COVID-19: Adaptations to Valuations
Q&A with Chris Carmosino, President of Valuations
Date April 9, 2020
As the coronavirus pandemic spreads and peaks throughout the world at different times and in different ways, it has affected us all. At Gordon Brothers, we are doing our best to help clients mitigate and navigate these tremendous and unprecedented challenges.
Valuations is part of our suite of services, and in this uncertain environment asset appraisals can play a critical role in determining the longevity or volatility of collateral values even while the economy has slowed to a crawl. To give you a better sense of how an appraisal can help, we asked Chris Carmosino, President of Valuations, what we can offer during the current environment, and best practices for valuing assets moving forward. Chris has over thirty years of experience in corporate banking and leads our comprehensive valuations team that values $60 billion of assets annually.
Q: What were some of the key trends in retail before COVID-19, and how is the spread of the virus impacting these trends?
Key secular trends, such as the decline of brick-and-mortar stores, particularly mall-based retail stores, and the concurrent rise of e-commerce sales, have been evolving for years. As more and more retail stores close due to non-essential business and social distancing mandates, we expect these trends to accelerate.
There has been tremendous pressure on retailers to continually ‘reinvent’ their brand proposition, product offerings, and on-line capabilities. Success in executing against these customer value propositions has been separating winners from losers across the retail spectrum, and the current environment will only accelerate these trends.
Longer term, it’s highly likely we will live in a new reality where social and consumer behaviors are permanently changed to some degree. Those retailers who have the platforms and the skills to best position their brands, offerings, and delivery channels in this evolving landscape will be best positioned to survive and thrive.
Q: What advice do you have for lenders given the current disruption in the retail landscape?
We all know this is an extremely challenging landscape – many retailers are in some form of stress or distress, and it’s virtually impossible to conduct a Going Out of Business sale of traditional brick-and-mortar stores during the current shut-down of non-essential business.
Given this backdrop, it is important for lenders to balance the need to take proactive measures to preserve and maximize value, with a measured approach to taking enforcement actions in the short term, which may not be in the lender’s best interest.
While it is difficult and in many cases not advisable to issue retail appraisals in this environment, we can work with our clients to provide guidance, and think through options, protective measures, and strategies to maximize value when the time is right. This includes both partial and full chain liquidations and monetizing the full array of retail assets – including real estate, fixed assets, brands, and other intangibles such as customer lists. We are working with our clients across the retail landscape to provide advice that can help protect value and prepare them for a variety of outcomes.
Q: The wholesale and industrial markets are similarly impacted by the spread of COVID-19, with supply chain disruption, customer shutdowns, commodity volatility, social distancing, and many other factors impacting their operations. How do you perform a consumer or industrial appraisal in this environment?
We are particularly well suited at Gordon Brothers to continue to provide valuation guidance and assessments across a variety of asset classes in this environment. We are the largest and most active appraiser and disposition agent of commercial and industrial assets in the world, and we have a tremendous amount of experience across virtually all significant industries and asset classes across the globe. Every situation is unique to a particular client, industry, and business model. It is critical that we talk through the situation with our clients and proceed with guidance, a valuation (and under what assumptions), or a decision to defer based on particular circumstances of each case. We are spending a lot of time with our clients on a case-by-case basis, working through every situation.
Q: Once the economy returns to normalcy, should lenders look to redo appraisals from earlier in the year?
It will be critical to conduct and update appraisals as the economy recovers post-crisis. The important thing to consider is that industries and businesses will be impacted in different ways, and the recovery will not be linear. Supply chain disruption, missed selling seasons, the shut-down of certain distribution channels, changing consumer buying patterns and selling channels, and many other factors too will impact asset values.
In addition, many lenders will see the value in increasing the frequency of appraisals going forward. The potentially devastating impacts of shutdowns on our economy, and the uncertain nature of the recovery will create too many unknown variables. One appraisal per year, or even two per year, may be deemed not frequent enough to maintain an accurate view on value in this new environment.
Q: Desktop appraisals seem to be the most prudent option for the time being. What are the risks and opportunities associated with this?
We have a number of approaches to valuation and guidance that can make sense, depending on the circumstances. The right approach is very client and situation specific, and we are continually working with our clients to provide the best advice and the right approach.
For example, we are continuing to provide up-to-date appraisals across many asset classes, even though we cannot physically site inspect at this time. In many cases, particularly in our consumer and industrial inventory practices, with the right data from the underlying company we can leverage our expertise to run our models and valuation tools, and then use our deep experience to generate values with a high confidence level. We will follow up with site inspections when the environment permits. In our Machinery and Equipment practice, we continue to do desktop appraisals where appropriate, and conduct remote assessments using video technology where practical.
In some cases, such as brick-and-mortar retail, where it may not make sense to issue an appraisal until stores reopen, we are continuing to roll information forward and run our models, so that we will be prepared to issue an appraisal as soon as the environment permits.