Underwriting Metrics
We are evaluating a leased land opportunity ( new to us ) Essentially we have a 4 year period of capital calls, a 5 year period of repayment of capital and pref, and then the balance of the lease period, 15 years, as free cash flow. I need some help on the best underwriting metrics to present to our investors. IRR is not great because of the time up front. Should I focus on Cash Flow Multiple on a deal like this
agreed on the IRR comment...deals that are peculiar like this aren't cookie cutter IRR looks. Without knowing much about it, data points I would want to know is the CF multiple probably first and foremost. Other than that I think running some sensitivities is your best bet. You mentioned 4yrs of capital calls up front...how much slippage/overruns can the project tolerate before returning a lower than allowed CFx? Some concept on the free cash flow period...though I imagine this isn't as important a metric since the variability would be limited -- assuming the lease would be contractually signed up front so you lock in your cash flow after the capital calls?
It also depends on your audience...everyone likes seeing different metrics...and it's a bit hypocritical since we nixed IRR...but on a long term deal like this someone might want to see the NPV of it all.
In addition to the equity multiple, I find it helpful to present the Investor Contribution, total Investor Distribution, and Net Profit. Sometimes seeing the sheer amount of net profit can sway a room, regardless of the IRR.
Agree with the sensitives + EMx. But when IRRs don't work but it still looks like a good solid investment then it's time to bring out the big guns...graphs! A fucking ton of them too. Make sure they can't sleep at night thinking about the potential yields living under their bed or in their closet.
But really, as an investor (lets just say I'm oblivious to cycles) I would probably like to see where it stands in year 9, so all cost (inc. capital/pref) relative to the estimated value of the asset...hopefully you can arrive at a significant discount for the 9 years you kept me waiting.
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