Rockspring Capital Texas Real Estate Trust II Land and Special Situation Real Estate in Texas

Transcription

1 Siddharth Rajeev, B.Tech, MBA, CFA Analyst Daniel Iwata, BA Associate August 29, 2014 Rockspring Capital Texas Real Estate Trust II Land and Special Situation Real Estate in Texas Sector/Industry: Real Estate Issuer Offering Amount Securities Offered Rockspring Capital Texas Real Estate Trust II $0.5 million Min/ $25 million Max Trust Units Minimum Subscription $10,000 / TFSA $5,000 Expected Time Horizon Expected Distributions to Investors Selling Fees Management Fee/Compensation Auditors Lawyer Summary of the Offering 3-5 Years Invested Capital back + 6% p.a compounded preferred return + profit sharing 10% selling and commission, 1.9% administrative 1.85% p.a. + management incentive fee Grant Thornton LLP Gowlings Based on Offering Memorandum ( OM ) dated August 12, All the figures associated with Rockspring s US funds are in US$. All the figures associated with the financings completed by Rockspring s Canadian funds are in C$. All the figures associated with the acquisitions and operations of Rockspring are in US$. FRC Rating Expected IRR N/A Rating 3+ Risk 4 Investment Highlights Rockspring Capital Texas Real Estate Trust II ( trust, fund ) will seek to invest in real estate (land) and/or special situation real estate in the major metropolitan areas of Texas. Special situation real estate refers to properties that do not trade according to market fundamentals due to special circumstances such as near foreclosure, overdue debt, bridge-financing, short-term financing, etc. Special situation real estate is generally acquired below market value. The trust is managed by Rockspring Capital LLC ( Rockspring ) which is based in Houston, Texas. Rockspring Capital has 10 real estate investment funds currently under management with a combined initial invested capital of $292 million. This will be Rockspring s second offering in Canada with the first trust raising its maximum amount of $25 million. The first Canadian trust has so far acquired 3 properties, and deployed $5.8 million in capital. Houston, San Antonio, Dallas, and Austin, or the Texas Triangle, will be the focus of investment. We maintain a positive outlook on real estate in these areas. Through their prior investments, experience, and relationships, management has developed considerable local real estate market knowledge. Their primary focus will be on land that can be developed, development ready land, and on debt secured to real estate assets. Of the 64 properties management has acquired for previous funds, they have exited, or partially exited, 32 with a weighted average annual return of 27.2%. Risks The hold period could be longer than management s anticipated 3-5 years. All of the previous funds still hold properties. Investors may not receive their principal and preferred return. Investors are exposed to exchange rate risks. Redemption options are limited. Land investments produce minimal cash flows, which limits the cash available to pay annual management fees, resulting in them being accrued. We have a positive outlook on the Texas metropolitan real estate market, but a downturn in the market could adversely affect Rockspring. The fund is not limited to invest in any specific type of real estate investment. Timely deployment of capital is critical. *see back of report for rating definitions 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

2 Page 2 Overview Rockspring Capital Real Estate Trust II, managed by Rockspring Capital LLC, is offering investors the ability to invest in real estate, and/or special situation real estate, in the major metropolitan areas of Texas. Rockspring s headquarters are in Houston, Texas. Rockspring s first fund was started in 2003, and they currently manage 10 funds (including this fund) with total initial invested capital of $292 million. This trust is the second Canadian offering of Rockspring, with the first trust (Rockspring Capital Real Estate Trust) raising the maximum amount, and closing the raise in April We have reviewed the first Canadian fund, and assigned an overall rating of 3-, and a risk rating of 4, in a report dated May 23, Compared to the first fund s OM, the OM of the new fund allows management to invest in a wider range of real estate investments. Management has indicated that they intend to hold a portfolio with 70% land (which may include land with no entitlements, partial and/or fully entitled), and 30% in investments that have the potential to generate cash flows in the near-term. Cash flowing investments would include short-term financings, bridge loans, and investment in properties, which can be broken up and sold in lots. James McAlister IV founded Rockspring in 2003, to offer real estate investments through a fund structure. Prior to that, the company was a privately held real estate investment firm named, The McAlister Company, which James McAlister ran with his father, James McAlister Sr. The McAlister Company invested in small projects with a limited number of investors. In addition to Rockspring, Mr. McAlister IV operates a real estate brokerage company (McAlister Real Estate) that works closely with Rockspring. McAlister Real Estate, which has 7 full time brokers, assist Rockspring in sourcing and sale of properties. Rockspring has offices and staff in Houston, San Antonio and Austin, Texas, with the majority of properties purchased for the prior funds located in Houston. We feel the prior experience, and focus on the Texas metropolitan market, are a significant advantage that Rockspring has. The trust intends to raise a maximum of $25 million. Investors are expected to receive distributions determined by management based on cash flow, with management having the ability to reinvest funds from the sale of properties at its discretion in the first two years. If funds from a property sale are reinvested, management intends to remit the profit, and only reinvest the principal. Management is targeting an overall Internal Rate of Return ( IRR ) to investors of 10% per annum, once all properties are exited. With regard to distributions, management starts to share profits only after investors receive 100% of their capital, and a 6% p.a. compounded preferred return. Management Team Rockspring s management has considerable experience in Texas real estate. The following section presents brief biographies of the principals involved (Source: Management). James McAlister IV President / CEO Mr. McAlister is the owner of the General Partner and Rockspring Capital. Prior to forming Rockspring, Mr. McAlister was a commercial real estate broker for 9 years. From , Mr. McAlister was involved with James McAlister Sr., father of James McAlister IV, managing and investing in distressed real estate with objectives similar to this fund. James McAlister IV also operates McAlister Real Estate Services, a real estate brokerage company, 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

3 Page 3 which provides real estate services for Rockspring. Mr. McAlister has been managing the Rockspring Capital funds since Mr. McAlister holds a B.B.A from the University of Texas. James Hynes - Managing Director Mr. Hynes joined Rockspring Capital in 2010 and is Head of Capital Markets. Mr. Hynes is in charge of all financing and structuring of new offers. Mr. Hynes has held executive positions raising capital for both public and private real estate companies. Mr. Hynes holds a BS in accounting from Merrimack College and an MBA in Finance from Suffolk University. Beau Ryan - Senior VP and COO Mr. Ryan has been with Rockspring since 2007 and manages the accounting and reporting of the funds. Mr. Ryan oversees all the financial and administrative matters for the partnerships. Prior to Rockspring, Mr. Ryan worked in financial analysis for Landry s Restaurants. He was involved in real estate site development for the restaurant. Mr. Ryan holds a BA in public relations from the University of Texas and a MBA in Finance from the University of Houston. Michael Ross - VP Asset Management and Entitlements Mr. Ross oversees all pre-acquisition due diligence and post closing entitlement activities for the Funds. Prior to joining Rockspring Capital, Michael was Vice President of Todd Land Company a long time residential development company in the Houston metro area. With Todd Land Company, Michael was directly responsible for the acquisition, financing and development of six residential communities. Prior to working at Todd Land Company, Michael was one of the youngest Area Managers for Royce Homes. At Royce, Michael managed sales, marketing and construction activities in 12 separate communities throughout Houston. Michael has BS in Environmental Management from the University of Houston Clear Lake. Fred Munn Director of the General Partner Mr. Munn, lives in Edmonton, and will oversee the operations and administration of the General Partner in Canada. Mr. Munn is a seasoned professional banker, venture capitalist and business management professional with over 20 years of experience. During his time (1992 to 2008) with ATB Financial (a regional Alberta based bank), Mr. Fred Munn held a number of senior roles such as Senior Operations Manager, Branch Manager and Commercial Business Relationship Manager. Mr. Munn managed ATB Edmonton Main Branch for three years, the company s flagship branch with the largest portfolio in excess of $500 million combined loans and deposits. Currently Mr. Munn is the CEO/President of Machlink Corporation and is assisting in the deployment of broadband Internet systems and smart patented programmable video analytics. Douglas Peterson Director Mr. Peterson has worked with several private practices specializing in corporate commercial law with a focus on international business transactions. He is a member of the Alberta Bar and the British Columbia Bar and is an instructor at the School of Business and Faculty of 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

4 Page 4 Law at the University of Alberta. Mr. Peterson is also general council for a selected portfolio of Canadian companies with international interests. Investment in Land This trust s focus will be on land and related investments. The following section discusses the benefits of adding raw land to an investment portfolio. From Q to Q3-2012, U.S. residential land prices have increased at a rate of 4.76% p.a. Home prices increased at 4.49% p.a. during the same time period. The following chart shows prices since Q Q1 1976Q3 1978Q1 1979Q3 1981Q1 1982Q3 1984Q1 1985Q3 1987Q1 1988Q3 1990Q1 1991Q3 1993Q1 1994Q3 1996Q1 1997Q3 1999Q1 2000Q3 2002Q1 2003Q3 2005Q1 2006Q3 2008Q1 2009Q3 2011Q1 2012Q3 Land Home Source: Lincoln Institute of Land Policy The standard deviation (a measure of risk), however, on land returns were much higher than home prices. Q to Q Residential Land Home Return 4.76% 4.49% Std Dev 9.33% 3.67% Return / Std Dev Source: Lincoln Institute of Land Policy and FRC As the table above shows, the return to risk ratio has been higher for homes. This indicates that, historically, buying U.S. homes has been a better risk-adjusted investment than raw land. However, because of the large variance in the performance of raw land, there is higher upside (and downside) potential in raw land, which is why we believe investors must look at the asset class on a case by case basis, and not in general, in order to select the assets with the highest expected return Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

5 Page 5 Favourable exchange rates: Real-estate investments in the U.S. are more attractive for Canadians when the C$ (with respect to the US$) is strong at the time of investment (which makes acquisitions cheaper in US$), and weak at the time when the assets are sold (which implies higher returns in C$). As our long-term C$/US$ exchange rate estimate is in line with today s levels, we do not expect the volatility in exchange rates to have a significant impact on investors returns. However, keep in mind that investors returns will be negatively impacted if the C$ strengthens significantly in the long-term. Interest rates: Interest rates continue to be at historically low levels. As a result of this, developers/investors are able to secure relatively cheap rates in the near term, allowing for better leveraged returns. The Federal Reserve stated, on April 30, 2014, that it will keep the target range for the federal funds rate at 0% %. Although Rockspring does not intend to use much leverage for its investments in this fund, we believe the low interest rate environment will be beneficial for this offering. Deal Sourcing The funds generated from this offering are intended for acquisition of real estate or special situation real estate with an intended exit of 3-5 years. The majority of previous funds managed by Rockspring have focused on raw land. For this fund, Rockspring estimates 70% of the investment will be in non-cash flow properties, which include raw land, planned to undergo entitlements and servicing. Management notes that raw land purchased may have all entitlements, some entitlements or none. The other 30% will focus on investments that have the potential to generate cash flows in the near-term, such as debt secured to land, land acquired to be broken up and sold as lots, etc. We have reviewed summaries of the three acquisitions to date for the first Canadian fund. Properties acquired included land intended for commercial development, retail development and industrial development. The following highlights what we feel are the major advantages of Rockspring. As mentioned earlier, Jim McAlister also operates a real estate brokerage firm, which aids in sourcing and selling properties for the funds under management. Since the brokerage arm receives commissions from properties purchased and/or sold, there are potential conflicts of interest with regard to Rockspring s properties. We feel this should not be of too much concern to investors because the performance fee, paid by the fund, offers an incentive for management to maximize property values. We have also reviewed Rockspring s previous funds and none of them turned over properties quickly just to generate commissions. Management states a key advantage for the fund is the relationship and connections they have formed from being very active in the real estate market through their previous funds and in-house brokerage team. To source distressed properties, Rockspring actively attends public auctions and maintains a database to identify delinquent properties near foreclosure. The in-house brokerage team, Rockspring notes, allows them to source the best prospective properties for the fund. According to management, Rockspring often has the opportunity to be one of the first to review properties for sale, or prior to being up for sale to the 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

6 Page 6 public. Management states that all three of the properties purchased for the first Canadian trust were off-market or through personal connections. Management estimates that Rockspring reviews thousands of properties annually, with approximately less than 1% of properties reviewed resulting in an acquisition. We feel that maintaining a full time brokerage team is beneficial to Rockspring as it allows them to maintain constant contact with developers, builders and investors who are looking for properties. Through their experience in the real estate markets, Rockspring has developed relationships with banks, financial institutions and lenders. This has allowed them to source and acquire distressed notes and other debt that is secured to real estate. As real estate investment is not the primary business of traditional lenders, they are open to sell distressed/underperforming assets, in order to avoid the process of foreclosure and management of the asset. Management indicated to us that lenders typically allow them to review underperforming notes secured to properties, which gives them the opportunity to choose the notes with the best pieces of land as security. Rockspring s strategy for distressed debt is to purchase the notes at a discount because they are underperforming (late payments / high-accrued interest), and begin the foreclosure process on the property. The owner then has the option to pay off the note and accrued interest, or lose their property in foreclosure. As an example, Rockspring used this strategy in fund 7 to generate a $220,000 return in one month on a note acquired for $1.6 million resulting in a 138.5% annual return. This was one of the best performing notes for Rockspring, and highlights the potential of this strategy. Rockspring also plans to lend high interest bridge-financing loans (secured to good quality properties) to developers and builders, which they have done in previous funds. In the case of a default, management will foreclose upon the property, and attain complete ownership which is yet another way to capitalize on the distressed opportunities. Management feels that a key component to their land growth strategy is purchasing land that is close to major metropolitan cities. Rockspring focusses on land that has the potential to be developed immediately or within a short time frame. They feel that this limits the hold period, and aims to acquire property where they can foresee an exit in 3-5 years of acquisition. They also use their land development team to give input into land where they can add value through entitlements, servicing and permitting. When Rockspring finds the right property, they offer cash, and generally have been quick to close on properties. Owners seeking a quick exit typically offer significant discounts for quick access to cash, especially because attaining financing for raw land is very difficult and expensive. Due Diligence Rockspring conducts extensive due diligence on each property before purchase. The due diligence generally starts with a site visit. They also conduct financial modeling on target properties to forecast returns and an exit strategy. Their team will review the history of the property including environmental reports, title searches, zoning and survey results. They do this to see if they can add value to the property by preparing it for development. If the property meets the requirements, it is presented to the investment committee for their approval Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

7 Page 7 Once a property is acquired, Rockspring uses its land development team to begin preparing and organizing the land for entitlements. From our review of the properties held in other funds, the team will look to zone the property for residential, commercial or industrial development this strategy typically leads to a significant increase in the attractiveness and value of the land. To do this, they complete environmental and other necessary reports to apply for entitlements and prepare services (utilities, electricity, water, sewage) required for the property. Management says that it usually takes months to prepare a piece of land, and costs 1.5% to 2.0% of the acquisition price. Rockspring does not intend to use any leverage for its investments. Previous funds have not used any debt for purchases. As per the OM, investments that are potentially cash flowing, may be purchased with up to 50% debt financing, but the portfolio as a whole will have no more than 35% leverage. We have discussed with management, and they have stated that generally, all assets will be acquired with cash. We feel the amount of leverage used by the fund will be minor, limiting the overall portfolio risks. Location of past properties The management of Rockspring has been investing in the Houston area real estate markets since the early 90 s. For funds 1-5, Rockspring invested only in Houston, where the company headquarters are located. For fund 6, which was started in 2007, Rockspring began to include properties from San Antonio and Austin. The company also expanded its staff and opened an office in Austin and San Antonio. The first Canadian trust acquired 2 properties in the San Antonio metropolitan area, and 1 property just outside of Austin. We feel that the metropolitan areas of Texas are some of the strongest real estate markets in the country (discussed in detail later in the report). For the current fund, as per the OM, management has the ability to invest in properties anywhere in the state of Texas. We have spoken to management, and they are currently not looking at properties outside the major metropolitan areas. Properties purchased by the first Canadian trust The first Canadian trust closed their first round of funding on July 15, 2013, and acquired their first property in January They completed the second and third acquisitions shortly after that. Management anticipates that the fund will deploy its remaining funds by September Through joint ventures with Rockspring s US funds, the Canadian trust invested in the properties listed in the table on the next page. Management states that the percentage ownership of each fund depends on the cash availability of each fund. To date, the Canadian trust has acquired interests in three properties, listed below, for a total of $5.77 million Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

8 Page 8 Property Expected use % interest in Date of land property Total Price Size City Rogers road Commercial 24-Jan-14 50% $ 994, acres San Antonio, TX Bella Colinas Retail Center 21-Jan-14 55% $ 5,741, acres Bee Cave, TX Sequin TX Industrial 18-Feb-14 70% $ 3,026, acres Sequin, TX Rogers Road - Rogers road is located in San Antonio, and is a 7.6 acre piece of land that runs along TX-151. The property is intended to be used as a commercial site. The property is located within a master planned 1,270 acre development, which is approximately 50% built out. Management notes that majority of entitlements, and work to the property, are already in place. Bella Colinas - Bella Colinas is located in Bee Cave, Texas, which is just outside Austin. The property is a 22.5 acre land parcel that runs along highway 71. Management feels that the parcel would be suited for a retail development, as there is growing demand for retail in the surrounding area. Management states that Bee Cave is a quickly developing suburban residential area. They plan to spend approximately $1.4 million to entitle and prepare infrastructure for the property before sale. Seguin - Seguin is a 121 acre parcel of land intended for industrial use. The property is located in Seguin, Texas, a suburb of San Antonio, approximately 40 minutes east of the city along the I-10. I-10 is a major highway that connects San Antonio and Houston. Management states that utilities are in place and there will be minimal investment needed in the property before sale. Management has provided us with annual audited financial statements for the previous eight U.S. funds. Investors in previous funds comprised of institutional investors, such as pension funds, as well as high net worth investors, and accredited investors. We have spoken to a few investors of previous funds, and all the investors shared the following strengths of Rockspring s management: regular communication with investors, management sends thorough quarterly reports, hosts investor meetings at their Houston office, management is generally quick to respond to investor inquiries, etc. The investors we spoke with were all located in Texas, and a majority noted that they had heard of James McAlister IV or his father, and their reputation within the Texas real estate market prior to investing in Rockspring. The table below displays all exited and active properties in the previous funds. Years Investments Exited Active % Exited % % % Total % Source: Management 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

9 Page 9 Of the 64 properties purchased by Rockspring, since 2003, 32 have been exited, or partially exited, as of December 31, The weighted average annual return was 27.2% for all exited and partially exited properties, and the weighted hold period was 47 months. All of Rockspring s funds still hold properties; however, the number of exits increased substantially in 2013 and Rockspring has made very few exits on properties acquired during We feel that the performance of properties acquired during the , and the periods, are more indicative of Rockspring s capabilities. Properties acquired in those time periods have had much shorter hold periods. From reviewing the financial statements and schedules prepared by management, there were 10 property exits in 2013 (shown below). We have reviewed the financial statements of the funds to confirm these exits. Rockspring distributed funds from property sales to investors, which we have verified with the audited financials. Fund Property Purchase price Sale Price Purchase Date Sale Gain Land Fund 1 Wilson & Will Clayton $91,162 $588,978 15/12/ /21/ % Land Fund 4 Morton & Williamette (7 of 15) $806,380 $1,304,535 05/05/ /04/ % Land Fund 1/2 I-45 South of FM 1960 $134,377 $450,758 20/01/ /10/ % Land Fund 7 White Wing $225,000 $876,960 01/02/ /28/ % Land Fund 2/3 West Lake Houston Pkwy (East of RR) $1,608,675 $4,221,632 19/11/ /03/ % Land Fund 1 Will Clayton & Wilson $444,305 $552,350 15/12/ /12/ % Land Fund 3 FM 1314 $3,013,490 $6,600,760 15/10/ /08/ % Land Fund 4 Morton & Williamette (1.4 of 15) $182,852 $583,696 05/05/ /06/ % Land Fund 3/4 Berdett and Meyer Road $7,758,029 $13,299,027 11/01/ /07/ % Land Fund 5 Katy Hockley $2,404,996 $5,263,504 10/17/ /14/13 *few of the sales above reflect partial property sales 118.9% The following calculations were prepared by management, but we have verified them by cross-checking the financial statements, and feel that the calculations are a fair representation Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

10 Page 10 Exited Properties June 1, 2003 Dec 31, 2013 Annualized return is net of property management fees, purchase and sales costs, and operating costs. G&A expenses to run the fund were not included. The hold period was calculated in days and rounded to nearest month. Partially Exited Properties June 1, 2003 Dec 31, 2013 Annualized return is net of property management fees, purchase and sales costs, and operating costs. G&A expenses to run the fund was not included. The hold period was calculated in days and rounded to nearest month. Source: Management The following table was compiled using information from management, and the audited financial statements of Rocksprings previous funds. The fair value of the assets are from appraisals used by BKD LLP in the audited financials. We have not reviewed the appraisals. Also, note that the company raised $25 million for the first Canadian fund, which is not shown in the below table because audited financial are yet to be completed. Capital Date started Cost of remaining assets FV of assets Change % % of initial capital distributed back to ivnestors Fund 1 $20 Million 2003 $ 3,494,296 $ 7,117, % 119% Fund 2 $31 Million 2004 $ 19,232,325 $ 26,976, % 40% Fund 3 $26 Million 2004 $ 11,343,053 $ 15,339, % 67% Fund 4 $56 Million 2005 $ 29,913,208 $ 42,454, % 53% Fund 5 $32 Million 2006 $ 25,686,486 $ 35,069, % 9% Fund 6 $67 Million 2007 $ 55,758,455 $ 74,399, % 0% Fund 7 $18 Million 2009 $ 14,336,016 $ 19,735, % 5% Fund 8 $14 Million 2012 $ 7,302,521 $ 9,847, % 0% Source: 2013 Audited financial statements of Rockspring funds and Management For properties sold in 2013, the sale price exceeded the 2012 appraised value for all the 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

11 Page 11 properties. Management has provided us a current list of offers on the existing properties in the funds under management. In total, they have offers on 13 properties with an offered value totaling $55 million. We have not verified these offers. All of Rockspring s funds performed well until the recession in Until 2007, the property exits were done in reasonable timeframes of 2-4 years. A majority of the 11 properties in fund 1 were purchased in late By 2007, the fund had sold 4 of the properties, and returned in excess of investor contributed capital. Fund 2, which began purchasing properties in 2004, distributed approximately 33% of the invested capital by the end of Fund 3 began acquiring properties in 2004, and returned 21% of the invested capital by Fund 4, started in 2005, returned approximately 38% of the invested capital from the sale of one property in under 2 years. Following the downturn in the U.S. real estate market, there were no significant sales activities in any of the funds during The combined total of the exits in was just $700,000. There were 2 exits in 2012 totaling $2.6 million was a strong year, with approximately $33.7 million of property sales. Rockspring s various funds distributed approximately $25 million to investors in Overall, in our opinion, Rockspring has shown that they have the knowledge and ability to acquire properties, and re-sell for significant gains. However, their track record is marred by the U.S. housing market downturn. The recession has caused Rockspring to hold onto certain properties for far longer than anticipated. Rockspring has considerable experience and specific market knowledge, and we anticipate a stable market will allow them to be more consistent in exiting projects in the future. For this fund, they are aiming for a 10% internal rate of return (IRR) to investors, which we feel is reasonable based on the current market and their previous track record. Macro Outlook GDP In the following section, we present various economic factors that affect the health of the housing market. Although Rockspring also purchases land for industrial and commercial uses, they look for areas of high residential growth. The Gross Domestic Product ( GDP ) of Texas is the second largest in the United States following California. Texas has typically outperformed the GDP growth rate of the U.S as shown in the chart below Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

12 Page 12 YOY GDP Growth Source: US Bureau of Economic Analysis Population The majority of properties currently held by Rockspring are located within the Houston Metropolitan Area (MSA). From , the population of Texas grew by 20.6%, while the US s population increased by 9.7%. The population of Texas is anticipated to continue its strong growth (see chart below). 30,000,000 Projected Population of Texas 29,000,000 28,000,000 27,000,000 26,000,000 25,000,000 24,000,000 23,000,000 22,000, Source: Texas State Data Center Employment Growth Texas employment growth has consistently outperformed U.S. employment growth, as shown below Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

13 Page 13 Non-farm employment growth rates Unemployment The unemployment situation in Texas has been improving since the recession. In March 2014, Texas had an unemployment rate of 5.5%, Houston 5.2%, Austin 4.0%, Dallas 5.3%, and San Antonio 5.0%. These unemployment rates are substantially lower than the national rate of 6.7%. Historic unemployment rates are shown below. 12 Unemployment P e r c e n t Houston MSA Travis (Austin) Texas USA Housing Market Source: Bureau Labor Statistics The housing market of Texas did not experience the significant price appreciation, and the subsequent downturn, that most other markets faced. This resulted in Texas and Houston experiencing a gradual decrease in home prices during the housing recession in comparison to the steep decline seen in much of the national housing market. The chart below shows home prices, and monthly property sales Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

14 Page 14 $300,000 $280,000 $260,000 $240,000 $220,000 $200,000 $180,000 $160,000 $140,000 $120,000 $100, Jan Jul 2004-Jan Jul 2005-Jan Average Home Price Jul 2006-Jan Jul 2007-Jan Jul 2008-Jan Jul 2009-Jan Jul 2010-Jan Jul 2011-Jan Jul 2012-Jan Jul 2013-Jan Jul 2014-Jan Dallas San Antonio Houston Source: Real Estate Center at Texas AM The housing price index for Texas compared to the U.S. is shown below. Source: Dallas Federal Reserve 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

15 Page 15 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Monthly Sales 2003-Jan May Sep 2004-Jan May Sep 2005-Jan May Sep 2006-Jan May Sep 2007-Jan May Sep 2008-Jan May Sep 2009-Jan May Sep 2010-Jan May Sep 2011-Jan May Sep 2012-Jan May Sep 2013-Jan May Sep 2014-Jan Dallas San Antonio Houston Source: Multiple Listing Service The following chart shows housing starts per month for Texas. From the chart below, we can see that there was a steep decline in starts following the recession, but starts been on the rise since then. Monthly Housing Starts - Texas (San Antonio and Austin on right axis. Houston and Texas on the left) 18,000 3,500 16,000 14,000 12,000 3,000 2,500 10,000 2,000 8,000 1,500 6,000 4,000 2,000 1, Texas Houston Austin San Antonio Source: Federal Reserve Bank St. Louis The chart below shows the months inventory of residential housing (suggesting increasing demand) in the major Texas cities compared to the U.S Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

16 Page 16 Months Inventory Overall, we feel that the real estate market will continue to show growth, with the expanding economy of the major metropolitan areas of Texas. We feel that specific area understanding is crucial, and management has the experience to acquire properties in growing areas that will benefit from the growth of Texas. Structure The following chart shows the structure of the offering Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

17 Page 17 Source: OM Investors will invest in Rockspring Capital Texas Real Estate Trust II. The trust will use 40% of their funds to acquire limited partnership ( LP ) units of Rockspring Capital Texas Real Estate II LP ( Canadian LP ), which is managed by Rockspring Capital LLC. The Canadian LP will use those funds to acquire all the LP units of the U.S. partnership. It is intended that the trust will hold all of the LP units of the Canadian LP. The remaining 60% of the funds will be lent to the U.S partnership as promissory notes. The U.S. partnership will use the funds from the trust to make their investments. The promissory notes will be ondemand notes with a 6% p.a. compounded interest. The notes are prepayable by the US LP at any time. Management notes they have adopted this structure because it is the most tax efficient way to flow income back to the trust, and allows investors to avoid filing tax returns in the U.S. We recommend investors consult with their tax advisor. The following table shows the use of funds Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

18 Page 18 *notes contained in the OM Source: OM Unit Price - The trust is seeking to raise a minimum of $0.5 million, and up to a maximum of $25 million. In order to incentivize initial investors, management has priced the units as follows: $0.90 per unit until October 14, $0.95 per unit between October 15, 2014 and January 29, 2015 $1.00 per unit starting January 30, 2015 Management had used a similar pricing structure for the first Canadian fund as well. Distributions - The following is the intended distribution of funds by the US LP: First, to the trust, until it has received 100% of the contributed capital (this includes the 60% notes payable, and the 40% capital contribution) Second, to the trust, until it has received a 6% p.a. (compounded) return. The U.S. partnership will pay 6% p.a. compounded interest on the promissory notes first, and then 6% p.a. preferred return on the remaining 40% of the funds. After the trust receives its invested capital, and the 6% p.a. return, investors and management split the remaining cash as explained in the example below. The OM states that the incentive payment to management shall become payable by the US partnership after the US partnership has received (from its investments) an amount equal to the gross proceeds raised in this offering, and 6% p.a. interest on the gross proceeds. This statement may indicate that the incentive fee may be paid even before the trust is paid the gross proceeds and the 6% p.a. interest. Although the statement may lead to misinterpretation, we do not believe investors should be concerned as there is no real incentive for management to leave cash in the US LP instead of passing it on to the trust Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

19 Page 19 Example of a property acquired for $1 million, and sold after 4 years for $2 million. Here is the expected flow of funds back to investors. Note that this example assumes no sales commissions and offering costs. 1) Investors receive their invested capital of $1 million 2) Investors receive 6% preferred return in arrears compounded annually: $1 6% p.a. compounded for 4 years = $262,477 3) Management and investors equally split funds until management has received 30% of the 6% compounded preferred return ($262,477). Investors and management would both receive $78,743 each. 4) The remaining profit is split 70/30 between investors and management: $2 million - $1 million - $262,477- $157,486= $580,037 is split 70 (investors) : 30 (management) Basically, investors are intended to receive their invested capital back, after that a 6% compounded annual return, prior to management receiving any performance fees. Additional returns, above the 6% p.a. compounded return up to 9.6% p.a., are split equally with management (1.8% p.a. each). Any returns above the 9.6% p.a. return, are split 70%:30% between investors and management. Keep in mind that these are approximate rates, and will vary with time period, as the preferred rate is compounded annually. The general partner has sole discretion for the amount and timing of distributions. We feel that the management incentive fee aligns the interests of management with those of investors. Only after investors have received their capital and preferred return do management share in the profits, focusing management on profitability. Selling Fees - Selling agents will receive a commission of 10% of the offering. In addition, management will pay a 1.9% investment administrative fee to unrelated third parties for assistance in the offering. We feel that fees of 11.9% are slightly higher than comparable offerings in the exempt market space, which are typically 8% - 10%. Management fee - During the first 3 years, 1.85% p.a. of contributed capital will be paid as a management fee to Rockspring. Following that, the fee will be the lower of the following: 1.85% of the aggregate contributed capital, or 1.85% of the fair market value of all investments held by the partnership There are generally two types of management fees for land investment companies 1) an acquisition / upfront fee, and/or 2) an ongoing asset management fee. We feel that for land funds (which hold predominantly non-cash flowing assets), a reasonable upfront acquisition fee is more aligned with investors, than the ongoing management fee structure for the following reasons Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

20 Page 20 Land is illiquid and the hold period is typically unknown; the longer the properties are held, the higher the management fee accrued. With a reasonable acquisition fee, investors know up front what they are paying, and do not have to worry about fees for a long term hold. Land investments generate zero to insignificant cash flows during the hold period; therefore, ongoing management fees are likely to be accrued until the investments are divested. These management fees are paid before distributions to investors. This has been the case for Rockspring s previous funds. Finding and acquiring the properties is the majority of the work for land investment teams, and an upfront acquisition fee better reflects this. The upfront fee (with no ongoing management fee) structure offers further incentive for management to exit quickly at attractive valuations, as management generates zero income/returns during the hold period. Redemption - As per the OM, redemptions are restricted to a total of $75,000 per quarter, or more if the general partner approves. Investors will receive 85% of the subscription price if the redemption request is within the first 12 months. Redemption requests received after 12 months will receive 95% of the fair market value of the investments. We feel that with such a small amount allocated for redemption, redemption options are limited for this offering. Redemptions may also be paid in promissory notes by the fund. The units cannot be sold and transferred unless approved by management. Risks The following risks, though not exhaustive, may cause our estimates to differ from actual results: There is no guarantee that principal or preferred returns will be received by investors. Assets purchased by Rockspring are often illiquid. The investment time horizon may exceed the 3-5 years estimated by management. The units cannot be sold and transferred unless approved by management. Although we have a positive outlook on the Texas real estate market, a downturn in housing could affect investor returns. Investors are exposed to currency risk. Management can choose to use leverage for cash flowing assets. Timely deployment of capital is critical. Redemptions options are limited. Land investments produce minimal cash flows, which limits the cash available to pay annual management fees resulting in them being accrued. Rating We feel that Rockspring maintains a strong management team with excellent experience in the Texas land markets. Their track record, although marred by the housing recession, shows management s ability to purchase property below market, and exit at a profit. Since 2013, management has been able to increase their number of exits, which we feel is encouraging. We feel that the Texas real estate market has experienced good growth over the last few years, and we expect continued growth for the next few years. As with the previous fund, we feel timely capital deployment is critical. We assign an overall rating 2014 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

21 Page 21 of 3+, and a risk rating of 4. FRC Rating Expected IRR N/A Rating 3+ Risk 4 We have assigned a stronger rating for this fund, compared to the first fund, primarily because of the following key reasons: Over the past 12 months, management has further strengthened their track record by significantly increasing the number of exits, while maintaining a strong overall return on investment. The first fund's three acquisitions, and the potential deals in the pipeline, look promising, and a slight improvement in the overall structure of the offering Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront

22 Page 22 Fundamental Research Corp. Rating Scale: Rating 1: Excellent Return to Risk Ratio Rating 2: Very Good Return to Risk Ratio Rating 3: Good Return to Risk Ratio Rating 4: Average Return to Risk Ratio Rating 5: Weak Return to Risk Ratio Rating 6: Very Weak Return to Risk Ratio Rating 7: Poor Return to Risk Ratio A + indicates the rating is in the top third of the category, A - indicates the lower third and no + or - indicates the middle third of the category. Fundamental Research Corp. Risk Rating Scale: 1 (Low Risk) 2 (Below Average Risk) 3 (Average Risk) 4 (Speculative) 5 (Highly Speculative) FRC Distribution of Ratings Rating - 1 0% Risk - 1 0% Rating % Risk - 2 2% Rating % Risk % Rating - 4 9% Risk % Rating - 5 6% Risk - 5 9% Rating - 6 1% Suspended 17% Rating - 7 0% Suspended 13% Disclaimers and Disclosure The opinions expressed in this report are the true opinions of the analyst about this company and industry. 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