Newport Beach, California – March 26, 2020
As of this communication we continue to see different events and outcomes which impact the operating environment. In anticipation of the passing of a $2 trillion stimulus bill the stock market closed on March 24, 2020 setting a record for the highest single day increase since the great depression. Yet, at the same time, the United States also experienced the deadliest day since the fallout of COVID-19 (the coronavirus). It is fair to say, the health, safety, economic, and geopolitical situation across the globe is very dynamic.
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 surfaced, the 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 Coronavirus (COVID-19) Update
Updates and Observations
Some of the observations gathered over the last week include:
- Pandemic. While there has been some positive news from China, the COVID-19 pandemic continues to spread in the United States and many European countries resulting in both physical and fiscal impacts.
- Recession. With a global recession being the base case, the questions continue to focus on the severity, duration, stimulus impacts and timing for recovery.
- Financial Stimulus. Following action by the Federal Reserve and the central banks of other countries, the United States passed a $2 trillion stimulus package to help bolster the US economy. The global markets reacted very positively both in anticipation of the package and after its approval. The package is 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.
- State and Local Action. Ahead of the federal action relating to foreclosures and evictions, state and local action has directly and indirectly impacted those types of actions. Examples of direct impacts include prohibitions against evictions in various cities and counties in California and moratoriums against foreclosures in Connecticut, Indiana, Iowa, Kansas, Louisiana, Massachusetts, New Hampshire, North Carolina, New Jersey and New York. Further, certain state courts have stayed or delayed evictions. 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.
- Capital Markets; Leverage. Based on conversations with other real estate executives, secondary market participants, brokers and borrowers, the anecdotal feedback is that lenders relying on securitization and/or large amounts of bank leverage under their lending platforms are experiencing extreme stress resulting from changes in the capital markets, the need to sell assets to raise cash, margin calls, and pull back on their lines of credit. We are hearing in some instances lenders in that situation have exited the market completely. It is important to note here that the funds managed by Wilshire have not used securitization as an exit strategy and are unleveraged.
Although the portfolios of each fund remain relatively healthy and we are not seeing material changes in collateral values at this point in time, that does not mean that the funds are immune to the impacts being felt across the globe. Therefore, as proactive, protective measures to help the funds weather the current market conditions, Wilshire has taken and will continue to take the following actions and is recommending that investors consider the following comments when making investment decisions:
- Reserves. As most investors are aware, a Loan Loss Reserve is not an expense but a set-aside which is intended to be used to offset the costs, expenses and impacts of problem loans within a fund’s portfolio and reduces the distributions to investors in the fund. From the inception of the WFP Income Fund, Wilshire has withheld and set-aside a small portion of the fund’s returns to establish and build a Loan Loss Reserve. Conversely, the WFP Opportunity Fund was designed seek and distribute higher returns and no Loan Loss Reserve was established in that fund. Based on the current market and potential future changes in market conditions, Wilshire believes it is prudent as a proactive measure to increase the Loan Loss Reserve in the WFP Income Fund and WFP Income Fund REIT and establish a Loan Loss Reserve in the WFP Opportunity Fund. As such, the accrual for the Loan Loss Reserve in each fund will be adjusted or established as follows:
- WFP Income Fund / WFP Income Fund REIT. At February 29, 2020, the Loan Loss Reserve in the WFP Income Fund / WFP Income Fund REIT was approximately 0.90% of total loans and approximately 0.79% of total assets. 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 will be increased to an aggregate of 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 monthly accrual for a loan loss reserve in the WFP Opportunity Fund will be established at rate of 0.17% per month (or approximately 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. After the current conditions have subsided and the real estate market has normalized, Wilshire may distribute excess reserves, if any, to the then current investors in the funds as a special dividend.
- Borrower Support; Potential Relief. Although only one borrower has approached us as of this writing with a “soft” inquiry, we need 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. Specifically, actions which could be beneficial to the borrowers and increase the probability of collection include:
- Counseling. Under stress, borrowers may not think through or consider alternatives that may be readily accessible to them. For example, a borrower may overlook that the financial impacts of the virus or shelter in place orders may be covered under the business interruption insurance carried by the borrower or their tenants. Further, the borrower may address short term cash flow issues on the subject property through the positive cash flow from other properties or investments. New federal and state programs and subsidies may become available that can benefit the borrower and their tenants.
- Forbearance. On a temporary basis, it may be wise to enter into a forbearance agreement which provides interim payment relief, versus payment forgiveness. Depending on the facts and circumstances, including the loan to value, that type of arrangement may (i) provide for the establishment of an interest reserve to fully or partially cover the loan payments, (ii) defer all or a portion of the current payments and add them to the principal of the loan such that they are paid when the loan is repaid, (iii) defer all or a portion of the current payments for a period of time and recast the loan payments (or spread those payments) over the original or extended term of the loan, or (iv) other variations of the foregoing.
- Modification. As opposed to the shorter-term nature of a forbearance, the loan may be modified as part of a restructuring of 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, as described above, 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 instituting a temporary moratorium on new redemptions in each of the funds. Therefore, effective immediately we are taking the following actions:
- Moratorium on Redemptions; Generally. We are instituting a temporary moratorium on new redemption requests from the funds, which will be reassessed on a weekly basis. All future requests will also remain subject to the requirements and restrictions in the operating documents of the respective fund.
- Requests Previously Received. To the extent there is sufficient cash in the respective fund and any such redemption will not cause the fund to be out of compliance with respect to, among other things, ERISA, REIT, or other regulatory requirements, or the fund’s organizational documents, we will honor pending requests per our prior communications with those investors. All future requests will be subject to any moratorium on redemptions which may be in place as well as the requirements and restrictions in the operating documents of the respective fund.
- Bona Fide Healthcare Emergencies. To the extent there is sufficient cash in the respective fund and any such redemption will not cause the fund to be out of compliance with respect to, among other things, ERISA, REIT, or other regulatory requirements, or the fund’s organizational documents, we will attempt to honor and accelerate requests for redemption arising from bona fide healthcare emergencies to the extent possible. Such investors will be required to provide a hardship letter together with documentation supporting their request.
Rest assured that we take our investors need for liquidity seriously. Therefore, the approach we are taking on redemptions is driven by the need to maintain compliance with a number of rules and regulations impacting the funds, make prudent decisions within the portfolios of the funds, and address the potential impact on all investors in the funds. As stated above, 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. These changes apply to both transactions in process as well as new loan requests.
- 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. The funds are diversified across borrowers, geographic locations and property types. We are not overly concentrated in any signal asset class or geographic location.
- Asset Types. While the funds have some exposure to retail through loans secured by neighborhood centers and limited exposure to hospitality though a single residential property receiving Airbnb income, the funds have little to no exposure to the hospitality, travel, recreational and big box retail asset classes. Further, the funds have not invested in loans made against land, development or ground up construction.
- Non-Correlation. Although real estate is not completely shielded from the impacts to the stock and bond markets, the funds are not directly correlated to the stock or bond markets and do not share the same volatility and market risk.
- Additional Risk Mitigation. Each of the funds is unleveraged and have maintained lower loan-to-values with more conservative underwriting relative to many of our peers. Further, as described above, we are increasing and establishing loan loss reserves in the funds as an additional measure to help provide additional down-side risk protection.
- 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. Over the last week we have seen a significant increase in loan requests as well as conversations with investors about opportunities in the marketplace. If these requests and conversations are an indication of what may materialize in the coming weeks and months, there will be an increase in lending and investment opportunities as a result of the current environment – which will require available capital. 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. Although on the one hand certain politicians may be willing for the impacts of the virus to subscribe to certain deadlines, on the other hand certain medical professionals are calling for increased vigilance now to turn the tide of the virus without any concrete timelines for that to occur. Obviously, there is not complete alignment, but the parties seem to be working toward the common goal of both physical and fiscal health. Even if we will experience a fast recovery, patience will be required during this interim 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 market where capital availability is shifting. Following the comments under “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.
As stated in prior communications the key issue is “duration.” And, what we may be seeing now is that duration cuts both ways – with potential risks and opportunities. However, for a number of humanitarian and business reasons, we are 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.
Although this message does not cover all factors and nuances impacting the market and the funds, the primary goals of this message were to provide feedback on the current environment, share our thoughts and approaches based on the same, and keep the lines of communication open with our investors. 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 are well, and our thoughts are with those who have been 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.