Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).
@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
