Everyone’s entitled to their 16 minutes of fame.
Zach Haptonstall, the founder of multifamily syndicator Rise48 Equity, recorded a video of that length to denounce an article in The Real Deal that identified his firm as vulnerable to distress sweeping through the sector.
Morningstar data show revenue at Rise48 properties covered only half of debt payments, at the median, and renovations at one property in need of upgrades to boost rental income had been delayed.
Syndicators pool money from a large number of investors, both sophisticated players and mom-and-pops, to purchase real estate assets. Similar troubles had foreshadowed distress at fellow syndicator Tides Equities. Tides, like Rise48, bought Sun Belt multifamily at the top of the market with floating-rate debt. When rates rose, revenue no longer covered debt service.
In late June, Tides said it would ask investors to cough up more cash to patch revenue shortfalls.
TRD reported that rising rates and delayed renovations could also threaten Rise48’s fix-and-flip strategy and its ability to refinance or extend loans coming due.
Haptonstall took to Vimeo to object. “We are not distressed,” he told investors at least seven times in the video, in which he described TRD as “salacious clickbait.”
His defense: Renovations were “going well,” the firm was topping rent growth expectations and those gains would eventually raise net operating income enough to fully service Rise48’s debts.
Loan documents, servicer commentary and market players suggest otherwise.
Sources said Haptonstall’s lengthy reply drew even more attention to problems emerging with Rise48’s loans. Online commentators echoed that take.
“Who advised them to respond?” wrote one reader on investment banking site Wall Street Oasis. “These guys have multiple loans on watchlists right now… I want those 16min back.”
But more importantly, many of the points Haptonstall made in the video signal problems ahead for Rise48.
Cash crunch
Haptonstall built his argument on Canyon Springs, rebranded as Rise Thunderbird, a Phoenix property cited in TRD’s article.
The $36 million loan backing the asset was watchlisted for a low debt service coverage ratio in October 2022, less than a year into the loan. A DSCR below 1 means that building revenue does not cover debt payments.
By December 2022, the loan’s DSCR had slipped to 0.67, TRD reported, citing Morningstar.
“I don’t know where they got the 0.67,” Haptonstall said in his video.
The source, Morningstar, provides investment research and credit ratings, similar to S&P, Moody’s and Fitch Ratings. It is a widely used resource in commercial real estate.
Haptonstall claimed the DSCR on the property was actually 0.73 in December and rose to 0.88 in May. Those figures would still indicate the property’s income isn’t enough to service its debt, yet the founder dismissed the ratios as “no news.”
“Pretty much everybody’s DSCR went down in 2022,” he said.
Indeed, many fix-and-flip investors who tapped variable-rate loans or didn’t finish renovations before rates rose have seen these ratios slip. But those declines can prove fatal for multifamily investments, as they have for many properties across asset classes this year.
Haptonstall projected renovations would boost Rise Thunderbird’s ratio. Rehab plans at Rise Thunderbird had been delayed in December, according to servicer commentary.
Haptonstall countered that work is “on schedule.” Rise48 has rehabbed 109 of the building’s 203 units, Haptonstall said, and is “very effectively increasing the rents, increasing NOI [net operating income] to increase our DSCR.”
Haptonstall claimed the firm is “in position” to get DSCR above 1 by the first quarter of 2024.
Yet, Morningstar projected a stabilized DSCR of 0.91 for Rise Thunderbird, meaning even after the improvements, cash flow still won’t cover debt service.
“We disagree with Morningstar’s projection that you’re referencing from December of 2022 based on actual financials and actual performance,” Haptonstall told TRD by email, noting that the firm has cash reserves to cover the deficiency until the firm hits its projected DSCR.
A low ratio when the loan comes due in January 2025 would pose a problem.
Below break-even
Haptonstall stressed that the loan has an interest rate cap. His firm took out the floating-rate debt at 3.7 percent in December 2021 with a three-year cap of 6.6 percent, according to Morningstar.
That cap has insulated the Rise48 debt from rates that have surged nearly 5 percentage points. Haptonstall said the loan’s cap was hit in the second half of 2022 and expires in December 2024.
Borrowers often have the option to extend an interest-rate cap. But to qualify, as with loan extensions, a sponsor must meet certain criteria. One metric is a healthy DSCR, typically 1.25.
Haptonstall predicted that renovations planned for the second half of the properties’ units would boost the ratio above 1.25 before the cap expires.
“We are executing our business plan and increasing DSCR, which has been effective,” he wrote.
A tale of two LTVs
Haptonstall also asserted the firm has “always taken out lower leverage loans.”
“Typically between 60 and 70 percent loan-to-value,” he previously told TRD.
Data from ratings agencies tell a different tale.
Loan-to-value ratios can vary depending on who’s doing the math. Ratings agencies and data firms tend to be more conservative than appraisers when assigning value to an asset, multifamily investors said.
Take Rise Thunderbird. The Phoenix property was appraised for $48.5 million when the $36 million loan on the asset was made. Considering that figure, the LTV is 75 percent, above Haptonstall’s touted range, but in line with typical multifamily deals.
But Morningstar, in a performance update for the loan pool that includes Rise Thunderbird, calculated the initial LTV as 84 percent. The higher the LTV, the less cushion a borrower has if property values drop.
Haptonstall pegged the LTV at 76 percent — the $36 million borrowed divided by the purchase price of $48 million.
“The numbers are the numbers and the facts are the facts.”
“There is no debating these LTV numbers in regards to what is more conservative or not,” Hamptonstall stressed. “The numbers are the numbers and the facts are the facts.”
But it’s not that simple, debt brokers said.
“There are a lot of different methods of applying value and that’s where it gets a little tricky,” said Matthew Dzbanek, a debt broker at Ariel Property Advisors.
Another example is the $42 million loan on Rise Parkside, a 352-unit property outside of Glendale, Arizona. The appraised LTV when Rise48 scored the debt in late 2021 was 75 percent.
But Trepp and Morningstar listed the LTV as a more worrisome 86 percent at the time. That loan was watchlisted in May for a depressed DSCR of 0.73.
“Leverage is high with an elevated going-in LTV at 85.7,” commentary from Morningstar reads. “The loan has one of the higher expected losses … because of its elevated going-in LTV.”
Downmarket
Despite the red flags, Rise48’s portfolio is performing. No loans are delinquent and most of the firm’s debt comes due in 2024 and 2025. It’s possible interest rates will decline, creating a more favorable refinancing situation.
But multifamily valuations have fallen by as much as 20 percent since 2022 and Haptonstall bought many of Rise48’s assets, which are concentrated in Phoenix, at the top of the market. The firm picked up 22 properties between the third quarter of 2021 and the same period in 2022.
The median price per unit for Phoenix-area multifamily deals topped out at $286,000 in 2022. By the first quarter of 2023, it had declined 19 percent to $233,700, according to debt brokerage Northmarq.
That doesn’t mean Rise48’s properties lost 19 percent of their value, but CoStar data show Rise48 picked up many assets at a hefty premium.
The median price it paid for the 17 properties it bought between 2021 and 2022 was $35 million. The median price for the same properties’ previous sales, generally one or two years earlier, was less than half as much.
Meanwhile, rents are falling in Phoenix. The average rent in June was 4.3 percent lower than a year ago, according to Apartment List. The regional vacancy rate rose to 6.4 percent in the fourth quarter of 2022 and remained at that level — the highest in four years — through the first quarter of 2023, according to Northmarq, which tracks commercial real estate trends and data.
“Much of the recent rise in vacancy rates has been recorded in mid- and lower-tier properties,” the firm’s report noted. Rise48 specializes in those assets.
Meanwhile, a record number of new apartments will come online in the Sun Belt over the next 18 months. In Phoenix, that influx may push the vacancy rate to 7.3 percent by the end of the year, according to Northmarq.
These factors could make it harder for Rise48 to reach its revenue goals for the properties.
“We have plenty of time to renovate,” Haptonstall said. He told TRD the firm had boosted rents on renovated units by an average of $500 — beating its own projections by $38 across 1,700 apartments.
The big question about the renovations is not when they will get done but whether they will generate enough extra rent to make refinancing possible when the loans mature.
A recent Radix report on the Phoenix multifamily market spelled out the extent of the obstacles ahead for owners.
“The short-term challenges to property performance and rent growth will be immense in the coming years,” it states.
Syndicators who overpaid, overborrowed and overstated revenue projections will be left with two options at refi time: kick in more equity or sell at a loss.
Neither option will sit well with the mom-and-pop investors who funded what is looking to be a short-lived investment strategy.
Isabella Farr contributed reporting.
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