Performance Update

Update on Transformation Housing Fund, LP — 3rd Quarter 2020

Los Angeles, California | October 16, 2020

Overview of the Fund and the Market
The US Economy is showing signs of recovery, which should continue as the lockdown due to COVID-19 is eased and Americans return to work. If one believes in medicine and science to end the lockdown, then an economic recovery will come. Retail sales have been climbing from the low point of the lockdown. According to a Deloitte economic update, in September retail sales were 5.4% higher than a year earlier. Predictably, sales were up over last year at home improvement stores (19.1%), grocers (9.6%) and sporting goods stores (14.4%). The consumer drives the largest component of our national GDP and, if these spending numbers continue, a solid recovery will be here by mid-2021.

As expected, working consumers will drive our recovery and economic growth. The steady drop in the unemployment rate and re-creating the jobs that were lost due to the pandemic are important factors in a sustained recovery. According to the US Government Bureau of Labor Statistics, 11.4 million jobs have been created in the last 5 months. Even with this gain, total jobs are 10 million below the peak in February; we still have more jobs to recover.

Workforce housing and Class B apartments will benefit from those returning to work as well as the "work from home" professionals. We expect to benefit from the economics of lowering unemployment and the "value renter" who can afford a more expensive Class A apartment but prefers the value of a seasoned property with fewer amenities.

The election is a factor of concern, not for the results of which candidate may become President, but more for the civil unrest and reaction that may occur. Regardless of the outcome, half the population will be dissatisfied. We have plans to protect our properties and sustain responsible property operations.

As for the impact the election may have on the economy, we believe Wall Street and the financial powerhouses have contingencies for any outcome; we are similarly situated. Government may grow or shrink, taxes may increase or not, but well positioned housing for working Americans will be in demand either way.

The establishment and monitoring of monetary policy has more impact on our national economy than any of our elected officials. The Federal Reserve Board and Fed Chairman have done a great job managing a very low inflation environment. The Fed wants to avoid a deflationary environment, as consumers do not spend when the goods will be cheaper in the future; likewise, high inflation will devalue savings and increase costs to consumers. The Fed has kept a steady hand and interest rates are low; low rates will help recovery and growth.

These factors all contribute to a good time to be a buyer of quality assets. We have had over 90 properties presented to us by brokers and finders in the industry; we have actively pursued over 15 assets that are within our acquisition criteria. Many sellers are still holding out for higher prices, but some are becoming flexible and realistic. We are disciplined in our patience for the right acquisitions.

New Investments
During this quarter, we have been successful in the pursuit of a new acquisition: the Burbank Blvd. Apartments LP. We have a contract on this eleven-unit apartment complex in the Los Angeles submarket of Tarzana, an area in the San Fernando Valley between the financial centers of Woodland Hills and West Los Angeles. The area is surrounded by jobs, economic drivers, and good schools. The property was built in 1988, boasts large units perfect for "work at home" professionals that proliferate the area, has secure parking and a high Walk Score due to proximity to a main commercial boulevard. 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.

We still believe there will continue to be a buying opportunity for well-located Class B assets with demand by workforce tenants. We expect our purchase opportunities to continue. 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 new acquisitions.

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. We have signed a new lease with a national grocery chain; this tenant will take 35,000 sq. ft. and bring daily traffic that will increase rents and property values. Operations have been steady; leasing has been active and positive. The renovation and repositioning of this asset is well underway; 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 this quarter: a lease with a grocery store, and a new acquisition of a solid investment. We will keep underwriting additional acquisitions and stay the course to achieve our mutual investment goals.

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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