yodizzle

what do you think about the Real Deal article on Rise48, Tides, etc and Zach Haptonstall's (CEO/Founder) response.

He just posted a video response today:

https://vimeo.com/843372979/8e2e83d257?share=copy

I want those 16min back

Who advised them to respond?  I would have said nothing 

Lets say in the future they need to do a capital call and one of their Investors ever litigated them about being upset about that, they can use that Video in court for sure.  

These guys have multiple loans on watchlists right now and definitely are handing some keys back at some point as they were so aggressive.  
 

The best part of that video was him acting like them pushing hard to get to a 1.0 DSCR was some sort of accomplishment.   
 

All these syndicators this cycle are straight Trash and the fall is going to be fun to watch 

 

Probably pushing a 1.00 IO DSCR as well.

The downfall of taking on literally only bridge debt & having little-to-no prior operating experience (sorry Z, your 2 years operating as “ZH Multifamily” doesn’t cut it) is that he likely has a huge blind spot as-to how stabilized, conventional deals get sized.

I also love the continued focus on barely beating proforma rents when cap rates have expanded 200+ basis points in PHX.

P.S - to the lovely Grace Haptonstall who is likely lurking here, many of the folks on this anonymous forum have multitudes more experience than you & have nothing to lose simply stating the facts. Xoxo

 
Most Helpful

I feel like a goof ball for even asking this, but you think they know a lot of their project details are public because of their debt?  They have to, right?  But this response seems so clueless, it further confuses me.

For example, Rise48 purchased Marble Creek (1985 vintage) in Phoenix, AZ for $65M in 2021 on a TTM of $1.87M.  That's a 2.88% cap rate, unadjusted.  If you adjust for property tax and insurance, it would be even lower.  Their internal business plan forecasted GPR @ $1,755 / unit.  The ratings agency's forecasted GPR @ $1,270 / unit.  They're currently asking $1,275 ($1,217 effective) for one bedrooms and $1,500 ($1,442 effective) for two bedrooms.  That's a weighted average effective rent (assuming all units at marked to market today, which some surely will be lagging) of $1,380 or a 21% miss on revenue assumptions.  Their forecasted stabilized yield was 5.78% and I'm getting closer to actuals of 3.58%.  These is the reality of the fundamentals.

But how about the capital markets?  Even with a rate cap and a fully renovated, fully leased asset, they're probably landing close to a 0.70 DSCR currently.  How are they making up this shortfall to keep payments current?  If you forecast a refinance today with a GSE based on a required 1.25 DSCR, you're looking at $28M in proceeds.  Their capital stack is $50.8M of debt and $18.7M of equity.  So you'd need to inject $22.8M, or 121% of the initial equity, to even save the deal.  But why would you do that if you're stabilized closer to a 3.50% yield?  You'd have to assume market cap rates are, or soon will be, below that mark to even have any equity left in this deal.  The reality is the equity is gone and the debt is probably worth $0.75 - $0.90 depending on the condition of the property.

This is ALL public information.  It is very easy to call b/s on any refuting the reality of what is going on.  Special servicers will have even more details that are less public, but are accessible.  Why even bother trying to refute this with a video?

 

Not sure if it's public per say but anyone invested in CMBS or CLO tranches that securitize the debt gets access to monthly data which reports financials, DSCRs, etc. 3rd party providers like Trepp and Costar supply the info as well.

 
Esque_

I feel like a goof ball for even asking this, but you think they know a lot of their project details are public because of their debt?  They have to, right?  But this response seems so clueless, it further confuses me.

For example, Rise48 purchased Marble Creek (1985 vintage) in Phoenix, AZ for $65M in 2021 on a TTM of $1.87M.  That's a 2.88% cap rate, unadjusted.  If you adjust for property tax and insurance, it would be even lower.  Their internal business plan forecasted GPR @ $1,755 / unit.  The ratings agency's forecasted GPR @ $1,270 / unit.  They're currently asking $1,275 ($1,217 effective) for one bedrooms and $1,500 ($1,442 effective) for two bedrooms.  That's a weighted average effective rent (assuming all units at marked to market today, which some surely will be lagging) of $1,380 or a 21% miss on revenue assumptions.  Their forecasted stabilized yield was 5.78% and I'm getting closer to actuals of 3.58%.  These is the reality of the fundamentals.

But how about the capital markets?  Even with a rate cap and a fully renovated, fully leased asset, they're probably landing close to a 0.70 DSCR currently.  How are they making up this shortfall to keep payments current?  If you forecast a refinance today with a GSE based on a required 1.25 DSCR, you're looking at $28M in proceeds.  Their capital stack is $50.8M of debt and $18.7M of equity.  So you'd need to inject $22.8M, or 121% of the initial equity, to even save the deal.  But why would you do that if you're stabilized closer to a 3.50% yield?  You'd have to assume market cap rates are, or soon will be, below that mark to even have any equity left in this deal.  The reality is the equity is gone and the debt is probably worth $0.75 - $0.90 depending on the condition of the property.

This is ALL public information.  It is very easy to call b/s on any refuting the reality of what is going on.  Special servicers will have even more details that are less public, but are accessible.  Why even bother trying to refute this with a video?

No this Zach guy seems like a total financial pyschopath who lies just to lie

You review any of their deals done pre June of 2022 and the ingoing cap rates were anemic and were unprepared for debt to rise.  They paid like double what groups had paid two years prior.  
 

These guys are so stupid that the only capital they can raise from is individual investors who have no idea the right questions to ask and fall for their garbage 

Rise48 going to turn into Fall24 pretty quickly 

 
Esque_

I feel like a goof ball for even asking this, but you think they know a lot of their project details are public because of their debt?  They have to, right?  But this response seems so clueless, it further confuses me.

For example, Rise48 purchased Marble Creek (1985 vintage) in Phoenix, AZ for $65M in 2021 on a TTM of $1.87M.  That's a 2.88% cap rate, unadjusted.  If you adjust for property tax and insurance, it would be even lower.  Their internal business plan forecasted GPR @ $1,755 / unit.  The ratings agency's forecasted GPR @ $1,270 / unit.  They're currently asking $1,275 ($1,217 effective) for one bedrooms and $1,500 ($1,442 effective) for two bedrooms.  That's a weighted average effective rent (assuming all units at marked to market today, which some surely will be lagging) of $1,380 or a 21% miss on revenue assumptions.  Their forecasted stabilized yield was 5.78% and I'm getting closer to actuals of 3.58%.  These is the reality of the fundamentals.

But how about the capital markets?  Even with a rate cap and a fully renovated, fully leased asset, they're probably landing close to a 0.70 DSCR currently.  How are they making up this shortfall to keep payments current?  If you forecast a refinance today with a GSE based on a required 1.25 DSCR, you're looking at $28M in proceeds.  Their capital stack is $50.8M of debt and $18.7M of equity.  So you'd need to inject $22.8M, or 121% of the initial equity, to even save the deal.  But why would you do that if you're stabilized closer to a 3.50% yield?  You'd have to assume market cap rates are, or soon will be, below that mark to even have any equity left in this deal.  The reality is the equity is gone and the debt is probably worth $0.75 - $0.90 depending on the condition of the property.

This is ALL public information.  It is very easy to call b/s on any refuting the reality of what is going on.  Special servicers will have even more details that are less public, but are accessible.  Why even bother trying to refute this with a video?

Here is what’s even crazier

in 2017 Western Wealth bought the deal for $16.6M

in 2019 they recapped it with Alliance Berstein as part of a portfolio recap at $28.3M

in 2021 they sold it to Rise48 for $62.3M

That is straight insanity 

Rise48 thought it would be worth $87.85M in 2024

So the thesis was a property that was worth $16.7M in 2017 would go up by 5.25x in 7 years

Keep in mind this property is not in a good area of Phoenix either

Never go full…insert tropic thunder line 

 

I had a parallel thought some time ago when ZMR purchased a property from Tides in Phoenix a few years ago.  It's interesting how incestuous the part of the market became over the last several years.  Tides purchased the property for $24.5M in in 2019, ZMR purchased it for $40.6M in 2021, and I think they were targeting an exit of $65M+ in 2024.

 

Based on the above, it is hard to believe that they were able to get to a loan of $50.8MM.  The property would need astronomical NOI growth for a Cash-Neutral refinance: 

image-20230710150921-1

Similar story with cap rate sensitivity.  Astronomical rent growth required to be breakeven on project cost:

image-20230710151431-2

It is not a question of "if" they will lose money but of "how much".

Pretend time is over.

 
Itsa Jungle

Based on the above, it is hard to believe that they were able to get to a loan of $50.8MM.  The property would need astronomical NOI growth for a Cash-Neutral refinance: 

image-20230710150921-1

Similar story with cap rate sensitivity.  Astronomical rent growth required to be breakeven on project cost:

image-20230710151431-2

It is not a question of "if" they will lose money but of "how much".

Pretend time is over.

They thought they could take NOI from $2M to $4M in three years after buying the deal from a value add group who bought it from a value add group.  It feels almost criminal to have gotten this loan.

If they were able to double NOI and interest rates stayed low, then the lender probably felt fine but zero chance either happens now 

 

When are these debt funds and CLOs going to start doing something about the underwater debt?

 

When the debt payments stop or maturities start.

The pretend and extend is only going to happen so far until they realize these assets aren't worth the paper. 

Many of these CLO shops are already getting bid on these guys notes at 90-95 cents from the loan to own groups, but they are still holding at par. I suspect it'll be like that til the wave of maturities hit, and the notes start trading in the 70/80s. Lenders always hold out until it's too late, they never look like the hero for taking a slight hair cut to be safe. 

 

I loved watching him pat himself on the back that his DSCR is 0.88 and not 0.77!  They're burning money like its going out of style, but want to reassure investors there will be no capital calls?  That does not jive.  How does getting to  a 1.25 DSCR on your existing debt help you refi into an environment where rates are 2x? 

This video will not age well. 

 
stevenh

I loved watching him pat himself on the back that his DSCR is 0.88 and not 0.77!  They're burning money like its going out of style, but want to reassure investors there will be no capital calls?  That does not jive.  How does getting to  a 1.25 DSCR on your existing debt help you refi into an environment where rates are 2x? 

This video will not age well. 

I bet his investors have no idea how stupid that looks in reality 

Oh Zach said we will get to a 1.0 DSCR…that’s great right 

 

By the way, these are short-term, variable rate, interest-only loans.  The bond holders only care about making sure they are covered in their interest payments and secure in t heir principal.  This has nothing to do with an actual DSCR as the GSEs would evaluate it, i.e. that little thing called amortization.  If you're at a 0.70 DSCR currently and working your way to 1.00 DSCR, that has ZERO to do with a DSCR at i) a current interest rate and ii) amortizing.  Even if you get interest only from the GSEs, they're still going to size it to an amortizing loan to make sure they are covered.

 

Maybe some of their investors are clueless enough to feel comfortable from this rebuttal, but anyone who has a clue of how these financing mechanisms work will be even more certain how much trouble they're in after listening to these stats. 

 

Esque_

By the way, these are short-term, variable rate, interest-only loans.  The bond holders only care about making sure they are covered in their interest payments and secure in t heir principal.  This has nothing to do with an actual DSCR as the GSEs would evaluate it, i.e. that little thing called amortization.  If you're at a 0.70 DSCR currently and working your way to 1.00 DSCR, that has ZERO to do with a DSCR at i) a current interest rate and ii) amortizing.  Even if you get interest only from the GSEs, they're still going to size it to an amortizing loan to make sure they are covered.

So for the deal Marble Creek referenced above the As-Is NOI was $2M and they projected to get it to $4M. 

They took on $50.74M in debt at a 5.9% interest rate cap so their yearly Debt is $2.993M

Right now for 1st quarter they showed $726K in NOI.  Lets give them credit this is true so times 4 its $2.9M in NOI for 2023 so they are barely going to cover their Debt Service.  

And that's a big Maybe.

But lets say they push NOI from $2M to $3M by 2024.  I doubt they push it more given the market. 

At $3M NOI with current GSE financing at say 6% Interest Rate with a 1.25 coverage ratio that's a $33.3M loan    

So they need to put roughly $17M of equity

That means they would have $35M of equity in the deal.  There yearly mortgage payment assuming I/O would be $2.4M so they would have $600K in positive cash flow

That total equity would be earning a 1.7% Cash on Cash return then.  

Now if they sold it with a $3M NOI for say a 5.5% cap rate then that's worth $54.5M and they lose roughly $10M in Equity.  

Literally its all bad.  This is what happens when you overpay for assets.

 

There is rampant obfuscation of NOI going on in this market for the last few years. If you hide most repairs, turnover and make ready expenses in the capital expense account, you can really make NOI sing while showing you’re “investing” capital into the property. It’s been common practice by some groups and I’ve always been really impressed by how low expense ratios are given the building vintages. I would imagine once a non-beholden PM steps into assets run in such a fashion the picture will be starkly different than what was previously provided and the DSCR will be pummeled. 

 

Where are you getting your numbers from?  We should clarify a few things,

1. Unadjusted TTM was $1.87M per regulatory filings.  As stated, it would be lower when you factor in increases in property tax and insurance.

2. Agreed their projected NOI @ exit was $4.00M.  This NOI figure assumed a 25% OPEX ratio - important for later.

3. Agreed on the debt balance.

4. That is the NOI figure THEY'RE reporting.  If you believe it to be true and based on current rents, they're running a circa 30% OPEX ratio.  Does that seem reasonable on a 1985 vintage property?

5. But for the sake of your math, let's give them credit for $3M in NOI and let's assume a 6.0% interest rate with our 1.25 DSCR.  That comes out to $33.3M in proceeds.  How are you getting for $40M?  =PV(interest rate, term, NOI / DSCR) or =PV(6%/12,30*12, $3M / 1.25 / 12) = $33M.  I'm guessing your math is off because you forgot to actually divide the NOI by the DSCR.

6. Who in the world is going to buy a fully renovated,1985 vintage, Class-B MF property in a secondary (arguably tertiary) market in a Class B/C submarket for a 5.50% interest rate where the cost to borrow is 6.00%?  Does that make any common sense?

I understand we're landing in "it's not a great situation" territory, but we should also be real about the numbers and in what position this is actually in.

 
Funniest
acqbot42

He shouldn't have made a response in the first place, but he just provided more evidence for future lawsuits. He also became the first person to brag about having a DSCR under 1.0

Totally hilarious video.  When he got upset about his age being wrong it reminded me of a toddler saying he was "three and a half" not "three"! 

 

It's funny and all but honestly, someone needs to do something. It's public information and he's flat out lying so that he can still pray on unsophisticated retail investors. They are still actively buying deals. I've been going through each deal they've acquired and running quick numbers. Every deal since they acquired in Phoenix since Rise Encore in 7/2022 is under water (debt > today's estimated purchase price). I've ignored the Texas portfolio because it's a non-disclosure state but knowing the timing of when they started buying there, those are under water as well. Only about 15 properties into the portfolio list but it's pretty clear where the rest of the properties will shake out. The support from the LinkedIn community is only making matters worse for those retail investors. It's easy to say that those retail investors are at fault for not doing due diligence but I don't accept that, especially now with how blatantly Rise48 is lying about public information. Average 60-70% leverage? Not a chance. Every deal prior to July 2022 was 75-80% debt funds. Average property occupancy is like 85%. Seriously, someone needs to raise a red flag here. At least Tides had the decency to be upfront about coming capital calls and valuations (although much too late as well).

 

What can be done?  There are hundreds of these groups doing the exact same thing.  The debt funds and CLOs are not dealing with the problems, which they helped cause.  The government isn't doing anything so far to come after these guys for misleading investors. 

 

The SEC should certainly be looking into them already and/or investors should be demanding an audit. There may have been hundreds of groups like this buying blindly but they've pulled back/stopped when the inevitable became clear. It's one thing to be a reckless sponsor (Tides), it's an entirely another thing to lie to investors and continue to be buying in the face of a giant wave of 80% distress across your portfolio. Zach went from irresponsible to straight fraud with this video. I got tired of going through their entire portfolio but below is 60% of it with assumed value's today at costar/yardi rents and occupancy, 65% expense ratios, and 5.5% cap rates. Generous on two fronts 1) 5.5% cap rates on crappy 80s product and 2) costar/yardi rents are mostly tracking asking rents which is usually the post-renovated units only so it's assuming fully renovated properties. Over half of the sample portfolio is under water. All public information. Why state that your portfolio is 60-70% levered when I can see that the below averages 77.64% leverage?

Property Name Debt Type Debt ($) Purchase Price ($) Est. Value ($) LTV (At Purchase) LTV (Est. Today) Equity Loss (Est. Today)
Rise Desert Cove Debt Fund  $        31,002,510  $            42,000,000  $            38,000,000 73.82% 81.59%  $                            (4,000,000)
Rise on McClintock Debt Fund  $        19,187,157  $            26,500,000  $            24,125,000 72.40% 79.53%  $                            (2,375,000)
Rise Suncrest Private  $        30,000,000  $            50,000,000  $            36,000,000 60.00% 83.33%  $                          (14,000,000)
Rise on Cactus Bank  $        17,536,000  $            31,000,000  $            25,000,000 56.57% 70.14%  $                            (6,000,000)
Rise at the Meadows CMBS  $        15,279,000  $            29,200,000  $            20,000,000 52.33% 76.40%  $                            (9,200,000)
Rise Encore Debt Fund  $        85,690,000  $         125,000,000  $            82,500,000 68.55% 103.87%  Under Water ($0 equity) 
Rise Lakeside Debt Fund  $        61,744,500  $            75,300,000  $            52,000,000 82.00% 118.74%  Under Water ($0 equity) 
Rise at the District Debt Fund  $     108,500,000  $         142,000,000  $            93,000,000 76.41% 116.67%  Under Water ($0 equity) 
Rise Broadway Debt Fund  $        72,600,742  $            92,000,000  $            55,000,000 78.91% 132.00%  Under Water ($0 equity) 
Rise at the Palms Debt Fund  $        28,565,000  $            35,000,000  $            23,411,700 81.61% 122.01%  Under Water ($0 equity) 
Rise at Dobson Ranch Debt Fund  $        31,293,000  $            38,125,000  $            24,740,352 82.08% 126.49%  Under Water ($0 equity) 
Rise North Mountain Debt Fund  $        20,250,000  $            28,600,000  $            23,973,809 70.80% 84.47%  $                            (4,626,191)
Rise Canyon West Debt Fund  $        25,117,000  $            31,020,000  $            24,028,493 80.97% 104.53%  Under Water ($0 equity) 
Rise on Country Club Debt Fund ??  $            60,625,000  $            46,109,440 #VALUE! #VALUE!  Under Water ($0 equity) 
Rise North Ridge Debt Fund  $        26,274,000  $            31,700,000  $            25,517,530 82.88% 102.96%  Under Water ($0 equity) 
Rise Trailside Debt Fund  $        12,414,000  $            14,750,000  $            11,895,709 84.16% 104.36%  Under Water ($0 equity) 
Rise on the Lofts Debt Fund  $        20,000,000  $            25,200,000  $            16,556,989 79.37% 120.79%  Under Water ($0 equity) 
Rise Estrella Park Debt Fund  $        58,800,000  $            59,800,000  $            44,181,370 98.33% 133.09%  Under Water ($0 equity) 
Rise on Cave Creek Debt Fund  $        30,500,000  $            36,600,000  $            31,387,336 83.33% 97.17%  $                            (5,212,664)
Rise Thunderbird Debt Fund  $        40,800,000  $            48,000,000  $            40,590,065 85.00% 100.52%  Under Water ($0 equity) 
Rise Westgate Debt Fund  $        26,701,000  $            32,300,000  $            27,461,426 82.67% 97.23%  $                            (4,838,574)
Rise Midtown Debt Fund  $        42,940,000  $            51,000,000  $