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The Pathfinder

Report June 2013


Thanks for Writing In


Charting the Course A Time to Borrow and to Sell (and on a Select Basis, to Buy)


FINDING YOUR PATH 2013 - More Raves and Rants


Selected Pathfinder Closed Transactions


GUEST FEATURE: The Great Housing “Trade” (Featuring “The Vegas Debacle”)


Zeitgeist: News Highlights


Trailblazing Aura, Phoeniz, AZ


Notables and Quotables



THANKS FOR WRITING IN We’re pleased to introduce a brand new design of The Pathfinder Report. We hope you enjoy this new easy to read (and share) online magazine format. If you have expertise in an area that could be of interest to our readers, please email us at info@pathfinderfunds.com with information about your proposed subject matter – we will be happy to consider it for a future edition. Hats off to Pathfinder’s own Alexa Head and Amanda Snyder for their finishes in this month’s San Diego Rock ‘n Roll Half-Marathon! Here’s a snapshot of the two finishers.

CHARTING THE COURSE A Time to Borrow and to Sell (and on a Select Basis, to Buy) By Mitch Siegler, Senior Managing Director “To everything, there is a season.” The core of the chorus in The Byrds’ 1962 hit, “Turn! Turn! Turn!” made these lyrics, penned in 1959 by Pete Seeger famous. They’re taken almost verbatim from the Book of Ecclesiastes – credit King Solomon for that version. Investors may find them every bit as timely today as farmers, shepherds and warriors did thousands of years ago. Leon Black, founder of $113 billion private equity firm, Apollo Global Management, in a speech to the Milken Institute Global Conference in Los Angeles last month said, “It’s almost biblical. There is a time to reap and a time to sow – we are harvesting.” Black and Apollo are selling because they think central bank monetary policies have driven equity and bond markets to record levels and just don’t see these gains as sustainable. “We think it’s a fabulous environment to be selling,” he says, noting Apollo has sold about $13 billion in assets in the past 15 months. “We’re selling everything that’s not nailed down. And if we’re not selling, we’re refinancing.” Apollo’s co-founder and chief

investment officer, Joshua Harris adds “Investors should run, not walk, from bonds at these prices. We’re seeing overvaluation in all traditional asset classes. This is the creation of the next distressed debt cycle.” It’s been a roller-coaster ride these past five years, as the Dow Jones Industrial Average, which was 12,986 five years ago in May 2008, fell 45% to 7,223 in March 2009 before more than doubling to 15,150 (the level at press-time) in June 2013. An S&P 500 chart tells a similar tale. There has never been such a good time to borrow – which raises the alert level to Defcon One for Leon Black. “The financing market is as good as we have ever seen it. There’s no institutional memory,” he said, referring to the over-heated environment of 2007, the peak of the most recent credit bubble. Black has read this book before. His pedigree includes a stint working side-by-side with junk bond impresario, Michael Milken at Drexel, Burnham Lambert and he’s anything but a reluctant buyer, shelling out $120 million for Edward Munch’s The Scream in May 2012. We’re amazed by the incredible, shrinking yields on government and corporate bonds, which may be even lower than the ultra-low stated rates on an inflationadjusted basis. Pathfinder just locked down 3.9%



ten-year, government agency financing on a recent apartment purchase and, on the home front, sub-4% residential mortgage loans abound. You might say that Uncle Ben, his merry band of Federal Reserve commissioners and their amazing, magical digital printing press have done it again – they’ve succeeded in causing businesses, consumers and investors to take on more risk. And his counterparts in Europe and Asia – and their investor and business minions – are marching in lock-step. Exhibit “A” in the ebullient financing market is Apple’s $17 billion bond offering last month, which was oversubscribed by 200%. Apple sold three-year bonds at paltry 0.45% interest rates. Meanwhile, International Business Machines sold 7-year bonds at meager 1.625% rates, equivalent to rates many sovereign governments are paying on their debt. The rate on German bunds hit a record low yield of 1.16% a few weeks ago. And, Chinese oil company CNOOC nabbed the lucky fortune cookie when it sold $4 billion in debt in late April in an offering that was 700% oversubscribed. Concomitantly, junk bond yields hit an all-time low, falling below 5%. The latter metric highlights how investors, disconsolate about sub-2% yields on 10-year Treasury bonds, are moving further out the risk curve, bidding down junk bond prices and driving up yields. This high-spiritedness, what Alan Greenspan dubbed “irrational exuberance,” creates a quasi-Dickensian “it’s the best of times and the best of times” dynamic for equity markets. Investors latch onto good news and bid prices up while they view bad news as a recipe for continued Fed money-printing, which can only be more good news for equities. Witness the manner that investors look past weak earnings at economic bellwethers like WalMart and pesky little details like 7% unemployment are continuously ignored.

not required. Yet, there is a shortage of skilled labor and the price for those workers could rise, surprising the Fed. And lest we remind you that Obamacare, despite the advertisements to the contrary, is driving up health care costs and causing employers to limit new hiring, add to overtime and cap hours below the 30 hour per week threshold requiring them to buy medical coverage for their employees. Unintended consequences in the form of higher labor costs may be the result. How does this relate to the bond market? A 1.0% increase in rates could drive down bond portfolio values by 15%. Retirees on fixed incomes may be frustrated now with their pitiful yields but they’ll be crestfallen when (not if ) they see their portfolio values slaughtered like spring lambs. And on the other side of the trade, the Fed’s good work to encourage banks to lend is working rather well. So, we won’t be surprised when smart borrowers take the banks up on their generous offers. Mitch Siegler is Senior Managing Director of Pathfinder Partners, LLC. Prior to co-founding Pathfinder in 2006, Mitch founded and served as CEO of several companies and was a partner with an investment banking and venture capital firm. He can be reached at msiegler@pathfinderfunds.com.

What could go wrong? Canadian wealth management firm Gluskin Sheff’s research director David Rosenberg thinks the Fed will be surprised by wage-push inflation, which will cause it to tighten, driving up interest rates and crushing bond portfolios. Sure, unemployment remains stubbornly high and young people are struggling to land jobs; financial expert John Mauldin’s research indicates that more than 50% of recent college graduates remain mired in jobs for which a degree is T HE PAT H FI NDE R R E PO R T: JUNE 2013


FINDING YOUR PATH 2013 - More Raves and Rants

By Lorne Polger, Senior Managing Director I received lots of positive feedback to this format last year, so I thought I would try again. Without further ado, here are my latest raves and rants for 2013. Rave: Austin, Texas. Okay, maybe I’m biased because my daughter attends UT (Hook ‘em, Horns!), but there’s a lot to this city. Great music scene, vibrant downtown, incredible school, technology galore, pro-business environment, culture, arts, food and lots of philanthropy. And it’s not flat like Dallas and Houston. Pathfinder hopes to do more business there in the coming future. Rant: The University of California system. While the academics continue to excel at breakneck speed, the economics are going in the opposite direction. Tuition increases for both undergraduate and graduate programs have increased at rates higher than almost any school system in the country, while endowments are now lagging behind; not just behind the private schools, but the public ones as well. Contrast UCLA’s endowment of $1.4 billion with UT Austin’s endowment of $7.2 billion. It’s going to be tougher for the UC system to compete for both top students and outstanding faculty if the trends continue. That would be both unfortunate and disappointing. Rave: The Urban Land Institute. Recently attended the annual ULI conference held here in San Diego. Probably one of the best real estate conferences that I’ve ever been to. Great substantive discussions, great speakers, and great connections. Pleased to have gotten involved with this organization and hope to increase my involvement in the future.

Rant: Congress. The bipartisan grilling of Apple CEO Tim Cook made my stomach turn. “Mr. Cook, how dare you take advantage of the tax code and loopholes that we created. What do you have to say for yourself?” Sigh. Rave: Phoenix. Biggest rebound since Magic stole one off the rim against the Celtics in the ’85 NBA championship series. Residential prices up almost 35% from the bottom in just 24 months. Lots of job creation. Terrific university system. Even a few cranes in the air these days! Sure, it’s hot this time of the year, but the resiliency of the city can overcome even that. And, it’s a dry heat anyway. Rave: San Diego. Can’t think of any other city in the U.S. that I would rather live in, but it always seems to ring truer this time of year. I can hike a mountain, ride 50 miles on my bike, and head to the beach in the same day, in each case with perfect weather and no humidity. Not possible anywhere else in the country. Rant: San Diego. We reject a multi-million donation from a local philanthropist tied to keeping our local, urban treasure, Balboa Park, free from cars in order to increase pedestrian access. The mayor is locked in mortal combat with the private tourism sector. It costs over $65,000 in permits to build a home before the first hammer is ever swung. When are we going to learn? Rave: Development again! And more importantly, better development! As a good friend said during our regular weekend hike, it’s not quite like the full steam ahead sign when you see people with building plans spread out over the tops of picnic tables and recycling containers and when any and every place turns into a conference room, but we’re not that far off. Lots of things in the works, and better development. Sustainability, energy efficiency and cutting edge design are routinely being incorporated into new projects. Provided that banks begin to lend again in earnest, I think this period may well end up being looked at with great historical relevance for architecture and design.



Rant: Government bureaucracy. Sorry, Mr. Smith, we would love to make you that home loan, but you checked the box on page 57 of the loan application that says you were late with a payment on your gas card one time within the last 20 years, and that simply eliminates your eligibility. Or how about the horror story I heard last week of the California Coastal Commission taking 11 years to approve a minor expansion to an existing hotel project? Or maybe the stories in Washington of making a developer remove and replace the entire project’s landscaping because a couple of trees were planted in the wrong places? Or the story I heard last night of having to go through a four month permitting process as part of a kitchen remodel, notwithstanding the fact that no walls were being moved? Or how about…well, you get my drift. I’m sure there are thousands of other stories just like these.

Rave: New restaurant concepts and designs. There’s a little bit of foodie in me, and in the real estate business, you can’t help but keep an eye out for restaurant trends. With capital coming back to the market, we’re starting to see some really interesting new concepts and designs featuring healthy trends and the use of sustainable (yet glamorous) materials in design. Move over TGI Friday’s.

Rave: The Honor Flight organization (www.honorflight.org). A great story of true American patriotism, grass roots community organization and philanthropy. Pleased to have my father with me to welcome back about 100 WWII vets to Lindbergh Field in San Diego last week after their trip to D.C. to view the war memorials funded entirely by donations. As Will Rogers once said: “We can’t all be heroes. Some of us have to stand on the curb and clap as they go by.”

Enjoy the summer and the recovery.

Rant: The loss of the good, old staple of comfort food, the Jewish Deli. Not quite yet the equivalent of the Dodo bird, but I guess the American palate has finally tired of knishes, kreplach and cholesterol. Rave: My partners and our team at Pathfinder. Couldn’t find a better group of people to work with. I’m very proud of what we have accomplished together.

Lorne Polger is Senior Managing Director of Pathfinder Partners, LLC. Prior to co-founding Pathfinder in 2006, Lorne was a partner with a leading San Diego law firm, where he headed the Real Estate, Land Use and Environmental Law group. He can be reached at lpolger@pathfinderfunds.com.




SELECTED PATHFINDER CLOSED TRANSACTIONS Pa t h f i n d e r Pa r t n e r s , L L C i s t h e s p o n s o r o f t h e Pa t h f i n d e r Pathfinder O p p o r t uPartners, n i t y f u nLLC d s , iswthe h i csponsor h a c q uofi rthe e oPathfinder p p o r t u n iOpportunity stic real estate funds, which acquire with institutional capital partners, distressed real estate p r o pproperties e r t i e s a and n d tthe h e underlying u n d e r l y i mortgages n g m o r t gfrom a g e sfinancial f r o m f institutions. inancial institutions. A DA TOWNHOMES

42,000 square foot parcel entitled for 21 townhomes in Chula Vista, CA



16 condominiums and adjacent parcel entitled for additional 10 units in La Mesa, CA

144-unit condominium community in Tempe, AZ

May 2013

May 2013

May 2013



142-unit student housing

600-unit student housing complex

complex in Akron, OH

in Greenville, SC

18-unit apartment building in Redmond, WA


April 2013

March 2013



Two senior mortgages totaling $7,800,000 on 55,000 square feet of office space in Riverside, CA

$2,925,000 senior mortgage on four condominiums in San Diego, CA

December 2012


Investing in distressed real estate assets and the mortgages underlying such properties An affiliate of Pathfinder Partners, LLC is the general partner of the fund December 2012

December 2012


49,000 square foot “flex” office/industrial property in Lakewood, CO November 2012

March 2013


11-unit condominium community in Phoenix, AZ December 2012


40-unit apartment complex in downtown Phoenix, AZ October 2012

This announcement appears as a matter of record only. T HE PAT H FI NDE R R E PO R T: JUNE 2013



Consider that in Las Vegas:

The Great Housing “Trade” (Featuring “The Vegas Debacle”) By Mark Hanson, Mark Hanson Advisors Like so many other epic bubble years’ housing market implosion epicenters, Las Vegas real estate caught fire again, pushing prices up 30% year-over-year versus the 10% national average. This statement alone should raise red flags to anybody remotely familiar with the sector. But to the new-era housing investor, a Wall Street bank or hedge fund – which seems to have a memory of about nine months at best – this is what a “housing market recovery” looks like this time around. I beg to differ. That’s because there is little about the past year of ‘better’ housing market data that is rooted in economic fundamentals (things that drive durable housing market expansion). It’s not like house sales volumes, rents, jobs or incomes are surging. It’s not like supply is so ‘low’ because demand is surging; rather, it’s because six million units of supply headed for market has been rented back to its legacy owners by the banks and government in the form of modifications, several states have made it virtually illegal to foreclose and foreclosure timelines have been stretched out 15 days for every 30 days that passed. But besides all that, taken in the context of “post-crash”, the past year of housing data are “underwhelming”, especially relative to consensus opinion, sentiment, and periods prior to 2007. That’s because this market is structurally broken. It lacks the fundamental horsepower that is imperative to sustain a “durable” housing market recovery. And, without the fundamentals in the driver’s seat, the past year of housing market activity is more closely akin to a stock market “short squeeze” than anything else. Take Vegas, for example. Sin City has received some interesting contra-recovery press recently from several market observers who have noticed that things just don’t feel or look right there. “Lack of Supply” is most commonly referenced as the reason house prices in Vegas staged a v-bottom recovery. And with the characteristics below, Las Vegas certainly isn’t a market where fundamentals are driving up prices.

• Unemployment is 10% • 7% of all homeowners are “Zombified” – underwater, over-levered renters of their own houses • 25% of all homeowners have loan modifications and workouts so exotic they would make Angelo Mozillo blush • 12% of all houses are in default or foreclosure • The number of construction permits has increased 50% year-over-year • Rents have fallen – and the picture here is about to get really bad • There is a MASSIVE single-family rental supply coming online (some 55,000 units) and multi-family starts are now back to 2006 highs • And, there are only 3,000 to 4,000 sales in an average month (down year-over-year for several months running, I might add) Bottom line: Las Vegas – and dozens of other legacy bubble-era markets around the country – just should not be performing so well. Yes, last year there was a transitory supply shortage amidst numerous wildly over-supplied housing markets, as investor demand collided with massive loan modification intervention and new laws outlawing foreclosures altogether. But that’s neither durable nor a positive. Rather, it makes it highly questionable whether the recent performance even can be durable. It makes more sense that these regions have turned highly volatile and house prices stand just as strong a chance of declining 10% over the next year as increasing. Housing is experiencing multiple expansion – just like stock market multiple expansion –following six years of zero interest rate policy, three years of everincreasing Quantitative Easing (QE), six million loan modifications and workouts, laws preventing foreclosures, and a shortage of “safe” yield. In short, housing is now a “trade” – just like 2004-2007 (how’d that work out?) but potentially much more violent and volatile this time around.



Everybody has been fooled by stimulus, yet again. It’s reminiscent of the 2009-2010 Homebuyer Tax Credit and Cash for Clunkers programs. Government and Fed stimulus is such a part of our everyday life now that people simply take it for granted. They even factor it into their models and forecasts as if it has always been there and always will be there. During the bubble years, a multiple expansion in housing also occurred, but through ‘leverage-infinance’ (e.g., exotic loans – think “Pay Option ARM” loans). In this era of relentless money printing, the expansion has occurred through ever-larger step downs in mortgage rates and a lack of “risk-free” yield. And, just like there was a cap on how much leverage could be introduced during the bubble years, there is a floor on housing’s “cap rate” and U.S. Treasuries’ relative yield. This will cap housing’s upside, just like in 2006 when everybody in America hit his debt-service ceiling/ cap-rate floor all at the same time. This housing market “trade” has ushered in unprecedented volatility that nobody can model and very few people respect. Stimulus, hangover, rinse, repeat. We have seen this housing market “recovery” movie before in the past five years, just the short film version. Housing responds to stimulus, no doubt. In fact, stimulus is about all it does respond to. The 2009-2010 Homebuyer Tax Credit was our first lesson on being “fooled by stimulus”. Back then, there were multiple offers, buyers lined up around the corner and a vertical Case-Shiller index. But, back then it was first-timer buyers bringing the incremental sales demand and pushing prices higher, fast. And when the tax credit ended in 2010 house sales volume – and ultimately prices – fell off a cliff…right smack in the middle of the peak season. Then, in the second half of 2010 and into 2011, housing went into “stimulus hangover mode”. Moving along, in August 2011 – when rates began to plunge in anticipation of Operation Twist – housing nosed up again, this time led by investors disgusted with sub-2% yields on 10year notes. As headline stories in the Wall Street Journal

and Bloomberg about Wall Street investors buying up all the foreclosure supply in “bulk” – and Warren Buffet saying he would “buy 200,000 houses if he could (and he could have if he really ‘wanted to’) – everybody got into the “buy to rent” game with “new-era” investors routinely paying 10% to 20% over appraised value/ purchase price for the privilege of a ‘modeled’ 6% cashon-cash return, which turned out to be half that if you bought in some markets after the first quarter of 2012. In short, Wall Street turned housing into a high-yield bond replacement trade, which has already become ‘low-yield’ in record time. What historically would have taken years to achieve was done in three quarters, during the first nine months of 2012. We have also seen this movie before in the auto sector. First, we had cash-for-clunkers. Followed by a hangover for auto manufacturers and dealers. Then, as rates plunged and banks began lending again, demand returned…in fact, there were a couple of years of pentup demand that really helped boost the sector back in 2010. But, as rates and Treasury yields plunged due to Fed stimulus, lenders in dire need of yield revived subprime lending. Today’s version of subprime auto lending is so exotic, it makes 2006 auto loans look restrictively tight by comparison. New-vintage subprime lending has now carried the auto sector for two years. So, what comes next…now that anybody with a heartbeat and a 540 credit score has been able to buy a car with 72, 84 and 96 month loans for a couple of years now? Where does the next demand wave come from? So, stimulus goosed the hell out of the auto sector, sucked years of demand forward, and will leave the sector in a demand void mess, perhaps beginning this year. The same is happening with housing on the Fed’s Operation Twist – it’s just a slower moving sector and “investors” are the subprime loans sucking years of demand from the



future. Beware: The Twist stimulus hangover in housing (and autos) will be epic. Enter, present day housing. The divergence between headlines and housing data are wider than ever. Everybody is convinced that housing is on a multi-year, durable recovery path. But first-timer buyer volume continues to wane (despite historic low rates) and over 50% of all mortgaged homeowners – historically housing’s top demand cohort – are Zombified; unable to sell and re-buy due to negative equity, “effective’ negative equity or insufficient credit or income needed for a loan. Moreover, demand for housing may be waning; rental demand is nowhere remotely close to what investors thought it would be; rents are falling; cap-rates are no longer ‘multiples’ of U.S. Treasury yields, and some big investors such as Och-Ziff and Oaktree are already flipping out of their ‘buy and rent’ inventory. By the way, I think this is a huge yellow canary in the coal mine and we’ll all slap ourselves for not recognizing it a few months or quarters from now. Greater-Fool housing investing and the days of 25 bidders on a home – of which 23 were the same institutional buyers house after house paying 10% to

20% over appraised value or purchase price treating houses like high-P/E dividend stocks or high-yield bonds – are coming to an end, quickly. And housing’s true fundamentals will be put to the test; a test that will most certainly be difficult to pass. Investors can sell a million shares of J&J or Kellogg pretty fast…try selling 5,000 houses in a sea of other investors liquidating at the same time and little organic demand. In closing, housing market history is littered with instances when investors and first-time buyers leave the market over the period of a few months. If that were to happen now – and given housing’s new found volatility this is a very real possibility – there is not another cohort to replace them. It would be an unmitigated disaster. This is not an outcome indicative of a fundamentally driven housing market recovery – and what we are seeing now is anything but. Mark Hanson is Managing Director of Mark Hanson Advisors, a leading mortgage and housing analyst and consultant to major financial institutions and real estate investment firms. He is widely quoted in the media and makes frequent appearances on television financial news programs. Visit www.mhanson.com for more information.





A compendium of notable news articles relating to the economy, commercial lending and real estate which we’ve edited and commented upon.

It’s no secret that the hottest real estate markets are back to peak-level pricing. So as investors look to the future, they are also looking to secondary markets. Multifamily Executive’s Lindsay Machak surveys a few industry leaders to find out where they are hunting.


INTEREST RATES – WHERE ARE THEY HEADED? As the Treasury’s 10-year note yield continues to fluctuate (albeit at historically low levels), Barron’s Zach Trenholm asks a few industry experts to chime in on their best guess about where it will be in a year and what that means for the U.S. economy. At press time, the yield is 2.17%. Cliff Corso, CEO of Cutwater Asset Management sees the 10year heading to 2.50%. “As the economy continues to recover, we see a move from the risk-free to the risky. That will be supported by a recovering economy that is less reliant on the monetary props that exist,” he says. Byron Wien, Vice Chairman of Blackstone Advisory Partners says “I have expected the Treasury yields to move higher for a long time, but accommodative Fed monetary policy and fear capital coming to the U.S. have kept rates low. That won’t change quickly, but the historical yield on the 10-year has approximated the economy’s nominal growth rate – now about 4%. If the economy picks up and Fed buying of mortgagebacked securities and Treasuries tapers off, we could see 2.5% to 3.0%.” Kathleen Gaffney, Lead Manager, Eaton Vance Bond Fund thinks the 10-year rate will shoot up to 3.75%. “The economy is in better shape, as is the global economy. Although the data out of Europe are weak, it’s still encouraging. That means the Treasury curve is going to respond to all that activity. It might not be straight up, but this time next year, we are going to be more worried about what happens when we go through 4% than what happens if we go back to 1.5% or lower,” she forecasts. [Editor’s note: The general consensus is that rates are going up, which is economist-speak for “the economy is improving”.]

Curtis Walk, Director of Acquisitions for Wood Partners likes Denver. “I think Denver is fairly constrained for a smaller market. It’s always expensive and difficult to build and the access to supplies and occupancies really justified the building comeback.” Ryan Severino, Economist at Reis likes Portland. “Not only are Portland’s fundamentals projected to perform well, but the presence of the technology sector bodes well for the metro area. Technology is clearly one of the drivers of the U.S. economy, and in October Intel announced that it was planning a $3 billion capital investment for a massive expansion of its facilities in the metro area,” he says. Lili Dunn, Chief Investment Officer, Bell Partners is watching South Florida. “It has attractive demand and supply fundamentals, and rents are below their longterm trend and still accelerating. Absorption is forecast to keep pace with supply, and both job growth and migration flows continue to strengthen. We’re focused on acquiring quality assets in supply-constrained submarkets,” she says. Michael McRoberts, Managing Director of Prudential Mortgage Capital is keen on the Upper Midwest. “A lot of people are starting to rotate towards older assets, and the prices have gotten bid up so much on coastal assets. It’s a shift. It’s not something we saw a few years ago. I’m not really that surprised by it. It’s good to see there’s population growth and properties are starting to perform better. We’re starting to see more trades. People are buying (in this area),” he says. [Editor’s note: We agree with Denver – though we’re concerned about the 7,000 units under construction and the permitting process downtown. We’re keen on Portland, too and like the fact that the major hometown employers like Nike are expanding. Some of us have Midwestern roots and we’re in no hurry to go back for the winter (or the summer, for that matter). South Florida is hot, and we’re not just talking temperature and humidity.]



TRAILBLAZING: AURA APARTMENTS, PHOENIX, ARIZONA Renovating a Well-Located, 1960s-Vintage Community



Faded paint, sparse landscaping and cracked pavers

New landscaping, paint, fencing, pavers and leasing office

When we first toured Aura, previously named The Academy Apartments in central Phoenix, we felt like we had been transported back to the 1960s, when JFK was in the White House, Lucille Ball and The Brady Bunch were on TV and Betty Crocker cake mixes were in virtually every pantry. Back to when apartment design was characterized by bold colors and funky, nontraditional materials and residents would congregate by the pool on Friday evening to sip martinis. Aura, a 96-unit property with mid-century modern design, is a throwback to this era – its architectural features, materials, colors and interior finishes are virtually unchanged after more than half a century.

two-bath units, ranging from 627 to 1,245 square feet (average of 869 square feet).

Despite the property’s age, we believed the design and layout (four buildings, each with its own, spacious courtyard) had a timeless appeal. Aura represented a unique opportunity to renovate and reposition a well located, attractive apartment project with a cool design to target today’s hip, young renters in a gentrifying neighborhood.

Our renovation strategy focused on blending the building’s original retro charm with subtle design elements suitable to younger, eclectic renters who will pay a premium to live in a fabulous, welllocated property that they truly love. Working with a prominent, local designer, we completed extensive interior and exterior renovations earlier this year. Renovations include upgraded kitchens (modern appliances, cabinets, countertops/backsplashes, light fixtures and flooring), bathrooms (sinks, faucets, light fixtures and mirrors) and new flooring. We also added community vegetable gardens, outdoor games (bocce ball, shuffleboard and corn hole), a fitness center, picnic areas with BBQs, new landscaping and upgraded pool areas for a more resort-style ambiance. Since the renovations were completed, Aura was featured in the sold-out “Best of Modern Phoenix” architectural tour and the Phoenix TV program “Metro Matters”.

Together with our Phoenix operating partner, we purchased Aura in February 2012, just as the Phoenix real estate market was beginning to show signs of recovery. (Phoenix single-family home values have since skyrocketed over 20%!). Aura consists of eight buildings on a 3.3-acre parcel. The community contains 52 two-bedroom/two-bath units, 40 onebedroom/one-bath units and four three-bedroom/ T HE PAT H FI NDE R R E PO R T: JUNE 2013



“U.S. Economy: Where are we now?”

“I am definitely bullish. The budget deficit is shrinking massively. Guys who are short, they better have a shovel to get out of the grave.” - David Tepper, Hedge-fund manager and founder of Appaloosa Management

“The apartment sector is receiving so much attention because investors clamor for immediate cash yields on their investments. And it’s not uncommon to sell a $100 million property to an investment group that has never purchased a building before, or hasn’t bought one in ten years.”

- Brian McAuliffe, Senior managing director for global real estate services provider CBRE

“Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk.”

- Bill Gross, Founder of Pacific Investment Management

“Investing, when it looks the easiest, is at its hardest.”

- Seth Klarman, American super-investor and billionaire

“It’s not that the economy isn’t generating enough jobs. It is. It’s just that we lost so many jobs in 2008-2009 – we created such a deep crater – that even with the pace of decent job growth that we’ve been having recently, it’s just going to take a long time to repair that damage.” - Joshua Feinman, Chief global economist with Deutsche Asset and Wealth Management

“There is a lot of disagreement about the economy today. Some analysts focus on signs the recovery is quickening while others see new problems stemming from the end of a bond market bubble. My own view is that of a long-run optimist… there is nothing on the horizon of normal U.S. economic prospects that indicates we cannot today be starting an expansion like that of the 1990s today.” - George Perry, American economist and fellow at the Brookings Institution



Important Disclosures Copyright 2013, Pathfinder Partners, LLC (“Pathfinder�). All rights reserved. This report is prepared for the use of Pathfinder’s clients and business partners and subscribers to this report and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without our written consent. Materials prepared by Pathfinder research personnel are based on public information. The information herein was obtained from various sources. Pathfinder does not guarantee the accuracy of the information. All opinions, projections and estimates constitute the judgment of the authors as of the date of the report and are subject to change without notice. Nothing in this report or its contents constitutes investment advice. Neither Pathfinder nor any of its directors, officers, employees or consultants accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents. Please add msiegler@pathfinderfunds.com to your address book to ensure you keep receiving our notifications. T HE PAT H FI NDE R R E PO R T: JUNE 2013


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