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, 2016. The Fund has completed its sixth 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 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 you will recall is to sell individual assets to the downstream retail buyer network) delivered continued results. The buyers in this network purchased 86 assets this past quarter, which in part contributed to the Fund’s 6.39% quarterly return, and which also created a “return since inception” of 12.76% (both annualized figures). Due to two of the Fund’s licensed loan servicers terminating operations with all of their customers, this unexpected disruption caused the Fund to not be able to sell as many assets as it otherwise would under a normal operational environment. We expect these changes to carry-over to the next few quarters as well and once assets are fully transferred to their new servicers, the normal levels of trading activity will resume.
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. We expect NotesDirect.com to be fully operational for all retail investors by the end of Q4, 2016. 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.
In the continued effort to bring transparency to you as investors, we have begun the 2016 annual fund audit process. Given the high-volume nature of the Fund, our goal is to have the audit and tax return completed by mid-to-late March, 2017. We are pleased with the early progress so far. At the annual CapitalFlow Conference in July, Colonial Capital Management and NoteSchool’s Founder and our fellow Fund Manager, Eddie Speed, was the first inductee to the Small Balance Real Estate Hall of Fame. “It’s an incredible honor being placed into the SBRE Hall of Fame and especially as its first inductee”, said Speed. “With all my industry peers and their incredible successes, it’s very humbling to be selected by such a high caliber organization. I accept this induction with my deepest appreciation and gratitude to Fairway America.” Matt Burk, CEO of Fairway America said “Eddie’s commitment to his students, colleagues, and investors, and really to the SBRE industry, epitomizes what small balance real estate is all about. He wholly deserves this honor and we are glad to be a part of it.”
We are seeing more and more of our existing and prospective Fund investors 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 Q3 was approximately $27,100, 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 $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 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 September 30, 2016, the Fund has deployed over $11,500,000 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 210 assets which will result in investor capital deployment of more than $7,000,000. 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 will announce additional enhancements throughout the remainder of 2016 that we feel will be of great value to you.
We enjoyed seeing many of you at this summer’s Motorhome and Money Tour (MotorhomeandMoneyTour.com) stops throughout the country. While the “Tour Bus” is parked now for the winter, we’ll begin the 2017 tour in April so stay tuned for those details in Q1. Additionally, we saw many of you at NoteExpo 2016 (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 hosted a special VIP reception just for our Fund investors at that event where we announced the Fund will be able to accept investments via traditional brokerage accounts, such Schwab, Fidelity and TDAmeritrade. Stay tuned to learn more about this exciting enhancement launching in Q1.
Thank you for your continued interest, trust and confidence. As the fall winds down, I hope you have a safe and enjoyable holiday season.
“Neither this document nor its contents are an offer to sell or distribute securities in any jurisdiction.”