Q2 2023 Apartment Ventures Investor Letter

Partners:

At the end of this quarter, Apartment Ventures celebrated its 25th anniversary of continual operations since its first acquisition in May 1999. Over these years, we have completed 163 transactions including both acquisitions and dispositions. We have worked with large pension funds and small family investors. We are very proud of our portfolio, having grown from a single asset in one state to 40 assets in four states, and our long-term track record for profitable and safe investment in all phases of the real estate market. As we again enter challenging times for both commercial real estate (CRE) and the broader economy, we are preparing in two ways – making sure that the core portfolio is intensively managed to the best performance possible and seeking new opportunities that will become available as markets shift and commercial real estate sellers become more aggressive. Uncertain times, both economic and in CRE, can often lead to opportunity for astute investors however, care and diligence is essential.

Operations:

Quarterly Operations within the Apartment Ventures portfolio continued their trend of steady occupancy coupled with very moderate rent growth. Revenue growth has slowed considerably at most assets but has remained positive to last year’s results.

Operating Expenses have continued to rise due to inflation and have risen faster than inflation for utilities and particularly property insurance which renewed in Q2 at a 25% increase in costs after a great deal of work to secure the most cost-effective and safe

policy available. Further, we completed a change to our banking relationship within JP Morgan Chase to handle the complicated needs of our company more effectively.

Distribution to all partnership continued without interruption and the accounts remain in JP Morgan Chase, one of the most secure banks in the US. This restructure also afforded us to invest excess funds from operations in a higher yielding money market account

through the JP Morgan Private Bank while offering full access to the funds at any time we need them.

Opportunities:

Apartment Ventures remains optimistic about its ongoing asset operations and the opportunities for rental housing investing in the coming years. As long-term skilled investors we believe that an effective business plan always includes well located, soundly built, and effectively operated assets. We compete as a housing provider with an array of options, but particularly with the single-family home market. As has been well documented, that market’s pricing rose very quickly and has now become much more expensive than apartments – recently peaking at over $1,200 per month more on a cost adjusted basis as illustrated in the graphic below showing premium of home ownership to renting over the past 23 years. Coupled with demographic trends and economic drivers in our locations such as jobs and quality of life, we believe these types of spread in affordability will lead to generational long-term demand for our quality assets.

Capital Markets:

New loans for apartments are much higher in rate than they were 12 months ago; a new fixed rate mortgage for apartment acquisition in early 2022 ran at about 3.5% annual percentage rate and generally included up to 5 years of interest only payments. Today a similar loan would be approximately +6.0% annual percentage rate and perhaps 1 to 2 years of interest only payments. Uncapped variable rate loans have run up to 8% to 10% annual percentage rate for many CRE investments. As a note, only two of Apartment Ventures’ 43 mortgages are variable rate debt (both are capped and on schedule to be refinanced when open for prepayment) and there are no loans coming due to maturity until 2026. We expect these favorable loan structures will give us stability and extended optionality as we consider when to move forward with buy/sell and refinance decisions.

Final Word:

As always, we thank you for your investment with our firm. We are hoping to meet many of you face to face at our upcoming Investor Open House. However, in the meantime, please feel free to contact any of the partners with questions or concerns. We are appreciative of your partnership with our firm and look forward to many more successful years with all of you. As a reminder, your investment account and operating information for your investments are posted quarterly and are available in Investor Portal at:

https://investors.appfolioim.com/apartmentventures/investor/login

 

Best,

John, Lee, and Kari

www.apartmentventures.com

T: 714.379.9900