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Quarterly Newsletter July 2013

Issue 1

29th Street Capital is multi-disciplined real estate investment and advisory business based in San Francisco, California. Executives have a combined 70 years of real estate experience including acquisitions, development, asset management and fund management. The firm invests in all asset classes across the U.S. and categorizes our investment approach into 3 main strategies: 

Single Family Residential – Portfolio consists of over 500 single family homes with a cost basis well below current market values, and an average occupancy of over 90%

Multifamily Acquisition – The firm owns 17 properties and over 3000 units in multiple states including CA, NV, AZ, CO, TX and GA. During Q2, in a joint venture with Auburn Communities & Five Mile Capital, the firm acquired two Class B properties in Decatur, GA. Located just 9 miles from downtown Atlanta, the properties (total 332 units) are currently 90% occupied. The properties were acquired at a significantly lower price per unit than comparable surrounding market properties.

Distressed Bank Assets – We acquired 51 distressed residential and commercial mortgages with a total asset value of $27MM. To date, we have liquidated and monetized 33 of 51 loans through a combination of workouts and note sales. We expect to earn returns of greater than 25% per annum when the remaining notes are worked out or sold.

Quarter Update - The 2nd quarter was an especially busy one for the company with multiple acquisitions in distressed mortgages, single family and multifamily residential properties. 29th Street Capital completed its first land acquisition in Auburn, CA purchasing a sizable piece of raw land, which will eventually be sold and used to develop 47 single family homes. The firm also purchased multiple single family lots in Palm Springs, CA at the prestigious Citrus Club golf course, which the company plans to begin developing in Q4’13. Our firm continues to expand our operations outside of CA, with several potential properties under contract in San Antonio, TX as well as recently purchasing several single family homes in Las Vegas, NV. While interest rates have risen in the last several months, the housing market remains robust and the firm continues to look for attractive investment opportunities across all market segments.

Current Market Environment The 30-year fixed interest rates have risen considerably over the last several months reaching a two-year high of 4.5%. This move was caused primarily by the Fed signaling that they could begin to taper off bond purchases in the coming months. Mr. Bernanke also noted that “downside risks to the economy and labor forces have diminished in recent months and the Fed expects inflation to be at or below the 2% stated target


We believe that there are 4 potential outcomes for the economy: 1) A return to stronger growth, in which case rents will rise; 2) A low growth, low inflation environment where income properties will be attractive; 3) A return of inflationary pressure, where real property should offer some protection; 4) A longer-term deflationary environment, which we believe would be the worst situation for us. While this looks less likely than it did 6 months ago, we are following developments closely and actively adjusting our strategy to take advantage of market conditions.

The Housing Market continues to be robust with both existing home sales and median home prices continuing to rise in most major cities. California has seen prices continue to rise with June marking the 16th straight month that median sale prices rose year-over-year. Most analysts expect prices to continue to rise over the next few years, although not at the current pace, with interest rates not seeing significant spikes. In locations where 29th Street Capitals focuses on, primarily Northern & Southern CA, NV, AZ and TX the fundamentals remain strong. In Northern CA (Sacramento, Oakland, San Jose, and San Francisco) job growth remains strong along with the areas unemployment remaining well below the state average. New construction has been popping up all over the major cities along with a sizeable increase in investor activity, especially in the Oakland resale market. In the southwest (Las Vegas NV, Phoenix AZ) the new home markets continue to be strong, with 80% of builders reporting sale price increases in their communities throughout Phoenix, AZ. In both markets resale inventory remain extremely limited, with just a one month worth of supply at the current sales paces in Las Vegas, NV as both individuals and institutions continue to look for opportunities. Throughout the TX area all the major metropolitan areas continue to remain hot, with strong underlying fundamentals (job growth) and continued increases in sales activity. As re-sale inventories remain extremely tight along with builders struggling to meet the rising demand, especially in areas such as San Antonio and Austin, prices have continued to rise. In some new communities prices have risen by as much as 5% this year, creating a sense of urgency among buyers in terms of affordability.

REITS have attracted quite a bit of investor attention this year, with five IPO’s generating $1.2BN in the first half of 2013. With American Homes 4 Rent announcing in July their own intentions to file an IPO for as much as $794MM, things continue to look good for this new market segment. With the recent rise in home prices, mortgage lending constraints, continued economic uncertainty and expanded rental options many people who would have in the past become homeowners are choosing instead to rent single family homes on a long term basis. American Homes 4 Rent would be the largest IPO for a company specializing in single family rentals. The company has spent $3.1BN on approximately 18,000 houses in 21 states, with another 1,150 properties currently in escrow. Professional money managers are beginning to institutionalize this new sector, moving it from a collection of small operations, to large professionally managed portfolios. Blackstone Group in particular is building a business around single family dwellings, having invested more than $5BN on 30,000 homes through its Invitation Homes division and is currently the largest player in the single family rental market


Other firm such as Colony Capital, GI Partners and Pine River Management feel there is plenty of capacity for single family homes to be institutionalized. Taken together, multifamily and single family housing is estimated to be a $20 trillion sector, which if institutionalized would be larger than any other real estate sub asset class. While institutions such as Blackstone and Colony Capital have invested billions into the market, they still own just a sliver of the total number of houses available for rent, with the vast majority of homes still owned by individuals who currently own two or three properties. According to Jonathan Gray of Blackstone “There were more than 10MM homes to rent before the (2008 financial) crisis”, putting into perspective how relatively small the roughly 100,000 homes that have been purchased by large institutional players compare to the overall market.

New Developments Single Family Residential – 29th Street Capital’s rental business continues to grow despite decreased inventory and increased demand from both individual and institutional investors. To date our portfolio consists of over 500 single family homes primarily in CA, with occupancy of approx. 90% and market values well above initial cost. 29th Street Capital continues to add to the rental portfolio, most recently purchasing properties in Las Vegas, NV and having several potential properties under contract in San Antonio, TX. Our High Net Worth Single Family Fund continues to secure capital, most recently being able to leverage our portfolio with $7.5 Million in long term debt at very attractive rates.

Kemper Oaks II – 29th Street Capital recently purchased a sizeable piece of raw land in Auburn, CA. With the tentative map in place, the land will be sold and eventually used to develop 47 single family homes as part of a premier housing community in Northern California. Located east of the metropolitan areas of Sacramento and Roseville, Kemper Oaks will offer convenient access to employment centers, schools and major shopping areas. Auburn offers a high quality of living especially for outdoor enthusiasts, who have a close proximity to the Sierra Mountains, Lake Tahoe and Heavenly Ski Resort. The land consists of 24 acres located near Auburns’ public transportation system as well as easy access to several major freeways.

Kemper Oaks II -Tentative site map with proposed example property


Citrus Club, La Quinta CA - 29th Street Capital purchased multiple lots for development at the prestigious Citrus Club golf course in La Quinta CA. An established course at the luxury La Quinta Hotel, lots are extremely limited due to high demand before the housing crash in 2008. The company is completing the initial building plans and is eager to strike ground in Q4’13

Multifamily Residential – 29th Street Capital has continued to take advantage of opportunities in the multi-family space. In Q2, our company acquired, in a joint venture with Audubon Communities and Five Mile Capital, two Class B multifamily properties in Decatur. GA. With a transaction price of ~$19.5MM, the two properties are located just 9 miles from downtown Atlanta, are currently 90% occupied with a total of 332 units. The properties are located in a strong submarket where occupancy is typically around 92.5% and rent growth has increased by an average 4% over the past 12 months. With an acquisition price of $19.5MM, the cost per unit is $40,000, significantly lower than the surrounding market properties. Renovations have already been completed with over half of the units, with 67% at Birch Cove, and 52% at Sycamore finished between Jan’12-Sep’12. The properties are located just minutes from major employment centers such as Emory University and DeKalb Medical center, and offer residents easy access to Atlanta, and Hartsfield-Jackson International Airport. With attractive adjusted net returns of 15-17% and a projected 10.5% yield, the acquisition made sense from many levels. Audubon Communities has acquired over $30MM of multifamily assets within the last 12 months in Atlanta, and Five Mile with an AUM of $2.9BN will be contributing $5.7MM as the majority partner. Audubon has a successful track record of acquiring and renovating over 16,000 apartment units since 1996 and makes the ideal partner for this joint venture.


Site Maps Birch Grove

Sycamore

Distressed Bank Assets – In 2013, 29th Street Capital acquired 51 residential and commercial notes with assets totaling $27MM. Despite it being 5 years since the financial crisis, we continue to see large volumes of non-performing loan sales from the major banks and the government. The U.S. Department of Housing and Urban Development has been selling over 10,000 non-performing residential loans on a quarterly basis. For the next 3-5 years, we see an opportunity to purchase assets from troubled banks under regulatory pressure and failed bank acquirers as loss share agreements start to expire.


Company Updates 29th Street Capital is pleased to announce the addition of several new team members: ● Director of Finance; Kyle McCollum is a CPA who has over five years of securities and real estate accounting/ regulation experience. Kyle will oversee all fund accounting. ● VP, Multifamily; Arash Kashani will be focusing on large multifamily properties on the west coast. Arash has years of experience in the multifamily real estate industry having recently worked at Equity Residential, one of the largest public REITS in the U.S. ● Casey Davis formerly at Green Leaf Partners, will be focusing on smaller multifamily properties specifically in the Oakland and San Francisco East Bay regions. ● Casey Phelan will oversee the residential loan portfolio and function as asset manager for 29th Street Capital’s east coast portfolio. He has over 8 years of experience in real estate acquisition and management.

Management Contact Information Stan Beraznik Founder & Managing Principal sberaznik@29thstreetcapital.com

Alan O’ Brien Director of Operations alan@29thstreetcapital.com

Jason Lee Director of Acquisitions jason@29thstreetcapital.com


2nd Qtr Newsletter