UPDATED JUNE 30 at 2:20 p.m.:
In late June, Tides Equities — a firm known for aggressively purchasing multifamily properties across the Sun Belt over the last two years — sent a 25-page letter to investors, warning of cash issues.
“A handful of the properties in our portfolio have become negatively cash flowing,” Tides’ co-founder Ryan Andrade wrote in the letter, a copy of which was obtained by TRD. “Please be aware that capital calls will likely begin to occur on some sites in the near future.”
Since its formation in 2016, L.A.-based Tides has pooled money from a number of L.A.-based commercial real estate firms, online investors through platforms like RealtyMogul and family and friends, according to two sources familiar with the company’s investment strategy.
But rising interest rates have unraveled its plans, because most of the acquisitions involved floating-rate debt.
Now Tides’ investors will have to decide whether to keep pumping money into Tides’ properties — at a time when Tides is struggling to meet debt payments and some of its assets are already underwater.
At some of its properties, Tides is not using revenue from the complexes to service debt. Instead, it’s using its own cash from acquisition and management fees to make payments, according to the letter.
“There are fortunately several options out there from traditional equity to preferred equity,” co-founders Andrade and Sean Kia said in an emailed statement. “We are weighing all those options to find the best solution on each asset as every deal calls for its own solution.”
Aggressive acquisitions
Over the last two years, Tides emerged as one of the most aggressive multifamily buyers exploiting low interest rates to scoop up more than $6.5 billion worth of apartments across Sun Belt markets that have seen hefty rent growth.
The company wasn’t alone in attracting an influx of cash into apartment properties in 2021 and 2022. Investors poured a record $335 billion into multifamily assets in 2021, according to CBRE, nearly double the $193 billion figure in 2019, as they steered cash away from office and hotel properties.
AMC Investments, Beverly Pacific and Mountain Pacific Holdings are three large investors in Tides, according to the two sources. All three firms are based in Los Angeles; Mountain Pacific’s offices in Brentwood are located in the same building as Tides.
On its website, AMC, run by James Hopper, has listed 51 Tides-owned properties under its investment page. It’s unclear how much AMC has given Tides in total and the firm did not respond to requests for comment.
However, Tides has purchased about $2.9 billion worth of apartments using a mix of equity and commercial mortgage-backed securities debt since 2021, according to data from Morningstar.
Given Tides’ average loan on a deal covers 80 percent of the purchase price, according to data from CoStar and Morningstar, Tides has likely raised about $588 million in equity from investors since at least the beginning of 2022.
And AMC has allegedly already given more money to help prop up Tides this year.
In January, AMC formed what it called a “capital infusion fund,” through which it expected to raise $20 million, according to a filing with the U.S. Securities & Exchange Commission. A source familiar with the matter said the cash went towards Tides deals.
“Every time there’s another hole, you can’t just keep using duct tape,” the source said, adding the letter was the first time Tides admitted it was having any financial issues across its portfolio.
“Great partners”
Mountain Pacific Opportunity Partners, which did not respond to a request for comment, is another investor in some of Tides’ deals — one source said “almost all.” In January 2022, the firms bought a 404-unit complex in Lewisville, Texas, for $83.8 million, according to a DBRS Morningstar report.
The two go back further than that: in 2021, they bought a 374-unit complex in Chandler, for $54.3 million, according to media reports at the time. Mountain Pacific provided equity on the deal, according to an announcement from law firm Sklar Kirsch, which represented Tides in the deal.
Most of the time, Mountain Pacific was putting preferred equity into the deals on a recourse basis, meaning if Tides defaulted, Mountain Pacific could go after the principals personally, the source added.
“AMC and Mountain Pacific Holdings are both great partners that stand behind their deals,” Andrade and Kia said in their emailed statement.
Beverly Pacific, an investment firm run by Guess Jeans co-founders Maurice and Paul Marciano, was also once an investor in Tides Equities. However, the firm cashed out most of its equity investments before 2021, when Tides ramped up acquisitions.
Apart from the institutional investors, Tides relied on investments from online syndicators like RealtyMogul.
Over the summer of 2022, Tides raised $9.5 million through RealtyMogul for its purchase of Tides on Oakland Hills, a 270-unit apartment complex in Fort Worth.
Congratulations to Tides Equities for a successful capital raise on the RealtyMogul Platform! Tides on Oakland Hills is a 274-unit property located in Fort Worth, TX with value-add potential.#JillieneHelman #realtymogul #realestateinvesting #realestateinvestor #invest pic.twitter.com/b4YEyegy4C
— RealtyMogul (@Realty_Mogul) September 9, 2022
Two sources familiar with Tides’ fundraising efforts said the firm also raised money from family and friends, a lot of which is still in deals.
“They’d go after kids — 24, 25-year-olds — and they would invest their parents’ money,” a source said of Tides. “They’d take money from anyone who would write them a check.”
One person who invested with a fund operator that raised money for a Tides deal alleged mismanagement of funds over an acquisition in Phoenix in 2017. The plaintiffs dismissed the lawsuit last month. No other legal action against the firm has been filed.
Cash call
The letter to investors, which puts some blame on the Federal Reserve for “intentionally trying to inflict pain on the economy” and issues with Tides’ property management firm, was sent in mass to various investors. And it calls for all investors to pump more equity into the properties.
“One major challenge that might arise is in the form of an incomplete capital call, which occurs if enough investors do not contribute their pro rata share,” the letter said. “This would result in the inevitable loss of originally invested equity.”
Kia and Andrade said they’ve had “many discussions with our investors over the past several months regarding the challenging high interest rate environment, and will continue to do so.”
Investors, eyeing the sinking valuations for multifamily properties, though, may be unwilling to throw good money after bad assets, experts say.
“There’s a lot of people because of where the market is that don’t have the ability to kick in capital, who don’t want to kick in more capital, ” Ariel Property Advisors’ Matthew Dzabenek said.
Correction: Story has changed to reflect that a former investor in a fund sued over the 2017 acquisition in Phoenix, not a direct investor in Tides Equities.
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Suzannah Cavanaugh contributed reporting.