Key Performance Indicator

A metric used to measure the performance of a property. Real estate-specific KPI’s include metrics such as Cap Rate, LTV, Debt Yield, Cash on Cash Return, Internal Rate of Return, Equity Multiple, among others.

Putting ‘Key Performance Indicator’ in Context

Silverstone Capital Partners, a real estate private equity firm, recently acquired The Arbor View Apartments, a 200-unit market-rate multifamily property located in Hartford, Connecticut. The property was built in 1995 and consists of ten 3-story buildings with a mix of one- and two-bedroom units. Silverstone’s strategy is value-add: they plan to renovate 75% of the units, upgrade common areas, and implement operational efficiencies over a 24-month period to increase the property’s Net Operating Income (NOI).

Using Key Performance Indicators (KPIs) to Measure Success

Silverstone uses several Key Performance Indicators (KPIs) to monitor and measure the property’s performance during the hold period. Below is an overview of the KPIs they are tracking and how they apply to this value-add project:

• Capitalization Rate (Cap Rate)

  The property’s NOI divided by its purchase price.

  The property was purchased for $25 million, with an in-place NOI of $1.25 million, reflecting a going-in cap rate of 5.0%. Silverstone aims to raise the NOI to $1.75 million after renovations, achieving a stabilized cap rate of 7.0% based on the purchase price.

• Cash-on-Cash Return

  Annual cash flow to equity investors divided by their initial equity investment.

  Investors contributed $7 million in equity. In the first year, the property generated $560,000 in cash flow after debt service, resulting in an initial cash-on-cash return of 8.0%. Post-renovation, Silverstone projects this metric to grow to 10%.

• Internal Rate of Return (IRR)

  The discount rate at which the net present value (NPV) of all cash flows equals zero.

  Over a five-year hold, with projected cash flows and a sale price of $32 million, the expected IRR is 16%, aligning with Silverstone’s target for value-add investments.

• Debt Yield

  NOI divided by the total loan amount.

  The acquisition was financed with a $18 million loan. At acquisition, the debt yield was 6.94% ($1.25 million NOI / $18 million loan). After stabilization, the projected debt yield increases to 9.72%.

• Equity Multiple

  Total cash distributions divided by total equity invested.

  Over the hold period, investors are projected to receive $11.2 million in total cash distributions, resulting in an equity multiple of 1.6x.

Contextualizing KPIs in Decision-Making

During the hold period, KPIs help Silverstone evaluate whether their value-add strategy is yielding the expected results. For example:

• Monthly tracking of NOI growth ensures unit renovations are driving higher rents.
• Regular updates on the cash-on-cash return help assess whether distributions to investors meet or exceed initial projections.
• Monitoring debt yield ensures compliance with loan covenants and measures financial stability.

KPIs also guide the decision on when to sell. If the IRR and equity multiple exceed targets ahead of schedule, Silverstone may exit early to maximize returns.

This hypothetical example demonstrates how KPIs are integral to measuring and optimizing the performance of a real estate investment. By consistently tracking these metrics, investors like Silverstone can make informed decisions to maximize value for stakeholders.