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Profit & Loss
Revenue grew 4.5% following two years of 6.4% growth. On the good news front we finally got an increase in our Oakland properties late in the year. The primary growth once again came from our Vegas properties. Revenue would have grown more however we had what we call a soft eviction in one property - Homestead which led to about two months of vacancy. Poor tenant choice who also left the property in poor condition The good news is that on the turnover we increased rent by 36% so we hope to see an uptick next year with a full year of that rate. We had one other turnover which resulted in a 29% increase with about half a month of vacancy. A third turnover led to a 11% increase. In a rising market turnover is good! Las Vegas continued to benefit from inward migration. Also the general price inflation made for a bouyant market. We were also able to raise rents across the portfolio at a lower rate on our good longstanding tenants. This is in keeping with our policy of keeping good standing tenants below market rents. The rental market in Las Vegas continues to be strong however the pace of growth has slowed so we certainly don't expect the dramatic increases of the last two years.. The Bay Area has stabilized from the exodus however conditions are still not strong. We are not too eager for turnover in this market. A Tale of Two Cities as depicted in these graphs from Zumper.com which we believe to be directionally correct:
Bay Area Las Vegas
Our repairs and maintenance was higher than average reflecting the three turns we had. As stated earlier the largest expense was for a tenant who we had to soft evict. In addition to the lost revenue, the tenant left the place in very poor condition. We ended up as usual upgrading many of the components including replacing a tub with a walk in shower in the master bath, wall tiles, new plumbing fixtures and stainless steel appliances. Unfortunately we had to fix many items including full paint, cabinets, appliances and restoring flooring.
For the property at Single Tree the improvements included installing a new quartz countertop in the kitchen replacing the old tile countertop, new plumbing and electricial fixtures, new kitchen and bath flooring as well as landscape improvements and stainless steel appliances.
The third turnover wasn't as bad consisting mostly touch up paint and lots of cleaning. We had several other items of note including a new garage door and the usual cleaning, pool and landscape items across the portfolio.
Prices have gone up on supplies and labor so the inflation is definitely showing up on the expense side.
Interest Expense
In 2021, we took out loans on two properties and returned all Partner Capital. Interest expense rose by 50% this year as we had the full year effect of this compared to half a year in 2021. We also paid more interest to Partners who have contibuted debt to the Company. At the end of the year the Company raised the interest rate on loans made by Partners in light of rising market rates. As always we appreciate the confidence placed in us by Partners and this expense is one we are happy to incur.
Other Items
Our Taxes paid went up quite a bit, more than actual expense. This reflects pre-paying in 2022 for 2023 and including double paying from the Company's bank and escrow from mortgage Company. This item will go down considerably next year when it balances out. Or perhaps the Accountants will smooth this out with a pre-paid account?
Overall Profitability
Profitabily was lower with the three primary expense items mentioned above. We achieved strong revenue growth which given the turnover was a reflection of our ability to fill vacancies quickly at higher rates. Cash flow was strong with more than enough cushion to meet all of the Company's obligations. Going forward we expect to see the higher rents set last year to be in effect for the entire year barring vacancy. Turnover may impact results as in any year. We are still optimisitic aboout turnover in Las Vegas given our ability to raise prices however we are pessimistic in the Bay Area so we wouldn't push for turnover in that market. We will continue to make significant improvements during periods of vacancy as we believe that drives long term wealth.
We returned about $32,000 in Partner Debt this year - given the relatively small taxable profit this year we will likely not issue a Special Distribution. It is our expectation in future years when we have more profitability we will return to issuing these as a way to offset tax implications for Partners and Managers adn continue to drive long term distributions.
Balance Sheet (Dec 31, 2022)
Assets
Cash $ 68,235
Other Current Assets $ 2.461
Book Value of Buildings $475,332
Book Value of Land $156,700
Other LT Assets $ 23,969
Total Assets $726,164
Liabilities
Current Liabilities $2304
Accounts Payable
Security Deposits $21,555
Partner Debt Tranche 1 $60,000
Partner Debt Tranche 2 $87,424
Partner Debt Tranche 3 $60,000
FOA - 74th $333,728
FOA - 75th $316,921
Total Liabilities $881,931
Equity
Partner Equity $0
Less Change in Cost Basis -155,767
Total Liabilities and Equity: $726,164
Market Balance Sheet (Dec 31, 2022)
Assets
Cash $ 68,235
Other Current Assets $ 2.461
Market Value of Properties $3,078,800
Zillow 2/1/2022
Total Assets $3,149,496
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 $2,234,170
Total Liabilities and Equity: $3,149,496
As predicted last year with the rising interest rate environment the huge rise in asset prices has stopped. Zillow estimates the portfolio to be worth $3.1M down from $3.25M last year. Not a huge decrease relative to other asset classes however with the rise in rates this was not surprising. Overall, we believe the rise in rents supports the price points for our properties, so we continue to want to hold, even in a declining price environment. Especially in light of the 4% rate we locked in last year.
From a capitalization standpoint we took down Partner debt by about $32,000. Which pretty much used up the Cash Flow from Operations last year. This was a stated goal when we raised the Third tranche during the refinancing event of last year. We will incur slightly higher interest rate costs next year as the Company increased rates paid out across all tranches to reflect the rising rate environment. The Company believes it is in very strong position with about $68K in cash and strong cash flow from Operations.
Look for the K1s in the coming weeks...
Finally, I wanted to acknowlege the support you gave this year with the passing of my dad and Partner Praful Talati. I can't express by thanks and gratitude enough to him, I know he meant a lot to many of you as well. He was proud of what we built and he became an independent real estate investor himself.
With gratitude,
Biren Talati
Managing Member
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