UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ___________ to _____________
Commission File Number:
a California Limited Partnership
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
|
Accelerated filer |
☐ |
|
|
|
|
|
☒ |
|
Smaller reporting company |
||
|
|
|
|
|
Emerging growth company |
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Part I –FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Balance Sheets
March 31, 2022 (unaudited) and December 31, 2021 (audited)
($ in thousands)
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
ASSETS |
|
|
|
|
|
|
||
Cash, in banks |
|
$ |
|
|
$ |
|
||
Loan payments in trust |
|
|
|
|
|
|
||
Loans held for sale |
|
|
|
|
|
|
||
Loans |
|
|
|
|
|
|
||
Principal |
|
|
|
|
|
|
||
Advances |
|
|
|
|
|
|||
Accrued interest |
|
|
|
|
|
|
||
Loan balances secured by deeds of trust |
|
|
|
|
|
|
||
Allowance for loan losses |
|
|
( |
) |
|
|
( |
) |
Loan balances secured by deeds of trust, net |
|
|
|
|
|
|
||
Receivable from related party (Note 3) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Real estate owned (REO), net |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Debt issuance costs, net |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
LIABILITIES AND PARTNERS' CAPITAL |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Payable to related party (Note 3) |
|
|
|
|
|
|
||
Accrued liabilities |
|
|
|
|
|
|
||
Line of credit |
|
|
|
|
|
|
||
Mortgages payable |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
||
Partners’ capital |
|
|
|
|
|
|
||
Limited partners’ capital |
|
|
|
|
|
|
||
General partners’ deficit |
|
|
( |
) |
|
|
( |
) |
Total partners’ capital |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Receivable from manager (formation loan) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Partners’ capital, net of formation loan |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total liabilities and partners’ capital |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Income
For the Three Months Ended March 31, 2022 and 2021 ($ in thousands) (unaudited)
|
|
Three Months Ended March 31 |
|
|
|||||
|
|
2022 |
|
|
2021 |
|
|
||
Revenue |
|
|
|
|
|
|
|
||
Interest income |
|
$ |
|
|
$ |
|
|
||
Interest expense |
|
|
|
|
|
|
|
||
Line of credit |
|
|
( |
) |
|
|
( |
) |
|
Mortgages payable |
|
|
( |
) |
|
|
( |
) |
|
Total interest expense |
|
|
( |
) |
|
|
( |
) |
|
Net interest income |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Late fees |
|
|
|
|
|
|
|
||
Total revenue, net |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Provision for (recovery of) loan losses |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
||
Operations expense |
|
|
|
|
|
|
|
||
Mortgage servicing fees to related party |
|
|
|
|
|
|
|
||
Asset management fees to related party |
|
|
|
|
|
|
|
||
Costs from Redwood Mortgage Corp. |
|
|
|
|
|
|
|
||
Professional services |
|
|
|
|
|
|
|
||
REO, net (Note 5) |
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
||
Total operations expense |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
||
Net income |
|
|
|
|
|
|
|
||
Limited partners ( |
|
$ |
|
|
$ |
|
|
||
General partners ( |
|
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Changes in Partners’ Capital
For the Three Months Ended March 31, 2022
($ in thousands) (unaudited)
|
|
Limited |
|
|
General |
|
|
Total |
|
|||
|
|
Partners’ |
|
|
Partners’ |
|
|
Partners’ |
|
|||
|
|
Capital |
|
|
Capital (Deficit) |
|
|
Capital |
|
|||
Balance, December 31, 2021 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Net income |
|
|
|
|
|
|
|
|
|
|||
Distributions |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Withdrawals |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, March 31, 2022 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
For the Three Months Ended March 31, 2021
($ in thousands) (unaudited)
|
|
Limited |
|
|
General |
|
|
Total |
|
|||
|
|
Partners’ |
|
|
Partners’ |
|
|
Partners’ |
|
|||
|
|
Capital |
|
|
Capital (Deficit) |
|
|
Capital |
|
|||
Balance, December 31, 2020 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
Net income |
|
|
|
|
|
|
|
|
|
|||
Distributions |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Withdrawals |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, March 31, 2021 |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2022 and 2021
($ in thousands) (unaudited)
|
|
Three Months Ended March 31 |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Operating activities |
|
|
|
|
|
|
||
Interest income received |
|
$ |
|
|
$ |
|
||
Interest expense |
|
|
( |
) |
|
|
( |
) |
Late fees and other loan income |
|
|
|
|
|
|
||
Operations expense |
|
|
( |
) |
|
|
( |
) |
Total cash provided by operating activities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Investing activities |
|
|
|
|
|
|
||
Loans |
|
|
|
|
|
|
||
Loans funded |
|
|
( |
) |
|
|
( |
) |
Principal collected |
|
|
|
|
|
|
||
Loan transferred from related mortgage fund |
|
|
|
|
|
( |
) |
|
Loans transferred to related mortgage fund |
|
|
|
|
|
|
||
Loans sold to non-affiliate |
|
|
|
|
|
|
||
Advances received from loans |
|
|
|
|
|
|
||
Total - Loans |
|
|
( |
) |
|
|
( |
) |
Total cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
||
Financing activities |
|
|
|
|
|
|
||
Partners' capital |
|
|
|
|
|
|
||
Partner withdrawals, net of early withdrawal penalties |
|
|
( |
) |
|
|
( |
) |
Early withdrawal penalties |
|
|
( |
) |
|
|
|
|
Partner distributions |
|
|
( |
) |
|
|
( |
) |
RMC payments - formation loan |
|
|
|
|
|
|
||
Cash distributions to partners, net |
|
|
( |
) |
|
|
( |
) |
Line of credit |
|
|
|
|
|
|
||
Advances |
|
|
|
|
|
|
||
Repayments |
|
|
( |
) |
|
|
|
|
Debt issuance costs |
|
|
( |
) |
|
|
|
|
Cash provided by line of credit |
|
|
|
|
|
|
||
Total cash provided by financing activities |
|
|
|
|
|
|
||
Net increase (decrease) in cash |
|
|
( |
) |
|
|
|
|
Cash, beginning of period |
|
|
|
|
|
|
||
Cash, end of period |
|
$ |
|
|
$ |
|
||
Non-cash investing activities includes $
Non-cash financing activity for the three months ended March 31, 2021 includes early withdrawal penalties of approximately $
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2022 and 2021
($ in thousands) (unaudited)
Reconciliation of net income to net cash provided by operating activities:
|
|
Three Months Ended March 31 |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Change in operating assets and liabilities |
|
|
|
|
|
|
||
Loan payments in trust |
|
|
|
|
|
|
||
Accrued interest |
|
|
( |
) |
|
|
( |
) |
Receivable from related party |
|
|
( |
) |
|
|
|
|
Other assets |
|
|
|
|
|
|
||
Accounts payable and accrued liabilities |
|
|
|
|
|
|
||
Payable to related party |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
NOTE 1 – ORGANIZATION AND GENERAL
Redwood Mortgage Investors VIII, a California Limited Partnership (“RMI VIII” or “the partnership”), was formed in 1993 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily by first and second deeds of trust. The partnership is externally managed by Redwood Mortgage Corp. (“RMC” or “the manager”). The general partners are RMC and Michael R. Burwell (Burwell), the President, Secretary and Treasurer of RMC and its principal shareholder. RMC provides the personnel and services necessary to conduct the business as RMI VIII has no employees of its own. The general partners are entitled to one percent (
In the opinion of management of RMC, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the consolidated financial information included therein. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the partnership’s Form 10-K for the year ended December 31, 2021 filed with the U.S. Securities and Exchange Commission (SEC). The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the operating results to be expected for the full year.
The rights, duties, and powers of the limited partners and general partners of the partnership are governed by the Limited Partnership Agreement (“Partnership Agreement”). Limited partners representing a majority of the outstanding units may, without the consent of the general partners, vote to: (i) dissolve the partnership; (ii) amend the Partnership Agreement subject to certain limitations; (iii) approve or disapprove the sale of all or substantially all of the assets of the partnership; and (iv) remove or replace one or all of the general partners. A majority in interest of partnership units is required to elect a new general partner to continue the partnership business after a general partner ceases to be a general partner due to its withdrawal.
The following is a summary of certain provisions of the Partnership Agreement and is qualified in its entirety by the terms of the Partnership Agreement itself. Limited partners should refer to the Partnership Agreement for complete disclosure of its provisions.
The manager is responsible for managing the business and affairs of RMI VIII, subject to the voting rights of the partners on specified matters. The manager acting alone has the power and authority to act for and bind the partnership. RMC is entitled to fees and reimbursements of qualifying costs as specified in the Partnership Agreement.
The partnership’s primary investment objectives are to:
Net income (losses) are allocated among the limited partners according to their respective capital accounts after one percent (1%) of the net income (losses) are allocated to the general partners. Investors should not expect the partnership to provide tax benefits of the type commonly associated with limited partnership tax shelter investments.
The partnership’s net income, cash available for distribution, and net-distribution rate fluctuates depending on:
Federal and state income taxes are the obligation of the partners, other than the annual California franchise tax and the California LLC cash receipts taxes paid by the partnership’s subsidiaries. The tax basis in the net assets of the partnership differs from book basis by the amount of the allowance for loan losses and the amount of the valuation allowance for real estate owned.
7
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
The ongoing sources of funds for loans are the proceeds (net of withdrawals from limited partners’ capital accounts and operation expense) from:
The partnership intends to hold until maturity the loans in which it invests and does not presently intend to invest in mortgage loans primarily for the purpose of reselling such loans in the ordinary course of business; however, the partnership may sell mortgage loans (or fractional interests therein) when the manager determines that it appears to be advantageous for the partnership to do so, based upon then current interest rates, the length of time that the loan has been held by the partnership, the partnership’s credit risk and concentration risk and the overall investment objectives of the partnership. Loans sold to third parties may be sold for par, at a premium or, in the case of non-performing or under performing loans, at a discount. Partnership loans may be sold to third parties or to the manager or its related mortgage funds; however, any loan sold to the manager or a related mortgage fund thereof will be sold for a purchase price equal to the greater of (i) the par value of the loan or (ii) the fair market value of the loan. The manager will not receive commissions or broker fees with respect to loan sales conducted for the partnership; however, selling loans will increase partnership capital available for investing in new loans for which the manager will earn brokerage fees and other forms of compensation.
Distribution to limited partners
At the time of their subscription to the partnership, limited partners elected either to receive monthly, quarterly or annual cash distributions from the partnership, or to compound income in their capital account. If an investor initially elected to receive monthly, quarterly or annual distributions, such election, once made, is irrevocable. If the investor initially elected to compound income in their capital account, in lieu of cash distributions, the investor may, after three (3) years, change the election and receive monthly, quarterly or annual cash distributions. Income allocable to limited partners who elect to compound income in their capital account will be retained by the partnership for making further loans or for other proper partnership purposes and such amounts will be added to such limited partners’ capital accounts. The percentage of limited partners electing distribution of allocated net income, by weighted average to total partners’ capital was approximately
Capital withdrawals and early withdrawals
There are substantial restrictions on transferability of units, and there is no established public trading and/or secondary market for the units. To provide liquidity to limited partners, the Partnership Agreement provides that limited partners, after the minimum
8
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
The partnership has not established a cash reserve from which to fund withdrawals and, accordingly, the partnership’s capacity to return a limited partner’s capital is subject to the availability of partnership cash. The general partner is under no obligation to sell loans from the portfolio in order to honor withdrawal requests, and the program can be restricted or suspended at any time. Cash flow is considered to be available only after all current partnership expenses have been paid (including compensation to the general partners and related mortgage funds) and adequate provision has been made for the payment of all periodic cash distributions on a pro rata basis which must be paid to limited partners who elected to receive such distributions upon subscription for units. Per the Partnership Agreement, no more than
Term of the partnership
The partnership will continue until 2032, unless sooner terminated as provided in the Partnership Agreement.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
Management estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates involve significant level of uncertainty and have had or are reasonably likely to have a material impact on the partnership’s financial condition or results of operations. Such estimates relate principally to the determination of the allowance for loan losses, including, when applicable, the valuation of impaired loans (which itself requires determining the fair value of the collateral), and the valuation of real estate owned, at acquisition and subsequently. Actual results could differ materially from these estimates.
Fair value estimates
GAAP defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
9
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Fair values of assets and liabilities are determined based on the fair value hierarchy established in GAAP. The hierarchy is comprised of three levels of inputs to be used.
The fair value of real property is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values, and publicly available information on in-market transactions. Appraisals of commercial real property generally present
These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, including the consideration of adjustments made for any attributes specific to the real estate.
Management has the requisite familiarity with the markets it lends in generally and of the properties lent on specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value, and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value in distressed markets and/or property types.
Cash in banks
Certain of the partnership’s cash balances in banks exceed federally insured limits of $
Loans and interest income
Performing loans are carried at amortized cost, which is generally equal to the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the partnership’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums, and attorney fees. Advances generally are stated at the amounts paid out on the borrower’s behalf and any accrued interest on amounts paid out, until repaid by the borrower. For performing loans, interest is accrued daily on the principal plus advances, if any.
Non-performing loans (i.e., loans with a payment in arears) less than
The partnership may fund a specific loan origination net of an interest reserve ( to
In the normal course of the partnership’s operations, performing loans that are maturing or have matured may be renewed at then current market rates of interest and terms for new loans.
10
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
From time to time, the manager negotiates and enters into loan modifications with borrowers whose loans are delinquent (non-performing). If a borrower is experiencing financial difficulties and a loan modification were to result in an economic concession to the borrower (i.e., a significant delay or reduction in cash flows compared to the original note), the modification is deemed a troubled debt restructuring (TDR).
The partnership funds loans with the intent to hold the loans until maturity. From time to time the partnership may sell certain loans. Loans are classified as held-for-sale once a decision has been made to sell loans and the loans held-for-sale have been identified. Loans classified as held for sale are carried at the lower of cost or fair value.
Pursuant to California regulatory requirements borrower payments are deposited into a trust account established by RMC with an independent bank and are presented on the balance sheet as “Loan payments in trust”. Funds are disbursed to the partnership as collected which can range from same day for wire transfers and up to two weeks after deposit for checks.
Allowance for loan losses
Loans and the related accrued interest and advances (i.e., the loan balance) are analyzed on a periodic basis for ultimate recoverability. Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the dollar amount by which the net realizable value (i.e., fair value less the cost to sell) of the collateral, net of any senior liens, exceeds the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest thereon.
If based upon current information and events, it is probable the partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, then a loan may be designated as impaired. An insignificant delay or insignificant shortfall in the amount of payments does not constitute non-performance with the contractual terms of the original loan agreement if the manager expects to collect the amounts due including interest accrued at the contractual interest rate for the period of delay. In determining the probability that the borrower will not substantially perform according to the terms of the original loan agreement, the manager considers the following:
Payments on loans designated as impaired are applied to late fees, then to the accrued interest, then to advances, and lastly to principal.
For loans that are deemed to be collateral dependent for repayment, a provision for loan losses is recorded to adjust the allowance for loan losses (principal and/or recorded interest) in an amount such that the net carrying amount (unpaid principal less the specific allowance) is reduced to the lower of the loan balance or the estimated fair value of the related collateral, net of any costs to sell and net of any senior debt and claims.
The partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible. Any amounts collected after a charge off is deemed a recovery of loan losses. If the loan goes to foreclosure, an updated appraisal is ordered and the recorded investment in the loan is adjusted to the net realizable value of the REO to be acquired. The adjustment is made to the specific reserve in the allowance for loan losses by a charge or a credit to the provision for loan losses.
Real estate owned (REO)
Real estate owned (REO) is property acquired in full or partial settlement of loan obligations generally through foreclosure and is recorded at acquisition at the property’s net realizable value, which is the fair value less estimated costs to sell, as applicable. The fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. REO is analyzed periodically for changes in fair values and any subsequent write down is charged to operations expense. Any recovery in the fair value subsequent to such a write down is recorded, not to exceed the value recorded at acquisition. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
11
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Accrued liabilities
Accrued liabilities at March 31, 2022 and December 31, 2021 were approximately $ and $
Debt issuance costs
Debt issuance costs are the fees and commissions incurred in the course of obtaining a line of credit for services from banks, law firms and other professionals and are amortized on a straight-line basis, which approximates the interest method, as interest expense over the term of the line of credit.
Recently issued accounting pronouncements
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (“ASU”) that significantly changes how entities will account for credit losses for most financial assets that are not measured at fair value through net income. The new standard will supersede currently in effect guidance and applies to all entities. Entities will be required to use a current expected credit loss (“CECL”) model to estimate credit impairment. This estimate will be forward-looking, meaning management will be required to use not only historical trends and current conditions, but must also consider forecasts about future economic conditions to determine the expected credit loss over the remaining life of an instrument. This will be a significant change from the current incurred credit loss model and generally may result in allowances being recognized in earlier periods than under the current credit loss model. The ASU is effective for smaller reporting companies for interim and annual reporting periods in 2023.
RMI VIII invests in real estate secured loans made with the expectation that the possibility of credit losses is remote as a result of substantial protective equity provided by the underlying collateral. The real estate secured programs and low loan-to-value ratios have caused the partnership to expect that the adoption of the CECL model from the incurred loss models presently in use as to credit loss recognition will likely not materially impact the reported results of operations or financial position. However, the impact, if any, upon adoption will be dependent upon the facts and circumstances relating to the partnership’s loans at that date.
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES
The Partnership Agreement provides for fees as compensation to the manager and for reimbursement of qualifying expenses, as detailed below.
Mortgage servicing fees
The manager acting as servicing agent with respect to all loans is entitled to receive a servicing fee of up to
Asset management fees
12
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Costs from Redwood Mortgage Corp.
The manager is entitled to request reimbursement for operations expense incurred on behalf of RMI VIII, including without limitation, RMC’s personnel and non-personnel costs incurred for qualifying business activities, including investor services, accounting, tax and data processing, postage and out-of-pocket general and administration expenses. Qualifying personnel/compensation costs and consulting fees are tracked by business activity, and then costs of qualifying activities are allocated to RMI VIII pro-rata based on the percentage of RMI VIII’s limited partners’ capital to the total capital of all related mortgage funds managed by RMC. Certain other non-personnel, qualifying costs such as postage and out-of-pocket general and administrative expenses can be tracked by RMC as specifically attributable to RMI VIII; other non-personnel, qualifying costs (e.g., RMC’s accounting and audit fees, legal fees and expenses, occupancy, and insurance premiums) are allocated pro-rata based on the percentage of RMI’s members’ capital to total capital of the related mortgage funds managed by RMC.
Commissions and fees are paid by the borrowers to RMC
For fees in connection with the review, selection, evaluation and negotiation of loans (including extensions), the general partners may collect loan brokerage commissions (points) limited to an amount not to exceed
RMC receives fees for processing, notary, document preparation, credit investigation, reconveyance and other mortgage related services. The amounts received are customary for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by the partnership.
Formation loan
Commissions for sales of limited partnership units paid to broker-dealers (“B/D sales commissions”) were paid by RMC and were not paid directly by the partnership out of offering proceeds. Instead, the partnership advanced to RMC amounts sufficient to pay the B/D sales commissions and premiums paid to partners in connection with unsolicited orders up to
RMC is repaying the formation loan principally from loan brokerage commissions earned on loans, early withdrawal penalties on partner withdrawals and other fees paid by the partnership. RMC will use the proceeds from loan brokerage commissions on loans to repay the formation loans. If both or either one of the initial general partners is removed as a general partner by the vote of holders of a majority of the limited partnership units, and if such successor or additional general partner(s) begins using any other loan brokerage firm for the placement of loans, RMC will be immediately released from any further obligation under the formation loans (except for a proportionate share of the principal installment due at the end of that year). In addition, if both of the general partners are removed, no successor general partners are elected, the partnership is liquidated and RMC is no longer receiving any payments for services rendered, the debt on the formation loans shall be forgiven and RMC will be immediately released from any further obligations under the formation loans. As such, the formation loan is presented as contra equity.
The formation loan transactions for the three months ended March 31, 2022 and 2021 are presented in the following table ($ in thousands).
|
|
2022 |
|
|
2021 |
|
||
Balance, January 1 |
|
$ |
|
|
$ |
|
||
Payments received from RMC |
|
|
( |
) |
|
|
( |
) |
Early withdrawal penalties applied(1) |
|
|
|
|
|
( |
) |
|
Balance, March 31 |
|
$ |
|
|
$ |
|
||
13
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Limited partner capital - withdrawals
Withdrawals of limited partners’ capital for the three months ended March 31, 2022 and 2021 are presented in the following table ($ in thousands).
Withdrawals |
|
2022 |
|
|
2021 |
|
|
||
Without penalty |
|
$ |
|
|
$ |
|
|
||
With penalty |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
|
||
Scheduled, at March 31, |
|
$ |
|
|
$ |
|
|
||
Scheduled withdrawals of limited partners’ capital in periods as of and after March 31, 2022 are presented in the following table ($ in thousands).
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
$ |
|
Scheduled withdrawals of limited partners’ capital of approximately $
Other related party transactions
From time to time, in the normal course of business operations, the partnership may have payables to and/or receivables from related parties. At March 31, 2022, the payable to related parties balance of $
At December 31, 2021, the partnership had a payable to related parties of approximately $
In the ordinary course of business, performing loans may be transferred by executed assignment, in-part or in-full, between the RMC managed mortgage funds at par, which approximates fair value.
In the three months ended March 31, 2021, a related mortgage fund transferred to RMI VIII
In the three months ended March 31, 2021 RMI VIII transferred to a related mortgage fund
14
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
NOTE 4 – LOANS
Loans generally are funded at a fixed interest rate with a loan term of up to
As of March 31, 2022,
As of March 31, 2022,
Secured loans unpaid principal balance (principal)
Secured loan transactions for the three months ended March 31, 2022, are summarized in the following table ($ in thousands).
|
|
|
|
|
|
|
|
2022 |
|
|
|
Principal, beginning of period |
|
$ |
|
|
|
Loans funded |
|
|
|
|
|
Principal collected(1) |
|
|
( |
) |
|
Loans transferred to held for sale(2) |
|
|
( |
) |
|
Principal, March 31, 2022 |
|
$ |
|
|
|
During the three months ended March 31, 2022, the partnership renewed
The partnership funds loans with the intent to hold the loans until maturity, although from time to time the partnership may sell certain loans when the manager determines it to be in the best interest of the partnership. During the three months ended March 31, 2022, no loans were sold.
Pursuant to California regulatory requirements borrower payments are deposited into a trust account established by RMC with an independent bank and are presented on the balance sheet as “Loan payments in trust”. Funds are disbursed to the partnership as collected which can range from same day for wire transfers and up to two weeks after deposit for checks. Loan payments in trust at March 31, 2022, were disbursed to the partnership’s account by April 22, 2022. Loan payments in trust at December 31, 2021 were distributed to the partnership’s account by January 14, 2022.
15
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Loan characteristics
Secured loans had the characteristics presented in the following table ($ in thousands).
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2022 |
|
|
2021 |
|
||
Number of secured loans |
|
|
|
|
|
|
||
Secured loans – principal |
|
$ |
|
|
$ |
|
||
Secured loans – lowest interest rate (fixed) |
|
|
% |
|
|
% |
||
Secured loans – highest interest rate (fixed) |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Average secured loan – principal |
|
$ |
|
|
$ |
|
||
Average principal as percent of total principal |
|
|
% |
|
|
% |
||
Average principal as percent of partners’ capital, net of formation loan |
|
|
% |
|
|
% |
||
Average principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Largest secured loan – principal |
|
$ |
|
|
$ |
|
||
Largest principal as percent of total principal |
|
|
% |
|
|
% |
||
Largest principal as percent of partners’ capital, net of formation loan |
|
|
% |
|
|
% |
||
Largest principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Smallest secured loan – principal |
|
$ |
|
|
$ |
|
||
Smallest principal as percent of total principal |
|
|
% |
|
|
% |
||
Smallest principal as percent of partners’ capital, net of formation loan |
|
|
% |
|
|
% |
||
Smallest principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Number of California counties where security is located |
|
|
|
|
|
|
||
Largest percentage of principal in one California county |
|
|
% |
|
|
% |
||
As of March 31, 2022, there are two loans with principal balances in excess of 10% of the total outstanding principal balance. The partnership’s largest loan, with principal of approximately $
As of March 31, 2022, the partnership had
16
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Lien position
At funding, secured loans had the lien positions presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
||||||
First trust deeds |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
||||||
Second trust deeds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total principal, secured loans |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
% |
||||||
Liens due other lenders at loan closing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total debt |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
||||||
Appraised property value at loan closing |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
||||||
Percent of total debt to appraised values (LTV) |
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
% |
|
|
|
||||||
Property type
Secured loans summarized by property type are presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
||||||
Single family(4) |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
||||||
Multi-family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total principal, secured loans |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
||||||
17
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Distribution by California counties
The distribution of secured loans within California by counties is presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Principal |
|
|
Percent |
|
|
Principal |
|
|
Percent |
|
||||
San Francisco Bay Area(5) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
San Francisco |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
San Mateo |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Alameda |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Santa Clara |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Solano |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Marin |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sonoma |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Northern California |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mariposa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sacramento |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Northern California Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Los Angeles & Coastal |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Los Angeles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Orange |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Santa Barbara |
|
|
|
|
|
|
|
|
|
|
|
|
||||
San Diego |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Southern California |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Riverside |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Southern California Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total principal, secured loans |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
Scheduled maturities
Secured loans scheduled to mature in periods as of and after March 31, 2022 are presented in the following table ($ in thousands).
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|||
2022(6) |
|
|
|
|
$ |
|
|
|
% |
|||
2023 |
|
|
|
|
|
|
|
|
|
|||
2024 |
|
|
|
|
|
|
|
|
|
|||
2025 |
|
|
|
|
|
|
|
|
|
|||
2026 |
|
|
|
|
|
|
|
|
|
|||
Thereafter |
|
|
|
|
|
|
|
|
|
|||
Total scheduled maturities |
|
|
|
|
|
|
|
|
|
|||
Matured at March 31, 2022(7) |
|
|
|
|
|
|
|
|
|
|||
Total principal, secured loans |
|
|
|
|
$ |
|
|
|
% |
|||
18
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Scheduled maturities are presented based on the most recent in-effect agreement with the borrower, including forbearance agreements. As a result, matured loans at March 31, 2022, for the scheduled maturities table may differ from the same captions in the tables of delinquencies and payments in arrears that are based on the loan terms and do not consider forbearance agreements. For matured loans, the partnership may continue to accept payments while pursuing collection of principal or while negotiating an extension of the loan’s maturity date.
It is the partnership’s experience that the timing of future cash receipts from secured loans will differ from scheduled maturities. Loans may be repaid or renewed before, at or after the contractual maturity date.
Delinquency/Non-performing secured loans
Secured loans summarized by payment-delinquency status are presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Loans |
|
|
Principal |
|
|
Loans |
|
|
Principal |
|
||||
Current |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
Past Due |
|
|
|
|
|
|
|
|
|
|
|
|
||||
30-89 days |
|
|
|
|
|
|
|
|
|
|
|
|
||||
90-179 days |
|
|
|
|
|
|
|
|
|
|
|
|
||||
180 or more days |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total past due |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total principal, secured loans |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||
At March 31, 2022 and December 31, 2021, there were no forbearance agreements in effect.
No loan forbearance agreements or other loan payment modifications were made during the three months ended March 31, 2022, and none were in effect at December 31, 2021, that would be deemed troubled debt restructurings.
Non-performing secured loans at March 31, 2022, and December 31, 2021, had principal payments in arrears totaling approximately $
|
|
Loans |
|
|
Principal |
|
|
Interest(8) |
|
|
|
|
||||||||||||||||
At March 31, 2022 |
|
Past |
|
|
Monthly |
|
|
Past |
|
|
Monthly |
|
|
Past |
|
|
Monthly |
|
|
Total |
|
|||||||
Past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
30-89 days (1-3 payments) |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
90-179 days (4-6 payments) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
180 or more days (more than 6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Total past due |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
|
|
Loans |
|
|
Principal |
|
|
Interest(9) |
|
|
|
|
||||||||||||||||
At December 31, 2021 |
|
Past |
|
|
Monthly |
|
|
Past |
|
|
Monthly |
|
|
Past |
|
|
Monthly |
|
|
Total |
|
|||||||
Past due |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
30-89 days (1-3 payments) |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
90-179 days (4-6 payments) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
180 or more days (more than |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total past due |
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||||
19
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Delinquency/Loans in non-accrual status
Secured loans in non-accrual status are summarized in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Number of loans |
|
|
|
|
|
|
||
Principal |
|
$ |
|
|
$ |
|
||
Advances |
|
|
|
|
|
|
||
Accrued interest(10) |
|
|
|
|
|
|
||
Total recorded investment |
|
$ |
|
|
$ |
|
||
Foregone interest |
|
$ |
|
|
$ |
|
||
Non-performing loans are placed on non-accrual status the first of the following month after it is 180 days delinquent or earlier if management determines that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued for accounting purposes only (i.e., foregone interest in the table above); however, previously recorded interest is not reversed. Once the payments are made current, interest income is recognized.
At March 31, 2022 , there were two loans with aggregate principal of approximately $
Provision/allowance for loan losses and impaired loans
Generally, the partnership has not recorded an allowance for loan losses as all loans have protective equity such that collection is deemed probable for all recorded amounts due on the loan. From time to time, the manager may deem it in the best interest of the partnership to agree to concessions to borrowers to facilitate a sale of collateral or refinance transactions primarily for secured loans in second lien position.
Activity in the allowance for loan losses for the three months ended March 31, 2022 and 2021 is presented in the following table ($ in thousands).
|
|
2022 |
|
|
2021 |
|
||
Balance, January 1 |
|
$ |
|
|
$ |
|
||
Provision for loan loss |
|
|
|
|
|
|
||
Recovery for loan losses |
|
|
|
|
|
( |
) |
|
Balance, March 31 |
|
$ |
|
|
$ |
|
||
Loans designated impaired and any associated allowance for loan losses is presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Number of loans |
|
|
|
|
|
|
||
Principal |
|
$ |
|
|
$ |
|
||
Recorded investment(11) |
|
|
|
|
|
|
||
Impaired loans without allowance |
|
|
|
|
|
|
||
Impaired loans with allowance |
|
|
|
|
|
|
||
Allowance for loan losses, impaired loans |
|
|
|
|
|
|
||
Weighted average LTV at origination |
|
|
% |
|
|
% |
||
20
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Loans designated impaired had an average recorded investment balance, interest income recognized, and interest income received in cash for the three months ended March 31, 2022 and the year ended December 31, 2021 as presented in the following table ($ in thousands).
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
||
Average recorded investment |
|
$ |
|
|
$ |
|
||
Interest income recognized |
|
|
|
|
|
|
||
Interest income received in cash |
|
|
|
|
|
|
||
NOTE 5 – REAL ESTATE OWNED (REO) AND MORTGAGES PAYABLE
There were
The fair value of the REO is adjusted on a nonrecurring basis. When it is determined that the fair value of REO is less than the original cost basis in the property based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions (Level 3 inputs) or if an offer deemed likely to result in a sale is received a write down is charged to operations expense. Any recovery in the fair value subsequent to such a write down is recorded, not to exceed the value recorded at acquisition.
REO at March 31, 2022 was comprised of
The
At March 31, 2022, accrued liabilities on the consolidated balance sheet include accrued interest of approximately $
Mortgages payable at March 31, 2022 and December 31, 2021 are summarized in the following table ($ in thousands).
Lender - summary of terms |
|
March 31, 2022 |
|
December 31, 2021 |
|
||
Wells Fargo Bank - secured by a first trust deed on a single family residence located |
|
$ |
|
$ |
|
||
Total mortgages payable |
|
$ |
|
$ |
|
||
21
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
REO, net
REO, net in operations expense on the consolidated income statements is comprised of the following for the three months ended March 31, 2022 and 2021 ($ in thousands).
|
|
2022 |
|
|
2021 |
|
|
||
Holding costs, net of other income |
|
$ |
( |
) |
|
$ |
( |
) |
|
REO, net |
|
$ |
( |
) |
|
$ |
( |
) |
|
Holding costs, net of other income includes month-to-month rents received of approximately $
NOTE 6 – FAIR VALUE
Secured loans
The following methods and assumptions are used when estimating fair value.
Secured loans, performing and non-performing not designated as impaired (Level 3) - Each loan is reviewed quarterly for its delinquency, LTV adjusted for the most recent valuation of the underlying collateral, remaining term to maturity, borrower’s payment history and other factors. Due to the nature of the partnership’s loans and borrowers the fair value of loan balances secured by deeds of trust is deemed to approximate the recorded amount (per the consolidated financial statements) as our loans:
Secured loans, designated impaired (Level 3) - The fair value of secured loans designated impaired is the lesser of the fair value of the collateral or the enforceable amount of the note. Secured loans designated impaired are collateral dependent because it is expected that the primary source of repayment will not be from the borrower but rather from the collateral. The fair value of the collateral is determined on a nonrecurring basis by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values and publicly available information on in-market transactions (Level 3 inputs). When the fair value of the collateral exceeds the enforceable amount of the note, the borrower is likely to redeem the note. Accordingly, third party market participants would generally pay the fair value of the collateral, but no more than the enforceable amount of the note.
The following methods and assumptions are used to determine the fair value of the collateral securing a loan.
Single family – Management’s preferred method for determining the fair market value of its single-family residential assets is the sale comparison method. Management primarily obtains sales comparables (comps) via its subscription to the RealQuest service, but also uses free online services such as Zillow.com and other available resources to supplement this data. Sale comps are reviewed and adjusted for similarity to the subject property, examining features such as proximity to subject, number of bedrooms and bathrooms, square footage, sale date, condition and year built.
If applicable sale comps are not available or deemed unreliable, management will seek additional information in the form of brokers’ opinions of value or appraisals.
Multi-family residential – Management’s preferred method for determining the aggregate retail value of its multifamily units is the sale comparison method. Sale comps are typically provided in appraisals, or by realtors who specialize in multi-family residential properties. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, rental income, number of units, composition of units by the number of bedrooms and bathrooms, square footage, condition, amenities and year built.
22
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Management’s secondary method for valuing its multifamily assets as income-producing rental operations is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to published data from reliable third-party sources such as the CBRE Cap Rate Survey. Management applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing project. When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
Commercial buildings – Management’s preferred method for determining the fair value of its commercial buildings is the sale comparison method. Sale comps are typically provided in appraisals, or by realtors who specialize in commercial properties. Sale comps are reviewed for similarity to the subject property, examining features such as proximity to subject, rental income, number of units, composition of units, common areas, and year built.
Management’s secondary method for valuing its commercial buildings is the direct capitalization method. In order to determine market cap rates for properties of the same class and location as the subject, management refers to reputable third-party sources such as the CBRE Cap Rate Survey. Management then applies the appropriate cap rate to the subject’s most recent available annual net operating income to determine the property’s value as an income-producing commercial rental project.
When adequate sale comps are not available or reliable net operating income information is not available or the project is under development or is under-performing to market, management will seek additional information and analysis to determine the cost to improve and the intrinsic fair value and/or management will seek additional information in the form of brokers’ opinion of value or appraisals.
Commercial land – Commercial land has many variations/uses, thus requiring management to employ a variety of methods depending upon the unique characteristics of the subject land, including a determination of its highest and best use. Management may rely on information in the form of a sale comparison analysis (where adequate sale comps are available), brokers’ opinion of value, or appraisal.
NOTE 7 – LINE OF CREDIT
Activity involving the line of credit during the three months ended March 31, 2022 and 2021 is presented in the following table ($ in thousands).
|
|
2022 |
|
|
2021 |
|
||
Balance, January 1 |
|
$ |
|
|
$ |
|
||
Draws |
|
|
|
|
|
|
||
Repayments |
|
|
( |
) |
|
|
|
|
Balance, March 31, |
|
$ |
|
|
$ |
|
||
Line of credit - average daily balance |
|
$ |
|
|
$ |
|
||
In March 2020, RMI VIII entered into a revolving line of credit and term loan agreement with Western Alliance Bank (bank) which is governed by the terms of the Business Loan Agreement (Revolving Line of Credit and Term Loan Agreement) between bank and the partnership (original credit agreement), as amended and modified by the First Loan Modification Agreement made effective March 4, 2022 (the "modification agreement" and together with the original credit agreement, the "credit agreement").The partnership can borrow up to a maximum principal of $
23
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
Prior to the March 4, 2022 modification agreement, interest on the outstanding principal was payable monthly and accrued at the
If the partnership does not maintain the required compensating balance with a minimum daily average of $
For each calendar quarter during which the aggregate average daily outstanding principal is less than fifty percent (
The loan proceeds are to be used exclusively to fund secured loans. The loan agreement provides for customary financial and borrowing base reporting by the partnership to the lending bank and specifies that
At March 31, 2022 and December 31, 2021, aggregate principal of pledged loans was approximately $
The debt issuance costs from the original credit agreement were fully amortized in March 2022. Debt issuance costs of approximately $
NOTE 8 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN AND REO COMMITMENTS
Commitments
Note 3 (General Partners and Other Related Parties) presents detailed discussion of the partnership’s contractual obligations to RMC and detail of scheduled withdrawals of limited partners’ capital at March 31, 2022.
Legal proceedings
As of March 31, 2022, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business. In the normal course of its business, the partnership may become involved in legal proceedings (such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc.) to collect the debt owed under the promissory notes, to enforce the provisions of the deeds of trust, to protect its interest in the real property subject to the deeds of trust and to resolve disputes with borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the net income or balance sheet of the partnership.
24
REDWOOD MORTGAGE INVESTORS VIII,
A California Limited Partnership
Notes to Consolidated Financial Statements
March 31, 2022 (unaudited)
NOTE 9 – SUBSEQUENT EVENTS
Promissory note payable to related party (RMI IX)
On April 15, 2022, the partnership borrowed $
In May 2022,
The manager evaluated events subsequent to March 31, 2022 and determined that there were no other events or transactions occurring during this reporting period that require recognition or disclosure in the unaudited consolidated financial statements.
25
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto, which are included in Item 1 of this report on Form 10-Q, as well as the audited financial statements and the notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the partnership’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year.
Forward-Looking Statements
Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), including statements regarding the partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements, which are based on various assumptions (some of which are beyond our control), may be identified by reference to a future period or periods or by use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “anticipate,” “continue,” “possible” or similar terms or variations on those terms or the negative of those terms. Forward-looking statements include statements regarding trends in the California real estate market, future interest rates and economic conditions and their effect on the partnership and its assets, estimates as to the allowance for loan losses, estimates of future withdrawals of units, future funding of loans by the partnership, and beliefs relating to how the partnership will be affected by current economic conditions and trends in the financial and credit markets. Actual results may be materially different from what is projected by such forward-looking statements, therefore, you should not place undue reliance on forward-looking statements which reflect our view only as of the date hereof.
Factors that might cause such a difference include, but are not limited to, the following:
All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ unless required by law.
Overview
Redwood Mortgage Investors VIII, a California Limited Partnership (“we”, “RMI VIII” or the “partnership”), was formed in 1993 to engage in business as a mortgage lender and investor by making and holding-for-investment loans secured by California real estate, primarily through first and second deeds of trust. The partnership is externally managed. Redwood Mortgage Corp. (“RMC” or “the manager”) is the manager of the partnership. See Note 3 (General Partners and Other Related Parties) to the consolidated financial statements included in Part I, Item 1 of this report for a detailed presentation of the partnership’s activities for which related parties are compensated and for other related party transactions.
Cash generated from loan payoffs and borrower payments of principal and interest is used for operating expenses, distributions to limited partners and withdrawals. The cash flow, if any, in excess of these uses plus the cash from advances on the line of credit is reinvested in new loans.
Per the Partnership Agreement, no more than 20% of the total limited partners’ capital account balances at the beginning of any year may be liquidated during any calendar year. Notwithstanding this 20% limitation, the general partners have the discretion to further limit the percentage of total limited partners’ capital accounts that may be withdrawn in order to comply with the safe harbor provisions of the regulations under Section 7704 of the Internal Revenue Code of 1986, as amended, to avoid the partnership being taxed as a corporation.
See Note 1 (Organization and General) to the consolidated financial statements included in Part I, Item 1 of this report on Form 10-Q for additional detail on the organization and operations of RMI VIII which detail is incorporated by reference into this Item 2.
26
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including, when applicable, the valuation of impaired loans (which itself requires determining the fair value of the collateral), and the valuation of real estate owned, at acquisition and subsequently. Actual results could differ significantly from these estimates.
Accounting policies are an integral part of our consolidated financial statements. For a summary of our critical accounting policies, see “Critical Accounting Policies” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2021.
There have been no material changes to our critical accounting policies since our annual report on Form 10-K.
Results of Operations
The following discussion describes our results of operations for the three months ended March 31, 2022. While the COVID-19 pandemic has not had a material adverse effect on our reported results, we are actively monitoring the impact of COVID-19, which may negatively impact our business, financial condition, liquidity and results of operations for subsequent periods.
General economic and real estate market conditions – California
All of our mortgage loans are secured by California real estate. Our secured-loan investment activity and the value of the real estate securing our loans is dependent significantly on economic activity and employment conditions in California. Wells Fargo’s Economics Group periodically provides timely, relevant information and analysis in its reports and commentary regarding California’s employment and economic conditions. Highlights from a recently issued report from Wells Fargo Securities Economics Group is presented below.
In the publication "California Employment Conditions - March 2022" dated April 15, 2022:
California's Recovery is Gaining Momentum
Summary
California Leads the Nation in Job Growth
27
California's Recovery Remains on Track
California added 60,300 jobs in March, which was considerably less than the 135,400 jobs added during the prior month. Despite the apparent moderation in job growth, California's economic recovery remains solidly on track. While job growth was more modest this past month, California still added more jobs than any other state and job gains continue to be extraordinarily broad based. For the second month in a row, none of California's 11 major industry sectors lost jobs and most saw solid increases. Moreover, the state's unemployment rate fell sharply, declining 0.4 percentage points to 4.9%. The drop came from a significant (+141,300) spike in household employment, which easily eclipsed a 63,100-person rise in the civilian labor force. The number of unemployed Californians fell by the difference, 78,300, which brought the number unemployed back below 1 million for the first time since before the pandemic.
California has now recovered 89.3% of the 2.76 million jobs lost during the pandemic. The state added 255,900 jobs during the first quarter and should see nonfarm employment surpass its pre-pandemic peak late this summer or early this fall.
Monthly estimates for California's nonfarm employed are derived from a survey of 80,000 businesses each month. The survey results are grossed up to a census of nonfarm employment that is compiled from unemployment tax records. California's unemployment rate is derived from a survey of 5,100 California households. The household survey also yields estimates of the number of employed Californians, the civilian labor force, the number of unemployed Californians and the unemployment rate.
Broad-Based Job Growth
California's recovery from the COVID-19 recession has gained considerable momentum over the past six months, which has seen the state add an average of 73,600 jobs a month. Hiring has picked up across most industries and nearly every major metropolitan area. Some of the greatest gains in hiring are coming in the industries and regions that were hit the hardest by the pandemic. The leisure and hospitality sector added the largest number of jobs in March, with employers adding back 14,800 jobs during the month. We refer to last month's gain as adding back because employment in the leisure and hospitality sector still remains nearly 10% below its pre-pandemic level.
Professional and business services added the second largest number of jobs in March, with the bulk of the 10,400 jobs added last month coming in professional, scientific and technical services. Normally the tech sector would account for the bulk of the growth in this subcategory. This past month, however, accounting and bookkeeping accounted for most of the new jobs. The gains precede tax season, which is widely expected to be a bit more problematic this year for many businesses and individuals due to the unusual circumstances resulting from the pandemic. Employment also rose solidly in education and health services (+9,000) and construction (+8,900).
Job growth was evident across nearly all of California's metropolitan areas in March. Sacramento posted the largest job gain, with 6,300 jobs added during the month. The San Francisco Bay Area continues to battle its way back, with overall nonfarm payrolls adding back 13,700 jobs in March. Employment in the Bay Area remains 3.5% below its pre-pandemic level, with the greatest shortfalls in San Francisco, Marin County and Napa County. Hiring is on the mend, however, with San Francisco posting a 4,800 job gain in March and hiring up a solid 8.8% year-to-year. One of the biggest immediate challenges for San Francisco is getting people back into the office on a regular basis. The latest data from Kastle Systems shows some improvement on that front, with 34.2% of San Francisco area office workers back in the office as of early April. While that is up 2.4 percentage points from the prior week, it is the second lowest reading of the 10 major markets covered by the Kastle report, just slightly ahead of San Jose's 33%. With so few workers back in the office, there is little business to support office-adjacent jobs at restaurants and other small businesses.
Southern California is faring somewhat better. Los Angeles (+5,700), San Diego (+5,600), Anaheim (+5,000) and the Inland Empire (+4,900) all posted strong gains during March and appear to be further along in the recovery process. Los Angeles has added back roughly 82% of the jobs it lost at the start of the pandemic and just over 40% of Los Angeles office workers have returned to the office. Moreover, job growth in the Inland Empire has more than surpassed its pre-pandemic peak, reflecting the strong growth in the region's logistics sector as well as steady gains in population. San Diego is another area that is further along in the recovery process, with just over 93% of the jobs lost at the onset of the pandemic having been recovered.
In the publication "California Job Growth is Ramping Back Up" dated March 25, 2022:
Hiring Ramps Up in February
With COVID fears subsiding, California's economy is reopening and hiring is ramping back up. Employers added 138,100 jobs in February, and the state's unemployment rate fell 0.3 percentage points to 5.4%. January job growth was also revised up by 6,700 to 60,300 jobs. With nearly 200,000 jobs added in just the past two months, California is finally making some headway in recovering the jobs it lost at the onset of the pandemic. The state has now recovered 87.2% of the 2,758,900 jobs lost at the onset of the pandemic, from February to April 2020.
28
California imposed heavy lockdown restrictions early in the pandemic and has been slower to reopen its economy. As a result, the employment recovery has been particularly drawn out. The pace of job growth has picked up since last fall, however, once the federal government's expanded unemployment compensation program ended in September. January's employment report provided annual benchmark revisions to prior years' data. The revisions showed that employers in California ramped up hiring last year at a faster pace than initially thought. Prior to the revisions, the Bureau of Labor Statistics had reported that employers had recouped about 71.2% of the jobs lost from February to April 2020. The benchmark revisions show that California regained 80% of the lost jobs by the end of 2021. Furthermore, the job gains registered in January and February 2022 brought the recovery rate up to 87.2%. State payrolls are still 491.1K short of the pre-pandemic peak, however.
With job growth ramping up, California has reclaimed its position as the nation's largest job creator. California's Employment Development Department (EDD) notes that of the 678,000 jobs the nation gained in February, California accounted for 20.4% of them. The state’s 6.8% year-over-year job growth considerably outpaced the nation’s 4.6% gain. It's important to note that California's lockdown in December 2020 and January 2021 set it up for a big year-over-year gain. States that did not lockdown did not see job growth slow nearly as much during that same period.
Strong Payroll Gains Carried by Southern California
Industries Expanded Across the Board in February
29
Key performance indicators
Key performance indicators as of and for the three months ended March 31, 2022 and 2021 are presented in the following table ($ in thousands).
|
|
2022 |
|
|
2021 |
|
||
Secured loans principal – end of period balance |
|
$ |
57,205 |
|
|
$ |
78,413 |
|
Secured loans principal – average daily balance |
|
$ |
60,785 |
|
|
$ |
74,241 |
|
|
|
|
|
|
|
|
||
Interest income |
|
$ |
1,320 |
|
|
$ |
1,642 |
|
Portfolio interest rate(1) |
|
|
8.6 |
% |
|
|
8.9 |
% |
Effective yield rate(2) |
|
|
8.7 |
% |
|
|
8.8 |
% |
|
|
|
|
|
|
|
||
Line of credit - end of period |
|
$ |
9,800 |
|
|
$ |
10,000 |
|
Line of credit - average daily balance(3) |
|
$ |
3,758 |
|
|
$ |
3,795 |
|
|
|
|
|
|
|
|
||
Mortgages payable - end of period |
|
$ |
1,453 |
|
|
$ |
2,449 |
|
Mortgages payable - average daily balance (4) |
|
$ |
1,453 |
|
|
$ |
2,449 |
|
|
|
|
|
|
|
|
||
Interest expense |
|
|
|
|
|
|
||
Line of credit |
|
$ |
60 |
|
|
$ |
61 |
|
Mortgages payable |
|
$ |
15 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
||
Provision for (recovery of) loan losses |
|
$ |
— |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
||
Operations expense |
|
$ |
899 |
|
|
$ |
960 |
|
|
|
|
|
|
|
|
||
Net income |
|
$ |
350 |
|
|
$ |
602 |
|
Percent(5)(6) |
|
|
2.0 |
% |
|
|
2.9 |
% |
|
|
|
|
|
|
|
||
Limited partners’ capital – end of period |
|
$ |
66,348 |
|
|
$ |
79,402 |
|
Limited partners’ capital – average balance |
|
$ |
67,952 |
|
|
$ |
81,197 |
|
Limited partners’ capital – withdrawals(7) |
|
$ |
3,245 |
|
|
$ |
3,806 |
|
30
Secured loans
The March 31, 2022 secured loans principal of approximately $57.2 million, was a reduction of 27.0% ($21.2 million) compared to March 31, 2021 secured loans principal of approximately $78.4 million. The loan portfolio and capital available to lend is declining due to partner withdrawals exceeding the net income retained in limited partners’ capital accounts. We expect the loan portfolio and capital available to lend to continue to decline as a result of continuing partner withdrawals although this may be offset in part by utilizing the Line of Credit to fund future loans.
At March 31, 2022, limited partners’ capital-end of period of approximately $66.3 million was a reduction of 16.5% ($13.1 million) compared to the March 31, 2021 limited partners’ capital-end of period of approximately $79.4 million, primarily due to limited partner capital withdrawals, partially offset by net income retained in the capital accounts of partners not electing periodic distribution of net income. See Note 3 (General Partners and Other Related Parties) to the consolidated financial statements included in Part I, Item 1 of this report on Form 10-Q for detailed presentations on withdrawals of limited partners’ capital.
In future periods, reductions in limited partners’ capital (and thereby in capital available to lend) may be offset in part by advances on the line of credit. The REO acquired by foreclosure sale, net of mortgages payable assumed, reduces the capital available to lend until the REO is sold. See Note 5 (Real Estate Owned (REO) and Mortgages Payable) to the consolidated financial statements included in Part I, Item 1 of this report on Form 10-Q for a presentation of the balances and the activity for REO.
We have sought to exercise strong discipline in underwriting loan applications and lending against collateral at amounts that create a mortgage portfolio that has substantial protective equity (i.e., property value to outstanding debt) as indicated by our overall conservative weighted-average loan-to-value ratio (LTV) at time of origination which at March 31, 2022 was 61.3%. Thus, based on the appraisal-based valuations at the time of loan inception, borrowers have, in the aggregate, equity of 38.7% in the property, and we as lenders have loaned in the aggregate 61.3% (including other senior liens on the property) against the properties we hold as collateral for the repayment of our loans.
Secured loans, principal by LTV and lien position at March 31, 2022 are presented in the following table ($ in thousands). The LTVs shown in this table are updated for any appraisals ordered and received by the manager after origination of the loan.
|
|
Secured loans, principal |
|
|||||||||||||||||||||
LTV(1) |
|
First trust |
|
|
Percent |
|
|
Second trust |
|
|
Percent |
|
|
Total |
|
|
Percent |
|
||||||
<40% |
|
$ |
1,133 |
|
|
|
2.0 |
% |
|
$ |
— |
|
|
|
0.0 |
% |
|
$ |
1,133 |
|
|
|
2.0 |
% |
40-49% |
|
|
2,373 |
|
|
|
4.1 |
|
|
|
5,341 |
|
|
|
9.4 |
|
|
|
7,714 |
|
|
|
13.5 |
|
50-59% |
|
|
10,299 |
|
|
|
18.0 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
10,299 |
|
|
|
18.0 |
|
60-69% |
|
|
21,209 |
|
|
|
37.1 |
|
|
|
2,581 |
|
|
|
4.5 |
|
|
|
23,790 |
|
|
|
41.6 |
|
Subtotal <70% |
|
|
35,014 |
|
|
|
61.2 |
|
|
|
7,922 |
|
|
|
13.9 |
|
|
|
42,936 |
|
|
|
75.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
70-79% |
|
|
13,217 |
|
|
|
23.1 |
|
|
|
998 |
|
|
|
1.7 |
|
|
|
14,215 |
|
|
|
24.8 |
|
Subtotal <80% |
|
|
48,231 |
|
|
|
84.3 |
|
|
|
8,920 |
|
|
|
15.6 |
|
|
|
57,151 |
|
|
|
99.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
≥80% |
|
|
54 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
54 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
48,285 |
|
|
|
84.4 |
% |
|
$ |
8,920 |
|
|
|
15.6 |
% |
|
$ |
57,205 |
|
|
|
100.0 |
% |
31
Non-performing secured loans, principal by LTV and lien position at March 31, 2022 are presented in the following table ($ in thousands). The LTVs shown in this table are updated for any appraisals ordered and received by the manager after origination of the loan.
|
|
Non-performing secured loans, principal |
|
|||||||||||||||||||||
LTV(2) |
|
First trust |
|
|
Percent(3) |
|
|
Second trust |
|
|
Percent(3) |
|
|
Total |
|
|
Percent(3) |
|
||||||
<40% |
|
$ |
— |
|
|
|
0.0 |
% |
|
$ |
— |
|
|
|
0.0 |
% |
|
$ |
— |
|
|
|
0.0 |
% |
40-49% |
|
|
910 |
|
|
|
1.6 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
910 |
|
|
|
1.6 |
|
50-59% |
|
|
5,779 |
|
|
|
10.1 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
5,779 |
|
|
|
10.1 |
|
60-69% |
|
|
5,217 |
|
|
|
9.1 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
5,217 |
|
|
|
9.1 |
|
Subtotal <70% |
|
|
11,906 |
|
|
|
20.8 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
11,906 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
70-79% |
|
|
— |
|
|
|
0.0 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
— |
|
|
|
0.0 |
|
Subtotal <80% |
|
|
11,906 |
|
|
|
20.8 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
11,906 |
|
|
|
20.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
≥80% |
|
|
54 |
|
|
|
0.1 |
|
|
|
— |
|
|
|
0.0 |
|
|
|
54 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
11,960 |
|
|
|
20.9 |
% |
|
$ |
— |
|
|
|
0.0 |
% |
|
$ |
11,960 |
|
|
|
20.9 |
% |
Payments in arrears for non-performing secured loans (i.e., principal and interest payments past due 30 or more days) at March 31, 2022, totaled approximately $9.2 million of which $9.0 million was principal, and approximately $193,000 was accrued interest. Almost the entire principal in arrears was loans past maturity, all of which were in first lien position.
See Note 4 (Loans) to the consolidated financial statements included in Part I, Item 1 of this report for detail of the secured loan portfolio, including loan characteristics, scheduled maturities, delinquency and payments in arrears, loans in non-accrual status and the allowance for loan losses, which presentations are incorporated by reference into this Item 2.
Performance overview/net income 2022 v. 2021 (three months ended)
Net income available to limited partners as a percent of limited partners’ capital – average daily balance (annualized) was 2.0% and 2.9% for the three months ended March 31, 2022 and 2021, respectively. Net income decreased approximately $252,000 (41.9%) for the three months ended March 31, 2022 as compared to the same period in 2021, primarily due to the reduction in net interest income of approximately $311,000 (20.0%) which was partially offset by a decrease in operations expense of approximately $61,000 (6.4%).
32
Analysis and discussion of income from operations 2022 v. 2021 (three months ended)
Significant changes to net income for the three month period ended March 31, 2022 compared to the same period in 2021 are summarized in the following table ($ in thousands).
|
|
|
|
|
Provision for |
|
|
|
|
|
|
|
||||
|
|
Net interest |
|
|
(recovery of) |
|
|
Operations |
|
|
Net |
|
||||
|
|
income |
|
|
loan losses |
|
|
expense |
|
|
income |
|
||||
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
||||
March 31, 2022 |
|
$ |
1,245 |
|
|
|
— |
|
|
|
899 |
|
|
$ |
350 |
|
March 31, 2021 |
|
|
1,556 |
|
|
|
(1 |
) |
|
|
960 |
|
|
|
602 |
|
Change |
|
$ |
(311 |
) |
|
|
1 |
|
|
|
(61 |
) |
|
$ |
(252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Decrease secured loans principal - average daily balance |
|
|
(301 |
) |
|
|
— |
|
|
|
(54 |
) |
|
|
(247 |
) |
Effective yield rate |
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
Interest on line of credit |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Interest on mortgages payable assumed at foreclosure |
|
|
10 |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
Decrease limited partners' capital - average balance |
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
|
27 |
|
Increase in allocable expenses from the manager |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
(16 |
) |
Tax compliance cost efficiency |
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
7 |
|
Legal, audit and consulting |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
5 |
|
REO holding costs |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
(16 |
) |
Other |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
(2 |
) |
Change |
|
$ |
(311 |
) |
|
|
1 |
|
|
|
(61 |
) |
|
$ |
(252 |
) |
The table above displays only significant changes to net income for the period and is not intended to cross foot.
Net interest income
Net interest income decreased approximately $311,000 (20.0%) for the three months ended March 31, 2022 compared to the same period in 2021. The decrease in net interest income is due to a decrease in interest income of approximately $322,000 (19.6%) resulting from the decrease in the secured loans principal – average daily balance of approximately $13.5 million (18.1%), offset in part by a decrease in interest expense of approximately $11,000 (12.8%) due to a reduction in the balance of mortgages payable. The mortgages payable - average daily balance for the three months ended March 31, 2022 was $1,453,000 and for the three months ended March 31, 2021 was $2,449,000, a decrease of approximately $996,000 (40.7%).
Provision (recovery)/allowance for loan losses
Generally, the partnership has not recorded a provision/allowance for loan losses as the secured loans have protective equity such that collection is deemed probable for all recorded amounts due on the loan. There were no additions to the allowance for loan losses and no charge-offs to the provision for loan losses during the three months ended March 31, 2022 or 2021. In the three months ended March 31, 2021 an insignificant recovery was recognized on a loan.
33
Operations expense
Significant changes to operations expense for the three months ended March 31, 2022 compared to the same period in 2021 are summarized in the following table ($ in thousands).
|
|
Mortgage |
|
|
Asset |
|
|
Costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
servicing |
|
|
management |
|
|
from |
|
|
Professional |
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
fees |
|
|
fees |
|
|
RMC |
|
|
services |
|
|
REO, net |
|
|
Other |
|
|
Total |
|
|||||||
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
March 31, 2022 |
|
$ |
223 |
|
|
|
65 |
|
|
|
175 |
|
|
|
351 |
|
|
|
84 |
|
|
|
1 |
|
|
$ |
899 |
|
March 31, 2021 |
|
|
277 |
|
|
|
77 |
|
|
|
174 |
|
|
|
361 |
|
|
|
68 |
|
|
|
3 |
|
|
|
960 |
|
Change |
|
$ |
(54 |
) |
|
|
(12 |
) |
|
|
1 |
|
|
|
(10 |
) |
|
|
16 |
|
|
|
(2 |
) |
|
$ |
(61 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Decrease secured loans principal - average daily balance |
|
|
(54 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54 |
) |
Decrease limited partners' capital - average balance |
|
|
— |
|
|
|
(12 |
) |
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
Increase in allocable expenses from the manager |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
Tax compliance cost efficiency |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
Legal, audit and consulting |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
REO holding costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
Change |
|
$ |
(54 |
) |
|
|
(12 |
) |
|
|
1 |
|
|
|
(10 |
) |
|
|
16 |
|
|
|
(2 |
) |
|
$ |
(61 |
) |
Mortgage servicing fees
The decrease in mortgage servicing fees for the three months ended March 31, 2022 as compared to the same period in 2021, was due to the decrease in the secured loans principal – average daily balance to approximately $60.8 million from approximately $74.2 million. Fees are charged by RMC at the annual rate of 1.5%.
Asset management fees
The decrease in asset management fees for the three months ended March 31, 2022, as compared to the same period in 2021, was due to the decrease in limited partners’ capital – average balance to approximately $68.0 million from $81.2 million. Asset management fees are charged up to 1/32 of 1% of the “net asset value” (3/8 of 1% annually).
Costs from RMC
The increase in costs from RMC of approximately $1,000 for the three months ended March 31, 2022 as compared to the same period in 2021 was due to an increase in cost reimbursements accrued by RMI VIII for costs incurred by RMC in March 2022 to be billed and paid in April 2022 of approximately $16,000 which was offset in part by a reduction of the partnership’s limited partners’ capital as a percent of the total capital of the related mortgaged funds managed by RMC.
Professional services
Professional services consist primarily of information technology, legal, audit and tax compliance, and consulting expenses.
The decrease in professional services of approximately $10,000 for the three months ended March 31, 2022 compared to the same period in 2021 was due primarily to a reduction in tax compliance costs as a result of process efficiency implemented in 2021 and a reduction in legal, audit and consulting fees.
34
REO, net
Holding costs, net of other income includes month-to-month rents received of approximately $2,700 and $17,000 for the three months ended March 31, 2022 and 2021, respectively for the homes in Fresno County, which were sold in July 2021, and the unit-storage lockers and signage in San Francisco county. The decrease in REO, net when comparing the three months ended March 31, 2022 to the three months ended March 31, 2021 is due to a decrease in rental income of approximately $14,300 primarily as a result of the sale of the homes in Fresno County.
The REO balance was approximately $8.3 million and $8.8 million at March 31, 2022 and 2021, respectively. There were no REO sales or acquisitions in the three months ended March 31, 2022 or 2021.
See Note 5 (Real Estate Owned (REO) and Mortgages Payable) to the consolidated financial statements included in Part I, Item 1 of this report for detailed presentations of REO activity during the period.
Cash flows and liquidity
Cash flows by business activity for the three months ended March 31, 2022 and 2021 are presented in the following table ($ in thousands).
|
|
Three Months Ended March 31 |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Limited partners' capital |
|
|
|
|
|
|
||
Withdrawals, net of early withdrawal fees |
|
$ |
(3,208 |
) |
|
$ |
(3,768 |
) |
Early withdrawal penalties |
|
|
(37 |
) |
|
|
— |
|
Distributions |
|
|
(308 |
) |
|
|
(379 |
) |
Formation loan |
|
|
125 |
|
|
|
113 |
|
Cash used in limited partners' capital |
|
|
(3,428 |
) |
|
|
(4,034 |
) |
|
|
|
|
|
|
|
||
Borrowings |
|
|
|
|
|
|
||
Line of credit advances, net |
|
|
9,800 |
|
|
|
7,547 |
|
Interest paid |
|
|
(29 |
) |
|
|
(34 |
) |
Debt issuance costs paid - line of credit |
|
|
(57 |
) |
|
|
— |
|
Cash provided by borrowings |
|
|
9,714 |
|
|
|
7,513 |
|
|
|
|
|
|
|
|
||
Loan earnings and payments |
|
|
|
|
|
|
||
Interest received, net |
|
|
1,055 |
|
|
|
1,619 |
|
Late fees and other loan income |
|
|
21 |
|
|
|
88 |
|
Loans funded, net |
|
|
(10,489 |
) |
|
|
(9,564 |
) |
Principal collected |
|
|
2,355 |
|
|
|
698 |
|
Loan transferred from related mortgage fund |
|
|
— |
|
|
|
(624 |
) |
Loans transferred to related mortgage fund |
|
|
— |
|
|
|
4,672 |
|
Loans sold to non-affiliate, net |
|
|
— |
|
|
|
485 |
|
Advances received from loans |
|
|
91 |
|
|
|
22 |
|
Total cash used in loan production |
|
|
(6,967 |
) |
|
|
(2,604 |
) |
|
|
|
|
|
|
|
||
REO |
|
|
|
|
|
|
||
Holding costs |
|
|
— |
|
|
|
(25 |
) |
Cash used in REO operations and sales |
|
|
— |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
||
Operations expense, excluding REO holding costs |
|
|
(801 |
) |
|
|
(650 |
) |
|
|
|
|
|
|
|
||
Net increase (decrease) in cash |
|
$ |
(1,482 |
) |
|
$ |
200 |
|
Cash, end of period |
|
$ |
2,421 |
|
|
$ |
564 |
|
35
Limited partners’ capital - withdrawals
Withdrawals of limited partners’ capital for the three months ended March 31, 2022 and 2021 are presented in the following table ($ in thousands).
Withdrawals |
|
2022 |
|
|
2021 |
|
|
||
Without penalty |
|
$ |
2,890 |
|
|
$ |
3,428 |
|
|
With penalty |
|
|
355 |
|
|
|
378 |
|
|
Total |
|
$ |
3,245 |
|
|
$ |
3,806 |
|
|
|
|
|
|
|
|
|
|
||
Scheduled, at March 31, |
|
$ |
20,487 |
|
|
$ |
31,362 |
|
|
Scheduled withdrawals of limited partners’ capital in periods as of and after March 31, 2022 are presented in the following table ($ in thousands).
2022 |
|
$ |
7,722 |
|
2023 |
|
|
6,711 |
|
2024 |
|
|
3,822 |
|
2025 |
|
|
1,626 |
|
2026 |
|
|
566 |
|
Thereafter |
|
|
40 |
|
Total |
|
$ |
20,487 |
|
Scheduled withdrawals of limited partners’ capital of approximately $500,000 are subject to early withdrawal penalties as the limited partners elected the accelerated payout option as permitted in the Partnership Agreement.
Borrowings
In March 2020, RMI VIII entered into a revolving line of credit and term loan agreement. For the three months ended March 31, 2022, the line of credit had an average daily balance of approximately $3.8 million. At March 31, 2022, the balance was $9.8 million.
See Note 7 (Line of Credit) to the consolidated financial statements included in Part I, Item 1 of this report for a detailed presentation of the activity and discussion on the terms and provisions of the loan agreement, which presentation is incorporated by this reference into this Item 2.
In June 2020, the partnership acquired REO by foreclosure sale subject to two mortgages payable of approximately $2,449,000. In August 2021, the partnership paid in-full the outstanding principal balance of $996,000 due on one of the mortgages. See Note 5 (Real Estate Owned (REO) and Mortgages Payable) to the consolidated financial statements included in Part I, Item 1 of this report for details on the remaining mortgage payable outstanding as of March 31, 2022, which presentation is incorporated by this reference into this Item 2.
Liquidity and Capital Resources
The ongoing sources of funds for loans are the proceeds (net of withdrawals from limited partners’ capital accounts and operation expense) from:
RMI VIII’s cash balances are planned to be maintained at levels sufficient to support on-going operations and satisfy obligations, without reducing loan fundings or suspending distributions or redemptions, although these options are available if future circumstances warrant. The manager will continue to utilize line of credit advances, loan assignments to related mortgage funds and loan sales to unaffiliated third parties to meet the liquidity requirements of the partnership, while striving to fully deploy capital available to lend.
36
The manager believes these sources of funds will provide sufficient funds to adequately meet our obligations beyond the next twelve months.
The partnership’s only obligation is to fund capital account withdrawal requests subject to cash available pursuant to the terms of the partnership agreement.
Contractual obligations, other than withdrawals of limited partners' capital
At March 31, 2022, the partnership had no construction or rehabilitation loans outstanding, and no other contractual obligations other than redemptions of members capital.
At March 31, 2022, RMI VIII had no off-balance sheet arrangements. Such arrangements are not permitted by the Partnership Agreement.
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not included because the partnership is a smaller reporting company.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The partnership is externally managed by RMC. The manager is solely responsible for managing the business and affairs of the partnership, subject to the voting rights of the limited partners on specified matters. The manager acting alone has the power and authority to act for and bind the partnership. RMC provides the personnel and services necessary for us to conduct our business, as we have no employees of our own.
California limited partnerships generally do not have a board of directors, nor, therefore, do we have an audit committee of the board of directors. Thus, there is no conventional independent oversight of the partnership’s financial reporting process. The manager, however, provides the equivalent functions of a board of directors and of an audit committee for, among other things, the following purposes:
RMC, as the manager, carried out an evaluation, with the participation of RMC’s President (acting as principal executive officer/principal financial officer) of the effectiveness of the design and operation of the manager's controls and procedures over financial reporting and disclosure (as defined in Rule 13a-15 of the Exchange Act) for and as of the end of the period covered by this report. Based upon that evaluation, RMC's principal executive officer/principal financial officer concluded, as of the end of such period, that the manager's disclosure controls and procedures were effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Exchange Act.
Changes to Internal Control Over Financial Reporting
There have not been any changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the manager’s or partnership’s internal control over financial reporting.
38
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2022, the partnership was not involved in any legal proceedings other than those that would be considered part of the normal course of business. In the normal course of business, the partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc. to enforce provisions of the deeds of trust, collect the debt owed under promissory notes or protect or recoup its investment from real property secured by the deeds of trust and resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions would typically be of any material importance.
Item 1A. Risk Factors
Not included because the partnership is a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of securities by the partnership which were not registered under the Securities Act of 1933.
Liquidations are made once a quarter, on the last business day of the quarter. Liquidations for the three months ended March 31, 2022 were approximately $3,245,000. The unit liquidation program is ongoing and available to partners beginning one year after the purchase of the units. The maximum number of units that may be liquidated in any year and the maximum amount of liquidation available in any period to partners are subject to certain limitations described in the Partnership Agreement.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
39
Item 6. Exhibits
Exhibit No. |
|
Description of Exhibits |
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
REDWOOD MORTGAGE INVESTORS VIII, a California Limited Partnership |
||
|
|
|
|
(Registrant) |
||
|
|
|
|
|
|
|
Date: May 23, 2022 |
|
By: |
|
|
Redwood Mortgage Corp., General Partner |
|
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Michael R. Burwell |
|
|
|
|
Name: |
|
Michael R. Burwell |
|
|
|
|
Title: |
|
President, Secretary and Treasurer |
|
|
|
|
|
|
(On behalf of the registrant, and in the capacity of principal financial officer), Director |
|
|
|
|
|
|
|
Date: May 23, 2022 |
|
By: |
|
|
Michael R. Burwell, General Partner |
|
|
|
|
|
|
|
|
|
|
|
|
By: |
|
/s/ Michael R. Burwell |
|
|
|
|
Name: |
|
Michael R. Burwell |
|
|
|
|
Title: |
|
General Partner |
41