Did we hit our business plan?

Question

What metrics do you use to determine if you have fully executed your business plan when exiting a syndication? IRR, Cash on Cash, equity multiple, sales price per door? Or all of the above? I am in a situation currently where we are possibly looking to sell one of our properties in about 15 months time when the original business plan was 6 years. The market has improved over the past 12 months and we have been able to push rents 3 times already with no drop in vacancy. This has put us in a position to sell and achieve close to the price per door we were targeting in year 6 which would mean the IRR will well exceed projections (double or triple), but price per door and equity multiple will be lower than targeted because we are selling much earlier than expected. As an investor, do you consider this a fully executed business plan or does it fall short in your opinion?

Do you take into consideration your investors velocity of money? For EXAMPLE ONLY, if they invested $50k in a deal and are getting an 8% cash on cash return ($4k/year) and we decide to keep it there is a point of diminishing returns (IRR). If we sell (albeit less price per door and equity multiple than projected) they can take their call it $85k and put it into an 8% cash on cash return project they are now making $6,800/year plus their equity build up. Thoughts?

Do you take into consideration your investors velocity of money?  For EXAMPLE ONLY, if they invested $50k in a deal and are getting an 8% cash on cash return ($4k/year) and we decide to keep it there is a point of diminishing returns (IRR).  If we sell (albeit less price per door and equity multiple than projected) they can take their call it $85k and put it into an 8% cash on cash return project they are now making $6,800/year plus their equity build up.  Thoughts?

Brian Burke · Answer

Kyle, I always like to say that you can never go broke making money.  Locking in gains is a good thing because the future is always uncertain.  If you can achieve year 6 performance in two years that’s a winner.  Lock it in and then do it again on the next one.  If you stay in and the market turned against you, you’d kick yourself for life.

My philosophy is to exit at the earliest opportunity, which is where I’ve added the most value in the shortest time. If you add 80% of the value in two years, there’s little to gain by waiting five more for the other 20%.

Brian Burke · Answer

That depends on who you ask.  If you are the sponsor the answer is no, because your big payday comes with the exit.  Refinance pushes that payday down the road.

If you are the investor, the answer is “it depends.”  Some investors would like that, others would prefer a complete exit. A refinance generally wouldn’t return all capital, but maybe most of it.  But it doesn’t return your gain (or at least not much of it).  So if the investor just wants to limit downside and clip coupons, a refinance works great.

But if the investor is more focused on total return, they’d do better with an exit because they get all their money back and all of their profits.  So now they have 1.5x or maybe more to invest in the next deal and compound their return.

If you are unsure what your investors want you could always put it out to a vote.  Regardless of what you decide there could always be a few investors that would have rather seen a different course taken, but when everyone is making money everyone is generally pretty satisfied.

Ivan Barratt · Answer

@Kyle Bryant good problem to have. We just sold a deal after ~3 years since we hit our year 7 sales price projection.  IRR was high and multiple was lower (only 1.7x lol). All investor were happy and re-invested in a new opportunity to offset the tax consequences.

As @Brian Burke pointed out it may be a great time to lock in profits and show an exit on your track record.

All the best!

Ronan Donnelly · Answer

With my investor hat on I would definitely prefer to exit early if we have hit or exceeded IRR projections. That way I could take the proceeds and roll it into multiple other deals which would diversify my risk and also enable me to continue compounding returns.

Greg Dickerson · Answer

I would consider this a successful execution of the business plan. IRR is the benchmark most investors use to measure success. The quicker the exit the higher the IRR the longer you hold the lower the IRR unless you generate even more growth exponentially but that’s not the norm. Equity multiple is irrelevant as it’s a time value of money question. Also there are no guarantees that CAP rates will be as aggressive in a couple of years. it’s a great time to sell.

Michael Ealy · Answer

Based on my experience, every time I exit early because I gave my investors a great return on their money, they are happy and they tend to reinvest in the next deal.

So my vote is to sell early - also another factor is that the market right now is good for selling. If the market changed 5 years from now and cap rates are 100 basis points higher, how will your investors feel?

John Fortes · Answer

Thinking as an investor: getting a good return on my initial investment 3 years earlier than projected is a win. Now show me another deal to throw this capital back in.

Thanks for playing and happy investing!

Evan Polaski · Answer

@Kyle Mitchell I hear you.  It is challenging.  The same dynamics that allow you to expedite your business plan and sell sooner than expected, are at play when looking to place the capital too.  It is terrible how that works!

Evan Polaski · Answer

@Kyle Mitchell, I am curious how your price per door is below target if you are at the price you were hoping for.

And, as others mentioned, what was the primary metric you used when raising capital?  Were most investors asking about the IRR of your projects?  Were most investors looking for that long term hold and equity multiple?

And finally, as others mentioned, what does your deal flow look like?  Are you able to 1031 their money into another deal, where you can juice those returns even more and continue making their money work for another few years?

In general, most investors are looking at IRR.  Most that I talk to believe a correction is coming, and would rather be sitting on cash right now, so I can only reiterate what other said.  "A bird in hand is better than 2 in the bush"

Kyle Mitchell · Answer

@Rick Martin I like the sounds of Red Lobster but quite honestly I will take either, the company is what is most important! :)

Did we hit our business plan?

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