Friday, October 19, 2012

Yearly Apartment Conference Call

Yesterday was the annual investor conference call for the Houston apartment complex. Management gave their views on the current performance of the property and their outlook for the future.

In short, it's looking much better. The Houston economy is improving. Unemployment there is dropping. Occupancy is up. The apartment continues to be classified as an institutional grade investment property.

Regarding the cash call the managers asked for last February - They had asked for $250,000 and they received about $140,000. Of that, they used $78,000 to pay down outstanding bills, $20,000 to pay late fees and legal fees resulting from the outstanding bills, and $12,000 to pay property taxes. Management also repaid themselves $20,000 that they had advanced the company. The rest went to operating expenses. Management notes that the mortgage was always paid on time, so we were never in danger of defaulting on the loan.

Since the property was purchased in 2008, we've seen a 36% increase in property taxes and a 44% increase in the water costs from the city. I've written before about how we had the property re-appraised, which resulted in a lower property tax bill back a few years ago. We saved about $100,000 in property taxes between 2010 and 2011. However, during that same period, our loan switched from interest only to interest and principal, so that ate up the tax savings. Management expects the 2013 property taxes to be about $100,000 less than the 2012 amount, but the government hasn't set the final rates yet, so nothing is definite. Insurance costs throughout the Houston area have risen and they expect our insurance to rise by about $50,000 in 2013.

Rents are trending upwards in our market sector. Unfortunately, there is always a lag before our property starts seeing increased rent income simply because the units are rented out on yearly leases, so the rents can't be adjusted until the leases come up for renewal.

The property is on budget through August 2012. In fact, we're within $100 of the budget, which is pretty amazing. The net operating income for the property in 2012 is projected to be $800,000, rising to $990,000 in 2013 and $1.07 million in 2014.

The tentative plan is to look at selling the property in 2014. Assuming a 6.5% CAP rate, the property should be worth about $15 million by that time. (We bought the property for $12.4 million.) This is, of course, based on management's projections of performance and the actual performance may vary. Management will take a closer look towards the end of 2013 and see how things look. These projections are based on not making any distributions to the investors during this period, although if things improve enough, management will look into resuming those payments.

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