If we have to run 30 sensitivities maybe it isnt a good deal guy, please make it stop. /rant
from a guy who just ran 30 sensitivities
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Just think of it as hazing to get into a fraternity.
It can help to make sure you aren't missing anything that can impact the deal. An assumption you didn't realize was so impactful to your business plan/returns. You're in institutional real estate, your job is to make sure nothing gets missed
spoken like a true post mba associate
I'm a VP and don't have an MBA
You have to have some sympathy that 30 sensitivities is likely overkill. How many permutations of inputs can you have before it's overkill?
For example let's say you want to sensitise rent, exit yield, cap ex, rental growth, void, would you really want to see all 120 permutations?
Sure you cover all bases but what kind of conclusion can you even make from 120 scenarios that you can't make from maybe 10? Ie if you know your yield sensitivity kills the deal beyond recovery, is there any real point in flexing it against every imaginable permutation?
I'm not personally advocating for running 30 sensitivities on any given deal. I don't have the details of his deal. There could be sensitivities around certain tenants, upside/downside, and sensitivities pertaining to the deals structure or waterfall to name a few that could run up the tally
No, it's a waste of fucking time is what it is. There are a handful of levers for each type of deal that will massively impact returns (e.g. in development your hard costs, timeline, rents/expenses, and exit cap), and outside of those you're really just wasting your analysts time by pushing them to run more numbers.
We've had partners ask us to run like 8 different downside scenarios with increasingly elaborate circumstances. Do you know what the impact on IRR was in each? Less than 1.5% on a value-add deal. It took hours for our analysts to run those scenarios.
I look at all sorts of deal profiles, and I'd say 8/10 we run a handful of typical sensitivities on purchase price, exit cap, rent growth, market rents, hold period to name the most common that come to mind. 10 - 20% of deals we end up running more. Maybe 5% we get up to 30 sensitivities, but those are quirky deals and when I say 30 sensitivities, I mean the same 5 I named above, but there's 3-5 different scenarios I run them for (similar to how I mentioned in my comment above). To give example, run sensitivities on purchase price, exit cap, rent growth, market rents, hold period, but run them for each of the following scenarios: 1) Base case - large tenant exercises below-market extension option, 2) We get large tenant out and market tenant in, 3) Same as 2, but this time we refi mid-hold since we got the NOI up, 4) Base case, but we modify waterfall structure to protect downside but give up some upside, 5) Same as 4, but do it in the scenario where we get the below-market tenant out early.
This helps us be able to bracket the deal:
- Base case, we're looking at 14 - 16% IRR that will net us 12 - 14%
- Upside (we get the tenant out) - 18 - 20% IRR, net to us is 15 - 17%
- Downside - 8 - 10% IRR, net to us is 7 - 9%
Then same as above, but bracket under a modified waterfall. Then in IC, we can sit down and understand the ballpark of scenarios to decide if we like the deal in general. Maybe we decide that we like it, but we're more worried about the downside than we are excited about the upside. So now we can see the bracketed returns if we give ourselves a protected waterfall instead (how much upside are we giving away in exchange for the downside protection in our scenarios, and is it worth it to us?)
Theres only 4 assumptions that matter: rent, yield, cost, time
Expense inflation, tax reassessments, interest rate, debt proceeds to name a few
Who even looks at all 30…
My firm will run 5 and the only one that ever gets questions is cap rate / acquisition price…
Why is everyone all up in arms about running sensitivities lmao. First of all its your job. Second of all, it takes two seconds for all the major movers. My models always have PP, topline, hard costs and exit cap already built in. I don't have to "run" anything, just hit F5 and its a wrap ffs. I have a sensitivity tab that spreads all these tables in one place. That way you can look at it and always have an answer: every x% change or $ change in hard costs = y% change in EM or IRR etc. Work hard not smart. and quit bitching. /rant
If it's a simple dealt then yes, having in built sensitivity tables is a matter of running the tables. But if you have development finance, with PIK interest/commitment fees with circuit breakers instead of iterative calcs, you're having to constantly resolve for each scenario manually before taking a snapshot of the table and putting it into your IC report.
Then you have the situations described above where tenants are breaking/renewing individually which becomes a tedious task very quickly.
I can't believe you are whining about downside sensitivities. I am assuming you are an analyst, correct? Last I checked, analysts are hired to ANALYZE investments. Unsure if you are living under a rock, but we're going through a massive correction. Assuming you work for an institutional investment firm, your company has a fiducial obligation to act in the best interest of said investor. For anyone wondering, this means more time spent creating downside sensitivities during unstable economic conditions. Or for any new acquisitions, better make sure your underwriting is bullet proof and you are actually thinking about risk mitigation measures.
We've had a massive bull run for well over a decade. During this time, you could have asked an orangutan to throw a dart at the wall with various real estate investments, and likely, that investment would generate a positive return. That ship has sailed. Going forward, expect things will be harder than before. more work. more analysis. Sorry. /rant.
I work entirely on hotel development and historic office conversions, with multiple layers of financing and government incentives. My model has like 30 tabs and runs fine with a ton of sensitivities, sounds like you have a lot of bloat in your plumbing that you need to fix.
If you're a good acquisitions guy with real excel chops you should be able to run most scenarios very quickly. Maybe you're still cutting your teeth and need more reps. Whenever we are negotiating terms on PSA, JVs loans etc, I will run any changes in key terms right away because I want to know what it means no one asks me to do it. I then take it to my CIO to strategize on the counter for each turn. It's my job to negotiate the best terms for us and I need to know the quantitative and qualitative value of key deal points right away so I know where I need to push and where I can give and throw a carrot.
None of this is counter to the argument that there's no need to run scenarios for obvious shit - like shortening the duration of a deal will probably increase IRR and decrease EM. If your MD asks you for something like that he's probably a knuckle dragging idiot.
Are you guys running 30 sensitivities on 30 individual drivers, or building 400+ sensitivity tables for the various permutations of the 30 drivers?
The former should take all of about 2 seconds and who doesn't love a nice tornado chart. The latter is legit crazy
If you can’t run 30 sensitivities in 3 minutes - then your model isn’t set up right
Have to save down separate Argus runs which isnt hard just takes forever because its so clunky. Its more annoying to export and format tables to add to the memo.
Agreed
BTW wouldn't be ranting if I didn't have to do all this in Argus then export and format respective tables / explanations.
Everyone realizes that proformas are BS right? It’s just a best guess.
Man, one time at my old firm, we lost a deal because we didn’t make an all cash offer on what was a really good deal for $100M. We had a several billion dollar fund (aka we NEEDED to place money) and one of the big wigs didn’t want to close all cash because it would lower the IRR to close all cash and then refinance later. We lost the deal to another firm that had an all cash offer. I about launched my keyboard.
I left shortly after. Looking back, it was at least a $30M mistake. Probably more
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