Inside PPR’s Loan Portfolio: Interview with Taylor Nelson, Senior Acquisition Analyst
Over the past few weeks we’ve been looking to introduce the PPR community to members of our team in order to explain their roles at the company. Specifically, we’ve been focusing most recently on the Portfolio Managers for the various asset classes we invest in and inviting them, in interview format, to provide color on how their asset classes work and fit into our overall portfolio.
In that spirit, we hope you enjoy the interview with Taylor Nelson. Taylor is a Senior Acquisition Analyst who focuses on the Mortgage Loan sector of the portfolio, which is its single largest asset class. You’ll see below that Taylor shares his perspective on the behind-the-scenes workings of this division and also how the buy/sell process works with the assets he manages. Finally, Taylor explains our outlook on both Q4 of this year and on the first part of 2024. We hope this conversation is helpful and educational!
So Taylor, tell us about your background…
Sure. I might be unique in the fact that I’ve worked at PPR since the beginning of my career. I was hired in June of 2017, shortly after I graduated college. Over the past six years, (co-founder and Chief Asset Officer) John Sweeney has been my main mentor and teacher in the note business. Of course, in the beginning we were more of a junior-lien shop than we are now. These days, we’re exclusively in the first-lien space on the NPL side of our business, and through that transition I also learned a lot from our consultants and joint venture partners.
Above all, I’ve learned the business by doing the business and being involved in lots of trades. To give perspective, we purchased between $600-$700M total in non-performing loans (NPLs) over the past 3 years. And we evaluated at least 10 times that amount in potential trades. So mostly I’ve been in the trenches buying and selling loans, and that’s my main job at PPR.
What does your day-to-day look like at PPR?
My days are made up of primarily monitoring our NPL portfolio and working on potential acquisitions. You might have seen me participate in the Investor Quarterly Updates, and part of my role is to provide those updates as well as review and recommend appropriate deals through memos to our Investment Committee in order for them to make the best possible decisions on our allocation, i.e. what we’re buying.
So how does the NPL process work?
A good analogy might be that on the NPL side of our business we’re really in the business of “flipping” loans the way real estate investors improve an asset’s value and flip a house.
The easiest way to explain it would be to start with the path an NPL goes on after we buy it. Keeping in mind that these loans are non-performing, which means that the borrowers aren’t paying them as they initially agreed, we first try to get a loan “re-performing,” i.e. get the borrower back on track and paying on the loan. That’s our preferred outcome.
In that scenario, we typically hold a now-re-performing loan (RPL) from 6-12 months. This hold period “seasons” the loan showing a pay history of the borrower, which makes it much more valuable on the secondary market.
To go back to our flipping analogy, turning an NPL into an RPL adds a lot of value to it. In this market you could, for example, buy an NPL for 75% of face value of the loan and sell it 9 months later as an RPL at 95% of face value. That’s one of the ways the fund generates profits.
For NPLs that we can’t turn into RPLs for whatever reason, often because the house is vacant or the borrower is deceased, we exit through the foreclosure process and liquidate the property at auction or via REO sale.
(*See our recent article on the PPR REO process here.)
And I should point out that we usually sell bundles of these assets rather than selling them as one-offs. We have a trade desk that helps us sell loans back into the secondary market, and we get superior price execution when selling in bulk this way to other institutional buyers.
Can you talk about some recent trades PPR has completed?
Regarding recent asset purchases, even though we’ve purchased over $97 million in non-performing loans this year we had been lighter in purchasing in the beginning of the year versus 2022. Which is strategic. Our forecasts predict that in 2024 a lot of these same assets available now will likely have better pricing over the next 12 months or so. So, we’re keeping some powder dry in order to take advantage of what we think will be more of a buyer’s market next year.
On the asset sale side, we typically do two large trades a year. Most recently, at the end of September (2023), we completed a re-performing loan sale, and these assets sold for between 80 cents on the dollar to 105 cents on the dollar, so this was a very good trade for us.
What do see in the buy/sell market going forward?
Traditionally Q4 is trade season since institutions are looking to get NPLs off their books before year end. We already have about $28M in NPL acquisitions in our pipeline to close in the next two weeks. We also have $50-$100M that we’re looking at buying later this quarter.
In Q1 things tend to settle down a bit, but with economic conditions as they are, our CIO, Spencer Staples, has been suggesting that the higher interest rates will open up product and create more buying opportunities for PPR.