As filed with the Securities and Exchange Commission on March 2, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-22842
FORUM FUNDS II
Three Canal Plaza, Suite 600
Portland, Maine 04101
Jessica Chase, Principal Executive Officer
Three Canal Plaza, Suite 600
Portland, Maine 04101
207-347-2000
Date of fiscal year end: December 31
Date of reporting period: January 1, 2017 – December 31, 2017
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Phocas Real Estate Fund |
Annual Report
December 31, 2017
PHOCAS REAL ESTATE FUND A MESSAGE TO OUR SHAREHOLDERS (Unaudited) DECEMBER 31, 2017 |
Market Summary
The securitized commercial real estate market, as measured by the FTSE NAREIT All Equity REIT Index (the "Index" or the "Benchmark"), posted a positive total return in the fourth quarter of +2.5%. The positive performance in the quarter was driven by the growth in November and partially offset by the late decline in December. While the Index closed the year with a total return of +8.7%, the Phocas Real Estate Fund (the "Fund") underperformed the Benchmark with a return of 7.4%.
As REITs have largely been driven by the direction of the 10-year Treasury over the last several years, there is obvious concern that should rates move up, investors would prefer to be underweight REITs. That said, REIT valuations could be supported given a modest forecasted rise in interest rates on both short and long term. Looking ahead to 2018, the tax bill will likely have important impacts on the economy, financial markets and commercial real estate.
Performance Summary
With the exception of Retail and Health Care, most REIT portfolios are experiencing historically high levels of occupancy and solid fundamentals. Despite the recent indications of a healthy 2017 holiday shopping season, Retail REITs have suffered through store closure announcements, bankruptcies and general unfavorable investor sentiment. Healthcare has also been challenged by increased cost of capital and Skilled Nursing Facilities (SNF) tenant issues including concerns on reimbursement rates, unaffordable contracted rent bumps, and contracting margins.
Data Centers and Manufactured Homes continue to perform well for the Fund. We remain positive on the demand for outsourced data center providers, including IT outsourcing, IP traffic growth and expansion of cloud computing. Sun Communities (SUI) performed well as fundamentals remain very healthy and the company continues to source acquisitions opportunities.
The year's top performing real estate sectors were Infrastructure (+35.4%), Data Centers (+28.4%) Manufactured Homes (+24.9%), Timber (+21.9%) and Industrial (+20.6%). The outperformance from Infrastructure and Data Center REITs were driven by the growing demand for mobile and cloud data streaming. Industrial REIT demand is continuing to grow due to ecommerce expansion. Retail REITs, on the other hand, lagged the Index at -4.8%, as Shopping Centers ended 2017 with -11.4% returns overall and Regional malls were -2.7%. Other, more traditional REIT property sectors also underperformed during the year, Healthcare (+0.9%), Apartments (+3.7%) and Office (+5.2%).
Contributors
Despite the negative headlines and poor performance of the Retail sector, two of the top three performers in the fourth quarter were in fact Retail REITs. The share price of General Growth Properties (GGP, +14.9%) was driven higher due to the buyout proposal from Brookfield Asset Management (BAM) and then Unibal-Rodamco takeover of Westfield Corp. Regency Centers (REG, +12.4%) also outperformed in the fourth quarter as its reported third quarter earnings results beat consensus. REG continues to be a top quality company with high quality properties and strong demographic markets.
Detractors
The largest detractor in the quarter was SBRA Health Care (SBRA, -12.1%), which was driven by the headline risks of its tenant mix, SNF and Senior Housing (SH). Despite the industry risks, SBRA's fundamentals remain solid, and management showed confidence with its recent 5% increase to the annual dividend. Seritage Growth Properties (SRG, +11.6%) declined during the fourth quarter after being a top performer in the prior quarter. We expect SRG's share price to remain volatile given its connection to its largest tenant, Sears Holdings, and its widely known struggles. SRG is working to redevelop the department store space, and is viewed as a significant opportunity to improve the asset through retenanting and densification. Corporate Office Properties (OFC, -10.2%) also impaired the Fund's performance during the quarter. The dip in OFC's share price was directly linked to concern over a letter OFC received from the SEC regarding its 2016 10-K. The matter was addressed and viewed as a non-issue.
Fund Positioning
Against a backdrop of tax cuts for the rest of corporate America that should accelerate earnings either from faster economic growth or larger dividends and stock buybacks, we expect REITs to face skepticism given presumed better growth elsewhere. That said, we believe the more interesting part of investing will likely be later in the year, as the sugar high of the tax cuts wears off and investors measure the actual impact on the economy. With the view of a recession still years off, REITs could return to favor as the valuation gap widens and demand builds for companies to expand office space and hire more employees.
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PHOCAS REAL ESTATE FUND A MESSAGE TO OUR SHAREHOLDERS (Unaudited) DECEMBER 31, 2017 |
From a portfolio positioning standpoint, we continue to favor a mix of growth oriented companies combined with selected REITs trading at deeper discounts to NAV and solid cash flow growth. While we don't expect any initial benefits, we believe that a few REIT sectors are well positioned to benefit from the changes in tax law, namely Office, Retail and Apartments.
Little has changed with the strategy of underweighting Healthcare, Freestanding, Suburban Office and Shopping Centers. In the current environment, Health Care REITs have several risks that make them less defensive today than in the past, particularly supply of Senior Housing and Skill Nursing reimbursement. The Fund remains overweight Office, preferring central business district holdings over suburban, as accelerating employment should drive strong same property NOI growth and lowered concessions.
Best Regards,
Phocas Financial Corporation
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William Schaff, CFA James Murray, CFA
IMPORTANT RISKS AND DISCLOSURES
The views expressed in this report reflect those of the Fund's Portfolio Managers as of the date this report is first published and may not reflect their views anytime thereafter. These views are intended to assist shareholders in understanding the Fund's investment methodology and do not constitute investment advice. This report may contain discussions about investments that may or may not be held by the Fund as of the date this report is first published. All current and future holdings are subject to risk and to change. To the extent this report contains forward looking statements, unforeseen circumstances may cause actual results to differ materially from the views expressed as of the date this is written.
The Fund is exposed to the same risks that are associated with the direct ownership of real estate including, but not limited to, a general decline in the value of real estate, fluctuations in rental income, changes in interest rates, increases in property taxes, increasing operating costs, overbuilding, changes in zoning laws, and changes in consumer demand for real estate. The Fund may invest in foreign securities which involve political, economic and currency risks, greater volatility, and differences in accounting methods from investing solely in the U.S. These risks are magnified in emerging markets. The Fund is non-diversified, meaning it may invest its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund.
The FTSE NAREIT All Equity REITs Index is an unmanaged index of all tax qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. One cannot invest directly in an index.
PHOCAS REAL ESTATE FUND
FOR MORE INFORMATION:
P.O. Box 588
Portland, ME 04112
(866) 746-2271 (toll free)
INVESTMENT ADVISOR
Phocas Financial Corporation
980 Atlantic Avenue, Suite 106
Alameda, CA 94501
TRANSFER AGENT
Atlantic Fund Services
P.O. Box 588
Portland, ME 04112
www.atlanticfundservices.com
DISTRIBUTOR
Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, Maine 04101
www.foreside.com
This report is submitted for the general information of the shareholders of the Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus, which includes information regarding the Fund's risks, objectives, fees and expenses, experience of its management, and other information.
215-ANR-1217
ITEM 2. CODE OF ETHICS.
(a) | As of the end of the period covered by this report, Forum Funds II (the "Registrant") has adopted a code of ethics, which applies to its Principal Executive Officer and Principal Financial Officer (the "Code of Ethics"). |
(c) | There have been no amendments to the Registrant's Code of Ethics during the period covered by this report. |
(d) There have been no waivers to the Registrant's Code of Ethics during the period covered by this report.
(e) Not applicable.
(f) (1) A copy of the Code of Ethics is being filed under Item 12(a) hereto.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees has determined that Mr. Mark Moyer is an "audit committee financial expert" as that term is defined under applicable regulatory guidelines. Mr. Moyer is a non- "interested" Trustee (as defined in Section 2(a)(19) under the Investment Company Act of 1940, as amended (the "Act")), and serves as Chairman of the Audit Committee.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees - The aggregate fees billed for each of the last two fiscal years (the "Reporting Periods") for professional services rendered by the Registrant's principal accountant for the audit of the Registrant's annual financial statements, or services that are normally provided by the principal accountant in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $13,400 in 2016 and $13,400 in 2017.
(b) Audit-Related Fees – The aggregate fees billed in the Reporting Periods for assurance and related services rendered by the principal accountant that were reasonably related to the performance of the audit of the Registrant's financial statements and are not reported under paragraph (a) of this Item 4 were $0 in 2016 and $0 in 2017.
(c) Tax Fees - The aggregate fees billed in the Reporting Periods for professional services rendered by the principal accountant to the Registrant for tax compliance, tax advice and tax planning were $3,000 in 2016 and $3,000 in 2017. These services consisted of review or preparation of U.S. federal, state, local and excise tax returns.
(d) All Other Fees - The aggregate fees billed in the Reporting Periods for products and services provided by the principal accountant to the Registrant, other than the services reported in paragraphs (a) through (c) of this Item, were $0 in 2016 and $0 in 2017.
(e) (1) The Audit Committee reviews and approves in advance all audit and "permissible non-audit services" (as that term is defined by the rules and regulations of the Securities and Exchange Commission) to be rendered to a series of the Registrant (each, a "Series"). In addition, the Audit Committee reviews and approves in advance all "permissible non-audit services" to be provided to an investment adviser (not including any sub-adviser) of a Series, or an affiliate of such investment adviser, that is controlling, controlled by or under common control with the investment adviser and provides on-going services to the Registrant ("Affiliate"), by the Series' principal accountant if the engagement relates directly to the operations and financial reporting of the Series. The Audit Committee considers whether fees paid by a Series' investment adviser or an Affiliate to the Series' principal accountant for audit and permissible non-audit services are consistent with the principal accountant's independence.
(e) (2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable
(g) The aggregate non-audit fees billed by the principal accountant for services rendered to the Registrant for the Reporting Periods were $0 in 2016 and $0 in 2017. There were no fees billed in either of the Reporting Periods for non-audit services rendered by the principal accountant to the Registrant's investment adviser or any Affiliate.
(h) During the Reporting Period, the Registrant's principal accountant provided no non-audit services to the investment advisers or any entity controlling, controlled by or under common control with the investment advisers to the series of the Registrant to which this report relates.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable
ITEM 6. INVESTMENTS.
(a) | Included as part of report to shareholders under Item 1. |
(b) | Not applicable. |
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant does not accept nominees to the board of trustees from shareholders.
ITEM 11. CONTROLS AND PROCEDURES
(a) The Registrant's Principal Executive Officer and Principal Financial Officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Act are effective, based on their evaluation of the controls and procedures required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as of a date within 90 days of the filing date of this report.
(b) There were no changes in the Registrant's internal control over financial reporting (as defined in
Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of Ethics (Exhibit filed herewith).
(a)(2) Certifications pursuant to Rule 30a-2(a) of the Act, and Section 302 of the Sarbanes-Oxley Act of 2002. (Exhibits filed herewith)
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) of the Act, and Section 906 of the Sarbanes-Oxley Act of 2002. (Exhibit filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant Forum Funds II
By | /s/ Jessica Chase | ||
Jessica Chase, Principal Executive Officer | |||
Date | February 26, 2018 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By | /s/ Jessica Chase | ||
Jessica Chase, Principal Executive Officer | |||
Date | February 26, 2018 |
By | /s/ Karen Shaw | ||
Karen Shaw, Principal Financial Officer | |||
Date | February 26, 2018 |