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29th Street Capital Third Quarter 2013 Newsletter Content:
1. Letter from Stan 2. Market Outlook 3. Single Family Rental Business Merger 4-6. Investing in Oakland, CA 7. Q3- Q4 Deals 8. Deals Under Contract 9. Contact Information
Letter from Stan Dear Investors, On Saturday morning when preparing for my usual run, I was throwing my daughter Amelie up in the air and my back gave out. I spent a few humbling hours lying on the floor reflecting on how fortunate I am. I am healthy, have an amazing family and work with you, my friends. Similar to Rosh Hashanah which recently passed, I reflected on 29th Street Capital’s journey – especially the amazing people that support our vision and the opportunities that we provide our investors to achieve their financial goals. The real estate environment is constantly changing, with all types of events impacting the market. The recent government shutdown increased interest rate volatility and led to a slowdown in most of our markets. While our business was not directly impacted, there were some practical considerations. For example, we were unable to secure Tax Identification Numbers for our newly created LLCs. Earlier in Q3, interest rates rose significantly due Bernanke's comments about the possible reduction of Quantitative Easing (QE3). Now it is likely that the first women, Janet Yellen, will be approved as the next chair of the Federal Reserve. Yellen is known to be a firm supporter of QE, hence we believe that the Fed will keep short term interest rates low. The interest rate increases did lead to a cooling off in the Real Estate market; while we see increased rates slowing the pace of appreciation, we do not see it changing the trend. In our local California markets, we have noticed a considerable shift. Only 12 months ago, we could readily purchase bank owned properties, and now those opportunities are limited. The majority of homes currently for sale are from traditional home owners who recently gained equity in their properties. We are thankful for our 93% occupied, 500 home portfolio in our home state. During the last few weeks, I visited some of our properties in Texas, Georgia and Wisconsin. I am thankful that we diversified into the multi-family space 2-3 years ago. For example, we undertook a very large rehab project in Atlanta and it has paid off. Our rents have increased significantly and our new appraised value is significantly higher than our basis. At 29th Street Capital, we remain bullish on the Real Estate market; while we see longer term rates rising, we see this occurring more gradually than during Q3. We see ourselves remaining in a relatively low growth, low inflation environment for at least another 12 months. When growth does start to increase, we see larger rent increases and real estate continuing to act as an inflation hedge. We continue to see great opportunities -- in Q3 we purchased assets at a faster pace than in Q2. We have put some very attractive assets (Single Family, Multi-Family & Non-Performing loans) into contract to close in Q4 and have received tremendous interest from you. In addition, we have decided to liquidate some of our current portfolio across all business units with estimated returns of 10% – 40% IRR’s for our investors. As we enter Q4, we are excited for the opportunities ahead; excited to close on the deals that we have in contract, excited to identify new investment opportunities, and excited for our annual investor Holiday party. I look forward to spending an evening with you and our team. Please let me know if you have any questions or comments: Stan Beraznik
Market Outlook Housing Market US Home prices, including single homes as well as apartments, posted the best year-over-year gain since 2006. The S&P/Case-Shiller Home Price Indices for July showed YoY gains of 12.3% and 12.4% respectively as measured by the 10 and 20 City Composites. For four months in row all 20 cities have shown gains, led by Phoenix with an amazing 22 consecutive months of positive returns. The Southwest continues to lead the housing recovery with prices in Las Vegas, NV up 27.5% YoY, San Francisco, Los Angeles and San Diego, CA up 24.8%, 20.8% and 20.4% YoY respectively. Homes prices are back at spring 2004 levels yet remain well below their peak levels. The monthly rate of price gains have begun to decline, suggesting that the rate of increase may have peaked. A likely contributor to the slowdown has been the recent rise in interest rates. Mortgage applications have dropped since May when interest rates began to increase. Inventory levels however remain low and could continue to drive further price increases in the near term. Construction of new single family homes has remained depressed since late 2007, while the US population has grown by more than 12 million people over the same time period.
Cash is King! All cash purchases are surging in US housing market, accounting for 45% of all residential sales in August. This up from 39% in July and 30% YoY. In areas population of more than 1 million the percentages are even higher. In Miami nearly 70% of all sales are cash only, followed by 68% in Detroit, 66% in Las Vegas and 65% in Jacksonville and Tampa Florida. Institutional investors have continued to be very active with the buying of 10 or more properties increasing 10% over the last 12 months. The recovery in prices continues to be driven largely by well capitalized investors, both institutional and individual.
Single Family Rental Business Merger Background 29th Street Capital (& affiliated sub entities) began in the single family space in 2008. Since inception, the company has purchased and flipped over 1,000 single family homes. In 2012, we begun to purchase single family rental homes for our high net worth and institutional investors. To date we have purchased nearly 600 rental homes in California & Florida with an average occupancy rate of 93% In early 2012, the REO rental market was a new institutional strategy and we were fortunate enough to begin a new long term JV partnership with Tricon Capital, a Canadian institution with over $1BN of assets under management. This company currently ranks in the top 10 of institutions purchasing REO rentals. When Tricon begun this strategy, their focus was to have a number of local operators who had local market knowledge and experience. Currently they have five partners in six locations. In Q1â€™ 2013 we were in the final discussions with Deutsche Bank regarding securitizing the debt for this particular strategy. (29th Street Capital currently has access to a $150MM debt facility) During these discussions, our partner proposed an opportunity for our single family business to merge with one of their other California based partners, increasing our market share and presence. After expansive discussions, we agreed to terms and are excited to announce our merger with McKinley Partners on our Single Family Rental Home Strategy. In September 2013, our single family rental business finalized all legal work to begin purchasing rental homes in our new merged entity (29th & McKinley Real Estate). With our merger, the partnership now owns and manages 1,400 single family homes with an estimated asset value of $250MM. We opened up two new markets, Las Vegas, NV & San Antonio TX. Currently, we are purchasing in 5 states (CA, NV, TX, UT & FL). 29th & McKinley Real Estate has nine principles, consisting of five day-to-day managers and four board members. Our operational headquarters is located in Folsom, CA and we have satellite offices in each market where we purchase. Our future strategy is to continue to purchase properties in markets that offer a discount to replacement cost and an attractive CAP rate. In certain markets, (including Sacramento), our purchasing has curtailed due to the increase in sales prices and reduction in inventory.
Construction & Property Management During 2013, we have vertically integrated our business so that we handle construction management and property/asset management in house. Over the past six months, we have negotiated the acquisition of a local property management company. The legal process will be completed in Q4â€™ 2013 and we will announce this venture in our next newsletter. Our goal is to manage all of our own properties to ensure the best returns for our investors. With this merger we truly are a turn key single family real estate investment company operating in five States. We continue to expand opportunistically while focusing on increasing our NOI and occupancy rates.
Investing in Oakland, CA-
Associate Director Casey Davis
Market Demographics Driven in part by a rapidly changing perception and a tech boom that is pushing people out of San Francisco; Oakland, CA has become one of the hottest real estate markets in the US. With the recent $120 million makeover of Lake Merritt and the launch of the Jack London Square night market this spring, and the always exciting First Friday block parties, Oakland is becoming a place where people not only want to live but visit as well. By offering its residents multiple transportation options whether via BART (Bay Area Rapid Transit), the ferries, or ever reliable bus system, Oaklanders and neighboring East Bay residents are able to commute to San Francisco or Silicon Valley with ease and affordability. As the Oakland demographic continues to change, companies (such as Pandora, Kaiser Permanente) are now locating their headquarters in the area and acclaimed chefs from San Francisco are now opening exciting new restaurants and nightlight venues as well. The city is rich in culture, offering residents and tourists alike, multiple museums, gallery's, parks and recreational centers. Trulia.com reports that Oakland homes sales are up 31% from a year ago with the median sales prices now topping $400,000, more than double the $165,000 sales price back in 2009. With such a strong demand for housing in the Bay Area, and very little new supply, market rents have increased dramatically since the 2010 recession. However, Oakland is a rent controlled market and many of its residents currently pay rents 15% to 30% below market rates. The rent control ordinance does allow landlords several ways to increase rents above the annual allowable CPI amount. The most lucrative of these options is through capital improvement pass-throughs, which allow the landlord to pass 100% of the improvement costs to the tenants, so long as the improvements are beneficial to the tenants. With a majority of the multi-family properties in Oakland built between 1920 and 1970 there is no shortage of assets in need of renovation work.
Investment Opportunity -1810 Oakland Having lived and worked in the Bay area for several years, Associate Director Casey Davis has been scouring the East Bay for potential properties. When he came across a 23 unit property located on 1810 E 25th street he knew he had a found a potential opportunity. The property presents a opportunity to benefit from the rapidly expanding economy and the shortcomings of the previous owner. Current rents are currently more than 20% below market rates.
Investing in Oakland, CA-
Market Demographics The neighborhood where the property is located is benefiting from new home owners who are reinvesting back into their properties, helping to increase the overall appeal of the area. The property also benefits from its close proximity to the Highland Hospital. Located less than 2 blocks away, the hospital is not only the main trauma center for Oakland, but also the largest teaching facility in the East Bay. The hospital is currently undergoing a multi-phased $668MM renovation project that is scheduled to be completed in 2017 and will bring the hospital into compliance with the new 2020 seismic-safety requirements
Renovation Plan 29th Street Capital plans to completely renovate the property, making improvements to both the exterior and all interiors units. Improvements to the exterior will include earthquake retrofitting. new paint, repairs to the roof, walkways, railings and pavement as well as landscaping. All units will be renovated with modern kitchen reconfigurations which will include new cabinets, countertops, appliances and flooring. Bathrooms will be redone with new vanities and refinished tubs. The plan is to invest $335,000 in capital renovations ($14,565/unit) which will allow 29th Street Capital to increase rents by several hundred dollars and bring the propertyâ€™s rents in line with current market rates. Renovations
Q3 & Q4 Deals
1810 Oakland – Multi Family
Single Family (Flip) – Residential
Oakland, CA – 23 Units Purchase Price: $2.45MM Est. Sales Price: $3.3MM
Lake Tahoe, NV – 3 Lake Front Homes Purchase Price: $9MM (Assumed $4MM debt) Est. Sales Price: $11.5MM
Audubon 2 – Multi-family JV
Single Family Rental -- Residential
Lithonia, GA -- 252 Units Purchase Price: $11.1MM Est. IRR (5 year hold): 18%
Single Family Rental – Note Sale Laurel Way, Beverly Hills, CA – 1 Unit Note Purchase Price: $2.5MM Note Sale: $3.1MM
Las Vegas, NV – 60 Homes Purchase Price: $7.166MM Cap Rate: 6.1%
Single Family Rental – REO Salem & Seneca, SC -- 5 units Purchase Price: $1.55MM Est. Sales Price: $1.96MM
Deals Under Contract Robert J. Bolhoffer - Managing Principal Mr. Bollhoffer recently joined 29th Street Capital as a Managing Principal. He will be focusing on joint ventures and value-add opportunities across the U.S. Before joining 29th Street Capital, Robb spent 8 years as a Managing Director at Strategic Capital Partners (â€œSCPâ€?), a privately held real estate investment fund, that invested over $1BN in value-add opportunities across all asset classes of real estate. Prior to joining SCP, Robb was a Senior Acquisition Analyst At Trizec properties, one of the nations largest publicly held owners and operators of commercial real estate. Robb holds an MBA from DePaul (Kellstadt) University and a BBA with a concentration in real estate and urban land economics from the University of Wisconsin - Madison. The acquisition of Southern Hills in Arlington, TX will be his first deal as a new principal with 29th Street Capital.
Southern Hills - Arlington, TX An off market opportunity to acquire a 250 unit multifamily property located in a Class A submarket of Arlington, Texas. This property is currently owned and self managed by four doctors from California. Their lack of real estate experience is evident, with the property lagging in both occupancy and rental rates. Due to a lack of capital reinvestment from its current owners, the property is also suffering from a significant amount of deferred maintenance 29th Street Capital, in a joint venture with Stonemark Management, will immediately implement professional management at the property as well as invest $1.29MM for both exterior and interior renovations, resulting in rents 10%-15% higher as well as occupancy levels consistent with surrounding properties. Our local partner in the venture, Stonemark Equities currently manages 13,000 units in The U.S., with a regional office located in Dallas. This investment is scheduled to closing on Oct 24, 2013.
Contact Information Stan Beraznik Founder & Managing Principal email@example.com Phone #: (415) 643-6875
Alan Oâ€™Brien Managing Principal & Director of Operations firstname.lastname@example.org Phone #: (949) 398-8091 ex. 101
Jason Lee Manager Principal & Director of Acquisitions email@example.com Phone #: (949) 398-8091 ex. 102
Robert Bollhoffer Managing Principal firstname.lastname@example.org Phone #: (312.) 933-2668
Other Team Memebers: Kyle McCollum Director Of Finance email@example.com Casey Davis Associate Director, Multifamily Acquisitions firstname.lastname@example.org Arash Kashani VP Multifamily Acquisitions email@example.com Casey Phelan Asset Management Associate firstname.lastname@example.org Jason Hilger Acquisition Associate email@example.com
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