Syndicators/LPs : What kind of MOIC are you seeing?

[Spencer Gray]

Hey BP community -

I want to throw a question out there for those in the 100+ unit multifamily space, specifically investors, sponsors/syndicators or anyone who looks at a lot of deals. 

Do you have a target MOIC (multiple on invested capital) when underwriting deals or when evaluating potential investments? If so what is it for LPs and then what about for the sponsor if you are co-investing? Include the type of deal, deal economics, hold period and anything else relevant.

Cash on cash, IRR, DSCR and breakeven occupancy are more important metrics to me on a deal by deal basis but I'm trying to take a long term view (15 years to start) of my investment strategy. By reinvesting as much return as possible in order to maximize compounding is the tried and true method of building wealth, and that's what I'm looking at. For these purposes I'm taking a little closer look at EM/MOIC as a simple metric I can use to build a very macro model of my strategy over a long period of time.

I've seen anything from 1.25-2.5 for value add deals in the Midwest that are a 5 year hold and 2.5-3.5 for 10 year holds. 7 year holds are right in the middle. On average the deals provide an 8% pref with a 70/30 waterfall.

On the sponsor/GP side with a +- co-invest of 10% I usually am underwriting above a 4-6+ EM/MOIC depending on the ratio of co-invest to LP equity and deal economics, again for Midwest value add market rate deals in secondary and tertiary markets.

What are you seeing? 

Do you even care about MOIC? Do your investors? 

[Brian Burke]

Originally posted by @Taylor L.:

@Brian Burke would you agree that IRR is the most esoteric, easiest to B.S. metric out of all of those?

That's my feel. Interested in your thoughts. Do more experienced passive investors lean to other metrics?

Naw, I don't agree with that at all. IRR is not the easiest to manipulate. They are ALL easy to manipulate. IRR, CoC and EM (Equity Multiple) are the resulting calculations of a set of cash flows, either forecasted or actual. Actual cash flows are not easy to manipulate and thus the resulting output isn't either.

But FORECASTED cash flows are easy to manipulate.  Overestimating first-year performance is extremely common.  Forecasting too low of a vacancy factor, or too high of rent growth, or too high of a "post-renovated rent" that isn't supported by the comps.  Neglecting to include, or reducing the impact of, other economic vacancy factors such as loss to lease, bad debt, concessions and non-revenue units.  Improperly calculating debt service, underestimating capital expenditures, and improperly forecasting future expenses, especially property taxes that re-assess at a higher value after acquisition are all common mistakes.  Not to mention simply underestimating acquisition and renovation costs that result in less capital to be raised in the sources of funds.  This slants returns higher in the forecast, only to be quietly reversed later when additional capital needs to be raised to complete the purchase or the renovation, but the forecasts don't get updated.

All of these variations in forecasting result in a different set of forecasted cash flows, and as a result, the output is a different IRR, CoC and EM. As the old saying from the computer world goes--"Garbage In, Garbage Out."

This is why passive investors considering an investment into a private offering should not simply scan a grid of forecasted IRRs, CoCs, and EMs and land their finger on the one with the highest number and "click the button to invest."  Instead, investors should carefully do their due diligence on the sponsor and the offering, and closely examine the assumptions that were made to arrive at the forecasted cash flows.  Then, choose to invest in the offering from the best sponsor with the most reasonable assumptions that result in performance indicators that fit their objectives, rather than chasing the shiny object of the highest forecasted return.