out expenditures.

• How government policies and health department regulations affect full-service restaurant operating costs.

• How employment trends impact restaurant expenses.


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COMMERCIAL LESSORS

3. LESSORS OF

NONRESIDENTIAL BUILDINGS (EXCEPT MINI-WAREHOUSES)


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CREDIT CONSIDERATIONS FOR COMMERCIAL LESSORS: ADVANTAGES

1As the business sector improves, so does demand for office, industrial, retail, and hospitality space.

The commercial leasing industry is expanding, boosting occupancy, and providing opportunities to increase rents.

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CREDIT CONSIDERATIONS FOR COMMERCIAL LESSORS: ADVANTAGES (CONT.)

3As operating revenue increases for commercial lessors, so should property value.

Volume and pricing for high-quality properties in the coastal markets have increased, a similar increase is expected in some secondary markets.

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CREDIT CONSIDERATIONS FOR COMMERCIAL LESSORS: RISKS

Demand varies by property type.

Demand for office space depends on office-related employment in the finance, insurance, technology, and real estate industries.

Demand for hospitality spaces is influenced by consumer spending, local business activity, the cost of travel, and the strength of the U.S. dollar.

Demand for retail space depends on consumer spending and increased employment in the finance, insurance, technology, and real estate industries.

Demand for industrial space is influenced by proximity to a labor pool, transportation, local tax rates, and the presence of related industries.


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CREDIT CONSIDERATIONS FOR COMMERCIAL LESSORS: RISKS (CONT.)

Equally important in determining how this sector will fare isUnderstanding how the national

economy affects local conditions— which can vary widely by

State

Town


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CREDIT CONSIDERATIONS FOR COMMERCIAL LESSORS: RISKS (CONT.)

Demographics

Tax burden

Zoning

Utility infrastructure

Demand in metropolitan markets can

also be influenced

by:


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COMMERCIAL LESSORS:FUNDING NEEDS

Typically need funds for: Land acquisition.

Land preparation and construction.Property acquisition.Working capital for ongoing financing needs.


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CREDIT RISK ISSUES TO CONSIDER FOR COMMERCIAL LESSORS


decisions, rely on

eStatement Studies.

• Key candidate success factors that indicate a good credit risk.

• The critical external factors likely to affect the industry.

• Trends to watch that may have adverse effects on the industry.


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4.OFFICES OF DENTISTS


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CREDIT CONSIDERATIONS FOR DENTAL PRACTICES: ADVANTAGES

1Dental practices are one of the most profitable industries in the entire economy, and that is likely to continue.

3There is expected to be a rise in the need for dental services in two population groups: children and the elderly.

Unlike other medical fields, the dental industry is not as burdened by the administrative costs of interacting with health insurance entities to be reimbursed for patients’ out-of-pocket costs: Many patients pay out-of-pocket costs themselves.

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CREDIT CONSIDERATIONS FOR DENTAL PRACTICES : ADVANTAGES (CONT.)

4The Affordable Health Care Act will expand the number of children who will have access to dental care.

6Dentists will also be in demand in the future: projections are that there will be more dentists retiring than new dentists entering the field.

It is projected that aging Baby Boomers, a population that numbers close to 70 million, will be seeing dentists more in the next few years.

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CREDIT CONSIDERATIONS FOR DENTAL PRACTICES : RISKS

One threat to dental practices is the possible

reduction of Medicaid funding by states.

Dental practices can also be hampered by the

large amount of money required to open an

office.

There have been great technological developments in equipment, but that has driven

up the overhead costs for starting a new dental

practice.

Overhead costs are becoming so cost

prohibitive that more dentists are combining with other dentists to form a shared clinic rather than

opening an independent office.


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DENTAL PRACTICES : FUNDING NEEDS

Typically need funds for: Dental equipmentDental suppliesFurnitureStaff salariesRent or mortgage paymentOffice suppliesWorking capital


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CREDIT RISK ISSUES TO CONSIDER FOR DENTAL PRACTICES


decisions, rely on

eStatement Studies.

• The effects of changes in Medicare, Medicaid, and private insurance coverage on the industry.

• Key points of healthcare reform that will impact dentists.

• How the prices of nonferrous metals and technological advances will impact dental practices.

• How the increasing elderly population will affect dental practices over the next five years.

• Insight into how the increase in at-home preventative care affects the industry.


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5. COMMERCIAL AND

INSTITUTIONAL BUILDING CONSTRUCTION


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CREDIT CONSIDERATIONS FOR COMMERCIAL AND INSTITUTIONAL BUILDERS: ADVANTAGES

As the nation’s economy rebounds, demand for new commercial and institutional building construction is growing at a steady pace.

Office building construction has been on an upswing over the last few years.

Institutional construction is expected to bounce back significantly after several years of a flat market, especially in the K-12 educational and public works sectors.

The rising trend of consumer spending and subsequent demand for new retail and office space is expected to grow industry revenue.


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CREDIT CONSIDERATIONS FOR COMMERCIAL AND INSTITUTIONAL BUILDERS: RISKS

Commercial and institutional builders rely on steel (a commodity prone to fluctuation) to construct a wide variety of structures.

Builders who try to generate business by keeping customer prices low could see negative effects on their profits.

External and internal factors determine how builders fare. Offsetting rising building material costs, tracking trends in office vacancy rates and consumer spending, and taking advantage of opportunities in private nonresidential construction will be key.

Delays caused by labor disputes or supply chain problems can also affect profitability.

Commercial and institutional builders must maintain access to skilled workers and subcontractors, secure new contracts without compromising price margins, and explore the pros and cons of upgrading to higher-quality construction materials.


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COMMERCIAL AND INSTITUTIONAL BUILDERS: FUNDING NEEDS

Typically need funds for: Land acquisition and development.Repositioning of underperforming properties.Equipment financing.Tract development.Construction labor and materials.Working capital for operating expenses.


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CREDIT RISK ISSUES TO CONSIDER FOR COMMERCIAL AND INSTITUTIONAL BUILDERS


decisions, rely on

eStatement Studies.

• How consumer spending affects demand for commercial and institutional building construction.

• Insight into key external drivers that influence profitability in this sector.

• The sectors that serve as major sources of demand and investments in this industry.

• How interest rates affect operating expenses and

profitability.

• How local government spending can be an indicator of profitability in this sector.


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ABOUT eSTATEMENT STUDIESSM

eStatement Studies is the online source for anyone involved in analyzing financial statements. It features two data set types:• Financial Ratio Benchmarks. • Industry Default Probabilities and Cash Flow.eStatement Studies gives you the power to make more informed financial decisions.

For more information, contact [email protected]

http://www.rmahq.org/estatement-studies/

mailto:[email protected]


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credit considerations for the 5 most-researched industries on estatement studies

Economy & Finance