5 Tips to Supercharge Your CRE Financial Model's Output Page

It’s easy to dive straight into a model from the get go and focus on building out a model - the input sheets, the calculations, the rent roll..

However, before starting, it’s always useful to take a pause and spend time thinking about the output first. For me, this step helps to shape how I think about the model, what to spend more time on, and most importantly, the story that I’m trying to tell and conclusions that I’m trying to reach with my model.

Think of it like an executive summary - most senior executives don’t have the time nor interest to trawl through complicated models to understand the mechanics of how a model runs. A good output page / executive summary should be able to tell a story quickly, succinctly, and most importantly, facilitate effective decision making.

It's always useful to spend some time thinking about the output sheet before starting the model

5 questions to ponder for the output sheet:

1. Return Metrics: What are the key return metrics that will be used to assess the viability of a deal (eg. IRR, yield-on-cost, cash-on-cash)? Return metrics should be front and centre. That’s the first thing most people look at.
   

2. Funding: How will the deal be funded? This is normally shown in the “Sources and Uses of Funds”.
   

3. Critical Deal Levers: Which critical assumption levers can be reasonably improved to improve a deal? This is normally analysed in sensitivity tables. Tip: Quality over quantity - having too many sensitivity tables makes it difficult for the reader to figure out what the critical factors actually are. The boundaries of the sensitivity inputs should be reasonable, ie. there’s very little value in testing cap rate sensitivities at unachievably low cap rates (eg. 0.25%).
   

4. What are the key drivers of value? Does most of the value come from some sort of income growth (eg. NOI margin improvement, rental growth), yield spread (Yield-on-cost vs. cap rate) or entry price?
   

5. Timing: What are the key timing milestones of the deal? This is typically reflected in the yearly / quarterly cashflow summary, which communicates key timing milestones such as i) construction / capex period, ii) time to reach income stabilisation, iii) investment hold period.

Where possible, keep it simple and straightforward.

Happy modelling!