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spk06: Good day and welcome to the AAMC Investor Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Kevin Sullivan. Please go ahead, sir.
spk02: Good morning, everyone, and welcome to our August Investor Call. I'm Kevin Sullivan, General Counsel of AAMC. Today, we'll discuss the material referenced in our Investor Presentation. which was issued earlier this morning and can be found on the investor relations page of our website at www.opplisourceamc.com. Note, information on forward-looking statements appears on the investor presentation, and we direct your attention to that information. This audio cast is copyrighted material of AAMC and may not be duplicated, reproduced, or rebroadcast without our consent. I'm joined today by our new Chief Executive Officer, Jason Kopchak, and our Chief Financial Officer, Stephen Kralman, who will be answering questions at the end of the prepared material. Now I'll hand this over to Jason, who will update you on the company's strategic plan.
spk01: Thank you, Kevin. I would also like to welcome everyone to our call. I'm excited to speak to you this morning and to be leading AAMC in this new direction. For today's call, I will start by describing the business we are building and the areas of focus in the near term. I will then discuss some recent developments. For those of you I haven't met or spoken with previously, I've been in the mortgage industry for more than 25 years. Most recently with Mortgage Stanley as, among other roles, a senior executive on the residential mortgage team who sat across trading, warehousing, securitization, and investment banking. I joined AAMC in May because I believe it provided a compelling opportunity based on the company's strong balance sheet, the expertise of its existing employees, and the opportunities in the alternative lending space not serviced by banks. Our immediate plan is to provide and source private credit for real estate in the non-bank space for fixed income accounts pursuing alternative assets. Initially, we were focused on the bridge and rehab loan space for single and multifamily homes and ground construction due to banks' inability to efficiently support the space. Despite the material rise in interest rate environment, which has caused a normalization in home sales, there's still an estimated 4 to 5 million shortage of housing units in the United States. We have a plan to help provide credit to build affordable housing, and we expect to be executing on it shortly. As we continue to grow and develop our origination platform, we plan to expand into other areas within private credit, both secured and unsecured. We are leveraging off the talent of our existing team. For example, our team in India has underwritten and led the acquisition of over 14,000 single-family rentals and over $4.1 billion in non-performing mortgages and REO. The team has actually managed over 30,000 single-family rentals, non-performing mortgages, and REOs. They have a deep experience in managing well over 2.5 billion warehouse lines and securitizations. Our management team has over 100 years' experience in real estate and on the street. Let me now turn to what we have accomplished so far. We've entered into a $50 million warehouse line with Flagstar. We're excited to partner with Flagstar as they are very experienced in the housing and hold-on space. and are providing a new source of capital to finance our growth. As of August 8th, we have received more than $40 million of funding from Flagstar. We have opened a new office in Tampa as headquarters for our sales staff, led by our new head of sales, Brendan Thiele. Brendan brings over 20 years of experience in the institutional whole loan and housing space, and has begun to build out our origination team both in Tampa and remotely. As part of our build-out, we have initially hired six specialists in the private credit space, and the expectation is to further grow the team. Due to the demand we are experiencing, over the last two months, we have grown our India operations by 47% and are expecting to increase headcount there and in St. Croix by another 50%. These hires consist of additional analysts, underwriters, and other supporting staff. Let me now briefly walk through our current portfolio. As of August 8th, we have purchased $105 million of loan commitments, This is an increase from approximately 53 million at the end of the second quarter. The weighted average yield across our portfolio is 7.9%, an increase from 6.7% as of the end of the second quarter. That summarizes where we are today. This is just the first phase in our growth. We plan on driving growth through originating and sourcing private credit products via direct to real estate developers and investors, wholesale originations, and correspondent lending, with originations being our primary focus. Originations allow us to better control the creation of assets to buyers of alternative assets, and we will be more accretive to our shareholders than purchasing loans. We do not plan on being an aggregator. We are not aware of comparable public companies that are exclusively platforms similar to those we are building, but more relevant comparisons are the origination platforms that have recently been acquired by sophisticated institutional fixed income investors. For example, KKR bought TORAC, premium bought anchor loans, NRZ bought Genesis, now known as Rhythm. MFA bought Lima One. These are significant investments by well-respected investors who see this as an area of growth for alternative investment strategy. Utilizing data, technology, and analytics would be critical to our success. We're developing a data-driven proprietary system, which will dramatically allow us to increase our reach to existing and new clients. We are also creating an enterprise data management system to help us utilize information for purposes of understanding our markets, clients' needs, and the overall customer experience. Our management team has a long history of money managers, insurance companies, debt and credit funds, banks, and other institutional investors. We believe our key strength will not only be to originate and source private credit, but also the ability to distribute various credit products into the deep demand for alternative assets among large fixed income accounts. As we optimize our platform through the leveraging of technology combined with the feedback from our fixed income investors and the market, we will be able to adjust our origination to fill that gap accordingly. Unlike some of our competitors, we are independent and not constrained by one set of yield and credit requirements. We do not want to limit ourselves to the securitization market as our only takeout partner, but rather we are focused on partnering with balance sheet accounts due to their stable source of funding. Finally, I want to update you on a couple of recent developments. Last month, we announced that we had purchased Putnam shares in our company. While we are not actively looking to buy back common stock, the purchase of Putnam's stake is consistent with our strategy of being opportunistic in the use of the firm's capital. The NYSE announced in late May that AAMC was not in compliance with the NYSE's listing standards. We submitted our plan to regain compliance to the NYSE at the end of June. We are confident in our plan. We expect to hear soon whether or not the NYSE has accepted our plan. Lastly, we continue to actively monitor the recent developments in the crypto markets. Our interest has always been in helping clients transact between cryptocurrencies and fiat currencies and not taking balance sheet positions in crypto assets. We still plan to move forward in the crypto ATM space. That concludes the prepared material for today.
spk03: I'm now happy to take questions.
spk02: While we wait to see questions come into the queue, we'll answer some questions that were received in advance of the call. Have you bought back any shares in addition to the Pudlin shares? And can you tell us a little bit more about detail about why you purchased the Pudlin shares?
spk01: Well, purchasing the Pudlin shares at a discounted market was a compelling opportunity to provide value to our shareholders. It also eliminated the risk of large-scale sale of the stock. We also terminated Putnam's most favored nation's clause related to any future settlement of the company's preferred stock litigation. So that was important to us. As I mentioned earlier, we're not looking to actively buy back shares. We have not repurchased any shares other than the Putnam stake. Our plan is to use the cash to build the business. Are there any plans for future insider purchases? We've thought about it, but nothing at the moment is planned. We have been more focused on the build out of the business and resolving other issues. Have you begun originating and selling loans? As I mentioned, we hired a number of private credit specialists and expect to close our first loan today. We expect volume to increase as we begin to direct market to clients. Our selling of loans, we are in discussion with multiple investors and are targeting the completion of our first distribution this quarter.
spk02: How does the selling, origination and selling of loans work? Which ones do you plan to keep on your books and why?
spk01: We're not purchase with intent to aggregate. Our goal is to distribute to credit partners in the fixed income space. We plan on selling our products in a pooling method to aggregate loans to investor partners, primarily between whole loans in the bond space. The goal is to maximize velocity and preserve liquidity. Where do people apply for loans? We will be launching our website and marketing very soon, but until then, you can apply for loans on the AAP. MC homepage or reach out to representatives directly at sales at altlending.com. Do you asset manage the loans that are sold and what kind of fee is there for doing that? Yes, we will asset manage the loans sold and are discussing the fees that we receive with our investors. There's a general market range of income strips that we expect to be in that range. What will margins look like and what are the costs associated with the business? On purchasing of closed loans, We are targeting a 200 to 250 basis point strip. Direct-to-borrow loans would be between 4 and 450. Loans closed via wholesale would be in between. We leverage cost efficiencies of our India team as well as the data-driven nature of our model. We also have a tax benefit from being in the USVI, which we view as compelling. When you sell a loan, what fees do you get up front?
spk02: Do you get any residual income?
spk01: Well, each loan product can be different. The shorter-duration product has an interest-strip protocol, whereas the loan The longer duration product comes with more of a premium. We also expect to receive an asset management fee. Keep in mind, on direct origination and wholesale, there's often an origination fee involved.
spk02: What kind of origination volume do you expect?
spk01: Is it still $600 million a year? We feel comfortable that we will meet or exceed those numbers in the next 12 months. We were not expecting the correspondent business to be a critical part of the business. However, it has turned out to be material to our business.
spk02: Operator, could you jump in right now? I can repeat how people can put a question in the queue if they want to.
spk06: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's press star 1 to ask a question.
spk02: Thank you. While we wait for any questions in the queue, We'll go through again some of the other questions still that were submitted before. Are you looking into increasing the capacity of your line of credit or getting another line or lines from other institutions?
spk01: Yes, we believe we need to constantly assess our sourcing capable for multiple institutions and we are looking to expand our credit line. How does the current interest rate environment affect the business? We believe that the market has adjusted the origination interest rates upwards to you know, probably within three to four points up from where it was four months ago. We have seen a more normalization within the housing sector. The fundamentals still seem to be driving demand for our product.
spk02: Why locate the office facility at Tampa?
spk01: We contemplated a number of locations and determined Tampa offered the best combination of access to talent and overall business climate.
spk02: Can you walk us through your thoughts on the crypto ATM business?
spk01: We still view crypto as an exciting opportunity, but in the current regulatory environment, we are still focused on finding a bank partner. We've always viewed the crypto opportunity as assisting people in transactions between crypto and fiat, not taking principal risk by holding crypto assets. Could you give us any guidance or projections on future earnings? We are focused on building out the business and not prepared to give any targets or projections at this point.
spk02: What is the levered return on equity targeted by AMC with the warehouse line, and how does that compare to competitors?
spk01: Again, to be clear, and I think it's important for people to keep in mind, our goal is to optimize our velocity and distribution. We are not looking to aggregate. As such, we don't have a target leverage ROE that we're looking to put out just yet. As we further develop the business, we will provide investors with updated financial targets for the alternative lending group business. What other credit products do you plan to move into in the near future? We expect the DSCR slash non-owner-occupied rentals. loan to be a big part of our business, and we expect to go live this quarter. We also expect multifamily bridge to be a bigger part of our business going forward. Do you plan to raise additional capital, either debt or equity? We are analyzing that at this point, and we believe the demand that we're experiencing may require additional capital to support our growth.
spk02: Can you update us on the status of the Luxor litigation?
spk01: While I can't comment much on the ongoing litigation, I can note that the summary judgment motion were filed last month.
spk02: And lastly, for the preferred questions we received in advance, what is the NOL situation? How much income could you hypothetically shield the pay?
spk01: The majority of the historical losses incurred by the company are in the USVI location. The NOL would offset future USVI-based income at the reduced USVI rate tax rate of 10% of the current federal tax rate in place as of December 31st, 2021, we had a deferred tax asset of $637,000 to offset against future taxes in the USVI.
spk02: Thanks, operator. We're happy to take the first question in the queue.
spk06: Thank you. We'll take our first question from Edward Riley with EF Hutton. Please go ahead. Your line is now open.
spk02: Hey, guys. Thanks for taking my question. The pre-submitted questions really took care of most of my questions. I'm just wondering how quickly you're able to sell a loan after it's originated.
spk01: So, again, as we mentioned earlier, we're going to be – we expect to be doing our first sale, and it's going to be in bond form. We expect that first sale to get done in the next several weeks. On a going forward basis, our plan is to – our goal is to execute on a weekly basis. But typically, when you're in ideal form, you're doing a sale – In whole loans, you can do it every three to seven days. We plan on doing it in bond form, and we expect to do it weekly. With that being said, we're not looking to aggregate. It's a velocity model. Our goal is not to aggregate, but to create velocity.
spk02: Go ahead. With the velocity, you expect $600 million in originations this year. Just wondering how you expect that to grow over time.
spk01: Again, that's the next 12 months. There's three channels. You have direct originations to business developers and investors. You have wholesale and you have closed loan purchases. So closed loan purchases have been the primary business to date, and it's actually going to be material amount going forward. But our originations, I think we're closing our first origination today. We have marketing and lead generation kicking in over the next several weeks. We expect the direct to borrower and the wholesale originations to ramp pretty quickly. I think we'll have more data over the next 30 to 45 days, but we feel very confident that the core of our business will be originations and that we will be hitting or exceeding that 600 million over the next 12 months. We feel good about those numbers that we provided.
spk02: Okay, great. And just wondering about the operations in India versus Tampa, could you provide us a little clarity on what the specific focus is for each location?
spk01: Yeah. I mean, so let me, we referenced earlier in the presentation, our India team has incredible experience. They, they've had to manage over 30,000 single family rentals, non-performing mortgages and REOs. They've also underwritten those same assets. So, you know, our analytics, our underwriting, our processing, our funding, you know, our database, all that's being housed in India and they've done a fantastic job. You know, frankly, they're, Their experience allowed us to quickly pivot into this business, and I think we've received a lot of good comments from clients indicating that our team understands the space very well. So that's been great. We've increased the staff there, and we're continuing to increase the staff in India. On the facing customer front, we needed to have that presence in the U.S., so we evaluated plenty of areas. We evaluated Dallas. We evaluated other geos throughout the United States, but we felt Tampa was for many reasons was the best location. So effectively in Tampa is going to be primarily salespeople. We probably will have some, you know, there'll be some support staff there like processors and other support staff. But again, our source of support staff is primarily based in India and our sales and customer facing staff will be based throughout the United States with a sales headquarters in Tampa.
spk03: Okay. Awesome. Thanks guys. Appreciate it. That's it for me.
spk06: We'll take our next question from the line of Mike Gondel with Northland Securities. Please go ahead. Your line is now open.
spk04: Hey, guys. Good morning. Just a little bit of follow-up, what you were saying about originate, sell, and asset management fees. Jason, just on average, at a high level, I'm saying, okay, you're going to originate $600 million of paper. What's the average origination fee, the average selling fee, the average asset management fee? How do we think about those as we apply them to $600 million?
spk01: Exactly. So those are good questions. So, again, let's break it up by channel. On the direct-to-borrower front, so, again, it's us facing the borrower directly, your originations are anywhere on the low side at 50 basis points to typically 150 basis points. So the average median would be about 150 basis points for the bridge product. For the DSCR product, it's about one point. When you sell the bridge, this again, so that applies for the direct origination. On the wholesale, you're getting about 50 basis points on the bridge and 50 basis points on the DSCR for wholesale. I'm sorry, let me back up. You get 50 basis points for the direct origination for DSCR. And then for wholesale, you get nothing on the origination front. And then on closed loan, you get nothing on the front. When you look at the asset management fee, you typically get about 50 basis points across the board, except for DSCR. So on the bridge product, the market is about 50 basis points for asset management fee. That's the market, okay? It does vary. But on DSCR, you don't get that. So you get that strip for bridge. So typically 12 and 18 month product. And then when it comes to interest strip, you typically on the bridge product, On the closed loan purchases, like I referenced in the presentation, you're between 200 and 250 basis points. On the wholesale, you're about 400 to 450 basis points. And the retail direct, I should say direct to borrowers, about 400 to 450 basis points on the, again, the interest strips, the interest strip. So, again, you have 200 to 250 for closed loan purchases, 400 to 450 interest on both wholesale and direct originations for the interest strip. Now, DSCR paper is sold at a premium, so typically it varies in the market, and the market's been pretty wild this year, but right now the market for DSCR products is anywhere from 103 to 104 for a premium on a DSCR product.
spk04: Does that help, Mike? Yeah, very helpful. Thanks, guys.
spk01: And then just to be clear, Our closed loan purchases, we didn't really bake that into the presentation back in March and April. But the closed loan purchases is a line of business we see continue going forward. We see it as being a material part of our business. So that's an area that was a surprise upside for us.
spk05: Once again, if you'd like to ask a question, please press star 1.
spk03: Okay, so look, appreciate everybody's time today.
spk01: As there are no more questions, we would like to thank everybody for joining the call. Please don't hesitate to reach out to our investor relations email or phone number with any questions. I look forward to speaking with you soon. Thank you very much.
spk05: This concludes today's call.
spk06: Thank you for your participation.
spk05: You may now disconnect.
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