I think I got dumber for watching that video. I love how they say rate locks are more expensive for some reason and it was unexpected. Ashcroft seems like a terrible operation if they keep paying inflated rate lock fees. These guys milked all the investors in the last 10 years and are now trying to maintain their status quo. See the recent "multifamily syndicators are scum" thread

 

They should probably coordinate their talking points next time.

Person A: Operations are solid

Person B: Properties in Atlanta have been impacted by bad debt and slow leasing. As a result, are underperforming expectations.

Person A: We don't anticipate a capital call

Person B: Properties will likely require additional capital for upcoming deferred maintenance 

 

Aren't the class A shares already quasi preferred equity? In the Ashcroft fund 3, class A is a 9% coupon with no upside. Good luck getting approval from two class investors to place additional preferred equity on top of the existing preferred equity class. If I was a class A investor and assuming it has priority positioning over class B, I'd be forcing a sale.

 

If I was in Class A I would be forcing class dilution and taking over the GP's equity stake. The only way to save this is to run those fuckers out of town becuase they are 100% still fee milking this.  The Class B shareholders are going to be pissed but if I was them I would rather have people with skills running the ship.  

Fuck does anyone have shareholder lists for these groups?  I smell an opportunity for an activist play.  Buyout the scared investors and gut these idiots. 

 

Obviously they're in a bad spot, but since I'm more junior just want to confirm for the future - regarding rate increases they should've had more cushion to deal with these issues, rate cap increases happened but again should've been aware of that and asked for more money up front? As an investor I'm sure you can say you should've known as the RE operator, but you also invested in the deal.

What are rebuttals you as an investor can say in the situation to the issues they're facing as a they should've been prepared? Or at this point is it more about knowing not to put anymore money in and where you can push for a sale and never invest with them again?

 

Yes and no. Reg D filings need more regulation from the SEC. Most of the investors were promised something ridiculous and they fell for it. Yes they're partially to blame but most of these investors are not knowledgeable. The syndicators have built their business on retail investors being clueless. When you can have an 18 year old spend a $1k in filing fees and then raise money for real estate projects with no experience, there has to be better oversight. The SEC has took their foot off the pedal here and i think the rate increases will decimate most of these multifamily syndicators.

Array
 
teddythebear

Yes and no. Reg D filings need more regulation from the SEC. Most of the investors were promised something ridiculous and they fell for it. Yes they're partially to blame but most of these investors are not knowledgeable. The syndicators have built their business on retail investors being clueless. When you can have an 18 year old spend a $1k in filing fees and then raise money for real estate projects with no experience, there has to be better oversight.

Why?  I said this on another thread, but why do we as a society have an obligation to protect greedy fools from the consequences of their actions?  If someone is deliberately lying or running a fraud that only a federal investigator is well placed enough to detect or stop?  By all means, lets crack down on that.  Just because someone promises pie in the sky returns doesn't make them a fraudster, it just means the people investing with them are stupid and greedy, and neither of those are or should be protected classes.

 

The government should not be our savior. I think this is a very weak position to take. In a democratic society built on capitalism, these things happen. Not all times are good times and we (those who lost $) can learn from this

I edited some statements because I’m trying to be nicer. 

“Bestow pardon for many things; seek pardon for none.”
 

I mean if it's true about the rate cap they bought initially, that's early 2021 late 2020 pricing (assuming a $50/60MM ish deal, right?). I'm a young AM guy so naturally pessimistic but who the hell was thinking in 2020/2021 that rate caps were going to explode to the degree they did? Not defending them but legitimately curious as well what they should have done, keeping in mind that hindsight is 20/20 blah blah blah

 

They can't be faulted for not foreseeing an increase in rate cap costs. No one did and if someone says otherwise, they're dumb for investing in real estate and not trading fixed income. HOWEVER, they are 100% at fault for not realizing that we were very late cycle and that 80% LTV debt fund execution + preferred equity on 1970s vintage assets is extremely risky.

 

Yes, of course. But so many of these sponsors came into the industry post GFC and seem to want to ignore what capital markets & asset values truly did during these times of economic crisis. Sure, short rates may fall but their asset's underlying fundamentals (& possibly credit spreads) will be fucked. These dudes are rate traders w/ no counter cycle experience. 

 
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In early 2020, I went to a syndicators conference in Colorado. Most of the big names were there including the Ashcroft team. The amount of inexperience among the operators was very apparent especially given the nature of the topics of discussion. The entire event felt like an MLM show (echoing the idea that everyone can be successful in multi as long as they do XYZ; strong emphasis on marketing). One of the key takeaways was that everyone was chasing asset value appreciation and pitching "passive cash flow". Most of the attendees were mainly concerned about getting the most amount of leverage available and were confused about why anyone would want to borrow Life Company financing. Even back then, right before Covid, many operators were looking for floating rate financing to take advantage of the yield curve.  

I would say that the idea that a light-moderate recession could be good for Multi is plausible. Here are some thoughts:

1) If a recession were to occur, it would occur because of the rapid climb in rates. In theory fundamentals are solid, hence why GDP growth is still going strong despite the drastic increase in rates. 

2) CRE (multi especially so) is largely a leveraged finance play. It is acutely affected by interest rates, much more than most other industries. 

3) If we were hit by a recession, presumably rent growth would slow (it's already pretty much at 0), vacancy rates may increase (which is plausible given lack of new supply coming online 1+ years from now and people still need a place to live), capital markets would dry up a bit (but life cos and agencies will still be lending). However, Debt Service constraints would diminish quite a bit which would lead to much better economics for multifamily properties assuming vacancy and rental rates aren't severely impacted (which even in 2008, they were not) and assuming that spreads don't blow out significantly

 

These guys are toast.  Why not be honest with the investors and stop throwing good money after bad?

Losing the deals because you didn't understand the market is one thing but throwing away more good money is terrible.

 

The government should have 0 obligation to police private investments like this RE: above post.

Excessive regulations have already cut off high quality growth companies from public markets. Look at the huge and sad drop in the amount of companies going public decade after decade. 

Now they want to put a collar on private markets because some greedy idiot gave his money to an obviously inexperienced "investor".

 
m_1

The government should have 0 obligation to police private investments like this RE: above post.

Excessive regulations have already cut off high quality growth companies from public markets. Look at the huge and sad drop in the amount of companies going public decade after decade. 

Now they want to put a collar on private markets because some greedy idiot gave his money to an obviously inexperienced "investor".

The cynic in me is that there aren't enough quality private companies to actually make it in public markets because public markets see straight through bull shit and demand profit at a certain point. Most private companies that have grown to unicorn status are just a pray growth continues forever and maybe we'll figure out how to be profitable at some point.

 
m_1

The government should have 0 obligation to police private investments like this RE: above post.

Excessive regulations have already cut off high quality growth companies from public markets. Look at the huge and sad drop in the amount of companies going public decade after decade. 

Now they want to put a collar on private markets because some greedy idiot gave his money to an obviously inexperienced "investor".

The cynic in me is that there aren't enough quality private companies to actually make it in public markets because public markets see straight through bull shit and demand profit at a certain point. Most private companies that have grown to unicorn status are just a pray growth continues forever and maybe we'll figure out how to be profitable at some point.

Bingo! You fucking nailed it!

I have worked with many private real estate operating companies who plan on going public. But once they begin to comprehend the compliances and legal standards of being a REIT, they do a 180-degree turn and run for the hills. 

 

They talk about rate caps but they don't talk about cap rates.  They also don't mention that the deals are under water and that the naked dscr is probably 0.6x DSCR.

 

Naked meaning if there is no rate cap.  Assuming your spread over SOFR is 300 bps, and your rate cap is 2%, you're paying a 5% rate. When the rate cap expires, with SOFR at 5.3%, your cost of debt is 8.3%.

If you're at a 1.28x on a 5% rate, at an 8.3% rate you'll be at 0.77X. (5 x 1.28 / 8.3) is the simple math behind that.

 

Curious if things have changed for Ashcroft and other firms like them? Can they recover, I saw they got $50mm in funding recently and bought two new deals in the last 4 months. Isn't this a bad time to buy? Thoughts on the overall firm pedigree and if they will survive? Always see that bingo book and noticed firms like Carroll which I thought had a great rep.

 

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