In response to feedback from our original diversification analysis, starting in January of 2018 we also began providing additional data to help investors assess where future performance might net out for loans that remain outstanding. Current performance cannot, of course, guarantee future results -- but it can provide insight into potential return scenarios.
Our portfolio analysis, now in its fifth edition, examines the historic relationship between loan performance state and repayments as well as the state of all outstanding loans in our current portfolio compared to our repaid loan numbers.
To provide context for this analysis, we first looked at the number of loans originated to determine what percentage repaid in full, what percentage repaid with a loss, and what percentage was still outstanding (in other words, still remaining in our active loan portfolio) as of December 31, 2020. As we did in our previous portfolio analysis (and as we will do going forward), we have broken out the repaid loan portfolio into cohorts based on the quarters in which loans were originated to provide a further degree of insight into loan performance as a function of when they were originated.
Table 1: Loan Performance by Quarter
This table details the total number of loans originated, as well as the number of those loans that were originated and sold as LROs in each cohort.¹ To calculate the percentages we see in the table, we use the total number of loans originated and sold as LROs, and the number of those loans that have been repaid, experienced a loss, or remain outstanding.
In total, we have originated and sold 1,626 loans to investors to date. So far, 71.5% of these loans have been repaid in full, 1.1% have been repaid with some degree of loss, and 27.4% remain outstanding in our active portfolio (see “The Active Portfolio” for details).
The Repaid Portfolio
Below is a stratification (in percentages) of all repaid loans by performance state as of December 31, 2020. As a reminder, the performance states are defined as:
Current - loan remained current through the term
Default - loan was put into default by GROUNDFLOOR, and resolved while in default
Workout - a workout plan was put into effect and the loan was resolved under the terms of the workout agreement
REO - GROUNDFLOOR assumed title to the property (either through foreclosure or deed in lieu) and sold the property for proceeds on behalf of investors
Table 2: The Repaid Portfolio as of 12/31/20
In total, we have repaid 1,180 loans to date. At the time of repayment, 72% of these loans were current, 12% were in default, 15% were in workout, and 1% were categorized as REO. To date, repaid GROUNDFLOOR loans have experienced a loss ratio (i.e. the amount of principal lost expressed as a ratio to the principal invested) of 0.62%.
To provide greater context, we’ve also calculated overall net returns by performance state in Table 3 below:
* Returns for loans in REO upon repayment are included in the default total.
Table 3: Overall Net Returns by Performance State
As we have advised elsewhere, workouts and loan defaults do not necessarily (or even usually) imply that a loss is imminent. Loans that go into default or workout do not necessarily result in losses. For example, in Q2 2019, 41% of loans repaid were in default upon repayment. However, those defaulted loans repaid with zero incidence of loss. Our Asset Management team proactively puts loans in default to accelerate project completion and loan repayment -- and as we can see from the data above, it works!
The data above shows that investors whose portfolios are properly diversified have not suffered losses on the whole. This would remain the case even if, through some stroke of very bad luck, every loan held by a hypothetical investor defaulted; as long as that investor had been invested in a large enough sample of the full population of defaulted loans, they would not have experienced heavy losses. In fact, investing in defaulted loans and only defaulted loans would still have generated a 9.08% annualized net return!
The Active Portfolio
Let’s turn now to an analysis of loans that haven’t yet repaid. There were 446 loans outstanding as of December 31, 2020. A similar stratification of these loans by performance state yields the following:
Table 4: The Active Portfolio as of 12/31/20
As we communicated to investors at the onset of the pandemic in March 2020, we expected project completions, and therefore loan repayments, would be delayed in the short-term. We also communicated that we would provide qualifying borrowers with leniency (in the form of a 90-day extension), given the uncertain effect of the pandemic on financial and real estate markets. Projects qualifying for this COVID extension included those reaching maturity between April 2020 and July 2020 that were likely to perform, but on a more protracted scale. To qualify, borrowers either had to have been current in their loan and proceeding according to schedule, or they must have completed their project and were actively awaiting sale or refinance.
In Table 4, we have differentiated workout loans that were extended because they qualified for COVID relief and those that necessitated a workout plan but did not qualify for COVID relief. Of the 446 loans that remain outstanding, 5.4% qualified for a COVID-related extension. The bulk of COVID extensions occurred in the Q2 2019 cohort, followed by Q3 2019 and Q4 2019. This is generally because those loans were coming to maturity right around the time that the pandemic hit the United States in earnest. After Q4 2019, no more COVID-related extensions were granted.
Our previous portfolio analysis (August 2020) reported that out of 433 loans outstanding at that time, 17.3% were extended because they qualified for COVID relief. Since then, these loans have largely been resolved from our active portfolio, and have repaid with little to no degree of loss. For example, let’s look at Q2 2019, which represents our highest quarterly cohort for COVID-related extensions. In August 2020, 10.6% of loans outstanding from that cohort were extended due to COVID; as of December 31, 2020, that percentage had dropped to 3.4%. Looking at Table 2, we can see that the repaid Q2 2019 cohort contained 128 loans as of December 31, 2020. This represents 36 more loans in that cohort that were repaid since August 2020 -- and they were repaid with zero instances of loss. The COVID pandemic may have slowed down project progress and extended repayment timelines, but it has largely not impacted investment performance to date.
Despite the unprecedented advent of the COVID-19 pandemic, this analysis shows that the performance of our active portfolio remains largely in line with historical performance. As the pandemic continues to disrupt normal business operations, some courts and cities remain effectively closed or highly constrained, impacting the processing and adjudication of claims, permit approvals, and inspections. However, increasing capital availability is supporting recovery, while the primary investment thesis for our lending -- that the supply of single family housing available for purchase in the United States continues to lag demand -- remains as valid as ever. Overall, GROUNDFLOOR remains well-positioned to continue weathering the COVID-19 crisis and continue delivering results for our investors.
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 email@example.com. We always look forward to hearing from you.
¹ Loans not originated and sold as LROs include institutional loan sales and loans that were repaid prior to offering to or being fully funded by investors.