Chahe Yerevanian, the chairman and chief executive of real estate company Sayfco Holding, is clearly comfortable in his capitalist boots. He has no reason not to be, since he owns 50 percent of a company that by his own estimate is worth about $350 million and has accrued $40 million in net profits over the past three years. That profit is equal to or higher than what the entire company was worth when he and his brothers transformed Ara Yerevanian & Sons, the family business established by their late father, into Sayfco not even 10 years ago.
Related article: Q&A with Chahe Yerevanian
In the manner of a modern, corporate governance-oriented businessman, Yerevanian has no qualms disclosing his corporate pay to Executive — $40,000 per month versus an average employee pay of $3,000 — and explaining in generous strokes with the valuation brush that the company’s $350 million comprises assets — lands, the head office building, and cash and equivalent — of about $200 million together with $100 million plus in secured revenue streams from development fees.
The key to Sayfco’s rapid growth over the past three years has been its fee structure. Until 2010, Sayfco had success as a developer with the foresight to pursue projects that anticipated the shift in demand to affordable, small to medium-sized apartments on the outskirts of Beirut. The company was a conventional developer during these “old days”, Yerevanian says, buying land, designing a project, financing it with a mixture of own equity and debt, marketing and delivering the units and pocketing the profit.
From 2010, however, things took a radical turn. Yerevanian had picked up on the fact that he could sell his corporate expertise to landowners as a fee-based services package under a far more scalable business model whereby Sayfco provides development and marketing services while landowners retain the project ownership and the risk. “This has helped us grow exponentially,” Yerevanian says. “With our own money, we wouldn’t have been able to grow this fast. Secondly, it has limited our risks because we are purely service providers. It has helped to create what Sayfco is today.”
The foundations for the new model were provided by the reputation the company had built in the Lebanese market and by its strong promotional and sales track record, which was fueled by apt use of Facebook and online advertising.
The company applied the services formula in the execution of 11 of its 14 projects from the start of 2010 through the summer of 2013, a period during which Sayfco sold 3,109 units in total. Of these, 500 or fewer were units which the company developed conventionally as project owner. Yerevanian tells Executive that he expects to boost his portfolio cycle from these 14 projects to 50 projects in the next couple of years. The vast majority of these upcoming developments will also not be owned by Sayfco.
As Yerevanian admits, the Sayfco of 2013 has become “a pure service provider” but he also likes to describe the business model as that of a “real estate factory” because of its streamlined processes.
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The way in which their “factory” generates profits is akin to revenue structuring by a funds management company. When signing Sayfco as their project developer, the landowner agrees to pay 8 percent of sales value over the project cycle. This comprises a basic development fee of 5 percent, calculated from the total projected sales value of the project, plus another 3 percent fee on sales.
This 5 percent basic fee is split into two equal tranches of which only the first is paid in cash by the landowner. The second half of the fee is collected by Sayfco from the down payments put up by buyers who sign for units in the first wave of marketing.
Fees keep flowing into Sayfco’s coffers during the three to four year cycle of project execution and also after completion. The company takes 3 percent from the installments paid by buyers when each installment is made and it earns a success bonus after the final delivery of the project.
This success fee is a hefty 30 percent on all amounts in sales revenue that exceed the project’s sales target which the landowner and Sayfco agree upon when signing their initial contract. “If total sales at $2,500 per square meter were $100 million and we were able to bring in $120 million, 30 percent of those added $20 million is ours,” Yerevanian explains.
Sayfco’s services entail project research and market studies, a concept and basic design for the development, detailed architectural designs and permit files, securing of all permits and official requirements, advertising, online marketing and sales management, and collection of payments and handling of relations with buyers until final delivery of their units.
Not included in the basic package is the construction management. Sayfco offers this option for a 12 percent fee on construction value.
Strong, but not invulnerable
Besides requiring little in capital outlay, the beauty of the model’s scalability affords Sayfco advantages such as extensive use of its marketing and project planning skills and efficiency gains from the pricing power that the developer holds vis-à-vis its own suppliers such as architectural firms for whom Sayfco is an attractive client.
While the company does not have the same operating profit margins as a conventional developer, the larger numbers more than make up for this. Theoretically, taking a project with $100 million sales value and construction cost of $40 million, a full execution package with fees of 8 percent (of sales value) for development and marketing and 12 percent (of construction cost) for construction management will generate $12.8 million. Success bonuses for revenue coming in above agreed targets can boost the total to an even more capitalist-heartwarming $19 million if the project sales clock up 20 percent over target.
As a percentage of total revenue in a highly successful development, this means Sayfco accrues an operating income that can reach up to between 14 and 16 percent of total sales. According to Yerevanian, the price tag of Sayfco’s services amounts to about half of the 8 percent basic fee. This means not only that profit runs at about 4 percent of total sales value but also that Sayfco reaches the breakeven point for its participation rather early in the project cycle, as the first tranche of the 5 percent basic fee is to be paid by the landowner at contract signature and the second tranche comes in shortly after marketing launch, which is well before the start of construction.
The model appears, however, to be just as vulnerable as any property development scheme to the common cyclicality in the real estate business; periods of slow demand can conceivably translate into pressure on margins when Sayfco’s high outlays during the early project phases cannot be covered fully from down payments. Profit also could take a hit when adverse market trends keep the final sales revenue close to the initial price targets. This would impair or cut off the flow of success fees, which by all indications supply a very significant boost to net results.
So far, Yerevanian has navigated the recently sluggish streams of real estate demand in Lebanon very well. “In the past few months we have been selling 500 units a month. That is amazing,” he says. An example for the sales splurge was the 450-unit Les Roches project of chalets in Kfardebian, of which Yerevanian recorded 320 buyer reservations within less than a month. The marketing for the leisure units consisted of online promotions — a smart pre-launch campaign on Facebook where Sayfco is a global leader in the real estate sector by number of followers — combined with price psychology, enticing buyers with a low first down payment of $10,000 to reserve their unit.
“The down payment is extremely important. We have proven this with our many projects,” Yerevanian says, explaining that people are much more likely to sign up for a down payment of $50,000 that is staggered into five installments. “I am still getting my $50,000 but in a six-month period, whereas not many people will come in the other scenario when I say I want $50,000 as down payment.”
Possibly due to the heavy emphasis on promotions via social networking, Sayfco reached many local and expatriate Lebanese buyers in the age group of 25 to 39. Despite the low entry point to sign up for a unit and the less-established profiles of younger buyer groups, Yerevanian claims that legal defaults on purchase contracts were nil because the strong demand for the units so far always enabled the company to find another person to step into the contract if an original buyer had to pull out.
On to Beirut
A focus on low initial payments and unit prices that are attractive when compared with unit prices of larger apartments in the same area is also how Yerevanian plans to tackle the luxury market in Beirut — his next major move into new projects, which he says will be announced very soon.
Another important agenda point is the plan to transform the company again, possibly by partnering with a large Lebanese bank, whereby it could be shaped into a fund-like venture that buys land and develops it on behalf of financial investors such as high net-worth clients of the participating bank. “There are so many potentials that are not just talk, but have potentials for real people and banks to come in. That is why you will very soon see Sayfco managing 50 projects per cycle,” Yerevanian promises.
This will release the company from the constraint that the current base of client landowners numbers just about seven, who all approached Sayfco on their own, without the company having an acquisition strategy for this client group. On the other hand, upscaling the venture from 14 to 50 and diversifying, as Yerevanian intends, the activity into projects in every part of Lebanon, will be another challenge entirely.