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Magnolia views risk as the potential for the permanent loss of invested capital. As such, Magnolia believes that the marked to market weighted average leverage of the fund is the best indicator of this risk.
The economic leverage of the Alpha fund can be calculated by examining the capital structure of each REIT in the Alpha fund, marking the equity to market, then calculating the leverage of each REIT. The weighted average of all REITs in the Alpha fund is then calculated by multiplying the fund’s concentration in each REIT by it respective leverage. Magnolia does not utilize portfolio level leverage so the only leverage employed in Magnolia’s strategy is the leverage employed by the REITs in Magnolia’s portfolio. Since the launch of Magnolia’s Alpha Fund, the portfolio weighted average leverage has been within several percentage points of 35%. This low leverage means that in the case of a drawdown in the value of the real estate assets, there is a large equity cushion to absorb this drawdown and therefore equity values are less affected than by a REIT utilizing more leverage. In the real estate investment industry, a 35% levered investment is considered very low leverage.
For a complete list of the risks applicable to the Fund, please refer to the Fund’s Confidential Offering Memorandum.