Anthem Equity Group Inc.

Anthem Equity Group Inc. is a real estate investment and asset management company dedicated to maximizing investor returns in a world of change, confusion and opportunity.  Anthem embodies the histories and accomplishments of Rodger Ford and David Mackstaller.

Our challenge is to develop a set of values, attitudes and behaviors that will allow us to consistently provide superior returns to our investors in a world of accelerating change.

Anthem was formed in 1991 by Rodger Ford, founder and driving force behind the worldwide network of AlphaGraphics quick print communication centers. Anthem was designed to achieve a breakthrough in real estate investment and management by employing the same systematic and disciplined approach Ford used to build AlphaGraphics into a company with 385 stores in 90 cities in 16 countries.

At AlphaGraphics, Ford developed unique systems to facilitate and monitor his carefully thought-out strategies. He created an organization that moved quickly and efficiently while it remained free of the choking bureaucracy that plagued his competitors. Complex decisions were executed in a simplified environment supported by his own brand of teamwork built on trust.

Early in 1992, Rodger Ford was joined by David Mackstaller, cofounder of the Schomac Group Inc. and National Self Storage Inc. Both of these highly respected real estate development and investment firms,  with their affiliates, operated more than $200 million of commercial and residential real estate.

Mackstaller, like Ford, is no stranger to innovation. His companies were often at the forefront of new real estate concepts. National Self Storage became a pioneer in the self-storage industry by stressing convenience and customer service at its quality retail locations. It grew from 3 projects in 1973 to a $130 million network of more than 50 projects coast to coast. Mackstaller’s companies were also innovators in creating effective value-added programs for their apartments, offices, and specialty projects, including the 700-acre Tucson Auto Mall.

In the first decade of the 21st century, Ford and Mackstaller have repeated the earlier success of AlphaGraphics, National Self Storage and the Shomac Group. They consolidated the Pet Boarding industry with the advent of the PetsHotel, now a mainstay in the PetsMart arsenal.  They became the management team that guided SynCardia  to success.

Ford and Mackstaller share common values and a common vision. They know that by building on their combined experience, management styles and operating histories, they can maintain the speed, accuracy and simplicity necessary to capture exceptional real estate opportunities in the next decade—2011 to 2020.

Economic Forecast

Our forecast relates primarily to the real estate industry of the second decade of the 21st century.  Our process is dynamic and, as circumstances change, we will modify and update our forecasts.

Most opportunities to acquire Arizona real estate bargains will disappear by 2016.

Commercial Values (2001 – 2011), Projected Values (2012 – 2018)

Change will occur more rapidly and in multiple and interdependent areas. In general, risks will escalate in all sections of the economy. The government will inadvertently add to risks as it reacts to the symptoms of change without addressing their causes. The annual payments on the growing U.S. debt will remain the largest annual budget item, limiting and driving future policy.  The frequency and magnitude of economic distortions will grow. Health care will remain the largest single cost, approaching 20 percent of the U.S. GDP by 2015.

Monetary policy that has given rise to lower interest rates will contribute to a new round of inflation later in this decade. Separate regions of the country and sectors of the real estate market will recover at different rates. In many markets, apartments are leading the recovery due to the inability of individuals to qualify for financing on single-family homes.  Offices will be slower to recover as collaboration alternatives reduce the demand for office space. Some forms of retail projects may never return because of changes in distribution methods—as packages fill UPS and FedEx trucks, local retailers lose more and more sales to Amazon and other Internet-based businesses.

The second decade of the 21st century  will account for an incredible transfer of wealth as troubled lenders work to improve their balance sheets by liquidating nonperforming assets.

As recovery and the demand for space continue to improve, scarce equity capital and cautious lenders will hinder development. Where the excess supply of real estate has been absorbed, shortages will be aggravated. Rents will recover and in some cases escalate, and a “landlord’s market” will emerge. In submarkets where space is scarce, owners of income-producing real estate will experience dramatic increases in cash flow and rapid appreciation.

Throughout the second decade of the 21st century, large businesses will find it economically difficult to relocate plants and headquarters from one state or city to another. The cost of relocating employees remains staggering due to the equity people have lost in their homes.

Most opportunities to acquire Arizona real estate bargains will disappear by  2016.

Strategies for the Second Decade of the 21st Century

While Anthem’s strategies for 2011 – 2020 are designed to take advantage of the opportunities inherent in the change we see, they will continue to evolve in response to new events. However, certain elements of our strategies will remain constant and provide the basis for our actions.

Investors who acquire the right real estate projects early will enjoy significant increases in cash flow and value.

Anthem’s Strategies

  • Build portfolios of undervalued real estate that will show high current returns and significant gains in operating cash flow and appreciation as markets recover.
  • Obtain access to projects before they reach the market. Owners and brokers recognize that Anthem can quickly analyze projects and close transactions that meet its requirements.
  • Acquire projects that operate with a large number of standard and frequently recurring transactions. The income and appreciation of these properties can be significantly enhanced through the application of Anthem’s management and operating systems.
  • Develop and maintain alliances with investors and lenders who want to supply capital for projects consistent with Anthem’s vision.
  • Reposition projects in their markets by making physical or operating modifications that respond to changes in demand or competition.
  • Implement and refine value-added programs that tenants/customers will reward with higher rents, multiple renewals and more frequent referrals.
  • Increase our speed and effectiveness by being simpler in our organizational structure and more direct in our communications.
  • Listen to our team members and support them with systems, education and training so they have the ability to act quickly and decisively.

Sound Investment in Arizona

Since Arizona was one of the first states to enter the real estate downturn and Tucson has been deemed the “Emptiest City in the USA” by CNN, the state has begun  to show signs of recovery. Even through the depths of its real estate troubles, Arizona’s population and economy continued to grow.

As the state’s population grows, corporations and businesses will continue to relocate here to take advantage of lower rents, reduced real estate prices and reasonable wages.

Home Values (2000 – 2011)

The early real estate decline in Arizona is now actually helping the economies of Tucson and Phoenix. While the surplus of empty homes is alarming to owners and banks, it is great news for individuals seeking to move to Arizona. As the state’s population grows, corporations and businesses will continue to relocate here to take advantage of lower rents, reduced real estate prices, and reasonable wages.

Arizona in the Second Decade of the 21st Century

Arizona has far outpaced the national average in creating jobs. Throughout the 1990s, Arizona’s population increased more than twice as fast as the national average. Rapid increases in housing starts between 2001 and 2006 provided ample housing inventory to support the state’s population growth. The excess supply of housing generated during this period  will offer bargains to newcomers. Consistent growth of Arizona’s population will create new jobs and stimulate the state’s economy.

The Anthem Opportunity

Opportunity
Anthem is creating two funds:

  • Tucson Residential Recovery Fund:  This fund will be a pooled non-property-specific fund, designed to purchase, rehabilitate and resell individual homes. This fund is expected to have a life of 36 to 48 months.
  • Tucson Commercial Recovery Funds:  These funds will be originated with the acquisition of individual properties.

Expected Outcome
While others are waiting with uncertainty for the sustained results of a real estate turnaround, informed investors can act to optimize their positions.

Occupancies in some markets will exceed 90 percent, and rents will continue to gradually increase upward for a long time before new developments begin to ease the pressure.

Objectives

  • Acquire quality projects with recoverable cash flow and strong upside potential at prices significantly below reproduction costs.
  • Mitigate risk through the careful implementation of Anthem’s proven acquisition and leverage strategies.
  • Manage assets to increase value by enhancing revenue, cutting expenses, improving the tenant/customer experience and strengthening market position.
  • Distribute profits to investors from increased cash flow, refinancing and the ultimate sale of properties.

Business Plan Summary

Current cash flow from acquired projects will be shielded against competition from new projects because existing rental rates will not support the costs and return on capital required by new development. For new development to become feasible, rental rates must increase substantially for cash flow to cover the increased costs of reproduction and to provide a return to investment capital.

While others are waiting with uncertainty for the sustained results of a real estate turnaround, informed investors can act to optimize their positions.

As rental rates rise, projects purchased at bargain prices will realize increases in cash flow and rapid increases in value before competition can become a factor. Patient capital will be handsomely rewarded for its participation in the recovery cycle.

Prudent Leverage

Prudent leverage for projects purchased below reproduction costs can provide strong upside potential while maintaining downside protection. As property values move upward, capital may be returned to investors through  refinancing while maintaining a conservative leverage position. Investors can decide if they wish to reinvest refinancing proceeds into additional opportunities.

Flexibility is a key to maximizing returns. The unique elements of each Anthem portfolio will allow us to better serve each investor.

Value Through Acquisition

Anthem regularly uncovers opportunities before they reach the market through a program that actively monitors troubled projects and maintains close contact with lenders and owners.

Anthem is also among the first to be presented new opportunities because it has developed a reputation for quick decisions and consistent performance. Anthem’s database is regularly expanded by virtue of its close working relationship with appraisers, lenders and title companies. As a result, Anthem recognizes changes and trends ahead of competitors.

Anthem selects only the best values because its proven analytical systems allow it to respond to opportunities with speed and accuracy. Projects that are bought right provide Anthem’s asset management team with a firm foundation from which to enhance value. Investors are the ultimate beneficiaries of this process.

Choosing the Right Opportunities

Selecting the right opportunities is a complex process that requires the careful analysis of many factors. The process begins by selecting dynamic communities with the necessary ingredients to sustain economic growth. Anthem monitors and avoids declining communities.

Patient capital will be handsomely rewarded for its participation in the recovery cycle.

Anthem knows from experience that long and difficult negotiations with sellers and existing lenders are often required to purchase properties that meet investors’ requirements. Today more than ever, completing acquisitions depends on understanding and meeting the complex needs of sellers and lenders. This requires a blend of creativity and skill based on a cooperative negotiating philosophy that seeks to discover and solve problems.

An integral part of each acquisition is the structure of its financing. Anthem has developed a leverage strategy designed to balance risk and return. While the benefits of leverage in an appreciating market cannot be overemphasized, Anthem is careful to exercise restraint in this area to minimize risk.

Investors who acquire the right real estate projects early will enjoy significant increases in cash flow and value. Historically, as a project’s performance improves, each additional $10,000 of net operating income increases its value by approximately $100,000. When a project is purchased with properly structured debt equal to 50 percent of its cost, the percentage rate of appreciation on equity is twice that of the same project purchased without debt.

The Tale of the $10 Million Property

2003 – New Investor Purchases the Property
This property, purchased by an investor group in 2003, was sold for $10 million. The lender placed a $7.5 million loan on the property; the investors provided $2.5 million.

New Investor Purchases the Property

2013 – Lender Forecloses on Property
With rents and occupancy declining, the owner finds it difficult to produce adequate cash flow to cover the mortgage payment. In addition, the 25-year amortizing loan originated in 2003 has matured—in this case, a 10-year stop.

The timing couldn’t be worse. Lenders evaluate a property’s ability to produce enough income to cover operating expenses and meet debt ratios. Properties with increasing vacancy, decreasing rent, decreasing value and maturing debt will find it difficult to meet renewal standards and contemporary underwriting criteria in a tight credit market. These 10-year expiration periods will peak in 2013-2016, when a tidal wave of distressed properties is expected to hit the market. These properties will provide opportunities for investors who are waiting and ready. The property in this example is no exception.

Lender Forecloses on Property

2013 – New Owner Purchases the Property
The property worth $10 million in 2003 with debt of $7.5 million may be worth only $5 million in 2013 as the loan matures. The property owner with $2.5 million in equity in 2003 now has zero equity remaining. The lender has a mortgage — originally worth $7.5 million and secured by a commercial building — now worth only $5 million. The lender forecloses on the property and sells it to a new investor. The lender takes a loss of 33 percent, and the previous owner loses his entire equity of $2.5 million.

New Owner Purchases the Property

2018 – Property Returns Reproduction Value
The $10 million property thrives and provides a place for customers/tenants to do business. It enjoys the care and attention it receives from the new and dedicated owner. Tenants and the owner/investors are happy.

Property Returns Reproduction Value

Conclusion

What we see for the second decade of the 21st century is not what we had hoped for. We would have preferred a world of calm and peaceful stability. Instead, we have relentless conflict and change. We have designed and established Anthem’s culture and systems to respond to the challenges we see.

We have formed alliances with investors, lenders and vendors who share our vision, and we will act with speed and accuracy to seize the opportunities presented by change. Since making the right decision late is like making the wrong decision, we will move swiftly and decisively.