WHY WE FOCUS OBSESSIVELY ON UNLEVERED YIELD

Potential investor: “Charles, what kind of returns do you generate? I want at least a double digit IRR, can you get me that?”

No.

Not because our projects and operations are incapable of delivering returns like that. Because we can, and we have. But I do not quote IRR numbers to anyone.

Why?

Because:

1. IRR doesn’t account for the risk factors that affect market conditions, the probability of black swan events, or the inherent difference between asset classes and individual deals.

2. We operate our homes as if we’re holding them forever, and the exit price and timing plays too big of a factor in total IRR.

3. Anyone who tells you they can predict where interest rates will be in 18-24 months, or 5 years, or 25 years for that matter, is either delusional or lying.

4. And anyone who tells you they can predict where investor sentiment will be at a specific point in time (unless it’s now) is full of it.

These are the most critical factors in determining the pricing for an asset at the disposition event. 

Anyone who knows me well also knows that I always choose the side of what is measurable and clear, and I pride myself on not telling investors and partners things I don’t know to be true.

Since I don’t know where pricing will be by the time we’ve completed an improvement project or are ready to sell, I’m not quoting a sale price. 

And since I can’t provide a definite sale price, I refuse, on principle, to quote or forecast IRRs for our assets.

We even have an entire slide in our executive summary dedicated to what we ignore in our underwriting and why.

You can request that here.

I’ve also learned that most traditional deals are structured with a set exit in mind simply because that’s how sponsors ‘juice’ the returns and get to earn larger ‘promotes’ (their share of the profits).

These sponsors are also typically not too preoccupied with post-tax returns (the real returns), because a lot of their LPs are institutional investors that don’t pay taxes, like foundations and endowments.

But for an individual HNW investor, or a single family office (SFO), or small PE investment group, investing in deals with the intention to sell doesn’t make as much sense as buying a good asset in a strong market, and holding it forever.

So here’s what I do say:

1. We minimize risk throughout every stage of an investment lifecycle in order to generate strong asymmetric returns.

2. We are exceptionally disciplined in sourcing rare intrinsic value with upside potential that is already present within the asset.

3. We focus obsessively on unlevered yield and generate current cash returns. 

4. We have a proven track record of at least 2x equity invested into our improvement projects, and of successfully elevating assets to outperform 99% of all highest-grossing luxury vacation rentals, globally. But past performance is not a bulletproof guarantee of future results.

5. We entertain every unsolicited offer that comes our way during the hold and we’ll help you make the most out of an early exit early if that’s something you really want to do. And although unpredictable, CAGR and appreciation will be a bonus as long as you have the patience and discipline to hold until the timing for exit is in your favour.

6. Depending on everything works out, the total yield on invested capital will be very attractive, somewhere between 10% per year and infinite.

We’ve broken revenue barriers on many occasions. 

We operate our assets as if we’re keeping them forever, exit strategy aside.

And we like to collaborate with property partners who appreciate our approach, who can evaluate each individual deal for what they are, and who understand the value of our track record.