Levered Return Metrics?
Wondering what people are using for levered return metrics. The classic L-IRR/L-EM is what I've been seeing but I also see some people using RoC levered. Does that make any sense? Since the equity commitment for a levered deal is lower and profit is juiced, RoC ends up being 100%+. Should this be used, adjusted, or tossed completed (or just looked at unlevered).
Profit is not juiced by using leverage - proportionally to dollars invested sure, but it's reducing your whole dollar profit because you're adding the cost of borrowing money.
I think what you're referring to is cash on cash - which is what most buy and hold investors focus on. It's basically the levered yield - FCF / equity.
Thanks, to clarify, returns are juiced*
I'm wondering since I work mostly on Development UW and looking at things in terms of Dev Yield, IRR, EM, Yield on Cost, etc. but we worked with a equity partner recently that mostly does IPP and they were bringing in metrics such as RoC and Cash-on-Cash yield to development projects.
For me, RoC would just be Profit/Total Costs but it doesn't make sense post-leverage since your profit would be reduced by financing costs but dividing it by Equity Commitment just juiced RoC to 100%+. Perhaps Return on Investment is a better term for it?
Wondering if looking at projects from this lens makes sense.
I think it's just a terminology thing, RoC is typically Return on Cost / Profit on Cost...someone is probably just referring to it as Return on Cash which others refer to as the Equity Multiple (EM) or Multiple on Invested Capital (MOIC).
I would suggest that you have this conversation directly with the partner that is using these metrics so that you're all on the same page.
Return on Cost and Yield on Cost are typically interchangeable. I have never seen Profit/Total Costs used in RE. That is ROI yes, but EM tells you the same thing (the difference will just be exactly 1, since EM includes the return of capital).
You'll see profit / total costs used in for-sale sometimes, although profit / total sellout is the more appropriate metric in my opinion.
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