Performance Update

Update on Transformation Housing Fund, LP — 2nd Quarter 2020

Los Angeles, California | July 31, 2020

Overview of the Fund and the Market
We had our first financial closing of investment capital on January 31, 2020. Our fund will be open to new investors into January 2021, unless the General Partner closes the offering sooner.

This fund was created to invest in value-add properties with a clear path to improved operations and increased valuation. The business plan generally requires active management by the property sponsor. Apartment Income Investors (Aii) has a 26-year track record of acquiring and repositioning properties. The target properties should provide a positive cashflow yield from rental operations, as well as a lift in value through renovation. Acquisitions will support a total net return target of a 2X equity multiple and an IRR in the 18% range. The General Partner is actively pursuing investments that meet these requirements.

The US Economy is currently in a recession as this report is written. The lockdown due to COVID-19 caused the largest negative growth in GDP in modern history and a loss of over 20 million jobs. The effects of the economic shutdown have been somewhat muted by the government assistance payments, both to individuals and businesses. Additional $600 per week unemployment, stimulus checks direct to individuals, and PPP loans to small businesses have all mitigated for the current huge economic update.

As a result, many real estate operators believe it's "business as usual" and pricing has not changed. And in some respects, our real estate industry, especially multifamily, has been affected much less than other parts of the economy. Tenants have used stimulus to stay somewhat current on rent payments. Things are changing, but slowly. We expect more tenant defaults, more loan defaults by owners, and more distressed selling to come.

On the other hand, employed "work from home" professionals have led a movement that impacts rental housing as well; they are moving into new homes they have purchased. These middle-class renters are taking advantage of historically low interest rates and becoming middle-class homeowners. While we are very happy for the progress of these professionals, we are monitoring the changes to rental rates and occupancy at some properties as these well-to-do renters are vacating. This shift could have a downward pressure on Class-A rents, which we include in our underwriting of new acquisitions.

The financial support from the government is scheduled to subside; however, new negotiations on Capitol Hill have hinted at another $1 Trillion dollar package. We have adopted a wait-and-see approach.

New Investments
For the past 26 years, Apartment Income Investors has used disciplined underwriting and our proprietary business model to generate significant returns to our investors. We plan to continue this strategy as we deploy capital into the market at this time of uncertainty.

During this quarter, we have reviewed and underwritten over 75 assets; we have made offers on 20+. We were close to a contract on a new apartment complex in the Los Angeles submarket. Our underwriting showed the property had a clear path to higher income, a solid location with working tenants, and a current yield that would serve investors well during the renovation and holding period of the investment. While the seller came to terms with us in an LOI, the seller has since gone silent and is having second thoughts. We will be patient and execute our plan when the opportunity arises.

We still believe there will be a buying opportunity for well-located Class B assets with continued demand by workforce tenants. So far, we have not seen a significant adjustment in pricing of assets in the Southern California or Texas markets; many properties have been taken off the market. As highlighted above, we have made bids for various assets but could not come to prices that are advantageous to us and acceptable to the seller. We hope with some easing of the government assistance payments, some sellers will become motivated to make deals and sell assets. We expect our purchase opportunities to improve with time. We look forward to buying solid properties that fit our desire for current yield and long-term value creation.

Summary of the Fund Investments
As of this writing, most of the fund assets are in cash, ready for an opportunistic acquisition. The Village at Moorpark (VAM) was a foreclosed retail property that was acquired from the lender. VAM has been mismanaged for many years and has a great deal of upside in occupancy and increased rental rates. Several major tenants are negotiating for space; leasing has been active and positive. The renovation and repositioning of this asset is not dampened by the current recession; we expect to meet or exceed our total return targets with this investment.

Closing Comments
While uncertainty and change are in the forefront of our daily tasks, the steadiness that comes from the demand for workforce housing is limiting volatility in our sector. And providing housing to working Americans is a noble endeavor; we are honored to provide this service in a professional and compassionate manner.

Overall, we are very excited about the progress made in the first half of 2020: a closing of investment capital, and a closing on a solid investment. We are underwriting new acquisitions. More interesting and positive news to come.

Please call or email anytime with questions or comments.

Michael D. Chesser, Manager
Aii Capital Management, LLC

About Apartment Income Investors and the Transformation Housing Fund
For the past 26 years, Apartment Income Investors has used disciplined underwriting and our proprietary business model to generate significant returns to our investors. We plan to continue this strategy as we deploy capital into the market at this time of uncertainty.

The Transformation Housing Fund was created to invest in value-add properties with a clear path to improved operations and increased valuation. The business plan generally requires active management by the property sponsor. Apartment Income Investors (Aii) has a 26-year track record of acquiring and repositioning properties. The target properties should provide a positive cashflow yield from rental operations, as well as a lift in value through renovation and improved rental operations. Acquisitions will support a total net return target of a 2X equity multiple and an IRR in the 18% range. The General Partner is actively pursuing investments that meet these requirements.

For more information, please visit www.aiiproperties.com or contact Michael Chesser at 805.604.2644 | mchesser@aiiproperties.com.

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