Vertical
Capital Income Fund |
STATEMENT
OF ASSETS AND LIABILITIES |
September
30, 2022 |
Assets: | |
| | |
Investments in Securities at Market Value (cost $109,861,488) | |
$ | 110,560,846 | |
Cash | |
| 1,968,276 | |
Interest Receivable | |
| 1,917,323 | |
Receivable for Investment Securities Sold and Principal Paydowns | |
| 758,585 | |
Prepaid Expenses and Other Assets | |
| 667,792 | |
Total Assets | |
| 115,872,822 | |
| |
| | |
Liabilities: | |
| | |
Line of Credit, net | |
| 7,455,337 | |
Payable for Securities Purchased | |
| 243,093 | |
Accrued Advisory Fees | |
| 104,827 | |
Related Party Payable | |
| 15,272 | |
Accrued Expenses and Other Liabilities | |
| 224,828 | |
Total Liabilities | |
| 8,043,357 | |
| |
| | |
Net Assets | |
$ | 107,829,465 | |
| |
| | |
Net Assets consisted of: | |
| | |
Paid-in-Capital | |
$ | 107,755,987 | |
Accumulated Earnings | |
| 73,478 | |
Net Assets | |
$ | 107,829,465 | |
| |
| | |
Net Asset Value Per Share | |
| | |
Net Assets | |
$ | 107,829,465 | |
Shares of Beneficial Interest Outstanding (no par value) | |
| 10,380,003 | |
Net Asset Value (Net Assets/Shares Outstanding) | |
$ | 10.39 | |
| |
| | |
The
accompanying notes are an integral part of these financial statements.
Vertical
Capital Income Fund |
STATEMENT
OF OPERATIONS |
For
the Year Ended September 30, 2022 |
Investment Income: | |
| | |
Interest Income | |
$ | 8,731,319 | |
Total Investment Income | |
| 8,731,319 | |
| |
| | |
Expenses: | |
| | |
Investment Advisory Fees | |
| 1,433,885 | |
Security Servicing Fees | |
| 393,355 | |
Interest Expense | |
| 384,713 | |
Insurance Expense | |
| 260,749 | |
Non-recurring Fees | |
| 201,803 | |
Audit Fees | |
| 194,069 | |
Trustees Fees | |
| 155,765 | |
Administration Fees | |
| 137,427 | |
Transfer Agent Fees | |
| 92,348 | |
Line of Credit Fees | |
| 84,815 | |
Legal Fees | |
| 77,588 | |
Printing Expense | |
| 64,177 | |
Chief Compliance Officer Fees | |
| 55,803 | |
Custody Fees | |
| 46,632 | |
Fund Accounting Fees | |
| 43,806 | |
Security Pricing Expense | |
| 36,003 | |
Miscellaneous Expenses | |
| 89,765 | |
Total Expenses | |
| 3,752,703 | |
Less: Expenses Waived by Adviser | |
| (214,432 | ) |
Net Expenses | |
| 3,538,271 | |
Net Investment Income | |
| 5,193,048 | |
| |
| | |
Net Realized and Unrealized Gain/Loss on Investments: | |
| | |
Net Realized Gain from: | |
| | |
Investments | |
| 2,087,057 | |
Net Change in Unrealized Depreciation on: | |
| | |
Investments | |
| (10,408,837 | ) |
Net Realized and Unrealized Loss on Investments | |
| (8,321,780 | ) |
| |
| | |
Net Decrease in Net Assets Resulting From Operations | |
$ | (3,128,732 | ) |
| |
| | |
The
accompanying notes are an integral part of these financial statements.
Vertical
Capital Income Fund |
STATEMENT
OF CHANGES IN NET ASSETS |
| |
For the Year | | |
For the Year | |
| |
Ended | | |
Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | |
Operations: | |
| | | |
| | |
Net Investment Income | |
$ | 5,193,048 | | |
$ | 4,384,254 | |
Net Realized Gain from Investments | |
| 2,087,057 | | |
| 5,719,044 | |
Net Change in Unrealized Depreciation on Investments | |
| (10,408,837 | ) | |
| (2,319,580 | ) |
Net Increase/Decrease in Net Assets Resulting From Operations | |
| (3,128,732 | ) | |
| 7,783,718 | |
| |
| | | |
| | |
Distributions to Shareholders From: | |
| | | |
| | |
Total Distributions Paid | |
| (9,452,773 | ) | |
| (11,494,103 | ) |
Return of Capital | |
| (912,958 | ) | |
| — | |
Total Distributions to Shareholders | |
| (10,365,731 | ) | |
| (11,494,103 | ) |
| |
| | | |
| | |
Total Decrease in Net Assets | |
| (13,494,463 | ) | |
| (3,710,385 | ) |
| |
| | | |
| | |
Net Assets: | |
| | | |
| | |
Beginning of Period/Year | |
| 121,323,928 | | |
| 125,034,313 | |
End of Period/Year | |
$ | 107,829,465 | | |
$ | 121,323,928 | |
| |
| | | |
| | |
The
accompanying notes are an integral part of these financial statements.
Vertical
Capital Income Fund |
STATEMENT
OF CASH FLOWS |
For
the Year Ended September 30, 2022 |
Decrease in Cash | |
| | |
Cash Flows Provided by Operating Activities: | |
| | |
Net decrease in Net Assets Resulting from Operations | |
$ | (3,128,732 | ) |
| |
| | |
Adjustments to Reconcile Net Increase (Decrease) in Net Assets Resulting from Operations to Net Cash Provided by Operating Activities: | |
| | |
| |
| | |
Purchases of Long-Term Portfolio Investments | |
| (36,111,602 | ) |
Proceeds from Sale of Long-Term Portfolio Investments and Principal Paydowns | |
| 32,619,703 | |
Increase in Interest Receivable | |
| (559,699 | ) |
Decrease in Receivable for Investment Securities Sold and Principal Paydowns | |
| 2,389,732 | |
Increase in Prepaid Expenses and Other Assets | |
| (210,069 | ) |
Increase in Payable for Securities Purchased | |
| 241,307 | |
Decrease in Accrued Advisory Fees | |
| (28,635 | ) |
Decrease in Related Party Payable | |
| (1,703 | ) |
Increase in Accrued Expenses and Other Liabilities | |
| 15,364 | |
Amortization of Deferred Financing Fees | |
| 84,815 | |
Net Amortization on Investments | |
| (1,374,179 | ) |
Net Realized Gain on Investments | |
| (2,087,057 | ) |
Change in Unrealized Depreciation on Investments | |
| 10,408,837 | |
| |
| | |
Net Cash Provided by Operating Activities | |
| 2,258,082 | |
| |
| | |
Cash Flows Used in Financing Activities: | |
| | |
Dividends Paid to Shareholders | |
| (10,365,731 | ) |
Deferred Financing Costs | |
| (52,500 | ) |
Proceeds from Line of Credit | |
| 15,581,453 | |
Payments on Line of Credit | |
| (10,081,453 | ) |
Net Cash Used in Financing Activities | |
| (4,918,231 | ) |
| |
| | |
Net Decrease in Cash | |
| (2,660,149 | ) |
Cash at Beginning of Period | |
| 4,628,425 | |
Cash at End of Period | |
$ | 1,968,276 | |
| |
| | |
Supplemental Cash Flow Information: | |
| | |
Cash Paid for Interest of $383,900 | |
| | |
| |
| | |
The
accompanying notes are an integral part of these financial statements.
Vertical
Capital Income Fund |
Financial
Highlights |
|
The
table below sets forth financial data for one share of beneficial interest outstanding throughout each year presented. |
| |
Year | | |
Year | | |
Year | | |
Year | | |
Year | |
| |
Ended | | |
Ended | | |
Ended | | |
Ended | | |
Ended | |
| |
September 30, 2022 | | |
September 30, 2021 | | |
September 30, 2020 | | |
September 30, 2019 | | |
September 30, 2018 | |
Net Asset Value, Beginning of Year | |
$ | 11.69 | | |
$ | 12.05 | | |
$ | 12.71 | | |
$ | 12.23 | | |
$ | 12.34 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
From Operations: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net investment income (a) | |
| 0.50 | | |
| 0.42 | | |
| 0.36 | | |
| 0.30 | | |
| 0.43 | |
Net gain (loss) from investments (both realized and unrealized) | |
| (0.80 | ) | |
| 0.33 | | |
| (0.50 | ) | |
| 0.72 | | |
| 0.06 | |
Total from operations | |
| (0.30 | ) | |
| 0.75 | | |
| (0.14 | ) | |
| 1.02 | | |
| 0.49 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Distributions to shareholders from: | |
| | | |
| | | |
| | | |
| | | |
| | |
Net investment income | |
| (0.73 | ) | |
| (0.89 | ) | |
| (0.33 | ) | |
| (0.34 | ) | |
| (0.39 | ) |
Net realized gains | |
| (0.18 | ) | |
| (0.22 | ) | |
| (0.19 | ) | |
| (0.20 | ) | |
| (0.21 | ) |
Return of capital | |
| (0.09 | ) | |
| — | | |
| — | | |
| — | | |
| — | |
Total distributions | |
| (1.00 | ) | |
| (1.11 | ) | |
| (0.52 | ) | |
| (0.54 | ) | |
| (0.60 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Asset Value, End of Year | |
$ | 10.39 | | |
$ | 11.69 | | |
$ | 12.05 | | |
$ | 12.71 | | |
$ | 12.23 | |
Market Price, End of Year | |
$ | 8.92 | | |
$ | 10.49 | | |
$ | 9.93 | | |
$ | 10.68 | | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Return-NAV (b) | |
| (2.77 | )% | |
| 6.52 | % | |
| (1.09 | )% | |
| 8.62 | % | |
| 4.03 | % |
Total Return-Market Price (b) | |
| (5.95 | )% | |
| 17.59 | % | |
| (2.99 | )% | |
| (8.73 | )% | |
| N/A | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Ratios/Supplemental Data | |
| | | |
| | | |
| | | |
| | | |
| | |
Net assets, end of Year (in 000s) | |
$ | 107,829 | | |
$ | 121,324 | | |
$ | 125,034 | | |
$ | 131,945 | | |
$ | 137,659 | |
Ratio of gross expenses to average net assets (c) | |
| 3.27 | % (d) | |
| 3.05 | % | |
| 3.06 | % | |
| 3.87 | % (e) | |
| 3.03 | % (f) |
Ratio of net expenses to average net assets (c) | |
| 3.09 | % (d) | |
| 2.88 | % | |
| 2.73 | % | |
| 3.34 | % (e) | |
| 2.09 | % (f) |
Ratio of net investment income to average net assets (c) | |
| 4.53 | % (d) | |
| 3.56 | % | |
| 2.95 | % | |
| 2.43 | % (e) | |
| 3.52 | % (f) |
Portfolio turnover rate | |
| 28.39 | % | |
| 14.73 | % | |
| 20.13 | % | |
| 7.12 | % | |
| 5.11 | % |
Loan Outstanding, End of Year (000s) | |
$ | 7,455 | | |
$ | 1,923 | | |
$ | 13,000 | | |
$ | 2,355 | | |
$ | 6,664 | |
Asset Coverage Ratio for Loan Outstanding (g) | |
| 1546 | % | |
| 6409 | % | |
| 1062 | % | |
| 5702 | % | |
| 2167 | % |
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding (g) | |
$ | 15,463 | | |
$ | 64,090 | | |
$ | 10,618 | | |
$ | 53,778 | | |
$ | 20,680 | |
Weighted Average Loans Outstanding (000s) (h) | |
$ | 8,051 | | |
$ | 10,788 | | |
$ | 9,796 | | |
$ | 7,500 | | |
$ | 4,500 | |
Weighted Average Interest Rate on Loans Outstanding | |
| 4.50 | % | |
| 3.75 | % | |
| 3.79 | % | |
| 5.14 | % | |
| 4.69 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| (a) | Per
share amounts are calculated using the annual average shares method, which more appropriately presents the per share data for the period. |
| (b) | Total
returns are historical in nature and assume changes in share price, reinvestment of dividends and capital gains distributions, if any,
and excludes the effect of sales charges. Had the Adviser not waived expenses, total returns would have been lower. |
| (c) | Ratio
includes 0.41%, 0.41%, 0.48%, 0.46% and 0.24% for the years ended September 30, 2022, 2021, 2020, 2019 and 2018, respectively, attributed
to interest expenses and fees. |
| (d) | Ratio
includes 0.18% for the year ended September 30, 2022 that attributed to extraordinary expenses that relate to the strategic alternative
search. |
| (e) | Ratio
includes 0.77% for the year ended September 30, 2019 that attributed to reorganization (NYSE listing) expenses and contested proxy expenses. |
| (f) | Ratio
includes 0.01% for the year ended September 30, 2018 that attributed to advisory transition expenses. |
| (g) | Represents
value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period. |
| (h) | Based
on monthly weighted average. |
The
accompanying notes are an integral part of these financial statements.
Vertical
Capital Income Fund |
Notes
to Financial Statements |
September
30, 2022 |
Vertical
Capital Income Fund (the Fund), was organized as a Delaware statutory trust on April 8, 2011 and is registered under the
Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company.
The investment objective of the Fund is to seek income. The Fund currently has one class of shares which commenced operations on December
30, 2011. Prior to March 29, 2019, the Fund offered shares at net asset value plus a maximum sales charge of 5.75%. Oakline Advisors,
LLC (the Advisor), serves as the Funds investment adviser.
As
disclosed in a press released dated February 22, 2022, the Board of Trustees has engaged Ladenburg Thalmann & Co. Inc. to evaluate
strategic alternatives for the Fund, with the goal of increasing shareholder value. The Boards review of strategic alternatives remains
ongoing.
| 2. | SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES |
The
Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946 Financial Services –
Investment Companies. The following is a summary of significant accounting policies and reporting policies used in preparing the
financial statements. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (GAAP). The Fund amortizes premiums and discounts using the effective interest rate method.
Offering expenses are amortized over 12 months following the time they are incurred.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of income and expenses for the period. Actual results could differ from those estimates.
Investment
Security Valuation
Mortgage
Notes – The Fund uses an independent third-party pricing service, approved by the Funds Board of Trustees (the Board)
and the Funds Advisor as the Boards valuation designee, to value its Mortgage Notes on a monthly basis. The third-party
pricing servicer uses a cash flow forecast and valuation model that focuses on forecasting the frequency, timing and severity of mortgage
loss behavior. The model incorporates numerous observable loan-level factors such as unpaid principal balance, remaining term of the
loan and coupon rate as well as macroeconomic data including yield curves, spreads to the Treasury curves and home price indexes. The
model also includes a number of unobservable factors and assumptions (such as voluntary and involuntary prepayment speeds, delinquency
rates, foreclosure timing, and others) to determine a fair value. While the model requires a minimum set of data to develop a reasonable
fair value, the model is capable of accepting additional data elements. The model makes certain assumptions unless a specific data element
is included, in which case it uses the additional data. Not all assumptions have equal weighting in the model. Using assumptions in this
manner is a part of the Funds valuation policy and procedures and provides consistency in the application of valuation assumptions.
The third-party pricing servicer also benchmarks its pricing model against observable pricing levels being quoted by a range of market
participants active in the purchase and sale of Mortgage Notes. The combination of loan level criteria and market adjustments produces
a monthly price for each Mortgage Note relative to current public market conditions.
Prior
to purchase, each Mortgage Note goes through a due diligence process that includes considerations such as underwriting borrower credit,
employment history, property valuation, and delinquency history with an overall emphasis on repayment of the Mortgage Notes. The purchase
price of the Mortgage Notes reflects the overall risk relative to the findings of this due diligence process.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
The
Fund invests primarily in Mortgage Notes secured by residential real estate. The market or liquidation value of each type of residential
real estate collateral may be adversely affected by numerous factors, including rising interest rates; changes in the national, state
and local economic climate and real estate conditions; perceptions of prospective buyers of the safety, convenience and attractiveness
of the properties; maintenance and insurance costs; changes in real estate taxes and other expenses; adverse changes in governmental
rules and fiscal policies; adverse changes in zoning laws; natural disasters and other factors beyond the control of the borrowers.
The
Funds investments in Mortgage Notes are subject to liquidity risk because there is a limited secondary market for Mortgage Notes. Liquidity
risk exists when particular investments of the Fund would be difficult to purchase or sell, possibly preventing the Fund from selling
such illiquid securities at an advantageous time or price, or possibly requiring the Fund to dispose of other investments at unfavorable
times or prices in order to satisfy its obligations. Securities for which current market quotations are not readily available, such as
the Mortgage Notes the Fund invests in, or for which quotations are not deemed to be representative of market values are valued at fair
value as determined in good faith by the Advisor in accordance with the Advisors Portfolio Securities Valuation Procedures (the
Procedures). The Procedures consider, among others, the following factors to determine a securitys fair value: the
nature and pricing history (if any) of the security; whether any dealer quotations for the security are available; and possible valuation
methodologies that could be used to determine the fair value of the security.
The
valuation inputs and subsequent outputs are reviewed and maintained on a monthly basis. Any calibrations or adjustments to the model
that may be necessary are done on an as-needed basis to facilitate fair pricing. Financial markets are monitored relative to the interest
rate environment. If other available market data indicates that the pricing data from the third-party service is materially inaccurate,
or pricing data is unavailable, the Advisor undertakes a review of other available prices and takes additional steps to determine fair
value. In all cases, the Board reviews at least annually its understanding of methodology and assumptions underlying the fair value used
through a report from the Advisor.
The
Fund follows guidance in ASC 820, Fair Value Measurement, where fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between the market participants at the measurement date. The Advisor
utilizes various methods to measure the fair value of its investments on a recurring basis. The sale price could be different than its
fair value determined under ASC 820. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. ASC 820 classifies the
inputs used to measure these fair values into the following hierarchy:
Level
1 – Unadjusted quoted prices in active markets for identical and/or similar assets and liabilities that the Advisor has the
ability to access at the measurement date.
Level
2 – Other significant observable inputs other than quoted prices included in Level 1 for the asset or liability, either directly
or indirectly. These inputs may include quoted prices for similar investments or identical investments in an active market, interest
rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level
3 – Significant unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available,
representing the Advisors own assumptions about the assumptions a market participant would use in valuing the asset or liability,
and would be based on the best information available.
The
availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example,
the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics
particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value
is greatest for instruments categorized in Level 3.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
The
inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes,
the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest
level input that is significant to the fair value measurement in its entirety.
As
of September 30, 2022, management estimated that the carrying value of cash, accounts receivable, prepaid expenses and other assets,
line of credit payable, payables for securities purchased, accrued advisory fees, related party payables, and accrued and other liabilities
were at amounts that reasonably approximated their fair value based on their short-term maturities.
The
inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
The following tables summarize the inputs used as of September 30, 2022 for the Funds assets measured at fair value:
Assets | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Mortgage Notes | |
$ | — | | |
$ | — | | |
$ | 110,163,130 | | |
$ | 110,163,130 | |
Other Investments | |
| — | | |
| — | | |
| 397,716 | | |
| 397,716 | |
Total | |
$ | — | | |
$ | — | | |
$ | 110,560,846 | | |
$ | 110,560,846 | |
There
were no transfers between levels during the current period presented. It is the Funds policy to record transfers into or out of
levels at the end of the reporting period.
The
following is a reconciliation of assets in which Level 3 inputs were used in determining value:
| |
Mortgage Notes | | |
Other Investments | | |
Total | |
Beginning Balance | |
$ | 113,855,799 | | |
$ | 160,749 | | |
$ | 114,016,548 | |
Net realized gain (loss) | |
| 2,085,476 | | |
| 1,581 | | |
| 2,087,057 | |
Change in unrealized depreciation | |
| (10,425,161 | ) | |
| 16,324 | | |
| (10,408,837 | ) |
Cost of purchases | |
| 36,111,602 | | |
| — | | |
| 36,111,602 | |
Proceeds from sales and principal paydowns | |
| (32,440,710 | ) | |
| (178,993 | ) | |
| (32,619,703 | ) |
Purchase discount amortization | |
| 1,373,840 | | |
| 339 | | |
| 1,374,179 | |
Net Transfers within level 3 | |
| (397,716 | ) | |
| 397,716 | | |
| — | |
Ending balance | |
$ | 110,163,130 | | |
$ | 397,716 | | |
$ | 110,560,846 | |
The
total change in unrealized depreciation included in the Statement of Operations attributable to Level 3 investments still held at September
30, 2022 is $7,798,425.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
The
following table provides quantitative information about the Funds Level 3 values, as well as its inputs, as of September 30, 2022. The
table is not all-inclusive, but provides information on the significant Level 3 inputs:
| |
Value | | |
Valuation
Technique |
| |
Unobservable
Inputs |
| |
Range
of Unobservable Inputs |
| |
Weighted
Average of Unobservable Inputs |
|
Mortgage
Notes | |
$ | 110,163,130 | | |
Comprehensive
pricing model with emphasis on discounted cash flows |
| |
Constant prepayment
rate |
| |
0 - 100.0% |
| |
11.1% |
|
| |
| | | |
|
| |
Delinquency |
| |
0 - 1,490 days |
| |
43 days |
|
| |
| | | |
|
| |
Loan-to-Value |
| |
2.0 - 230% |
| |
75.6% |
|
| |
| | | |
|
| |
Discount rate |
| |
2.9 - 20.2% |
| |
7.3% |
|
Other
Investments | |
| 397,716 | | |
Market comparable |
| |
Sales price |
| |
$87 - $91 sq/ft |
| |
$88.6 sq/ft |
|
Closing
Balance | |
$ | 110,560,846 | | |
|
| |
|
| |
|
| |
|
|
A
change to the unobservable input may result in a significant change to the value of the investment as follows:
Security Transactions and | |
| |
|
Investment Income - | |
Impact to Value if | |
Impact to Value if |
Investment Security | |
Input Increases | |
Input Decreases |
Constant Prepayment Rate | |
Increase | |
Decrease |
Delinquency | |
Decrease | |
Increase |
Loan to Value | |
Decrease | |
Increase |
Discount rate | |
Decrease | |
Increase |
Cash
– Cash includes cash and overnight investments in interest-bearing demand deposits with a financial institution with maturities
of three months or less. The Fund maintains deposits with a high quality financial institution in an amount that is in excess of federally
insured limits.
Security
Transactions and Investment Income – Mortgage Notes are accounted for on a trade date basis. Cost is determined and gains and
losses are based upon the specific identification method for both financial statement and federal income tax purposes. Interest income
is recorded on the accrual basis. Purchase discounts and premiums are accreted and amortized over the life of the respective securities
using the effective interest method.
Interest
Income on Non-Accrual Loans – The Fund discontinues the accrual of interest on loans when, in the opinion of management, there
is an assessment that the borrower will likely be unable to meet all contractual payments as they become due.
Credit
Facility – On July 21, 2021, the Fund entered into an amended and restated revolving line of credit agreement with Nexbank
for investment purposes and to help maintain the Funds liquidity, subject to the limitations of the 1940 Act for borrowings. The
maximum amount of borrowing allowed under the amended and restated agreement was the lesser of $35 million or 75% of the eligible portion
of the Funds loans. Borrowings under the amended and restated Nexbank agreement bear interest at a rate equal to the Prime Rate
plus applicable margin of 0.5%, per annum, on the outstanding principal balance. The Nexbank agreement matures on July 18, 2023 and has
an one-year extension available. The Nexbank agreement is secured by assets of the Fund.
Accumulated
amortization of deferred financing fees was $84,815 during the year ending September 30, 2022. The average amount of borrowing outstanding
for the period was $8,050,993 and the total interest expense was $384,713. The outstanding balance under the NexBank line of credit was
$7,500,000 at September 30, 2022.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
Federal
Income Taxes – The Fund intends to continue to comply with the requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and will distribute all of its taxable income, if any, to shareholders. Accordingly, no provision for
Federal income taxes is required in the financial statements.
The
Fund recognizes the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained
assuming examination by tax authorities. Management has analyzed the Funds tax positions and has concluded that no liability for
unrecognized tax benefits should be recorded related to uncertain tax positions taken in the Funds September 30, 2019 –
September 30, 2021 tax returns or expected to be taken in the Funds September 30, 2022 tax returns. The Fund identified its major
tax jurisdictions as U.S. Federal jurisdictions where the Fund makes significant investments; however, the Fund is not aware of any tax
positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next
twelve months. The Fund accounts for interest and penalties for any uncertain tax positions as a component of income tax expense. No
interest or penalty expense was recorded during the year ended September 30, 2022.
Distributions
to Shareholders – Distributions from investment income and capital gains, if any, are declared and paid monthly and are recorded
on the ex-dividend date. The Boards decision to declare distributions will be influenced by its obligation to ensure that the
Fund maintains its federal tax status as a Registered Investment Company (RIC). In order to qualify as a RIC, the Fund
must derive a minimum of 90% of its income from capital gains, interest or dividends earned on investments and must distribute a minimum
of 90% of its net investment income in the form of interest, dividends or capital gains to its shareholders. Otherwise, the Fund may
be subject to an excise tax from the Internal Revenue Service.
The
character of income and gains to be distributed is determined in accordance with Federal income tax regulations, which may differ from
GAAP. These book/tax differences are considered either temporary (i.e., deferred losses, capital loss carry forwards) or
permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of
net assets based on their federal tax-basis treatment; temporary differences do not require classification.
Indemnification
– The Trust indemnifies its officers and Trustees for certain liabilities that may arise from the performance of their duties
to the Trust. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations
and warranties and which provide general indemnities. The Funds maximum exposure under these arrangements is unknown, as this
would involve future claims that may be made against the Fund that have not yet occurred. However, management of the Fund expects the
risk of loss due to these warranties and indemnities to be remote.
| 3. | INVESTMENT
IN RESTRICTED SECURITIES |
The
Fund may invest in Restricted Securities (those which cannot be offered for public sale without first being registered under the Securities
Act of 1933) that are consistent with the Funds investment objectives and investment strategies. Investments in Restricted Securities
are valued at fair value as determined in good faith in accordance with procedures adopted by the Board of Trustees. The Fund would typically
have no rights to compel the obligor or issuer of a Restricted Security to register such a Restricted Security under the 1933 Act. No
such securities were owned by the Fund at September 30, 2022.
| 4. | INVESTMENT
ADVISORY AGREEMENT AND TRANSACTIONS WITH RELATED PARTIES |
The
business activities of the Fund are overseen by the Board, which is responsible for the overall management of the Fund.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
Advisory
Fees - Pursuant to an Advisory Agreement with the Fund, the Advisor, under the oversight of the Board, directs certain of the daily operations
of the Fund and supervises the performance of administrative and professional services provided by others. As compensation for its services
and the related expenses borne by the Advisor, the Fund pays the adviser a management fee, computed and accrued daily and paid monthly,
at an annual rate of 1.25% of the average daily net assets of the Fund. For the year ended September 30, 2022 the Advisor earned advisory
fees of $1,433,885.
The
Advisor has contractually agreed to waive all or part of its management fees and/or make payments to limit Fund expenses (exclusive of
any taxes, leverage interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, expenses of investing
in underlying funds, or extraordinary expenses such as litigation and Advisor transition expenses) so that the total annual operating
expenses of the Fund do not exceed 2.50% of the average daily net assets through September 30, 2022. This agreement has been extended
through September 30, 2023. Waivers and expense reimbursements may be recouped by the Advisor from the Fund within three years of when
the amounts were waived only if the Fund expenses are lower than both the lesser of the current expense cap and the expense cap in place
at the time of waiver. For the year ended September 30, 2022, the Advisor waived advisory fees of $214,432. Expenses subject to recapture
by the Advisor amounted to $847,207 of which $428,908 that will expire on September 30, 2023, and $203,867 that will expire on September
30, 2024, and $214,432 that will expire on September 30, 2025.
In
addition, certain affiliates provide services to the Fund as follows:
Ultimus
Fund Solutions, LLC (UFS) – UFS provides administration and fund accounting services to the Fund. Pursuant
to a separate servicing agreement with UFS, the Fund pays UFS customary fees for providing administration and fund accounting services
to the Fund. Certain officers of the Fund are also officers of UFS, and are not paid any fees directly by the Fund for serving in such
capacities. For the year ended September 30, 2022 UFS earned $181,233.
Northern
Lights Compliance Services, LLC (NLCS) – NLCS, an affiliate of UFS, provides a Chief Compliance Officer to
the Fund, as well as related compliance services, pursuant to a consulting agreement between NLCS and the Fund. Under the terms of such
agreement, NLCS receives customary fees from the Fund. For the year ended September 30, 2022 NLCS earned $55,803.
Blu
Giant, LLC (Blu Giant) – Blu Giant, an affiliate of UFS, provides EDGAR conversion and filing services as
well as print management services for the Fund on an ad-hoc basis. For the provision of these services, Blu Giant receives customary
fees from the Fund. For the year ended September 30, 2022 Blu Giant earned $8,687.
Trustees
– The Fund pays each Trustee who is not affiliated with the Fund or Advisor a quarterly fee of $5,000 and the lead unaffiliated
Trustee a quarterly fee of $10,000. Additionally, each unaffiliated Trustee receives $2,500 per meeting as well as reimbursement for
any reasonable expenses incurred attending meetings. The interested persons who serve as Trustees of the Fund receive no
compensation for their services as Trustees. None of the executive officers receive compensation from the Fund.
| 5. | INVESTMENT
TRANSACTIONS |
The
cost of purchases and proceeds from sales and paydowns of mortgage notes, other than U.S. Government securities and short-term investments,
for the year ended September 30, 2022 amounted to $36,111,602 and $32,619,703 respectively.
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
| 6. | DISTRIBUTIONS
TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL |
The
Statement of Assets and Liabilities represents cost for financial reporting purposes. Aggregate cost for federal tax purposes is $109,766,798
and differs from fair value by net unrealized appreciation (depreciation) of securities as follows:
Unrealized Appreciation | |
$ | 6,918,542 | |
Unrealized Depreciation | |
| (6,124,494 | ) |
Tax Net Unrealized Appreciation | |
| 794,048 | |
The
tax character of distributions paid during the fiscal year ended September 30, 2022 was as follows:
| |
Fiscal Year Ended | |
| |
September 30, 2022 | |
Ordinary Income | |
$ | 5,833,699 | |
Long-Term Capital Gain | |
| 3,619,074 | |
Return of Capital | |
| 912,958 | |
| |
$ | 10,365,731 | |
As
of September 30, 2022, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
Undistributed | | |
Undistributed | | |
Post October Loss | | |
Capital Loss | | |
Other | | |
Unrealized | | |
Total | |
Ordinary | | |
Long-Term | | |
and | | |
Carry | | |
Book/Tax | | |
Appreciation/ | | |
Distributable Earnings/ | |
Income | | |
Gains | | |
Late Year Loss | | |
Forwards | | |
Differences | | |
(Depreciation) | | |
(Accumulated Deficit) | |
$ | — | | |
$ | — | | |
$ | (720,570 | ) | |
$ | — | | |
$ | — | | |
$ | 794,048 | | |
$ | 73,478 | |
The
difference between book basis and tax basis accumulated net realized losses and unrealized appreciation from investments is primarily
attributable to tax adjustment for securities with significant debt modifications.
Late
year losses incurred after December 31 within the fiscal year are deemed to arise on the first business day of the following fiscal year
for tax purposes. The Fund incurred and elected to defer such late year losses of $624,328.
Capital
losses incurred after October 31 within the fiscal year are deemed to arise on the first business day of the following fiscal year for
tax purposes. The Fund incurred and elected to defer such capital losses of $96,242.
| 7. | MARKET
RISK AND CORONAVIRUS |
Unexpected
local, regional or global events, such as war; acts of terrorism; financial, political or social disruptions; natural, environmental
or man-made disasters; the spread of infectious illnesses or other public health issues; and recessions and depressions could have a
significant impact on the Fund and its investments and may impair market liquidity. Such events can cause investor fear, which can adversely
affect the economies of nations, regions and the market in general, in ways that cannot necessarily be foreseen. An outbreak of infectious
respiratory illness known as COVID-19, which is caused by a novel coronavirus (SARS-CoV-2), was first detected in China in December 2019
and subsequently spread globally. This coronavirus has resulted in, among other things, travel restrictions, closed international borders,
enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery,
prolonged quarantines, significant disruptions to business operations, market closures, cancellations and restrictions, supply chain
disruptions, lower consumer demand, and significant volatility and declines in global financial markets, as well as general concern and
uncertainty. The impact of COVID-19 has adversely affected, and other infectious illness outbreaks that may arise in the future could
adversely affect,
Vertical
Capital Income Fund |
Notes
to Financial Statements (Continued) |
September
30, 2022 |
the
economies of the U.S., many other nations and the entire global economy, as well as individual mortgage note borrowers and capital markets
in ways that cannot necessarily be foreseen. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political,
social and economic risks in the U.S., certain other countries or globally. The duration of the COVID-19 outbreak and its effects cannot
be determined with certainty.
The
Fund is required to recognize in the financial statements the effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed
to keep the financial statements from being misleading, the Fund is required to disclose the nature of the event as well as an estimate
of its financial effect, or a statement that such an estimate cannot be made. Management has evaluated subsequent events through December
12, 2022, which is the date of these financial statements, and determined that no events or transactions occurred requiring adjustment
or disclosure in the financial statements other than the following.
In
September 2022, Hurricane Ian impacted homes that secure mortgages owned by the Fund. With limited information available as of September
30, 2022, 28 loans located in counties designated by the Federal Emergency Management Agency (FEMA) as disaster areas were
discounted based on the Funds estimate of potential losses related to these loans. Values of these 28 loans were discounted by 35% which
reduced the value of the portfolio by approximately $2.4 million or $0.23 per share on September 30, 2022.
During
October and November 2022 all of these homes were inspected and found to have no damage; the 35% discount from these loans was removed
and is reflected in the accompanying financials.
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GRANT
THORNTON LLP
1717
Main Street, Suite 1800
Dallas,
TX 75201
D
+1 214 561 2300
F
+1 214 561 2370 |
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
|
|
|
|
|
Board
of Trustees and Shareholders
Vertical Capital Income Fund
Opinion
on the financial statements
We have audited the accompanying statement of assets and liabilities
of Vertical Capital Income Fund (the “Fund”), including the schedule of investments, as of September 30, 2022, the related
statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Fund as of September 30, 2022 and the results
of its operations and its cash flows for the year then ended, the changes in net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then ended in conformity with accounting principles generally accepted
in the United States of America.
Basis
for opinion
These financial statements are the responsibility of the Fund’s
management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to
be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part
of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly, we express
no such opinion. |
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GT.COM |
|
Grant
Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal
entities and are not a worldwide partnership. |
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Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of September 30, 2022 by correspondence with the custodian and loan servicers. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the financial statements. We believe that our audits provide a reasonable basis for our opinion. |
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We have
served as the Funds auditor since 2017. |
|
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Dallas,
Texas |
|
December
12, 2022 |
Supplemental
Information (Unaudited) |
CURRENT
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT POLICIES AND PRINCIPAL RISKS OF THE FUND
Investment
Objective and Policies
The
Funds investment objective is to seek income. The Fund pursues its investment objective by investing primarily in individual interest
income-producing debt securities secured by residential real estate (i.e., mortgage loans made to individual borrowers that are represented
by a note (the security) and a security agreement in the form of a mortgage or deed of trust). These notes are typically
sold individually or in groups or packages, all of which are difficult to value. The Fund acquires loans with varying terms and structures,
levels of borrower equity and credit profiles. The Fund does not limit the allocation of Fund assets in performing loans along the dimensions
of terms and structures, borrower equity, and credit profiles. Up to 10% of the loans the Fund acquires may be delinquent or in default
at the time of acquisition. The Fund will not purchase loans that currently are in foreclosure; however, loans acquired by the Fund may
go into foreclosure subsequent to acquisition by the Fund. In addition, the Fund may invest up to approximately 10% of its assets in
loans that are classified as sub-prime at the time of purchase by the Fund. The Fund does not invest in foreign securities.
The
Fund defines the individual borrowers issuing these types of mortgage-related notes as a type of industry. Therefore, the Fund concentrates
investments in the mortgage-related industry because, under normal circumstances, it invests over 25% of its assets in mortgage-related
securities. This policy is fundamental and may not be changed without shareholder approval.
Principal
Risk Factors
Investing
in the Fund involves risks, including the risk that you may receive little or no return on your investment or that you may lose part
or all of your investment.
Borrower
Risk. A specific security can perform differently from the market as a whole for reasons related to the borrower, such as an
individuals economic situation. Compared to investment companies that focus only on securities issued by large capitalization companies,
the Funds net asset value may be more volatile because it invests in notes of individuals. Individuals issuing notes secured by residential
real estate are more likely to suffer sudden financial reversals such as (i) job loss, (ii) depletion of savings or (iii) loss of access
to refinancing opportunities. Further, compared to securities issued by large companies, notes issued by individuals are more likely
to experience more significant changes in market values, be harder to sell at times and at prices that the Adviser believes appropriate,
and offer greater potential for losses.
Concentration
Risk. Because the Fund will invest more than 25% of its assets in the mortgage-related industry, the Fund will be subject to
greater volatility risk than a fund that is not concentrated in a single industry. The Funds investments may be concentrated in regions
or states, which exposes the Fund to region- or state-specific economic risks.
Supplemental Information (Unaudited)(Continued) |
Credit
Risk. Individual borrowers may not make scheduled interest and principal payments, resulting in losses to the Fund. In addition,
the credit quality of securities may be lowered if a borrowers financial condition deteriorates, which tends to increase the risk of
default and decreases a notes value. Weak or declining general economic conditions tend to increase default risk. Lower-quality notes,
such as those considered sub-prime by the Adviser are more likely to default than those considered prime by the
Adviser or a rating evaluation agency or service provider. An economic downturn or period of rising interest rates could adversely affect
the market for sub-prime notes and reduce the Funds ability to sell these securities. The lack of a liquid market for these securities
could decrease the Funds share price. Additionally, borrowers may seek bankruptcy protection which would delay resolution of security
holder claims and may eliminate or materially reduce liquidity.
Defaulted
Securities Risk. Defaulted securities lack liquidity and may have no secondary market for extended periods. Defaulted securities
may have low recovery values and defaulting borrowers may seek bankruptcy protection which would delay resolution of the Funds claims.
The Fund anticipates a significant likelihood of default by mortgage-related borrowers.
Fixed
Income Risk. Typically, a rise in interest rates causes a decline in the value of fixed income securities. Rising interest rates
tend to increase the likelihood of borrower default.
Leverage
Risk. The use of leverage by borrowing money to purchase additional securities causes the Fund to incur additional expenses and
will magnify losses in the event of underperformance of the securities purchased with borrowed money. In addition, a lender to the Fund
may terminate or refuse to renew any credit facility. If the Fund is unable to access additional credit, it may be forced to sell investments
at inopportune times, which may further depress the returns of the Fund.
Liquidity
Risk. The Funds investments are subject to liquidity risk because there is a limited secondary market for mortgage notes. Liquidity
risk exists when particular investments of the Fund would be difficult to purchase or sell, possibly preventing the Fund from selling
such illiquid securities at an advantageous time or price, or possibly requiring the Fund to dispose of other investments at unfavorable
times or prices in order to satisfy its obligations.
Management
Risk. The Advisers judgments about the attractiveness, value and potential appreciation of a particular real estate segment
and securities in which the Fund invests may prove to be incorrect and may not produce the desired results.
Market
Risk. An investment in the Funds shares is subject to investment risk, including the possible loss of the entire principal amount
invested. An investment in the Funds shares represents an indirect investment in the securities owned by the Fund. The value of these
securities, like other market investments, may move up or down, sometimes rapidly and unpredictably. The Funds borrowing costs, if any,
will increase when interest rates rise. Additionally, unexpected local, regional or global events, such as war; acts of
Supplemental Information (Unaudited)(Continued) |
terrorism;
financial, political or social disruptions; natural, environmental or man-made disasters; the spread of infectious illnesses or other
public health issues (such as the global pandemic coronavirus disease 2019 (COVID-19)); and recessions and depressions could have a significant
impact on the Fund and its investments and may impair market liquidity. Such events can cause investor fear, which can adversely affect
the economies of nations, regions and the market in general, in ways that cannot necessarily be foreseen.
Prepayment
Risk. Securities may be subject to prepayment risk because borrowers are typically able to prepay principal. Consequently, a
securitys maturity may be longer or shorter than anticipated. When interest rates fall, obligations tend to be paid off more quickly
than originally anticipated and the Fund may have to invest the prepaid proceeds in securities with lower yields. When interest rates
rise, obligations will tend to be paid off by the obligor more slowly than anticipated, preventing the Fund from reinvesting at higher
yields.
Real
Estate Risk. The Fund will not invest in real estate directly, but, because the Fund will invest the majority of its assets in
securities secured by real estate, its portfolio will be significantly impacted by the performance of the real estate market and may
experience more volatility and be exposed to greater risk than a more diversified portfolio. The value of residential real estate collateral
is affected by:
| (i) | changes
in general economic and market conditions including changes in employment; |
| (ii) | changes
in the value of real estate properties generally; |
| (iii) | local
economic conditions, overbuilding and increased competition; |
| (iv) | increases
in property taxes and operating expenses; |
| (v) | changes
in zoning laws; |
| (vi) | casualty
and condemnation losses including environment remediation costs; |
| (vii) | variations
in rental income, neighborhood values or the appeal of property to tenants or potential buyers; |
| (viii) | the
availability of financing; |
| (ix) | changes
in interest rates and available borrowing leverage; and |
Servicer
Risk. Because the Fund engages servicers to collect payments from borrowers, there is a risk that payments to the Fund will be
delayed if a servicer fails to perform its functions or fails to perform them in a timely manner. If a servicer becomes insolvent or
the Fund otherwise decides to move to a new servicer, the Fund will incur expenses in transferring servicing duties to a new servicer
and borrower delinquencies would likely rise during a transition.
Supplemental
Information (Unaudited)(Continued) |
The
Adviser may invest up to 10% of the Funds assets in notes secured by commercial real estate. The Adviser selects securities by evaluating
the issuers credit quality and the potential liquidation value of the commercial real estate collateral securing the issuers debt obligation.
When evaluating credit quality the Adviser uses an underwriting model that takes into account the following factors, but may also take
into consideration others:
Commercial
Issuers
| ● | Issuer
payment history including delinquencies and defaults |
| ● | Securitys
interest rate |
| ● | Issuer
total debt service load and total fixed costs |
| ● | Tenant
quality and lease roll-over |
| ● | Local
market competition |
| ● | Title
search of property to assure clear title by issuer |
When
evaluating commercial real estate collaterals potential liquidation value the Adviser uses a collateral valuation underwriting model
that may take into account the following factors, but may also take into consideration others:
| ● | Current
property value as established by an independent brokers price opinion |
| ● | State
laws pertaining to mortgages in that domicile |
| ● | Local
real estate trends around the respective property |
| ● | Potential
environmental remediation costs at site |
| ● | Estimated
foreclosure value for the property |
Even
though the Adviser re-evaluates each issuers ability to pay, it nonetheless anticipates a significant likelihood of default by issuers
because of difficult-to-predict economic events. The Adviser expects to resolve or forestall defaults primarily by renegotiating note
terms to lower interest and/or principal payments so that an issuer can resume payments on its note. The Adviser also may enter into
an agreement with the issuer and a third party to sell the property to the third party for less than the principal balance on the note
while forgiving any unpaid principal that remains after receiving the proceeds from the sale (commonly referred to as a short-sale).
The Adviser may also foreclose upon the property and seek to recover via sale of the property.
There
are also special risks associated with particular sectors, or real estate operations generally, as described below:
Retail
Properties. Retail properties are affected by the overall health of the economy and may be adversely affected by, among other things,
the growth of alternative forms of retailing, bankruptcy, departure or cessation of operations of a tenant, a shift in consumer demand
due to demographic changes, changes in spending patterns and lease terminations.
Office
Properties. Office properties are affected by the overall health of the economy, and other factors such as a downturn in the businesses
operated by their tenants, obsolescence and non-competitiveness.
Hotel
Properties. The risks of hotel properties include, among other things, the necessity of a high level of continuing capital expenditures,
competition, increases in operating costs which may not be offset by increases in revenues, dependence on business and commercial travelers
and tourism, increases in fuel costs and other expenses of travel, and adverse effects of general and local economic conditions. Hotel
properties tend to be more sensitive to adverse economic conditions and competition than many other commercial properties.
Healthcare
Properties. Healthcare properties and healthcare providers are affected by several significant factors, including federal, state
and local laws governing licenses, certification, adequacy
Supplemental Information (Unaudited)(Continued) |
of
care, pharmaceutical distribution, rates, equipment, personnel and other factors regarding operations, continued availability of revenue
from government reimbursement programs and competition on a local and regional basis. The failure of any healthcare operator to comply
with governmental laws and regulations may affect its ability to operate its facility or receive government reimbursements.
Multifamily
Properties. The value and successful operation of a multifamily property may be affected by a number of factors such as the location
of the property, the ability of the management team, the level of mortgage rates, the presence of competing properties, adverse economic
conditions in the locale, oversupply and rent control laws or other laws affecting such properties.
Community
Centers. Community center properties are dependent upon the successful operations and financial condition of their tenants, particularly
certain of their major tenants, and could be adversely affected by bankruptcy of those tenants. In some cases a tenant may lease a significant
portion of the space in one center, and the filing of bankruptcy could cause significant revenue loss. Like others in the commercial
real estate industry, community centers are subject to environmental risks and interest rate risk. They also face the need to enter into
new leases or renew leases on favorable terms to generate rental revenues. Community center properties could be adversely affected by
changes in the local markets where their properties are located, as well as by adverse changes in national economic and market conditions.
Self-Storage
Properties. The value and successful operation of a self-storage property may be affected by a number of factors, such as the ability
of the management team, the location of the property, the presence of competing properties, changes in traffic patterns and effects of
general and local economic conditions with respect to rental rates and occupancy levels.
Other
factors may contribute to the risk of commercial real estate investments:
Development
Issues. Certain commercial real estate issuers may engage in the development or construction of real estate properties. These issuers
are exposed to a variety of risks inherent in real estate development and construction, such as the risk that there will be insufficient
tenant demand to occupy newly developed properties, and the risk that prices of construction materials or construction labor may rise
materially during the development.
Lack
of Insurance. Certain commercial real estate issuers may fail to carry comprehensive liability, fire, flood, earthquake extended
coverage and rental loss insurance, or insurance in place may be subject to various policy specifications, limits and deductibles. Should
any type of uninsured loss occur, the portfolio company could lose its investment in, and anticipated profits and cash flows from, a
number of properties and, as a result, adversely affect the Funds investment performance.
Dependence
on Tenants. The value of commercial real estate issuers properties and the ability to repay their notes depend upon the ability
of the tenants at their properties to generate enough income in excess of their operating expenses to make their lease payments. Changes
beyond the control of commercial real estate issuers may adversely affect their tenants ability to make their lease payments and, in
such event, would substantially reduce both their income from operations and ability to repay their notes.
Financial
Leverage. Commercial real estate issuers may be highly leveraged and financial covenants may affect the ability of these issuers
to operate effectively.
Environmental
Issues. In connection with the ownership (direct or indirect), operation, management and development of real properties that may
contain hazardous or toxic substances, a commercial real estate issuer may be considered an owner, operator or responsible party of such
properties and, therefore, may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental
fines and liabilities for injuries to persons and property. The existence of any such material environmental liability could have a material
adverse effect on the results of
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Information (Unaudited)(Continued) |
operations
and cash flow of any such issuer and, as a result, the amount available to make interest or principal payments to the Fund could be reduced.
The
Adviser may invest a portion of the Funds assets in indirect real estate loans through loan participations. Loan participations represent
a percentage of an outstanding loan or package of loans. Loan participation holders typically participate on a pro-rata basis in collected
interest and principal payments and are similarly exposed to a proportional risk of default. Loan participations are also subject to
the default risk of the loan participation grantor, which is heightened if that entity also services the underlying loan or loans.
The
Adviser may invest a portion of the Funds assets in second mortgage loans. These are subject to the risks of a first mortgage loan but
are also highly sensitive to default. A borrower default on a second mortgage (or related first mortgage) typically results in a total
loss of the Funds investment in the second mortgage loan.
Fundamental
Policies
The
Funds stated fundamental policies, which may only be changed by the affirmative vote of a majority of the outstanding voting securities
of the Fund (the shares), are listed below. Majority of the outstanding voting securities of the Fund means the vote, at an annual or
special meeting of shareholders, duly called, (a) of 67% or more of the shares present at such meeting, if the holders of more than 50%
of the outstanding shares are present or represented by proxy; or (b) of more than 50% of the outstanding shares, whichever is less.
The Fund may not:
(1)
Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (the 1940 Act) (which currently
limits borrowing to no more than 33-1/3% of the value of the Funds total assets, including the value of the assets purchased with the
proceeds of its indebtedness, if any). The Fund may borrow for investment purposes, for temporary liquidity, or to finance repurchases
of its shares.
(2)
Issue senior securities, except to the extent permitted by Section 18 of the 1940 Act (which currently limits the issuance of a class
of senior securities that is indebtedness to no more than 33-1/3% of the value of the Funds total assets or, if the class of senior
security is stock, to no more than 50% of the value of the Funds total assets).
(3)
Underwrite securities of other issuers, except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as
amended (the Securities Act) in connection with the disposition of its portfolio securities. The Fund may invest in restricted
securities (those that must be registered under the Securities Act before they may be offered or sold to the public) to the extent permitted
by the 1940 Act.
(4)
Invest more than 25% of the market value of its assets in the securities of companies, entities or issuers engaged in any one industry,
except the mortgage-related industry, as defined in the Funds Prospectus. Under normal circumstances, the Fund will invest at least
25% of its net assets in mortgage-related securities. This limitation does
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Information (Unaudited)(Continued) |
not
apply to investment in the securities of the U.S. Government, its agencies or instrumentalities.
(5)
Purchase or sell real estate or interests in real estate. This limitation is not applicable to investments in securities that are secured
by or represent interests in real estate (e.g. mortgage loans evidenced by notes or other writings defined to be a type of security).
Additionally, the preceding limitation on real estate or interests in real estate does not preclude the Fund from investing in mortgage-related
securities or investing in companies engaged in the real estate business or that have a significant portion of their assets in real estate
(including real estate investment trusts), nor from disposing of real estate that may be acquired pursuant to a foreclosure (or equivalent
procedure) upon a security interest.
(6)
Purchase or sell commodities, commodity contracts, including commodity futures contracts, unless acquired as a result of ownership of
securities or other investments, except that the Fund may invest in securities or other instruments backed by or linked to commodities,
and invest in companies that are engaged in a commodities business or have a significant portion of their assets in commodities, and
may invest in commodity pools and other entities that purchase and sell commodities and commodity contracts.
(7)
Make loans to others, except (a) through the purchase of debt securities in accordance with its investment objectives and policies, including
notes secured by real estate, which may be considered loans; (b) to the extent the entry into a repurchase agreement is deemed to be
a loan; and (c) by loaning portfolio securities. Additionally, the preceding limitation on loans does not preclude the Fund from modifying
note terms.
If
a restriction on the Funds investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund
assets invested in certain securities or other instruments, or change in average duration of the Funds investment portfolio, resulting
from changes in the value of the Funds total assets, will not be considered a violation of the restriction; provided, however, that
the asset coverage requirement applicable to borrowings shall be maintained in the manner contemplated by applicable law.
Annual
Shareholder Meeting
At
the Annual Meeting of Shareholders of the Fund, held at the offices of Thompson Hine LLP, 41 S. High St. 17th Floor, Columbus, Ohio 43215,
on Wednesday, September 28, 2022, shareholders of record as of the close of business on August 31, 2022, voted to approve the following
proposal:
Proposal
To re-elect Robert J. Boulware as a Trustee of the Fund:
FOR:
4,465,353.356
WITHHOLD:
3,779,125.409
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Information (Unaudited)(Continued) |
Renewal
of Investment Advisory Agreement
Approval
of Renewal of Investment Advisory Agreement with Oakline Advisors, LLC
At
a meeting held on August 12, 2022, the Board of Trustees (the Board or Trustees) of the Vertical Capital Income
Fund (the Fund), including a majority of the Trustees who are not interested persons (the Independent Trustees),
as such term is defined by the Investment Company Act of 1940, as amended (the 1940 Act), approved the renewal of the investment
management agreement (the Advisory Agreement) between Oakline Advisors, LLC (the Adviser or Oakline)
and the Fund. Matters considered by the Trustees in connection with the Boards renewal of the Advisory Agreement included the following:
Nature,
Extent and Quality of Services. The Trustees discussed Oaklines history and portfolio management experience. They noted that Oakline
and its affiliates served a variety of clients, and managed approximately $400 million in assets. The Trustees reviewed the background
and experience of Oaklines investment team. The Trustees further noted the Adviser had provided a high level of expertise and diligence
in performing investment advisory services for the Fund and appreciated the Advisers long-term view in managing the Fund. They acknowledged
the Advisers lack of material regulatory issues, careful stewardship of the portfolio and careful ongoing attention to portfolio valuation.
The Trustees acknowledged that the Adviser retained a third-party compliance services provider to the Adviser, subject to oversight of
the Advisers Chief Compliance Officer. The Trustees also observed that the Adviser had enhanced its cybersecurity protocols, in part,
by employing more sophisticated encryption. After further discussion, the Trustees concluded that they are satisfied with Oakline and
believed Oakline would continue to provide quality advisory services to the Fund.
Performance.
The Trustees reviewed the performance of the Fund compared to its benchmark indices for the one-year, three-year, five-year and since
inception periods. Next, the Board noted that interval fund comparisons are useful from a management fee and expense ratio, but they
are not entirely useful from a performance standpoint because of the Funds novel strategy. They noted that the Adviser focuses on two
applicable indices: the Bloomberg Capital MBS Index and the Barclays US Aggregate Bond Index when managing the Fund. The Trustees noted
that the Fund outperformed the indices for the one-year, three-year, five-year and since inception periods. The Trustees agreed that
the Adviser had delivered positive, acceptable returns consistent with the Funds objective and that it is expected to continue to do
so.
Fees
and Expenses. The Trustees noted that Oakline charged an advisory fee of 1.25% and the Fund had a net expense ratio of 2.50%, as
measured by the current expense limitation agreement, which excludes certain expenses. The Trustees noted that total expenses were somewhat
higher at 2.85% as of June 30, 2022, as per the Administrators report. The Trustees reviewed average fees for two peer groups: (i) closed-end
exchange traded real estate and mortgage funds, and (ii) closed-end real estate related and other interval funds. The Trustees acknowledged
that neither peer group was precisely comparable to the Fund due to various factors including the significantly larger size of some peer
funds, and differing strategies and objectives, but agreed the information was relevant. They noted that the Funds advisory fee was
lower than the average for the interval fund comparison group and within the range of reasonable advisory fees as it was between the
average and the maximum for closed-end exchange traded closed-end funds. The Trustees also observed that Funds net expense ratio, measured
at either the expense cap of 2.50% or total expenses of 2.85% is within the range of reasonable expenses when viewing both peer groups
together. The Trustees noted that the Adviser has agreed to continue an Expense Limitation Agreement, whereby the Adviser will waive
its fees and pay or absorb the ordinary operating expenses of the Fund (including offering expenses, but excluding interest, brokerage
commissions, extraordinary expenses and acquired fund fees and expenses) to the extent that they exceed 2.50%. The Trustees also observed
that the financial statements of the Adviser imply it has adequate financial resources to meet its obligations to the Fund including
performance under the Expense Limitation Agreement. The Trustees concluded that the advisory fee and Fund expenses were not unreasonable.
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Information (Unaudited)(Continued) |
Profitability.
The Trustees reviewed a profitability analysis provided by Oakline, and discussed Oaklines historical profitability in connection
with its relationship with the Fund. The Trustees considered that Oakline realized a reasonable pre-tax net profit through its relationship
with the Fund in the most recent calendar year and semi-annual period. The Trustees concluded, after further discussion of the profitability
analysis provided, that excessive profitability from Oaklines relationship with the Fund was not an issue at this time.
Economies
of Scale. The Trustees considered whether the Fund had yet reached a size where economies of scale had been achieved. The Trustees
concurred with the Advisers representation that economies of scale were difficult to achieve given the labor intensive mortgage note
selection process. The Trustees agreed to reevaluate the issue at the next renewal.
Conclusion.
Having requested and received such information from Oakline as the Trustees believed to be reasonably necessary to evaluate the terms
of the advisory agreement with Oakline, and as assisted by the advice of Counsel, the Trustees concluded that the fee structure was reasonable
and that reapproval of the Investment Advisory Agreement was in the best interests of the Fund and its shareholders.
Vertical
Capital Income Fund
Dividend
Reinvestment Plan
Unless
the registered owner of shares elects to receive cash by contacting the Plan Agent, all dividends declared for the shares of the Fund
will be automatically paid in the form of, or reinvested by American Stock Transfer & Trust Company (AST) (the Plan
Agent), agent for shareholders in administering the Funds Dividend Reinvestment Plan (the Plan), in additional shares
of the Fund. If you are a registered owner of shares and elect not to participate in the Plan, you will receive all dividends or other
distributions (together, a dividend) in cash paid by check mailed directly to you (or, if the shares are held in street or
other nominee name, then to such nominee) by AST, as dividend disbursing agent. You may elect not to participate in the Plan and to receive
all dividends in cash by sending written instructions or by contacting AST, as dividend disbursing agent, at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by contacting the Plan
Agent before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared
dividend. Some brokers or other financial intermediaries through which shareholders may hold their shares, may automatically elect to
receive cash on the shareholders behalf and may reinvest that cash in additional shares of the Fund for the respective shareholders.
The
Plan Agent will open an account for each shareholder under the Plan in the same name in which such shareholders shares are registered.
Whenever the Fund declares a dividend payable in cash, non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares. The shares will be acquired by the Plan Agent for the participants accounts, depending upon the circumstances
described below, either (i) through receipt of additional unissued but authorized shares from the Fund (newly issued shares)
or (ii) by purchase of
Supplemental
Information (Unaudited)(Continued) |
outstanding
shares on the open market (open-market purchases) on the New York Stock Exchange or elsewhere.
Whenever
the Fund declares a dividend, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent
in shares. The shares will be acquired by the Plan Agent for the participants accounts, depending upon the circumstances described below,
either (i) through receipt of additional unissued but authorized shares from the Fund (newly issued shares) or (ii) by purchase of outstanding
shares on the open market (open-market purchases) on the NYSE or elsewhere. If, on the payment date for any dividend, the closing
market price plus estimated brokerage commissions per share is equal to or greater than the NAV per share, the Plan Agent will invest
the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participants
account will be determined by dividing the dollar amount of the dividend by the Funds NAV per share on the payment date. If, on the
payment date for any dividend, the NAV per share is greater than the closing market value plus estimated brokerage commissions (i.e.,
the Funds shares are trading at a discount), the Plan Agent will invest the dividend amount in shares acquired on behalf of the participants
in open-market purchases.
In
the event of a market discount on the payment date for any dividend, the Plan Agent will have until the last business day before the
next date on which the shares trade on an ex-dividend basis or 30 days after the payment date for such dividend, whichever
is sooner (the last purchase date), to invest the dividend amount in shares acquired in open-market purchases. It is contemplated
that the Fund will pay monthly income dividends. If, before the Plan Agent has completed its open-market purchases, the market price
per share exceeds the NAV per share, the average per share purchase price paid by the Plan Agent may exceed the NAV of the shares, resulting
in the acquisition of fewer shares than if the dividend had been paid in newly issued shares on the dividend payment date. Because of
the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase
period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in newly issued
shares at the NAV per share.
The
Plan Agent maintains all shareholders accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including
information needed by shareholders for tax records. shares in the account of each Plan participant will be held by the Plan Agent on
behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The
Plan Agent will forward all proxy solicitation materials to participants and vote proxies for shares held under the Plan in accordance
with the instructions of the participants.
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Information (Unaudited)(Continued) |
In
the case of shareholders such as banks, brokers or nominees which hold shares for others who are the beneficial owners, the Plan Agent
will administer the Plan on the basis of the number of shares certified from time to time by the record shareholders name and held for
the account of beneficial owners who participate in the Plan.
There
will be no brokerage charges with respect to shares issued directly by the Fund. However, each participant will pay a pro rata share
of brokerage commissions incurred in connection with open-market purchases. The automatic reinvestment of dividends will not relieve
participants of any tax that may be payable (or required to be withheld) on such dividends. Accordingly, any taxable dividend received
by a participant that is reinvested in additional shares will be subject to U.S. federal (and possibly state and local) income tax even
though such participant will not receive a corresponding amount of cash with which to pay such taxes. Participants who request a sale
of shares through the Plan Agent are subject to a $15.00 sales fee and pay a brokerage commission of $0.12 per share sold.
The
Fund reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by the participants.
All
correspondence concerning the Plan should be directed to the Plan Agent at American Stock Transfer & Trust Company, 6201 15th
Avenue, Brooklyn, New York 11219; telephone 1-866-277-8243.