IRR increasing with longer holding period?

Need some help with my model.

For some reason my IRR is increasing with a longer holding period. Cannot for the life of me figure it out.

My NOI is increasing steadily post-stabilized period, and everything else grows as should. IO of 60 months, fixed rate.

Any ideas as to why a model would do this?

 

What kind of annual rent bumps are being modeled? My initial hunch is that the residual value must be increasingly outsized as the hold period goes on.

I had a flair for languages. But I soon discovered that what talks best is dollars, dinars, drachmas, rubles, rupees and pounds fucking sterling.
 

Why is this surprising? Presuming this is some form of development or value-add deal (based on the stabilization comment), you probably have some cap rate spread/developer's profit (ie. build on 8% cap, exit value at 6%), thus with growing NOI you can easily magnify returns due to the growing cash flow and growing exit value. Just calculate annual income yields and appreciate returns to see if this is logical. The loan spread will also make a huge deal, wider it is, the more cash flow grows with each annual increase. 

Really, this doesn't sound surprising, especially if you use same exit cap rate for the analysis across the years. 

 
Most Helpful

It just depends on the spreads (development profit/cap rate spread, and debt spread), but it is very possible if you wide margins. Eventually accumulated equity value will over power this and IRR will decline, but if you have wide spreads and enough growth, it's completely mathematically possible. 

Hint, just do annual IRR calcs until you get an inflection (assume you have error checked as first step). 

Not sure why this is so surprising to everyone, basic law of math with IRRs, if you ever seen an "IRR graph" this will make more sense.

That said, it is usually most accretive to bang out (sell, recap, refinance) sooner than later. I wonder if the terms of the IO for 60 months are driving this, many loans flip to being amortized upon stabilization (for the mini-perm), if you keep it IO, that is just more cash flow! 

 

Sounds like there could be an error somewhere. If the asset is stabilized and both growth and expenses are growing at the same rate an earlier exit should return a higher IRR (especially with 60 month I/O) is your exit cap compressing significantly yoy? 

 

This happens from time to time, especially in the instance where the returns of the deal are more dependent on cash flow than appreciation. At some point if you are increasing the hold period 2, 3, 4 years out into the future you should be adjusting the cap rate upwards. 

 

Aut dolores architecto voluptatem et sunt. Quisquam placeat explicabo qui accusamus odit aut quia.

Sit sit facilis qui est ipsa officiis quia dignissimos. Dolor neque ex velit et. Velit animi ad soluta quasi.

Eveniet ut aliquam beatae in. Tempore totam earum veniam dolores repellendus alias. Quisquam ut aut rem. Dolor nam sed ab ducimus sint aut tenetur. Nisi repellat vel sint esse quo hic et officiis. Eum cumque sed earum quia molestias sed inventore repellat.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
DrApeman's picture
DrApeman
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
kanon's picture
kanon
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”