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spk02: Please stand by. We're about to begin. Good afternoon, ladies and gentlemen, and welcome to the Great Ajax Corporation First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session, if you would like to And I'll turn things over to our host, Mr. Larry Middleton, Chief Executive Officer. Please go ahead, sir.
spk01: Thank you very much. Thank you, everybody, for joining us for Great Ajax First Quarter 2022 Earnings Call. I'd like to just have you take a quick look at page two, the Safe Harbor Disclosures, before we get into the meat of the call. Q1 of 2022 was a good quarter. There is some non-economic noise in the Q1 income statement numbers, which makes it a little confusing, but we'll walk through this on today's call. A significant increase in loan performance and loan cash flow velocity continued and has also continued into the second quarter of 2022 so far. This continuing increase in the present value of loan cash flow and the resulting decrease in unallocated reserve discount in excess of modeled expectations has led to an additional acceleration of interest income on loans during the first quarter of $3.9 million. The significant cash flow velocity from our mortgage loans and our mortgage loan JV structures increases income acceleration through the application of CECL, but it also rapidly pays down our loan and securities portfolio leverage, which can reduce ROE. At March 31, we had approximately $71 million of cash and more than $300 million of unencumbered bonds and loans. The significant cash balance does create an earnings drag, but in today's environment, especially today, today's environment, we expect significant opportunities to invest in loans and related assets, as well as the repurchase of our shares and liabilities. If we move to page three. A quick discussion business overview. Our manager's data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution pathway probabilities, and our manager's ability to source these mortgage loans through longstanding relationships has enabled us to acquire loans that we believe have a material probability of long-term continuing re-performance and prepayment. We've acquired loans in 356 transactions since 2014, including four transactions in the first quarter. We own 19.8% of the equity of our manager at close to a zero basis, and we do not mark to market our ownership interest on our balance sheet or through the income statement. Additionally, our affiliated servicer, Gregory Funding, provides a strategic advantage in non-performing and non-regular paying loan resolution processes and timelines and it's a data feedback loop for our managers analytics. In today's world, having our portfolio teams and analytics group at the manager working closely with the servicer is essential to maximize performance probabilities loan by loan by loan. We've certainly seen the benefit of this during the COVID pandemic and in the first quarter and second quarter so far of 2022. We've seen this with significant ongoing increase in loan cash flow velocity and credit performance, and our 2022A securitization structure is the first of its kind that I will discuss later on this call. Like our 20% equity interest in our manager, we have a 20% economic interest in our servicer at a very low basis as well. We don't mark to market our equity interest in the servicer either on our balance sheet or income statement. Our servicer is currently evaluating a potential private equity round as part of rolling out a few new programs. The data analytics and sourcing relationships of our manager and the effectiveness of our affiliated servicer also enables us to broaden our investment reach through joint ventures with third-party institutional investors and thereby invest in larger transactions as well. The servicer's loan expertise is definitely appreciated by our joint venture partners as several of them now pay our servicer providing third-party due diligence services for other transactions they may be working on, and have hired our servicer to solve problems they may have with other servicers. We still have low leverage. Our March 31 corporate leverage was 2.4 times. Our Q1 2022 average asset-based leverage was 2.2 times. We keep trying to increase asset-based leverage, but the significant capital from our loan portfolio offsets it. So let's talk about the quarter on page four. Net interest income from loans and securities, including 3.9 million interest income from the increase in the present value of cash flow in excess of modeled and unallocated reserves, was approximately 18.6 million in the second quarter. Our gross interest income, excluding that $3.9 million from the increase in cash flow to our reserve models, was similar to Q4 and Q3 of 2021, but net interest income was $400,000 higher, primarily due to calling our 2019 C securitization and accelerating the amortization of remaining deferred issuance costs and paying double interest on the underlying loans for a period of time in Q4. However, our average asset-based debt balance was $10 million higher in Q1 of 2022, even though our cost of interest was $400,000 lower. 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 at the securities waterfall. So interest income from joint ventures 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, gap interest income grows more slowly than if we directly purchased loans outside of joint ventures by the amount of the servicing fees, but the gap servicing fee expense decreases by the corresponding offsetting amount. An important part of discussing interest income is the payment performance on our loan portfolio. At March 31, approximately 73.5% of our loan portfolio made at least 12 of the last 12 payments, as compared to only 13% at the time we purchased the loans. This is strong, even though in June, August, and November 2021, we purchased a significant number of NPLs in loans and in joint venture structures, and NPL purchases have increased relative to RPL purchases. Two years ago, we mentioned that we expected COVID-19-related events would negatively impact the percentage of 12 of 12 borrowers in our portfolio. Thus far, the impact on regular payment performance has been far less than expected. Percentage of our portfolio that is 12 of 12 is very stable. Additionally, we've seen significant prepayment increases from a subset of borrowers that experienced material increases in absolute dollars of equity and were in specific geographic areas. These patterns, along with increases in housing prices and housing demand stability in certain markets that we have concentration in, helps maintain these prepayment and payment patterns and leads to increases in the present value of borrower payments in excess of our modeled expectations and the related income recognition of $3.9 million of unallocated loan purchase discount reserves in the first quarter and similar reserve releases in each of the previous four quarters. Approximately 25% of our full loan payoffs in the first quarter were from loans that were materially delinquent at the time of payoff. 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. Loans that are not regular monthly pay status tend to have materially shorter durations. We have seen and continue to expect the stability of housing prices will drive prepayments from property sales for both regular paying and non-regular paying loans. We do, however, expect that prepayment from rate term refinancing will slow in the second half of the second quarter of 2022. Prepayment shortens duration and increases to the present value of collectability of a portion of the discount reserve in excess of our modeled expectations. Our cost of funds in the first quarter was effectively flat versus the fourth quarter of 2021. Given inflation and Fed rate increase expectations, we expect our cost of funds on adjustable rate repurchase agreements to increase over time. However, we also expect to call several 2019 securitizations and resecuritize at low cost of funds. We have already called our 2019 securitization transaction in fourth quarter of 21 and called and re-securitized our 2018 D and 2018 G joint venture securitizations in April of 2022. Net income attributable to common stockholders was 3.6 million or 15 cents per share after subtracting out 1.95 million of preferred dividends. There are a couple other things to note. Our acceleration of discount allowance related to credit performance and cash flow velocity was $3.9 million in Q1 versus $4.2 million in Q4 of 21 and $3.7 million of Q3 of 21. Cash flow and excessive expectations continue to increase in April so far of Q2 2022. We expensed approximately $3.2 million relating to the GAAP required fair value accrual of the warrant put rights from our Q2 2020 issuance of preferred stock and warrants versus $2.8 million in Q4 of 2021. The biggest difference that is primarily a timing effect rather than an economic effect, comes from the calling of our 2018 D and 18 G unrated joint venture securitizations and the re-securitization of the underlying loans into a 2022 A AAA-rated agency securitization, agency-rated securitization. Since 2018, D&G were joint ventures in which we owned a combined approximately 23%. It was not consolidated on balance sheets as loans, but held legally and under GAAP as securities and beneficial interests. In the April 14, 2022 re-securitization to the new AAA-rated structure, we continue to own the same percentage, but the mark-to-market is lower on April 14 than on December 31, 2021. because of this at march 31 we take an impairment equal to the difference between the securities carrying value and the market values in april versus december 31st of 3.97 million what is unusual is the loans are transferred from our two 2018 joint venture trusts to our new joint venture 2022 a trust with the same partnership and partners owning the same percentages in each we and our partner effectively sold the loans in the form of securities exchange from ourselves to ourselves which triggers a loss under gap it would go through book value whether or not it's a sale under gap because of mark to market change there is no difference in expected cash flow on the underlying assets and we expect this mark to market quote-unquote sale loss amount is fully recaptured over the expected life of the 2022 a trust This also doesn't reduce taxable income, as we and our partner effectively sold the assets from ourselves to ourselves, and it's a refinancing rather than a sale, so there's no tax impact. Without this confusing income statement item, earnings would be $0.33 per share. Book value per share was $15.95 at March 31, versus $15.92 at December 31 of 21. Book value increased primarily as a result of the anti-dilutive effect of our existing convertible notes, offset by a reduction in fair value of our debt securities of approximately $9.8 million. Because we buy loans at a discount, the decline in loan market prices since December 31, 2021, has not resulted in any impairment in the loan portfolio. The decline in the market value of loans does lower the implied NAV by potentially reducing some unrealized built-in gain. We do not mark to market our equity interest in our manager and servicer and have close to a zero basis in them. They are worth more than that. We still believe NAV remains materially higher than our gap of value. Taxable income was 49 cents per share. After preferred dividends of the equivalent of $0.09 per share, it would be $0.40 per share that would be distributable. Taxable income in the first quarter was primarily driven by continuing increases in prepayment, especially for non-performing loans, high cash flow velocity on performing loans, and continuing lower financing costs. We saw many delinquent loans prepay in full and generate tax gains. Taxable income is very instructive of the current cash economics of the portfolio. At March 31, we had approximately $71 million of cash. And for the first quarter, we had average daily cash and cash equivalent balance of approximately $74 million. We had $85 million of cash collections in the first quarter, which is a 7% increase over the average quarterly collections in 2021. At April 30, we had $75 million of cash. As I mentioned earlier in this call, at March 31, we also had more than $300 million face amount of unencumbered securities from our securitizations and joint ventures and unencumbered mortgage loans. The available cash and available asset-backed leverage provides us a good position for loan and other asset-type purchases, share repurchases, and liability repurchases. In January 2022, we invested an additional $6.1 million in Gaia Real Estate Corp. as part of an additional $30 million private equity round, and now have approximately $25.5 million invested in Gaia Real Estate that invests in triple net lease veterinary clinic properties, multifamily properties, and multifamily repositioning mezzanine loans. We own approximately 22.2% of Gaia. Gaia is managed by a subsidiary of our manager, and we own a 19.8% interest in our manager at a near-zero basis. We think Gaia has a great deal of optionality and that Gaia can grow materially. Many of the Gaia-owned triple net lease veterinary clinics have annual rent increases based on uncapped CPI, which is a pretty good way to hedge inflation. Additionally, several of Gaia's mezzanine repositioning loans also have equity participations in the underlying collateral properties. Approximately 73.5% 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 increased from 72% in the fourth quarter of 21, despite buying a significant amount of NPLs in late Q3 and Q4 of 2021. If we flip to page five and we talk about the loan portfolio, purchased RPLs represent approximately 89% of our loan portfolio at March 31. Purchased RPLs represented 96% at June 30, 2021. We primarily purchase RPLs that have made less than seven consecutive payments and NPLs that have certain loan level and underlying property specifications that our analytics suggest lead to positive payment migration and more prepayment on average. On page six, we continue to buy and own lower LTB loans. Our overall RPL purchase price is approximately 45% of the underlying property value and 88.75% of UPB. We have always been focused on loans with lower LTVs, with certain absolute thresholds of dollars of equity and target geographic locations. In the current times of rising rates and the potential for market disruption, this becomes even more important for RPLs and NPLs. On page 7, for NPLs on our balance sheet, our overall purchase price is 90% of UPB and 52% of property value. Purchase price represents approximately 84% of the total owing balance, including any arrears. As a result of the low loan-to-value and higher absolute dollars of equity on average for our NPL portfolio, we've seen that rising home prices have significantly accelerated prepayment and regular payment velocity on our NPLs as borrowers can turn significant equity into cash. Under CECL, this leads to greater interest income from the acceleration of unallocated reserve loan purchase discount due to the increase in present value of collected unanticipated cash flow. On page eight, California continues to represent the largest segment of our loan portfolio. Our California mortgage loans are primarily in Los Angeles, Orange, and San Diego counties. We've seen consistent payment and performance patterns from loans in these markets and consistently strong prepayment patterns. However, over the last nine months, California has gone from being approximately 30% of our portfolio to about 26% of our portfolio. florida prepayments have also increased significantly we purchased an npl portfolio of approximately 85 million in late q3 of 2021 in which all of the loans are secured by properties in miami-dade broward and palm beach palm beach counties in florida in q4 of 2021 and in the first quarter of 22 these loans have far outperformed expectations we continue to see strong demand for homes and home rentals in our target markets If we look at portfolio migration on page nine, at December 31, approximately, at March 31, approximately 73.5% of our loan portfolio made at least 12 of the last 12 payments, including approximately 64.4% of our loan portfolio that made at least 24 of the last 24. This compares to 13% when we bought them. Nonpaying loans, which usually have shorter durations than paying loans, were expected to receive significant timeline extensions as a result of COVID moratoriums. This would typically negatively affect yields on true non-performing loans, as extended resolution timelines can lead to more property tax, insurance, legal, and repair expenses. However, in the past five quarters and continuing into Q2 2022 so far, we've seen the significant increase in prepayment of non-performing loans actually shorten durations. Subsequent events. As I discussed earlier, on April 14, 2022, we called and re-securitized our 2018-D and 2018-G joint ventures into our rated 2022-A joint venture structure with the same third-party institutional joint venture partner. We own 23.28% of the securities and trust certificates from the trusts similar to our ownership in 2018-D and 2018-G. 2022A acquired 811 RPLs and NPLs, UPB of $215.5 million, underlying property value of $518 million. The AAA through single-A rated securities represent 71.9% of UPB, and the underlying bonds carry a weighted average coupon of 3.47%. This is the first rated structure for a group of loans in which approximately 35% of the loans are greater than 60 days delinquent. Based on the joint venture structure of the transaction, we will not consolidate 2022A under US GAAP. We've agreed to purchase approximately 11 million UPB of NPLs and RPLs in seven transactions subject to due diligence. The purchase price for the loans is approximately 99% of UPB approximately 92% of the total owing balance, including arrears, and approximately 44% of the value of the underlying properties. On May 5th, we declared a dividend of $0.26 per share to be paid in cash on May 31 to holders of record on May 16. On page 11, some financial metrics. Average loan yields excluding the accelerated income from unallocated discounts due to the present value of cash flows in excess of our modeled expectations decline marginally by about 0.3%. Income from loan purchase discount that gets accelerated under CECL can reduce yield on loans in the future since a portion of the unallocated loan discount gets captured earlier under CECL. For debt securities and beneficial interests, remember that yield is net of servicing fees and yield on loans is gross of servicing fees. Debt securities and beneficial interests is how our interests and our JVs are presented under GAAP. As our JVs increase as they did in 2020 and 2021 relative to loans, the GAAP reporting shows lower average asset yields by the amount of the servicing fees. Leverage continues to be low, especially for companies in our sector. We ended the first quarter with asset-level debt of 2.2 times. Average asset-level debt for the quarter was also 2.2 times. Our total average debt cost was slightly lower in the first quarter versus Q4 of 21. This is primarily the result of double-paying some interest as a result of a timing gap between the purchase of the loans and the calling of our 2019 C securitization structure in Q4 that we discussed on the Q4 2021 quarterly call. Similar to the 2022 AAA rated structure for NPLs, we're working on two additional similar structures, one for the re-securitizations of two of our 2019 JV structures and one for some of our wholly owned loans. These would likely result in lower cost of funds than the existing related securitization structures. On page 12, our total repurchase agreement related debt at March 31 was approximately $522 million, of which $221 million was non-mark-to-market mortgage loan financing, and $218 million is financing on Class A1 senior bonds in our joint ventures. At March 31, we had $142 million face of unencumbered bonds, as well as $139 million UPB of unencumbered equity certificates, and $40 million UPB of unencumbered mortgage loans. Combined with $75 million of cash at March 31, we have significant resources for being on offense and defense and to expand our stock and liability repurchases in today's volatile environment. And with that, I'm happy to take any questions that anybody might have.
spk02: Thank you very much, Mr. Mendelsohn. Ladies and gentlemen, at this time, any questions or comments, simply press star 1. And if you can find your question has already been answered, you can remove yourself from the queue by pressing star 1 a subsequent time. We'll pause for just one moment. Take our first question this afternoon from Kevin Barker at Tiger Sandler.
spk00: Thank you very much. Good evening, Larry.
spk01: Hi, Kevin. How are you?
spk00: Good. I'm doing well. So, you know, could you – you made some comments about net asset value. I mean, it's come down from last quarter. Could you give an estimate of where your net asset value is today and where it was at the end of the first quarter?
spk01: Sure. At the end of the first quarter versus today or at the end of – or today or end of first quarter versus 12.1. So, versus – Verse 1231, our net asset value is down at March 31 pretty marginally. The first two weeks of April, you've especially today, rates come up a little bit, so it would be a little lower. But if book is just under 16, net asset value probably was around high 19s or 20 at the end of the year. I would expect it's still in the 19s, particularly given the value of both servicer and the – And as you might imagine, you know, you've seen kind of MSR valuations increase dramatically. The servicer has non-terminable contracts except for cause. So kind of the value of the servicer's contracts has increased as well.
spk00: Okay. And so I think you alluded to a private equity investment in the servicer.
spk01: Yeah, the servicer is just starting to have some discussions about a private round of equity at the servicer. It's been working on some automated programs and building them out and offering them. to uh customers we've had some of our joint venture partners uh ask the servicer if they could specifically build things out for their balance for them to be balance sheets as well um so uh we're uh just starting that uh for the servicer uh in its i won't say preliminary stages but maybe a step past that um would that be a type of event that would require a
spk00: recognizing a realized gain or some type of mark on the position that Great Ajax holds in the servicer? And if so, is there any way to quantify that at this point in time, or is it too early to tell?
spk01: Too early to tell. It would be more than our current basis on evaluation, that's for sure. It would probably not trigger Great Ajax booking a gain or a mark because it wouldn't be a public security, but it would be something that we would have to put in fair value discussion in our 10Qs.
spk00: Okay. And then can you just remind us what the cost basis of the stake in the servicer is today?
spk01: We own 8% plus have three sets of warrants at different valuations for another 12% at a total cost basis of $2.8 million.
spk00: Okay. So 20% on a cost basis, 20% at $2.8 million. Okay. All right. Thank you for taking my questions.
spk02: Sure. Thank you. We'll go next now to Eric Hagan with BTIG.
spk03: Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. Eric Hagan with BTIG. If you can comment on the kind of status of your liquidity position and how you feel about that, that'd be good. Thanks.
spk01: Sure. For the servicer, the servicer had a small amount of income. However, because of mark-to-market of the stock it owns in Great Ajax, that would have a negative effect in a pass-through. from a liquidity perspective at Great Ajax with about $75 million of cash on hand and a lot of unencumbered bonds. The volatility in the world means we'll probably keep more than we would have, say, nine months ago. Being said, we have a lot of flexibility on unencumbered assets that we could always add more financing if there was a demand for additional liquidity or there was an opportunity set that was irresistible that we wanted to go by. We do think that... there's going to be some, the volatility will eventually create some interesting opportunities that we'll be able to take advantage of. We were not aggressive loan buyers in the first quarter. We thought that where securitization executions were getting done versus where loans, to the extent they actually did get transacted in, were transacting, it didn't make enough economic sense in a volatile environment for that limited spread. We think there's going to be better opportunities ahead for that.
spk03: That's interesting, Collin. I appreciate that. And then with home price appreciation and affordability being kind of the focal points in many ways for our market right now, do you feel like we'll see things like subordinate liens and other types of financing increase and is that an opportunity for you guys to feel?
spk01: The answer is yes. I would expect that closed end and HELOC seconds will become a bigger thing as where if rates were low, you would have seen more trade-up owners of houses selling their house, buying a more expensive house, and getting an inexpensive loan, but with higher rates. We would expect those same buyers to use HELOCs and do renovations and things like that. We also think that similarly in consumer and home improvement loans, and also potentially on the credit card side. We do, however, think that it's going to be very much subject to specific markets, as opposed to everywhere like an index, because we think the stability in home prices will definitely be different market by market based on a number of different factors, some of which are economic factors, some of which are previous HPA in those markets, some of which are absolute dollars of equity that people have in those markets versus other markets, and some of it is the percentage of homeowners that refinance into very low-rate loans that effectively removes the mobility of their living or their moving for a while and keeps that house off the market for a considerable period of time. And that's different market by market.
spk03: Thanks for the call. Appreciate it. Sure.
spk02: Thank you. And just a reminder, ladies and gentlemen, star one, please, for any further questions. And Mr. Mendelson, it appears we have no further questions today. I'll turn the conference back to you for any closing comments.
spk01: Thank you very much, everyone, for joining us on our first quarter 2022 earnings call for Great Ajax Corp. Feel free to reach out if you have additional questions. We always like talking about our company and our business. And thanks again for joining us.
spk02: Thank you, Mr. Mendelson. Ladies and gentlemen, again, I will conclude first quarter 2022 financial results call. Thank you all so much for joining us. I wish you all a great remainder of your day.
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