Is it really this bad with syndicators?

Question

We run investor relations in house with our company - so I believe this adds another level of transparency when communicating with investors.

So every month we have a member of our team reach out to investors to check in and see if they have questions, wish them a happy anniversary for investing and just check in…..

Over the past few months we have had multiple investors panic on calls noting “please don’t tell me my investment is gone” (NOTE as we mention above not purpose of call), as several have noted they cannot take another complete loss on investment.

They have noted who they invested with and several of these sponsors used to be huge contributors to a BP and now have gone completely dark on their investors or but continue to pump out podcast episodes and speaking engagements…

So my question is: is it that bad out there in the syndication space?

Drew Sygit · Answer

@Chris Seveney I remember when cupcakes shops were popping up everywhere and were a big thing.

Then, poof, most of them were gone!

Just one example of a market getting overheated and then right-sizing.

Same is going on with syndications, STRs and soon LTRs.

BP took off after the Great Recession when investors could buy almost anything and rent it out for positve cashflow. Now investors, especially the newbies, are chasing returns by going after higher risk investments - many NOT really understanding the true risks.

Many more investors will be losing money and choosing to liquidate real estate - which will be buying opportunities for the better prepared investors.

Gino Barbaro · Answer

@Chris Seveney

I think those that took short term debt, trying to extend their terms, and now that the 10 yr has shot up, it's gonna be very interesting. There will be opportunities to buy deals at a discount.

We all have short term memories. This is just a repeat of what happened in the last down cycle, even though it happened over a decade ago. Cheap money and low rates produce euphoria, which increases flow of money to an asset, which pushes up the price to uninvestable levels.

I think it's going to get worse than better in the short term.

Gino

Andrew Hogan · Answer

Yep, a recurring theme is that communication from the operators is essential -- especially during challenging times. Investors want to hear good news fast and bad news even faster...

Evan and Jay talked about other operators doing "Skinny" deals, with not enough in reserves and/or too much leverage. You simply can't be cash-poor today or you're toast.

I suppose "Only when the tide goes out do you learn who has been swimming naked.”

- Warren Buffett

Evan Polaski · Answer

@William Coet, what can cause a total loss in syndication?  The most common answer, especially in recent times, is highly levered, floating rate debt.

This is not the only answer, by any means.

Historically, real estate will appreciate over the long term.  The issue is: can the operator survive to that "long term".  If the floating rate debt starts costing too much and there is no capital to replace a rate cap, reserves run out.  No reserves and no cash flow = capital infusion from investors and/or return property to bank.  Buyers have trouble underwriting deal with current rates, so price goes down.  All equity lost.  You LP lost everything.

Other ways, poor property management team isn't managing property well, and syndicator bought in tertiary market with only one or two managers available and no way to self manage.  Possibly break loan covenants and can't cure default, lender takes back property.  Foreclosure sale price + accrued costs mean sale price on satisfies loan.  All LP equity gone.

Even before interest rates took a huge jump: property bought with 75% LTV first mortgage, pref equity up to 90% LTV, and funded last with LP equity.  Capex budget was underfunded.  First unforeseen issues wipes out all cash flow and reserves.  Foreclosure sale could sell at same price as original purchase, but with accrued interest and fees, all LP equity gone.

At the end of the day, all LPs loses boil down to an issue with cash flow available and/or a decline in overall values.  While real estate values do rise over time, if you can't cover your bills during the downturns to get you into better times to sell, you are likely to lose money.  Depending on how far values decline is the difference between a partial loss and total loss.

Evan Polaski · Answer

@Chris Seveney, even in good times, I would have this experience on proactive outreach.  There are at least a couple factors at play.

One, societal norms that your phone only rings these days for someone selling you something or something bad happening.

Two, these are passive investors.  The ones that truly understand it often don't want to be bothered, so, slightly back to one, are assuming that any outreach is bad news, otherwise, let it go.

Everyone's preferences are different, but I found sending out a semi-generic email with a link to schedule time with me was the best way to reach the most people, and people that wanted to talk without making them assume something bad was happening.

And for those that I may be wanting to connect with that don't sign up from an email link, I will text them first, with a message along the lines of "I just wanted to check in and hear how you've been, address any questions, and give you a quick update on recent initiatives we have been working on" (or something along those lines).

Is it that bad out there?  I don't know.  For some people, it isn't too bad.  But given most people's diversification is value-add multifamily in the southeast, bought in 2021/2022, and the only real diversification is between one BP/LinkedIn sponsor and the next... well that isn't very diversified.

Chris Seveney · Answer

I saw a post yesterday on twitter where someone said Real Estate with interest rates where they are at is a bad investment. I immediately did the wrong thing and started assuming this person has limited time in investing in real estate (which was a correct assumption). This is just my opinion and most likely wrong, but the US and its printing of money put themselves in this hole where now their debt is expensive to service which is why rates are high. But this will also lead to future inflation.

The issue is going to be the rich will get richer as they can live with lower cash flow but gain appreciation. That is how my portfolio had been stacked for 10+ years - I would buy class A/B assets with little cash flow but hold long term for appreciation. This has been the most successful model I have seen in real estate.

This goes 100% against every guru and investor the past 5 years of get rich quick of buy, rehab, rent and refinance with little money - that video game is out of order so the gurus need to reinvest themselves and they are trying with seller financing and zero down. This will crash and burn eventually when real estate (temporarily) resets itself and reprices the assets down.

Reality is most of us who make it long term work our butts off in a W2, save as much as possible and build it over time -- When I see people want 10 properties in one year with no money down - I question how realistic that is, of course anything can be done but is that even the right play unless your sitting on $2-$3M in cash?

Jay Hinrichs · Answer

in essence its the same position of those who make second loans behind the first or third position when pref goes in front of you.. If you think about it in a mortgage sense.. So if the LP's have enough cash they simply pay the loan off and own it free and clear.. but the size of the deals are so large raising cash to pay off debt simply is not realistic at all so if the property goes into default your junior position investors find themselves wiped out.

Further more thats why a debt fund like Chris has can be a good choice for the very conservative investor.. U invest in the fund and there is no debt ahead of you you own the debt free and clear the only risk is they buy the wrong debt and the underlying collateral does not support the investment.. which is why you go with folks that have a lot of experience in the space and now how to value the collateral. But the chance of a wipe out like those that are coming in as equity basically in a junior position is mitigated.. This is true for all private money lending situations.. And of course being in a first position loan is ( everything being equal) the safest position if the collateral has been valued correctly.. Other wise we would not have banks loaning money and we all know banks take the first position the safest.

What an investor gives up though is tax bene's and the chance ( well at least proforma wise) that you bought at X cap rate and can sell at Y cap rate and there is a big profit that is added on to your returns.  But when it goes the other way.. Syndicator bought at to high a cap or caps Drop like we have seen and or as we all know sort term debt etc etc.. thats what leads to wipe outs.

Jay Hinrichs · Answer

I think so at least for the ones we read about on BP..

I had the same experience total loss on multiple syndication deals

So I am feeling pretty good about how we are doing.. No one is perfect though in RE

if your doing volume your going to have a few that are bummers but at least in our program

there is control.. not this feeling of helplessness when you hand your money over to a syndicate and they go dark your totally out of control of your funds.. So investor need to choose wisely.

Marina Wong · Answer

@Chris Seveney  As an LP in multiple syndications, this year is definitely a horror show. I have started investing for a few years and had some good results with a few GPs but even those GPs who had been coaching other people had really bad results this year (mainly no distribution). Some of them have less than 1 DSCR (not foreclosed yet) and one of my smaller syndication could end up in foreclosure. The managers are non-communicative. While they did try to get the lender to work with them, they don't want to replace the management company because they are part of the GP. We should have a "good, bad and ugly" GP list for people to look up and avoid these GPs in the future.

I wonder if anyone of you have heard of 711 Rescue and can let me know if this kind of company might be able to help the LPs. They are not cheap. One of the LP just emailed me and said they are raising 65k to enlist help from this company. Any info on what you think can be helpful for the LPs is greatly appreciated. TIA

Is it really this bad with syndicators?

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