37th Parallel Properties June 2017

Inside

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Business Asset Advantages

June 2017

Vacancy Rates Are Lower Than Ever The Aegean Winds

Capitalization Rates Resident Retention

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The Stone City of Tikal

Business Asset Advantages

— manufacturing, retail, etc. And finally, it includes the sum of all external world events that could impact participants in the market. Pure hard assets like metals are interesting in that they are valued by the sum of several different variables. For example, gold is affected by inflows and outflows of the stock market, as well as by foreign governments and sovereign funds looking to hedge certain outcomes. It is further impacted by the manufacturing benefit and use of gold (conductive and malleable). It is impacted by aesthetic opinions of the market. And, the overall economic cycle and inflation expectations have an impact, as well. While metals are hard assets, they are still subject to thousands of external opinions and factors. Business assets provide a benefit tied to their profit and loss statement — net profits. Are there economic considerations that the business must react to? Of course there are. The same holds true for publicly traded companies. The big difference, however, is that business assets, regardless of the external events, provide value based on how they perform. There is no sum of all market participants risk, no foreign government risk, etc. Business assets are different.

Multifamily apartment investments are business assets.

When you invest, you are purchasing a direct interest in a limited liability company that owns 100 percent of the real property. You have the hard asset benefits of real land and real improvements that have value, especially if you’re buying below replacement costs, which we typically are. In addition to the real land and real property improvements, you own the operating apartment business. This business collects income from rents and it pays expenses, all of which results in net operating income. This net operating income is then used to pay the debt service, then reserves, then fees. The final result is net distributable income, which flows back to the investors. This income can be relatively consistent based on the evergreen nature of apartments. In addition, if operated well, there will be net operating income growth. All things being equal, if you improve the net income of a property, you increase its value. There is no total marketplace expectation vagueness. There is no market volatility risk. How the property performs, which you have 100 percent visibility into, is what you make.

There’s a big difference in how paper assets, hard assets, and business assets behave.

For example, paper assets in liquid markets (e.g. stocks) are impacted by several variables. Fundamentally, you’re investing in a business, but since it’s a listed stock on an exchange, you don’t experience the direct profit and loss of the business. What you actually experience is the sum of all expectations regarding that business in the market. This includes the opinions of thousands of analysts paid to provide opinions about the stock. It also includes the sum of all market participants (including index investors) trading in that particular stock. Additionally, it includes the sum of all participants investing in that overall sector

I love that.

– Chad Doty

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