Interview with Taylor Nelson, Director of NPL Investments.
As many of you know, non-performing loans (NPLs) are the largest segment of the portfolio of PPR’s flagship Reliant Income Fund. In talking to investors, however, while many understand the importance of NPLs, they are also interested in learning more about the acquisition/disposition process and our view of the asset class going forward. In that regard, we sat down with Taylor Nelson, PPR’s Director of NPL Investments. As you read the interview transcript below, you’ll hear Taylor’s perspective on why NPLs remain one of PPR’s main investment concentrations and what the year ahead looks like for the asset class.
Q: “Taylor, can you give us a run-down on the NPL process and why PPR likes NPLs?”
That’s a multiple-part answer! First, there’s the specific buying of the NPLs, and then there’s our current NPL fund strategy; obviously those are related, but the specific NPL asset class is what we’ve been doing at PPR for almost 20 years now. It’s what we got started on and have grown up on. In fact, our expertise and loan-level, bottom-up approach with NPLs is what gives us a competitive advantage.
Here’s our current approach to investing in NPLS: We try to aggregate about $200-300 million of non-performing loans during the investment period, which usually lasts 12 to 15 months. We do that with investor equity and short-term financing facilities, and then when the portfolio gets to a critical mass, we look to securitize that portfolio, which locks in our long-term financing. Once long-term financing is locked in, we move to the “harvest” period, where we work through the assets. This is a rinse and repeat process.
So, you have the “ramp-up” period where you buy all your loans, and then the securitization works as a cash-out refinance. You can compare it to a more traditional real estate investor buying a property with hard money or a bridge loan, and then after fixing the property, they refinance to long-term financing.
What we’re doing is basically the same idea. We’re buying these loans on short-term financing, locking in long-term financing, and then comes the harvest period. This is where we work through and perform loss mitigation on all of the loans, meaning we try to get the non-performing loans back on track, pay, and then sell them back into the market as re-performing loans. If we can’t get them performing again, we take the non-performing loans through the foreclosure process and liquidate the hard real estate backing the loan.
Q: “What does the NPL market currently look like?”
Right now, the market is still pretty similar to the end of 2023. In the past (2022 and the first half of 2023), we were somewhat defensive until we saw interest rates leveling off. We leaned into that as we made a couple of big purchases, and that’s what got us to a January 2024 securitization. Throughout 2024, we were in buying mode for at least the first six to nine months. We didn’t see interest rates going up at all – if anything, our view was that they would be declining.
If you can buy NPLs at an elevated interest rate period and the rates go down after you buy them, the value of the NPLs should go up as a result. We’re not necessarily trying to time the market as much as we’re dollar cost averaging and picking spots. We ended the year with around $250 million in NPL acquisitions, which pretty much matches our highest NPL total from 2021 and 2023.
That being said, in November, we were awarded a $150 million trade, but the seller requested that we close in January, so we just recently closed on that. If we included that in the 2024 total we would have ended the year at around $400 million, which would have been our biggest annual NPL annual acquisition total.
Q: “What has PPR purchased so far in late 2024 and early 2025?“
I would highlight the above mentioned trade in November 2024, which was from a large institutional U.S. bank. It was a competitive auction – while we weren’t necessarily the highest bidder, we were close and were awarded the trade based on our reputation in the marketplace as trusted buyers.
We were very excited about that trade, especially as we saw a couple of other trades that happened after that priced higher. We were thrilled to lock in that trade when we did. As mentioned earlier, it covered both late 2024 and early 2025, so it got the year off to a great and positive start.
Q: “Can we expect any purchases from PPR in Q1?”
Most likely, yes. We have been getting early indicators from our portfolio management department that we might be scaling back a bit on the acquisitions at some point later in the year, depending on some macroeconomic factors.
We look at and are interested in several different factors including the fed funds rate, or SOFR, which impacts our short-term variable rate financing facilities as well as longer term rates like the 10-year Treasury yield and 30-year mortgage rates, as they significantly impact the value of the re-performing loans in our portfolio.
With the uncertainty of the new administration in Washington and what may come from their policies, if certain things happen such as inflation increasing, we would have to adjust our strategy. We work closely with our portfolio management team and economists to look for early warning signs — but for now, we’re still in buying mode.
Q: “What can we expect from the buy/sell market in 2025?”
We should be selling a decent-sized piece of our re-performing portfolio in Q1. We are probably going to market with about $50 million worth of loans in February and March — because it’s time to sell those loans and reinvest the proceeds into new assets, but also because we want to try to get them out before potential rises in both interest rates and inflation later in 2025.
The current consensus thinking is that it looks like interest rates will stay relatively flat in 2025, with a potential cut or two later in the year. The market is definitely fluid and we expect it to stay that way, so we work very closely with our CIO Spencer Staples and his team to keep a pulse on what they’re seeing, and to decide when we’re going to lean in versus when we’re going to back off. But even when we are defensive in buying, like we were in 2022 and in the first half of 2023, we’re still acquiring assets.
No matter what the market is like, however, we always perform deep due diligence and look at how to generate appropriate risk-adjusted returns. We’re never cavalier when we make trades. After all, we are stewards of our investors’ money and work to earn their trust accordingly. That being said, even if we were defensive for all of 2025, I expect to see at least $150 to $200 million worth of acquisitions.
There are always loans out there to buy – at a price. The question is if or when we’d feel the need to go after some of those bigger trades that are priced at market, rather than trying to bid on the smaller trades that are available at discounts, which is what we typically try to do.
Wrap-up
NPLs are a key component of PPR’s investment strategy, and we’re excited to see what new acquisitions we bring to our portfolio in 2025. Thank you, Taylor, for giving insight on the NPL market and what to expect in 2025!
