Dear Valued Investor,
As an important part of the Colonial Impact Fund II (the “Fund”) family, we are pleased to share with you the quarterly investor newsletter from Q3, 2018. The Fund has completed its fourteenth full quarter of operations. Growing in a profitable and well-managed way continues to be our highest priority.
Since its inception, the Fund has strived to acquire performing and non-performing notes secured primarily by single family residential properties valued under $125,000 located throughout the United States. By completing these acquisitions consistent with our philosophy and process, the Fund was able to maintain its assets under management to just over $17.5MM at the end of Q3, represented by the total unpaid principal balance of loans held plus the value of the real estate owned by the Fund.
The Fund’s disposition model (which is to sell individual assets to the downstream retail buyer network) delivered continued results. The buyers in this network purchased 52 assets this past quarter, which in part contributed to the Fund’s 9.54% quarterly return, and which also created a “return since inception” of 11.86% (both annualized figures).
We continue to welcome existing and prospective Fund investors to attend the 3-day training classes offered by our sister company, NoteSchool (NoteSchool.com), to learn more about performing and non-performing notes. While it is by no means a requirement to attend these as an investor in the Fund, we continue to hear meaningful feedback from both existing and prospective Fund investors as they learn more about these assets that the Fund invests in. Particularly as a passive investor, you may find these to be of value, so you have more insight not only into the asset class itself, but how they are managed. What we teach investors through NoteSchool mirrors how we manage and operate the Fund on a daily basis.
In an effort to keep the Fund diversified, the Fund’s assets are spread over 25 states, reducing the overall exposure to any one market. Additionally, the average acquisition price per asset in Q3 was approximately $29,300 thereby minimizing capital exposure to any one particular asset. Because the Fund can purchase assets at attractive discounts, the “investment to value” (ITV) ratio stays at levels that the Fund desires. The Fund currently has about a 55% ITV, meaning that on average, the Fund purchased the real estate notes at fifty-five cents on the dollar of current market value of the properties securing those notes. (Of course, the ITV is an assessed or approximate ratio and is not in any way certain or guaranteed).
Market conditions continue to be favorable in terms of the amount of available inventory of discounted mortgage notes. Q3 reports continued to show over $2 Billion of
discounted notes being released into the market. Based on the waterfall of how these assets work through the marketplace, Colonial Impact Fund II is firmly positioned to see the types of assets we seek out and meet our underwriting guidelines. The Fund continues to be routinely approached by institutions looking to trade their loans, secured by properties valued under $125,000. This price point serves as a significant source of deal flow for the Fund because these tend to be the costliest assets for the larger institutions to hold.
Additionally, with continued signs of market volatility in both domestic and global markets (including traditional stock market indices), it’s possible to see a correction in real estate values and prices associated with the purchase of discounted notes over the next several quarters or even years. While we have no idea what the overall ramifications of such a correction will be, or how long the effects will last, we are taking the steps we deem prudent and important, in our best assessment of the order of their importance to safeguard, preserve and protect your investment to the best of our ability.
Our management team has built relationships with the key sellers of these assets over several decades. Additionally, our management team works consistently with both existing and new private investors as a source of additional capital to take advantage of opportunities in the market. With less than one percent of the total capital raised coming into the debt vertical of the Fund, the vast majority of capital raised is unlevered equity. As of September 30, 2018, the Fund has raised $13,193,539 of net investor capital. We expect this number to decrease for a period of time as the Fund has a surplus of operating capital. As a result, some amount capital may be returned to all investors in the near term.
While the Fund can secure a credit facility or institutional type debt, the Managers have not opted to do so at this point. In large part, thanks to our valued private investors, the Equity Vertical has been well received from a fundraising standpoint, reducing the need to secure a credit facility. So long as the equity capital market conditions continue to be robust, it keeps the need for an institutional lender low.
As of the writing of this newsletter, we are in the process of conducting due diligence on more than 100 assets which will result in investor capital deployment of more than $1MM. While not all of these assets will pass through the underwriting process, we continue to see tremendous opportunities for the Fund.
We have engaged Redwood Real Estate Administration to administer the day to day accounting, statement production and process investor capital. Through this third-party administration company, there is additional transparency and accounting support, amongst other services provided to the Fund and its investors. Additionally, Spiegel Accountancy conducts an annual financial audit of the Fund.
As a part of our overall communication plan, we held the annual investor meeting at NoteExpo 2018 in Dallas. It’s always enjoyable to see many of our investors at this annual event. It was an opportunity for us to discuss the current and evolving market conditions. We welcome all investors to join us at next years annual meeting.
Thank you for your continued interest, trust and confidence.
Neither this document nor its contents are an offer to sell or distribute securities in any jurisdiction.