Trust Deeds vs. Bonds – Comparing High Yield Investments
Trust deed investments feature a stable NAV, monthly cash flow and preferred lien position against real property collateral with attractive yield spreads. However, alternative investments must compete with more than the market. Aside from spreads to risk-free treasuries; high yield investments must compete with each other for investor dollars. This comparison provides insight into how trust deeds may enhance fixed income strategies of all types.
Coupon and duration are among the popular metrics used to evaluate fixed income investments from high yield funds to FDIC insured notes. Savvy investors can further analyze HOW this is achieved to enhance income portfolios.
This analysis includes:
- Control: What is the lien position and what is the flexibility to adapt with market changes?
- Cash Flow: How much, how reliable and how frequent are payments?
- Correlation: Many alternative investments may be more tied to macro trends than income seekers suspect.
Gain Control with Trust Deed Investments
Seeking yield with less volatility? High grade corporate paper or MBIA (formerly known as the Municipal Bond Insurance Association) backed municipal bonds carry minimal risk-premiums. After all, brand names or issuers of guaranteed bonds can borrow money for cheap. Lien position on collateralized corporate debt is ahead of equity stakeholders, such as preferred stock. Moody’s ratings aside; companies also can and do lose market share or competitive advantage, which affects repayment.
Tax equivalent yields (TEYs) on muni bonds appeal to high tax brackets. Yet, this appeal is tempered by interest rate risk that causes price volatility. Meanwhile, changes to coupon rates or personal tax brackets can quickly make TEYs less attractive. While MBIA backing offers assurance, the time value of money is precious and the months or years spent in an under-performing muni bond is sobering.
Comparatively, loans secured by first deeds of trust have high yields with first lien position secured by real property with low loan-to-values (LTVs). Unlike a corporation or city; a real estate investor cannot turn to the debt markets for cheaper financing. The result is higher yields for investors in loans secured by real property collateral with 65% loan-to-values or less. Low LTVs provide a large margin of safety against changes on a micro or macro level that cannot be controlled.
Flexibility with Deeds of Trust
High yield mutual funds buy bonds that are issued at coupons relative to the current interest rate environment, which may not meet an investor’s income bogey. Given the rock bottom rates of today, the risk-reward profile of many funds creates concerns for income investors.
Historically low interest rates are also more likely to go higher than any lower. A pooled mortgage fund or individual trust deeds hedge against this risk by making new loans with coupons that adapt to the market. This bottom-up approach offers leeway to thrive with top-down economic and interest rate changes.
Cash Flow and Correlation
Ready to tap the housing boom for cash flow? Income starved investors may turn to mortgage backed securities or real estate investment trusts. The NAV of these securitized investments is sensitive to interest rate changes and shocks up or down may create other concerns. This includes prepayment risk when long term rates drop and mortgages in the underlying portfolio pay off early.
Meanwhile, rate hikes may cause mortgage backed investors to redeem shares and seek higher yielding alternatives. Mortgage REIT investors recall the global crisis stemming from high LTV portfolios, while Equity REIT shareholders must consider NAV and cash flow as occupancy rates rise or fall.
Conversely, first deeds of trust, such as those in the WFP Income Fund, are generally not mark-to-market. This pooled mortgage fund holds high yield trust deeds and mortgages to maturity, which helps explain the stable NAV since inception. Short maturities of 6 months to 3 years helps to reduce risk in terms of borrower repayment or changes to collateral value. These attributes make trust deeds and the WFP Income Fund a REIT alternative or complement to mortgage backed securities.
Contact Wilshire Finance Partners at (866) 575-5070 to learn more about buying trust deed investments as individual notes or through pooled mortgage funds.
* ADDITIONAL DISCLOSURES:
ADDITIONAL DISCLOSURES FOR TRUST DEED AND MORTGAGE INVESTMENTS:
The information contained on this Website (the “Overview”) is not an offer to sell or the solicitation of an offer to purchase trust deed or mortgage investments, or the securities of the WFP Income Fund, the WFP Opportunity Fund or other securities or investments (individually and collectively, the “Investments”) offered through Wilshire Finance Partners, Inc. (“Wilshire”). The purpose of this Overview is to provide an overview of one or more Investments and its private placement. Persons interested in learning about one or more Investments and their private placement will be provided with the Private Placement Memorandum, Operating Agreement (as applicable), Subscription Agreement and other related documents (collectively and inclusive of exhibits and any supplements thereto, the “Memorandum”) prepared by Wilshire, which provides a description of the particular Investments, the terms of the private placement, a discussion of risk factors, and other information related to such Investments. To the extent that there is any inconsistency between the information provided in this Overview and the Memorandum, the Memorandum shall control. This Overview and the Memorandum contain certain forward-looking statements regarding the Investments. The forward-looking statements are based on current expectations that involve numerous risks and uncertainties which are difficult or impossible to predict accurately and many of which are beyond the control of Wilshire’s management, including, but not limited to, national and international economic conditions, changes in legislation, and other factors that can disrupt economic stability. Although Wilshire believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements, the inclusion of such information should not be regarded as a representation by Wilshire, any placement agent, or any other person, that the respective objectives and strategies of investing in one or more Investments will be achieved. Investments be made solely by accredited investors (which for natural persons, are investors who meet certain minimum annual income or net worth threshold), who are provided with the Memorandum and who complete, execute and deliver the subscription documents included therein. The Investments are securities and each of the Investments are being offered in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Regulation D, Rule 506(c), and are not required to comply with specific disclosure requirements that apply to securities registered under the Securities Act. Neither the Securities Exchange Commission nor any state securities regulator or agency has passed upon the merits of or given its approval to the securities, the terms of either offering, or the accuracy or completeness of any offering materials. As securities offered in an exempt transaction, each of the Investments are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell the Investments. Past performance is not indicative of future results. The Investments involve substantial risk, including loss of investment, and is not suitable for all investors. Loans are made by Wilshire Finance Partners, Inc., Bureau of Real Estate Broker’s License number 01523207. Loans made by Wilshire Finance Partners, Inc. outside California will be made pursuant to licenses, authorizations or exemptions in each other state./p>