CEF Insights: Vertical Equity Income Fund, Unique Opportunity in the Mortgage Industry (NYSE: VCIF)

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Katherine Hawkins, Portfolio Manager for Vertical Capital Income Fund (VCIF) and the Closed-End Fund Association discuss the unique income opportunity of wholly owned loans in the residential mortgage market.

THIS F :

Welcome to CEF Insights, your source for closed-end fund information and education, brought to you by the Closed-End Fund Association. Today we are joined by Katherine Hawkins with Oakline Advisors and portfolio manager for the Vertical Capital Income Fund. We are happy to have you with us today Katherine.

Catherine Hawkins:

Hi CEFA, glad to be here. Thank you for.

THIS F :

Katherine, let’s start with Oakline’s investment orientation. Can you discuss the main features of comprehensive loans and direct investment in residential mortgages?

Catherine Hawkins:

Absoutely. Vertical Capital Income Fund invests primarily in senior loans, performing single family loans and non-agency loans in the residential loan market.

THIS F :

And what is your investment philosophy?

Catherine Hawkins:

We really like to take a holistic approach, but get into the finer details of the loan. The objective of each acquisition of the Fund is that the loan continues to operate and operate until the loan has matured or been repaid. When we review a loan’s credit report, we not only look at the borrower’s FICO, but also the borrower’s behaviors, such as how many mortgage payments have they paid on time? Did they own several houses at the same time? Are there any credit lapses? If there are any defaults in the credit, we will investigate whether it was revolving debt, installment debt, medical debt, or a student loan. We will look at the trend if they continued to pay their mortgages on time, despite missing other payments on other debts.

Our job is to find and buy loans that will continue to pay us every month. But as we know, extenuating circumstances sometimes arise and a borrower can no longer afford that mortgage. Therefore, we also perform our own due diligence on the property or collateral side of the loan. We make sure the value is there. So if we need to seize a property, we want to know that there is enough equity in that property to be able to recoup our investment.

THIS F :

What are the benefits and risks it presents for investors?

Catherine Hawkins:

Sure. I think the biggest advantage of this fund is its agility and ability to respond quickly to opportunities presented by an ever-changing mortgage market. The advisor is pragmatic and thorough in his approach and draws on decades of experience in every market cycle. And then the Fund’s underlying assets are all first liens on homes in the United States that are part of an $11 trillion US mortgage market. However, as with any investment, there are risks that the Fund will generally be correlated to the US economy and real estate markets.

THIS F :

How do you see that in relation to the overall position of an MBS investor? Is it rather a complement or a replacement of the pooled mortgage-backed securities?

Catherine Hawkins:

Vertical Capital Income Fund is unique and different from its peer group, which is actually mostly consistent with mortgage-backed securities funds. In a mortgage security, an investor will hold the right to cash flow if all the other moving parts fall into place. There is no direct relationship from the perspective of MBS investors. If a mortgage borrower misses a payment or the loan stops working, that MBS investor doesn’t know the history of the borrower or even necessarily the address of the property.

There is a total lack of transparency. Vertical, on the other hand, acquires and wholly owns each mortgage in its portfolio. This means that we are in contact with the borrower through our servicer. We have the ability and legal rights to alter or seize certain property or loans. There’s complete control, there’s simplicity, and there’s transparency from an ownership perspective.

THIS F :

Katherine, you manage the Vertical Capital Income Fund, ticker symbol VCIF. The Fund began trading on the New York Stock Exchange after operating in an interval fund structure for several years. Has this change had an impact on the way you manage the portfolio?

Catherine Hawkins:

Initially, this did not change the way we manage this portfolio. The way we acquire the assets and the overall strategy remain the same. However, in order to remain competitive, within this new set of peers in the exchange, what we have ultimately changed are our performance targets.

THIS F :

The Fund announced a managed distribution plan in December last year. Can you tell us what rate is currently being paid and how the plan works?

Catherine Hawkins:

Sure. And that’s what I was referring to that has changed recently. The Fund currently pays an annual rate of 8% per share. It is calculated on the basis of 8% of the average net asset value of the last three months, which corresponds to the net asset value divided by 12. The purpose of the plan is to provide the shareholders of the fund with a constant distribution of the fund, regardless of when or whether income is earned or capital gains are realized.

THIS F :

What are the ramifications for the risk profile of the portfolio and its assets?

Catherine Hawkins:

Although the distribution plan has changed, the Fund’s overall strategy will remain consistent in 2021 and beyond. We will continue to buy performing residential mortgages on single family homes. We will be shifting our focus from mostly newly created conventional 30-year loans, and focusing more on higher-yielding assets with shorter maturities. And that’s an area of ​​the market where we see a unique opportunity right now. We’re basically going from one bucket of an $11 trillion market to another bucket. And we don’t think the actual risk profile of the portfolio will suffer.

THIS F :

The US economy appears to be in a tumultuous time with the strains of the pandemic. How do you think economic policies and fundamentals will affect your strategy and opportunity set?

Catherine Hawkins:

Yeah, it’s been a really interesting 18 months. Despite the unique challenges 2019 and 2020 presented for the Fund, we were able to generate nearly $7.5 million in investment income in 2019 and 2020. The effects of COVID have been significant across the industry as a whole . And I hate to keep insisting on this, but every loan the Fund buys is fully owned and ceded, and it’s not securitized. We were able to process each loan and each borrower that was affected on an individual basis.

The result of this has been our ability to keep every borrower in their home and further increase net investment income in 2020 compared to 2019. And with the foreclosure process in the near future, we expect this timeframe be longer than before the pandemic. . But as volumes in the United States continue to increase, we do not expect our ability to recoup our capital investment to be affected.

THIS F :

What are your prospects for investing in residential mortgages in the future?

Catherine Hawkins:

Well, I can’t make any forward-looking statements regarding the potential performance of the Fund. I think the Fund is well positioned in a very strong housing and mortgage market environment. Our assets continue to perform and given the scale and scope of the mortgage industry, we believe there will always be a unique and niche opportunity for a fund of our size.

THIS F :

Katherine, thank you so much for taking the time to join us today.

Catherine Hawkins:

Thank you CEFA. I also appreciate your time.

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