Update, June 27, 2023 at 4:45 pm: Tidal stocks are feeling the brunt of rising interest rates.
According to a copy of an investor letter obtained by Tides Equities, the firm’s co-founders Sean Kia and Ryan Andrade told investors that capital calls (limited partners capital injection) will help boost the portfolio. The real deal.
The co-founders said in the letter that Tides Equities is facing cash liquidity problems due to rising interest rates. The company did not respond to a request for comment.
The Los Angeles-based investment firm emerged as one of the most aggressive multifamily buyers in 2021 and 2022, snapping up more than $6.5 billion worth of condos in the Sunbelt market, some of them in double digits over the period. rent increase.
But almost all of those acquisitions were made using floating-rate loans during a period of low interest rates. As interest rates rise, debt payments soar.
In the letter, Tidal said “properties that previously had good cash flow during renovations” suddenly became cash-strapped as operating income was increasingly used for fast-growing mortgage payments. “Many properties have gone into negative cash flow territory.”
Tides Equities has 47 loans due by the end of 2025 totaling about $1.5 billion, according to one agency. TRD Data analysis from DBRS Morningstar. The median loan size is $29.1 million, while the company’s largest loan due through 2025 is $99.5 million.
With nine properties — in Mesa, Arizona; Las Vegas; and Fort Worth, Austin, and Lewisville, Texas — Tides reports a debt service coverage ratio of less than 1, meaning the company has no Generate enough income to pay off debt.
As of June, its loans averaged 3.91%, with the highest being 6.9% at the Tides on Country Club in Mesa, a 582-unit complex.
Tidal isn’t the only multifamily homeowner facing the fallout from rising interest rates.
The delinquency rate on CMBS loans tied to multifamily properties jumped to 3.04% in March, compared with 1.66% in March 2023, according to Trepp.
“Multifamily investment is at record levels in 2021,” said Scott Rechler, CEO of New York-based developer RXR. “There will also be record levels of multifamily development coming online in 2023, 2024.” TRDThis month’s podcast Deconstruction. “All these loans are being made at low or no interest rates. That’s where the day of reckoning is coming.”
Kia emphasized the message to Realty Alert: “We are not alone,” he said.
Earlier this year, Tidal already acknowledged that it was struggling with rising interest rates.
“Frankly, we’ve given it our all. I’m sure most of our peers are probably in a similar situation,” Andrade said. Tell TRD in January. “When you’re buying a property, it’s the worst-case scenario. But that’s why interest rate caps exist.”
Andrade told Real Estate Alert that as much as 20 percent of the current Tides portfolio, which covers about 32,000 units, may require additional funding. The company first reported the letter.
Andrade added that Tidal tried a number of other strategies to raise cash before resorting to a capital call.
To tide it over until more money comes in, Tidal is temporarily using its own money to help pay the mortgage.
“As the circumstances of these circumstances are beyond our control, unfortunately, we cannot guarantee that we will maintain a perfect record of making mortgage payments on time,” the co-founders said in the letter, adding that returning the keys to the lender is a “possibility”.