Welcome to the sixth installment of our Portfolio Analysis, a series we began in January 2018 to give our investors further insight into the performance of our loans over time, and the size and shape of our portfolio of loans outstanding currently.
Since our last installment in this series, an analysis performed as of December 31, 2020, we have seen a significant increase in lending activity, enabled by tremendous growth of our investor base. We have expanded our geographic reach, and have added new channels through which we are able to reach prospective borrowers. And we have achieved this growth without relaxing our underwriting standards or our asset management practices.
The COVID-19 pandemic has stressed our loan portfolio in new ways, and we have responded aggressively and creatively. You can view a summary of how we’ve adapted to the pandemic in this blog post, and you can view a recap of our 2020 performance in this blog post.
Despite the challenges, we have continued to monitor our lending practices and outstanding loans rigorously. We continually seek to improve as we scale to meet our investors’ demand for greater volume, greater diversification, and strong returns.
Lending Activity: 2016 to June 30, 2021
As we have done in prior analyses, we begin by looking at our lending activity over time, organized into “cohorts” of loans according to the quarter in which they were originated. For each cohort, how many loans were originated, how many have since repaid, and how many are still outstanding?
Lending Activity, 2016 - Q2 2021
As shown, we have originated (or in a few cases, purchased) 2,212 loans since 2016, and of those, 1,443 have repaid and 769 remain outstanding as of June 30, 2021 (the end of the Q2 reporting period). After a slowdown in lending activity caused by the disruptions of COVID, our lending activity has returned to its prior growth trajectory, as the graph below indicates.
Loans Repaid vs. Outstanding by Origination Cohort
Repaid Loans: January 1, 2016 to June 30, 2021
Next we turn to an analysis of all loans that have been resolved, whether through successful repayment by the borrower or an alternative means of recovery.
As we did in the previous Portfolio Analysis, we will explore our book of repaid loans by reporting on the “performance state” of those loans at the time of repayment: Current, Workout, Default, or REO. As a reminder, we have historically defined these performance states as follows:
- Current – The loan remained current throughout the term of the loan
- Workout – A workout plan was put into effect and the loan was repaid under the terms of the workout agreement
- Default – The loan was put into default by Groundfloor and repaid while in default
- REO – Groundfloor assumed title to the property, either through foreclosure or deed in lieu of foreclosure, and obtained a recovery through sale of the property
Performance States of Repaid Loans, 2016 - Q2 2021
The chart above illustrates the impact of COVID-19 on our portfolio. The loans originated throughout 2019 – projects in progress at the time the disease emerged – experienced the greatest shock. The pandemic economy disrupted the market for housing, for materials, and for construction and renovation services; regulations and social practices introduced as safety measures disrupted the labor supply and introduced a new source of friction for our borrowers; and state and local government entities have shut down for periods, faced severe resource constraints, and been unable to timely provide the services (permitting, for example) that are key to keeping the real estate market moving.
As discussed in this blog post, we worked on a loan-by-loan basis to assess our portfolio and take the actions that we believed would maximize the return on our loans. In many situations, we offered our borrowers extensions to allow them the time and flexibility needed to complete their projects and repay our loan, as evidenced in the chart above by the increase in workout arrangements for loans originated in 2019. In others, we accepted negotiated loan repayments that we believed maximize our investors’ return.
In aggregate, of the 1,443 loans that have repaid since 2016, approximately 62% have repaid while in a state of Current, 16% from a state of Workout, 20% from a state of Default, and 2% through the sale of an REO property. As we have advised previously, though, workouts and defaults are not necessarily an indication of an impending principal loss. The analysis below shows that of the 1,443 repaid loans represented in the chart above, only 31 have resulted in a loss of invested principal – and the loss ratio resulting from those repayments (i.e. the total principal loss, expressed as a percentage of total principal invested) was only 0.7%.
Loans Repaid with Principal Loss, 2016 - Q2 2021
Newer investors to our platform may be surprised to learn that investing in Workout and Default loans alone has historically yielded a strong positive interest return, nearly on par with investing in loans that repay from a state of Current. While that might be counterintuitive, it speaks to a fundamental truth about our product: our loans are well-collateralized and soundly underwritten, and even when loans have gone into forbearance or default, we have historically been able to recover strong interest returns on those loans – which we then pass through to investors.
Average Returns by Performance State
Active Loans, as of June 30, 2021
Finally, we turn to an analysis of our loans currently outstanding – our active loan portfolio. As we did with repaid loans, we report here on the performance state of our outstanding loans, using the same definitions as above.
Active Loans as of June 30, 2021
Summary
Following a period of disruption caused by the COVID-19 pandemic, Groundfloor has emerged with a loan portfolio that is strong, growing, and continuing to generate positive returns in line with historical results. Our lending activity is at an all-time high, thanks to the demand from our investors. Loans originated in 2019, in particular, and outstanding in 2020 felt the shock of the COVID economy and resulted in a higher-than-usual percentage of loans in workout and default situations. However, on account of our borrowers’ resilience and our flexible asset management measures, those loans have continued to repay and to deliver strong returns. The first six months of 2021 have been a story of recovery and return to our prior growth trajectory. We look forward to continuing that momentum into the second half of the year.
Over eight years ago, Groundfloor was founded to enable everyday Americans to invest in high-yield securities previously reserved for the top 5% of wealth holders and income earners. As Groundfloor continues to expand its loan origination capabilities, the degree to which our investors can diversify their portfolios has become unprecedented in the real estate investment space. In line with our mission, we will continue to empower our investors to develop and execute their own investment strategies. Whether and how you take full advantage of this degree of freedom is up to you.
We share this kind of information to help support our investors’ success. If you have any questions or comments about this report, do not hesitate to reach out to us. You can comment below or send an email to support@groundfloor.us. We always look forward to hearing from you.
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