By Datta Khalsa, Broker
For many businesses, 2020 was a case study in how to pivot and respond to the unexpected challenges brought about by a pandemic. This has certainly been the case for Firmus Financial, for the various types of investments and markets we are involved in.
These challenges showed up in the form of late payoffs and delayed foreclosures on loans, or in slow approval and permit processes on several of our development projects. The pandemic also caused a full year setback on three relatively smaller hotel-related investments due to government mandated shutdowns.
As part of the growth process, we also made the decision to phase out of Residential flip projects for the time being, based on some disappointing results and several less-than-satisfactory business relationships that needed to be either terminated or restructured.
In spite of these challenges, we managed an annualized return of 9.011% for our investors over the course of the year by making adjustments, collaborating on creative solutions and taking strong steps when needed. This made it possible to maintain our level of performance from the previous year, and our pipeline is showing likely increased returns in the coming months.
The ways in which we created workable outcomes varied in response to the particular project or situation, many (but not all of which) were related to the pandemic:
For one partnership which had simply ceased to operate in good faith, we took active steps to recover the capital, with our management team stepping up to help cover the costs of doing so.
For two smaller investments in hotel redevelopment projects that missed their seasons due to the pandemic, we agreed to accept accruals instead of monthly disbursements while our partners get things back on track, while remaining committed to honoring the preferred returns due to us under their Operating Agreements.
And in the case of a few different non-performing partnerships on a series of SFR flip projects, the solution has been to either sell off the non-performing asset to cut our losses or to convert our equity in the partnership to a single note against properties in the outgoing partner’s portfolio.
Along the way, the upward trend in real estate values enabled us to make a year-end mark-to-market portfolio adjustment specifically based upon increases in valuations for two of our larger investments which are on course to sell in the coming months—one of which is already in escrow at a price that is well above even its adjusted accrual conditions.
The sale of this investment in Blythe, CA in early March will result in an estimated bump of around $250,000 for the fund. Our plan is to use the proceeds to pay off several financial obligations and to also pay down debt as we continue to streamline our portfolio against possible changing market conditions
Our 20-unit townhome development in Phoenix is on track to come to market in May, with its current valuation also well ahead of our initial estimates.
Summing up our performance, following is an updated table showing Firmus’ historic IRR over the course of the seven years since its formation:
Year YOY % IRR Value per $100
2014 10.039 $110.04
2015 24.930 $137.47
2016 11.522 $153.31
2017 18.330 $181.41
2018 7.535 $195.08
2019 9.023 $212.68
2020 9.011 $231.84
Average IRR: 12.913% 18.83 %
To recap our reporting method, the fund’s returns are based on the combined performance of our assets. Using what is termed mark-to-market appreciation, we set a timeline for each investment starting with the initial cost as of the date of acquisition and ending with the projected net proceeds as of the forecasted date of disposition or payoff. Each investment’s individual returns are then calculated as a percentage of its annual estimated accrued value over the course of the year. The weighted returns for all these assets are then pooled together along with the fund’s annual cash flow to calculate the overall yield for the period evaluated.
As always, we appreciate the trust of our current investors and welcome new members to enable us to capitalize on the multiple opportunities we are seeing in the marketplaces where we are active. And moving into 2021 we are excited to see our investments and development projects continue to evolve, as we keep building on the foundation of our diverse portfolio.