As we covered in our December update, Q4 was when trade activity really picked up. We had been interested in some substantial deals last month and to cut to the chase…. we won!
We closed on all of the trades we outlined in that update (15 NPL trades, 700+ assets total) and wanted to recap what was included and add some detail to what the process entailed.
Deal Flow
As the Director of NPL Investments at PPR, I see quite a lot of trades in any given quarter. It could be up to ten times what we end up bidding on, depending on the quality of the assets.
The December trades started like many others. First, we received “tapes” of loans from various trade desks and brokers, or direct from sellers, with loan-level data of each asset. Most of these are non-performing mortgage loans backed by Single Family Residences. These loans are sourced via our trade desk from large financial institutions and regional banks, national brokers, as well as GSE’s (Government Sponsored Enterprises). From there, we analyze these trades, create investment memos, and take those to PPR’s Investment Committee (headed by our Chief Asset Officer, John Sweeney).
Bid Analysis
We then evaluate each trade based on its given loan characteristics in order to match our general buy box (i.e. acquisition criteria) and make a recommendation to our Investment Committee. The Committee then reviews the financial projections (i.e. gross revenue, net proceeds, IRR, average timeline, expense budgets, etc.).
Alongside our portfolio management team, our CIO also evaluates relevant macro-economic conditions for things like interest rate risk and geographic location to forecast how well each trade and loan is likely to perform on a risk-adjusted basis.
While we have a base-case approval for our projections on each asset, we also look at a number of different scenarios. An example of this would be a sensitivity analysis such as how much this trade would be worth if there is a 5% reduction in property values. Each asset and trade gets assessed on a best case/worst case spectrum of execution and market timing.
Due Diligence
After we are awarded a trade, we complete final due diligence on the assets. That includes tax and title searches, compliance review, property inspection review, servicing comment, pay history review and collateral review.
Last, we get the final investment memo that includes the due diligence results (including loans that fell out from the original bid and any price changes), which is formally approved by the investment committee prior to moving forward with funding the trade.
Loan Trade Details
Q4 Acquisition highlights:
- 15 different trades in total
- Over 700 assets across 45 different states
- Approximately $120,000,000 in purchase price
It may be of interest to know that just three of these trades represented over 75% of the total purchases, and we sourced these three trades via:
-1 off market, negotiated trade from a large institutional bank
-1 from a smaller, Northeastern regional bank
-1 from another large institutional bank
All three of the above trades have similarly low LTVs (Loan to Value) and are comprised mostly of recent defaults. This type of asset works well for our investment strategy as we think economic conditions should be favorable for modifying most of these loans and getting them back on track to re-performing status. Once this is done, we can then season the loans to get them ready to sell back into the market as Re-Performing Loans (RPLs). We think we should start to see declining interest rates in the quarters ahead so those RPLs should sell for higher prices than we are seeing in the market today.
The other 12 trades, which represent 25% of the purchases, have a variety of different characteristics that line up with our overall investment strategy. For these loans we will likely modify the loans or liquidate the assets via REO to achieve our desired outcome.
What Next?
Stay tuned for our next Investor Update that will not only give additional color on 2023 Q4 trade activity but will also share updates about our REO and Multifamily Real Estate portfolios.
