RREAF Holdings' CEO discusses opportunities, outlook for year ahead
Anna Butler, Dallas Business Journal, 22 December 2022
Kip Sowden may see headwinds ahead for commercial real estate in the first two quarters of 2023, but that doesn’t mean he isn’t still bullish on the opportunities ahead for a commercial real estate firm like his.
“2022 was, quite frankly, our biggest year ever. I thought 2021 would be hard to beat transacting over $1.3 billion in deals, but we beat that in 2022,” said Sowden, who is chairman and chief executive of Dallas-based RREAF Holdings, in a recent interview.
Traditional garden-style multifamily, hospitality, drive-to leisure and – a more recent addition – RV parks across the Sunbelt and Southeast are among the key areas that will keep RREAF busy in the new year.
“As a company, we’re catering to Middle America. We're not trying to be the highest price, trophy property in any market. We’re more of the bread and butter, providing safe, quality housing and vacations to the majority of the population of the U.S.,” said Sowden.
It’s the lower cost of living and consistent in-migration that stand as the pillars behind the RREAF strategy.
“You get more bang for your buck in this part of the country than you do in other areas, and that will continue to lead to positive in-migration,” he said.
“That positive in-migration creates demand, and that demand continues to exceed supply as a result of that. It bodes well for investors and for us in the commercial real estate space,” he added.
Aside from a massive transaction that closed in September and the launch of the firm’s RV platform, other key changes at the firm include the promotion of Sowden’s son, Graham, to the role of chief investment officer from his post as director of Acquisitions.
Sowden spoke more about his 2023 outlook and more:
What do you see in terms of transaction volume next year? It’s a more challenging environment, but that might lead to opportunities.
We do look at it as an opportunity. We’re going to see transaction volume lighter – at least for the first half of 2023 in Q1 and Q2. We expect fewer transactions than the number recorded in Q1 and Q2 of 2021 and 2022 as buyers and sellers try to figure out where values are.
Sellers are always slower to realize their assets are not as valuable as perhaps they were just a year ago when debt was ultra-cheap. Cap rates are lagging and slower to come up than the recent increases in interest rates, meaning that to meet sellers’ expectations, you’d have to buy with negative leverage. That will not happen today. Buyers were OK with buying it with neutral or maybe a little bit of negative leverage a quarter or two ago when rental rates were increasing at such a rapid pace. They felt like they could be in neutral or positive level territory shortly. That’s not the case anymore.
There are certain asset classes in certain areas of the country that are going to fare better than others.
Everything is more expensive right now than it was a year before. Is it that the right deals are still going to get done?
The right deals in the right locations in the right asset class will still get done. Sellers and buyers need to come together, and there's still a big gap today between what sellers are willing to sell and what buyers are willing to buy. That gap needs to get closer before you will see many transactions
I think there are going to be some forced transactions. There are some buyers and sponsors that are not as well-capitalized, that took down assets with bridge financing and high leverage with the idea that they were going to grow rents and NOI in a short period of time and put long-term permanent debt on them or use agency debt like Freddie Mac and Fannie Mae. Those same deals today are not going to underwrite to a level to pay off their existing higher-leverage bridge debt. A lot of those bridge lenders are not going to be in a position to extend those loans because they are getting squeezed by their warehouse lenders. They're going to be forcing the sponsors to sell the asset, or they're going to foreclose on it.
Companies like us will be ready, willing and able to pay a fair market price for the asset when that happens and will transact quickly.
Is that a matter of being patient, disciplined or both?
It's both. We're certainly patient. We are not set up with funds that have pressure to buy. We'll only buy if we think it's a good asset at a fair price in a good market. We're going to pick and choose where we want to be.
A lot of other well-capitalized buyers are in this wait-and-see mentality right now to determine whether or not there is going to be some distressed selling. We think there probably will be some, but not as much in the areas in which we transact. You're gonna see a lot more of it in the Northeast and on the West Coast.
The RV space reminds me of when private equity and more institutional investors began to acquire HVAC companies to streamline something fragmented and make it more efficient. What’s driving your entrance into the space?
That is the way RVs have always been set up and operated.
We've been somewhat contrary and not doing exactly what everybody else does.
We started buying multifamily assets in the secondary and tertiary markets before it was popular to do so and were buying from more mom-and-pop owners with one or two complexes. It was clearly a space that had not been institutionalized. By aggregating and bringing in our discipline in the way we property manage, we institutionalized that space.
Institutional capital is buying in all the markets they were not when we started. We were able to realize some significant returns to our equity investors.
It's the exact same concept that we did in our beachfront hospitality resort platform. We were buying older properties in iconic locations on beaches. These are properties that were owned by a family for generations, and we would come in, renovate them, and institutionalize that aspect of it by bringing them all under a bigger, more sophisticated property management platform. We're doing the exact same thing in the RV space.
Who is the RV investor? Or are y’all leaning on your traditional RREAF investor based on the relationships you’ve built?
It's all about trust and investors getting comfortable that you're best in class, you understand the space, and you've been successful in the past in building these platforms. With those same investors day in and day out, it's all about producing what you say you're going to produce. I think we do that very well.
The returns on this RV platform are far beyond anything I've seen anywhere else in real estate, particularly the way we're set up and structuring it.
We're creating an interesting dynamic for an industry that's been around for a long time in that we're coming in, buying these parks and then completely renovating them. We're building resort pools, lazy rivers and outdoor cooking facilities. We're putting in tiny homes and casitas on some of the pads. We're creating a family-oriented, highly amenitized program. We think it'll play very, very well.
We've seen the average age of RV owners come down by 20 to 25 years, and Covid taught us a lot. We are seeing more and more families that are working remotely and even homeschooling their kids across the country.
This interview has been edited for clarity and brevity.