Facing cash crunch, Tides may call investors for more money

UPDATED, June 27, 2023, 4:45 p.m.: Tides Equities is feeling the brute force of rising interest rates. 

The firm’s co-founders, Sean Kia and Ryan Andrade, have told investors to expect capital calls — injections of equity from limited partners — to help boost the portfolio, according to a copy of an investor letter from Tides Equities obtained by The Real Deal.

Tides Equities faces cash liquidity issues, the co-founders said in the letter, due to rising interest rates. The firm did not respond to a request for comment.

The Los Angeles-based investment firm became one of the most aggressive multifamily buyers in 2021 and 2022, scooping up more than $6.5 billion worth of apartments across Sun Belt markets, some of which saw double-digit rent growth during that period. 

But those acquisitions were almost all made using floating-rate loans in a period of low interest rates. As rates have risen, debt payments have soared.

“Properties that had previously been positively cash flowing” during renovation periods “suddenly became strapped for cash, as the operating revenues increasingly went towards the rapidly rising mortgage payments,” Tides said in its letter. “Many properties entered negative cash flow territory.”

Tides Equities has about $1.5 billion across 47 loans coming due by the end of 2025, according to a TRD analysis of data from DBRS Morningstar. The median loan size is $29.1 million, while the firm’s largest loan maturing by 2025 is for $99.5 million. 

At nine properties — in Mesa, Arizona; Las Vegas; and Fort Worth, Austin and Lewisville, Texas — Tides’ reported debt service coverage ratio is less than 1, meaning the firm is not yielding  enough income to meet debt payments. 

The average interest rate on its loans is 3.91 percent as of June — its highest being 6.9 percent on Tides on Country Club in Mesa, a 582-unit complex. 

Tides is not the only multifamily owner dealing with the impact of rising interest rates. 

Delinquencies on CMBS loans tied to multifamily properties jumped to 3.04 percent in March, compared to 1.66 percent in March 2023, according to data from Trepp. 

“There has been a record level of multifamily investments made in 2021. There’s a record level of multifamily development that’s coming online in 2023, 2024,” Scott Rechler, the CEO of New York-based developer RXR said on TRD’s podcast Deconstruct this month. “All these loans were done in that low-to-no interest rate paradigm. This is where the day of reckoning is coming.”

Kia emphasized that message to Real Estate Alert: “We’re not alone in this,” he said. 

Earlier this year, Tides already acknowledged it was struggling with rising rates.

“Frankly, we’re into our caps. And I believe most of our peers are probably in a similar situation,” Andrade told TRD in January. “It is kind of a worst-case scenario when you buy the properties. But that’s why rate caps exist.”

Now, up to 20 percent of Tides’ portfolio — which spans about 32,000 units — could need capital calls, Andrade told Real Estate Alert, which first reported on the letter.

Andrade added that Tides tried many other strategies to raise cash before resorting to capital calls. 

To weather the storm until more money comes in, Tides is temporarily using its own funds to help make mortgage payments. 

“As we do not control the situation in those cases, we unfortunately cannot guarantee that we will remain with our perfect track record” of making on-time mortgage payments, the co-founders said in the letter, adding that handing back keys to the lenders was a “possibility.”

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