February Kings Castle LP - Investor Update

Transcription

1 February 2012 Kings Castle LP - Investor Update We opened this partnership in spring 2010 on the heels of the financial crisis and in a recovering real estate market. The focus is on cash-flowing apartment buildings in growth markets but also on select opportunities, with a small subset of the money invested, in order to enhance the return without undue risk. We have raised approximately $4.75M from 101 investors which includes $2.63M from cash investors and $2.12M from RRSP investors. You will receive 2011 financial statements and the Statement of Partnership Income and Losses (T5013) for Kings Castle LP at the end of March The T5013 should be used to adjust your taxes payable for Castleview Park Apartments (25% ownership of 120 units) Calgary, AB 2011 was a great first year for this property which started the year with five units vacant and ended the year with only one vacant out of all 120 (coowned) units. Although we had very few expenses in the first month of operation the property went to normal operations in February 2011 with some fluctuations in total cash flow in May when we undertook a capital replacement program for all existing (23 litre) flush toilets at a cost of $21,500. Additional non-regular expenses included a couple of burst pipes (due to freezing) that caused damage to three suites which have been repaired and are back in the leasing program. Overall the property ended the year with $90,160 positive Net Income (without adjusting for the $68,786 in capital expenses) and paid down the mortgage by $216,471 for a stellar performance and a great trend into 2012 (See chart below. Please note, figures above are for all 120 units PRISM A LP owns ¾ of the building, ¼ is owned by this, our newest LP, Kings Castle). In spring 2011, the City of Calgary assessed the property at $15,340,000 which was $690,000 higher than our purchase price a few months earlier. It reconfirms our belief that the property was purchased well below market value. We just received a new 3 rd party appraisal for our audited 2011 IFRS financial statements and the market value as of January 2012 was $16.6M due to rent and value improvements and further CAP rate compression (from 5.75% to 5.5%). A whooping $2M increase from our $14.65M purchase price in December 2010 on the roughly $5M cash allocated to this asset by Feb Prestigious Properties Kings Castle LP Investor Update Page 1 of 5

2 both LPs. Nice! It proves that our revised strategy, based on lessons learned over the last decade is paying off in spades. More on this below, towards the end of this update. Adding the roughly $30,000 net cash-flow and the mortgage paydown by about $216,000 in 2011, we created plenty of equity for investors in the process. Cold Lake As you know, our focus is on apartment buildings in growth markets. Every so often we come across a non-apartment deal that we think makes sense for a very small sub-set of the cash invested. I have been studying the Cold Lake land market since Having missed the Fort McMurray boom in the early to mid 90 s I saw this as another promising real estate investment based on the world s second largest oil deposit: the oilsands. As per the chart to the right, there are three major areas with oilsands in Alberta: around Peace River, north of Ft. McMurray and in Eastern Alberta around Cold Lake into Western Saskatchewan. As the Oilsands in E-AB and W-SK are deeper in the ground, they do not use pit mining techniques like Ft. McMurray, but steam-assisted gravity drainage (SAGD) technology. Let s call it green oil as it doesn t disturb the surface area nearly as much as the huge pit mines around Ft. McMurray. Cold Lake is the hub of that expansion, and house prices today are higher than Edmonton, around $425,000 for a 3 BR house on a small 45 by 120 lot with a single car garage. Cold Lake in the year 2000 was a sleepy hamlet, today it is a vibrant town with new subdivisions, a new community centre, new high school, new Wal-Mart, new Canadian Tire, new hotels and new Boston Pizza, just to name a few. It may be bigger than Red Deer in another years if the growth continues and oil stays over $80 a barrel. Imperial Oil just announced a $2B expansion in Cold Lake (see news link on our facebook page) validating our purchase as we will see many new residents moving to this area for 20+ years. In addition Cold Lake also hosts a large airforce base and the Cold Lake weapon s range, a vast territory for NATO pilots training and mission preparation, such as the attack on Libya in It will also get enhanced training facilities for the new F35 fighter jets, a 20+ year investment program. Feb Prestigious Properties Kings Castle LP Investor Update Page 2 of 5

3 At the moment PRISM A LP and Kings Castle LP each have a $1M loan at 8% against this land that we intend to develop over the next few years. The land is on the very north end of the City of Cold Lake, to the West of the lake along English Bay Road. Approximately 1/4 to 1/3 of future lots will have awesome lake views. The current zoning, with approved ASP (Area Structure Plan) of the ½ section parcel is acre lots, although a re-zoning to approximately acre lots with less costly water/sewer infrastructure is a second option being explored right now (the water/sewer lines would come from a near-by subdivision or along English Bay Road.). The purchase price with generous vendor financing was $2M cash, plus $2M due in 2015 at 0% interest, plus $40,000 per lot for the first 100 lots sold due from lot sales, postponable to any builder s mortgages, with no time limitations whatsoever. Thus, no interest bearing mortgage on this land with no time pressure to develop and sell residential lots. This time pressure, combined with high interest rates forced many land bankers into receivership between 2007 and A safe and very profitable investment in a growing high-demand region in our opinion. The two ¼ sections were appraised post financial crisis at over $9M and are possibly worth over $10M today after the latest round of investment announcements in Cold Lake (to be verified in due course, of course). This equates to a cash value of around $21,000 per acre, with an estimated retail value of $50 to $65M if we proceed with the 300 lot serviced lot option. As we get close to development we may convert the loan(s) and accrued interest into a preferred equity stake, as we may raise money via a dedicated LP in late 2012/2013. Fund raising options are being developed as we speak. Final Thoughts & 2012 Outlook: In addition to this $1M investment into the Cold Lake land project, we have about $1M in cash and/or in interest bearing short-term loans on our books. We are seeking to deploy this capital in 2012 but prefer to wait for the right opportunity in a somewhat larger asset (40 units or bigger, over $4M asset value). We are patient investors in a flattish market readying yet another boom in AB and SK. Our main target is Edmonton as we know this market very well, but are open to other SK or AB cities of size. We don t envision investing in BC, ON or TX as we have done in previous LPs. BC s prices are by and large too high and the economy too fickle, with a NDP led government a distinct possibility in Ontario s (as well as BC s) manufacturing and public sector is undergoing negative wage pressures due to sizeable budget deficits and a weakening economy, which does not bode well for house price or rental increases. We like Texas though, but have decided to keep Kings Castle LP US asset free, and may in fact open a US LP dedicated to this growing and oil rich state, in US dollars. This would allow us to eliminate one uncertainty, namely currency fluctuations [our 308 suite asset in LP4 near Dallas, TX, purchased in Sept is performing rather well now.. and even during the deep recession] Feb Prestigious Properties Kings Castle LP Investor Update Page 3 of 5

4 2011 was a year with modest improvements over will be slightly better than 2011, but only in select sub-markets like Alberta or Saskatchewan, or very select BC or ON pockets, namely in cities with job growth. Several markets will see downwards price corrections, and since the Vancouver and Greater Toronto Area make up almost 50% of Canadian home inventories please be prepared for headlines such as Canada house prices fall of a cliff or Real estate loses its luster or Forget real estate as an investment. Residential real estate with income, especially in job creating and growing urban centers, continues to be a safe and profitable investment class outside the often volatile and frequently manipulated stock market. Kings Castle LP will continue to do very well in our opinion. It s like owning gold with a yield! Returns will be lower than in the 1998 to 2007 boom years, but still respectable counting cashflow, value appreciation and mortgage paydown over a minimum 5-7 year suggested holding period. Other investment classes are not a solid bet. Confusion & uncertainty will continue to abound in 2012 with a world trying to shed excessive government debt across the industrialized nations, a grid locked US government anticipating a new (or the same) president in late 2012 and a somewhat cooling Chinese economy. What is a good investment these days? Gold (down from a historic high but still very high)? Silver? Oil & gas stocks (will oil go up much beyond $100.. will the KeyStone XL or Northern Gateway pipeline be built or not.. will fracking be banned in some provinces or states.. what is the impact on the world economy if Iran closes the Straight of Hormuz)? ETFs (which one)? Mutual funds (with high fees)? REITs (up over 100% since 2.5 years ago now trading at very low yields and frequently above NAV)? Bonds (a recent 3 year bond auction in the US yielded less than 0.4% for a 3 year bond)? The Euro (will Greece leave it or not.. I think it will.. although my former home country of Germany certainly is a big winner of the weak Euro and thus, may schlepp along Greece for a while)? We would love to hear your thoughts here. As expected, and as predicted by us about a year ago, we have already experienced far more rental demand, and thus higher property values, throughout 2011 and going into 2012 in most of our well located properties in markets like Lower Mainland, Calgary, Edmonton Capital Region, or Dallas. In our current Kings Castle LP and/or any new LPs that may be announced later in 2012, we will continue to focus on apartment buildings but with five major changes compared to earlier LPs: a) We will avoid smaller towns. This will afford us lower risk purchases and staying power if markets go sideways for a while with low to very low chance of property value decline. b) We will use far less leverage. This means we will put down more cash and thus, have a lower mortgage. Until 2008 we used up to 80% loan-to-value mortgages, which is a great way to enhance your cash-on-cash ROI in fast growing markets. However, it has higher risk and much lower cash-flow, frequently negative once one deducts operating expenses of an LP and required, ongoing property upgrades. The recent 120 suite Calgary purchase is a prime example: we have a mortgage at 4.14% interest for 5 years at less than 69% Feb Prestigious Properties Kings Castle LP Investor Update Page 4 of 5

5 loan-to-value, and we might go lower still going forward to be even more conservative and have better cash-flow in these fairly flat, uncertain, volatile and deleveraging times. c) We will provide early exit options in case of changes of mind or life circumstances, d) We will provide an optional 5% annual distribution, paid quarterly, (to satisfy a line-ofcredit perhaps or for retirees seeking income in addition to equity growth) or 6% equity creation through our DRIP program. e) We will have low fees, especially initially, but also ongoing. It is critical that the vast majority of your investment goes into income or wealth producing assets. Some folks charging a 10% commission and a 3% acquisition fee, for example, on a 30/70 levered asset, means 20% of your cash goes to the syndicator, right up-front. Add the necessary legal fees and the usual marketing expenses and as little as 65-70% of your dollars gets actually invested. To get from 65% to just your original investment one needs a 50% cash-on-cash ROI and that is very difficult in today s market. That is why so many syndicators have failed and will continue to fail. In addition, we will continue with our commitment to: 1) Not uplift asset values before syndication to investors; a major profit killer for investors. Beware of land or commercial property syndicators that attempt to sell you on those inflated assets with slick marketing brochures 2) Continue with open communications about successes, major events but also misjudgments; 3) Provide access to president or LP executives for any questions about your investment or any real estate related documents, or for any issue that you may have, 4) Our uncompromising due diligence on area and property, before property acquisition; 5) Sensible property upgrades to increase rent levels and thus, the value of the asset for medium- to long term ownership, and; 6) Impeccably manage our properties with a focus on customer service, tenant selection and tenant retention. As always, please feel free to call or Scotty, Mike, me or any registered rep at one of the four EMDs that are selling our product to discuss this investment or any other in more depth! Kings Castle is still open for additional investments at $5000/LP unit, and since you already invested the minimum amount it could be in $5000 increments. Successful Investing & Yours Sincerely, Thomas Beyer, President Prestigious Properties Group T: or E: tbeyer@prestprop.com P.S.: Feel free to check out the latest news affecting your investments or Thomas market commentaries at twitter.com/prestprop, our website prestprop.com or facebook.com/prestprop. Detailed Kings Castle LP info such as financial statements, titles or appraisals is also on the investor website section that you can access with the User-ID: Kingscastle and Password: kingscastlelogin Feb Prestigious Properties Kings Castle LP Investor Update Page 5 of 5