R2 Partners: Investment Evaluation

The company…

R2 Partners is a parent company to several subsidiaries in the real estate sector. Its a large company with deep pockets that looks to provide stable returns back to its investors.

The challenge…

R2 Partners had the opportunity to acquire a large, multi-use property in downtown Los Angeles but wasn’t sure it was the right move. While they planned for restaurants and retail at ground level they intended to use the rest of the space as short-term rentals. The short-term rentals would have been operated by their sister company Sure Home Stays, so they would’ve been doubly exposed to any risk.

Would it be profitable? What was fair market value? Is this a deal they should execute? With a big project and big money on the line, R2 Partners needed to know if this investment was right for them.

The Method …

RevPARTY used a detailed pro forma based on past experience and industry standards to accurately capture all costs. Then, using techniques developed in-house, a three year forecast was generated which included launch, ramp-up, and stabilization. Finally, the size and scale was taken into account and market shocks (like political influence, recession, etc.) were modelled. All of this was combined into a Monte Carlo Simulation that not only produced hypothetical financials with the expected value but also assigned a probability to a range of outcomes.

The Result…

This allowed R2 Partners to not only have a most probable scenario but to fully evaluate risk. They knew that odds they went bankrupt, they knew the chances of hitting a home run, and they knew they would probably land somewhere close to the expected value.

After taking all of this into account, R2 Partners decided not to invest in the opportunity. While it might sound more exciting if the case study ended with an executed deal and outstanding performance, knowing when not to do something is just as valuable. In this case, R2 Partners was able to save millions of dollars and move on to find other opportunities that would provide them a better return.