UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from___________ to _____________
Commission file number:
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Securities registered pursuant to Section 12(b) of the Act:
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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 |
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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). ☐ Yes
2
REDWOOD MORTGAGE INVESTORS IX, LLC
Table of Contents
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PART I. |
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Item 1. |
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5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
36 |
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Item 4. |
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PART II. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
38 |
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39 |
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3
Part I – FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS IX, LLC
Balance Sheets
March 31, 2023 (unaudited) and December 31, 2022
($ in thousands)
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March 31, |
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December 31, |
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ASSETS |
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2023 |
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2022 |
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Cash, in banks |
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$ |
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$ |
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Loan payments in trust |
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Loans |
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Principal |
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Advances |
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Accrued interest |
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Prepaid interest |
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Loan balances secured by deeds of trust |
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Allowance for credit losses |
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Loan balances secured by deeds of trust, net |
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Debt issuance costs, net |
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Prepaid expenses |
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Total assets |
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$ |
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$ |
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LIABILITIES AND MEMBERS’ CAPITAL |
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Liabilities |
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Accounts payable and accrued liabilities |
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$ |
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$ |
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Payable to related parties (Note 3) |
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Distributions and redemptions to members (Note 3) |
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Line of credit |
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Total liabilities |
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Members’ and manager’s capital, net |
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Receivable from manager (formation loan) |
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Members’ and manager’s capital, net of formation loan |
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Total liabilities and members’ capital |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited financial statements.
3
4
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Income
For the Three Months Ended March 31, 2023 and 2022 (unaudited)
($ in thousands)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Revenue |
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Interest income |
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$ |
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$ |
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Interest expense |
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Net interest income |
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Late fees |
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Total revenue, net |
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Provision for credit losses |
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Operations expense |
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Mortgage servicing fees to Redwood Mortgage Corp. |
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Asset management fees to Redwood Mortgage Corp. |
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Costs from Redwood Mortgage Corp., net (Note 3) |
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Professional services |
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Other |
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Total operations expense |
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Net income |
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$ |
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$ |
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Net income |
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Members ( |
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$ |
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$ |
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Manager ( |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited financial statements.
4
5
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Changes in Members’ and Manager’s Capital
For the Three Months Ended March 31, 2023 (unaudited)
($ in thousands)
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Members’ |
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Manager’s |
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Unallocated |
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Members’ and Manager’s |
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Balance at December 31, 2022 |
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$ |
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$ |
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$ |
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Adoption of ASC 326 |
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Balance at January 1, 2023 |
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Net income |
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Earnings distributed to members |
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Earnings distributed used in DRIP |
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Members’ redemptions |
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Organization and offering expenses allocated |
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Organization and offering expenses repaid by RMC |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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For the Three Months Ended March 31, 2022 (unaudited)
($ in thousands)
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Members’ |
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Manager’s |
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Unallocated |
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Members’ and Manager’s |
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Balance at December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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Earnings distributed to members |
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Earnings distributed used in DRIP |
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Members’ redemptions |
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Organization and offering expenses allocated |
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Organization and offering expenses repaid by RMC |
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Balance at March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited financial statements.
5
6
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Cash Flows
For the Three Months Ended March 31, 2023 and 2022 (unaudited)
($ in thousands)
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Three Months Ended March 31, |
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2023 |
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2022 |
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Operations |
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Interest income received |
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$ |
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$ |
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Interest expense paid |
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Late fees and other loan income |
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Operations expense |
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Total cash provided by operations |
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Investing |
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Loans funded |
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Principal collected |
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Loans transferred from related mortgage funds |
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Loans transferred to related mortgage fund |
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Advances collected |
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Total cash (used in) provided by investing |
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Financing |
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Members’ and manager's capital |
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Distributions to members and manager |
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Earnings distributed, net of DRIP |
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Redemptions, net of early withdrawal penalties |
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Total distributions to members and manager |
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Organization and offering expenses repaid by RMC, net |
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Early withdrawal penalties |
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Cash used in members' and manager's capital |
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Line of credit |
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Advances |
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Repayments |
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Debt issuance costs |
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Cash (used in) line of credit |
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Formation loan collected |
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Total cash used in financing |
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Net (decrease) increase in cash |
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Cash, beginning of year |
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Cash, end of year |
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Non-cash financing activities for the three months ended March 31, 2023 and 2022 include earnings distributed to the dividend reinvestment plan of $
Non-cash investing activity for the three months ended March 31, 2022 includes $
Member redemptions of approximately $
The accompanying notes are an integral part of these unaudited financial statements.
6
7
REDWOOD MORTGAGE INVESTORS IX, LLC
Statements of Cash Flows
For the Three Months Ended March 31, 2023 and 2022 (unaudited)
($ in thousands)
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Three Months Ended March 31, |
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Reconciliation of net income to total cash provided by operations |
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2023 |
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2022 |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to total cash provided by operations |
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Amortization of debt issuance costs |
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Change in operating assets and liabilities |
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Loan payments in trust |
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Accrued interest |
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Prepaid interest |
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Prepaid expenses |
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Receivable from related parties |
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Accounts payable and accrued liabilities |
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Payable to related parties |
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Total adjustments |
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Total cash provided by operations |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited financial statements.
7
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
NOTE 1 – ORGANIZATION AND GENERAL
Redwood Mortgage Investors IX, LLC (“RMI IX” or “the company”) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily through first and second deeds of trust. The company is externally managed by Redwood Mortgage Corp. (“RMC” or “the manager”). RMC provides the personnel and services necessary for the company to conduct its business as the company has no employees of its own. The mortgage loans the company funds and invests in are arranged and generally are serviced by RMC.
In the opinion of management of RMC, the accompanying unaudited financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly and accurately the financial information included therein. These unaudited financial statements should be read in conjunction with the audited financial statements included in the company’s Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (SEC). The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results to be expected for the full year.
The rights, duties and powers of the members and manager of the company are governed by the Ninth Amended and Restated Limited Liability Company Operating Agreement of RMI IX (the “Operating Agreement”), as amended by the Second Amendment to the Operating Agreement, the Delaware Limited Liability Company Act and the California Revised Uniform Limited Liability Company Act.
Members representing a majority of the outstanding units may, without the concurrence of the manager, vote to: (i) dissolve the company, (ii) amend the Operating Agreement, subject to certain limitations, (iii) approve or disapprove the sale of all or substantially all of the assets of the company or (iv) remove or replace one or all of the managers. Where there is only one manager, a majority in interest of the members is required to elect a new manager to continue the company business after a manager ceases to be a manager due to its withdrawal.
The following is a summary of certain provisions of the Operating Agreement and is qualified in its entirety by the terms of the Operating Agreement. Members should refer to the Operating Agreement for complete disclosure of its provisions.
The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC is entitled to
The company’s primary investment objectives are to:
Net income (or loss) is allocated among the members according to their respective capital accounts after one percent (
The company’s net income, cash available for distribution, and net-distribution rate fluctuate depending on:
Federal and state income taxes are the obligation of the members, other than the annual California franchise tax and the California LLC gross receipts tax. The tax basis in the net assets of the company differs from book basis by the amount of the allowance for credit losses.
8
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
The ongoing sources of funds for loans are the proceeds (net of redemption of members’ capital and operating expenses) from:
The company 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 company may sell mortgage loans (or fractional interests therein) when the manager determines that it appears to be advantageous for the company to do so, based upon then current interest rates, the length of time that the loan has been held by the company, the company’s credit risk and concentration risk and the overall investment objectives of the company. 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. Company 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 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 company; however, selling loans will increase members’ capital available for investing in new loans for which the manager will earn brokerage fees and other forms of compensation.
The company’s business is neither dependent on any one, nor concentrated with a few, major borrowers, investors, or lenders.
Distribution policy/Distribution reinvestment plan (DRIP)
Cash available for distributions allocable to members who have elected to receive distributions is disbursed at the end of each calendar month. The manager’s allocable share of cash available for distribution is also distributed not more frequently than cash distributions to members.
The distribution reinvestment plan provision of the Operating Agreement permits members to elect to have all or a portion of their monthly distributions reinvested in the purchase of additional units. Cash available for distributions allocable to members who have elected to participate in the DRIP is distributed and reinvested in units at each month end.
In May 2019, the company filed a Registration Statement on Form S-3 with the SEC (SEC File No. 333-231333) that went effective May 9, 2019, to offer up to
Liquidity and unit redemption program
There are substantial restrictions on transferability of units, and there is no established public trading and/or secondary market for the units and none is expected to develop. In order to provide liquidity to members, the Operating Agreement includes a unit redemption program, whereby a member may redeem all or part of their units, subject to certain limitations.
The price paid for redeemed units is based on the lesser of the purchase price paid by the redeeming member or the member’s capital account balance as of the date of each redemption payment. Redemption value – for other than DRIP units – is calculated based on the period from date of purchase as follows: after one year
9
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
The company redeems units quarterly, subject to certain limitations as provided for in the Operating Agreement. The maximum number of units which may be redeemed per quarter per individual member shall not exceed the greater of (i)
The company has not established a cash reserve from which to fund redemptions. The company’s capacity to redeem units upon request is limited by the availability of cash and the company’s cash flow. The manager also has the right, in its sole discretion, at any time, to reject any request for redemption, or to suspend or terminate the acceptance of new redemption requests without prior notice, or to terminate, suspend or amend the unit redemption program upon 30-day notice.
Pursuant to the Operating Agreement, the company will not, in any calendar year, redeem more than five percent (
Manager’s interest
If a manager is removed, withdrawn or terminated, the company will pay to the manager all amounts then accrued and due to the manager. Additionally, the company will terminate the manager’s interest in the company’s profits, losses, distributions and capital by payment of an amount in cash equal to the then-present fair value of such interest.
Term of the company
The term of the company will terminate on December 31, 2038 unless: (i) the term is further extended by RMC with the affirmative consent of a majority interest of the members; or (ii) the company is earlier terminated pursuant to the Operating Agreement or by operation of law.
The initial term of RMI IX was extended through December 31, 2038 by an affirmative (
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
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 a significant level of uncertainty and have had or are reasonably likely to have a material impact on the company’s financial condition or results of operations. Such estimates relate principally to the determination of the allowance for credit losses (including the fair value of the underlying collateral), and the valuation of real estate owned (“REO”) (RMI IX has not acquired REO since it commenced operations in 2009). Actual results could differ materially from these estimates.
10
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Fair value estimates
The fair value of real property (as to loan collateral and REO) is determined by exercise of judgment based on RMC’s 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 three approaches to estimating value: 1) market-comparables or sales approach; 2) cost to replace; and 3) capitalized cash flows or income approach.
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, and 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.
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.
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:
Cash in banks
Certain of the company’s cash balances in banks exceed federally insured limits of $
11
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Loans and interest income
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 company’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. In the normal course of the company’s operating activities, performing loans that are maturing or have matured may be renewed at then current market rates of interest and terms for new loans. (These loan extensions are not reported as new loans for financial reporting purposes.) The company may fund a specific loan net of an interest reserve (one to two years) to insure timely interest payments at the inception of the loan. Any interest reserve is amortized over the period that the amount is prepaid. In the event of an early loan payoff, any unapplied interest reserves would be first applied to any accrued but unpaid interest and then as a reduction to the principal.
Loans with a payment in arrears continue to recognize interest income as long as the loan is in the process of collection with the borrower and is considered to be well-secured.
Payments on loans are applied in the following order: accrued interest, advances, and lastly to principal. Late fees are recognized in the period received. 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 company as collected which can range from same day for wire transfers and up to two weeks after deposit for checks.
The company funds loans with the intent to hold the loans until maturity. From time to time the company may sell certain loans when the manager determines it to be in the best interest of the company. 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.
Allowance for credit losses
Loan balances (i.e., the sum of the unpaid principal, advances and accrued interest) 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.
For a loan that is deemed collateral dependent for repayment, a provision for credit losses is recorded to adjust the allowance for credit losses to an amount such that the net carrying amount (unpaid principal, advances plus interest accrued, i.e., interest owed net of foregone interest for loans in non-accrual status) is reduced to the lower of the loan balance or the estimated fair value of the related collateral, net of any senior debt and claims and costs to sell.
As of January 1, 2023, the company adopted Accounting Standards Codification 326, Financial Instruments – Credit Losses using the modified retrospective approach, which requires a lifetime, current expected credit loss (CECL) measurement objective for the recognition of credit losses at the time a loan is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses for loans and accrued interest. The determination of the amount of the allowance for credit losses considers historical loss experience, current fair value of collateral and the resultant LTV, current real estate and financial markets, as well as reasonable and supportable forecasts about future economic scenarios. The forward-looking estimates consider the likelihood that any combination of events would adversely impact economic conditions and real estate markets in California such that the substantial protective equity existing for the loans would no longer be sufficient to collect the recorded amounts of principal, advances and accrued interest due on the loan.
12
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
The limited number of loans and the short terms for which the loans are written enable a loan-by-loan analysis to determine the risk of loss. The primary determinate in the analysis is the LTV, and consideration of lien position of deed of trust. The analysis also considers the vintage in which the secured loans originated. The ultimate collectability of the amounts owed is reliant on the estimate of the fair value of the real property collateral securing the loans. Such estimation is not variant by vintage or time on file. Such considerations are consistent with the ‘no-credit-losses’ experience of the company over the preceding 5+ years.
The company 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. 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 real estate to be acquired.
Prior to the adoption of the CECL accounting model, if a loan modification was agreed to and was 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 would have been deemed to be a troubled debt restructuring (“TDR”). The Company did not have any TDR’s for the year ended December 31, 2022.
Real estate owned (“REO”)
Real estate owned, or REO, is property acquired in full or partial settlement of loan obligations generally through foreclosure and is recorded at acquisition at the property’s fair value less estimated costs to sell. 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 credit 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 expenses. Any recovery in the fair value subsequent to such a write down is recorded and is not to exceed the value recorded at acquisition. Recognition of gains or losses 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.
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.
Reclassification
A reclassification has been made in the prior year statement of cash flows to reclassify the presentation of formation loan collected from changes in partners' capital to a separate line item within the financing section of the statement of cash flows. There was no change in total cash used in financing activities.
Recently issued accounting pronouncements
None at March 31, 2023 are applicable to the company.
NOTE 3 – MANAGER AND OTHER RELATED PARTIES
The Operating Agreement provides for compensation to the manager and for the reimbursement of qualifying costs as detailed below. RMC is entitled to
13
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Mortgage servicing fees
The manager is entitled to receive a servicing fee of up to one-quarter of one percent (
Asset Management Fees
The manager is entitled to receive a monthly asset management fee for managing RMI IX’s assets, liabilities, and operations in an amount up to three-quarters of one percent (
Costs from RMC
The manager is entitled to request reimbursement for operations expense incurred on behalf of RMI IX, 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 IX pro-rata based on the percentage of RMI IX’s members’ 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 IX; 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 IX’s members’ capital to total capital of the related mortgage funds managed by RMC.
The amount of qualifying costs attributable to RMI IX incurred by RMC was approximately $
Loan administrative fees
The manager is entitled to receive a loan administrative fee of up to one percent (
Commissions and fees paid by the borrowers to RMC
For fees in connection with the review, selection, evaluation and negotiation of loans (including extensions), RMC may collect a loan brokerage commission that is expected to range from approximately
RMC receives fees for processing, notary, document preparation, credit investigation, reconveyance and other mortgage related fees. 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 company.
14
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Formation loan
Commissions for unit sales to new members paid to broker-dealers (“B/D sales commissions”) and premiums paid to certain investors upon the purchase of units were paid by RMC and were not paid directly by RMI IX out of unit-sales proceeds. Instead, RMI IX advanced to RMC amounts sufficient to pay the B/D sales commissions and premiums to be paid to investors. Such advances in total were not to exceed seven percent (
Formation loan transactions for the three months ended March 31 are presented in the following table ($ in thousands).
|
|
2023 |
|
|
2022 |
|
||
Balance, January 1 |
|
$ |
|
|
$ |
|
||
Payments received from RMC |
|
|
( |
) |
|
|
( |
) |
Balance, March 31 |
|
$ |
|
|
$ |
|
In March 2022, the Operating Agreement was amended to extend the term for the repayment of the formation loan to December 2038 to coincide with the extended term of the company. In accordance with the amended Operating Agreement, the formation loan is repayable by RMC in annual installments of approximately $
Redemptions of members’ capital
Redemptions of members’ capital for the three months ended March 31 are presented in the following table ($ in thousands).
Redemptions |
|
2023 |
|
|
2022 |
|
||
Without penalty |
|
$ |
|
|
$ |
|
||
With penalty |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
Early withdrawal penalties |
|
$ |
|
|
$ |
|
Effective March 31, 2023, the manager intends to strictly adhere to the quarterly and annual members’ capital redemption limitations as described in the company’s Operating Agreement. The manager has no present intention to exercise its discretionary power to waive or modify the enforcement of the annual redemptions limitation in the foreseeable future.
Total redemption requests scheduled for March 31, 2023 approximated $
Accordingly, the redemption requests were honored in the following order of priority:
A redemption carried forward from December 31, 2022, that approximated $
Redemption requests scheduled but not paid at March 31, 2023 were approximately $
15
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Organization and offering expenses
The manager was reimbursed for O&O expenses incurred in connection with the organization of the company and the offering of the units of membership interest including, without limitation, attorneys’ fees, accounting fees, printing costs and other selling expenses (other than sales commissions) in a total amount not exceeding
The O&O expenses incurred by RMI IX are allocated to the members as follows -
Unallocated O&O transactions for the three months ended March 31 are summarized in the following table ($ in thousands).
|
|
2023 |
|
|
2022 |
|
||
Balance, January 1 |
|
$ |
|
|
$ |
|
||
O&O expenses allocated |
|
|
( |
) |
|
|
( |
) |
O&O expenses paid by RMC(1) |
|
|
( |
) |
|
|
( |
) |
Balance, March 31 |
|
$ |
|
|
$ |
|
Other related party transactions
From time to time, in the normal course of business operations, the company may have payables to and/or receivables from related parties. At March 31, 2023, the payable to related parties balance of approximately $
At December 31, 2022, the payable to related party balance 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 value, which approximates market value.
In the three months ended March 31, 2023, related mortgage funds transferred to RMI IX
In the three months ended March 31, 2023, RMI IX transferred to a related mortgage fund
16
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
NOTE 4 – LOANS
Loans generally are funded at a fixed interest rate with a loan term of up to five years. Loans acquired are generally done so within the first six months of origination and are purchased at par value, which approximates fair value. See Note 3 (Manager and Other Related Parties) for a description of loans transferred by executed assignments between the related mortgage funds.
The company’s loans are all secured by real estate in coastal California metropolitan areas, which is a strategic market. The portfolio segments are first and second trust deeds mortgages and the key credit quality indicator is the LTV ratio. First mortgages are predominant, but second lien deeds of trust are not infrequent nor insignificant. First-mortgage loans comprised
Secured loans unpaid principal balance (principal)
Secured loan transactions for the three months ended March 31 are summarized in the following table ($ in thousands).
|
|
2023 |
|
|||||||||
|
|
Total |
|
|
First Trust Deeds |
|
|
Second Trust Deeds |
|
|||
Principal, beginning of period(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Loans funded |
|
|
|
|
|
|
|
|
||||
Principal collected(2) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Loans transferred from related mortgage funds |
|
|
|
|
|
|
|
|
|
|||
Loans transferred to related mortgage fund |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Principal, end of period |
|
$ |
|
|
$ |
|
|
$ |
|
During the three months ended March 31, 2023, the company extended
As of March 31, 2023, there were
17
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Loan characteristics
Secured loans had the characteristics presented in the following table ($ in thousands).
|
|
March 31, |
|
|
December 31, |
|
||
|
|
2023 |
|
|
2022 |
|
||
Number of secured loans |
|
|
|
|
|
|
||
First trust deeds |
|
|
|
|
|
|
||
Second trust deeds |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Secured loans – principal |
|
$ |
|
|
$ |
|
||
First trust deeds |
|
$ |
|
|
$ |
|
||
Second trust deeds |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
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 members’ and manager's capital, net |
|
|
% |
|
|
% |
||
Average principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Largest secured loan – principal |
|
$ |
|
|
$ |
|
||
Largest principal as percent of total principal |
|
|
% |
|
|
% |
||
Largest principal as percent of members’ and manager's capital, net |
|
|
% |
|
|
% |
||
Largest principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Smallest secured loan – principal |
|
$ |
|
|
$ |
|
||
Smallest principal as percent of total principal |
|
|
% |
|
|
% |
||
Smallest principal as percent of members’ and manager's capital, net |
|
|
% |
|
|
% |
||
Smallest principal as percent of total assets |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Number of California counties where security is located |
|
|
|
|
|
|
||
Largest percentage of principal in one California county |
|
|
% |
|
|
% |
||
|
|
|
|
|
|
|
||
Number of secured loans with prepaid interest |
|
|
|
|
|
|
||
Prepaid interest |
|
$ |
|
|
$ |
|
As of March 31, 2023,
As of March 31, 2023, there were
As of March 31, 2023, the company's largest loan with principal of $
18
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Property type
Secured loans summarized by property type are presented in the following table ($ in thousands).
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
||||||
Single family(3) |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
||||||
Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Multi-family |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Land |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total principal, secured loans |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
Lien position/LTV at origination
At funding, secured loans had the lien positions presented in the following table ($ in thousands).
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
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 |
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
|
|
|
||||||
LTV (weighted average) at loan closing |
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
% |
|
|
|
19
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Distribution of secured loans - principal by California counties
The distribution of secured loans within California by counties is presented in the following table ($ in thousands).
|
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Principal |
|
|
Percent |
|
|
Principal |
|
|
Percent |
|
||||
San Francisco Bay Area(4) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
San Francisco |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
||||
San Mateo |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Santa Clara |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Alameda |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contra Costa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Napa |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Northern California |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Placer |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Tehama |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Northern California Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Southern California Coastal |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Los Angeles |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Orange |
|
|
|
|
|
|
|
|
|
|
|
|
||||
San Diego |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Southern California Total |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total principal, secured loans |
|
$ |
|
|
|
% |
|
$ |
|
|
|
% |
Scheduled maturities/Secured loans-principal
Secured loans scheduled to mature in periods as of and after March 31, 2023 , are presented in the following table ($ in thousands).
|
|
|
|
|
|
|
|
|
|
|
First Trust Deeds |
|
|
Second Trust Deeds |
|
|||||||||||||
|
|
Loans |
|
|
Principal |
|
|
Percent |
|
|
Loans |
|
|
Principal |
|
|
Loans |
|
|
Principal |
|
|||||||
2023 (scheduled to mature after March 31) |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|||||||
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
2027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total scheduled maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Matured(5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Total principal, secured loans |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
20
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (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, 2023, for the scheduled maturities table above may differ from the same captions in the tables of delinquencies and payment in arrears presented below that do not consider forbearance agreements. For matured loans, the company may continue to accept payments while pursuing collection of principal or while negotiating an extension of the maturity date.
Delinquency/Secured loans
Secured loans principal summarized by payment-delinquency status are presented in the following table ($ in thousands).
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March 31, 2023 |
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December 31, 2022 |
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Loans |
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Principal |
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Loans |
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Principal |
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||||
Current |
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$ |
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$ |
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||||
Past Due |
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||||
30-89 days |
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90-179 days |
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180 or more days |
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Total past due |
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||||
Total principal, secured loans |
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$ |
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$ |
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All
At March 31, 2023 and December 31, 2022, there was one loan with a forbearance agreement in effect with principal of $
Delinquency/Secured loans with payments in arrears
Payments in arrears for secured loans (5 loans) at March 31, 2023 are presented in the following tables ($ in thousands).
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Loans |
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Principal |
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Interest(6) |
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At March 31, 2023 |
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Past |
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Monthly |
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Past |
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Monthly |
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Past |
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Monthly |
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Total |
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|||||||
Past due |
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30-89 days (1-3 payments) |
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$ |
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$ |
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$ |
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$ |
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$ |
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90-179 days (4-6 payments) |
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180 or more days (more than 6 payments) |
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|||||||
Total past due |
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$ |
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$ |
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$ |
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$ |
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|
$ |
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21
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Secured loans with payments in arrears, principal by LTV and lien position at March 31, 2023 are presented in the following table ($ in thousands). The LTVs shown in this table use the appraisals at origination of the loans.
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Secured loans with payments in arrears, principal |
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||||||||||||||||||
LTV(7) |
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First trust |
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Percent(8) |
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Second trust |
|
Percent(8) |
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Total |
|
Percent(8) |
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||||||
<40% |
|
$ |
|
|
% |
|
$ |
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% |
|
$ |
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|
% |
||||||
40-49% |
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||||||
50-59% |
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||||||
60-69% |
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Subtotal <70% |
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||||||
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70-79% |
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||||||
Subtotal <80% |
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||||||
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≥80% |
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||||||
Total |
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$ |
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|
% |
|
$ |
|
|
% |
|
$ |
|
|
% |
Non-accrual status/Secured loans
Secured loans in non-accrual status are summarized in the following table ($ in thousands).
|
|
March 31, 2023 |
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December 31, 2022 |
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||
Number of loans |
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||
Principal |
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$ |
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||
Advances |
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||
Accrued interest(6) |
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||
Total recorded investment |
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$ |
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||
Foregone interest |
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$ |
|
In conjunction with the adoption of ASC 326 (CECL), the company changed its guidelines for non-accrual status and recognized a cumulative-effect adjustment (with an increase to members’ and manager's capital) of $
Provision/allowance for credit losses
Activity in the allowance for credit losses for the three months ended March 31 are presented in the following table ($ in thousands).
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2023 |
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2022 |
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||||||||||||||||||
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Principal and Advances |
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Interest |
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Total |
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Principal and Advances |
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Interest |
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Total |
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||||||
Balance, December 31 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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||||||
Adoption of ASC 326 (CECL) |
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||||||
Balance, January 1 |
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Provision (Recovery) for loan losses |
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Charge-offs |
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Balance, March 31 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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22
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Each secured 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.
In periods prior to January 1, 2023, the company followed the incurred loss model for recognition of credit losses and had recorded an allowance for credit losses of principal and interest totaling approximately $
In conjunction with the adoption of ASC 326 (CECL), the company recognized a cumulative-effect adjustment (with a decrease to members’ and manager's capital) of $
The analysis included projecting the outstanding principal for loans – individually and in total, by lien position – until maturity to determine the count, amount and weighted average LTV of the loans for future quarters and year ends.
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First Trust Deeds |
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Second Trust Deeds |
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Loans |
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Principal |
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LTV(11) |
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Loans |
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Principal |
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LTV(11) |
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Loans |
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Principal |
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LTV(11) |
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2023(10) |
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$ |
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% |
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$ |
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% |
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$ |
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% |
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2024 |
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2025 |
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2026 |
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2027 |
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Thereafter |
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As indicated by the tables above, there is no future period covered in the analysis - nor is there any individual loan - in which a real estate market decline in values is likely to occur that would be sufficient to offset the substantial protective equity in the secured-loan portfolio (and in the individual loans) sufficient to put at risk collection of amounts owed under the notes, secured by the deeds of trust. In arriving at the determination, the manager consulted a range of banking/industry and academic studies and forecasts.
23
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
In performing the analysis, the manager considered the vintages in which the secured loans originated. The ultimate collectability of the amounts owed is reliant on the estimation of the fair value of the real property collateral securing the loans. Such estimation is not variant by vintage. Further there is no evidence, nor any indication in the analysis, that the ultimate collectability of the amounts owed fluctuates with the time on file or vintage. Such considerations are consistent with the ‘no-credit-losses’ experience of the company over the preceding 5+ years.
|
|
Secured loans, principal |
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LTV(12) |
|
First trust |
|
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Percent |
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Count |
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Second trust |
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Percent |
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Count |
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Total |
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Percent |
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||||||||
<40% |
|
$ |
|
|
|
% |
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|
|
|
|
|
|
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% |
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|
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$ |
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|
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% |
||||||||
40-49% |
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|
|
|
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— |
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|
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|
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50-59% |
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|
|
|
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|
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|
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|
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|
|
|
|
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||||||||
60-69% |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Subtotal <70% |
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|
|
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|
|
|
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|
|
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||||||||
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- |
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|||||||
70-79% |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Subtotal <80% |
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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||||||||
|
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|
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|
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— |
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|
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|||||||
≥80% |
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|
|
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|
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|
|
|
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— |
|
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|
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|||||||
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||||||||
Total |
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
|
|
|
|
$ |
|
|
|
% |
Fair Value
The following methods and assumptions are used when estimating fair value (Level 3 inputs).
Secured loans/performing
Due to the nature of the company’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 the company's loans:
Secured loans, with payments in arrears
The fair value of secured non-performing loans is the lesser of the fair value of the collateral or the enforceable amount of the note. Secured non-performing loans 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.
24
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
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. Sales 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.
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 - 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 5 – LINE OF CREDIT
Activity involving the line of credit during the three months ended March 31 is presented in the following table ($ in thousands).
|
|
2023 |
|
|
2022 |
|
||
Balance, January 1, |
|
$ |
|
|
$ |
|
||
Draws |
|
|
|
|
|
|
||
Repayments |
|
|
( |
) |
|
|
( |
) |
Balance, March 31, |
|
$ |
|
|
$ |
|
||
Line of credit - average daily balance |
|
$ |
|
|
$ |
|
In March 2020, RMI IX 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 the bank and company (“original credit agreement”), which was 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 of 2022”).
Under the terms of the credit agreement of 2022, RMI IX can borrow up to a maximum principal of $
25
REDWOOD MORTGAGE INVESTORS IX, LLC
Notes to Financial Statements
March 31, 2023 (unaudited)
Prior to the modification agreement,
If the company 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 (
Advances on the line of credit are to be used exclusively to fund secured loans. The credit agreement provides for customary financial and borrowing base reporting by the company to the bank and specifies that the company shall maintain (i) minimum tangible net worth of $
At March 31, 2023 and December 31, 2022, 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 6 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN COMMITMENTS
Commitments
Note 3 (Manager and Other Related Parties) presents a detailed discussion of the company’s contractual obligations to RMC and scheduled redemptions of members’ capital at March 31, 2023.
Legal proceedings
As of March 31, 2023, the company is not involved in any legal proceedings or governmental proceedings other than those that would be considered part of the normal course of business. In the normal course of its business, the company 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 company (i.e., exceeding ten percent of the company’s consolidated current assets).
NOTE 7 – SUBSEQUENT EVENTS
26
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 company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (or SEC). The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operations 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 company’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 company and its assets; estimates as to the allowance for credit losses; forecasts of future sales and redemptions of units, forecasts of future funding of loans; loan payoffs and the possibility of future loan sales (and the gain thereon, net of expenses) to third parties, if any; forecasts of future financial support by the manager including the eventual elimination of financial support; future fluctuations in the net distribution rate; and beliefs relating to how the company 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.
27
Overview
Redwood Mortgage Investors IX, LLC (“we”, “RMI IX” or “the company”) is a Delaware limited liability company formed in October 2008 to engage in business as a mortgage lender and investor by making and holding-for-investment mortgage loans secured by California real estate, primarily through first and second deeds of trust. The company is externally managed by Redwood Mortgage Corp. (“RMC” or “the manager”). See Note 3 (Manager and Other Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of the company’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 members and unit redemptions. The cash flow, if any, in excess of these uses plus the cash from sale of DRIP units and advances on the line of credit is reinvested in new loans.
Pursuant to the Operating Agreement, the company will not, in any calendar year, redeem more than five percent (5%) (or in any calendar quarter 1.25%) of the weighted average number of units outstanding during the twelve-month period immediately prior to the date of the redemption; however, the manager may, but is not required to, waive this limitation if it deems it in the best interest of the company. In the event unit withdrawal requests exceed 5% in any calendar year (or 1.25% in any calendar quarter), and are held by the company, units will be redeemed in the order of priority provided in the Operating Agreement. The manager may, in its sole discretion, also waive any other holding periods or penalties applicable to redemptions in the event of the death of a member or other exigent circumstances or if the manager believes such wavier is in the best interests of the company.
Effective March 31, 2023, the manager intends to strictly adhere to the quarterly and annual members’ capital redemption limitations as described in the company’s Operating Agreement. See Results of Operations, Redemptions of members’ capital included below in Item 2 of this report for a detailed presentation on capital redemption limitations.
See Note 1 (Organization and General) to the financial statements included in Part I, Item 1 of this report for additional detail on the organization and operations of RMI IX which detail is incorporated by this reference into this Item 2.
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 credit losses, including determining the fair value of the collateral, and the valuation of real estate owned (RMI IX has not acquired real estate owned (“REO”) since it commenced operations in 2009). Actual results could differ significantly from these estimates.
Accounting policies are an integral part of our 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, 2022.
Adoption of ASC 326 (CECL)
As of January 1, 2023, the company adopted Accounting Standards Codification 326, Financial Instruments – Credit Losses using the modified retrospective approach, which requires a lifetime, current expected credit loss (CECL) measurement objective for the recognition of credit losses at the time a loan is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses for loans and accrued interest. The determination of the amount of the allowance for credit losses considers historical loss experience, current fair value of collateral and the resultant LTV, current real estate and financial markets, as well as reasonable and supportable forecasts about future economic scenarios. The forward-looking estimates consider the likelihood that any combination of events would adversely impact economic conditions and real estate markets in California such that the substantial protective equity existing for the loans would no longer be sufficient to collect the recorded amounts of principal, advances and accrued interest due on the loan.
In conjunction with the adoption of CECL, the company changed it guidelines for non-accrual status and recognized a cumulative-effect adjustment with a net decrease to members’ and manager's capital of $7 thousand, consisting of an increase to the allowance for credit losses of $65 thousand to recognize lifetime expected credit losses for secured loans at December 31, 2022, and the recognition of $58 thousand of previously foregone interest for loans designated non-accrual at December 31, 2022. The limited number of loans (42) and the short terms for which the loans are written - enabled the manager to do a loan-by-loan analysis to determine the risk of loss.
There is no future period covered in the analysis - nor is there any individual loan - in which a real estate market decline in values (likely to occur) would be sufficient to offset the substantial protective equity in the secured-loan portfolio (and in the individual loans) sufficient to put at risk collection of amounts owed under the notes, secured by the deeds of trust. In arriving at the determination, the manager consulted a range of banking/industry and academic studies and forecasts.
28
In performing the analysis, the manager considered the vintages in which the secured loans originated. The ultimate collectability of the amounts owed is reliant on the estimation of the fair value of the real property collateral securing the loans. Such estimation is not variant by vintage. Further there is no evidence, nor any indication in the analysis, that the ultimate collectability of the amounts owed fluctuates with the time on file or vintage. Such considerations are consistent with the ‘no-credit-losses’ experience of the company over the preceding 5+ years.
Loans on non-accrual status
Loans are placed on non-accrual status if management determines that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (i.e., a notice of sale is filed and/or when the borrower files for bankruptcy) or when the loan is no longer considered well-secured (i.e., the LTV for the loan based on the estimated net realizable value of the collateral and the total owing of principal, advances and accrued interest (at the note rate) is at or greater than eighty percent (80%), seventy-five percent (75%) for lands outside of metropolitan areas).
In periods prior to January 1, 2023, loans were placed on non-accrual status if 180 days delinquent or earlier if management determined that the primary source of repayment would 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 was no longer considered well-secured.
There were no other 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, 2023.
29
Key Performance Indicators
Key performance indicators as of and for the three months ended March 31, 2023 and 2022 are presented in the following table ($ in thousands).
|
|
2023 |
|
|
2022 |
|
|
||
Members’ capital, gross – end of period balance |
|
$ |
70,995 |
|
|
$ |
76,654 |
|
|
Members’ capital, gross – average daily balance |
|
$ |
71,688 |
|
|
$ |
77,723 |
|
|
|
|
|
|
|
|
|
|
||
Member redemptions(1) |
|
$ |
1,028 |
|
|
$ |
1,927 |
|
|
|
|
|
|
|
|
|
|
||
Secured loans principal – end of period balance |
|
$ |
74,041 |
|
|
$ |
64,293 |
|
|
Secured loans principal – average daily balance |
|
$ |
75,208 |
|
|
$ |
77,524 |
|
|
|
|
|
|
|
|
|
|
||
Number of first trust deeds |
|
|
28 |
|
|
|
31 |
|
|
Principal – first trust deeds |
|
$ |
59,759 |
|
|
$ |
54,646 |
|
|
Weighted average LTV – first trust deeds(2) |
|
|
56.5 |
% |
|
|
59.3 |
% |
|
|
|
|
|
|
|
|
|
||
Number of second trust deeds |
|
|
14 |
|
|
|
13 |
|
|
Principal – second trust deeds |
|
$ |
14,282 |
|
|
$ |
9,647 |
|
|
Weighted average LTV – second trust deeds(2) |
|
|
60.7 |
% |
|
|
53.2 |
% |
|
|
|
|
|
|
|
|
|
||
Interest income |
|
$ |
1,615 |
|
|
$ |
1,621 |
|
|
Portfolio interest rate(3) |
|
|
8.2 |
% |
|
|
8.2 |
% |
|
Effective yield rate(4) |
|
|
8.6 |
% |
|
|
8.4 |
% |
|
|
|
|
|
|
|
|
|
||
Line of credit – end of period balance |
|
$ |
9,650 |
|
|
$ |
7,000 |
|
|
Line of credit – average daily balance(5) |
|
$ |
9,897 |
|
|
$ |
5,485 |
|
|
|
|
|
|
|
|
|
|
||
Interest expense |
|
$ |
199 |
|
|
$ |
82 |
|
|
Interest rate – line of credit(5) |
|
|
8.1 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
||
Provision for (recovery of) loan losses |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
||
Total operations expense(9) |
|
$ |
570 |
|
|
$ |
537 |
|
|
|
|
|
|
|
|
|
|
||
Net income(9) |
|
$ |
848 |
|
|
$ |
1,016 |
|
|
Percent of average members’ capital(6)(7) |
|
|
4.7 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
||
Member distributions |
|
$ |
903 |
|
|
$ |
1,071 |
|
|
Percent of average members’ capital(6)(8) |
|
|
5.0 |
% |
|
|
5.5 |
% |
|
30
Redemptions of members capital
Redemptions of members’ capital for the three months ended March 31 are presented in the following table ($ in thousands).
Redemptions |
|
2023 |
|
|
2022 |
|
||
Without penalty |
|
$ |
1,010 |
|
|
$ |
1,816 |
|
With penalty |
|
|
18 |
|
|
|
111 |
|
Total |
|
$ |
1,028 |
|
|
$ |
1,927 |
|
Early withdrawal penalties |
|
$ |
1 |
|
|
$ |
3 |
|
Effective March 31, 2023, the manager intends to strictly adhere to the quarterly and annual members’ capital redemption limitations as described in the company’s Operating Agreement. The manager has no present intention to exercise its discretionary power to waive or modify the enforcement of the annual redemptions limitation in the foreseeable future.
Total redemption requests scheduled for March 31, 2023 approximated $2 million, which amount exceeds the quarterly limitation of $936 thousand. Pursuant to the Operating Agreement, unless waived by the manager, the company will not redeem in any calendar year more than five percent (5.0%) and in any calendar quarter one and one-quarter percent (1.25%) of the weighted average number of units outstanding in the twelve (12) month period immediately prior to the date of redemption.
Accordingly, the redemption requests were honored in the following order of priority:
A redemption carried forward from December 31, 2022, that approximated $100 thousand was paid and was considered apart adherence to the quarterly limitation, as it was deemed owing at the beginning of the year.
Redemption requests scheduled but not paid at March 31, 2023 were approximately $972 thousand and are carried forward to subsequent quarters until paid. Total redemption requests of members' capital received at March 31, 2023 approximated $3.2 million, including approximately $2.3 million received in the three months ended March 31, 2023.
Secured loans
We have sought to exercise strong discipline in underwriting loan applications and lending against collateral at amounts that create a secured loan portfolio that has substantial protective equity (i.e., property value to outstanding debt) as indicated by the overall weighted average loan-to-value ratio (LTV) which at March 31, 2023 was approximately 57.3% at time of origination. Thus, pursuant to the appraisal-based valuations at the time of loan inception, borrowers have, in the aggregate, equity of 42.7% in the property, and we as a lender have lent in the aggregate 57.3% (including other senior liens on the property, for other than first-lien loans) against the properties we hold as collateral for the repayment of our loans.
31
Secured loans, principal by LTV and lien position at March 31, 2023 are presented in the following table ($ 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% |
|
$ |
1,424 |
|
|
1.9 |
% |
|
$ |
1,946 |
|
|
2.6 |
% |
|
$ |
3,370 |
|
|
4.5 |
% |
40-49% |
|
|
24,334 |
|
|
32.9 |
|
|
|
— |
|
|
0.0 |
|
|
|
24,334 |
|
|
32.9 |
|
50-59% |
|
|
8,013 |
|
|
10.8 |
|
|
|
246 |
|
|
0.3 |
|
|
|
8,259 |
|
|
11.1 |
|
60-69% |
|
|
23,345 |
|
|
31.6 |
|
|
|
6,153 |
|
|
8.3 |
|
|
|
29,498 |
|
|
39.9 |
|
Subtotal <70% |
|
|
57,116 |
|
|
77.2 |
|
|
|
8,345 |
|
|
11.2 |
|
|
|
65,461 |
|
|
88.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
70-79% |
|
|
643 |
|
|
0.9 |
|
|
|
5,937 |
|
|
8.0 |
|
|
|
6,580 |
|
|
8.9 |
|
Subtotal <80% |
|
|
57,759 |
|
|
78.1 |
|
|
|
14,282 |
|
|
19.2 |
|
|
|
72,041 |
|
|
97.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
≥80%(2) |
|
|
2,000 |
|
|
2.7 |
|
|
|
— |
|
|
0.0 |
|
|
|
2,000 |
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
59,759 |
|
|
80.8 |
% |
|
$ |
14,282 |
|
|
19.2 |
% |
|
$ |
74,041 |
|
|
100.0 |
% |
Loans with payments in arrears, principal by LTV and lien position at March 31, 2023 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 with payments in arrears, principal |
|
||||||||||||||||||
LTV(3) |
|
First trust |
|
Percent(4) |
|
|
Second trust |
|
Percent(4) |
|
|
Total |
|
Percent(4) |
|
||||||
<40% |
|
$ |
— |
|
|
0.0 |
% |
|
$ |
— |
|
|
0.0 |
% |
|
$ |
— |
|
|
0.0 |
% |
40-49% |
|
|
910 |
|
|
1.2 |
|
|
|
— |
|
|
0.0 |
|
|
|
910 |
|
|
1.2 |
|
50-59% |
|
|
1,500 |
|
|
2.0 |
|
|
|
— |
|
|
0.0 |
|
|
|
1,500 |
|
|
2.0 |
|
60-69% |
|
|
8,960 |
|
|
12.1 |
|
|
|
— |
|
|
0.0 |
|
|
|
8,960 |
|
|
12.1 |
|
Subtotal <70% |
|
|
11,370 |
|
|
15.3 |
|
|
|
— |
|
|
0.0 |
|
|
|
11,370 |
|
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
70-79% |
|
|
— |
|
|
0.0 |
|
|
|
— |
|
|
0.0 |
|
|
|
— |
|
|
0.0 |
|
Subtotal <80% |
|
|
11,370 |
|
|
15.3 |
|
|
|
— |
|
|
0.0 |
|
|
|
11,370 |
|
|
15.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
≥80% |
|
|
— |
|
|
0.0 |
|
|
|
— |
|
|
0.0 |
|
|
|
— |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
11,370 |
|
|
15.3 |
% |
|
$ |
— |
|
|
0.0 |
% |
|
$ |
11,370 |
|
|
15.3 |
% |
Payments in arrears at March 31, 2023 for non-performing secured loans, (i.e., principal and interest payments past due 30 or more days) totaled approximately $10.5 million of which approximately $10.4 million was principal and approximately $72 thousand was accrued interest. The entire principal in arrears was loans past maturity, all of which were in first lien position.
See Note 4 (Loans) to the financial statements included in Part I, Item 1 of this report for detailed presentations as to the secured loan portfolio, including loan characteristics, scheduled maturities, delinquency and payments in arrears, loans in non-accrual status and the allowance for credit losses.
32
Performance overview/net income 2023 v. 2022
Net income available to members as a percent of members’ capital, gross – average daily balance (annualized) was 4.7% and 5.2% for the three months ended March 31, 2023 and 2022. Net income decreased approximately $168 thousand for the three months ended March 31, 2023 as compared to the same period in 2022 primarily due to a decrease in net interest income of approximately $123 thousand and an increase in operations expenses of approximately $33 thousand.
Analysis and discussion of income from operations 2023 v. 2022 (three months ended)
Significant changes to net income for the three months ended March 31, 2023 and 2022 are summarized in the following table ($ in thousands).
|
|
Net interest |
|
|
Provision for |
|
|
Operations |
|
|
Net |
|
||||
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
||||
March 31, 2023 |
|
$ |
1,416 |
|
|
|
— |
|
|
|
570 |
|
|
$ |
848 |
|
March 31, 2022 |
|
|
1,539 |
|
|
|
— |
|
|
|
537 |
|
|
|
1,016 |
|
Change |
|
$ |
(123 |
) |
|
|
— |
|
|
|
33 |
|
|
$ |
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Decrease secured loans principal - average daily balance |
|
$ |
(49 |
) |
|
|
— |
|
|
|
(3 |
) |
|
$ |
(46 |
) |
Effective yield rate |
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
Decrease in members' capital - average daily balance |
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
|
|
11 |
|
Decrease in RMI IX capital as a percent of total related mortgage funds capital managed by RMC |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
Interest on line of credit |
|
|
(124 |
) |
|
|
— |
|
|
|
— |
|
|
|
(124 |
) |
Amortization of debt issuance costs |
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
Late fees |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
RMC fees/costs reimbursements collected |
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
4 |
|
Reduced legal services |
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
23 |
|
Timing of services rendered |
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
(9 |
) |
Independent contractors |
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
|
(67 |
) |
Reduced audit services |
|
|
— |
|
|
|
— |
|
|
|
(16 |
) |
|
|
16 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
15 |
|
|
|
(15 |
) |
Change |
|
$ |
(123 |
) |
|
|
— |
|
|
|
33 |
|
|
$ |
(168 |
) |
The table above presents only the significant changes to net income for the period, and is not intended to cross-foot.
Net interest income
Net interest income decreased approximately $123 thousand (8.0%) for the three months ended March 31, 2023 compared to the same period in 2022. The decrease in net interest income is due primarily to (i) an increase in interest expense due to an increase in the line of credit average daily balance of approximately $4.4 million (80.4%) and a rapid increase in interest rates, offset in part by a decrease in amortized issuance costs of $7 thousand (50%) and (ii) a decrease in interest income of approximately $6 thousand due to a decrease in the average daily balance - secured loans of approximately $2.3 million. The line of credit - average daily balance increased approximately $4.4 million (80.4%) for the three months ended March 31, 2023 compared to the same period in 2022, and the average interest rate on the line of credit increased 2.83 percent (56.6%) over the same period, resulting in an increase of approximately $124 thousand (182.4%) in interest expenses on the line of credit. See Key performance indicators table included above in Item 2 of this report for specific details of average interest rate on the line of credit.
Provision/allowance for credit losses
In conjunction with the adoption of ASC 326 (CECL), the company recognized a cumulative-effect adjustment to members’ and manager's capital of $65 thousand to recognize lifetime expected credit losses for secured loans at December 31, 2022. The limited number of loans (42) and the short terms for which the loans are written - enabled the manager to do a loan-by-loan analysis to determine the risk of loss. The analysis included projecting the outstanding principal for loans – individually and in total, by lien position – until maturity to determine the count, amount and weighted average LTV of the loans for future quarter and year ends.
See Note 4 (Loans) to the consolidated financial statements included in Part I, Item 1 of this report for a detailed presentation of allowance for credit losses.
33
Operations expense
Significant changes to operations expense for the three months ended March 31, 2023 and 2022 are summarized in the following table ($ in thousands).
|
|
Mortgage |
|
|
Asset |
|
|
Costs |
|
|
Professional |
|
|
Other |
|
|
Total |
|
||||||
Three months ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
March 31, 2023 |
|
$ |
47 |
|
|
|
127 |
|
|
|
81 |
|
|
|
311 |
|
|
|
4 |
|
|
$ |
570 |
|
March 31, 2022 |
|
|
50 |
|
|
|
138 |
|
|
|
86 |
|
|
|
263 |
|
|
|
— |
|
|
|
537 |
|
Change |
|
$ |
(3 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
48 |
|
|
|
4 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Decrease secured loans principal - average daily balance |
|
$ |
(3 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
(3 |
) |
Decrease in members' capital - average daily balance |
|
|
— |
|
|
|
(11 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11 |
) |
Decrease in RMI IX capital as a percent of total related mortgage funds capital managed by RMC |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
RMC fees/costs reimbursements collected |
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
Reduced legal services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
— |
|
|
|
(23 |
) |
Timing of services rendered |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
Independent contractors |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
67 |
|
|
|
— |
|
|
|
67 |
|
Reduced audit services |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(16 |
) |
|
|
— |
|
|
|
(16 |
) |
Other |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
4 |
|
|
|
15 |
|
Change |
|
$ |
(3 |
) |
|
|
(11 |
) |
|
|
(5 |
) |
|
|
48 |
|
|
|
4 |
|
|
$ |
33 |
|
Mortgage servicing fees
The decrease in mortgage servicing fees of approximately $3 thousand for the three months ended March 31, 2023 as compared to the same period in 2022 was due to a decrease in the average daily balance - secured loans of approximately $2.3 million at the annual mortgage servicing fee to RMC of 0.25%.
Asset Management Fees
The decrease in asset management fees of approximately $11 thousand was due to a decrease in the members' capital base at year-end December 31, 2022 compared to year-end December 31, 2021. The decrease in the members' capital base is due in part to increased redemption requests and a decrease in loan payoffs largely attributable to the recent rapid increase in interest rates. The asset management fee is determined based on the prior year end member’s capital base which is computed as the then fair value of the company’s loans plus working capital reserves less outstanding debt.
Costs from RMC, net
RMC is entitled to request reimbursement for operations expense incurred on behalf of RMI IX, 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. In the three months ended March 31, 2023, RMC - at its sole discretion - collected less than the maximum allowable reimbursement of qualifying costs attributable to RMI IX (Costs from RMC on the Statements of Income). The reimbursement of costs from RMC waived was approximately $131 thousand and $101 thousand in the three months ended March 31, 2023 and 2022, respectively.
The amount of qualifying costs attributable to RMI IX incurred by RMC was approximately $212 thousand and $187 thousand in the three months ended March 31, 2023 and 2022, respectively. The increase was primarily due to an increase in allocable costs period over period.
34
Professional Services
Professional services consist primarily of information technology, legal, audit and tax compliance, and consulting expenses.
The increase in professional services of approximately $48 thousand for the three months ended March 31, 2023 compared to the same period in 2022 was due to (i) timing difference of services rendered partially as a result of prior year-end tasks completed in the three months ended March 31, 2023 and (ii) an increase in fees due to an outside contractor, offset in part by a decrease in legal fees due to reduced legal services and a decrease in audit fees.
Cash flows and liquidity
Cash flows by business activity for the three months ended March 31, 2023 and 2022 are presented in the following table ($ in thousands).
|
|
|
|
|
|||||
|
|
2023 |
|
|
2022 |
|
|
||
Members’ capital |
|
|
|
|
|
|
|
||
Earnings distributed to members, net of DRIP |
|
$ |
(326 |
) |
|
$ |
(554 |
) |
|
Redemptions, net |
|
|
— |
|
|
|
(1,925 |
) |
|
O&O expenses repaid by RMC |
|
|
15 |
|
|
|
34 |
|
|
Early withdrawal penalties |
|
|
(1 |
) |
|
|
(3 |
) |
|
Cash – members’ capital, net |
|
|
(312 |
) |
|
|
(2,448 |
) |
|
|
|
|
|
|
|
|
|
||
Borrowings |
|
|
|
|
|
|
|
||
Line of credit borrowings (payments), net |
|
|
(250 |
) |
|
|
(1,480 |
) |
|
Interest paid |
|
|
(185 |
) |
|
|
(93 |
) |
|
Debt issuance costs paid |
|
|
— |
|
|
|
(57 |
) |
|
Cash – borrowings, net |
|
|
(435 |
) |
|
|
(1,630 |
) |
|
Cash – members' capital and borrowings, net |
|
|
(747 |
) |
|
|
(4,078 |
) |
|
|
|
|
|
|
|
|
|
||
Loan principal/advances/interest |
|
|
|
|
|
|
|
||
Loans funded & advances, net |
|
|
(6,200 |
) |
|
|
(999 |
) |
|
Principal collected |
|
|
7,068 |
|
|
|
11,941 |
|
|
Loans transferred from related mortgage funds |
|
|
(3,233 |
) |
|
|
— |
|
|
Loans transferred to related mortgage fund |
|
|
857 |
|
|
|
— |
|
|
Interest received, net |
|
|
1,535 |
|
|
|
1,581 |
|
|
Late fees |
|
|
71 |
|
|
|
22 |
|
|
Cash – loans, net |
|
|
98 |
|
|
|
12,545 |
|
|
|
|
|
|
|
|
|
|
||
Formation loan collected |
|
|
52 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
||
Operations expense |
|
|
(758 |
) |
|
|
(610 |
) |
|
|
|
|
|
|
|
|
|
||
Net change in cash |
|
$ |
(1,355 |
) |
|
$ |
7,980 |
|
|
Cash, end of period |
|
$ |
3,700 |
|
|
$ |
9,013 |
|
|
Member redemptions of approximately $1 million and March member distributions of approximately $156 thousand were paid out in April 2023, and are included in the balance sheet as payable to related parties as of March 31, 2023.
Borrowings
See Note 5 (Line of Credit) to the 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 and the First Loan Modification Agreement dated March 4, 2022, which presentation is incorporated by this reference into this Item 2.
35
Liquidity and capital resources
The ongoing sources of funds are the proceeds from:
The company’s cash balances are 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 maintain liquidity of the company, while striving to fully deploy capital available to lend. In addition, effective March 31, 2023, the manager intends to strictly adhere to the quarterly and annual members’ capital redemption limitations as described in the company’s Operating Agreement.
The manager believes these sources of funds will provide sufficient funds to adequately meet our obligations beyond the next twelve months.
Contractual obligations and commitments
At March 31, 2023, the company had no construction or rehabilitation loans outstanding, no loan commitments pending, and no off-balance sheet arrangements as such arrangements are not permitted by the Operating Agreement. Note 3 (Manager and Other Related Parties) to the financial statements included in Part I, Item 1 of this report presents detailed discussion of the company’s contractual obligations to RMC.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not included because the company is a smaller reporting company.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The company is externally managed by RMC. The manager is solely responsible for managing the business and affairs of the company, subject to the voting rights of the members on specified matters. The manager acting alone has the power and authority to act for and bind the company. RMC provides the personnel and services necessary for us to conduct our business, as we have no employees of our own.
As a limited liability company, RMI IX does 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 company’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) as of and for 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 Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the manager’s or company’s internal control over financial reporting.
36
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
As of March 31, 2023, the company is not involved in any legal proceedings or governmental proceedings other than those that would be considered part of the normal course of business. In the normal course of business, the company may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc. to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes or protect or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions, in and of themselves, typically would be of any material financial impact to the company (i.e., exceeding ten percent of the company’s consolidated current assets).
Item 1A. Risk Factors
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
There were no sales of securities by the company which were not registered under the Securities Act of 1933.
Use of Proceeds from Registered Securities
On May 9, 2019, the company filed a Registration Statement on Form S-3 with the SEC (SEC File No. 333-231333) to offer up to 15,000,000 units ($15,000,000) to members of record as of April 30, 2019 that had previously elected to participate in the DRIP or that elect to participate in the DRIP in those states in which regulatory approval has been obtained. The Registration Statement on Form S-3 became effective on May 9, 2019.
As of March 31, 2023, the gross proceeds from sales of units to our members under our DRIP pursuant to the May 9, 2019 Form S-3 Registration Statement (after May 9, 2019) was approximately $8.6, which proceeds are used for general corporate operations.
The units have been registered pursuant to Section 12(g) of the Exchange Act. Such registration of the units, along with the satisfaction of certain other requirements under ERISA, enables the units to qualify as “publicly-offered securities” for purposes of ERISA and regulations issued thereunder. By satisfying those requirements, the underlying assets of the company should not be considered assets of a “benefit plan investor” (as defined under ERISA) by virtue of the investment by such benefit plan investor in the units.
Item 3. Defaults Upon Senior Securities
There has been no material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured within thirty (30) days relating to indebtedness of the company.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
37
Item 6. Exhibits
Exhibit No. |
|
Description of Exhibits |
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
Certification of Manager pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certification of Manager 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) |
38
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 IX, LLC |
||
|
(Registrant) |
||
|
|
|
|
Date: May 22, 2023 |
By: |
Redwood Mortgage Corp., Manager |
|
|
|
|
|
|
|
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) |
39