Ian Rennick: For those of you that don't know me, my name is Ian Rennick. I'm a wealth advisor here at Morton Wealth. And we're going to, have a talk with Wes Carpenter over at Stormfield. Stormfield is a private real estate fund. They're located over in Connecticut, actually, and they have a very unique, way that they look at some of the investments.
I want to kind of give just a little brief overview of what private real estate lending looks like. The easiest way to explain this is a lot of you probably have bought a home before. You probably put some sort of, initial down payment down, and then you got a loan from the bank. You pay the bank and your mortgage every single month, and, they basically collect that paycheck.
In this scenario, you're the bank, you're collecting that paycheck. And so we really like, the consistency and the downside protection that some of these loans, can really provide and produce, for our clients. One of the ways that they are able to, really provide the structure is being in the first line, for, for the loans.
And what I mean by that is that they're going to have the, the highest priority claim on a borrower's, collateral. And so in this case, it would be like a house. And what they're also able to do is provide a very low loan-to-value rate. So again, with the example of a home, if you probably put, 20% down and you borrowed 80% from the bank, so an 80% loan-to-value, what we try to do is keep that closer to 60% or even better in some cases, which can provide some more cushion for, for the borrower.
And so Stormfield here, Wes Carpenter is going to he's a co-founder. He's going to give us, a little bit more idea of what their strategy looks like, what they're seeing in the market. And so we're very excited to have him today. I want to start kind of with how they look at their loan balances. They look and try to do more of the smaller loan balances.
Why do you guys focus more in this area. And what would you say the main trade offs are?
Wes Carpenter: So to put everyone's mind at ease that we are not lending to consumers. So the loans that we make, our business purpose loans. So we lend against investment properties. So these loans might be secured by single family homes, but they're single family homes that are being acquired for investment purposes. Now the reason we like lending against single family homes and specifically single family homes, I would say sub four dollars million.
Is that the single family housing market is the deepest and most liquid real estate asset class there is. It's which makes it easy to value. In the event that a loan goes bad, it's easy to take possession of the collateral and liquidate it quickly. So we're not in the business of making loans against real estate properties to end up owning them.
But in the rare event that we do, we want to be able to seize the collateral and sell it very quickly so we can take that money back and then re-lend it out to generate more income.
Ian Rennick: When you compare kind of the East and West Coast markets, how does that influence where you're actually looking to land? If you think of California those tend to be higher appreciating higher yielding. How does that go into interplay?
Wes Carpenter: Yeah, the bridge lending market is is really interesting in that it's one of the kind of financial products that actually started on the West Coast. So most financial products will start on the East Coast and then make their way, you know, across across the country. Due to some deregulation that took place in the s and s, the real estate secured bridge lending market really blew up in California during those periods.
And so what we find when we look across the investing landscape, everyone here may have heard of, you know, deed of trust investing, Fractionalized notes. You know, really, popular asset class out here. When we look at a similar risk, you know, same risk profile, New York versus California. In New York, we can earn three to four hundred basis points more return.
And now there are some very specific reasons why, loans in New York command a greater premium in price. I won't go into all the details. It has to do with foreclosure laws. But we grew up Stormfield, grew up as an East Coast lender. We're based in Connecticut. We do a lot of lending in New York.
These are judicial foreclosure states. And net net, we ultimately believe that the premium that we can earn by lending in judicial foreclosure states, outweighs, the risk of prolonged litigation in these states.
Ian Rennick: I want to go back to the focus on the smaller loan balances. Does this create any additional complexity for the team, and if so, like how are you guys able to manage that.
Wes Carpenter: Yeah. So you know we you know we view our you know our job is to build diversified portfolios. You know for you our investors. And you know we don't want to take idiosyncratic position level risk in the portfolio. Because what we're looking to do is harvest the excess returns that you can earn by building a diversified portfolio of these loans.
So, for example, conversation, you know, prior to this was about, you know, marinas, marinas are really interesting asset class. And I think if you're the equity investor, there's a lot of upside that can be generated through investing in marinas. But we're not equity investors, right? We're debt investors. We're looking to generate a stable fixed return for you. And so, you know, to that point we don't want to lend against marinas and similarly, we don't want to lend against the twenty-five or thirty dollars million home that's, you know, being built whose value is a little bit more ethereal.
Right. The average loan that we make at Stormfield against a single family home is probably a five hundred thousand dollars loan against a eight hundred fifty thousand dollars piece of real estate. Now, the average home in the United States is four hundred thousand dollars today. Now, which is to say, you know, we're not lending in highly rural locations, but we're lending in the first and second, you know, degree suburbs of major cities, you know, in the northeast where, you know, an eight hundred thousand dollars home is well within one standard deviation of the median for that local market.
Ian Rennick: So I know obviously, we are looking for all these loans to go really well. But there's got to be times where there's been a loan that might have become delinquent. What is your guys's standard procedure when something like that happens and can you kind of just walk us through that?
Wes Carpenter: Yeah. So I think maybe just to step back, you know what? You know why this why this asset class? So, you know, we we're we're equity investors. Before we got into real estate lending. And what we observed was that when you're a debt investor, you know, making low loan-to-value senior secured loans by highly liquid residential real estate, it is very difficult to lose money, but borrowers will default.
That's it is you know, it's, you know, something that's true. As old as, you know, lending is as a as a business, right? Borrowers will not perform and you'll need to be able to enforce your rights. Now we have a very diligent work out process. We have a dedicated team whose sole job is to manage loans where borrowers have defaulted.
Approximately 70% of our portfolio are in judicial foreclosure states. That's where you have to file. You know, litigation affected, you file a complaint, and you start a foreclosure action with the ultimate goal being get to an auction to sell the property, to pay off, to pay off our debt. So in terms of our strategy and our focus, you know, we are pragmatic.
We are willing to have a conversation with a borrower if they're having trouble, you know, paying their bills, quite frankly, paying their interest payment. But if after sixty days, that person hasn't given us a reasonable plan and made attempts, to to repay us, we will file foreclosure action. This is your capital. So everyone in this room who's invested with us, it's your capital.
And we view ourselves as stewards of that capital. And, you know that we don't really like the check is in the mail, you know, type of argument. So, we move quickly, we move swiftly. And our, you know, what we've ultimately found is that loans that go into default and this is a unique characteristic about our asset class loans that go into default.
The interest rate jumps from the stated rate, which is normally around 1111%, up to a default interest rate, which depending on the state, is between 18 and 24%. So while we are not out seeking loans that default, there is a premium that we can earn for you when when a loan goes into some form of default.
Ian Rennick: So I know over time markets that they'll change. Are there certain areas where you're you're maybe making loans right now, that you're either looking to maybe emphasize more or maybe de-emphasize now hour in the future?
Wes Carpenter: Yeah. You know, probably the best the best example of a market that, you know, we saw getting a little bit frothy and we chose to de-emphasize was was Florida. You know, at one point in time, we had, 24% of our total portfolio in the state of Florida. A lot of investors that we work with in New York, new Jersey and Connecticut, you know, we'll go down to Florida and invest in that market as well.
It became obvious to us probably eighteen months ago that the Florida market was getting, you know, a little bit frothy. You had the hurricanes, you started to see challenges with insurance. And you also saw people who had moved down to Florida during the Covid pandemic, realized that maybe they didn't want to actually spend all of their time down there, and they were taking, you know, taking places back up north again.
So we've reduced our exposure to Florida, from 24% to 14% as we sit here today. So I think that's kind of one, one shift in the portfolio that we've made over the past eighteen months. Other than that, though, you know, what I'd say is, you know, we love the northeast, you know, northeast United States, it's a very mature, stable state market, you know.
And back to my point. We're not equity investors. So we're not we're not chasing six, seven, 8% year over year growth in in real estate values. In fact, when we can lend in stable markets, it actually makes our job easier. You know, just ascribing a value to a piece of real estate in a stable market is, is is easier than in a, in a appreciating market, right?
So in an appreciating market, you have to use what's called the kind of the anticipatory value theory. When you're value valuing real estate, real estate. And that's not a game we necessarily want to play. So you know, we love the suburbs of New York, the suburbs of Boston. And then there's also, you know, a handful of tier two markets, in the northeast that we very much like as well.
Ian Rennick: Is there maybe an example, maybe just from a high level of, of maybe a deal that you guys have done recently or in the past that you can maybe just touch on or go over for everyone?
Wes Carpenter: Absolutely. So yeah, we've we've spoken a lot about single family homes, and single family homes are, the largest, segment of our real estate portfolio, real estate loan portfolio. But we also make loans against multifamily properties and condominium buildings as well. Now, a kind of a building of condominiums is essentially, a building of, you know, for sale, single family housing units.
But an interesting transaction type that we've seen, come to the forefront over the past twelve to sixteen months, or what we call a condo inventory loan. And this is where a developer is building a, you know, condo condo building, you know, could be anywhere from twelve to fifty units. And their goal is really to build these units.
And then sell them to generate a profit. Now, typically, a condo developer is going to finance, with a construction loan that has some sort of semi-permanent element to allow the sponsor to sell off the condominium units. Given some of the challenges that have been seen in construction, and in interest rates, many banks are pulling back from that market.
And so what's happening in mass right now across the United States is condo developers are completing their buildings. They're starting to sell their units. But their bank, who would normally give them a little bit more time to sell out the entire building, says Mr. Developer. No, I want my money back. And the developers left in a in a very precarious situation in that they've completed the development.
Units are starting to be sold and they really just need time. They need six to twelve months to sell out the rest of those units. And so we've been very active in the condo inventory lending space recently because, again, for sale single family units there, it's new construction. Generally speaking we have sales history, very recent sales history.
So we can ascribe a very accurate value to the remaining units. And it's a perfect solution for a short term real estate secured bridge loan.
Ian Rennick: You kind of already touched on it, but why? Why would somebody need to go to Stormfield for a loan rather than just go to a bank like a, like a normal person?
Wes Carpenter: Yeah. So oftentimes I think there's this when we talk about real estate secured bridge lending, there's this belief that, you know, it's because the borrowers have bad credit or there's something about their background that, you know, prevents them from from accessing the conventional capital markets. The reality of the matter is banks don't participate in one to two year lending.
Right? Given the regulatory, architecture of a bank, right. This kind of burdensome regulation that our U.S. banking system has, they can't afford to make a loan that's only going to be on their balance sheet for twelve to thirty-six months. And that's left an immense opportunity as banks continue to consolidate an immense opportunity for the private markets, right.
The private credit markets to step in and fill that void. So to answer your question more specifically, though, beyond just kind of broad market structure, what our borrowers are seeking is surety of execution. Very many of the transactions we lend into the borrower needs to close quickly. So they're looking for a counterparty or a lender who can execute.
And they can trust they can execute. So sure of execution. And then post-closing servicing so many lenders, everyone here might be familiar with CMBS or securitizations. Many lenders will securitize their loans, with Stormfields. And the loans that we make are borrowers want to know that the people they borrow money from will be the same people they deal with to make their interest payments take any draw as if there's a construction element.
So that kind of continuity of service is the other thing that our borrowers are looking for.
Ian Rennick: I think we still have a few minutes. I do want to open it up to see if anyone does have any questions for Wes.
Wes Carpenter: I'm just curious to know, the percentage of your portfolio. What percentage is in single family percentages in that family? I'm really not doing my business. So that's my perspective. That's the second question I have is, what percent of the portfolio is in default?
So just just for everyone, the two questions were, what is the asset allocation, across the portfolio. And then what percentage of the portfolio is in default. So the percentage in single family will change over time. Right now it's approximately 50% in single family, which, you know, if anyone is in real estate, we describe this one to four family units, which tend to behave pretty similarly.
Approximately 25% is in multifamily. And then the balance would be in mixed use. And we have a very small sliver of, logistics in the portfolio as well. The one thing I will say about the multifamily sleeve that we have is the super majority of loans secured by multifamily properties are sub fifty units. And what we've found in observed is that the sub fifty unit multifamily space behaves very differently than the truly institutional one hundred plus unit multifamily space, and it has to do with the nature of the of the end buyer.
But you tend to have a more kind of retail mom and pop type investor who buys the smaller multifamily, which we ultimately like, versus the institutional assets, which are obviously dealing with institutional type capital. Now, defaults in the portfolio. We've touched on it a little bit, depending on where we are through economic cycles. Default rates will be as low as 3%, as high as 10 or 11%.
You know, right now we're kind of smack in the middle at around six and a half, I think maybe 7%. That's a natural part of this business. The super majority of those defaults will resolve through our regular, light touch servicing efforts. And only a very small percentage of those defaults will require us to engage our special servicing team and file the litigation that I mentioned previously.
Yes. When, there is a default and it goes to auction, I assume the borrower loses all their equity in it and so, yeah. So, not necessarily. So in most cases. So I think one, one interesting. So the question was about what happens at a foreclosure auction and does the borrower lose all of their equity.
When when there's a foreclosure auction, we, the lender will be what's called the credit bid. And so the credit bid is the sum of our principal or accrued regular interest, default interest, any fees that we've advanced or incurred through the enforcement. So that would be the credit bid. If and this happens very regularly, you know, we make our credit bid, let's say a six hundred thousand dollars property might be worth eight hundred fifty.
Someone comes in and bids seven hundred thousand dollars. When that transaction settles, the excess above what we're owed would actually go back to the borrower, in the form of, you know, repayment. But we always get one 100% of what we're owed, as long as it's the bid is above that amount.
In the back, in the single family, it's not really that simple for some people who live in.
What's the purpose? That that's the purpose. If you want to be these, why are we.
It's an excellent question. So many of our many of our borrowers, well, all of our borrowers are real estate investors, but many of them pursue the fix and flip strategy. I'm sure everyone here is at least heard of of the fix and flip strategy, but at its core, it's acquire a dated single family home, do cosmetic renovations, and sell it for a profit.
And again, these borrowers are typically, implementing, you know, doing that in less than nine months. And so back to my previous point, you know, why don't banks participate in this is because banks don't want to spend the time to underwrite and close a loan for it to only be on their balance sheet for for nine months. We're happy to do that.
Ian Rennick: I think that's all we have time for, but I'm sure West will be happy to answer any questions after this. Wes, thanks so much.
