Great Ajax Corp.

Good day and thank you for standing by. Welcome to the Great Ajax Corporation Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Lawrence Mendelson, CEO. Sir, please go ahead.

Thank you very much. Welcome, everybody, to the Great Ajax Corp second quarter 2021 conference call. Also here with me are Mary Doyle, our CFO, and Russell Schaub, our president. Before we get started, I just want to have everyone quickly take a look at page two, the saved hardware disclosure of the presentation. And with that, we can go on to page three and begin. As an introduction, the second quarter of 2021 was a good quarter. Our overall corporate cost of funds further decreased by approximately 25 basis points, and our asset-based cost of funds decreased even more after decreasing nearly 50 basis points in Q3 of 20, 26 basis points in Q4 of 20, and 30 basis points in Q1 of 21. Our cost of funds has continued to decrease in the third quarter of 21 as well. A significant increase in loan performance and loan cash flow velocity continued, and it's also continued into the third quarter of 2021. This continuing increase in loan cash flow velocity led to an additional acceleration of income on loans during Q2 of 2021 of 4.7 million, as the present value of cash flow and payoff proceeds exceeded expectations. We continue to be in an offensive position, and in Q2, we purchased a significant amount of loans, primarily in joint venture structures, at good prices, in good locations, and at low percentages with the underlying property values. The prices we paid are materially lower than when mortgage loans are currently selling today. At June 30, 2021, we had approximately $88 million of cash and more than $300 million of unencumbered bonds, unencumbered beneficial interest, and unencumbered mortgage loans combined. As of July 31, 2021, we still have approximately $88 million of cash and still have a similar amount of unencumbered bonds, beneficials, and mortgage loans. This significant cash balance does create some earnings drag and a significant cash flow velocity from mortgage loans and mortgage loan JV structures reduces our loan and securities portfolio leverage as well. We are, however, well-equipped for volatility and the investment potential it creates, and we have good opportunities in our pipeline as well. And with that, we jump to page three, the business overview. Starting out talking about our manager, our manager's strength in analyzing loan characteristics and market metrics for re-performance probabilities and pathways and its ability to source these mortgage loans through longstanding relationships enables us to acquire loans that we believe have a material probability of long-term continuing re-performance. We've acquired loans in 338 different transactions since 2014, including six different transactions in the second quarter. Remember that we own a 19.8% interest in the equity of our manager. Additionally, our affiliated servicer provides a strategic advantage in non-performing and non-regular paying loan resolution processes and timelines and a data feedback loop for our manager's analytics. In today's environment, having our portfolio teams and analytics group at the manager working closely with the servicer is essential to maximize re-performance probabilities loan by loan by loan. We have certainly seen the benefit of this during the COVID pandemic and in Q2 and Q3 2021 with the significant increase in loan cash flow velocity and credit performance. Like our 20% equity interest in our manager, we have a 20% economic interest in our servicer. The analytics and sourcing of the manager and the effectiveness of affiliated servicer also enables us to broaden our investment reach through joint ventures with third-party institutional investors. On the leverage side, we still have low leverage. Our June 30, 2021 corporate leverage ratio was 2.3 times versus 2.3 times at March 31. Our Q2 2021 average asset base leverage was two times versus 2.1 times in Q1 of 2021, even though we made significant acquisitions in Q2. We also have $20 million invested in Gaia Real Estate Corp., a REIT that invests in multifamily properties, multifamily repositioning mezzanine loans, and triple net lease veterinary clinic real estate. We think Gaia has a great deal of optionality, and we expect Gaia to grow materially in the second half of 2021 and 2022. On page four, we can talk about highlights of the second quarter. It was a busy quarter. Net interest income from loans and securities, including a $4.7 million interest income from the increase in present value of loan caps and cash flow velocity in excess of expectations, was approximately $18.95 million in the second quarter. Our gross interest income, excluding the $4.7 million from income from the increase in present value of cash flow velocity, was lower than Q1, but net interest income was $500,000 higher due to our reduced cost of funds. interest expense decreased by approximately $1.47 million. A gap item to keep in mind is that interest income from our portion of joint ventures shows up in income from securities, not interest income from loans. For these joint venture interests, servicing fees for securities are paid out of the securities waterfall, so our interest income from joint ventures the joint venture securities is net of servicing fees, unlike interest income from loans, which is gross of servicing fees. As a result, since our joint venture investments have been growing faster than our direct loan investments, GAAP interest income will grow more slowly than if we directly purchase loans outside of joint ventures by the amount of the servicing fees, and the GAAP servicing fee expense will decrease by the corresponding offsetting amount. An important part of discussing interest income is the payment performance of our loan portfolio. At June 30, approximately 74.2% of our loan portfolio by UPB made at least 12 of the last 12 payments, as compared to only 13% at the time we purchased the loans. This is up from 73% at March 31, 2021. In our first quarter of 2020, last year, investor called, we mentioned that we expected the COVID-19-related economic environment would negatively impact the percentage of 12 for 12 borrowers in our portfolio. Thus far, the impact on regular payment performance has been far less than expected, and the percentage of our portfolio that is 12 of 12 has been quite stable and increasing since Q4 of 2020, and is only 2% lower than pre-COVID Q4 of 2020. Q4 of 2019. Additionally, we have seen significant prepayment from material subset of our COVID impacted borrowers that had significant absolute dollars of equity and were in strong home price appreciation locations. The continuing strong irregular payment pattern and the prepayment pattern of certain previously delinquent loans led to the 4.7 million increase in the present value of borrower payments in excess of expectations in the quarter. Approximately 20% of our full loan payoffs in second quarter of 2021 were from loans over 180 days delinquent. While regular paying loans produce higher total cash flows over the life of the loans, on average, they can extend duration, and because we purchase loans at discounts, this can reduce percentage yield on the loan portfolio and interest income. However, regular paying loans generally increase our NAV, enable financing at a lower cost of funds, and provide regular cash flow. Loans that are not regular monthly pay status tend to have shorter duration. However, we have generally expected that this duration reduction would be less than typical due to the impact of certain COVID-19 resolution extension requirements. As I mentioned earlier, most of our loans were purchased as non-regular paying loans, and the borrowers, our servicer, and portfolio team, and our manager have worked together over time to reestablish these loans as regularly paid. We also expect that given the low mortgage rate environment and the stability of housing prices so far, that higher prepayments will likely continue for both regular paying and non-regular paying loans. We have seen this trend continue in Q3 of 2021. Our cost of funds in Q2 2021 was lower than Q1 by 25 basis points. This was due to spread reductions on repurchase facilities and the six securitizations we completed in Q1 and Q2 and two securitizations we called in late February of 2021. We expect our cost of funds to continue decreasing materially, especially since we called four of our older securitizations and resecuritized the underlying loans in late Q2 of 2021, and will likely do so with some of our other older securitizations in the next few quarters. Net income attributable to common stockholders was $10.37 million, or $0.45 per share, after subtracting out $1.95 million of preferred dividends. A couple of other things to note. We recorded $161,000 expense from the acceleration of the amortization of deferred issuance costs as a result of repurchasing $5 million of our convertible bonds in the open market. We also paid approximately $100,000 in duplicate interest due to the three-week timing gap between re-securitizing loans and culling the underlying bonds that were previously backed by those loans. Additionally, we expensed approximately $2.2 million relating to the gap required accrual of the warrant put rights from our Q2 2020 issuances of preferred stock and warrants versus $1.95 million in the first quarter of 2021. Book value per share was $1,586 at June 30, 2021 versus $1,618 per share at March 31. The difference in book value comes from gap treatment of our convertible bonds based on changes in earnings amounts and share price. Our stock price at March 31 was $1,090 and at June 30 was $1,300. Taxable income was $0.34 a share. Taxable income in Q2 is primarily driven by lower interest expense, increases in prepayment, especially for delinquent loans, and from cash flow velocity on performing loans. Delinquent loans usually generate tax gains at the time of a foreclosure and the creation of related REO and then tax losses at the sale of REO. Less REO creation typically leads to lower taxable income. However, we saw many delinquent loans prepay in full and generate tax gains. Additionally, and probably more importantly, as our cost of funds decreases, we should have further reductions in interest expense, which increases taxable income. In Q2, we completed four securitizations in joint venture structures totaling $1.4 billion in UPB, and we called for securitizations. The four new securitization structures contain approximately $900 million of newly purchased loans, as well as approximately $535 million of loans from the four called securitizations. The new securitizations combined will reduce funding costs by approximately 150 basis points per year for the approximate 120 million UPB that is our percentage ownership of the 535 million of re-securitized loans from the securitizations we called in the second quarter. Of the approximately 900 million of newly purchased loans in these four securitized joint venture structures, we retained another approximately 140 million UPB in the form of debt securities and beneficial interests. Cash collections at June 30, 2021, we had approximately 88 million of cash, and for Q2 2021, we had an average daily cash and cash equivalent balance of approximately 114 million. We had 78.9 million of cash collections in the second quarter, which is an 11% increase over the first quarter. Our surplus cash tempers earnings and return on equity, but this provides us with significant optionality, and the related earnings drag decreases as we get cash invested over time, like we did in the second quarter. As I mentioned earlier in this call, at June 30, we also had approximately $289 million base amount of unencumbered securities from our securitizations and joint ventures, and approximately $53 million unpaid principal balance of unencumbered mortgage loans. As of July 31, we still have $88 million of cash and unencumbered assets, and approximately $300 million of unencumbered assets, even though we invested approximately $85 million in the month of July. As I mentioned earlier on this call, approximately 74.2% of our portfolio by UPB made at least 12 of their last 12 payments compared to only 13% at the time of loan acquisition. This difference creates material embedded net asset value versus loan purchase discount. It also enables us to continue reducing our cost of funds and advance rates through rated securitization structures. On page five, we continue to be primarily RPL-driven with purchased RPLs representing approximately 96% of our loan portfolio at June 30. We primarily purchase RPLs that have made less than seven consecutive payments and have certain loan level and underlying property specifications that our analytics suggest will have positive payment migration on average. The positive payment migration of these purchased RPLs results in increase in the fair market value of the loans and a related decrease in cost of funding. On page six, you can see on RPLs, we continue to buy and own lower loan-to-value loans. Our overall RPL purchase price is approximately 51% of property value and 88.2% of UPB. On page seven, non-performing loans, important discussion. Purchased non-performing loans have declined over time relative to the total loan portfolio. For NPLs on our balance sheet, our overall purchase price is 79% of UPV and 47.2% of property value. As a result of the low loan-to-value and higher absolute dollars of equity on average for our RPL and NPL portfolios, we have seen that rising home prices and relatively low mortgage rates have significantly accelerated prepayment and regular payment velocity on our loans as borrowers can capture significant and growing equity. This leads to greater interest income by accelerating the receipt of loan purchase discount and the present value of cash flow velocity. Subsequent to June 30, we have purchased a significant amount of NPLs and have agreed to purchase approximately 100 million of NPLs subject to due diligence in Q3. I will discuss this in more detail on page 10 in this presentation. Our target markets, California continues to represent the largest segment of our loan portfolio. California mortgage loans are primarily in Los Angeles, Orange, and San Diego counties. We have seen consistent payment and performance patterns from loans in these markets. Performance in Southern California has far outperformed expectation during the COVID-19 pandemic period. We have also seen consistently strong prepayment patterns and even more so in recent quarters. Since May of 2020, California prepayments represent nearly 40% of all our prepayments. Until May of 2020, we had been seeing material negative effects from the tax loss salt provisions in New York City metro and in suburban New Jersey and southern Connecticut home values and home sale liquidity. We've seen quick positive turn in the liquidity in these suburban locations as a result of COVID-19. It's too early to tell, though, whether this is a short-term phenomenon or a longer-term change in lifestyle as a result of COVID-19, and it also is likely to be affected by any potential new tax law changes becoming effective. Related to this, we have also seen demand and prices for homes and home rentals increase materially in several of our metro areas of Florida, Phoenix, Dallas, Charlotte, Atlanta, and a number of others. We're seeing this strength primarily in single-family homes and a bit less so, though, for condominiums. On page 9, we can talk about portfolio migration. At June 30, approximately 74.2% of our loan portfolio made at least 12 of the last 12 payments, including approximately 67% of our portfolio that made at least 24 of 24. Again, this compares to approximately 13% at the time of purchase. Non-paying loans, which usually have shorter durations than paying loans, get timelines extended as a result of COVID moratoriums. This affects the yield on true non-performing loans as extended resolution timelines can lead to more property tax, more insurance payments, more repair expenses. However, in the past four quarters and continuing so far in Q3 2021, we've seen prepayment of non-performing loans shorten duration on average rather than extend duration from COVID. Since we purchased most of our loans when they were less for 12 of 12 payment history and at a discount, Our servicers worked with most of our borrowers over time. While it was too soon to understand the full impacts of COVID-19 on home prices and mortgage loan performance, so far the impact on our portfolio has been significantly positive as we have seen demand for homes in our target markets generally increase, cash flow velocity on the loans increase, and prepayment in full on COVID-impacted loans increase. 12 loans in today's loan market trade materially higher prices than our cost basis. They trade significantly over par. As a result, our portfolio and related implied corporate NAV estimates are materially higher than gap book value, which presents our loans at the lower of market or amortized cost. Subsequent events on page 10. Since June 30, it's continued to be busy. In July of 2021, we purchased 170 million of RPLs and NPLs into a joint venture securitization that we closed in June of 2021 with a securitized pre-funding structure. We own 20% of this joint venture. The purchase price was made at 98% of UPB, significantly lower as a percentage of owing balance, and 54.2% of the underlying property value. We also directly purchased 3.1 million of non-performing loans at 74.2% of UPB and 69.7 of underlying property value. We've also agreed to purchase approximately 103 million UPB of NPLs in five transactions subject to due diligence. The purchase price for the loans is approximately 97% of UPB, approximately 91% of the owing balance, and 64% of the value of the underlying properties. One of these purchases is approximately $90 million of UPB with 100% of the related underlying properties in Miami-Dade, Broward, and Palm Beach Counties, Florida. We expect these transactions to close in August, and we expect to own 100% interest in these loans. We've agreed to purchase subject to due diligence 3.8 million of RPLs. in four transactions at a price of 78.9% of UPV and 51.7% of underlying collateral value. We expect these transactions to close in August and to own 100% interest in these loans. In July, we completed a $518 million rated joint venture securitization with a subset of loans from two of our 2020 joint venture structures. The AAA through A classes represent 83% of UPB. AAA through single B represents 95.5% of UPB. We retained approximately 53 million of various classes of securities in this joint venture. On August 5th, we declared a cash dividend of 21 cents per share to be paid on August 31 to holders of record of August 16. On page 11, we have some financial metrics. And there's a couple that I'd like to share. One, average loan yield, excluding the increase in the present value of cash flow, declined marginally by approximately 0.1%. For debt securities and beneficial interest, however, remember that yield is net of servicing fees and yield on loans is gross of servicing fees. Debt securities and beneficial interest is how our interest in our JV structures are presented under GAAP. As our JVs increase, as they did in 2020 and 2021 relative to loans, the GAAP reporting will show lower average asset yields by the amount of the servicing fees. That being said, yields on beneficial interest increased in Q2 as cash flow velocity increased. Our average asset level mid-interest margin increased as well. Leverage continues to be low, especially for companies in our sector. We ended Q2 2021 with asset-level debt of 2.1 times, and average asset-level debt for the quarter was two times. Our asset-level debt cost of funds was lower in Q2 2021 than Q1 by approximately 25 basis points, and the cost of our asset-level debt has further declined so far in the third quarter. As we get our surplus cash invested, as we did in the second quarter, we should see increases in interest income and net interest income as well. Also, as we continue to repurchase our convertible notes in the open market, our cost of funds and interest expense further decreases. On the next page, actually two pages, securities and loan repurchase agreement funding, our total repurchase agreement related debt on June 30 was approximately $394 million, of which $42 million was non-marked to market mortgage loan financing, and $283 million was financing on Class A1 senior bonds in our joint ventures. At June 30, we had $155 million face of unencumbered bonds, as well as $132 million of unencumbered equity beneficial interest certificates and $53 million UPV of unencumbered mortgage loans. Combined with $88 million of cash at June 30, we have significant resources for being on offense and defense. That concludes my discussion and presentation. If anybody has any questions, very happy to answer whatever you might have interest in.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, you may press the pound key. Please stand by while we compile the Q&A roster. Our first question from Kevin Barker of Piper Sandler. Please ask your question.