Quarterly Newsletter – 3rd Quarter 2015

Dear Friends
of TwinRock,

Welcome to the latest issue of the TwinRock Partners’ Quarterly Newsletter and what a quarter it was. For those investors that benefit from volatility and uncertainty in the financial markets the 3rd Quarter was a dream, for TwinRock and our investors, our portfolio and our investment strategy it was the antithesis. TwinRock’s real estate portfolio has offered greater predictable cash flow and total return over the past five years compared to the S&P 500. While we believe appreciation in values in both our single-family and multi-family markets will continue there are signals arising that we may be near a top in coastal markets.

Last month I attended my product council for the Urban Land Institute in San Francisco. The council consists of 50 real estate professionals from across the country in which we meet twice a year. This was the first time since the recession that the majority felt we are near or are approaching the end of a bull market in core real estate locations specifically the western and southeastern coastal markets. The minority believed there are still a couple of more years to run which in real estate terms are very near term. One of my fellow members put it best when she quoted the motto from the House of Stark in the TV show Game of Thrones “Winter is Coming”, which doesn’t necessarily imply a crash, but that a correction could be near. The second signal comes from real estate tycoon, Sam Zell, who is selling roughly a quarter of his Equity Residential
portfolio of apartments to Starwood Capital. Outside of Denver the properties are in coastal markets of southern Florida, Seattle, Washington, D.C., and Southern California. Sam Zell made fortunes buying in the recessions of the 1970s, early 1990s and timed his sale of Equity Office perfectly at the top of the market in 2007 for $39 Billion. A third signal also comes from Starwood with the merger of Starwood Waypoint Residential Trust and Colony American Homes, which will have 30,000 homes under management. We have long stopped buying homes for rent and the acquisition volume from REITS has also come to a stall with mergers arising, typically seen in the last stage of the economic expansion cycle.

All are not as negative, at the 2015 Multifamily Executive Conference last month, owners, investors and operators struck a tone of solid optimism about the state of the market. “We’ve waited for 25 years for this part of the cycle to arrive,” said Tom Toomey, CEO of apartment developer UDR. “If the current market cycle is compared to the side of a mountain, we’re still in the foothills.”
Adding its voice, Freddie Mac recently released its Multifamily Outlook stating, “The multifamily rental market is in its sixth straight year of robust growth with demand keeping pace with new supply hitting the market, calming concerns that growth might start to decelerate. Demand for rental housing will remain strong for several more years because of a strengthening job market, growth of household formations, and reduced affordability of owning a home.”

The two opposing points of view are easy to reconcile – the strong demand for residential rentals continues, and together with low interest rates, prices of properties in core markets have been driven to extreme highs and possibly unsustainable levels.

We all know the three-key words to real estate are “location, location, location” and this is why we echo this upbeat sentiment for the firm’s investment strategy as we continue to seek undervalued asset opportunities in secondary markets that benefit both qualitatively and quantitatively from the economic recovery with an expanding business base, growing employment, and high
demand for housing. One of our investment theses is already coming to realization as it relates to income growth for workforce housing. Companies such as Wal-Mart, Tyson Foods, Target and McDonalds have significantly raised their minimum wage to employees on a percentage basis. With the majority of our resident base in the retail and service sector and earning an average of less than $10 per hour, these wage increases will have a direct benefit to our properties future rental growth.

While we are confident in our strategy, 2015 has not been without a challenge, with only one property closed for the year and a second acquisition to close in the 4th Quarter, we will remain disciplined to our investment criteria. The benefit TwinRock enjoys is that we are not mandated to certain products or areas nor are we against a clock to deploy funds and are committed to only finding the best of opportunities.


Alexander Philips

Chief Executive and Investment Officer

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