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 Q2, 2016. The Fund has completed its fifth 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 mortgages secured 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 grow its assets under management to just over $12,300,000 at the end of Q2, 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 you will recall is to sell individual assets to the downstream retail buyer network) delivered the projected results. The buyers in this network purchased 100 assets this past quarter, which in part contributed to the Fund’s 12.20% quarterly return, and which also created a “return since inception” of 13.96% (both annualized figures), both of which returns fall within the Fund’s targeted and expected return percentages. (These returns also include the equity investors 9.5% annualized preferred return).
The return from the downstream retail buyer network was also enhanced by the launch of an additional resale channel, NotesDirect.com. While still in its initial phase, NotesDirect.com allows individual mortgages to be sold to even more retail investors wishing to incorporate such mortgages directly into their investment portfolios.
Early in the quarter, we announced to our investors the results of the 2015 Audited Financials. We will continue to have the Fund’s financials audited each calendar year as part of our overall transparency effort. Additionally, we continue to have our Fund administered by a third-party fund administrator, who oversees day-to-day accounting and administrative procedures related to GAAP guidelines and stated policies contained in our Private Placement Memorandum (PPM).
At our Annual Investor Meeting, which took place on June 1, 2016 at our office in Southlake, TX, we announced that investors who take their quarterly distributions in cash will have the option to receive those now through an automatic deposit transaction as opposed to receiving a physical check. This was met with much excitement from both investors as well as your Managers as it further simplifies the administrative process. If you invest through a self-directed IRA custodian and receive distributions quarterly, those will still be issued via “snail mail check.”
We are seeing more and more of our investors attend the 3-day training classes offered by 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 31 states, reducing the overall exposure to any one market. Additionally, the average acquisition price per asset is approximately $21,500, thereby minimizing capital exposure to any one particular asset. Because the Fund is able to purchase assets at attractive discounts, the “investment to value” (ITV) ratio stays at levels that the Fund desires. The Fund currently has about a 52% ITV, meaning that on average, the Fund purchased the real estate notes at fifty-two 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. With the estimation of more than 7,000,000 distressed mortgages in the market, the large banks and hedge funds continue to look for liquidation strategies. The Fund is 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 mostly costly assets for the larger institutions to hold.
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 investors as a source of additional capital and in an effort to take advantage of opportunities in the market. With less than five 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 June 30, 2016, the Fund has raised $9,466.441.00.
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 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 230 assets which will result in investor capital deployment of more than $6,460,000. While not all of these assets will pass through the underwriting process, we continue to see tremendous opportunities for the Fund.
We continue to identify assets that meets the Fund’s underwriting guidelines, while also developing streamlined systems and processes to make your experience as an investor as remarkable as possible. We will announce additional enhancements throughout the remainder of 2016 that we feel will be of great value to you.
It’s been a pleasure to see so many of you throughout this summer’s Motorhome and Money Tour (MotorhomeandMoneyTour.com). While the Tour continues through mid-October, we hope to see as many of you as possible at NoteExpo (NoteExpo.com) November 4-5, 2016 in Ft. Worth, TX. This is the premier discounted and distressed note investor industry event of the year. We’ll be hosting a special session and reception just for our Fund investors at that event so if it works for your calendar, we would be delighted to see you there.
Thank you for your continued interest, trust and confidence. As the summer winds down, I hope you have a safe and enjoyable Labor Day holiday weekend.
Ryan Parson, MBA, CFP®, ChFC
*Neither this document nor its contents are an offer to sell or distribute securities in any jurisdiction.