January 15, 2023

JF3055: Focusing on the Fundamentals in a Market Downturn ft. Kip Sowden

Kip Sowden is the CEO at RREAF Holdings, which works in multifamily, hospitality, ground-up construction, single-family, build-to-rent, master-planned communities, and more. In this episode, he tells us about the biggest lessons he’s learned throughout his 37 years in real estate, his advice for investors experiencing their first market downturn, and why he believes the South and Southeast U.S. will have a softer landing in the years ahead. 

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Kip Sowden | Real Estate Background

  • CEO at RREAF Holdings, which works in multifamily, hospitality, ground-up construction, single-family, build-to-rent, master-planned communities, and more. 
  • Portfolio:
    • Over $5B in assets
  • Based in: Dallas, TX
  • Say hi to him at: 


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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Kip Sowden. Kip is joining us from Dallas, Texas. He is the CEO of Reef Holdings, which works in multifamily hospitality, ground-up construction, single family, builds to rent, masterplan communities and other asset classes. He has over 37 years of industry experience, and knowledge totaling over 5 billion in assets. Kip, can you tell us a little bit more about your background and what you're currently focused on?

Kip Sowden: Sure, Slocomb. Thank you for having me. I think your introduction covered quite a bit. As you correctly pointed out, I've been in the commercial real estate business 37 years; we're based here in Dallas. Today we focus on six main divisions, or six main verticals within the company. One is multifamily acquisitions, where we're buying existing multifamily assets throughout the South and Southeastern part of the United States. All of the product that we buy in that vertical has a light value-add component to it. We typically leverage with agency debt, either Freddie Mac or Fannie Mae, but occasionally, we'll use debt funds, or bridge fund lenders. We do property-manage ourselves. We are a vertically-integrated company, in-house acquisition team, underwriting, due diligence, legal department, obviously accounting, property management, asset management, construction... We have our own general contractors.

A second division or vertical within Reef Holdings is our beachfront hospitality and resort platform, where we're buying existing hotels in iconic locations, on beaches. Currently in that division we own two hotels on Panama City Beach, one on Pensacola Beach, just finished construction of a new tower on Pensacola Beach... We own on Cocoa Beach, we've got two hotels on Amelia Island, that we recently bought. We bought the Sea Palms resort on St. Simons Island in that division... And I know I'm forgetting one or two, but what Reef really focuses on is quality housing for middle America, and quality vacations for middle America. We're not trying to be the highest in hospitality company. We like to provide good value family vacations catering to most of America.

We do have a ground up division building multifamily and hospitality. On the multifamily side, we're currently building seven projects in Texas and Tennessee, and then on the hospitality side we're building two large Margaritaville resorts. One on Galveston Island, and another on Myrtle Beach. I can keep going if you'd like...

We've got another division focused on a ground-up extended stay hospitality. Those we are building all over the country, with ESA, Extended Stay America, and Wood Springs and the Evergreen product, both by choice. And then we have Reef Communities. Reef Communities is developing cities; highly programmed, highly amenitized, masterplanned communities, large communities in close proximity to major MSAs.

For example, we bought 3,300 acres just south of DFW airport. It's halfway between Dallas and Fort Worth, in Midlothian, where we've designed 8,500 single family homes, 3000 build to rent. We'll build multifamily product there, two schools, town center, hiking/biking trails... We've bought another 3200 acres between Austin and San Antonio, on the Texas 130 tollway at highway 80... So it's growing.

And then the newest article is RV communities. We're buying RV communities in phenomenal locations throughout the South and Southeast. I think we've got 23 under contract closed over the next 90 days, at a total cost of around 800 million. So that's Reed. About 400 employees today, and this year topped 5 billion in AUM. That's us.

Slocomb Reed: Quite an impressive resume, for sure. Kip, you know, as much as you all do and as much experience as you have, I'm feeling led to lead this conversation in a bit of a different direction.

Kip Sowden: Okay.

Slocomb Reed: You've been doing this as long as I have been alive. And I don't say that to point out your age. I do say it to point out mine. I got into real estate investing after the recession of '08, meaning that frankly, even in 2022, I am still experiencing my first market cycle. I know quite a few of our Best Ever listeners, whether they invest actively or passively, are still experiencing their first market cycle, regardless of their investing strategy... I feel like the best question I can ask you, for myself, frankly, but also for our listeners, is what advice do you have for those of us who have experienced significant success, but frankly, we've had tailwinds for the last 10 or 12 years - what advice do you have for those of us who are still experiencing our first market cycle, and either are, or are about to experience our first real market downturn?

Kip Sowden: Yeah, there's a lot packed into that question. I'll start by saying that I think that the success that we're enjoying today, and have over the last five to seven years is truly a function of all the mistakes that we've made in prior years. And having gone through multiple cycles in the commercial real estate space, and learning how to deal in those more difficult times have led us to be a much stronger, better company, and more focused on the fundamentals of real estate. I learned when I first started in real estate, 1984-1985 timeframe, that location matters: and it does. Asset class, asset quality and location matters. Your sponsor matters. It matters quite a bit.

I think over the last four or five years there's been tailwinds for commercial real estate companies, particularly in the South and Southeast in multifamily, or hospitality, and in many other asset classes, that it's hard to tell who is really sound, strong, good. So there's companies that have been around for decades, and have been through various cycles that I would focus on. And I'm not saying just Reed. There's tons of my competitors and great companies out there that have been around a long time. And I think that experience matters, particularly when we're going into a real estate cycle where there will be headwinds.

I would also look to geographical locations. I do believe that the South/Southeast is going to have a much softer landing than other parts of the country as we come through this recessionary period. And then lastly, I would say look at the asset classes. I think that solid B, B+, A- multifamily is going to fare well. Residential in general is going to fare well in these areas of the country where you have great in migration. And that's Texas, that's Florida, that's Georgia, North/South Carolina. A lot of the states in which we transact.

There's a lot behind the verticals that Reed does today, and the locations in which we focus. We've always said that our programs and our platforms are recession-resilient; nothing's recession-proof, but recession resilient. I think that that's holding true. I think it's important to have fixed rate debt, and not be over leveraged, particularly when you're in a environment where interest rates are likely to continue to rise, at least in the short-term.

Slocomb Reed: Kip, that is, of course, excellent advice. There are a couple of things that I want to pick out of that and ask you about though. The first is - while I can guess what your answer would be, I'd rather hear it from you... Why do you believe the South and the Southeastern United States will have a softer landing in the months, possibly years ahead?

Kip Sowden: Because we see great in migration. We're seeing increases in the population all throughout Texas and Florida, and a lot of the other states in the South/Southeast. They're business-friendly environments. Currently, the cost of living is far less than, say, the West Coast and the Northeast. And like I said earlier, it's just a business-friendly climate and environment, and you get a heck of a lot more bang for the buck. And we're seeing companies move from the West Coast and the Northeast down to the South/Southeast, and just families, for quality of life and more bang for the buck. And it's that demand that exceeds the supply that is keeping real estate values where they are in this part of the country.

Slocomb Reed: You've also pointed out asset quality, and then talked about B, B+, A- multifamily. Kip, I will say a large part of my own portfolio right now is C class, workforce housing. I intend to continue investing there. Do you see a negative outlook for C areas within growing markets?

Kip Sowden: I think the term "workforce housing" has many different meanings to many different people.

Slocomb Reed: Yeah, that's why I used it. It's sufficiently generic.

Kip Sowden: Yeah, it's very generic, and it's kind of a favorite word in the industry. But the reality is, when I talk about quality housing, whether it's C, B, A, up the spectrum, I'm really talking about 2-3 storey, garden, walk-up, [unintelligible 00:11:51.21] versus urban high-rise, type one construction. We don't play in that space. I think that that space, the high-rise apartment and condo residential does real well when you have a booming economy, and you have a lot of renters by choice, as opposed to renters by necessity. And we shy away from that. We like to produce yield and make money at [unintelligible 00:12:21.29] in multifamily, but we're delivering very high-quality housing, and we'll buy an asset, and we'll come in and really renovate it by pulling up carpet, and putting in the vinyl plank flooring, resurfacing countertops, replacing light fixtures, plumbing fixtures... Heavy amenity packages added to it. New workout facilities, clubhouse, common areas, those type of upgrades. We do not buy the product that you have to come in and shut down and spend 20k, 30k a unit to renovate. Our real forte in our existing multifamily division is spending no more than 10k a unit in upgrades, and in markets that demand far exceeds supply, and they're just in great demand for better quality housing.

But I think you're spot on - workforce housing in the South/Southeast I think will continue to be a good bet. And I think in the Midwest as well, and others areas. It'll beat out many other asset classes.

Break: [00:13:37.06]

Slocomb Reed: Kip, going back to your six verticals now, with the breadth of experience that you have, you said you have a focus on quality housing and vacations for Middle America. As many different asset classes as you are working in, I do want to ask, why didn't you get into something like self storage, or frankly, mobile home parks, but also other commercial/industrial/office/warehouse types of asset classes? Why did you stick to six verticals within housing and vacations?

Kip Sowden: So over the 37 years, there is, I'd venture to say, little to no asset class that I haven't worked in, either as a broker, or lender, a buyer, a builder, developer... And we, over the years, have felt like the most recession-resilient space are the verticals that we currently operate in. Now, you did mention self storage - that's one that we have contemplated as a separate vertical, but have not stepped into that space yet, although we've done it in past lives. I do like it quite a bit.

On the mobile homes, we're not buying mobile home parks, but we are getting into the RV park space in a big way. And what we like to do as a company is we're not going to do things the same as all of our competitors do. We operate quite differently, and try to create and find markets that are not as recognized, or focused by a tremendous amount of other institutional capital, at least on the onset.

For example, when we started buying existing multifamily assets in some of the secondary and tertiary markets throughout the South/Southeast, we had very little competition. We were buying at 150 to 200 basis points higher cap rate than if that exact same asset were located in a larger MSA. But we knew that if we assembled a big enough portfolio, and could bring in our property management expertise to really work not only the revenue side, but also the expense side of the equation, we'd make a lot of money. And we did just that.

This new space, this RV space that we're getting into, it's something that's never been done before, to the extent or the way that we're going to do it. We've picked out the best locations we believe in the country. And they're all areas that you and I and our friends would like to vacation. And we'll buy these existing parks, but we'll go in and significantly renovate them with lazy rivers, resort pools, outdoor cooking facilities, and really institutionalize a somewhat fragmented space, and do almost identically what we did in the multifamily space in the Southeast. The exact same thing is true on the beachfront hospitality. We're buying owners that have owned property, it might be the only property that they've owned, but they've owned it for 20, 30, 40+ years, and their children are not interested in managing and taking over that hotel, so we institutionalize that, and we bring our expertise, from property management, asset management, and technology to the table, that really helps us create significant value for ourselves and our investors, more importantly.

And all of these verticals have a common denominator, which is we're catering to Middle America, most United States. The affordability factor is very, very important. Drive to leisure.

Slocomb Reed: That's awesome. Kip, are you ready for the Best Ever lightning round?

Kip Sowden: Sure.

Slocomb Reed: Great. What is the best ever book you've recently read?

Kip Sowden: Okay, I'm currently reading two books... One is called "How much is enough?" It's by Jay Bennett. And I really enjoy that. And I'm also reading Halftime by Bob Buford.

Slocomb Reed: What is your best ever way to give back?

Kip Sowden: My wife and I have created our foundation, the [unintelligible 00:19:02.19] Kip Sowden Foundation, and it caters to children through education, health and community. And then we also have Reef Charities. And as a company, we give back in a big way; we've got a whole, I want to say division, but a team set up under Reef Charities. Currently this year's projects were Habitat for Humanity, [unintelligible 00:19:25.29] the Children's Hospital, St. Jude, and Alzheimer's research. So I think giving back is a big, important part of making money, and being involved in the community.

Slocomb Reed: Kip, this may be a difficult question to answer, but what is the biggest mistake you've made in commercial real estate investing, and the best ever lesson that resulted from it?

Kip Sowden: Well, I've made quite a few mistakes in commercial real estate over the years, and I'd actually encourage people not to be afraid of making mistakes. I like people that test the limits, think outside the box, and are innovators. And you're not going to get it right every time, so don't be afraid of making mistakes. I think that mistakes are a part of learning, and getting better.

And I think in terms of biggest mistake in real estate was not recognizing that if something's too good to be true, it's likely too good to be true. Prior to setting up these six main verticals, which we started with the multifamily, then the beachfront hospitality, then the ground-up, then came Reef Communities, and now RVs... The one that we did mention is -- well, I guess I did mention it, the extended stay hospitality, building those all over the country... Focused on the fundamentals of real estate matters. Where I made a mistake was we bought limited-service hospitality in areas of Texas, the Permian Basin and the Eagle Ford, where the occupancies and ADRs, the average daily rates were excessively high, we're buying at extremely high cap rates. But that was all a function of demand far exceeding supply. But what was creating that demand was not real estate fundamentals, it was the price of oil. And then when the price of oil tanked in '15, those 100% occupied extended stay - or not extended stay, but limited service, hospitality assets went from 100% down to 20%, and from $300 a night to $25 a night. And that can happen overnight. So it's losing sight of true fundamentals and letting some outside factor that you can't control drive decisions... And I think that's called greedy. So don't be greedy.

Slocomb Reed: Kip, on that note, what is your best ever advice?

Kip Sowden: Never stop learning. Never think that you know it all. Be open to everybody's ideas, always listen, and enjoy life. Give back.

Slocomb Reed: Last question - where can our best ever listeners get in touch with you?

Kip Sowden: I'm always available - my cell phone published, it's on our website; call me any time. Hopefully, I'll be on Out of Touch, which is our boat in St. Thomas, which by the way, we charter... But you can always get in touch with me. I'm accessible 24/7/365, wherever I am.

Slocomb Reed: Excellent. The links to your website are in the show notes. Kip, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five-star review, and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a best ever day.

Kip Sowden: Thank you, Slocomb.

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