Newport Beach, California – April 20, 2020
Since our last communication, events and outcomes still remain very dynamic. Certain forward-looking information is positive, but near-term impacts continue to surface and may not yet have peaked. The stock market had another tremendous week as investors seemed to focus on the long-term prospects for businesses and the economy. However, new coronavirus cases and deaths related to the disease continue to be reported throughout the United States and businesses continue to suffer from the impacts of the virus, either directly or as a result of the public health measures instituted to help combat the spread of the disease.
The purpose of this communication is to provide additional thoughts and observations about the potential impacts to the real estate market and Wilshire’s funds as a result of the current events. The content of this communication is based on the facts and circumstances as we believe them to be true today. However, we are in an extremely dynamic and fast-paced environment and, although certain impacts have been identified, the full impact of the virus and other factors resulting from the virus on the broader economy and real estate market specifically still remains unknown.
To keep our investors informed, we have started to create an archive of Wilshire’s investor communications related to the COVID-19 outbreak. To access those prior communications, click https://wilshirefp.com/covid-19-update/.
Updates and Observations
Some of the observations gathered over the last week include:
- Pandemic. According to some reports, the number of new coronavirus cases in the United States may have reached a plateau, with the disease spreading at a constant pace versus accelerating. However, those same reports indicate that there is no obvious decline in the number of new cases and the plateau is high with roughly 30,000 new cases and 2,000 deaths reported daily. Further, there was positive news related to the creation of vaccines to help combat the virus; as well as negative news that individuals who already had the virus and developed antibodies may not be immune from reinfection.
- Recession. The fallout from COVID-19 has triggered a recession as the economy seized-up and millions of Americans lost their jobs. Although there is still uncertainty from a public health prospective, increased emphasis is being placed on the importance of reviving the economy as well as protecting the health of the general public. Continued economic stimulus and reopening businesses are now a primary focus in Washington.
- Financial Stimulus.
- In spite of another spike in unemployment and lackluster earnings reports, the $2 trillion stimulus package passed by the United States Congress (“US Congress”), combined with glimmers of positive news related to potential peaking of the virus’ spread in certain regions and the development of vaccines to help combat the virus, caused a positive reaction in global markets as participants seemed to have a forward-looking focus.
- On Thursday, April 16, 2020, the United States Small Business Administration (“SBA”) officially ran out of money for the Paycheck Protection Program (“PPP”), a $349 billion emergency small business lending program. The PPP was part of the larger $2 trillion stimulus package designed to provide cash and relief in various forms; including, direct payments to citizens, loans and loan guarantees, federal aid to workers, grants to businesses (including airlines) and a short term forbearance against foreclosures and evictions under federally backed mortgage loans. However, the US Congress is currently debating another round of stimulus funding to inject an additional $300 billion into the PPP for small businesses, $50 billion for the Economic Injury Disaster Loan Program, $75 billion for hospitals and $25 billion for testing.
- Businesses are still at risk and the economy remains fragile, but the takeaway is that the Federal Reserve and US Congress are continuing to take aggressive action to blunt some of the impact on businesses and the economy.
- State and Local Action.
- Several states have announced plans to start removing social distancing and shelter in place orders. Further, the federal government is issuing guidelines to reopen the country in phases. Those actions and recommendations remain subject to much debate and there is tension between the science of opening-up too quickly versus the need to kick start the economy.
- While some states are starting to loosen the shelter in place restrictions, there has been little to no loosening in the federal, state and local actions impacting leases and mortgages. The federal, state and local actions and directives put in place as a result of the COVID-19 pandemic has had and will have direct and indirect impact on mortgage lending, loan servicing and portfolio management. Multiple states, counties and cities have prohibitions against evictions and foreclosures, and certain state courts have stayed or delayed evictions and foreclosure proceedings. Indirect impacts include the inability to institute foreclosure actions due to court closures and the inability to conduct a public foreclosure sale due to lock down orders because bidders cannot congregate to have a fair sale. While some of these actions do not prohibit the filing of an eviction or foreclosure action, or the recording of a notice of default or notice of sale, like the positions taken in the financial crisis a decade ago, the judicial temperament in this environment is expected to be pro-tenant and pro-borrower.
- Mortgage Lending.
- Many banks and other lenders have significantly reduced their lending activities in the current environment. Some have ceased lending altogether. Reasons for the changes in the lending environment include banks inundated with applications for PPP loans only focusing on that business, extreme stress in the mortgage capital markets, the need for some firms to sell assets to raise cash, margin calls on mortgage backed securities, and pull back on lines of credit used for funding mortgages. Because the funds managed by Wilshire have not used securitization as an exit strategy and are unleveraged, the funds were not directly exposed to the impacts of those capital market dynamics.
- Mortgage payments due on April 1, 2020 have provided an initial indication of the financial stress experienced by the borrowers and underlying properties as well as the potential impacts that stress will have on loan portfolios. On April 3, 2020 Moody’s, one of the top mortgage bond rating agencies, predicted that mortgage defaults may exceed 30% if economic activity has not been restored in the summer of 2020. In response to federal mandates, the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), the Department of Housing and Urban Development (HUD) and banks have offered “mortgage holidays” for federally backed mortgage loans. As a form of forbearance borrowers receive short term payment relief but are still responsible for making up the missed payments on a longer-term basis. The goal is to provide near term relief for borrowers experiencing a severe interruption in property cash flows resulting from the fallout of the pandemic. The key to whether the mortgage holidays will be effective will hinge on duration of the downturn and how quickly the economy will rebound.
- Several large banks, including Bank of America and Citigroup, posted large declines in profits in the first quarter of 2020 and are preparing for a large number of loan defaults and potential loan losses. In the case of Citigroup, much the decline was the result of increasing its loan loss reserves in anticipation of a greater number of loan defaults. Other banks preparing for loan defaults and other portfolio issues are following suit and increasing their loan loss reserves.
Wilshire Funds – Loan Servicing Update
With respect to the funds managed by Wilshire Finance Partners, the impacts of the COVID-19 pandemic and the April 1, 2020 mortgage payment due date was also a catalyst for a large influx of borrower conversations. In order to provide additional transparency and feedback to our investors, the following information was prepared as an update on the status of the loan portfolios and borrower discussions and requests for the respective funds.
This update is based on the facts and circumstances we believed them to be true as of April 17, 2020. However, we are in an extremely dynamic and fast-paced environment and, although certain potential issues and impacts have surfaced, the ultimate impact of the virus and other factors on the borrower, the property, it’s cash flows and prospects may change. Further, some of the information is based on initial conversations and communications with the borrower. Additional communication, information or changes in the facts and circumstances may positively or negatively impact one or more borrowers or properties resulting in a change in the method or approach used by Wilshire.
As of April 17, 2020, we were contacted by and initiated communications with approximately 40% of the borrowers in the WFP Income Fund. The outstanding principal balance of those borrowers represented approximately 46% of the loan portfolio. Several of the borrowers reached out to Wilshire to discuss their concerns about a potential future need for payment relief but did not require any immediate action.
As of April 17, 2020, we also had 3 loans where the borrower did not make the April 1, 2020 mortgage payment within the 10-day grace period (i.e. April 11, 2020). It is not necessarily unusual for one or more borrowers to be delinquent on a payment in any given month. However, although those loans are not past 30 days in the delinquency, all delinquencies arising at this stage of the COVID-19 fallout are being monitored even more closely and are under greater scrutiny. Notwithstanding the present environment, all borrowers who are delinquent are contacted by Wilshire by phone, email and mail. Of the 3 delinquent loans, Wilshire is already in discussions with the borrowers on 2 of the loans about a potential modification or forbearance to provide short-term payment relief.
Wilshire is in discussions with 7 borrowers, including the 2 referenced above, who have requested either a modification or forbearance.
With respect to the forbearance discussions, those loans represent approximately 7.93% of total loans and 6.77% of total assets. Further, the original weighted average loan-to-value (Original WALTV) of that sub-set of loans was 62.40% and has an estimated current weighted average loan-to-value (Current WALTV) of 74.15%. The increase in the Current WALTV over the Original WALTV is the result of one loan where the borrower has listed the property for sale at a price they believe is substantially below the market value to facilitate a quick sale. We are in discussions with that borrower about a potential forbearance while the property is marketed for sale.
We are in modification discussions with 4 borrowers whose loans represent approximately 10.54% of total loans and 9% of total assets. The original weighted average loan-to-value (Original WALTV) of that sub-set of loans was 56.80% and has an estimated current weighted average loan-to-value (Current WALTV) of 55.91%. The decrease in the Current WALTV over the Original WALTV is the result of one loan where the borrower has listed the property for sale for a price which is higher than the original appraised value and, at this point, seems to be supported. The original appraisal on that property was completed in 2017.
As of April 17, 2020, no loans were in foreclosure and the fund did not hold any real estate owned (REO) in its portfolio. Further, the Loan Loss Reserve represented 1.10% of total loans.
WFP Opportunity Fund
As of April 17, 2020, we were contacted by and initiated communications with 1 borrower in the WFP Opportunity Fund. That borrower reached out to Wilshire to discuss their concerns about a potential future need for payment relief but did not require any immediate action.
As of April 17, 2020, we also had 1 loan where the borrower did not make the April 1, 2020 mortgage payment within the 10-day grace period (i.e. April 11, 2020). As addressed above, it is not necessarily unusual for one or more borrowers to be delinquent on a payment in any given month. However, although the loan is not past 30 days in the delinquency, all delinquencies arising at this stage of the COVID-19 fallout are being monitored even more closely and are under greater scrutiny. Notwithstanding the present environment, all borrowers who are delinquent are contacted by Wilshire by phone, email and mail. As of April 17, 2020, the borrower on the delinquent loan did not contact Wilshire about a potential modification or forbearance to provide payment relief.
As of April 17, 2020, no loans were in foreclosure and the fund did not hold any real estate owned (REO) in its portfolio. Further, a Loan Loss Reserve was just initiated for the fund at the end of the first quarter of 2020.
As addressed in previous communications, Wilshire has taken and will continue to take various actions and is recommending that investors consider the comments and disclosures prepared by Wilshire as well as conducting additional reviews in this environment when making investment decisions. To access prior communications from Wilshire, including those that provide greater detail on our Strategic Adjustments, please use the following link: https://wilshirefp.com/covid-19-update/.
In summary, those adjustments include:
- WFP Income Fund / WFP Income Fund REIT. In order to create a greater cushion in the fund through the reserve, effective as of March 31, 2020 distribution, the monthly accrual for the loan loss reserve in the WFP Income Fund and WFP Income REIT was increased to an aggregate of approximately 0.17% per month (or approximately 2.00% per annum).
- WFP Opportunity Fund. In order to establish a loan loss reserve in the WFP Opportunity Fund, effective as of the March 31, 2020 distribution, a quarterly accrual for a loan loss reserve in the WFP Opportunity Fund was established at rate of approximately 0.51% per quarter (or approximately 0.17% per month or 2.00% per annum).
Wilshire will continue to assess the market and the adequacy of the reserves on a move forward basis and may make further adjustments, which may include specific reserves against particular problem assets, if any. That said, there can be no assurance that the present or future amount of the Loan Loss Reserves will be sufficient to cover any and all losses which the funds may experience.
- Borrower Support; Potential Relief. Wilshire will continue to consider the impacts of regulatory and police orders on our borrowers; including, shelter in place orders, closures of non-essential businesses, furloughs and layoffs, prohibitions against evictions and foreclosures, court closures, pro-tenant and pro-borrower regulatory action and judicial attitudes, and other factors and actions. Specifically, we need to consider the long-term impact of taking action which, even if legally permitted, merely exacerbates versus addresses and provides solutions for what could be shorter-term impacts to our borrowers. In connection with the same, and as addressed above, Wilshire is in discussions with various borrowers on the following potential actions, including:
- Forbearance. Entering into a forbearance agreement which provides interim payment relief versus payment forgiveness.
- Modification. Entering into a modification to restructure the debt to increase the probability of collection and full repayment.
The goal in each of these approaches is not debt forgiveness but short-term payment relief allowing what is otherwise a good borrower caught in a bad set of circumstances the opportunity to manage their property and cash flows until the market stabilizes. It is also important to note that these are some, but not all, of the approaches that may be taken in this environment. Further, identifying potential approaches and having contingency plans in place does not necessarily mean that they will be employed or that they are the best approach based on the facts and circumstances surrounding the individual loan.
- Returns. The near-term impact of the increase and establishment of the loan loss reserves and potential payment relief, if any, will be a reduction in the distributable return to the investors in the WFP Income Fund / WFP Income Fund REIT and the WFP Opportunity Fund, respectively. However, we believe that establishing procedures and having certain tools and approaches in place are prudent at this point in time.
- Redemptions. After careful consideration, in order to better determine the impact of the current environment on the funds, maintain regulatory compliance, ensure a sufficient level of capital in the funds, and strive for a level of stability in the funds for all investors, we will be continuing the temporary moratorium on redemptions in each of the funds. We also intend to assess and, as necessary, adjust this approach on a weekly basis.
- Underwriting Changes. We have already instituted changes to our underwriting policies and procedures which, among other things, requires enhanced communications with all parties in the lending process, eliminates certain asset classes from loan consideration, reduces loan to value thresholds, increases the use of personal guarantees, and addresses certain practical considerations related to appraisals and third-party reports.
- Fund Performance. With respect to your investments in and the performance of the WFP Income Fund and WFP Opportunity Fund, we are cautiously optimistic about the performance of the funds, and, with the exception of certain known impacts like those to the funds’ returns resulting from the increase and establishment of the Loan Loss Reserves, Wilshire cannot provide any representations guarantees about how the current situation will impact the underlying investments in the funds. We do believe, however, that there are several factors that we have employed when originally making the loans, in our management of the funds and the actions we are now taking that will help buffer the impacts to the funds, including: diversification, limited to no exposure to highly impacted property types, no direct correlation to the stock or bond markets, increasing and establishing loan loss reserves, and additional risk mitigation measures.
- Selective Opportunities. While it is a contrarian point of view, some of the best results Wilshire and the funds have historically achieved were the result of lending partially through and after the great recession. The contraction of the capital markets, bank pullbacks, margin calls, the use of prior leverage cutting in the wrong direction on certain lenders, and other factors resulted in market conditions which were very favorable for alternative lenders, such as Wilshire and the funds. However, that does not mean that we or our investors should rush to deploy capital in this environment. Rather, we believe an even more conservative approach is warranted in today’s market environment; including, assessing the market and the timing of new lending opportunities, avoiding certain asset classes, adjusting loan-to-values, being more selective on lending opportunities, and otherwise maintaining underwriting discipline. While past performance is not indicative of future results, we believe informed investors who have sufficient liquidity and diversification in their portfolios to meet short term cash needs and mitigate down-side risk may still consider an investment in Wilshire’s funds to take advantage of additional lending and investment opportunities in this market.
- Investment Horizon. While we have seen some positive news over the last couple of weeks, even if we will experience a fast recovery, patience will be required during this period on a lot of levels, including, on the investment front. Like the recovery in real estate values we experienced after the great recession, having a longer investment horizon may be one way to consider and address the near-term impacts to the market and the funds.
- Additional Thoughts. The primary goals of these actions and considerations are to: first, strive to protect and preserve our investors’ principal investment, and second, seek opportunities to generate risk-adjusted returns as a capital provider in a market where capital availability is shifting. Following the comments under “Selective Opportunities” above, we believe it is wise to continue to review and assess the impacts of the virus, the protective measures, and the stimulus packages to the economy and the real estate market to avoid reaching premature conclusions or taking what in hindsight may be overly aggressive action. Further, each individual investor’s situation, risk tolerance, goals and objectives are different and need to be considered. Therefore, additional thought, investigation, and consideration is important when making investment decisions in this environment – whether that involves investments in Wilshire’s funds or otherwise.
“Duration” continues to be the key word. The duration of the COVID-19 pandemic will create both potential risks and opportunities. However, we remain hopeful that the issues arising from the COVID-19 virus are shorter lived, fewer people are harmed, a faster recovery occurs and there are lower impacts overall.
While this message does not cover all factors and nuances impacting the market and the funds, we believe it is important to provide additional information to our investors and the lines of communication open. If there are any questions, comments or concerns that you would like to discuss, please feel free to contact me at (866) 575-5070.
We hope all of you remain well, and we would like to thank all of the healthcare professionals and first responders whose commitment and sacrifice is helping those most severely impacted by the fallout of COVID-19.
WILSHIRE FINANCE PARTNERS, INC.
Chief Executive Officer
About Wilshire Finance Partners and our investment alternatives.
Wilshire Finance Partners, Inc. (“Wilshire”) specializes in real estate finance and investments and is the manager of the WFP Income Fund, LLC (“WFP Income Fund”) and the WFP Opportunity Fund, LLC (“WFP Opportunity Fund” and collectively with the WFP Income Fund, the “Funds”). The WFP Income Fund invests in a diversified pool of residential, multifamily, and commercial real estate related short-term bridge loans secured by first trust deeds and mortgages. The WFP Opportunity Fund invests in a diversified pool of residential, multifamily, and commercial real estate related short-term bridge loans, participating loans, real estate joint ventures, and direct real estate investments. Wilshire commenced operations in January 2008 and launched the WFP Income Fund and the WFP Opportunity Fund in September 2013.
The WFP Income Fund is approved for both retirement and non-retirement accounts on the following alternative investment platforms:
- Charles Schwab; (SSID Number available through an Advisor)
- Fidelity Investments (National Financial Services or NFS); CUSIP Number 94699K534
- Pershing as WFP INCOME FUND LLC; CUSIP Number 929LP9220
- TD Ameritrade as WFP INCOME FUND LLC NSA; CUSIP Number 93099B102
- Wells Fargo Advisors; No CUSIP number required
The WFP Opportunity Fund is approved for both retirement and non-retirement accounts on the following alternative investment platform:
- Charles Schwab; (SSID Number available through an Advisor)
- Fidelity Investments (National Financial Services or NFS); CUSIP Number 94699B948
- TD Ameritrade as WFP OPPORTUNITY FUND NSA; CUSIP Number 93099C100
In addition, each of the WFP Income Fund and WFP Opportunity Fund are approved for self-directed retirement accounts and various other platforms without the need for the CUSIP number, including, Community National Bank, Equity Trust Company (Sterling Trust), Millennium Trust Company, Pensco Trust Company, Provident Trust Company, Strata Trust Company and Shareholder Services Group.
Each of the WFP Income Fund and WFP Opportunity Fund is open to investors, wealth managers and individual investment advisors under the above referenced platforms using standard subscription and transfer procedures.
Investors and advisors may also invest directly through Wilshire. Individual investors not using a third-party advisor may be required to meet additional requirements of the platform providers.
Safe Harbor Statement
This communication is not an offer to sell or the solicitation of offers to purchase the securities of either of the Funds, individual loan or trust deed investments, or otherwise (individually and collectively, the “Securities”). The purpose of this communication is to provide an overview of the respective Securities and their private placement. Persons interested in learning about the Securities and their private placement will be provided with the respective Private Placement Memorandum (inclusive of exhibits thereto and any supplements, the “Memorandum”), which provides a description of the Securities, the terms of their private placement, a discussion of risk factors, a copy of the limited liability company operating agreement for the fund (as applicable), a subscription agreement and other information related to the Securities.
This communication contains certain forward-looking statements regarding the Securities and the investment objectives and strategies of each of the Funds. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire, as the manager of the Funds. Although Wilshire believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire, any placement agent, or any other person, that the objectives and strategies of the respective Securities or the Funds will be achieved.
Investments in the Securities may only be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. Each of the Securities is being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the Securities Act) and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act. The Securities Exchange Commission has not passed upon the merits of or given its approval to the Securities, the terms of the offering, or the accuracy or completeness of any offering materials. Each of the Securities is subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Securities. Past performance is not indicative of future results. Investing in any of the Securities, including the Funds, involves substantial risk, including loss of investment, and is not suitable for all investors.
Wilshire Finance Partners, Inc.
Donald H. Pelgrim, Jr.
Source: Wilshire Finance Partners, Inc.
Wilshire Finance Partners, Inc. specializes in real estate finance and investments and is the manager of the WFP Income Fund, LLC (the “Income Fund”) and the WFP Opportunity Fund, LLC (the “Opportunity Fund” and collectively with the Income Fund, the “Funds”). This communication is not an offer to sell or the solicitation of offers to purchase the securities of either of the Funds or otherwise. The purpose of this communication is to provide an overview of the respective Funds and their private placement. Persons interested in learning about either of the Funds and their private placement will be provided with a Private Placement Memorandum (inclusive of exhibits thereto and any supplements, the “Memorandum”), which provides a description of the respective Fund, the terms of its private placement, a discussion of risk factors, a copy of such Fund’s limited liability company operating agreement, a subscription agreement and other information related to the respective Fund. This communication contains certain forward-looking statements regarding each of the Funds’ investment objectives and strategies. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire Finance Partners, as the manager of the Funds. Although Wilshire Finance Partners believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire Finance Partners, any placement agent, or any other person, that the objectives and strategies of the respective Funds will be achieved. An investment in either of the Funds may be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. Each of the Funds securities are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act. Neither the Securities Exchange Commission nor any state agency has passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials. The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the securities. Past performance is not indicative of future results. Investing in the Funds involves substantial risk, including loss of investment, and is not suitable for all investors.