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How to Scale Commercial Real Estate

Jul 3, 2023

Today’s guest is Graham Sowden.


Graham is the Chief Investment Officer at RREAF Holdings. He has been directly involved in the sourcing, underwriting, and acquisition of over $1 billion in asset value including over 11,000 multifamily units. Join Sam and Graham in today’s episode.


Growth of Reef Holdings [00:00:26]

Investing in secondary and tertiary markets [00:03:42]

Challenges in the multifamily market [00:09:14]

The Risks of Short-Term Investing [00:12:27]

Reef Holdings' Portfolio [00:14:20]

Advice for Starting in Real Estate [00:19:06]


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Want to read the full show notes of the episode? Check it out below:

Graham Sowden(00:00:00) - And, you know, they've got no profit participation, so they've got a fixed kind of rate of return and eight current and eight accrue. And then we brought $30 million of common equity that has all of the upside, um, on a $580 million transaction and the weighted cost of capital on that deal was five and a quarter. So you've got basically 97% leverage at 5.25%. Welcome to the How.


Sam Wilson (00:00:26) - To scale commercial real estate show. Whether you are an active or passive investor, we'll teach you how to scale your real estate investing business into something big. Graham Soden is the chief investment officer at Reef Holdings. Graham, welcome to the show.


Graham Sowden(00:00:44) - Thank you. How are you doing, Sam?


Sam Wilson (00:00:46) - I'm great, sir. Cannot complain. Graham. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there?


Graham Sowden(00:00:55) - Oh, gosh. 90s. Um, so started my career and the commercial real estate space at Reiff back in 2016.


Graham Sowden(00:01:07) - Um, I was kind of in a, you know, floating analyst role at the time. I was probably the eighth or ninth employee. Um, we were, you know, a much different, much smaller shop at the time. I pretty quickly transitioned into the director of acquisitions role and ran our multifamily acquisitions platform for about six years. And then towards the end of 2022, um, took on a new role within the organization as chief investment Officer.


Sam Wilson (00:01:45) - That is fantastic. So you said you were employee. Let me get this right. 8 or 9.


Graham Sowden(00:01:51) - Yeah. Okay.


Sam Wilson (00:01:53) - So I'm looking right now at your company website and just a random stab would put it at 40 or 50 people at this point.


Graham Sowden(00:02:01) - So we are somewhere between 400 and 500 employees nationwide now. And so that's, you know, inclusive of our property management company and all of the on site, you know, the leasing agents and maintenance folks. Um, but we've got about 120 here in our corporate offices in Dallas. Um, and then the rest kind of spanned throughout the South and southeast.


Graham Sowden(00:02:28) - So we've, we've, we've come a long way since, since 2016.


Sam Wilson (00:02:33) - Yeah, that's, that's pretty explosive growth. What do you attribute that to?


Graham Sowden(00:02:39) - Um, you know, I think that we have always been, you know, kind of at the forefront of different investment theses and strategies. Um, and, you know, it was a lot of being in the right place at the right time. We back in, you know, 15, 16 kind of identified multifamily, um, in the south and southeast, particularly in secondary tertiary markets as being, um, you know, desirable, you know, investment kind of strategy for us. We were buying, you know, mostly B kind of B-minus type product in the early years. Um, that all had, you know, a light kind of value add component to them. Um, and we found that we were able to buy it 200, 250 basis points, kind of wider cap rates than you would if that exact same asset was located in one of the primaries or cause.


Graham Sowden(00:03:42) - And so, you know, we were chasing yield and our investors were chasing yield before any of the institutional groups had really, you know, transitioned, think, um, into those markets. And so, you know, we were, we were buying it seven and a half, eight caps. And you know, ultimately in 2020, 2021, we were able to exit a lot of those deals that, you know, three, three and a half caps. So tons of thread, um, built up a really, really good reputation in the marketplace with owners and, and, and brokers and built up a really strong track record for our investors. And you know, it was just kind of natural evolution and growth.


Sam Wilson (00:04:29) - Do you feel like it was just right time, right place situation and you guys seize that opportunity or was there something else you guys did to really create such incredible value?


Graham Sowden(00:04:41) - Um, mean that would be an an easy way of looking at it. But it was, it was definitely more strategic and more defined than that.


Graham Sowden(00:04:52) - Mean we did have kind of the foresight at the time to go in and aggregate, you know, a big a bunch of scale and all of these kind of overlooked markets and. Had the conscious thought that, you know, if we scale in all of these markets that the institutional groups aren't really looking at but create, you know, enough valuable and prove out this as a viable strategy, you know, then these bigger institutional groups will be able to come in and write the bigger checks that they historically hadn't been able to write in these markets. Right. You know, as we built out, you know, a larger portfolio and that's kind of exactly what we saw happen.


Sam Wilson (00:05:39) - Wow. That's that's that's really great foresight. And that's that's a tough one. Um.


Graham Sowden(00:05:45) - We had a lot of people tell us that, you know, we were, we were wrong. So it feels good sitting here today.


Sam Wilson (00:05:53) - Right? And not just because you get to say I told you so, but because you were right and you got to reap the rewards of being right.


Sam Wilson (00:06:00) - So that's absolutely fantastic. How does how does your role or how has your role changed in the company from acquisitions director to now the CIO?


Graham Sowden(00:06:12) - Um, you know, it's it's stayed the same in some regards. I think, you know, as the director of acquisitions, I was more specifically focused on the direction, overall direction and strategic growth of just the multifamily platform. We have six other verticals internally, other investment strategies, um, that we take advantage of as well. But you know, that was kind of my main focus was growing out the multifamily portfolio. Um, and I'm still doing that, but it is kind of evolved into that role a little bit more management now of, you know, my team members and personnel and overseeing the growth strategy for all of the seven verticals at Reif, not just, you know, multifamily.


Sam Wilson (00:07:09) - Got it. Is there is there a part of your previous role that you miss or is is it I guess as you think about that, there's always transition and change for anybody as they grow and move into the next step or the next part of their career or business.


Sam Wilson (00:07:25) - So any part of that that you say, Man, I wish I could just still go do that.


Graham Sowden(00:07:30) - Uh, yeah, absolutely. And there's a lot that I missed just about the last 6 or 7 years. You know, it was, it was a really good time to be in the space. And that's not to say that today isn't it's just changed and we have to adapt and, you know, evolve some. Um, you know, it became kind of second nature, you know, tying up deals and running them through our process and getting them closed. Um, you know, so today things have like changed such that we have to be. A little bit more careful, I guess, in the opportunities that we're going after and pursuing. So I think it's a really good time to focus like internally, you know, operations and the organization like on a holistic level, looking at management, looking at, you know, asset management, property management, all of the things that kind of make us kind of run and fine tune everything, you know, at the holding company level.


Sam Wilson (00:08:44) - Yeah, I can. I can certainly see that. And how how for you guys, I mean, you saw it in the front end in 2016. You said, okay, hey, you know, we're going to buy all this stuff, we're going to aggregate it, we're going to operate it professionally such that institutional capital and other sources will want to come in and then buy it from us. You've seen kind of that whole cycle occur. And I think on the multifamily side, what are we down like 75% this year? I think on transaction volume, I mean, it's.


Graham Sowden(00:09:14) - Yeah, I was actually quoted in a Wall Street Journal article 2 or 3 weeks ago, and the title of the article was Apartment sales are down 74% year to date. Yeah, So you're right on.


Sam Wilson (00:09:27) - Yeah. I mean, that's that's an astounding number or a stunning decline, I guess I should say, in transaction volume. Does that create any opportunity for you guys? Maybe that wasn't there a year ago.


Graham Sowden(00:09:43) - Uh, short answer is yes.


Graham Sowden(00:09:47) - And I'm sure you've talked to a lot of other multifamily owners and operators and think everybody kind of shares the same sentiment that, you know, there was a lot of irresponsible investing between 2020 and 2023. Um, you know, you saw syndication groups kind of popping up everywhere and, you know, chasing what was at the time, you know, the most popular investment asset class and commercial real estate, multifamily. And I think people kind of. Forgot about the fundamentals. And, you know, we're buying to buy. There are a lot of shops that were set up, as you know, fee driven shops that would go out and overpay for an asset which kind of ultimately contributed to that, you know, bubble that we may have been in. Um, you know, people were borrowing money irresponsibly, I think extremely high leverage, floating rate debt, short term, you know, going in to a lot of these deals with negative leverage whereby you have to underwrite, you know, ten, 15, 20% rent growth, you know, just to meet your debt service, you know, just just to basically break even.


Graham Sowden(00:11:06) - And and that's assuming interest rates don't rise. And, you know, as interest rates rose, you also it was kind of just this confluence of of of issues insurance kind of, you know, insurance rates just skyrocketed, um, due to all, you know, the losses that the insurance companies had sustained through natural disasters and the like. And, you know, taxes have been an issue in a lot of areas and then interest rates being so high all kind of contributed to like, you know, values kind of plummeting in the last, you know, call it six months. But, you know, we, again, don't know if it's luck or foresight. I mean, this was kind of a constant internal debate that we had over here whether to, you know, fix or float our agency debt. And, you know, we always opted to fix everything. And, you know, a large majority of our portfolio has long term fixed rate agency debt. And so, you know, we're kind of prepared to weather any storm, any, you know, rise in interest rates mean some of our biggest portfolios, you know, are locked in with sub 3% interest rates for ten years with six years of interest only at 80% leverage.


Graham Sowden(00:12:27) - So and there are a lot of groups that were very successful in the short term, buying a property, fixing it up and flipping out of it and, you know, having the ability to flip out of it in such a short period because most of those floating rate, you know, debt instruments have maybe a 12 month lockout and then there's a 1% prepayment penalty versus having to pay yield maintenance or deficits, which, um, you know, can devalue one's exit. So a lot of groups were able to get into these deals quick, turn them around 18, 24 months later exit and they hit a home run. But you know, it's not sustainable. And as soon as you find yourself in a market with, you know, varying or distinct attributes from what I just described, um, you're going to have, I think, some pain and suffering amongst those groups that, you know, took out those risky loans and weren't able to see the 15, 20% rent growth that they they had underwritten. And they're going to be upside down in a lot of their deals.


Graham Sowden(00:13:33) - And so that's where the opportunity lies.


Sam Wilson (00:13:35) - Yeah, it's the that's the unfortunate gambler's curse where you you go gambling and you make and fallacy. What's that now?


Graham Sowden(00:13:44) - The hot hand fallacy, right?


Sam Wilson (00:13:46) - Yeah. You're like, Hey man, I win. We made a bunch of money real quick and easy and we can just keep doing that. It's like, Well, maybe. Maybe you got lucky and you ought to just go home. So. Yeah, yeah.


Graham Sowden(00:13:59) - Think it was. I think it was Warren Buffett that said that, uh, you know, as soon as the tide comes out, you're going to start seeing who's swimming naked. Right?


Sam Wilson (00:14:09) - Right. Yeah, there's that. And I think on the flip side of that, though, you know, you guys having everything is fixed rate. I mean you say sub 3%.


Graham Sowden(00:14:20) - Mean Yeah we did at the end of 2021 we did a portfolio dubbed TC 21. It was the Trans coastal 21. It was made up of three different sellers that we had kind of, you know, pieced together 21 properties all throughout the south and southeast.


Graham Sowden(00:14:39) - Um, I think we bought it at probably five and a half blended cap rate. Um, we locked in ten year fixed rate money with Freddie Mac through Cadia out of Dallas at 271 with six years of interest only. And so it was a $580 million total capitalization. We had $406 million of first lien debt at that 271 rate. We brought in a very good partner of ours, 3650 right there out of New York and LA and Miami. It's CalSTRS money and New York purs but they came into a pref position that. Took us up to probably 90% leverage with a weighted cost. You know, they were about 10%, 10.5% money at the time. And then we brought in another group called in a priority equity position that took us up to about 97%. And, you know, they've got no profit participation, so they've got a fixed kind of rate of return and eight current and eight accrue. And then we brought $30 million of common equity that has all of the upside, um, on a $580 million transaction and the weighted cost of capital on that deal was five and a quarter.


Graham Sowden(00:15:55) - So you've got basically 97% leverage at 5.25% money, right?


Sam Wilson (00:16:03) - Right. That's astounding. I mean, what you just described is beyond advanced for many, probably of our listeners.


Graham Sowden(00:16:13) - I apologize. So.


Sam Wilson (00:16:14) - No, no, you don't have to break it down. But by no means. I'm just saying that what I understood everything you said and I think our listeners will too, but yet it's a strategy that many of us, myself probably included. I go, gosh, that's that's a lot of moving parts to assemble.


Graham Sowden(00:16:28) - It is. And that was it's kind of what has always like separated us from a lot of groups. I mean, we've got, you know, a lot of 30 plus year vets over here, um, a ton of experience through out, you know, all sectors of commercial real estate. And, you know, we have found that we can put together some of the more creative structures to maximize our returns to our investors while mitigating as much risk as possible. And, you know, our track record kind of shows that it's not always the cleanest deal.


Graham Sowden(00:17:05) - A lot of times mean any new groups that we're working with. It's it's a learning curve. Even the agency lenders a lot of times, you know, have to come to terms with what we're trying to structure. But it's it's it's panned out really well for us. So we kind of created some of those different tranches of capital and and we got Freddie Mac to sign off and become comfortable with them.


Sam Wilson (00:17:30) - So wow. Yeah, I can only imagine that was a tough hill to climb because those agencies, they're not exactly ones that, you know, color outside the lines.


Graham Sowden(00:17:40) - No, they're not. So but we are we have so we have the benefit of being select sponsors. And so, you know, there's maybe. 40 or 50 select sponsors every every year. And it goes like the biggest borrowers for, you know, Fannie or Freddie. And, you know, what you get is you kind of have a direct line of communication with the agencies. And, you know, you you can kind of create or give feedback to some of the programs and, you know, tell them what what you, the borrower wants.


Graham Sowden(00:18:16) - Um, and, you know, they can hopefully help accommodate, you know, you also get preferred pricing and queue times and things like that.


Sam Wilson (00:18:24) - But man, this is fantastic. You have given us so many things here to think about. I love just hearing the journey. Would you say you came on as person number eight, 8 or 9? Yeah, there at the company and then you're talking about a deal 5 or 6 years later where you guys are assembling a $580 million portfolio By I mean that's, that's a lot of a lot of progress in a very short period of time. As you look back over the past call it now seven years. What what is one piece of advice or one what's one piece of advice you'd give to somebody or maybe even to yourself if you were starting back over right here in 2016?


Graham Sowden(00:19:06) - Oh, gosh. Mean could take this in a lot of directions. I think one is just. Go do it. Like all of us can sit around with our buddies and talk about the greatest ideas or the greatest investment strategies in the world.


Graham Sowden(00:19:22) - But none of it means anything unless you get out there and go do it, you know, that's kind of like. This company, you know, Reef is has become like this big, well-oiled machine. But it wasn't always that. It didn't start out that way. I mean, we were cowboys, you know, we were gunslingers. We had, you know, all of the tools we had, all the experience we had, you know, the right guys. Um. But, you know, we had a good idea and we went out and we got it done. I mean, you learn a lot just by doing it. You're not going to know all the answers. You know, there's such a thing as analysis paralysis where, you know, you think of all of these what ifs and hypotheticals and it just bogs you down into, um, you know, not getting out and actually doing the work that needs to be done. So, I mean, there's a lot to just like is what always say feet on the floor, you know, in the morning, put your feet on the floor, get out of bed and just start the day.


Graham Sowden(00:20:26) - You know, like you never know where it's going to go. It's always going to be a good day if you just put your feet on the floor.


Sam Wilson (00:20:33) - Get your feet on the floor, Graham. Love it. Thank you for taking the time here to come on the show today. It's a bummer. I've got lots more questions here for you, but we are unfortunately out of time. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?


Graham Sowden(00:20:48) - Um, well, you can go on to our website if you're interested in investing. We have an investor portal. We've kind of created a digital marketplace for all of our offerings. We typically have, you know, 5 to 6 different investment offerings at any one time. Um, you've got to be accredited to actually invest. But we do the accreditations here internally through our legal department. Um, you know, otherwise all of my contact information is on our website. You can find me on LinkedIn and I'm always happy to get on the phone and talk with anybody about anything.


Graham Sowden(00:21:33) - So if you find my cell phone, I'm not going to give it to you on your podcast. But if you are able to find my cell phone, you can give me a call anytime and I will take it.


Sam Wilson (00:21:42) - That sounds great. Graham, very generous of you. Certainly appreciate your time here today. And we'll make sure we include that there in the show notes. For those of you who are listening, that's Reef spelled RCAF Reef. Graham, thank you again for your time. Have a great rest of your day.


Graham Sowden(00:21:58) - Absolutely. Thank you, Sam. And you have an incredible podcast voice.


Sam Wilson (00:22:03) - Thank you, sir. Appreciate it. Talk soon. Bye bye now. Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show.


Sam Wilson (00:22:22) - It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.