As a multifamily operator, we look forward to getting past these volatile times and into a more predictable lending environment but unfortunately there will likely be some casualties in the syndication business. Trouble will come from inexperienced operators who were ill equipped to handle unexpected and prolonged adversity or did not conduct proper risk management, much like the several dozen of failed or distressed banks making the headlines recently.
There will be some good deals to be had for savvy and patient investors that act on the old adage “buy low and sell high” but just how do you pick the right sponsor team to partner with or the jockey as they say? There is just no replacement for track record and is the single best predictor in the long term success of your investment. You will want to work with an operator with a sufficient size portfolio, assets under management (AUM), operational history, and niche expertise. Ask how many deals have gone full cycle and what were the actual results versus projections, and how much of the results were attributed to market conditions vs. operational expertise. It is preferable that the operator has market cycle experience either in multifamily or running a major business, particularly through the 2008 Great Financial Crisis, as well as a history of successfully navigating through operational challenges. Additionally, ask if the sponsor has ever declared bankruptcy, lost a property or investor’s money, issued a capital call, paused distributions, or performed below expectations.
The investor should also assess the financial stability of the operator and whether it is profitable and have ample liquidity and balance sheet to not only qualify for loans but also to backstop unexpected adversities. You should also review the background of each team member to assess their qualifications and experience and whether those skills transfer to their current roles. Ideally, you will want to see dedicated members in key roles like asset / acquisitions management, investor relations, and strong back office support. Some operators tout having in house property management but there are pros and cons to both in-house vs. third party. You may have more control with an in-house staff, but you also give up the independent assessment and vendor relationships that a reputable long-time third party manager specializing in your asset class / submarket can provide in addition to the sponsor’s own underwriting.
Most investors cite communication as one of the most critical determinants whether they will invest with the sponsor again, regardless of performance and we fully agree as transparency and communication are two of our core values. We believe that proactively reporting good and bad news (and what the sponsor is doing about it) in a timely manner is the only way to ensure investors that we are good stewards of their precious capital. You will want to see monthly or quarterly updates highlighting execution of business plan, wins and challenges, as well as actual vs. projected Key Performance Indicators (KPI’s) and financials to evaluate the sponsor’s operational expertise. Ask to see past samples. A serious sponsor should also have an investor portal that stores all of the important documents like the PPM, OA, SA, K1s, etc.
And you should expect reasonable response time to inquiries prior to investing (can you imagine if the communication was poor prior to investing, how about after they have your money!)
Don’t just blindly trust the information presented by the sponsor. Verify their online presence such as the company’s website, Linkedin profile(s), podcast (either as host or guest) and various social media sites. Look for evidence of honesty, integrity, and humility in how they interact with others. You can join various passive investor groups and ask around or ask the sponsor to provide you with a few investor and professional references.
You can also do background checks and look for any history of criminal, regulatory violations, bankruptcies, liens, and poor credit. Meet in person if possible to get a gut feel!
Break of Day Capital created a free evaluation tool with a comprehensive list of questions that you can use when evaluating the sponsor team. https://breakofdaycapital.com/investor-tools/
As always, please feel free to reach out to Joe if you have any questions. joseph@breakofdaycapital.com
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