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Profit & Loss
Revenue grew 6.4% again following years of 6.4% and 6.9% revenue growth. The growth once again came entirely from our Vegas properties. As with the prior year, Las Vegas benefitted from several factors. First there was a migration of people away from higher priced areas into Las Vegas. Second people left denser apartments buildings and our single family homes became much more desirable. Third, some of our tenants benefitted from the stimulus programs offered by the government which allowed them to afford our rents. We had one turns in Las Vegas this year and we were able to raise rents 20% with half of a month of vacancy which we used to upgrade the house to our millenial gray color scheme and new laminate flooring. We were also able to raise rents across the portfolio. We continue to keep good standing tenants below market rents. The rental market in Las Vegas continues to be strong and we see no issue raising rents in 2022. Our Oakland properties have Section 8 tenants which once again did not grant us a rent increase. However, the Bay Area is facing an exodus and we have seen rent reductions and increase in vacancy. While the decreases have mostly stopped rents are about 20 - 25% below pre-pandemic levels and there continues to be increase in the supply of housing.
Our repairs and maintenance was lower than average at $28K. The most significant expenses was for the turnover where we upgraded the property which was lived in hard by tenants who had stayed there for over 5 years. The new tenant came from a recommendation from a present tenant so it was nice to see that referral. The new tenant moved from CA which fits the larger macro narrative. Here is a snapshot of the living room after tenant moved in:
We also made a few improvements / repairs in another property bathrooms again keeping with the gray scheme
There were the other usual repair items including one new water heater, HVAC repairs (no replacement), tree trimming and pool maintenance which were as expected.
Later in the year we have definitely seen an increase in costs and in less availability. Our primary handyman in Las Vegas had a tragic personal family issue as well as at various times Covid related staff shortages so we were hampered by that. All in all though we have built up some good relationships with vendors so that has carried us through.
Interest Expense
As we will discuss more in the Balance Sheet section below we had a major increase in Interest Expense this year as we took out loans on two properties and returned all Partner Capital. There were loan origination costs which we so far have put entirely in this category - our Accountants may decide to amortize - so this expense may go down. We also increased Partner Debt and this category also includes payments made to Partners in each of the three debt tranches. We are happy to make those payments. Thanks to those of you supporting the Company through these programs.
Overall Profitability
We achieved record profits due primarily to increase in revenue and only having one turnover. Going forward the increased interest expense will continue to lower profits while we anticipate continuing to raise rents in Las Vegas. As we get tenant turnover, we will continue to make major improvements. The pace that we can do that drive profitability going forward. We would like to have turnover in Las Vegas given the rapid price increase and in Oakland while we wouldn't push it - there is still opportunity to achieve longer term value by improving the properties.
For this year, given the amount of capital returned we may not issue a Special Distribution on profits and may instead use that to pay down Partner debt - esp. on the 3rd tranche which was intended to be shorter duration. Going forward given the strategy of not having an Partner Distributions as all capital is returned we should resume those payouts.
Balance Sheet (Dec 31, 2021)
Assets
Cash $ 74,695
Other Current Assets $ 360
Book Value of Buildings $499,388
Book Value of Land $156,700
Total Assets $731,144
Liabilities
Current Liabilities $0
Accounts Payable $2,461
Security Deposits $15,115
Partner Debt Tranche 1 $60,000
Partner Debt Tranche 2 $100,000
Partner Debt Tranche 3 $80,000
FOA - 74th $340,010
FOA - 75th $322,663
Total Liabilities $915,326
Equity
Partner Equity $0
Less Change in Cost Basis -184,182
Total Liabilities and Equity: $731,144
Market Balance Sheet (Dec 31, 2021)
Assets
Cash $ 74,695
Other Current Assets $ 360
Market Value of Properties $3,247,000
Zillow 2/1/2022
Total Assets $3,322,055
Liabilities
Current Liabilities $0
Accounts Payable $2,461
Security Deposits $15,115
Partner Debt Tranche 1 $60,000
Partner Debt Tranche 2 $100,000
Partner Debt Tranche 3 $80,000
FOA - 74th $340,010
FOA - 75th $322,663
Total Liabilities $915,326
Equity
Partner Equity $0
Unrealized Gain $2,406,729
Total Liabilities and Equity: $3,322,055
The big change in the Balance Sheet was the placing of a mortgage on two of our properties. We secured a fixed rate of 4% over a 30 year period. This (and another smaller round of Partner Debt) allowed all Partner Capital to be repaid. When you account for the distributions made through the years you all have negative equity in the Company on a Book basis. There is nothing wrong with that. The percentage shares held by you are set as of the Management capitalization table. As stated earlier this transaction has the positive benefit of returning Capital in accordance with expectations set by me originally and also allows us to continue to reap the benefits of a continuing income stream in an appreciating market.
Which brings us to the most significant highlight of the year. The highly expansive monetary policy has led to another massive increase in asset prices. According to Zillow our properties increased in value almost 20% year over year, almost $600K. This is phenomenal growth in any environment. We of course don't expect this to continue as the Fed as already said it will raise interest rates this year. However, we still believe that the Vegas properties have upside and in an inflationary environoment we anticipate that rents will continue to rise. The bet in the Bay Area is that it will come back, as it has in the past, and we would expect a longer term recovery at some point in the future. We have opportunites for value-add construction with the relaxed CA zoning rules, so there are future growth opportunities if we choose to take advantage of those. With our financing complete and all Partner capital returned we see no need to sell anytime soon.
We made Partner Distributions in the first 5 months prior to the recapitalization totaling $18,885 and we had Interest payments of about $25,400 compared with cash flow of aboout $70,000. We ended the year with more cash than usual and as stated I will most likely use that excess cash to reduce the third tranche of Partner debt.
Also note the new website - after many years of maintaining my own I couldn't keep up with the upgrades and put most of it on Google sites. I trust they will manage this better than I can on my own. Still a work in progress...
As always thanks for your support, stay healthy and look for the K1s in the coming weeks...
With gratitude,
Biren Talati
Managing Member
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