Tides Equities flew too close to the sun. It wasn’t alone

Multifamily syndicators GVA, Rise 48, ZMR and Nitya face a reckoning

Clockwise from top left: Tides Equities' Ryan Andrade, Nitya Capital’s Swapnil Agarwal, Tides Equities' Sean Kia, ZMR Capital’s Zamir Kazi and Rise 48’s Zachary Haptonstall
Clockwise from top left: Tides Equities' Ryan Andrade, Nitya Capital’s Swapnil Agarwal, Tides Equities' Sean Kia, ZMR Capital’s Zamir Kazi and Rise 48’s Zachary Haptonstall (Getty, Tides Equities, Nitya Capital, ZMR, Rise 48)

Tides Equities’ showed its hand last week. If this were poker, folding would be a good option.

Instead, the multifamily syndicator asked investors to cough up more capital to salvage properties with negative cash flow and declining occupancy.

In the past few years, Tides acquired a $7 billion multifamily portfolio by taking out floating-rate loans at dirt-cheap interest. When the Fed hiked rates, the firm’s debt service ballooned.

Now, 20 percent of its portfolio faces distress, co-founder Ryan Andrade told investors in a letter. Without a capital infusion, Andrade warned, properties would not have “sufficient holding power.” At least $1.5 billion of the firm’s floating-rate loans mature in the next two and a half years.

Tides isn’t alone.

A number of small-time investors, lured by the cheap money of yesteryear, employed the same value-add strategy. So-called syndicators pooled money from well-heeled yet largely unsophisticated investors, promising outsized returns on multifamily deals.

The premise was that rent increases, made possible by renovations and constrained supply, would boost revenue.

But the music has stopped, insiders say. Rental housing is supposed to be a good investment in the event of high inflation because rents can be raised, but the Federal Reserve’s hiking of interest rates to fight inflation made floating-rate loans very expensive, very fast. When those loans mature, refinancing them will be painful if not impossible for many borrowers.

A TRD analysis of Morningstar’s CMBS database reveals the firms most exposed to that fallout by loan volume: GVA Investments, Rise 48, ZMR Capital and Nitya Capital.

The four syndicators have a combined $1.7 billion in floating-rate debt set to mature by the end of 2025. Loans with updated financials show many properties have suffered drops in cash flow as debt service has risen, a sign of trouble to come.

Sun Belt bust

GVA Investments is in nearly as deep as Tides.

Launched by former golf course marketing company CEO Alan Stalcup in 2015, the Austin-based firm went on a spending spree prior to the rate hikes — much like Tides.

GVA Investments’ Alan Stalcup
GVA Investments’ Alan Stalcup (GVA)

The firm scooped up scores of garden-style rental properties across the Sun Belt with a focus on “opportunities that can yield above market cash flow once stabilized,” its website reads. Those assets are collateral for nearly $1 billion in maturing debt.

In 2021 and 2022, when Covid migrations sent Sun Belt rental demand rocketing, rehab acquisitions seemed like a no-brainer. Expiring leases would offer the chance to boost rents and renovations could push them even higher.

But as a slew of apartments have come online in the region, demand has waned and rent growth slowed to 3 percent annually in the second quarter of 2023 from a peak of 10 percent in early 2022, according to CBRE.

Green Street projects a record number of multifamily completions over the next 18 months, a supply boom that threatens to further depress rent growth.

In Austin, where the bulk of GVA’s investments are, rents fell 6 percent annually in June.

A squeeze may be imminent. The median interest rate on the firm’s maturing floating-rate loans was only 3.7 percent when they were issued. Rates have since risen substantially.

At properties such as San Antonio’s 300-unit Melia Apartments, vacancies are up and will be challenging to fill. That could pressure the property’s $23 million loan.

The debt carries a high loan-to-value ratio of 80 percent. With multifamily valuations having fallen at least 20 percent in the past year, GVA could find itself overleveraged.

The property’s debt service coverage ratio has already sunk to 0.6 from 1.6 in October 2021, meaning its revenue is not nearly enough to cover loan payments. GVA did not return a request for comment.

Other syndicators may not have had the time to execute renovations before the market turned.

Renovations gone wrong

Rise48, the multifamily investment firm of 31-year-old Zach Haptonstall, launched in 2019 with a focus on acquisitions in Phoenix and Dallas. In just four years, the firm has amassed $1.4 billion in assets.

This year, its focus turned to distressed multifamily, acquiring buildings where declining valuations coupled with an impending maturity or expiring interest-rate cap forced a sale, Haptonstall said on the Best Ever Real Estate Investing Advice podcast in June.

Rise48 loans set to mature in 2024 and 2025 will reveal whether the firm’s moves live up to the podcast’s name. It has $200 million in loans coming due and its plans to renovate and raise rents haven’t panned out on some investments.

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At Canyon Springs apartments in Phoenix, service commentary noted that the borrower has delayed unit renovations to protect occupancy, likely fearing that displaced tenants may not be readily replaced.

The debt service coverage ratio on the property’s $36 million loan fell to 0.67 in December largely because loan payments have “nearly doubled since the closing date,” according to Morningstar.

Some properties have seen cash flow drop as much as 40 percent. Across those where updated debt coverage data is available, the median DSCR has dropped to a paltry 0.51.

Haptonstall told The Real Deal that the firm is “in good shape across our portfolio due to how we’ve structured debt and been able to renovate units,” noting that the firm has “always taken lower-leverage loans, typically between 60 and 70 percent loan-to -value.”

He added that Rise48 has never done capital calls and doesn’t plan to.

Zamir Kazi of ZMR Capital, eyeing a turning market, still took the gamble that renovations would boost rents more than enough to compensate for the revenue losses caused by vacancies.

The firm, which holds $320 million in maturing multifamily assets, tried an evict-and-flip strategy. In January 63 evictions were in process at its 982-unit Reserve at Brandon in South Florida. Occupancy, which was 95 percent when Kazi bought the building in March 2022, had dropped to 82 percent. In December, net operating income slipped 30 percent from the previous month, according to Morningstar.

The loan was watchlisted in May for its DSCR of 0.6. Other properties, such as Dallas’ Chimney Hill have seen their ratios fall almost to zero. ZMR did not return a request for comment.

Syndicators such as Nitya Capital haven’t executed renovation plans at all.

The Houston-based firm has closed $1 billion in multifamily acquisitions, according to its website, and holds $512 million in loans approaching maturity backed by multifamily properties in Dallas, Las Vegas, Phoenix and South Florida.

The firm prides itself on “empathy,” according to its website.

“We value the major tenants of acquisition, operation and renovation,” founder Swapnil Agrwal narrates in a promotional video. “Our major goal is improving people’s living conditions.”

Servicer commentary paints a different picture. At 2704 South Cockrell Hill Road, a 332-unit building in Dallas, windows remained boarded-up one year after a fire last June. Glass was strewn through the yard, the boiler leaked and the property’s trees were dead.

The building was watchlisted in May for a DSCR of 0.89.

Other Texas properties, such as the Stonecreek Apartments in Katy, Treehouse Apartments in Austin and Waterstone Place Apartments in Stafford, were watchlisted for “major life safety issues” found in February.

A tenant on Reddit described the Siegel Suites, a Nitya multifamily building in Las Vegas, as 

“without a doubt one of the worst places to live in Vegas besides the underground tunnels.”

Agarwal, through his property management firm Karya, was found liable for stealing trade secrets from management software provider ResMan last year. He settled the suit, but the litigation reduced his sponsor strength designation to “bad,” according to Morningstar.

Nitya did not return a request for comment.

Two options

Troubled syndicators’ fates are likely to play out like a slow-motion train wreck. The firms have some time before maturities force refinancing or a loan extension, which likely won’t be granted at a DSCR below 1.

That will leave two options — a capital call or a sale, said Matthew Dzbanek of Ariel Property Advisors.

“Once people have come to that realization, once they’ve done the math and had all the conversations they need to have, you’re going to see that become a much more realistic scenario,” Dzbanek said.

The good news for syndicators is that sales will be possible. Multifamily fundamentals are still solid, meaning investors will be waiting to pick up distressed assets. Also, most of the loans backing syndicator’s acquisitions are non-recourse, sources said, meaning lenders can’t come after a borrower’s personal assets — just the property.

The exception would be if an investor broke any “bad boy” or non-recourse guarantees baked into the loan documents. Those might include misrepresentation of a company’s assets or other fraud.

Similarly, completion guarantees on non-recourse construction loans may require borrowers who default to finish the construction at their own expense. The hit, insiders say, will likely be reputational, as multifamily owners will lose investors’ confidence and funding.

“I have watched every deal that hits the market get overlevered since the pandemic,” one person wrote on investment banking site Wall Street Oasis last month. “When are these ultra aggressive groups going under? GVA? Tides Equities? … ZMR?”

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