2023 Update – CWS/7e Investments
CWS/7e Investments is pleased to provide you with our Fourth Quarter Update for 2023. We continue to consistently deliver distributions on time each month as expected for 17 months straight.
The fourth quarter of 2023 was busy and productive for our asset management team. We reviewed over $3.9B in loans during this past quarter. Throughout the year, we received over $13.6B in assets to review, with $1.1B to review in December 2023 alone.
A key focus in the 4th quarter was the strategic rebalancing of the portfolio. A major activity involved the liquidation of assets we held over 12 months. Our attention was particularly focused on the lower balance loans to align with our long-term portfolio optimization goals.
Concurrent with these liquidations, we actively acquired additional performing and non-performing loans, aimed at diversifying and strengthening the portfolio. This rebalancing was not ad-hoc, but a calculated step in our overarching investment blueprint.
So while our overall loan count has declined, it’s crucial to note the value and average balance of the loans have increased, while maintaining our loan to values and continuing to diversify across multiple states.
Current Portfolio Overview
Assets Under Management (AUM)
In the past quarter, we continue to observe a notable trend in the non-performing loan pools and additional observations based on the current interest rate environment. We will continue to educate our investors how these shifts affect our note fund, especially in comparison to other investment vehicles.
Current Interest Rate Dynamics
While the general market shows a softening interest rate landscape, it’s crucial to understand that this trend does not directly correlate with our portfolio’s performance. Unlike traditional lenders, our strategy does not hinge on originating loans at market rates.
- Our Unique Approach: Our focus lies in purchasing loans on the secondary market. This strategy enables us to target specific yields, adapting our discount rates accordingly for lower interest loans. It’s a method that sets us apart from market fluctuations experienced by traditional lending mechanisms.
- Contrast with Other Asset Classes: Asset classes like self-storage and multifamily housing are more directly impacted by interest rate changes. These sectors typically operate on “Cap rates,” usually 1.5-2% above the current rates. Consequently, a 1% hike in interest rates could lead to an approximate 15% devaluation in these assets. This direct correlation starkly contrasts with our portfolio’s resilience to such market changes.
Zero Leverage Approach
We proudly maintain a stance of zero leverage in our fund. This deliberate strategy is designed to mitigate risk and ensure greater stability for our investors, setting us apart from many market players.
- Challenges in the Market: We’ve observed that entities utilizing lines of credit are facing unique challenges. Many have originated fixed-rate loans while securing these with variable-rate lines of credit. With recent shifts in interest rates, they are now encountering a ‘double whammy’ scenario, where the cost of their credit line surpasses the income from these loans.
- Our Advantage: Unlike these entities, our fund is not exposed to such risks. Our decision to operate without leverage insulates us from the volatility that arises from fluctuating interest rates on lines of credit. This is a crucial aspect of our risk management strategy, ensuring consistent and reliable returns for our investors.
2024 Year of Declining Home Prices? Why We Buy Older Loans
The real estate market is showing signs of home price declines, a trend that merits close attention. This shift can impact various real estate investment strategies differently.
- Rising Costs: Alongside declining home prices, there’s an uptick in property-related expenses, notably taxes and insurance. These increased costs can affect the overall profitability of real estate investments.
- Acquisition of Pre-2020 Loans: Our focus on acquiring loans originated pre-2020 is a critical component of our strategy. These loans often come with significant equity, providing a buffer against market corrections.
- Insulation from Market Corrections: The substantial equity in these pre-2020 loans places us in a strong position. Even if home prices soften, as some predict for 2024, our fund is well-insulated. This is because our valuation basis differs from other asset classes that are more directly impacted by current price depreciations.
- Lower Balances, Reduced Risk: By purchasing loans with lower balances relative to their original value, we effectively shield our portfolio from the anticipated risks. This approach is in stark contrast to strategies based on today’s values, which are more vulnerable to market fluctuations.
We have enjoyed sending out weekly case studies to keep our investors in the loop on our day-to-day operations. If you haven’t been receiving our updates, be sure to sign up here: 7e Newsletters
Borrower Started Trial Payment Plan
- UPB: $53,997.92
- Principal & Interest Monthly Payment: $578.60
- Status: Borrower was consistently paying one month behind
- Property Characteristics:
- 6 bedrooms, 3 bathrooms
- 3996 Living Sqft
- Fair Market Value of $482,000.00
- STORY – ACTIONS TAKEN:
- Purchased for $35,500 in April 2023
- We acquired this nonperforming loan from a broker with whom we have been building a close relationship
- Borrower was about 18 months behind in payments when we purchased the loan
- We sent a Demand to the borrower immediately, and the borrower let us get to the complaint stage of the foreclosure process before finally coming to the table asking to work with us. We requested they fill out a Financial Hardship Package/Application and they complied, sending a filled-out application in October 2023
- In November, they signed the Trial Payment Plan and paid their downpayment to start the plan
- Borrower plans to fully reinstate the loan in March 2024 after he receives his annual bonus from his day job
This quarter we take immense pride in acknowledging the extraordinary efforts of Julie Bower, our Director of Accounting. Julie’s role is crucial in orchestrating one of the most challenging aspects of our operations – the annual audit, a testament to her exceptional capability and dedication.
The audit, a rigorous process undertaken with our third-party auditor, Grant Thornton, involves the comprehensive valuation of all our assets, including the intricate task of working with the Asset Management team on determining if they are performing or nonperforming, as they must be accounted for differently, as well as valuing them marking them to market. Julie’s expertise shines through in this demanding exercise, ensuring accuracy and compliance in every facet.
Her foresight and strategic approach allow for the successful completion of the audit by the end of April each year, a timeline that speaks volumes about her efficiency and commitment. Once this is complete, soon thereafter we must provide our semi-annual report to the SEC. During this time, she also handles all our accounts payable, accounts receivable and is instrumental in working with Investor Relations to make sure monthly investor distributions are issued in a timely fashion and your tax forms are received on-time.
Julie’s pivotal role in managing this complex process is indispensable to CWS Investments. Her contribution not only upholds our standard of financial integrity but also reinforces our reputation as a leader in the industry.
Employee Spotlight – Julie Bower
Director of Accounting