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  The Wall StreetJournal - 05/24/2023 Page : A001 This copy is for personal, non-commercial use only. Do not edit, alter or reproduce. For commercial reproduction or distribution: Contact Dow Jones Reprints & Licensing at (800) 843-0008 or djreprints.com Powered by TECNAVIA Choice Hotels International is seeking to buy Wyndham Hotels & Resorts, according to people familiar with the mat- ter, a deal that would create one of the biggest budget ho- tel owners in the country with brands including Days Inn and Econo Lodge. The companies, each valued at just under $6 billion as of midday Tuesday, aren’t in seri- ous talks and it isn’t clear whether Wyndham wants to do a deal. If it doesn’t, Choice Hotels could take an offer di- rectly to Wyndham’s share- holders, some of the people said. It is also possible that nothing will come of the bid. Wyndham shares surged on news of the possible deal, re- ported by The Wall Street Journal, closing up more than 5%. Choice shares, down be-  Hilton, Marriott face off in extended-stay battle............. B6 fore the report, dropped 4.6% on the day. Both companies primarily cater to budget-conscious con- sumers on the road for leisure or extended work trips. Choice Hotels, whose brands include Quality Inn, Econo Lodge, Clarion and Comfort, has said that it wants to grow in the so-called upper-midscale and upscale segments, and combining with Wyndham would help with that effort. The lodging industry, from the high to the lower end, is benefiting from the return of travelers to hotel rooms, res- taurants and event venues. Hotel owners were battered at the onset of the pandemic as travel around the globe screeched to a halt. One group PleaseturntopageA2 BY LAUREN THOMAS AND DAVID BENOIT ey Diehards ing to Fold i i d or phone payment, y! Don’t comply!’ murmured some names—a coffee shop, a bakery. “OK, we can do this,” Hicks said. “It’s not too late!” Some 200 years after tex- tile workers smashed newfan- gled looms here during the first stirrings of the industrial revolution, other rebels are worried about a newer tech: tap-and-go bank cards and PleaseturntopageA10 last year drew promises from across the North Atlantic Treaty Organization to boost military budgets. Members have pledged to place multibillion-dollar weapons orders and put arms industries on a war footing. But, more than a year later, countries are moving at sharply different speeds, with some believing the poor per-  Russia fights to regain full control of border region...... A7 formance of the Russian mili- tary means they don’t have to reinforce so quickly. That divide is greatest be- tween neighbors Germany and Poland. Berlin this year will fall $18.5 billion short of a pivotal PleaseturntopageA7 ending Divides NATO ticks down................................... A4  Stocks decline amid debt- ceiling negotiations............... B11  Heard on the Street: Dust off the 2011 playbook................. B12 ing whether company coordi- nation affected sales more broadly, outside of the Women, Infants and Children formula-supply program, In January, the FTC had asked Abbott, one of the lead- ing manufacturers of baby for- mula in the U.S., for informa- tion for the agency’s Reckitt Benckiser, the third company frequently awarded WIC contracts, said it can’t comment on specific govern- PleaseturntopageA6 Few investors rode the pandemic-era housing boom as high as Jay Gajavelli. Fewer still have fallen as far. Before Gajavelli found his real-estate ca- reer, the 61-year-old immigrant from India was just another information-technology worker, putting in 60-hour weeks for a mid- dling job in Dallas. Last year, Gajavelli’s com- pany owned more than $500 million worth of Sunbelt apartment buildings with more than 7,000 units, and was one of Houston’s biggest landlords. Over the past four years, Gajavelli built his real-estate empire using funds from doz- ens of small investors who wanted a chance to earn a landlord’s riches without any of the work. He pitched double-your-money re- turns in ebullient, can-do talks at investor conferences and on YouTube videos. He described buying buildings with plans to upgrade units, raise rents and sell for a profit after as little as three years. The idea that everybody needs a place to live was the PleaseturntopageA10 By Will Parker, Konrad Putzier and Shane Shifflett A Housing Bust Comes For Small-Time Investors Thousands of people risk losses in apartment-building purchases Choice Hotels Seeks Wyndham to Forge Budget Hotel Giant INSIDE DeSantis help form an AI rival to teased an announcement via Ron DeSantis. A6, B4 WORLD NEWS Pretrial detention is extended for WSJ reporter Evan Gershkovich. A7 THE WALL STREET JOURNAL F o r p e r s o n a l , n o n - c o m m e r c i a l u s e o n l y .
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  The Wall StreetJournal - 05/24/2023 Page : A010 This copy is for personal, non-commercial use only. Do not edit, alter or reproduce. For commercial reproduction or distribution: Contact Dow Jones Reprints & Licensing at (800) 843-0008 or djreprints.com Powered by TECNAVIA Real estate syndicators’ annual fundraising Source: Wall Street Journal analysis of Security and Exchange Commission filings 2010 ’15 ’20 0 10 20 30 40 50 60 $70billion 2022 $66.23 mania where people wouldn’t even look at the unit,” said Co- lin Ralls, principal of Phoenix- based property manager Acora Asset Management. Prospec- tive tenants would just apply, he said. Syndicator investors have few legal protections, said Joan MacLeod Heminway, a securities-law professor at the University of Tennessee in Knoxville. Unlike public com- panies, syndicators in many cases aren’t required to give regular updates on their build- ings’ financial performance, she said. As limited partners, investors have no say over spending. Some who lost their investment never knew the properties were in trouble un- til they were near foreclosure. Munzer Haque, a former IT professional in Plano, Texas, said he was Applesway’s larg- est individual investor in the company’s four foreclosed properties and in two others he described as in trouble. Haque said he and his wife, both in their 60s, lost millions of dollars, the majority of their life savings. Their two adult children also invested in Applesway and lost money, he said. “When you trust the wrong person, that’s the highest risk,” Haque said, “because you give them everything.” Many syndicators are rac- ing to either raise funds or sell properties before tipping into foreclosure. Most hold bal- loon-payment loans that re- quire repayment when they come due this year or next. Those syndicators face large payouts at a time when get- ting new, more affordable property loans will be diffi- cult. Even firms with multibil- lion-dollar portfolios have used syndication to buy apart- ment buildings that no longer make enough money to cover debt payments, bond docu- ments show. “The bubble is going to start popping if these guys can’t get out of these deals in time,” said Ralls, of Acora As- set. Lenders also risk heavy losses. This account of Gajavelli and Applesway is based on in- terviews with his investors, tenant organizers and others who did business with him and his company, as well as securities filings, investor doc- uments, social-media posts and property records. Get on board Gajavelli grew up in a lower-middle-class family in rural India before immigrating to the U.S., he said in one of his promotional videos. After finishing one exhausting work- week, he said, he was struck by a thought that changed his life: “I’m sick and tired of working for my money.” That was when he decided to become a landlord, he said. In time, “I was able to replace my IT income,” he told pro- spective investors last year in a webinar. “I live on my own terms.” Gajavelli passed on that message to Shri Sinha, an- other IT professional, saying he had acquired more than $400 million worth of rentals and was looking to buy more. “That’s what got me attracted to him,” Sinha recalled. They were on a bus tour of Dallas apartment buildings last year, hosted by real-estate investing coach Brad Sumrok, who drives a Ferrari with the vanity license plate “APT KING,” according to his social- media posts. He, too, assem- bles investors as a syndicator to buy apartment buildings. Sumrok also charges for mem- bership in his real-estate in- don’t have down payments to buy the home,” he said in a webinar for prospective inves- tors last year. “They live in apartments forever.” That calculation propelled thousands of similar apart- ment deals by investors across the U.S. who hunted for build- ings where they believed ten- ants could be charged much higher rents than what they were paying. In Sunbelt cities such as Phoenix, Las Vegas and Atlanta, these so-called value-add purchases ac- counted for more than 60% of all rental-apartment building sales over the past decade, ac- cording to property-data firm CoStar Group. “As soon as someone de- tects a property with rents priced below market, it’s now guaranteed a syndicator steps in and changes that,” said An- ton Mattli, chief executive of Peak Financing, a company in the Dallas area that has ar- ranged loans for syndicators. Syndicators generally invest little of their own money. They collect acquisition fees from investors that typically go from about 2% to as high as 5% of an apartment building’s purchase price. They also take management fees of 2% to 3% from the building’s gross in- come. Syndicators often profit even if the investment is a failure, which real-estate ana- lysts say encourages excessive risk-taking at the expense of inexperienced investors. During the pandemic, syn- vestment clubs—as much as $35,000 a year—where he teaches the ropes to pros- pects. “Just love collecting rent from 9,716 miles away,” Sum- rok said in one post. “Invest in apartments and make money while you travel.” Gajavelli belonged to one of Sumrok’s clubs, the “Million- aire Multifamily Mastermind,” and he had joined Sinha that day on a tour of buildings that showed off the past success of club members and showcased properties that offered new chances at riches. After meeting Gajavelli, Sinha agreed to invest $75,000 in a 706-unit apartment com- plex called Reserve at West- wood in southwest Houston. The complex was selling for $76 million, and Gajavelli told investors that with rent in- creases, they could more than double their money in three to five years, Sinha said. High demand for affordable housing and a limited supply meant working-class renters had few options, Gajavelli told investors. “Unfortunately, they don’t have good credit. They Thousands had hoped to earn a landlord’s riches without the work. dicators found it easier than ever to raise money. Sean Tate, a Dallas-based real-es- tate attorney who has worked with syndicators, said he was inundated with calls from peo- ple seeking help to syndicate rental-apartment deals. Many of the callers learned about the chance to become a landlord from social-media ads, Tate said, and had little idea of what they were getting into. “You couldn’t get on Facebook without the algo- rithm saying ‘Deal! Deal! Buy multifamily!’ ” he said. One of Sumrok’s mentors, Grant Cardone, a former car salesman from Louisiana turned syndicator, has amassed 4.3 million Instagram followers, and his company bought $618 million worth of apartments in 2019, according to CoStar. In one December 2020 presentation, Cardone tells the audience that making only $400,000 a year is em- barrassing. “My plane eats $2.7 million a year,” he said. Cardone didn’t respond to a request for comment. Broom clean A video for prospective Ap- plesway investors that was posted in December 2021 fea- tured the 704-unit Houston apartment complex called Timber Ridge. Applesway, Ga- javelli’s company, bought the complex that month for $56.7 million with plans to more than double investor returns by raising rents and adding tenant fees for washing ma- chines and covered carports. The investor video showed a tidy complex of apartments arranged around a shimmering swimming pool. By summer 2022, the pool water had turned a sickly green. High piles of trash littered the park- ing lot. Tenants complained to city officials about rats, mold, illegal evictions and the failure of management to properly maintain the buildings. Last July, Houston Mayor Sylvester Turner visited the Timber Ridge Apartments and threatened legal action. “The situation that the people are living in right now is deplor- able,” Turner said at a news conference in the property’s parking lot. “And none of us would want to live in it.” “The tenants were desper- ate,” said Mitzi Ordoñez, a for- mer staff member of the non- profit Texas Organizing Project. The group had worked with the mostly low-income, Spanish-speaking tenants to get help from the city. For most of 2022, Ap- plesway sent brief updates to investors about the company’s various properties, as well as monthly cash disbursements based on the amount of their investment. Sinha said the first big sign of trouble came this year in a late February email. Gajavelli asked investors for additional funds to shore up property fi- nances at Reserve at West- wood, the Houston apartment complex he had invested in. “I want to let you know that things are not going well,” Ga- javelli wrote. In March, Gajavelli told in- vestors no money was needed after all. In early April, he sent investors letters telling them the buildings had gone into foreclosure. “Few things are more painful than having to notify investors of a failed business,” he wrote. Gajavelli offered a silver lining. “We suggest that you contact your tax advisor to discuss how your investment loss can be recognized on your tax filings,” he wrote. bedrock of Gajavelli’s pitch. “I never worry about [the] econ- omy now,” Gajavelli told inves- tors in a webinar presentation last year for his company, Ap- plesway Investment Group. “Even if [the] economy goes down, still I make money.” Gajavelli’s investors were, in fact, highly vulnerable to in- terest-rate increases over the past year that crushed the business model they and thou- sands of others in similar deals across the U.S. had hoped would make them wealthy. For them and a host of small investors —who were expecting a share of rents and a piece of the profit in an eventual sale—it is looking like a looming investment- property disaster. In April, Gajavelli’s com- pany lost more than 3,000 apartments at four rental com- plexes taken in foreclosure, one of the biggest commercial real-estate blowups since the financial crisis. Investors lost millions. Gajavelli didn’t re- spond to requests for com- ment. His company had taken out commercial real-estate loans that carried floating interest rates and were adjusted each month. Those types of loans in 2021 offered initial rates as low as 3.5%. Everything changed when the Federal Re- serve began raising rates last year, driving up monthly loan payments. Inflation contrib- uted to higher expenses, and Applesway couldn’t raise rents fast enough to keep pace. Af- ter bills went unpaid, company properties went into foreclo- sure. Gajavelli is one of thou- sands of real-estate entrepre- neurs in the U.S. known as syndicators. Many have come under similar financial pres- sures and hold properties they can no longer afford. From 2020 through 2022, real es- tate syndicators reported rais- ing at least $115 billion from investors, according to a Wall Street Journal analysis of Se- curities and Exchange Com- mission filings. So far, defaults have been rare. But real-estate analysts and property investors antici- pate a wave of foreclosures ahead. Congress in 2012 opened the door to the syndicators with a law that made it easier to market real-estate invest- ments online. The law, in- tended to open financial op- portunities to lower-income people, greatly expanded the reach and audience for syndi- cator deals. Syndicators largely favored apartment complexes in the South and Southwest, where real-estate prices were lower, rents were rising and housing regulations were generally looser. Many of these locales had fewer renter protections, which made it easier to evict tenants and raise rents. The rental-market boom made millions for syndicators and their investors through rising rents and escalating property values. Average rent for a one-bedroom apartment in Phoenix has increased 37% since January 2021, driven by pandemic migration and a lim- ited housing supply, according to the rental listing site Zumper. “There was this huge ContinuedfromPageOne Apartment Investors Face Losses Clockwise from top, the swimming pool at the 704- unit Timber Ridge Apartments in Houston last summer, which was owned by Applesway Investment Group at the time; a boarded-up unit last summer at the complex; Jay Gajavelli of Applesway in a still from an online video. The Houston mayor last July said living conditions at the complex were deplorable. sources to fund studies to show how cash is an impor- tant piece of infrastructure. Simon Youel at Positive Money, a nonprofit, says by cards but pays with cash as of- ten as he can. He and his wife bring hundreds of dollars on twice-monthly runs into town. He said he has never been old people’s home,” said one brother, Fred Fairbrass. “With- out cash, those people are ab- solutely stranded.” Brett Scott, author of withdraw cash. In the U.S., Congress is mulling legislation that would require businesses to accept cash, as is already the case in some cities, such Cash withdrawals ticked up slightly in the U.K. last year, the result, economists say, of people wanting to sock some away. young woman replied. “That’s OK, then,” Hicks said, taking a bite before look- ing around for a café that might take cash, too. MITZI ORDONEZ/TEXAS ORGANIZING PROJECT (TOP; BOTTOM RIGHT) EAGLEVIEW One of the four Houston apartment complexes owned by Applesway that went into foreclosure. F o r p e r s o n a l , n o n - c o m m e r c i a l u s e o n l y .