Pepper Pike initially had an impressive track record but became greedy far too quickly. I invested early in several deals in the Indianapolis area, while receiving next to no distributions over a four-year period. However, after those initial acquisitions, the firm moved aggressively to purchase four to five additional properties. This forced them to simultaneously build new management teams and attempt major upgrades across seven properties in a very short time frame.
As expected, their resources were spread too thin, and problems began to cascade rapidly. The firm repeatedly came back to investors with capital calls and mezzanine debt, forcing investors to double and even triple down, which was a clear indication that the deals were deteriorating.
To make matters worse, while these issues were unfolding, CEO Paul Kiebler approached investors for funding on a Michigan property called Waverly. This occurred despite his full knowledge of the ongoing problems in the existing Indiana portfolio. He actively downplayed those issues while promising resolve all these issues and Waverly would not be an issue to manage, which represented a serious breach of fiduciary duty and possible fraud since Paul has an obligation to focus on stabilizing existing assets and was most likely aware the properties were going to fail as he continued to raise funds. It appears his focus was on continuing to make large acquisitions fees and collecting management fees before the entire house of cards collapsed.
Riverbend could have been sold in 2022 for a substantial profit for everyone, including Paul. He reportedly had an offer of $179M, with a cost basis around $123M, possibly slightly higher, which likely would have delivered roughly a 3x return to LPs. While I don’t have the exact figures, the ROI should have been significant. Instead, Paul chose to hold out for an additional $10M, a decision that ultimately led to major losses for the LPs. Riverbend has managed to stay afloat for now due to a $20M capital infusion from another investor to salvage the deal. However, this came with new preferred equity, pushing the breakeven exit point to around $180M. This appears to be yet another misstep in what has become a growing pattern of poor decisions.
As of this writing, four to five properties have been taken back by lenders to the best of my knowledge. There are numerous lawsuits from unpaid contractors for huge sums of money, as well as a lawsuit from the Indiana Attorney General’s Office citing more than 130 health code violations at one property. Investor relations have attempted to deflect blame on rising interest rates while refusing to accept responsibility for their mismanagement, excessive risk-taking, and operational failures. Communication with investors has largely ceased, with emails to investor relations going unanswered.
