Regarding Potential Risks
The combined benefit of the Fund's Loan Loss Reserve and lower Loan-to-Value ratio offers our investors a buffer. Due to a lower Loan -to - Value Ratio borrower who falls upon difficult times would most likely be able to sell or refinance any property before it goes into foreclosure. In the event a property did go to auction as part of the foreclosure process, a third party could potentially overbid the Fund, leaving the Fund in the position to receive 100% of the principal investment back, in addition to
Any money invested in real estate, whether through a partnership or a REIT, will be subject to some risk because those investments may involve direct investment in real estate with no buffer against changes in property values or other factors, may involve debt or other leverage which may be senior to the investor's capital, may have greater exposure to market and interest rate changes, and would be subject to all the risks attendant to the management and operation of one or more properties. If, for example, there is a shortage in cash flow and a partnership isn't able to make the payments on the debt or pay insurance and property taxes, a lender can choose to foreclose the property causing investors to lose their principal investment.
On the other hand, the Fund's portfolio consists of a diversified pool of first mortgages and deeds of trust secured by real estate. These are first priority liens and are senior to the equity investors in the property. The Fund's loans are made at lower Loan-to-Values, meaning that the equity of the borrower in the property becomes a cushion or a buffer against loss for the Fund.
Further, while the value of ownership interest in real estate or real estate-backed securities can fluctuate due to changes in interest rates or the markets in which they trade, the value of the Fund is designed to remain fixed (based on the principal balances of all the loans within the Fund's portfolio).
As seasoned investors already know, the principal invested in stocks, bonds, mutual funds and REITs may rise or fall, be increased or lost, due to fluctuations in respective markets in which those securities trade. Such losses may be completely unrelated to the fundamentals of the underlying business or investment quality. They may be due to factors such as investor sentiment or action by the Board of Governors of the Federal Reserve. Conversely, the Fund is comprised of a diversified pool of real estate secured loans (i.e. mortgages and deeds of trust) that are not correlated to the stock market, the bond market, interest rate changes and other factors which affect many other investments. This does not mean that real estate values underlying these loans are immune from fluctuation or change. Real estate values have changed in the past and will change in the future.
However, the Fund uses a number of protective safeguards to help mitigate or reduce the risk that declines in real estate values will impact the Fund's principal investments. Among other things, the Fund invests in short term loans. By investing in loans with terms of approximately 1 to 3 years and holding those loans to maturity, the Fund is better able to react to changes in real estate values and interest rates as compared to being locked into 30 year mortgages. Further, the Fund makes loans at lower Loan-to-Value ratios (LTV). The lower Loan-to-Value ratio results in a protective equity cushion to act as a buffer against loss in the event of a change in property values or a borrower default. In addition, the Fund is diversified across a number of segments, including the number of loans, geography, property types, borrowers, maturities, interest rates, Loan-to-Values and other factors. As compared to an investment consisting of a pool of homogeneous loans that react in a similar way (e.g. a mortgage backed security consisting of 30 fixed rate loans secured against single family homes), the diversification helps to mitigate the risk of the entire pool of loans negatively reacting in a similar fashion at the same time.
The actions taken will depend on the facts, nature and circumstances of the default. Potential actions may include permitting additional cure periods, restructuring the loan, appointing a receiver to collect rents and manage property, selling the loan, or foreclosing on the property. In the event the Manager elects to sell the loan, likely buyers may include junior lien holders or other investors interested in owning the property. The point is that there are a number of potential actions that may be taken by the Manager in an effort to protect and preserve the principal investment in the loan. That said, the Manager has the ability to act quickly and aggressively in the event of default.
As an active market participant that has weathered several real estate cycles, the Manager's principals have in-depth knowledge, expertise and experience managing such risks. In anticipation of potential market changes the current underwriting philosophy employed by the Manager results in the use of third party valuations (e.g. appraisals), market analysis, stress testing of cash flows, capitalization rates and other factors, lower Loan-to-Value (LTV) ratios, shorter maturities and other loan terms to help mitigate downside risk. The result is a protective equity cushion for the loans within the Fund to help buffer the impact of changing real estate values and related market conditions.
Further, by keeping the terms of the loans short, the Fund has the ability to require existing borrowers to payoff or remargin (i.e. pay down the principal balance) their loans at maturity and to make new loans at the then current market values. This helps to reduce the risk of having a legacy portfolio of loans with longer maturities made at a time when property values were much higher. Lastly, in a waning market the Manager also has the ability to review and revise its underwriting approach and stress testing as necessary so that maximum Loan-to-Values (LTV), capitalization rates, loan maturities and other loan terms are adjusted (i.e. may become more conservative) to address changing market conditions.
Through June 30, 2018, Fund members earned a 7.19% net annualized return in 2018. Further, the Fund generated an 8.80% net annualized compounded return from inception through June 30, 2018. The target annualized return for the Fund is 7% to 8%, net of management fees and other Fund expenses. However, while we believe those returns are realistic, they are not guaranteed.
Yes, future returns may be lower than returns paid in prior periods. Once loans pay off, there is no guarantee that the Fund will find comparable quality loans at the same or a higher interest rate to replace them. Specifically, in order to stay competitive and maintain a portfolio of higher-quality loans, the Manager carefully monitors the market and adjusts interest rates as needed. Therefore, if market interest rates drop, the Manager may elect to lower the Fund's interest rates on new loans to ensure it receives a sufficient flow of new loan requests to meet the Fund's portfolio needs. Conversely, if market interest rates rise, the Manager may elect to raise the Fund's interest rates to capture additional yield for the Fund if loan quality may be maintained. Other factors that may affect the Fund's returns include potential increases or decreases in the Loan Loss Reserve (see above), if a loan is not performing or is in foreclosure, and large repayments which may cause excess liquidity in the Fund.
It is unlikely that the rate of return earned by the Fund's members will be inferior to the rates offered by banks, credit unions or other insured financial institutions on checking accounts, savings accounts, money market accounts and certificates of deposit. The explanation is relatively simple: the financial models of those institutions differ from the Fund.
Banks and other insured financial institutions have an incentive to reduce their cost of funds (a large portion of which is based on the rate they pay on deposits) to ensure a healthy Net Interest Margin (NIM). Essentially, the Net Interest Margin is the spread between a bank's cost of funds and the rates they charge on loans. All other things being equal, the greater the NIM or spread, the more potential profit the bank receives. In a low interest rate environment like the one we have experienced over the last several years, the deposit rates offered by some banks may be under 1%. Therefore, while the banker may have the same objective of protecting their depositor's principal, the banker's incentive is to maximize returns for their shareholders and themselves and not necessarily their depositors.
However, the Fund, while not unlike a bank in many respects, has an incentive to maximize investor returns. A bank makes real estate loans using it's depositor's money in essentially the same way the Fund makes loans with the money invested by its investors. However, unlike depositors in a bank, Fund investors receive all distributable cash earned by the Fund. The distributable cash in the Fund is primarily the interest received on the loan portfolio less the costs of operating the fund, working capital and loan loss reserves. As a result, the Fund has a targeted net annualized return to its investors of 7% to 8%.
Generally, the distributions would be treated as ordinary income. However, investments through IRA, 401K, pension and other qualified plans may receive more favorable tax treatment, such as the deferral of income taxes. We do not provide legal, tax or accounting advice and therefore, recommend that you consult with your tax advisor about your particular tax situation.
The operating agreement of the Fund allows you to withdraw all or a portion of the investment after an initial 12 month period has passed. After that period, you may withdraw up to the lesser of 25% of your investment or $100,000 every consecutive 3 months, although additional restrictions on withdrawals may apply. Further, in certain circumstances, the Manager may permit an accelerated or full withdrawal of invested funds. Earnings will accrue on your investment to the date of the withdrawal and there are no penalties for withdrawals.
There are two cash sources available for withdrawals, with the main source being loan payoffs. The Fund's portfolio consists of loans with different maturity dates, creating a laddering effect where loans payoff at different times creating liquidity in the Fund to pay withdrawal requests.
The second source is cash entering the Fund through new subscriptions. Effectively, cash from a new subscription to purchase Units in the Fund may be used to pay an outgoing investors, request for a withdrawal.
Generally, less than 1 month. Once the Subscription Documents are completed by the investor and investment funds are deposited into the Fund's subscription account, the Manager must promptly accept or reject the Subscription Documents. If the Subscription Documents are rejected, the investor's funds will be promptly refunded to that investor from the subscription account.
If the Subscription Documents are accepted, the investor's funds will be moved into the Fund's general account on the first day of the month following the acceptance of the subscription and the investor will become a member of the Fund on that date. Subject to the Subscription Documents being accepted by the Manager, an investor's funds may be borrowed from the Subscription Account at a rate of 4% per annum prior to the investor being admitted as a member of the Fund on the first day of the following month. Therefore, depending on when an investor invests with the fund (i.e. early in the month or later in the month), if accepted by the Manager, funds may be held in the subscription account from a few days to a few weeks, but less than 1 month.
Many of the Fund's borrowers are professional real estate investors. As such, they need an efficient lending source when capitalizing on market opportunities - and they are willing to pay a premium in the interest rate and fees on the loan in exchange for speed and efficiency. It becomes a business expense of the transaction. Therefore, because the Manager and the Fund have a funding platform that can deliver the speed and efficiency desired by those borrowers, they can command higher interest rates and fees than banks and other institutional lenders. This results in higher yielding loans in the Fund's portfolio and higher risk-adjusted returns for the Fund's investors.
The Fund has engaged the services of Armanino, LLP ("Armanino") to perform an annual audit. Further, Armanino assists with a review of the Fund's monthly reconciliations and member distributions.
Armanino is one of the largest California based Certified Public Accounting firms and one of the top 50 accounting firms in the United States. They have been providing accounting and consulting services for over 50 years. Armanino provides services to more California mortgage pools and funds than any other firm in the state and are rapidly becoming a national leader in this industry. Armanino is subject to review by the Public Company Accounting Oversight Board ("PCAOB"), a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the audits of public companies and other issuers in order to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports. Further, Armanino is a member of Moore Stephens, one of the world's major accounting and consulting networks and provides access to over 300 independent accounting firms in 100 countries.
As described above, the Fund "bridges" the gap in timing or financing borrowers often experience when they need speed and efficiency to capitalize on a market opportunity, or before they can position their property for more traditional institutional financing or a sale.
Shorter and medium term loans allow the Fund to manage its portfolio in several important ways. By keeping the terms of the loans short, the Fund has the ability to require existing borrowers to pay off or remargin (i.e. pay down the principal balance) their loans at maturity. This helps to reduce the risk of having a legacy portfolio of loans with longer maturities made at a time when property values were much higher. In addition, as loans pay off, the Fund can make new loans at the then current market values. This helps to preserve the protective equity cushion in the Fund.
Shorter and medium term loans also give the Fund the opportunity to react to a changing interest rate environment. If interest rates increase, as loans pay off the Fund may reinvest that capital in loans with higher interest rates resulting in higher relative yields for the Fund's members.
In a waning market, as opposed to being locked into the terms and conditions on longer term loans, the Manager has the ability to review and revise its underwriting approach and stress testing as necessary to adjust to changing market conditions and mitigate overall portfolio risk as new loans are made.
Lastly, shorter and medium term loans create liquidity in the Fund's portfolio to address withdrawal requests by the Fund's members.
Investment Type: The WFP Income Fund is a professionally managed fund investing in short term loans secured by first trust deeds and mortgages against real estate; within the United States. It should be measured against other short-term, fixed income investments in your portfolio.
Investment Objective: Stable Income & Principal Protection® The WFP Income Fund strives to provide a combination of consistent risk-adjusted returns and principal protection through diversification and the protective equity cushion in the loan.
Investment Strategy Justification: The WFP Income Fund is a short-term, fixed income investment alternative that provides the following benefits:
- Professionally managed, pooled investment
- Higher predictable returns
- Protective equity cushion
- Low/little correlation to stock or bond market, or interest rates
- Easy, understandable investment
- No Load
- Secured by hard asset - Real Estate
- Portfolio diversifier
If you have further questions, please contact Donald Pelgrim, Chief Executive Officer of Wilshire Finance Partners, at (866) 575-5070.