2023 Management Discussion

Profit & Loss

Revenue grew a record 10.8% following the full year impact of the rent increases primarily in our Vegas properties.  We had no turnover.  In additon to 100% occupancy the no turnovers led to substantially below repair costs.  This led to record cash flow and profitability.  Last year when we had two turnovers we were able to increase rent 36% and 29% so we enjoyed the full year effect of those rents.  We also were able to pass along more modest rent increases to our other good tenants.  We continue the strategy of keeping them below market rents.  

For the Bay Area we agree with Zillow's assessment of a COOL market.  There is an influx of new inventory and demand is muted as there continues to be net outflow of residents.  If there is a case to be bullish it is the anticipated next wave of tech led growth in AI which would usher in many new jobs.  However we are still seeing the bigger companies laying off workers after the hiring binge of the Pandemic years.  

OAKLAND MARKET DATA - Zillow Rentals

For the Las Vegas market we see a stable market which is a downturn from the very strong market of the last few years.  Some of that is the correction from the post pandemic boom when travel and tourism rebounded as people were tired of being pent up.  Going forward, the Super Bowl is in Vegas and the Oakland As will be playing there soon so we are bullish about the growth prospects in its main travel and tourism industries.  

LAS VEGAS MARKET DATA - Zillow Rentals

We usually discuss the improvements made to properties in this section and while we didn't have any turnovers we did place an emphasis on upgrading appliances.  We settled on Costco as our preferred vendor for the no cost delivery, install and haul away as well as generally having a better quality of appliances to choose from.  Among the items at Lodge Haven: Dishwasher and Washing machine, Homestead:  Washing Machine, Dishwasher, Microwave, Refrigerator and at 74th:  Washing Machine.  We have already purchased a new dishwasher and refrigerator at Single Tree this year.  There is a very positive customer satisfaction increase when you get a quality brand new stainless steel appliance, so we are likley to continue those improvements.  Last year we also escaped having to replace a new HVAC system.  When that happens instead of costing $6500 the cost has gone up to $10,500 so we will feel the impact of inflation on the cost side very soon.  I also supplemented a new handyman this year who while more costly has the benefit of being more responsive on the smaller items which invariably come up.  So another customer satisfaction upgrade.   

 Interest Expense

Interest expense stayed the same for both the institutional mortgage and the Partner debt.  On the mortgage side we had locked in the 4% for 30 years which in a rising rate enviroment has proven very well timed.  We did raise rate paid out to Partners, however the story going forward will be the reduction of this expense as we payback Partner debt with the excess cash from operations.  We will discuss this in the Balance Sheet section below.  

Other Items

Taxes paid dropped as we had a pre-paid balance from last year which was returned this year.  We can see the effect of inflation in the year over year increase in insurance.  Thankfully none of the Company's properties are in a high risk zone.  We have outside ownership of one property in a high risk fire zone which is in a significant peril of losing its massively overpriced insurance.  

Overall Profitability

We achieved record profits with an almost perfect calm of ZERO vacancy, NO Turnovers and NO major repair expense such as HVAC unit replacement.  

Going forward we have some increase in rents that we have placed last year that will drive growth in 2024.   However, that rate growth has stalled in Vegas and in the Bay Area we are seeing a decline.  So we are not necessarily looking for tenant turnover in any of the markets and especially not in the Bay Area.  Having said that we do have value add opportunities to increase size of the units in our Bay Area properties and when we have a vacancy we shall explore that option.  We also plan on improving properties thru selective enhancements on appliances and landscaping.   

Given the relatively large taxable profit this year we will issue a Special Distribution to offset tax implications for Partners and Managers.  Look for that along with your K1s - we may withhold that as needed for CA taxes for out of state members.

Balance Sheet (Dec 31, 2023)

Assets

Cash   $ 64,095 

Other Current Assets $   2,461

Book Value of Buildings $475,332

Book Value of Land $156,700

Other LT Assets $  23,969

Total Assets $722,024

Liabilities

Current Liabilities $     614

Accounts Payable

Security Deposits $21,805

Partner Debt Tranche 1 $60,000

Partner Debt Tranche 2 $37,424

Partner Debt Tranche 3 $30,000

FOA - 74th $327,428

FOA - 75th $310,722

Total Liabilities $787,993

Equity

Partner Equity $0

Less Change in Cost Basis -65,969

Total Liabilities and Equity: $722,024

Market Balance Sheet (Dec 31, 2023)

Assets

Cash   $     64,095 

Other Current Assets $       2,461

Market Value of Properties $3,177,100

Zillow 2/1/2024

Total Assets $3,243,656

Liabilities

Current Liabilities $     614

Accounts Payable

Security Deposits $21,805

Partner Debt Tranche 1 $60,000

Partner Debt Tranche 2 $37,424

Partner Debt Tranche 3 $30,000

FOA - 74th $327,428

FOA - 75th $310,722

Total Liabilities $787,993

Equity

Partner Equity $0

Unrealized Gain $2,455,663

Total Liabilities and Equity: $3,243,656

Zillow estimates the portfolio to be about flat to last yar at about  $3.177M.  While the mortgage market has been faced with the large increase in rates last year, asset prices have not come down that much.  Low inventory and an otherwise inflationary environment offsetting the negative effects of rising interest rates.  Rates did ease later in the year as the Fed signalled they believe the worst of inflation is over.  Overall, we believe the rise in rents supports the asset prices for our properties, so we continue to want to hold, even in a declining / flat asset price environment.  

From a capitalization standpoint we took down Partner debt by $80,000 late last year.  With much gratitude to Partners who supplied this Debt when asked, the Company returned this cash from the strong cash flow from Operations which we discussed above.  Our goal this year is to continue returning Partner Debt while maintaining a healthy cash balance of about $50,000.  With this lower Debt amount outstanding we shall see a reduction in Interest Expense going forward.  Once the Partner Debt is exhausted the Company will increase Special Distributions and/or make Value Add investments. 

Look for the K1s around March...

As always, thanks to all Partners for your support and continued trust in management.  

With gratitude,

Biren Talati

Managing Member