2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com | INVESTOR NEWSLETTER | JANUARY 2020 EXECUTIVE SUMMARY Thank you for your investment in the Socotra Fund and the Opportunity Fund. This newsletter is intended to inform you of recent Fund performance and update you on changes regarding investment outlook. This letter is not intended to be used for risk management or serve as an investor prospectus. As of the end of 2019, the annual yield for both funds was 8%-9%. Looking at 2020, we expect investor yields to be within the same range. SOCOTRA FUND The Socotra Fund’s 2019 yield for income investors was 8.0%. For those investors who opted to reinvest the monthly distributions, the rate of return was 8.3%. The Socotra Fund continues to target low LTV opportunities in the amount of $1M-$5M. In 2020, we expect investor yields to be similar to 2019, ranging from ~7.8%- 8.1% for our income investors. The Opportunity Fund’s 2019 yield for income investors was 8.3%. For those investors who reinvested the monthly distributions, the rate of return was 8.6%. The Opportunity Fund seeks transactions with significant long term upside potential. In 2020, we expect investor yields to increase relative to 2019, ranging from ~8.6%- 8.9% for our income investors. OPPORTUNITY FUND
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2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| INVESTOR NEWSLETTER | JANUARY 2020
EXECUTIVE SUMMARY
Thank you for your investment in the Socotra Fund and the Opportunity Fund. This newsletter is intended to inform you of recent Fund performance and update you on changes regarding investment outlook. This letter is not intended to be used for risk management or serve as an investor prospectus.
As of the end of 2019, the annual yield for both funds was 8%-9%. Looking at 2020, we expect investor yields to be within the same range.
SOCOTRA FUND
The Socotra Fund’s 2019 yield for income investors was 8.0%. For those investors who opted to reinvest the monthly distributions, the rate of return was 8.3%. The Socotra Fund continues to target low LTV opportunities in the amount of $1M-$5M. In 2020, we expect investor yields to be similar to 2019, ranging from ~7.8%-8.1% for our income investors.
The Opportunity Fund’s 2019 yield for income investors was 8.3%. For those investors who reinvested the monthly distributions, the rate of return was 8.6%. The Opportunity Fund seeks transactions with significant long term upside potential. In 2020, we expect investor yields to increase relative to 2019, ranging from ~8.6%-8.9% for our income investors.
OPPORTUNITY FUND
2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| SOCOTRA FUND
CASH FLOWSCOLLECTIONS:In Q4 2019, the Socotra Fund collected $9.8M in interest payments and loan payoffs. Relative to Q3 2019, the Socotra Fund has a higher percentage of non-performing loans, but no REOs are presently on the books. We are comfortable with our position for the non-performing loans and expect resolution on all of them in Q1 2020.
DISTRIBUTIONS & DISBURSEMENTS:The fund made $2.3M in distributions, ~$1.1M was reinvested and the other ~$1.2M was disbursed to income investors.
FUNDINGS, ADDITIONS, & WITHDRAWALS:The fund closed on ~$26.7M in new loans during Q4 2019. The fund added $14.6M in new investor capital and processed ~$1.3M in member withdrawals.
# of Loans: 186 First Lien
Average Loan Size: $680,000
30-90 Day Delinquent Loans: 3
90+ Day Delinquent Loans: 1
97.9%
LOANS CURRENT
47.4%
8.3%
LOAN-TO-VALUE
2019 YIELD - REINVESTMENT
8.0%2019 YIELD -
INCOME
Average Annual Yield for Income Investors
Average Annual Yield for Reinvestment Investors
SOCOTRA FUND - INVESTOR YIELD THROUGH DECEMBER 2019PERFORMANCE 1 YEAR 3 YEAR 5 YEAR SINCE INCEPTION
8.0%
8.3%
8.0%
8.3%
8.3%
8.7%
8.8%
9.2%
The Socotra Fund ended 2019 holding a cash and loan portfolio of ~$129.6M. As mentioned above, the portfolio is exceptionally healthy with ~98% loans current and an aggregate Loan to Value (LTV) of 47.4%. The portfolio is presently allocated ~80% to commercial properties while the remaining 20% is invested in residential loans, which is unchanged relative to Q3 2019. The fund’s largest loan is ~3.9% of total capital, indicating no key concentrations exist. The Socotra Fund seeks both residential and commercial loan opportunities of up to $5M with target LTVs of ~50-55%.
The Socotra Fund's addition of a subsidiary REIT was established effective November 1, 2019.
*As of Dec 31, 2019
Loan Loss Reserve Balance: $1.5M
2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| OPPORTUNITY FUND
CASH FLOWSCOLLECTIONS:The Opportunity Fund collected ~$1.7M in interest payments, loan payoffs, and fees during Q4 2019. The fund exited 2019 with only 1 non performing loan, a newly acquired REO. This property is presently listed for sale and we expect to exit the loan by April 2020. We expect full recovery of principal and interest on this transaction.
DISTRIBUTIONS & DISBURSEMENTS:The Opportunity Fund made ~$330K in distributions during Q4 2019, with ~$140K being disbursed as income and ~$190K being reinvested.
FUNDINGS, ADDITIONS, & WITHDRAWALS:The Opportunity Fund closed on $2.4M in new loans during Q4 2019 and added $0.9M in new investor capital.
# of Loans: 43 First Lien, 1 Second Lien
Average Loan Size: $340,000
30-90 Day Delinquent Loans: 0
90+ Day Delinquent Loans: 1
97.6%LOANS CURRENT
46.4%
8.6%
LOAN-TO-VALUE
8.3%
Average Annual Yield for Income Investors
Average Annual Yield for Reinvestment Investors
OPPORTUNITY FUND - INVESTOR YIELD THROUGH DECEMBER 2019
PERFORMANCE 1 YEAR 3 YEAR SINCE INCEPTION
8.3%
8.6%
8.6%
9.0%
9.0%
9.4%
The Opportunity Fund exited 2019 with a cash and loan portfolio of ~$16M. The Opportunity Fund seeks loan scenarios with potential for long term upside, foregoing a consistent monthly performance for longer term yield. The loan portfolio is now comprised of ~37% residential loans and ~63% commercial. As the real estate market cools off, we expect to find opportunities to purchase distressed notes and buy real estate on the courthouse steps. When a material portion of the Fund's assets are in these types of positions, we will announce a final capital call and close the Fund.
Please be advised that the Opportunity Fund PPM stipulates all investors recommit their capital each year as redemptions are limited to the 4th quarter.
2019 YIELD - INCOME
2019 YIELD - REINVESTMENT
*As of Dec 31, 2019
Loan Loss Reserve Balance: $180K
2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| LOAN OF THE QUARTER
TRANSACTION SUMMARY
Borrower is a real estate investor who had acquired two other properties all cash in 2018, looking to close on a third acquisition of a multi-tenant industrial property in the San Jose area. The prior two acquisitions were a combined purchase of $6.6M for a multifamily property in downtown Oakland and a commercial office property in Stockton.
The borrower had the industrial property in contract for $5.3M and agreed to pledge the other two free and clear properties as collateral. The borrower needed a non conventional lender due to the closing timeline and they expect to be able to refinance conventionally once there is sufficient "seasoned" income. Loan amount was slightly above the purchase price to cover the cost of closing fees.
Kerati joined Socotra Capital in 2014 while still attending UC Davis, later joining the company full time after graduating. A San Francisco native, Kerati specializes in loans
across Northern California as well as spearheading loan opportunities in
Colorado. Kerati recently celebrated 1 year without alcohol or cigarettes.
$5.3M ACQUISITION OF AN INDUSTRIAL PROPERTY IN SAN JOSE
PURCHASE OF 25,344 SF MULTI TENANT INDUSTRIAL BUILDING
2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| MARKET DYNAMICS
The conclusion of 2019 saw the US economy extend its decades-long economic expansion, avoiding what many thought would likely be the beginning of a recession. The Federal Reserve's proactive response to market headwinds may have temporarily avoided a market downturn while others are hopeful that the recent Fed actions will soften the impact of whatever market correction does occur. Trade tensions were a significant headwind in 2019 and while there appears to be a cooling in tensions with China, it appears
as though the current administration has redirected its trade focus now with Europe. Whatever the result, consumer confidence exited 2019 at the highest levels in over 10 years and long term interest rates are near all time lows. When questioned at its last meeting in December, the majority of governors indicated interest rates to be unchanged in 2020.
Concurrent with the conventional capital markets, the private debt market continues to show that it has the ability to fill a void that is being left behind by the consolidation of conventional banks. In 2002, there were almost 8,000 US commercial banks, whereas today there are fewer than 5,000. This observation is most acutely visible when looking at the the proportion of small balance business loans held by US banks (see chart). The percentage of small balance loans (<$5M) held by US banks has steadily declined the last 20 years leaving many small balance borrowers with limited options. This underserved market is where we see the greatest opportunity for our funds and our investors. These borrowers tend to own quality real estate with significant equity and in many cases have a strong capacity to service their debts.
The Socotra Fund established a subsidiary Real Estate Investment Trust (REIT) effective November 1, 2019. The REIT simplifies investor tax returns, enhances third party financial oversight, and improves after tax returns for our taxable investor capital by 20%. Our long term goal is to maintain our clients' after tax yields while maintaining our best in class loan to values. Establishing a subsidiary REIT allows the Socotra Fund to execute this strategy.
As we examine the marketplace, our fundamental thesis remains the same. We seek low loan to value loans, collateralized by quality real estate, primarily on commercial properties ranging between $1M-$12M. This continues to be our focus and has proven to be both a challenging and rewarding market. We appreciate your continued investment at Socotra Capital and should you know anyone that is interested in joining our investor family, please feel free to share our contact information.
S
2208 29th Street Suite 100, Sacramento, CA 95817 | (855) 889-7626 | socotracapital.com
| UPCOMING EVENTS
2020 SACRAMENTO INVESTOR FORUM
We will be hosting our Sacramento investor forum on April 23rd at the Del Paso Country Club. We will also host an online investor forum on March 26th for everyone who is unable to attend our hosted forums. A recording of the online forum will be made available on our investor portal. Similar to 2019, we plan to host another Bay Area forum in July and a Lake Tahoe forum in September. Please feel welcome to attend whether you are a prospective investor or an existing investor.
If you have questions or feedback, please contact us at 916-617-2221, email us at [email protected], or visit our investor portal at https://socotracapital.com/accredited-investors.
DATE:Thursday April 23, 2020
TIME:6:00 PM — 8:00 PM PST
LOCATIONDel Paso Country Club3333 Marconi AveSacramento, CA 95821
