Tides’ original investors may be wiped out by preferred equity deal

For a few months, Tides Equities has been desperately seeking preferred equity to shore up its investments in 30 apartment complexes. The company has said the money would help it through this punishing stretch of high interest rates and prepare the properties for sale in the next couple of years.

But there’s a tradeoff: If Tides scores that lifeline, some of its original investors could lose everything they put in.

Tides, working with AMC Investments, pooled together $277 million from limited partners in 2021 and 2022 to buy 28 properties across Nevada, Arizona and Texas.

Now, if Tides hits its $69 million preferred equity goal, 88 percent of that original equity will be wiped out, according to marketing documents obtained by The Real Deal. Just $30 million will be returned to the original limited partners.

On some deals, investors may see nothing.

To buy the Dallas apartment complex Tides on Esperanza, Tides used $11.8 million in equity, most of which was pooled through AMC, a feeder fund. AMC finds equity investors for Tides, which then couples those cash commitments with a loan to buy property.

The marketing materials estimate that $0 will be returned to original equity investors on the Tides on Esperanza deal. With preferred equity in the capital stack, any proceeds from a real estate investment are distributed first to preferred investors, then to common equity investors.

“Scenarios do exist in which the math for existing equity does not work for preferred equity without significant improvement of terms from the senior lender,” Tides said in an emailed statement.

Translation: Unless the senior lender cuts Tides a huge break on its loan, the property won’t produce enough cash for anything to be left after the preferred equity investors take their cut.

On the bright side, Tides said: “Successfully lining up a preferred equity injection alleviates the need for a capital call.”

Tides did not comment on whether it has closed a deal for preferred equity.

Since the Federal Reserve started hiking interest rates in March 2022, Tides’ monthly payments on its floating-rate debts have soared, shrinking or erasing cash flow at its properties. The firm has been trying to stave off tens of millions of dollars’ worth of defaults.

Some Tides’ strategies — including getting loan modifications, buying new rate caps to hedge against further hikes and enlisting new property managers — have worked out.

On Tides at Whitney Ranch, an apartment complex in Las Vegas, Tides agreed to deposit $400,000 into a reserve to pay off monthly debt service, working out a deal with lender MF1 Capital to avoid delinquency or default.

But Tides hasn’t been able to save everything: foreclosure auctions are scheduled next month on three properties in Fort Worth, Texas.

Preferred equity is one of the few other fixes that firms such as Tides can tap.

On Tides at Esperanza, Tides would pay out 15 percent a year to preferred equity investors, but not every year. The payouts would accrue until the property is sold.

Tides and AMC’s numbers only pan out if they are able to sell at their projected prices.

Tides aims to sell Tides at Esperanza next year for $62 million — almost 30 percent more than it paid in January 2022, when multifamily was fetching a much higher price per unit.

Tides expects to lose money on some properties. It expects Tides on 67th in Glendale, Arizona, to sell for 17 percent less than it paid in December 2022.

In 2023, Class C multifamily complexes in Phoenix were selling at an average of $208,000 per unit, according to Northmarq data, down 17 percent from the previous year.

Tides is hoping to sell its Phoenix-area properties in the AMC portfolio, which count as Class C and are older, lower-quality assets, at an average of $256,000 per door, 23 percent higher than the 2023 median. It bought the buildings for $201,600 per unit, according to its marketing materials.

But the way the market is going, some observers see that projection as wildly optimistic.

Across Phoenix, Las Vegas, Austin and other Sun Belt cities, vacancy increases and falling rents are driving down multifamily property values. Rents in Phoenix dipped 2.5 percent from 2022 through 2023, according to Northmarq.

In Austin, rents have fallen 5.6 percent, according to data from Matthews Real Estate Investment Services. At the beginning of 2022, apartment buildings in Austin were trading at $270,000 per unit, according to Matthews.

One multifamily agent in Austin said Class C, 1980s-era apartment properties were selling at $180,000 or $190,000 a unit at the height of the market in 2022. Now, those same properties are “struggling to trade at $120,000 a door.”

“To think that pricing is going to rebound like that is insane,” the agent added.

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