HOOVEST SECURITIZATION BOND FUND

REAL ESTATE – STRUCTURED YIELD

Hoovest Securitization Bond Fund

OBJECTIVE

Hoovest Securitization Bond Fund provides access to structured, non-guaranteed investments issued by the U.S. government-sponsored enterprise “Freddie Mac” backed by high-quality mortgages to deliver a target average annual return of above 10% (based on a 5-year term net of all fees).

MANDATE

The underlying investment of Hoovest Securitization Bond Fund provides exposure in high-quality U.S. affordable housing mortgages with real estate assets as a collateral. The fund will participate in future limited partnership fund series (the “LP”) of our U.S. origination and fund partner Arc70 Capital LLC (“Arc70”) and other high-quality debt or securitization investments, starting with LP Fund II. The underlying manager Arc70 manages over US$400 million in similar assets and has provided Hoovest with exclusivity in the region of Canada to access its investments.

Drs. Julian & Raye Richardson Apartments — one of the securitization financing projects by Arc70.

HIGHLIGHTS OF THE FUND AND MANAGER OF THE UNDERLYING LP

  • Predictable cash yield — the Hoovest Securitization Bond Fund targets predictable cash flows after the initial loan placement and securitization period, aiming for at least 10% in average cash yield in U.S. dollars over 5 years, net of all fees based on previous loan placements in LP Fund I.
  • Strong risk management and control — the Arc70 team is experienced in affordable housing mortgage origination and uses extensive risk assessment tools in the placement and ongoing monitoring of mortgages and underlying properties.
  • Liquidity option — the Hoovest Securitization Bond Fund, being a fund of funds structure, can provide investors with liquidity prior to maturity of the underlying LP Fund or the underlying securitization bonds.

HIGHLIGHTS OF THE UNDERLYING ASSET CLASS AND COLLATERAL

  • Near zero historical default risk — Even in 2009, affordable housing mortgage delinquency rates were 0.1% (Footnote i) vs. 4.1% (Footnote iii) for multifamily assets. Annual foreclosure rate since 1986 for affordable housing assets were 0.04% (Footnote i) vs. 0.26% (Footnote ii) for multifamily assets.
  • Tax credit stream as additional collateral — Affordable housing mortgages have the unique feature of federal tax credits granted to the owner the affordable housing assets. These tax credit streams are extremely liquid and sell close to the full dollar in the market. These tax credits are pledged as collateral for the benefit of the creditors.
  • Laws allow for converting the property immediately into market-rate properties upon default, increasing payback ability — Affordability restrictions on the properties can be removed in the event of default, resulting in effective LTV (loan-to-value) of 40-60%. Affordable housing rental income are artificially depressed by regulations, thereby suppressing its resale value compared to its costs due to lower net operating income (NOI). However, in the event of default, the creditors can elect to convert the property into market-rate property to recover the mortgage. As such, the true loan-to-value (LTV) for these affordable housing mortgages are even lower on a recovery basis.
  • High occupancy rates during economic downturns — Affordable housing properties do well in both expansionary and contractionary economic cycles. The average vacancy rate in 2016 for affordable housing assets is 2.5% (Footnote iii) vs. 5.1% (Footnote iv) for U.S. multifamily apartments.

Footnotes:

(i) CohnReznik Low Income Housing Report and National Association of Home Builders estimate of one-year local impact of affordable housing

(ii) E&Y: Understanding the Dynamics – Housing Tax Credit Investment Performance

(iii) CohnReznik Low Income Housing Report: Performance Update Analysis

(iv) Moody’s Commercial Real Estate Information REIS

  • Fundserv code — direct purchases only

  • Fees — Series I: 0.5%  /  Series F: 1.0%  (underlying LP charges 1.5% + 17.5% in performance fees)

  • Asset class — real estate structured product

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