Horizon Residential Income Fund I

Despite a challenging past four months, with several market disruptions and external pressures, Horizon’s team remains committed to steering the Fund towards its long-term goals. Today, the Horizon team is pleased to present an updated fund overview for mid-October.

Horizon Fund Capital Overview

In an effort to return the Fund to normal operations, the Investment Committee made the decision to reopen the Fund for new equity admittances on September 1st. In the past 45 days, the Fund has raised $1.32M, with $493K of new equity admittances coming in October. This brought the Fund’s total equity balance to $23.93M, as of 10/16/2024. With an inflow of new capital for the first time since mid-May, the Investment Committee felt that the Fund was now in a position where it could look to purchase new loans for the first time in over four months. While the committee did not want to exhaust all of the newly raised capital, it found that deploying a portion of this capital into new loan purchases would be best for the Fund’s overall book performance. The team reviewed 10-15 loans at the end of September and made the decision to purchase four new loans, totaling $826,000.00.

Due to the reported disruption caused by the shutdown of a critical vendor at the end of May, the Fund’s senior financing lender still remained on pause through the first couple of weeks of October. As a result, any cash proceeds received from payoffs were directed towards paying down the Fund’s senior line, with $4.33M being paid down over the past 30 days. However, with the Fund experiencing positive momentum over the past 45 days, the senior financing partner has decided to return to normal operations on a limited basis and has agreed to begin remitting partial equity back to the Fund through proceeds received from loan payoffs. Additionally, they have agreed to remove the incremental 1% oversight fee they began charging. We expect these changes will go into effect towards the end of October. These are additional positive developments towards returning the Fund back to normal operations and will allow the Fund to generate additional cash flow and improved return potential.

Below is a monthly breakdown of the Fund’s total equity, loan balances, and leveraged capital.

Portfolio Composition & Risk Management

When looking at portfolio composition and risk management for Horizon, a few of the main portfolio metrics the Horizon team considers are geographic location, weighted average leverage metrics, and project type. We underwrite and monitor these different metrics to ensure we are maintaining a balanced portfolio that aligns with our overall investment strategies.

As of mid-October, the portfolio's top markets were North Carolina (23.40%), Florida (21.09%), and South Carolina (9.59%). Below you will find visuals to display Horizon’s full state concentration by gross loan amount, as of 10/16/2024. As only four new loans have been purchased in the past 120 days, recent geographic shifts in the portfolio are strictly due to loan repayments. While the top markets in the portfolio have remained the same, you will notice that North Carolina and Florida’s total concentrations have shifted above 20%. However, with 50% of the loans held in these two states are over 95% complete on construction, we anticipate seeing a downward shift in the state’s total concentration as these loans repay in the coming months.

Horizon State Exposure – % of Total Portfolio as of 10/16/2024

North Carolina. . . . . . . . . . 23.40%	Alabama . . . . . . . . . . . . 4.23%
Florida. . . . . . . . . . . . . . . . . . 21.09%	Virginia. . . . . . . . . . . 3.74%
South Carolina. . . . . . . . . . . .9.59%	Georgia . . . . . . . . . . . . . 2.62%
Ohio . . . . . . . . . . . . . . . . . . . . . . 9.23%	Pennsylvania . . . . . . . . .1.90%
Texas . . . . . . . . . . . . . . . . . . . . 7.10%	Other . . . . . . . . . . . . . .11.67%
Indiana . . . . . . . . . . . . . . . . . . . 5.73%

Horizon’s loan leverage metrics are also a vital piece to the portfolio’s overall health. These leverage ratios are what protect each loan against any potential downside risk. Below is a breakdown of each metric:

Loan to As-Is Value (LTAIV): We have set a maximum LTAIV constraint per loan of 70%, and are targeting a portfolio below 65% LTAIV.
Loan to Cost (LTC): We have set a maximum LTC constraint for any loan within the portfolio at 90%, while targeting a weighted portfolio makeup below 85%.
Loan to After Repair Value (LTARV): The Horizon team has set a 70% maximum LTARV constraint for each loan and for the entire portfolio.

In the below table, Horizon’s month-over-month changes in WAVG loan leverage metrics are presented. All three portfolio metrics have remained at or below their target mark through mid-October.

Additional Horizon Portfolio Composition
Project Type – % of Total Book (10/16/2024)

Loan Performance & Delinquencies

Delinquency management is a core focus at Upright, beginning with rigorous underwriting practices and supported by our Servicing and Asset Management teams, who employ industry-leading strategies for effective recovery. These strategies include relationship-based borrower management, timely issuance of Notices of Default, and loss mitigation evaluations after 61 days of delinquency. Given the short-term nature of our asset class, understanding delinquency rates is crucial, as performing loans typically repay within 10 months on average, while delinquent loans may require longer resolution periods.

As we have progressed through 24Q3 and into 24Q4, the Fund has experienced an increase in its overall delinquency rate, shifting from ~12% at the end of July to ~26% in mid-September. From mid-September to mid-October, the Fund saw its total delinquency rate remain constant at ~26%. This uptick in delinquency, however, is not solely indicative of deteriorating loan performance. With continued restrictions from the Fund’s senior financing facility, the Fund’s loan portfolio has continued to be reduced in size, shrinking from 197 loans at the end of June to a current portfolio size of 145. The Fund’s increase in delinquencies reflects the maturity of the loan book, as delinquency typically occurs in the later stages of a loan's term when initial interest reserves have been exhausted and projects encounter more complexities as they work towards repayment.

Throughout 24Q3, our Servicing team has worked proactively to address delinquencies. In July and August, the team managed 19 loans in the 31-90 day delinquency buckets, with Notices of Default issued promptly for loans exceeding 60 days delinquent. The team's continuous efforts resulted in a decrease of delinquent loans in the 31-60 bucket, with only 6 new loans entering the 31-60 bucket in mid-September, and continued to decrease in mid-October with only 5 new loans entering the 31-60 bucket.

With a substantial decrease in the number of loans in the 31-60 bucket, the Fund also saw the number of loans in the 61-90 bucket shrink from 13 in mid-September to only two in mid-October. However, the Fund saw loans held in the 91+ bucket jump from 18 to 28 through mid-October, with four additional loans actively working through foreclosure. Our Asset Management team continues to explore foreclosure and workout options for all 91+ delinquencies, ensuring that we pursue the best possible outcomes. Additionally, of the 34 delinquent loans in the 61+ bucket, 20 are held between three unique developers. Of these 20 loans, 16 are more than 92% complete and we feel strongly that the developers will soon be able to exit these loans as the properties are listed for sale.

Below is a chart displaying the Fund's delinquency rates from July 2024 through mid-October 2024, presenting both the total count and the percentage of the active book based on the Unpaid Principal Balance of delinquent loans. This detailed transparency reflects our commitment to rigorous reporting standards and aligns with the MBA’s approach, while also providing an expanded view of our delinquency performance.