Scholastic Capital Update #13 | First Distribution

Managing other people’s money is about trust.

Investors give their fund manager their hard earned dollars because they trust the fund manager will do everything they can to protect it.

It’s why, when all of our investors join us, I send them a handwritten note that thanks them for their trust.

And, to be clear, all of our investors placed even more trust than normal with Scholastic. We were a new fund, and they were buying into the idea of Scholastic Capital vs the track record of an established fund.

Since then, the onus has been on our team to prove them right to trust us.

We’re taking the first step towards doing that today by sending out our first monthly distribution of cash flow today.

If we continue to perform according to plan, we should continue to send out distributions to our investors every month from here on out.

It’s our turn now to, quite literally, repay their trust in us. 

In this month’s update, we’re going to talk through the data we’re seeing now and provide commentary on the plan going forward.

Recap: Who We Are

We are Scholastic Capital, a real estate fund that buys homes in elite school districts & rents them on long-term leases. 

Our investors have historically been interested in our monthly cash flow distribution schedule, equity appreciation, and depreciation tax benefits.

We publish this public newsletter monthly to share details about our performance and current thought process. 

Key Data

Let’s review some key data:

• 21 homes owned

• Average rent: $3,557

• Average tenant salary: $204,000

• Average purchase price per home: $480,548

• Average value at last accountant re-price: $535,016

• Portfolio LTV: 59%

• Average interest rate: 6.15%

• Average debt term: 30 years

Distributions & Equity

In a lot of ways, Scholastic functions somewhat similarly to a stock. Investors buy “Units” in the fund. Each “unit” functions similarly to a stock.

In keeping with the stock analogy, our monthly distributions function as the “dividend” the stock pays. Our first distribution this Friday puts us at a 5.1% annualized dividend. 

We will continue to share updates regarding how that dividend changes.

For many investors, this dividend could be tax-free due to depreciation. The 5.1% “post-tax” dividend therefore may be equivalent to an 8-9% “pre-tax” dividend.

The other side of our stock analogy is the actual “stock price” that represents the investors’ underlying equity.

As of the investor’s most recent reprice, the investor’s equity is now up 7.3%. We will again share consistent updates here on how that changes.

Commentary on Performance

We are happy with performance to date on the portfolio & are currently tracking close to initial underwriting.

The big item we are currently watching at this point is maintenance. Insurance, property tax, and management fees are budgeted and unlikely to change over the next year.

Maintenance, however, is unpredictable. We do not know when we will have a maintenance request or the exact cost of each request.

At the time of this writing (October 15th, 2024), we have two open maintenance requests across the portfolio. This is approximately as expected, with roughly an 11% chance that a property has a maintenance issue in any particular month.

We are fortunate to have a fantastic property management team supporting the portfolio. Their experience has been invaluable, and their scale has been helpful in driving down vendor cost. 

We will keep a close eye on maintenance here and continue to escrow funds monthly to pay for maintenance issues as they occur. 

Commentary on next month

We foresee very little change in portfolio operation over the next month. Our property management partner is doing a fantastic job on the portfolio right now.

We have still yet to collect a late fee. Tenants, to date, have always paid on time.

One big pillar of work for the next month is improving our home underwriting process, which is how we evaluate which homes to buy.

Last year, we worked with a fantastic developer to build custom software to assist in this process.

This software enabled us to quickly underwrite homes to decide which homes to place offers on. As a result, we were able to move quickly and had a big competitive advantage when buying homes.

At the recommendation of our advisors, we’re now trying to “double down” here by underwriting even faster so we can write offers even sooner.

Doing so means making some changes to our software, which we are currently working on now. 

Commentary on fund priorities

There are two big priorities for the fund right now.

Process

First, process improvements. This is our “offseason” where home purchases slow down. This is the perfect time for us to evaluate what worked and what could be better in our processes. 

We use Asana as our task management system and enjoy reviewing the data we’re collecting. 

For anyone as into process as we are, the Scholastic team has completed 1,662 tasks on Asana. Of those, 814 were part of a larger process and the remainder were one-off tasks that we had to complete.

Greatly simplified, that means 49% of our daily work fits into a larger process. We’d like that number to grow, meaning we have pre-built a process for most of our daily to-do work.

Since this is a KPI we are now tracking and measuring, I’d expect this KPI to increase over the next few months.

Process is especially important as our team size grows. We have worked to implement an organization-wide Scorecard for metric performance, with each team member owning three metrics.

Fundraising

We have started conversations ahead of fundraising for the 2025 purchase season and have already had new investor capital come into the fund over the past few weeks.

The optimistic hope is fundraising for summer 2025 will be easier. The rationale is two-fold:

• Scholastic Capital has more of a track record now than it did last year

• Investors who join the fund are buying into the existing portfolio

That last bullet point is important. All new investors will have an ownership position of all homes we already own. Their investment dollars are, quite literally, buying underlying real estate.

The tentative goal is to raise $20 million by the end of summer 2025.

The hypothesis on how to get there is:

• Increased investment from existing investors, many of whom have expressed interest in increasing their stake

• Referrals from existing investors, many of whom have already done so

• Re-engaging with possible investors we spoke with last year who eventually decided not to join the fund

• Continued organic meetings with investors via social media, this newsletter, and similar

We also are exploring some other strategies. We are in conversations with multiple large institutions about a check in Scholastic. 

One area that is of particular interest to us is wealth management platforms. To simplify, many RIA’s (Register Investment Advisors) have an online platform of approved third-party funds to recommend to clients.

We believe our thesis is well suited for these platforms. We believe we are more conservative in nature than many real estate funds. We have also repeatedly seen that people with kids tend to “get” our thesis and resonate with it.

Get in touch

As always, feel free to reply to this email with any thoughts, questions, or feedback. It will come directly to us here at Scholastic!