We recently sent investors in AlphaFlow Fund 1 their first quarterly update, sharing both information on the Fund and our commentary on the market. We wanted to highlight a number of key points for all of our members:
We are pleased to let you know that AlphaFlow Fund 1, LP (“Fund 1”) is now fully invested and earning returns. The Fund 1 portfolio now contains 77 loans with a weighted average return of 10.0% (net of AlphaFlow’s 1% AUM fee) and a weighted average LTV of 68.6%, with all loans secured by first liens on the underlying properties. The Fund 1 portfolio is invested across 5 different platforms, with investments in 20 states across the country. As such, the Fund 1 portfolio is currently more diversified than 98.5% of AlphaFlow portfolios of users invested in the real estate crowdfunding industry.
AlphaFlow Fund 1 ultimately invested across five real estate crowdfunding platforms after reviewing potential investments across eight different platforms. AlphaFlow may choose to work with additional platforms in the future, but at this point we found these five platforms to have the combination of underwriting processes, risk-adjusted returns, and procedures / performance in handling delinquencies / defaults that best fits our desired investment profile.
Platforms in AlphaFlow Fund 1:
Fund That Flip
Patch of Land
During the course of investing Fund 1, we experienced a shift in the riskiness of loans. We had the ability to invest Fund 1 much quicker if we simply looked for 10%+ investments with LTVs at 75% or below. However, we chose to forego many of these investment opportunities, as too often we were presented with inexperienced rehabbers (often doing their first project ever) undertaking significant construction plans in competitive markets.
Given the proliferation of platforms in the space, it’s not surprising that better borrowers who last year may have paid 11% or 12% interest for their loans are now paying 8% or 9%. Ultimately, today’s 12% borrower is rarely as creditworthy in our eyes as what we saw only one year ago, so we expect to see a measured increase in defaults across the industry.
Real estate prices are on an upswing, but there are questions as to its sustainability. One way to evaluate this risk is to measure the median home price in the U.S. vs median family income. As the chart below illustrates, we’re currently above the historical average (by ~1.5 standard deviations). Compared to the last bubble, we appear safe. In financial circles this situation is often referred to as an echo bubble. That is, a belief that we’re still in safe territory because of how much worse it was in 2006, and thus believing we’re still far from a bubble, even if we’re actually in a smaller one today.
That said, interest rates today are significantly lower than during the last bubble (both in the U.S. and worldwide). As such, higher real estate prices still look more attractive than they did in the past. In addition, with interest rates so low around the world, we expect U.S. real estate prices to be supported by foreign capital looking for relatively safe asset-backed investment opportunities. Given all of these factors, we believe we are still 1.5-2.5 years away from the housing market peaking.
Moving forward into AlphaFlow Diversification Fund 2, LP, we plan to invest more capital in lower-rate loans that we are finding to be relatively attractive on a risk-adjusted basis. The supply of these is very strong, and they generally have borrowers with significantly more experience and allow us to invest more in what we find to be attractive geographies.
Our aggregate portfolio in AlphaFlow Fund 1 consists of 77 loans, all of which are secured by first liens.
Below is the list of loans contained in AlphaFlow Fund 1.
This AlphaFlow Fund 1 Portfolio Fact Sheet and Market Analysis is a summary highlighting key points in the May 2016 AlphaFlow Fund 1 Quarterly Updated letter from AlphaFlow Fund 1, LLC (“Fund 1”) to its investors.
This document does not constitute an offer to sell or the solicitation of an offer to buy any security, product, service or fund. This document is for informational purposes only and is not intended to be, and must not be, taken as the basis for an investment decision. The information contained herein may not be used, reproduced or distributed to others, in whole or in part for any purpose without the prior written consent of AlphaFlow, Inc. (“AlphaFlow”). Neither AlphaFlow nor any of its affiliates is under any obligation to inform you if any of this information becomes inaccurate. No representations is made as to the accuracy and completeness of information obtained from third parties. This document is qualified in its entirety by the Offering Memorandum of AlphaFlow Diversification Fund 2, LLC (“Fund 2”), which should be carefully read prior to any investment in Fund 2, a successor fund to Fund 1.
This document has been prepared for prospective investors who are legally eligible and are suitable to invest in the type of investment described herein. Generally, prospective investors would include investors who are “accredited investors” under the U.S. Securities Act of 1933, as amended (the “Securities Act”) and verified pursuant to rule 506(c) of Regulation D promulgated under the Securities Act. An investment in Fund 2 is suitable only for sophisticated investors and requires the financial ability and willingness to accept the high risks inherent in such an investment. It is the responsibility of any prospective investor to satisfy itself as to full compliance with applicable laws and regulations of any relevant jurisdiction. For a description of certain risk factors associated with an investment in Fund 2, please refer to the “Risk Factors and Conflicts of Interest” section of the Fund 2 Offering Memorandum.
Interests in Fund 2 have not been and will not be registered under the securities laws of any U.S. State or Non-U.S. Jurisdiction, and have not been recommended or approved by any U.S. federal or state or any non-U.S. securities commission or regulatory authority. Furthermore, the foregoing authorities have not passed upon the accuracy or determined the adequacy of the information contained herein.
Past performance is not indicative of future results. Any AlphaFlow Fund 1 investments listed herein are being provided for informational purposes only. Investments in real estate loans may result in the loss of principal. There can be no assurance that Fund 2 will be able to achieve the same portfolio composition and underlying loan terms as Fund 1.
These materials contain projections and other forward-looking statements. Any statements that are not historical facts are forward-looking statements that involve risks and are inherently uncertain. Sentences or phrases that use such words as “believe,” “anticipate,” “plan,” “may,” “hope,” “can,” “will,” “expect,” “should,” “goal,” “objective,” “projected” and similar expressions also identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Projections and other forward-looking statements, including statements regarding AlphaFlow’s assessment of the market, are by their nature uncertain insofar as actual realized returns or the projected results can change quickly based on, among other things, unexpected market movements, changes in interest rates, legislative or regulatory developments, errors in strategy execution, acts of God and other developments. There can be no assurance that projections and other forward-looking information will not change based on subsequent developments and without further notice, and no assurance can be given as to outcome. You should not place undue reliance on forward-looking statements, including forecasts and projections, and statements regarding the assessment of the market, which speak only as of the date referenced herein.
These materials do not constitute legal, tax, financial or other advice. The legal, tax and other consequences of any proposed transaction may differ for each recipient as a result of, among other things, the particular financial situation of, and the laws and regulations applicable to, each recipient. You should consult your own legal counsel, accountants and other advisors regarding the information contained herein and the transactions described hereby.