horizon asset management - baystreet.ca · - invictus one limited partnership (“lp”) is seeking...

Siddharth Rajeev, B.Tech, MBA, CFA

Analyst

Daniel Iwata, BA

Research Associate

May 3, 2013

2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Invictus One Limited Partnership – Multifamily Residential Housing in Houston, Texas

Sector/Industry: Real Estate www.invictuscommercialinvestment.com

IssuerInvictus One Limited

Partnership

Initial: $0.50 million (Closing -

May 29, 2013)

OfferingInterim: $3.25 million

(Closing - July 29, 2013)

Final: $5.2 million (Closing -

October 31, 2013)

Securities Offered Limited Partnership Units

Unit Price $1,000 per unit

Management's

Expected Time

Horizon

28 Months

Fees

Asset Management - 2.5%

p.a. of gross income /

Property Management (which

also includes third-party fees

of 3%) - 6% p.a. of gross

income

Selling Fees and

Commissions

9% selling commission +

1% EMD fee

Auditor Hutcheson & Co.

Summary of the Proposed Offering

Based on Offering Memorandum (“OM”) dated April 17, 2013.

FRC Rating

Base-Case

Return (IRR)14.1% p.a.

Rating 3 (Good)

Risk 3 (Average)

Investment Highlights - Invictus One Limited Partnership (“LP”) is seeking to acquire and

renovate a multi-family residential complex in Houston, Texas for

a total estimated cost of $9.6 million.

- The LP is managed by Invictus Commercial Investment Corp.

(“ICIC”), a real estate investment firm based in Victoria, BC.

Management has experience in real estate development and

revitalization of properties. This will be ICIC’s first exempt market

offering.

- The target property is Northwest Pines, and it consists of 29

buildings, with 364 units, on 11.61 acres.

- The funds required for the project ($7.5 million to acquire the

property and $2.1 million estimated for renovations) are planned to

be from funds raised from this offering, and assuming an existing

mortgage of $5.26 million on the property.

- The property’s vacancy and loss to lease (incentives offered to

tenants) are much higher than market averages. Invictus’s game

plan is to increase the property’s Net Operating Income (NOI)

through revitalizations and restructuring.

- Invictus will use Asset Plus Corp., a large property management

company, to manage the property, and oversee renovations. The

Chief Business Development Officer of Asset Plus is also a part of

ICIC’s management team – which is a significant positive for this

investment.

- We have a favorable outlook on the Houston rental market.

Risks - Actual renovations costs may exceed current estimates.

- Renovations and revitalization of the property may not result in an

increase in the rental rate or occupancy.

- No redemption option.

- The exit on the project may be longer than management’s

anticipated 28 months.

- The project may not proceed unless the minimum $3.25 million is

raised.

- There are financing deadlines that must be met, or the project might

not proceed.

- Exchange rate risks

- Mortgage rates may vary when the existing mortgage is renewed in

2015.



Background

and Terms of

the Offering

Purpose

Management

Invictus One Limited Partnership is seeking to raise funds to purchase and renovate the

Northwest Pines multi-family property in Houston, Texas. The LP is managed by Invictus

Commercial Investment Corp., a recently formed real estate investment firm based in

Victoria, BC. The property has a 364 unit multi-family residential building,

approximately 12 miles northwest of downtown Houston. Management plans to conduct

significant renovations, and property management restructuring, in order to increase annual

revenues, and resell the property in an anticipated 28 months from acquisition. Once sold,

investors will first receive their invested capital back, and 10% preferred return per

annum in arrears, with any remaining profits split 50/50 with management.

For the offering, there is a minimum of $0.5 million to be raised by May 29, 2013, following

that, there is an interim close for $3.25 million (total) by July 29, 2013, with the final close

of $5.2 million (total) by October 31, 2013. If either of the first two closes are not met,

investors’ funds will be returned. Therefore, there is no risk of capital being tied up in this

investment if management is unable to raise the minimum amount (gross proceeds of $3.25

million) required to complete the acquisition. Management currently has the property under

contract to purchase, pending due diligence. Funds raised above $3.25 million (gross) will

be used for renovations.

The purpose of this report is to analyze the potential risk/reward profile of the units offered

by Invictus One Limited Partnership.

The promoter of the LP is Invictus Commercial Investment Corp., which is managed and

owned by Doug Foord and Joseph Kee. Doug Foord will also control the general partner of

the LP.

Doug Foord, the founder of ICIC, is located at the head office of the LP at 933 Cobblestone

Lane, Victoria, BC,, and has stated that he plans to permanently relocate to Houston to help

manage the property once renovations begin. We have seen that Mr. Foord’s house is

currently for sale in Victoria (Source: MLS). Joe Kee lives and works in Houston, and is

responsible for all the current due diligence, property inspections, etc; in addition he works

full time at Asset Plus. This offering will be the first project where Doug Foord and Joe Kee

work together. Both have experience in real estate development and revitalization.

Biographies of the management team, obtained from the OM, and additional information

provided by management, follow.

Douglas Vernon Foord

Doug Foord has been in the real estate business for 36 years. He has successfully completed

many real estate developments in Canada including retail, warehouse, condominiums,

resorts and sub-divisions. In addition, he has acquired, revitalized and resold shopping

center investments in the US. Prior to this time Foord was a licensed real estate agent and

mortgage broker and served two terms as President of a credit union. The most recent

completed project in Canada was a multi-use, residential retail office complex (Tuscany

Village, Victoria, BC) with a market value of $60 million.



We have verified several reference letters (RBC, Scotia Bank, Mortgage Services

Companies) that confirm Mr. Foord’s involvement with several real estate deals and that his

personal/corporate accounts have been in good standing. We received a detailed biography

of Mr. Foord, which indicates his involvement with about 15 – 20 projects in the past

20 years. According to Mr. Foord, he had external (unrelated) investors only on three

projects – two in Phoenix, Arizona, and one in Corpus Christy, Texas, U.S.

Management provided us documents showing investors’ IRRs on all three projects – which

showed IRRs of 36%, 39% and 66% p.a. The accountant of Invictus’s partner in those

projects produced the documents showing the IRRs. This will be Mr. Foord’s first exempt

market offering.

Joe Kee

In addition to acting as a Director of Invictus Commercial Investment Corp., Joseph (Joe)

Kee is also Chief Business Development Officer of Asset Plus Corporation. In this capacity,

Mr. Kee supervises a national portfolio consisting of multifamily and commercial properties.

Prior to joining the Asset Plus team, Mr. Kee spent eight years at RMI Management as a

partner and Senior Vice President supervising properties in Texas, Oklahoma and Florida

before the company was sold to Riverstone Residential Properties in 2008. In his 35 years’

experience in property management, Mr. Kee has served as Regional Vice President of the

South Central States for Pinnacle Realty Management and spent 14 years as First Vice

President of Con Am Management Corporation.

Asset Plus

A key partner in the renovation and management of Northwest Pines will be Asset Plus

Corp., which Joe Kee is an executive of. Asset Plus Corp. is a property management firm

based in Houston, Texas. According to their website and brochures, the firm manages

in excess of 25,000 multi-family units nationwide; they also manage a portfolio of

student housing, office and retail properties. The firm has experience in overseeing

renovations and subsequent rental of multi-family properties. Asset Plus was founded in

1986, and currently has 1,800 employees in 87 cities across the U.S. In 2011, they were

ranked #34 in National Multi Housing Council’s and #31 in Multifamily Executive’s “Top

50” managers across the U.S. Asset plus has been the property manager for Northwest Pines

since 2007, but was limited in its abilities, as discussed later in the “Property History”

section.

Asset Plus will assist Invictus with the following for Northwest Pines:

Assessing and determining what renovations need to be conducted.

Overseeing the renovations of the property.

Hiring new management and staff for the property.

Assisting in finding new tenants for the property.

Property management at Northwest Pines following renovations.



Why Invest in

Real Estate?

For their property management services, they receive 3% of gross rental income,

which is in-line with other property management companies. For the inspection and

determination of renovations, Asset Plus is charging $10 per unit – we have verified the due

diligence agreement. To oversee the renovations, Asset plus receives 4% of the total

renovation contract, and will credit Invictus the $10 per unit inspection fee mentioned

above. These costs are factored into the renovation budget totalling $2.1 million.

The following factors describe the benefits of adding real-estate investments to an

investment portfolio:

Diversification: Real estate offers significant diversification benefits to an investment

portfolio. A look at U.S. stocks/bonds and real estate investments over the period of 2001-

2010, illustrates the potential diversification benefits. Over this period, the S&P 500 had a

correlation with the NCREIF NPI index (private real estate) of 0.23. The NAREIT

Equity index, a broad index of publicly traded REITS (Real Estate Investment Trusts), had a

correlation with the S&P 500 of 0.71. The lower the correlation, the higher the

diversification benefits – implying that private real estate investments have historically been

better for diversification compared to publicly traded REITS.

High risk-adjusted returns: Returns and standard deviations calculated are sensitive to the

time period chosen, however, we have found multifamily developments offer one of the

best risk adjusted returns (compared to other direct real estate investments).

Below is a chart illustrating the risk adjusted returns on different real estate options over a

large, and relatively up to date interval. Over the same period, the S&P 500 had an average

return of 11.4%, standard deviation of 17.8%, and a return per unit of risk of 0.64; far below

the risk adjusted return of multifamily real estate investments.



Property Type Characteristics (Q1 – 1978: Q1 – 2010)

Source: NCREIF, LaSalle Investment Management, August 2009, Marquette Associates Oct 2010

Tax benefits: Real estate investments may offer tax deductions, through property

depreciation, potentially offsetting the tax implications of the income received.

Leverage: Real estate investments typically offer high leverage potential whereby a

property can be purchased or built with a cash outlay much less than the value. The benefit

of leverage to investors is the magnification of returns (including losses). Most investments

do not offer the ability to leverage as much or as easily as real estate investments. For the

current offering, management plans to finance part of the purchase price with a mortgage.

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$ dollars). The US$ is expected to stay near or slightly above par

in the upcoming months - which will benefit Invictus on their acquisition. With a gradual

recovery in the US economy, we expect the US$ to recover in the long-term – which will be

beneficial for investors when the property is sold. The exposure to the US$ is an added risk,

but we think it will benefit investors.

Interest rates: Interest rates are still 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 graph below shows some key historical bank rates and

illustrates the low rates still available. The Federal Reserve stated on May 1, 2013, that it

has decided to keep the target range for the federal funds rate at 0 to 1/4 percent until the

unemployment rate decreases to 6.5%. At the current pace of employment, the Federal

Reserve predicts that this will take until 2015.



Property

Location

Neighborhood

Source: US Federal Reserve

Northwest Pines (B in below map) is located in northwest Houston, approximately 11.5

miles, or 15-20 minutes from downtown Houston (A in below map).

Source: Google Maps

The below map shows the location of the property marked by the blue dot, and the maroon

lines delineate the zip codes. As the map shows, the property is right on the boundary

between zip codes 77092 and 77091. The 77091 neighborhood, from data gathered from the

American community survey (2007-2011), conducted by the U.S. Census Bureau, shows



that it is a lower income neighborhood than 77092.

Source: City of Houston

The median household income in the 77091 zip code, where the property is located is

$28,510, and has 34.4% of the population below the poverty line. The 77092 zip code,

which borders the property, has a median income that is nearly 20% higher; unemployment

is also lower (9.4% versus 12.5%). These two areas are well below the income level and

employment rate of Harris county, which contains most of metropolitan Houston.

The two zip codes also have very different ethnic makeups. 77091 is a predominantly black

community, where 77092 are mostly Hispanics. According to Joe Kee, the current building

is made up of approximately 25% black, with the rest split between Hispanics and white.

Both the 77091 and 77092 have a high percent of renters compared to Harris County –

indicating the strong rental demand in the region. They also have lower median value

homes and rental rates.



Property

Specific

Information

Area 77091 77092 77018 Harris County

Population 23,472 33,745 25,563 4,092,459

Unemployment 12.5% 9.4% 3.6% 7.6%

Median Household Income 28,510$ 35,647$ 56,342$ 52,675$

% of people below poverty line 34.4% 24.0% 16.3% 17.3%

Race/Ethnicity

% White 8.5% 25.6% 53.6% 33.6%

% Black or African American 61.5% 13.9% 10.5% 18.6%

% Hispanic 28.1% 57.6% 33.0% 40.3%

Housing Information

% Renter occupied 55.90% 59.60% 33.40% 42.40%

Median value home 97,300$ 126,200$ 194,800$ 132,300$

Median Gross rent 687$ 728$ 757$ 849$

% of rental units between $500-749 per month 41.50% 50.90% 39.00% 29.90%

% of rental units between $750-999 per month 24.50% 31.10% 27.60% 30.40%

*Only major race/ethnicity listed.

Source: American Communities Survey 2011 US Census Bureau

The Northwest Pines property contains 29 buildings, with 364 units, on 11.61 acres.

The following data was taken from the rent roll for December 2012, provided by the

seller. There are 204 one-bedroom, and 160 two-bedroom (E&F floor plans) apartments,

with rental income (net of loss to lease) averaging $454 per month. The current average

gross potential rent is $527 per month. The net rental square footage is 271,824 sf, averaging

747 sf per unit. The occupancy for the one bedroom units is much higher than the 2 bedroom

units. The average sf, occupancy, and rental income are shown below.

Floorplan # Units Avg SFAvg Rental

IncomeOccupancy

A 48 519 $ 377 93.75%

B 48 625 $ 375 81.25%

C 68 670 $ 415 89.71%

D 40 683 $ 399 85.00%

E 64 812 $ 504 75.00%

F 96 959 $ 550 79.17%

364 747* $ 454 83.24%*

*weighted average (Source: Rent Roll December 2012)

The highlighted area displays the Northwest Pines property, and shows an aerial view of the

complex, and its 29 buildings. The map also shows that two major roadways border the

property - Antoine Dr. and Tidwell Rd.



Source: Bing Maps

The building was constructed in 1980, and has undergone renovations in 2002, and

2008. Most of the improvements done in 2008 were to the damaged exterior due to

Hurricane Ike. In a memo, prepared in 2009, provided by the seller, driveways and roads

were repaired, all the roofs were replaced, painting and siding were redone, and

approximately 50% of interior carpets were replaced. The following pictures display the

exterior of the building.



Building

Exterior

Property

Interiors

Source: Seller

The following pictures are from the realtor (Cushman & Wakefield) who listed the

property for sale.



Source: Seller Realtor (Cushman)

According to Joe Kee of Invictus, the pictures above represent the best units currently on the

property, and do not display the true conditions of the majority of the units.

The following pictures were provided by Joe Kee, from a property tour he did a few weeks

ago. He was only allowed a quick tour of the property, as it was not yet under a purchase

agreement. Joe Kee inspected 15 – 20 vacant units in the half day of viewing the property.



Mr. Kee believes the below pictures are indicative of the condition of the majority of the

units. Note that Joe Kee also has access to the team at Asset Plus that has been involved in

the day to day operations, as a property manager, of the property since 2007. According to

Mr. Kee, the team at Asset Plus has been able to provide him insights on the actual condition

of the units, vacancy rates, required renovations, etc,



Property

History

Source: Invictus

Asset Plus started a formal investigation, subsequent to Invictus signing a PSA (purchase

and sale agreement), on May 1, 2013. The inspection process, which will take a few days,

will include - inspection of all the units, auditing of lease agreements / third-party contracts,

verification of financials (rents, loss to lease, and operation expenses), etc. The primary

goal of the inspection is to identify and determine the renovations required to

significantly improve the quality of the building.

Invictus has negotiated the purchase of the property for $7.5 million, or $20,600 per

unit. Invictus says the original asking price in the sales package from the realtor was $9.7

million. Mohan Ramchandani, the current owner and seller, had purchased the property in

2005, for $10.4 million (Source: Texas A&M News).

Mr. Ramchandani, a high profile tailor in New York, has recently pleaded guilty to tax fraud

for falsifying business records. From various reputable news outlets such as the New York

Post and CBS news, we have compiled the following. Mr. Ramchandani failed to pay $1.7

million in sales tax, $0.86 million in corporate tax, and $0.25 million in personal income tax.

Mr. Ramchandani has agreed to settle civil suits against him for $5.5 million (to be paid over

the next 24 months), and could face up to 3 years in prison at his sentencing, set for

September 18, 2013. We have verified that Mr. Ramchandani is the current owner of the

property from mortgage documents provided by management. From reviewing Mr.

Ramchandani’s situation, we feel that his situation warrants the quick sale of the property –

a reason why we believe Invictus was able to negotiate a reasonable purchase price. In our

research, we tried to find if the seller is involved in any other lawsuits, or whether he has any

restrictions on selling any of his assets. When asked, Invictus management stated that they

are not aware of any such restrictions.



Texas A&M University real estate news reported that Northwest Pines sold for $10.4

million in 2005, but the acquisition closed only in 2007, after a 2-3 year hold period. At

that time, the building was at 94% occupancy, and rated as a class B complex (discussion on

building classes presented later in this report). The asking price for the property was $11.4

million, and had a cap rate of 8.5%, implying annual net operating income (NOI) of $0.98

million.

From the information provided by the seller, and his broker, the NOI for the year ended

November 2012, was $0.37 million – a significant decline from the $0.98 million in 2005.

This indicates a 62% decline in NOI, while market rents rose by 20% during the same

time period, as shown in the chart below.

Source: Apartment Data Services

The substantial decline in NOI clearly indicates that the property is underperforming, and

that there is room for improving NOI.

Invictus’s purchase price of $7.5 million, and the current NOI of $0.37 million, reflects a

cap rate of 4.9% for the property, which is very low for a C class property in the Houston

market. The low cap rate indicates that Invictus might be overpaying for the asset. However,

we do not believe Invictus is overpaying – a) as there is potential to substantially increase

the property’s NOI, and b) the purchase price is lower than comparable property sale prices

in the area (based on a $ per sf).

The gross potential revenues of the property, assuming it was fully rented, were $2.30

million for the year ended November 2012. After vacancy and loss to lease, the gross total

revenue was $1.57 million. After operating expenses of $1.20 million, the property

generated a NOI of $0.37 million. Note that these are estimates compiled by Invictus’

management based on the information received from the seller/broker, and inputs from the

property management team at Asset Plus.

The following table shows how Northwest Pines’ rental income and expenses compare to an



average low rise units in the U.S.

NAA Survey Northwest Pines

Gross Potential Rent 100% 100%

Loss to Vacancy -6.2% -21.6%

Collection Losses -1.1% -3.1%

Loss to Lease -2.8% -15.7%

Other Revenue 9.3% 8.5%

Total Revenue 99.2% 68.1%

Operating Expenses 48% 52.3%

NOI 51.3% 15.8% The National Association of Apartments (NAA) surveyed over 3,400 properties nationally, which consisted of

916,000 rental units, in 2012.

Source: NAA 2012 Survey Income & Expenses and Northwest Pines Seller

The national average NOI margin of 51.3% is in line with the average of 50.7% for the

region, including, Texas, Oklahoma, Arkansas and Louisiana.

As shown by the above table, Northwest Pines has substantially higher vacancy and loss to

lease. Loss to lease is the amount of gross potential revenue (GPR) that is lost due to

incentives being offered to secure a renter. Free months or discounted rents are examples of

loss to lease. After going through Northwest Pines’ operating expenses, Invictus feels that

they could manage the expenses of Northwest Pines better. Certain expenses such as repairs

and maintenance were overlooked, while insurance and utilities were higher than they

should be. Invictus believes they can significantly bring the property’s current insurance

costs and utility expenses down. Management believes insurance is high due to the poor

condition of the building/units, while utility expenses are high as the building does not use

energy efficient equipment. Asset Plus also estimates that water costs can be cut down by

installing newer toilets that are more efficient and low-flow showerheads

Invictus says the decreasing NOI was the result of the seller having no experience in real

estate management, and being located away from the property, in New York. The seller

hired Asset Plus to manage the property in 2007, based on the property lender’s (debt)

requirement to hire a property management firm. According to Mr. Kee, the Asset Plus

team has been involved in the day to day operations of the property, but none of their

inputs/efforts to improve the conditions of the property were taken into consideration due to

the sellers’ resistance to spending any additional capital on the property for

maintenance/improvement. Asset Plus was getting paid a fee of 3% of the gross income for

its services.

According to Invictus, poor management and lack of maintenance led to poor quality tenants

occupying the building. This caused the condition of the building to further decrease. This

is evident by the vacancy rate increasing substantially from 6% in 2005, to rates as



Project

Financing

Renovations

high as 24% in 2012. As a proof of the current owner not wanting to spend anything

significant on property improvement, Joe Kee and the team at Asset Plus indicated that

appliances and materials were taken from vacant suites in order to maintain the rented suites;

making the vacant suites even more unrentable. Due to the poor condition of the building,

Northwest Pines had to offer discounts and incentives to attract renters, this is shown by the

high loss to lease.

For Northwest Pines, management feels that the contributing factors of poor management,

poor tenants, and a deteriorating building offer them the opportunity to increase NOI

(through higher rents, higher occupancy, lower loss to lease, and better managed expenses)

through renovation and better management.

In order to fund the purchase and renovations of Northwest Pines, Invictus intends to

use the funds from this offering and assume the existing mortgage on the property

from the current owner. Management requires the interim minimum offering amount of

$3.25 million to close on the property. If they raise that amount, but do not raise funds for

renovations, Invictus’s management may have to seek bridge financing to fund renovations

and revitalization. If only the interim minimum amount is raised, the loan to value on the

property would be 70% ($5.26mm/$7.5mm). We feel that there is enough equity in the

property, and a strong potential for increase in cash flow, that Invictus should be able

to raise the necessary funds for renovation, if the current offering is unable to do so.

Management has provided information on the existing mortgage, as of December 27, 2012,

which shows the principal remaining to be $5.26 million. Monthly payments for the

mortgage are $31,815, and bear a fixed rate of 5.16% p.a. The mortgage is open to transfer

and matures November 11, 2015. Management believes they will be able to extend the

mortgage if there are delays in construction or the sale of the property. There is the

possibility that upon maturity, Invictus may pay mortgage fees for refinancing and the

interest rate may change.

Building Classes - Multi-family buildings are classified on a letter grade scale from A to D

by realtors. The ratings are based on age of building, neighborhood, vacancy, rental rates,

condition and type of renters. Class A buildings are generally newer buildings, with low

vacancy that usually charge high rents because they are in desirable areas. Northwest Pines

is currently rated as a class C building due to the age, high vacancy and poor condition.

Invictus believes that after renovations are complete, the building will be a B or C+

classification. A higher rated building, on average, has higher rents, lower vacancy and

lower exit cap rates resulting in higher valuations. In 2005, Northwest Pines was classified

as a B building. We feel that although the building was constructed in 1980, the significant

renovations planned, and increased occupancy should allow the building to reach a B/C+

classification.

Based on information collected from Joe Kee’s preliminary walk through on the property,

and the property management team at Asset Plus (who have been involved in the daily

operations of the property), Invictus put together an estimate of $2.1 million in renovation



costs. Renovations planned are extensive as shown by each unit valued at $20,600,

averaging $5,700 in renovations.

Some of the major renovation expenses from the breakdown are as follows:

Interior:

$75,000 - The interior of all the units will be cleaned and re-painted. This is a

relatively low-cost high return renovation.

$480,000 - The flooring, which can be seen from the pictures presented earlier, is

quite dated. Management plans to install new flooring including tile, laminate and

carpet in all the units.

$150,000 - Management plans to add crown molding and baseboards to update the

look of the units.

$245,000 - Appliances that are dated will be replaced. They estimate 200

dishwasher, stoves, and refrigerators will be replaced.

$105,000 - 150 HVAC units will be replaced.

$58,320 - All the toilets will be converted to low flush; showerheads will be

converted to low-flow.

$91,400 – Kitchens will be updated by re-facing cabinets and adding new countertop

surfaces.

Exterior:

$58,000 - Roofs will be re-insulated.

$55,000 - Driveways and roads will be repaired

$57,000 - Windows of units will be replaced.

$10,000 - New security system will be installed.

To renovate the suites, management plans to start work on the vacant suites (70 – 80 units).

Once units are renovated, tenants that wish to move into the renovated units will have their

current lease waived and may rent at the increased price. Those that do not wish to pay the

higher prices will not have their leases renewed when they expire, management may allow

them to stay on a month to month term depending on vacancies and renovation progress.

Since current tenants are on a 6 month lease, units will be constantly available to renovate as

tenants leave, or move to completed suites.

Invictus estimates that it would take them approximately 2 years to complete all the

renovations, which includes approximately 6 months for renovating the exteriors, and about

22 months to renovate the interiors (20 units per month if the focus is on vacant units / 15

units per month if the focus is on occupied units). Renovations to the exterior and interiors

can be done simultaneously.

Vacancy and loss to lease is anticipated to decrease as higher quality tenants begin to rent at



Outlook on

Houston

GDP

the building making it a more attractive location. These tenants are advantageous because:

- They are willing to pay more

- Higher quality tenants keep the units in better condition

- Less evictions

- Longer term leases decrease loss to lease and turnover

- Attract other high quality tenants making the building a desirable location to live.

As mentioned earlier, Doug Foord intends to relocate to Houston to manage the

property with Asset Plus Corp. The purchase and sales agreement for the property states

the current staff contracts will be terminated upon sale to Invictus. Invictus plans to

interview and hire a new management team to run the day to day operations at

Northwest Pines. This team is in addition to Asset plus who assists the day to day

operations team. Asset Plus and Invictus will still maintain overall control over the

property. By having a new management team in place, they anticipate they will be able to

control expenses and screen better tenants.

As the company plans to acquire multi-residential property in Houston, it is important to

consider the macroeconomic environment of the area. In the following section, we analyze

the key macroeconomic factors: Gross Domestic Product (GDP) growth, population growth,

unemployment rate, and rental demand.

The real GDP growth of Texas fared much better than the United States average in times of

recession and during recovery, and is expected to continue to do so in FY2013 and FY2014.

For the year ended 2011, Houston had the highest growth rate in GDP of the 20 largest

metropolitan areas (Source: Bureau Labor Statistics).

Source: US Bureau of Economic Analysis, JP Morgan Chase, Wells Fargo



Population

Growth

Unemployment

Rate

As displayed in the chart below, Houston is expected to have strong increase in their

population over the long term.

Employment growth has recovered rapidly since the economic downturn. Houston has had

the highest job growth in metropolitan areas since 2007. For the 12 months ended February

2013, the YOY increase in employment was 4.5%, leading the 20 largest metropolitan areas

(U.S. Bureau labor statistics). Employment growth is expected to remain strong at 2-3% p.a.

over 2013 and 2014 (Dallas Federal Reserve Bank).

Houston’s current unemployment rate is 6.1%, lower than Texas’s 6.4%, and the

nation’s 7.6%.



Affordability

Rental Demand

A key feature that makes Houston a very attractive place to live is that Houston is one of the

more affordable major metropolitan cities in the U.S. Houston’s cost of living is 7.8% lower

than the national average.

As can be seen by the below chart, the amount of new units coming onto the market is a

small portion of the demand.

The chart below also shows the strong rental market in Houston - notice the steep decline in

vacancy rates since 2008/2009.



Structure

Overall we feel that Houston has one of the strongest economies of major metropolitan

cities. The job growth and population increases are expected to fuel consistent demand for

rental units. The consensus forecast for rent increase in Houston for the next two years

is 4-5% p.a. growth.

For this offering, investors will purchase units in Invictus One Limited Partnership for

$1,000 per unit, with a maximum 5,201 units available. There is a $10,000 minimum

subscription amount.

After offering costs and sales commissions, the funds from the Invictus One Limited

Partnership will be loaned to the US Partnership (which has yet to be formed). The US

Partnership will use the funds to acquire the Northwest Pines property in Houston, Texas.

The following shows the use of funds. .

The general partner for both the Invictus One Limited Partnership, and the US partnership,

will be Invictus General Partner #1 Corp., which is controlled by Doug Foord.

As mentioned earlier, there are three deadlines/phases for financing. The initial minimum

offering closes on May 29, 2013, the interim closes on July 29, 2013, and the final closes on

October 29, 2013. Funds are returned if the first two minimums are not met. The following

flow chart summarizes the possible sequence of events.



The following table shows the net funds that can be raised from this offering:

*Please see OM for notes

Source: OM

Distributions to investors

Once the property is sold, funds will be distributed to investors in the following manner.

Invested capital is returned.

10% per annum hurdle rate until disposition date, is paid in arrears.

Net profit remaining from the sale of the project are split 50/50 between investors

and management.



Key factors for

Northwest

Pines

The profit sharing with management, we believe, aligns management and investors’

interests. Management only takes part in the profit sharing after investors have received

their invested capital + 10% p.a, incentivizing management on generating significant returns.

Note that management receives asset management and property management fees, annually,

as described below.

Selling Commissions

Sales commissions will total 10% of the amount raised, which includes a 9% sales

commission, and a 1% Exempt Market Dealer (EMD) fee. This is in line with other exempt

market products. Invictus intends to sell the units through multiple EMDs.

Management Fee

Invictus Asset Management Corp. will receive an annual asset management fee of 2.5% of

the gross income of the property. In addition, both Invictus Commercial Investment Corp.

and Asset Plus Corp will each receive a property management fee of 3% of the gross income

of the property, annually, totalling 6% annually.

The total annual fee that will be taken from gross income will be 8.5% p.a. – 3% to

Asset Plus, and 5.5% to Invictus. Asset Plus’s 3% is in-line with property management

fees in the industry. The fee to Invictus, we feel, is high, given comparable offerings.

There are no options for redemption in this offering. The units are not eligible for registered

plans.

The following will discuss the key factors that will influence the return to investors:

Rental Rates

The average gross potential rent of the property is currently estimated at $527 per month.

This rate is about 7% lower than the comparable market rate of $563 per month, as

estimated by market sources and Apartment Data Services (ADS). ADS, in their report

dated February 15, 2013, used 26 comparable class C buildings with similar amenities for

the analysis. The locations of the comparables are shown in the below map; Northwest

Pines is highlighted green.



Source: ADS

We looked at market data to see what kind of rent increase Northwest Pines could expect to

receive after renovating the building. From looking at various market reports, the difference

between C class buildings and B class buildings is approximately a 10% increase in rental

rates.

Rental rates in Houston have been increasing substantially in the last 2 years. According to

Trulia, a real estate services website, year over year asking rental rates increased by 9.1% in

May 2012. Strong rental increases are forecasted to continue. The consensus estimate is

mid 4%-5% p.a. rent increase in Houston over the next two years.

Two factors can result in a rent increase for Northwest Pines - renovations and market rental

increase. We think that renovations can increase the rent by first bringing the property rents

to market comparable rates (for Class C buildings) – an increase of 7%. In addition, we

think that increasing the classification of the building to a B/C+ will increase rents, the

average being 10%. Therefore, the renovations could increase rental rates by up to 17.7%

(1.10*1.07) from current levels. For our base case, we have used 60% of this estimate, or a

10.5% increase.

We have also assumed that over the 3 year renovation period, the market rental rate

increases by 3% annually.

Occupancy/Vacancy The current occupancy of Northwest Pines is estimated as 81.9%, which is up from a year

prior of 76%. In Houston, the average market occupancy is currently around 85% for Class

C multi-family buildings (Source: CBRE). ADS, in their report, estimated that comparable C

class property occupancy was 86.2%. We have also looked at the average occupancy



Financials

differences between Class C and B buildings, which on average, results in a 5% higher

occupancy for class B properties. We feel an improved building and management team will

attract more renters increasing the occupancy. We anticipate that occupancy will increase

over the course of renovations from the current 82% to 87% in Year 3.

Loss to Lease

Loss to lease, as mentioned earlier, is the amount of potential rent lost. Management says

that the current owner had to offer large discounts and incentives to attract renters do to the

the building. With the renovated building, management feels that the loss to lease rate can

be lowered to 2% of gross potential income. The NAA survey showed an average of 2.8% in

2012.

Management will also look to rent for longer terms to decrease the amount of turnover and

vacancy. We feel that due to these factors, loss to lease will steadily decrease as renovations

are completed and new renters move to the building. Our models assume that loss to lease

will total 4% of gross potential revenue by Year 3.

Exit Cap Rate

The average cap rate in Houston for all property classes is around the low 6% range. We

have looked at multiple cap rate estimates and view that the range for C properties to be

between 7 - 8.5% and B properties 6-7%. Due to the stabilization of the NOI not yet being

certain, we estimate a base-case exit cap rate of 7.75% for Northwest Pines.

Renovations

We have used Joe Kee and the Asset plus renovation estimates, and added a 10% premium

for contingency.

Time Horizon

Management estimates that the renovations of the property will take 2 years to complete,

with the property being sold in the early part of year 3 for a total time of 28 months. In our

analysis, we have extended the timeline to assume the property is sold at the end of year 3.

The table below shows the property’s actual net income for the 12 months ended November

2012, along with our projections (based on the above assumptions).



Year Ended Nov

2012Year 1 Est Year 2 Est Year 3 Est

Revenues

Gross Potential Rent $ 2,300,160 $ 2,420,421 $ 2,671,621 $ 2,770,291

Other Income (laundry, late fees, utilities, etc) $ 196,350 $ 196,350 $ 196,350 $ 196,350

Gross Potential Revenues $ 2,496,510 $ 2,616,771 $ 2,867,971 $ 2,966,641

Vacancy $ 496,154 $ 411,472 $ 400,743 $ 360,138

Loss to Lease $ 432,123 $ 363,063 $ 267,162 $ 110,812

Actual Gross Revenues $ 1,568,233 $ 1,842,236 $ 2,200,066 $ 2,495,692

(Vacancy + Loss to Lease)as a % of Gross Potential Rent 40.36% 32.00% 25.00% 17.00%

Expenses

Salaries & Benefits $ 334,679 $ 350,801 $ 367,700 $ 385,412

Administration $ 32,184 $ 33,734 $ 35,359 $ 37,063

Marketing $ 14,022 $ 20,000 $ 25,000 $ 30,000

Repairs & Maintenance $ 56,507 $ 59,229 $ 62,082 $ 65,073

Contract Services $ 46,114 $ 48,335 $ 50,664 $ 53,104

Turnover (make ready expenses per unit) $ 21,087 $ 22,103 $ 23,168 $ 24,284

CAPEX (reserves) $ 43,745 $ 90,000 $ 90,000 $ 90,000

Utilities $ 311,762 $ 326,780 $ 342,522 $ 359,021

Insurance (per unit) $ 168,223 $ 176,327 $ 184,820 $ 193,724

Property Taxes $ 127,636 $ 133,784 $ 140,229 $ 146,984

Property Management (Asset Plus - 3%) $ 46,056 $ 55,267 $ 66,002 $ 74,871

Total Operating Expenses $ 1,202,015 $ 1,316,361 $ 1,387,546 $ 1,459,535

Op Expenses as a % of Gross Potential Revenues 48% 50% 48% 49%

Net Operating Income $ 366,218 $ 525,875 $ 812,520 $ 1,036,156

Less: 5.5% - Invictus $ 101,323 $ 121,004 $ 137,263

Cash Flow $ 424,552 $ 691,516 $ 898,893

The following shows the use and source of funds:

Offering Close Year 1 Year 2 Year 3

Beginning Cash $2,128,041 $1,021,313 $181,550

Cash From Rental Income $ 424,552 $ 691,516 $ 898,893

Equity Financing $5,200,000

Sales Commissions - 10% ($520,000)

Offering Cost ($150,000)

Net Equity Financing $4,530,000

Mortgage Assumed $5,260,850

Mortage Payment ($381,780) ($381,780) ($381,780)

Acquisition Price ($7,500,000)

Soft costs ($162,809)

Renovations ($1,149,500) ($1,149,500)

Ending Cash $2,128,041 $1,021,313 $181,550 $698,663

The following tables show the potential cash flow for investors at the end of Year 3.



Sensitivity

Year 3

Annual NOI 1,036,156$

Exit Cap Rate 7.75%

Sale of Property (NOI/CAP) 13,369,757$

Less: Commissions (2.5%) 334,244$

Less : Closing costs 100,000$

Net Sale 12,935,513$

Ending Cash - Year 3 (from operations) 698,663$

Net Cash on Hand 13,634,176$

Less: Mortgage Repayment 4,957,046$

Less: Investor Capital 5,200,000$

Less:10% p.a. Preferred Return 1,560,000$

Distributable Cash 1,917,130$

50% Split with Management 958,565$

Total Cash Returned to Investor 7,718,565$ *These estimates do not account for tax.

Note - We have used a conservative estimate for commissions (related to the sale of the

property) of 2.5%. Management believes commissions should be 1.5-2%, based on their

discussions with brokers in the area.

Offering Close Year 1 Year 2 Year 3

Funds to Investors $ (5,200,000) - - $ 7,718,565

Funds to Management $ - $ 101,323 $ 121,004 $ 1,095,828

Investor's IRR 14.07%

As shown in the table above, investors’ expected Internal Rate of Return (IRR) is

14.07% (per year).

The sensitivity of our IRR estimate to various inputs are shown below.

Sensitivity Base

Rental Increase from Renos 0.0% 5.00% 10.5% 15.0% 20.0%

IRR 9.1% 11.6% 14.1% 16.1% 18.3%

Annual Rental Increase (Market Growth) 0.0% 1.5% 3.0% 4.5% 6.0%

IRR 11.0% 12.5% 14.1% 15.6% 17.2%

Vacancy at End of Year 3 25.0% 17.5% 13.0% 9.0% 5.0%

IRR -6.0% 10.4% 14.1% 17.6% 20.8%

Exit Cap Rate 12.00% 9.00% 7.75% 6.00% 5.00%

IRR -7.9% 9.4% 14.1% 22.8% 29.5%

Renovation Cost Over-Run (% increase from

management's est.)0% 5% 10.0% 25% 50%

IRR 14.6% 14.3% 14.1% 13.3% 12.0%

The sensitivity analysis shows that investor returns are very sensitive to the exit cap rate –

the expected IRR ranges between -8% (for a cap rate of 12%) to 30% (for a cap rate of 5%).

It is important to note that all real estate investments are sensitive to cap rates. We feel that



Risks

Rating

our exit cap rate estimate of 7.75% is conservative. As mentioned earlier, the current B cap

rate is between 6-7%.

In addition to the sensitivity analysis, we have looked at possible delays in the sale of the

property. Management estimates that the property will be renovated and sold within 28

months. For our base case, we used a more conservative estimate of 36 months. If the

project is sold after 48 months, we anticipate an IRR of 12.4%. The IRR drops to 11.2% if

the property is sold after 60 months. Notice that delays do not significantly decrease the

IRR, because of the strong NOI forecasted for the property.

The worst case scenario is that the planned renovations on the property do not result in any

increase in rent or occupancy – in which case, the property will not generate sufficient cash

flows to make the mortgage payments of $0.38 million per year. In such a scenario,

investors will lose 100% of their capital – this scenario, however, is extremely unlikely.

Proposed renovations do not guarantee higher rental rates or increased vacancy.

There is no guarantee that the invested capital will be returned.

The investment is illiquid and there are no redemption options.

Renovations may exceed the cost estimates management has for the project.

Renovations and sale of the property could take longer than the anticipated time

horizon.

Although we have a positive outlook on Houston multi-family properties, a drop in

property prices / rent will affect investors’ returns.

The LP has to raise at least $3.25 million for the project to proceed.

Exchange rate risks.

The interest rate of the mortgage may change if it is extended past maturity.

Based on our review of the offering, outlook on the project, financial projections, and

the management team, we have assigned an overall rating of 3 (Good).

FRC Rating

Base-Case

Return (IRR)14.1% p.a.

Rating 3 (Good)

Risk 3 (Average)

Our risk rating is 3 (Average).



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)

Rating - 1 - Risk - 1 -

Rating - 2 31% Risk - 2 -

Rating - 3 55% Risk - 3 60%

Rating - 4 7% Risk - 4 40%

Rating - 5 7% Risk - 5 -

Rating - 6 -

Rating - 7 -

FRC Distribution of Ratings

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opinions based upon information that was provided and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the

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