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 Q4, 2016. The Fund has completed its seventh 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 by single family residential properties valued under $100,000 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 $15,400,000 at the end of Q4, 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 continued results. The buyers in this network purchased 71 assets this past quarter, which in part contributed to the Fund’s 11.57% quarterly return, and which also created a “return since inception” of 12.59% (both annualized figures). In Q3, the Fund experienced two of its licensed loan servicers terminating operations with all their customers, which caused disruption to be able to sell as many assets as it otherwise would under a normal operational environment. While we anticipated these changes to carry-over into Q4 as well as the early part of 2017, we have been pleased to see the impact of those unexpected events have been minimized allowing the Fund to more normal operations with the Preferred Return being restored to equity investors in Q3 and fully realized for equity investors in Q4.
As a management company, we continue to support the enhancements with NotesDirect.com. This platform will allow individual notes to be sold to even more retail investors wishing to incorporate this asset class directly into their investment portfolios. NotesDirect.com became fully operational for all retail investors at year-end. This not only opens up our downstream retail buyer network, but it also adds more operational efficiency to the overall re-sale and transfer process.
Additionally, at NoteExpo 2016, we announced that Colonial Impact Fund II will go live on the Alternative Investment Product platform effective January 2017. This will allow both current and new investors to invest tax qualified and non-tax qualified accounts directly into the Fund through a wide variety of traditional brokerage custodians like Charles Schwab and Fidelity. This will allow the Fund additional access to capital markets to support the ongoing growth efforts while making it easier for investors with those types of accounts to invest without having to go through a separate self-directed custodian. An investment into the Fund through the AIP will result in the investment showing in the brokerage account just like any other type of traditional investment. We’re excited about this new opportunity for investors to access the Fund.
As mentioned last quarter, we have begun the 2016 annual fund audit process. With the Fund’s continued growth, the audit process requires more time, particularly once the books are finalized. We expect to have the K1’s delivered to investors in early April, 2017 with the audit process being completed later in Q2, 2017. As of the writing of this newsletter, the audit continues to progress as expected. We’ll notify all investors once the final audit report is available.
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 34 states, reducing the overall exposure to any one market. Additionally, the average acquisition price per asset in Q4 was approximately $27,357.64, 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 58% ITV, meaning that on average, the Fund purchased the real estate notes at fifty-eight 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 $100,000. 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 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 December 31, 2016, the Fund has deployed over $10,500,000 of net investor capital. This allowed the Fund to produce an annual combined realized and unrealized return of 10.83%.
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 115 assets which will result in investor capital deployment of more than $3,000,000. 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 are working with our third-party fund administration provider to bring additional investor interfaces to you like online account access and streamlined subscription processing for additional investments you are considering making in the Fund.
We hope the New Year has started out to be tremendous for you! We have many events in the new year that we will see several of you at including the annual Titanium meeting February 2-3 and the Mile Marker Club Symposium-Glenwood Springs February 21-23. Additionally, we’ll be introducing the Fund to prospective new investors and the Mile Marker Club Symposium-Portland April 4-6 and at the annual Small Balance Real Estate Summit in Del Mar April 27-29. All of these events are in addition to the regular informational webinars we offer for new investors to learn more about the market, asset class and our offering. We certainly appreciate your referrals to your friends and family that are accredited investors that may have an interest in including the Fund in their portfolio as well.
Thank you for your continued interest, trust and confidence. With the winter in full swing, stay warm and safe.
Ryan Parson, MBA, CFP®, ChFC
Neither this document nor its contents are an offer to sell or distribute securities in any jurisdiction.