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 Q1, 2017. The Fund has completed its eighth 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 $17,852,580 at the end of Q1, 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 87 assets this past quarter, which in part contributed to the Fund’s 11.61% quarterly return, and which also created a “return since inception” of 12.48% (both annualized figures). In Q3, 2016 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 return to more normal operations with the Preferred Return being realized by equity investors in Q1 plus Excess Distributable Profit.
Q1 marked the launch of Colonial Impact Fund II onto the Alternative Investment Product platform. This now allows both current and new investors to invest tax qualified and nontax 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 and further solidifying the Fund’s presence in the small balance discounted note industry.
Q1 represents tax time. All K1s were issued to equity investors from 2016 in early April. We were pleased with the overall results from 2016 and the K1s reflected those strong earnings and profits for investors. The Fund’s financial results are audited by a third party auditing firm and that continues to progress well and as expected. We expect the full audit to be completed by end of Q2, 2017. 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 30 states, reducing the overall exposure to any one market. Additionally, the average acquisition price per asset in Q1 was approximately $29,268 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 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. Q1 reports showed over $3 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 $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.
Additionally, with continued signs of interest rate volatility in both domestic and global markets, 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. 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 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 March 31, 2017, the Fund has deployed $10,288,375 of net investor capital.
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 43 assets which will result in investor capital deployment of more than $1,429,000. While not all of these assets will pass through the underwriting process, we continue to see tremendous opportunities for the Fund.
For those of you newer to the private placement fund arena, we have engaged Redwood Real Estate Administration to administer the day to day accounting, statement production and process investor capital. Through a third-party administration company, there is additional transparency and accounting support, amongst other services provided to the Fund and its investors.
We continue to be very active in the marketplace meeting with existing investors and meeting new investors. We saw many of you at Small Balance Real Estate Summit in Del Mar April 27-29 and will see more of you at the NoteSchool Summer Summit June 2-3 in Dallas. Stay tuned for additional days and locations for when the 2017 Motorhome and Money Tour is rolling through your area. That’s always an enjoyable time to connect with new and existing investors to educate about the marketplace and opportunities to take advantage of. 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. As you begin to think about your summer vacation plans, be safe with your travels.
Ryan Parson, MBA, CFP®, ChFC
Neither this document nor its contents are an offer to sell or distribute securities in any jurisdiction.