Borrower Profile: RREAF Steers Cautious course in volatile market
Samantha Rowan, Real Estate Capital USA, 10 Janurary 2023
RREAF Holdings, a Dallas-based commercial real estate owner and investor, is taking an eyes-wide-open approach to evaluating and executing potential investment opportunities.
The company has a diverse portfolio that includes multifamily- and single- family residential properties, beachfront hotels geared toward middle market users, branded extended stay hotel properties and its newest area – investments in RV parks.
“Transaction activity has slowed down across the board, and we need to be very selective in the products and markets we are entering,” said Graham Sowden, chief investment officer. “When you speak to investment sales brokers across the country, every single one will tell you the deals they have been marketing have been coming in below their strike prices, getting re-traded by borrowers, or dropped entirely.”
The biggest reason why, of course, is the widespread volatility in the capital markets caused by rising inflation and higher interest rates, Sowden added. “We were fortunate to have avoided a lot of the interest rate risk by having the foresight to lock in long-term, fixed- rate debt on our last three big portfolio acquisitions.”
Those acquisitions, with an aggregate value of just more than $2 billion, were completed over the past two years and have fixed-rate loans with 10-year terms and long interest only periods. “It is incredible to think about the savings if you extrapolate that out based on today’s interest rates,” Sowden said.
The company has no expectations that the investment sales market will unlock in the near-term, with Sowden noting that there continues to be a significant disconnect between buyer and seller valuation of properties.
“The sellers who aren’t working with a shot clock are just pulling deals off market rather than selling out a discount and buyers aren’t stepping in because of the higher-rate, floating-rate debt that will make it impossible for them to generate they returns they need,” Sowden added. “But this is also the kind of imbalance we are looking to take advantage of as buyers and owners.”
There continues to be a huge supply of liquidity in the market that needs to be placed. “That is why, in my opinion, we haven’t seen as much cap rate expansion as we might have with interest rates rising,” Sowden said. “The supply of liquidity and equity market has been keeping cap rates relatively stable throughout all this but it is shrinking the yields and causing investors to rethink their return expectations.”
Despite the volatility, RREAF continues to be optimistic about real estate investing. “We are going to continue to allocate capital to areas in which we believe we have achieved higher risk-adjusted returns than our competitors and, if you look at our history and track record, it shows we have always been looking in places where nobody else is looking or we’re looking at areas that are going to become the next big thing.