Are you receiving distributions?

Question

I'm curious to know which sponsors have been paying out distributions during this pandemic. If you’re a limited partner and your sponsor has not been paying distributions, what are your thoughts? If you are a limited partner and your sponsor has been paying distributions, what are your thoughts?

Steve Chan · Answer

@Brian Adams I'd like to preface what I'm about to say with a few points:

• I think the correct answer depends on the goals of the limited partners in an investment; therefore, I do not believe there is a "correct" answer to my question. My question comes a standpoint of curiosity.
• I believe that capital preservation should be the number 1 goal of every sponsor. So, if withholding distributions in order to protect your investor's capital is necessary, I would fully support that.
• Having the support of you partners is of utmost importance, which highlights the importance of effective communication, regardless of the chosen strategy regarding distribution adjustments.

With those points established, I have continued to receive distributions and that has strengthened my confidence in my partners. 1) Buy for cash flow, 2) secure long-term, low leveraged debt, and 3) have adequate cash reserves are principles that guide the business. So, in my opinion, paying distributions during economic uncertainty demonstrates that the business plan properly accounted for these principles prior to the unforeseen economic event.

Also, one of the most important attributes of an investment for me is passive cash flow. So, if I were put in a position that stopped that cash flow, I imagine that my confidence in that sponsor would decrease. However, I say that very carefully, knowing that economic uncertainty is extremely high right now considering the many variables that this coronavirus pandemic has created.

Daniel McNulty · Answer

@Steve Chan

I have received all distributions like clockwork.

If I stopped receiving them, I would view it quite negatively. Regardless of extenuating circumstances, underwrite conservatively and execute as planned or I will take my business elsewhere.

Brian Adams · Answer

@Steve Chan I agree 100% with your points.

As a sponsor when I have had to defer cash flow payments, I clearly communicated with my investors the "plan". Why a deferral was necessary, the steps to accomplish the plan and ultimately paying the investors their deferred cash flow payments.

My situation was to redirect investor cash flow payments back into a value-add property so we could upgrade and turn vacant units quickly. It resulted in additional value of about $3.5 million so the investors were thrilled with the end result.

Were all investors thrilled in the beginning with zero cash flow for a couple of quarters...no.

The best sponsors in my opinion are those that are in regular communication with their investors to keep them updated. Even when the update is not good news.

Shannon C. · Answer

I know this is old but in case you're still curious:

I'm invested in a dozen deals total across four different sponsors. They've all taken a slightly different approach during the past year.

One syndicator suspended distributions entirely. This asset was slightly underperforming before Covid anyway, so it didn't come as a huge surprise. I do feel like transparency and communication could have been better around this decision though.

One sponsor temporarily switched most distributions to from monthly to quarterly. I thought this was a thoughtful approach and appreciated the communication about it.

One sponsor kept the frequency of the distributions but reduced the amounts in order to conserve cash. This seemed reasonable to me as well.

One was able to keep the monthly distributions at the full amount. Obviously that was my favorite approach because I am invested for the cash flow, but that had more to do with the profile of those deals than anything, so I understand why it wasn't possible (or smart!) for every deal!

Overall, as others have said above, I think communication with investors is the most important thing. I understand that these are tough times and different decisions need to be made. Generally speaking, these decisions increased my confidence because part of the reason I'm with those particular sponsors is because their risk tolerance aligns with mine, and I believe these were smart, conservative decisions given the uncertainty.

Steve Chan · Answer

Thanks for the feedback Daniel! Is there anyone on the other side of the fence that has invested with a sponsor that has not been paying distributions? How has that impacted your perception of that sponsor?

Eduardo Calle · Answer

@Steve Chan So far i still receiving monthly distributions from all three different propertie investments i have with Ashcroft Capiital.

Brian Adams · Answer

@Steve Chan has your confidence in the sponsor changed?

A good operator should be communicating regularly with the investors and sharing the good, bad, and most importantly the ugly.

Steve Chan · Answer

I understand the technicalities of the distributions. My question is geared towards LP's perception and how withholding/paying distributions made them feel about the sponsor that they invested with. For example, if you invested with a sponsor that withheld distributions, did your confidence in that sponsor increase because you thought they were taking the necessary precautions to protect your investment, or did your confidence in that sponsor decrease because you thought they did not plan for enough reserves?

Will Dixon · Answer

@Steve Chan

Yes still received distributions for Q1. In the past it was 13% CoC but it was reduced to 12% to improve liquidity since the investment is near the Permian Basin and heavily impacted by the oil crash. I know other investments in the portfolio have been classified based on liquidity and distributions reduced as necessary.

For a lot of class B multi-family, the combination of increased UI benefits and stimulus payments have allowed collections to stay relatively unaffected. I expect Q2 to be unchanged. Hard to say whether Q3 will have people going back to work or if the federal unemployment supplement will be extended.

Mike Dymski · Answer

Most syndicated investments trade various levels of leverage and liquidity for higher returns.  Sponsors can flex this trade off during tough economic times by reducing distributions and holding more liquidity (which reduces risk and investor IRR).  Same goes for most any business...or personal balance sheet.

Are you receiving distributions?

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