BROWNSTONE CORPORATION SINGLE FAMILY AND MULTIFAMILY RESIDENCES An ORION DHC, Inc. Company ROI = Net 70% to OODH THE MARKET CRISIS • • • • • • • • • • • 2008 -2010 The harbinger of death for the United States real estate market. Subprime mortgages and foreclosures. Record bank defaults and toxic assets on balance sheets. Plummeting real estate prices Excessive inventory. Boarded up houses. Homes vandalized. Neighborhoods decimated. Displaced families – former homeowners become renters to repair their credit. 2011-2012 Small, foreign and professional investors start to buy these properties. The development of realtor and investor expertise with REO (Real Estate Owned) properties. Asset managers, online auctions, and bulk buying become common place. THE OPPORTUNITY 2013 Blackstone Corporation, the world’s largest private-equity firm, has spent $1.5 billion on over 10,000 foreclosed properties in the U.S. making it the biggest buyer of single-family homes in the country. Blackstone has been buying $100 million a week of these properties said Stephen Schwarzman chairman of Blackstone during an October 18, 2013 earnings call. Why have private equity firms and hedge funds entered this market? • The best risk adjusted returns are in real estate. • High returns. • Assets purchased at below replacement cost and are relatively liquid. • Cash flow, income and the ability to leverage these properties makes this market a perfect investment. • This market has attracted major investors to purchase SFR assets, to repair , lease and manage and SFR has emerged as alternative asset class to hold or to securitize in REITs or fixed income. THE OPPORTUNITY (CON’T) 2014 • Homes can be purchased at prices from a decade or longer ago. • They can be bought below replacement value, and in many cases close to or below the land value. • Homes can be purchased below new construction cost. • Homes can be purchased at incredible discounts of 35-50% compared to peak prices in non-bubble markets. • Homes can be rented for more than 15% gross rental yields. • Investors typically buy mainly for income and at this point the values to rent charged represent an excellent, above stock market return. Rents did not collapse with home prices and are at 2014 values. Never has this environment or opportunity existed before. INVENTORY • 2013 data RESIDENTIAL HOUSING • Residential housing is the single largest "tangible" US real estate asset, worth roughly $18 trillion (but well below the total financial assets in circulation in the US). • Housing inventory as of May 2013 was 133.2 million units, of which owner occupied was 78.9 million, renter occupied was 41.7 million, and12.6 million units were vacant. • Of the Owner-occupied units, 3.3 million units were 90+ delinquent or in foreclosure, 2.0 million units were 30-90 days delinquent, and 5.8 million were current but with negative equity. • Units may be vacant because of foreclosure, poor condition, or in certain markets – population decline (Detroit would be a good example). DISTRESSED MARKET • 6 million distressed homes (foreclosures, REOs and short sales) • Distressed sales account for 25% of all sales • Banks and government agencies don’t want to own real estate (carrying costs – taxes, HOA, maintenance, protection) • Distressed assets become liabilities on lenders balance sheets • Forced selling with few buyers creates great opportunity CASE SHILLER INDEX CASE SHILLER 20 CITY GLOBAL HOUSING MARKETS 2014 • 2013data PRICE TO RENT RATIO • The price-to-rent ratio provides a comparison between owning and renting properties in certain cities. The ratio uses the average list price with average yearly rent on two-bedroom apartments, condos and townhomes that are listed on www.trulia.com, a real estate search website. The price-to-rent ratio is calculated by dividing the average list price by the average yearly rent price, as follows: Price-to-rent ratio = Average list price / (Average Rent * 12) • High ratio – compelling to rent. Low ratio – compelling to buy. RENTAL MARKET MULTI FAMILY RESIDENTIAL MARKET Apartment Vacancy Apartment Market BROWNSTONE BUSINESS PLAN • Buying at 20xx prices with 2014 rents • • • • Single Family Portfolio Size Sought: 25-100 rented homes per transaction. Class A Cap Rate = 10% to 15% Class B Cap Rate = 15%+ Expenses: 45% or less (including property management, maintenance, tax, insurance, vacancy, HOA, & credit loss) Purchase Price Target 25% discount to fair market value, replacement or 10% cap rate valuation Tenants: Tenants must not be in default or late on rent payments. Maintenance: All deferred maintenance must be fixed or will be deducted from the purchase price. Management: Brownstone has negotiated an arrangement with a national property management company. • • • • • • • • • Multifamily Residential 10-12% cap rate B properties with low deferred maintenance 80% vacancy or better TARGET MARKETS Major metropolitan areas that demonstrate: • Population Growth • Diversity of Economy • Education and Cultural Assets • Favourable real estate investment environment (vacancy rates, laws) • • • • • • • • • • • • • • Atlanta, GA Houston, Dallas/Fort Worth, Austin, San Antonio TX Raleigh, Charlotte, Wilmington NC Tampa, West Palm Beach, Fort Lauderdale, Miami, Orlando, FL Oklahoma City, Tulsa, OK Nashville, Memphis, TN Denver, CO, Louisville, KY Chicago, IL Rochester, Syracuse NY Hartford, New Haven, CT Memphis, TN Kansas City, St. Louis, MO Columbus, OH BROWNSTONE PARTNERS, LLC. • Janet McGinty – background in finance and securities, focused on REITs in Canada and the US. • Andrew Strecker – background in construction, renovation and project management. • Tom Copeland – background in real estate – management and development of hospitality assets. UPREIT • The UPREIT Option As part of our business plan, we may, but are not required to, structure future portfolio acquisitions using an "umbrella partnership REIT" ("UPREIT") structure. Specifically, portfolio acquisitions could be structured as a contribution of property by sellers to the REIT's operating partnership (the "OP") in exchange for the limited partnership interests in the OP ("OP Units"), in lieu of cash. Such contributions can generally be structured in a manner that allows the seller to defer the recognition of taxable gain. The seller, through the OP Units, would be able to participate in any distributions from the assets owned by the OP and, because the OP Units are convertible to shares in the REIT, the seller benefits from appreciation of the REIT shares over time. When a seller converts its OP Units into REIT shares, the gain that was deferred upon contribution of the property to the OP is triggered, but the seller is now holding publically traded shares that may be sold or otherwise monetized in order to pay the resulting tax. The diagram on the following page illustrates an example of the UPREIT structure. ACQUISITIONS THROUGH UPREIT • The plan is to acquire suitable properties through financing via UPREIT transactions to maximize opportunities and preserve capital. DISCLAIMER This content is for information only and does not offer or solicit to invest in any security and does not form part of any solicitation or offering that may exist now or in the future. The content of this presentation is provided for general information purposes only and is not intended to solicit the purchase of securities or be used as immigration, investment or tax advice. Security offerings, if any, will only be made pursuant to exemptions from registration requirements set out in applicable securities laws. The content of this presentation is qualified in its entirety by any offering memorandum and related operating agreement that may exist now or in the future.