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.

Hey, Larry. How you doing?

Good. How are you, Kevin? Good.

We're up on a good quarter. Looks like a pretty strong quarter. Busy. It was a busy quarter. Sorry, busy. When we think about the pricing changes that you're seeing just by calling a bunch of your securitization and reissuing some of the securitizations, Very strong trajectory there on interest expense and pretty strong commentary as well. Can you give us an idea of where you think interest expense could drop to on a run rate basis after you've done the majority of these cleanup calls or at least calling the securities that you see out there today?

Sure. We have a couple more 2018 securitizations and a number of 2019 that we can already call. Those have coupons anywhere between 3% and 4.5%. And we can issue now all-in sub 2%. So we would expect that additional call, the new securitization, would get us somewhere between 150 and 200 basis points of savings for each call.

Okay, so on a net basis, when we think about, you know, your total funding, your total funding across all different, not only securitizations, but other forms of financing, you know, what orders of magnitude do you think you could see your interest expense drop to by, you know, the start of 2022 relative to what we saw on, like, a run rate basis versus 2020? Sure.

So if you look at now our total cost of funds, well, if you look at now our total cost of funds, overall cost of funds, excluding our convert, is in the low 3s. Excluding our convertible bond, that could go down by at least another 100 basis points from the refinance of everything, maybe a little bit more than that.

Okay. That's a pretty strong result. And then what about – and you also had positive commentary on the interest income side as well. Could you talk about that on the top line and a potential run rate that you could see in – you know, the increase in potential yields that you're talking about?

Yeah, since we, you know, we buy loans at discounts, so interest income shows up in kind of two different places. One, it shows up from regular monthly payments, and two, from captured discounts. You see on the loan side, it's more direct. When we own the security side, we have both debt securities and beneficial interests. Beneficial interests, you see it more in accreted value because they don't get direct cash flow until you call the deal. Where on the loan side, you get it every single month. In the debt securities and beneficial interest side, you get a debt securities coupon, but you you turbo Class A principal before you get that. So on the interest income side, you'll see it pick up. Obviously, more prepayment is good. More monthly cash flow is good. Cash flow velocity is still pretty stable. Also, we increased our portfolio pretty considerably in the late second quarter, and we'll do so even more in the third quarter. with the purchases of loans. So we would see interest income pick up from those new purchases that came on in June, July, and August, really start to pick up in late Q3. Got it.

Okay. And then, so that's obviously helping out your provision expense as well, right? Yep.

It's kind of funky. Because we buy loans at discounts, the concept of a provision is a little bit different. What you do is you have a modeled expectation of how much of that discount you're going to collect. And what we're finding is we're collecting significantly more than we expected of that discount capture.

Okay, and then just one more before I get back in the queue. You raised the dividend again. Your taxable income is running fairly high. Can you remind us of your capital allocation policies going into the end of the year here? How do you think about that dividend relative to the amount of taxable income you're producing right now?

Well, at a minimum, we have to pay 90% of taxable income, and that includes the preferred dividend. I think our board is biased to a higher dividend, but on the flip side, they want to make sure there isn't another March and April of 2020 that comes out of the blue and affects dividends. So they want to do it over a long, steady, predictable tenor as opposed to all at once. Okay.

Do you feel like you're going to be forced to do something?

If the tax return continues at this pace, we'll have no choice, correct? Okay.

All right. Thank you very much.

And our next question from Eric Hagan of VTIG. You may ask your question.

Eric Hagan, VTIG Director, VTIG, Good afternoon. Hope you guys are well. Lots of good discussion here on prepay speeds and cash flow velocity. I guess the question is focused on the folks that haven't found an opportunity to refinance. And I guess what the opportunity looks like for them specifically as it relates to the potential for mortgage rates to go up.

Sure. So we've seen – so we spend a lot of time tracking prepayments, sources of prepayments, and where the payoff wire comes from. And we found different breakpoints based on different absolute dollars of equity and different delinquency history. And one of the things we found is that a real turning point is about $130,000 of equity. And for borrowers that have been more than 180 days and have more than $130,000 of equity, we see a lot of their payoffs from selling their home, and moving as opposed to just refinance. We see significant refinance in certain markets for example, in Texas and in Florida. But, for example, a higher percentage of our California payoffs are sales versus refinances. So a lot depends on characteristics of the loan itself, location of the loan itself. But the lion's share of payoffs on our over 180-day delinquents are loans over $130,000 of equity And it's a sale of the home as opposed to a refinance of the home. And we see that kicks in even more so when you get to about $220,000 of equity that it's almost overwhelmingly sales of the home versus a refinance. and our 12 of 12s and 24 of 24s, a higher percentage is refinancing. Keep in mind that our weighted average coupon on our portfolio is still in the mid-force. So we still, from a mortgage rate kind of refinance competition, if you think you need at least a half a point or a point reduction to be worthy of refinancing, As long as mortgage rates stay under about 350 or 360, our borrowers are still more than a point away from the average coupon on our loans or the effective coupon on our loans. But we still see significance from the resale or from the sale of properties rather than just from refinance. I would say it's more a function of whether you believe in the stability of home prices for those loans rather than the stability of mortgage rates. Now, that being said, there may be some from a buyer's perspective of the property that our delinquent borrower is selling, the buyer might care about mortgage rates to get to that price. But that's more of an HPA question than just a rate question.

Right. That was good detail. Thank you for that. Another couple questions on the activity since quarter end. Can you talk about how you're financing the package of MPLs that you're buying and how much capital you expect to allocate to that transaction? And then I'm also just looking at the purchase price on the RPLs that looks like maybe 81% of par and then the MPLs at 98% of par, just trying to square the difference there.

So it depends on two things. One, the seller, their need for liquidity, and also what the actual owing balance is. So on the NPLs, while it may be 98% of UPB, it's only about 91% or 92% of the actual owing balance. Because in NPLs, we get all prior servicer advances and all past due interest without having to pay for it, and that's part of the owing balance. And we also expect a significant amount of those to re-perform based on the absolute dollars of equity that those loans have. So we look at them almost as bad RPLs versus NPLs. or sub-performing RPLs versus MPLs from an expected performance given the locations and the characteristics of the loan themselves. But loan price is definitely a function of, you know, we get calls just before ends of quarters all the time from people looking to sell loans who need liquidity and they need it before the end of the quarter. So there's a different price for a loan where someone needs six days closing versus where someone needs six weeks closing.

Got it. That's helpful. How about the financing? Sure.

On the financing side, we will take down the August closings into a non-mark-to-market repurchase facility, and we will likely call one or two old securitizations and put these into one of those resecuritizations in either late Q3 or Q4.

Uh, got it.

So just trying to understand how much capital would be assigned or allocated to the... So, so in a, so figure, uh, uh, on, on day, on day one, about 25%. Okay. Uh, and then once securitized about, uh, 15%. Got it. Thank you.

Thanks for the comments. Sure.

And, sir, our next question from Matthew Howitt of B. Riley. You may ask your question.

Larry, thanks for taking my question. Sure, absolutely. Larry, you know, I look at the balance sheet, and you have the JV retained interest that's growing, and then, you know, loans have been flattish down a little bit. Remind me again, what's the economic to AJAC from an economic perspective? I realize accounting... recognition difference between servicing income and interest income. Is there any difference from an economic standpoint for doing it 100% or doing a JV where you take a partial interest back?

The only difference is the size of the underlying combined acquisitions. So if we have four or five acquisitions that we know together are going to be $400 million or $500 million, We'll do those in a JV structure, and we'll take, say, $100 million of it vertical, and our joint venture partner will also take it, and then we have rights refusal on any time they might want to sell a piece of what they own. But on the flip side, this is why it's so important for us to own a 20% interest in our servicer, because our servicer gets the servicing on all $400 million of it. So we get kind of a little bit of extra piece from that as well. I mean, going forward, do you expect that? I'm sorry?

Going forward, do you expect continued growth in the retained interest and outpacing the loan, the whole loan or the on-balance sheet?

I don't know. It's really a question of the number and size of each acquisition we make. So for acquisitions that are $20 million, $30 million, we do those ourselves. For acquisitions that are $230 million, we'll generally put them into a securitized joint venture structure, where we just close it into a securitized structure. And then if... has similar economics overall to owning the loans directly. It's as if you bought, it's really just a loan participation structure in accusive form. so that if we bought 200 million of loans into a joint venture structure and we were, say, 30% of it, it's like having a 60 million participation and our partner would have $140 million participation. We just put it into accusive form because a lot of our joint venture partners want to be able to have securities mark to market daily for their funds.

Got it. And your partners are the institutional quality, you know.

Oh, they're all brand name in the securitization and money management world. Exactly right. Got it. Okay.

And then speaking of sort of values, you know, your servicer gets a piece of that and that goes your UPB and servicing. I mean, the gap, the low common gap, you mentioned, I mean, the book is materially, the gap book is materially below. I mean, can you make any more comments on what the low comp, how do you think about the low comp?

Well, you know, the easiest way to think about it is the 20% interest we have in our manager and the 20% economic interest in our servicer, our total gap carrying value is about $2 million.

For the manager and servicer?

Yeah. Okay. So it's not, obviously, they're obviously worth more than that, right? Right.

I mean, the loans, I mean, are worth more.

And the loans, you know, if you look at our cost basis of loans, which is sub-90, and then the loan market is all over par, right?

Right.

And beneficial interests are just a Q-sub form of loans. So the easiest way to think about beneficial interests is if you know the UPB of the loans underlying the beneficial interest, it's UPB times market price of loan minus A minus B would be effectively the value there. And obviously our cost basis is material below that if all the loans are worth over par.

Got it. Great. Got it. Thanks for that. And so you're buying back that convertible debt. Yes, we still are, right. And I guess the last thing is that that amortization, that put right, I mean, that's definitely, I mean, at some point that's going to go away. Can you just remind me?

Yeah, when it goes away, sure, there's two ways it can go away. Either we can just pay it in cash or we can pay it in shares or a combo of cash and shares. And if we pay it in shares, then the whole liability on the balance sheet goes to zero. and then you have more shares, or you can just pay it in cash, and then that liability goes away and you have less cash. Or you can pay it in some combination. We can call that put right in 39 months from April of 2020. So that's summer of 23. You got it. Okay.

I mean, obviously, it clearly makes sense to go do that.

We actually have had some discussions with the put-right owners, there's three of them, about paying a small premium to extinguish the put-right and just go on versus waiting until... And we've had some prelim discussions. I wouldn't say that will happen or not happen. It's too early to kind of have an inkling on that. But I met with the owners two weeks ago of the put rights and started that discussion. That would be really interesting. But please keep us updated on that.

Sure. Thanks a lot, Larry.

And, sir, we have our question from Steven Loss of Raymond James. He may ask your question.

Hi. Good afternoon, Larry. Hey, how are you? Good. Long time. Hope you're doing well, and congratulations on a nice quarter. I was a little late with some overlap on some calls, but glad to make most of the discussion. And I just wanted to follow up on slide eight. You know, you talked about the attractive markets you're in. Are there any other markets that you're starting to see become an opportunity, either due to population migration shifts, demographic changes? Sunbelt and Southeastern are obviously mentioned a lot. But are you seeing any other markets that you think you may move into?

We absolutely are and have increased some allocations in certain markets, but they're not big enough markets that you could ever have an enormous amount. So some of those markets are like Nashville, Birmingham. Once COVID started... We started getting nervous about Las Vegas because if there was any market where you would expect no travel to have a material effect on economics, that would be the market. But what we've seen is significant numbers of home sellers, especially from California, moving to Las Vegas. And we've seen a significant increase in home price demand and home prices in Las Vegas. So we started expanding there a little bit, maybe about seven, eight months ago. But given how fast prices have gone up there, it'll never become a significantly material part. versus where it was in our portfolio, say, in 2009 or 2010 from acquisitions. But Birmingham and Nashville, we definitely also increased our Charlotte and metro areas of Charlotte in terms of the acquisition side. The other markets where we've tried to get more involved but have found it almost impossible are places, small parts like Jackson Hole in Wyoming and some parts of Montana and things like that. But those, one, could never be big markets, and two, it's very hard to find any aggregation-like scalability in those markets. And one of the things that matters is it has to be a market that we think has positive, you know, demographics, positive data pointing to improvement there. But it also has to be, to some extent, scalable. And, you know, there's some markets that aren't scalable. But right now I'd say that aren't on this map probably the ones that we've spent a lot of time with is Charlotte, Birmingham, and Nashville. Okay.

Great. Well, I really appreciate the color on that, and I'm glad to hear you're doing well. Take care, Larry.

Thanks. You too.

And that would be our last question for this call. I'll turn the call over to Mr. Mendelson for a closing remark.

Thank you, everybody, for joining us in our second quarter of 2021 conference call. Feel free to reach out to us if you have additional questions. And Q3 has been busy already, and we look forward to welcoming you back again after the end of Q3 for our next conference call. And with that, everybody, have a good night.

This concludes today's conference call. Thank you all for joining. You may now disconnect.