Q4 2019 Earnings Call
Dead dead dead dead row down to us good day and welcome to the fourth quarter 2019. Yep.
and finance
Show results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after Thursday's presentation. There will be an opportunity to ask questions to ask a question. You may press * then one on your telephone keypad to withdraw your question, please press * then two, please note. This page is being recorded. I would now like to turn the conference over to Lawrence Mendelson CEO, please go ahead.
Thank you very much. And thank you everybody for joining us for the ingredient Jack's fourth quarter 2019 conference call also happy super Tuesday to everybody on page. Just want to point out before we get started the Safe Harbor disclosure about some of the statements, uh, it will be talking about.
As an introduction to for 2019 was a very good net asset value building cord. We bought loans from multiple sources primarily closing in late December and I ended our joint venture structures pretty significantly. We continue to improve the rates in terms of our asset-based financing and close including closing. Our third rated long-term securitized bonds and the first aaa-rated structure for loans with all non clean pay histories, the market value of our assets continues to increase and we will discuss further when we look at life Apartments migration on this call and talk about current market conditions intrinsic nav grew significantly in the fourth quarter and it continues to grow even more. So in the first quarter of 2020 and we'll just we'll jump to page three and we'll do a brief overview and then get into the highlights of the quarter and year-end.
We can.
Can you to buy and privately negotiated transactions? We've made $297 transactions over our lifetime here at Great Ajax. Um, we close 9:00 transactions in June 2019. Our sourcing network is very important to our ability to acquire the types of loans. We want our sellers are more Banks than ever before Originators and funds may have seen an increase in selling from the larger Banks as cecl Cecil has approached and is now in force and we expect later this year that will be the case with the smaller Banks as well. We use our managers analytics or very important. We analyze a large amount of data to determine Target loan characteristics and to develop a pattern recognition algorithms for choosing loans pricing loans and driving the servicing of those loans through our service or Gregory funding our JV Partners really rely on our managers analytics and yep.
website that enables us to
Provide we own 19.8% of the equity of our manager at a zero-cost basis and as a result, it's valued as we mentioned before it does not show up in our book value similarly with the service off the analytics of our manager really helps Drive service or performance and it's created significant nav increases that we'll talk about later today to our loan portfolio and it also causes of institutional investors to approach us as JV Partners. We also own 20% of the economics of our service sir. We use moderate non Mod market leverage for the most part average leverage over the quarter including corporate level level leverage for Q4 2019 was 2.9 times and asset-based leverage was 2.6 times leverage increase in December as we did some securitizations and to the closing of the two joint ventures that being said Leverage is still pretty low and that alone brings a significant number.
opportunity in the account
environment for us
For the court, if you look at the first bullet point, we acquired 309 million of loans in joint ventures all of those clothes in December. So Thursday, we didn't receive significant income from them, but they're all quite important on the net interest income side that interesting come in Q4 2019 decreased by approximately $800,000 versus Q3. Nineteen. This was primarily driven by a 600,000 decrease in Gross interest income which is partially offset by 400,000 decrease in interest expense. Most of em, fourth quarter purchase is closed in December if we had purchased these assets early in the quarter net interest income actually would have increased for the quarter. We had a lower average balance of investments in mortgage loans than in Q3 off, but we had a higher average balance of our joint venture Investments.
Because we had a higher average balance of a joint venture Investments. It's important that Gap item to keep in mind that interest income from our share of joint ventures shows up in income from Securities and not loans and for these joint venture interests servicing fees for Securities are paid out of the waterfall. So our interest income from joint ventures is actually needs servicing fees unlike interesting come from loans, which is gross of servicing fees as a result since our joint venture Investments are growing faster than our direct loan Investments Gap interest income, which is slower than if we directly purchase loans by the amount of the servicing fees on the joint venture interests 4 to 4. We had also had an average cash balance of $6 million during the quarter which was a considerable drag and for a portion of Q4, we had significantly more cash than this as well.
the most
Important part of discussing interest income is the payment re performance of our loan portfolio. However, as of December Thirty One two thousand and nineteen more than 76% of our loan portfolio by unpaid principal balance be made at least 12 of the last 12 payments as compared to only 13% at the time. We purchased these loans this significant payment status Improvement leads to 3 a.m. And financial issues. I want to discuss first loans that default have much shorter duration than loans that clean pay and as a result of extending duration percentage decrease and therefore the current interest income decreases second and more important 12-month paying loans have a market value above par especially loans with our lower waited on a TV and weighted average coupon of 4.55% are amortized cost basis is approximately 89% of upb will go through the numbers more specifically in the nav effects.
More detail on page nine though.
Third paying loans overtime generates significantly more cash flow than defaulted loans.
And ultimately too much lower cost of funds for financing them as well as we call securitizations and re-issue and rated structures are cost of funds financing. These loans will continue decreasing significantly.
Additionally 12 or 12:00 loans are much more likely to prepay and although prepayment was slower in Q4 2019 leading to duration extension based on current market conditions in a new Fannie Mae far rates. We would expect prepayments for these loans to increase significantly in the second quarter of 2020.
On the cost of funds side our overall cost of funds decreased by approximately 18 basis points during the fourth quarter of 2019 primarily due to issuance of R-rated securitization a mortgage loan trust 2019. F as well as well as from lower interest rates on a repurchase credit on both loans and retained joint venture interests as Libor has decreased material cost of our repurchase lines of credit had decreased commensurately as well in Q4 2019. We put in place an additional repurchase line of credit for a joint venture security says approximately 65 basis points lower cost. We expect our interest costs relating to financing joint ventures to decline as we continue to rotate Securities to that facility given recent declines and treasury yields and a significant decline in in a swap levels. We anticipate our cost of funds will continue to decline materially at the acid base and corporate level.
That income attributed, and stockholders of six point seven million net income was about 31.3 cents per share. There are a few distorting factors in this number which costs about twenty seven to eight cents per share. So normalized would be about 38 or 39 cents in the quarter. We took an impairment of $600,000 on a Florida waterfront residential life that is in a 2015 non-performing loan acquisition pool. The loan became performing a 2017 and then purposely stopped in late 2019 since it's just one of the few remaining loans in an early 2015 non-performing loan pool. There are no loans to offset the impairment in that small pool. Strangely. However under the new rules Cecil which took effect in q1 twenty-twenty. We would not need to book this impairment as it's immaterial to our larger loan portfolio grouping and lost reserves. However in Q4 2019 CC, yep.
not in the sect and we are required to
the impairment of approximately $0.03 per share
We also accelerated 247,000 preferred issuance costs from calling our 2017s securitization Andre securitizing the underlying collateral. This would have been advertised offer 12 months instead of taking the full charge of 1.3 cents per share in Q4 2019. However, the securitization overtime will material reduce funding costs for the related, We took an hour on Paramount of approximately $400,000. Approximately two cents per share. REO impairments come before REO gains as we don't get the write-up REO. We only need to write it down. Also the best Oreo the collateralize has non-performing loans rarely becomes REO these loans usually re perform or the property sells to a third party at the Foreclosure sale, which is then considered a loan payoff rather than l
In November of 2019 we completed a private Capital raised for our former wholly-owned subsidiary Gaya real estate Corp guy raised 66.3 million of new common Equity great Ajax continues to have a 23.2% ownership in gaea. But as a result for a little more than a third of the quarter, we only receive 23.2% of guys come rather than historically receiving a hundred percent of guys income guy. You may remember invest primarily in urban multi-family and mixed-use properties triple net lease properties and property repositioning mezzanine loans of subsidiary of our manager. One thing to keep in mind is subsidiary of our manager manages Gaya since we own 20% of our manager. We indirectly owned sixty percent of guys manager as well.
Spelling come with 14 cents a share. That was really the decrease in taxable income really driven by two things. Um first we sold twenty-five. REO properties was only nine newly-created re-emerge or selling res generally causes tax losses and creating REO Foreclosure generates generally creates taxable income second as more Loans pay and fewer break-ins default taxable income gets extended to contractual maturity of the paying Loan in equal installments rather than early on through foreclosure or short sale. There is a true up one in performing prepays Loan prepayments in the fourth quarter of 2019 were lower than the third quarter of 2019 prepayment similar to foreclosures capture cost discount more quickly for tax purposes prepayments in the second half of Q 12020 have increased and based on current mortgage rates. We would expect repayment to increase materially in Q2 2018.
If we look at page five our portfolio, we continue to be primarily RPL driven. However in Q4 of nineteen our Acquisitions I Direct Loans of our bills and Imperials was about fifty fifty.
REO rental, you can see on the right hand side has decreased significantly in Q4 versus Q3. Mostly As a result of D. Consolidating Gaya real estate Corp as part of the 66 million Equity Capital raised of Gaia and also from selling REO REO held-for-sale which typically results from foreclosures continues to decline as we sold twenty-five and only created nine new wage.
On page six, you can see that we continue to buy lower LTV loans with our overall RPL purchase price of approximately 62% of the property value and eighty 7.5% of you. Keep in mind. Just we talked about we buy our we buy our PLS based on the number of analytical criteria that we help use our service or use as well to drive the re performance later on and to increase the value of those loans over time through re performance.
On the npl. So I purchased npls have been declining in absolute dollars invested. This is one of the reasons for having to take the loan impairment. We did for pre-owned to 120 Cecil accounting. We pull loans by RPL and npl and by the quarter in which they were acquired. The loan. We recorded an impairment on was at first quarter 2015 npl1 a few remaining so there was no pool offset under Cecil pulling is done through a far larger Aggregate and can be offset by pool loan loss reserves as well.
If you look at our non-performing loans that remain on balance sheet or purchase, the purchase price of property value is still 56% in the purchase price. That uvp is approximately 74% off.
Our portfolio continues to have California representing the largest segment both in residential and small balance commercial loans are California assets are primarily in Los Angeles orange and San Diego counties where those our locations we're seeing consistent payment and performance patterns particularly in the urban centers. We've also seen consistent prepayment patterns, especially for service or characteristic subsets. We've not seen any impact on our portfolio from the recent wildfires of Q4, um, uh in a portfolio
we are seeing
However, that the new tax law the salt Provisions is having material facts on higher-end property values with four states really singled out New York, Connecticut, New Jersey in Illinois. We're definitely seeing a decrease in value differences between higher end and middle property deciles. The other thing we're seeing is less flight capital in the Florida Market both from trade conflicts and emerging-market currency declines. This is affecting higher-end homes and condominiums in Florida and especially South East, Florida.
Page nine my favorite page. If you look at our loans that are 12 12 or 24 24 payments 1.02 billion GB of our loan portfolio. Thursday is 12 for 12 payments or better compared to only 13% or 170 million of these loans at the time of our purchase our cost basis on these loans is approximately 89% of upb market value based on recent transactions is over par for 12 of 12 or better with approximately ADL TV and a 4:45 coupon since we don't Mark to Market our loan portfolio except when it's bad for impairments. None of this built-in value shows up on our balance sheet.
Number two in addition to increasing cash flow in the nav material materially the significant loan performance Improvement. Also lowers our asset-based financing costs go through securitization and Loan not purchase facilities. It allows us to get high Advanced rates for our senior classes of securitized bonds relative to our cost basis.
Return to page 10 on subsequent events a couple of points that I want to talk about. Number one. It's going to be a very busy second half of March we continue to buy lower LTV loans as purchase price is to Collateral values continue to be in the low sixties or fifties for what we're doing. We have three hundred thirty-seven million of our PLS under contract with expectation of closing in late March and we bought a hundred and five million also expectation of posing late March. We have three million of small balance commercial loans also closing our board declared a 32% dividend record date March 17th payable, March 27th, given the pay performance in the intrinsic value and expected prepayment coming on performing loans. Our board is very comfortable with maintaining the dividend base wage expectations for taxable income. The other thing is on February 28th. Our board of directors approved to stock buyback is up to twenty-five million of our common shares obviously depending upon market conditions.
And availability of those common shares as well.
If we jump to the the financial metrics page was a couple of things. I want to point out. If you look at average loan yield net of impairments from Q3 92 Q4 nineteen and went from 8.7 to 8.5 part of that is driven by the 600,000 loan impairment. We previously discussed and the other part is driven primarily by extension of duration do to in an odd way too many loans performer. If you look at average debt Securities and beneficial interests that stayed approximately the same it's also net of 65 basis points servicing fee. So if you wanted to compare it with interest rates on loans, you'd have to add in the sixties dips average servicing fee versus the the loan yields because debt Securities been official interests are the way we present under gaap. The servicing fee is net.
If you look at our asset level debt cost in the middle of that page, it's gone from 4.5% to 4.2% This will decrease even further we continue to expect the ASL alphabet caustic decrease both through securitization and the repurchase facilities on our joint venture Securities as well as we purchased facilities unload those costs are coming down. Uh, some of it directly related to Libor but declines but swap spreads now declined almost a hundred basis points middle Q4.
From Leverage itself. If we go closer to the bottom of the page, we've significantly delivered over the last twelve months, uh with so many loans 12 of 12 or better. However, we're very comfortable with more asset-based leverage expect to increase this through securitization, especially now given financing rates have come down so materially in the last few weeks.
and with that I'm happy to take any questions anybody might have
we will now begin the question-and-answer session to ask a question. You may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys off all your question, please press star then to our first question will come from Tim Hayes with Riley FBR. Hey, good afternoon, Larry. How you doing? My name is Tim. How are you doing? Well, thank you. My first question. I just wanted to touch on the trajectory of taxable income. You know, you you highlighted that you expect repayment pick up giving the move in rates and then you know, the REO held-for-sale portfolio continues to work its way down and the npl portfolio is pretty small So eventually you won't see as much net sales activity. I guess they're can you just maybe tie all that into the potential impact from today's fed cut and the Mac that that might have on credit and cash flow off.
In taxable income and and when you really see taxable income starting to take off, especially as you do more.
TV's versus on balance sheet Investments. Yep, the the taxable income is not that different from JVS versus actually only the loans directly because we still own the equity certificates in the joint ventures pro-rata with our TV Partners. So we get are proportionate share the big place where taxable income occurs is two things two cases one is just regular interest payments versus uh, the cost of being in business and interest expense and two is capturing discount from our purchase price. If you look at our tax basis purchase price is actually low wage Gap basis is 89, but our tax base is actually material material materially lower than $89 of upb. So as a result any acceleration of capture that discounts generate significantly significant taxable income. Our tax Gap difference is about 3 and 1/2 or four points. So on a billion to Thursday,
This is call it it's about $56 billion of tax Gap difference right now. And that's largely because performing loans you take tax in equal installments contractual maturity. So on a 360 month loan, you take effectively 160th of it each each month. We're for Gap purposes. You take it based on expected life of the loan you suck income. So it creates a tax Gap difference for some uh, now given we're current interest rates. Are you we would expect given that depending May prorate today is 2.56. We would expect a material amount of loan prepayment occurring starting about 60 days from now because of the time lag a moment origination and are weighted average coupon are performing loans is about 4.45% The second thing I want to mention is that in 2019 forward because we are dead.
Hang up this large tax Gap.
Prince we uh-huh working with Deloitte, uh came up with the tax methodology where we can from 2019 forward for loans acquired 2019 forward, uh closer match the tax and the gap on performing loans by creating the discount for tax purposes. It's not exactly identical for Gap, but it's closer and that will narrow Gap also as well as prepayment narrowing the Gap, you know, ultimately, you know tax and went alone pays off tax and GAP over the life of ownership are identical wage tax Gap different obviously closes at the time of payoff. Let me know or if we were to sell a loan as well which given that a percentage of a high percent of our portfolio is worth material are in this environment and probably since mid two for uh, that's certainly something now reads do have restrictions on limitations of what they can sell. So it's not like you could just capture
All at once but you'd capture some of it by selling some assets and some of it by Ugg making the interest rate spread materially bigger by refinancing existing facilities.
Okay, so I guess by the way by the way less interest expense increases taxable income. Correct, correct? Yeah, I think it's the one point wage. Um of the of the question that maybe you could shed a little bit more light on it just the impact you expect the the FED cut to have on on cashflows Thursday. So so so so there's two two things that we can see from the FED cut and and uh, we started getting based on some factors that we look at in our life lyrics and from some of our long-time investors own businesses in the insides. They provide uh, we started to see this kind of coming in a mid to late fourth-quarter, which is one of the reasons why we built up cash in the fourth quarter cuz we wanted to have plenty of liquidity for the first-quarter and second-quarter the dead
If you look at the feds cut.
Got two things one. You're clearly going to see based on the shape of the yield curve and we're swap rates are and where new origination of mortgages are. I mean you can you know, I got four emails today. They offering me 10 one arms at 2.7% I oh so as a result you're going to see significant amount of money prepayment gets generated on a lag to today's markets and even more strangely, you know loans that were done several years ago called three or four years ago when Thursday mortgage rates for three and a half percent fixed and everybody was presumed to be completely immobile and could never refinance those loans. Now, they can refinance those loans in the current market because the Phantom APR rate is now 2:56 a.m. Versus the 350 that they're in so we expect that. We'll see significant prepayment as a result of where the curve is and if you look at the the euro-dollar curve and forward 3 month Libor rates you would expect
that more
Absent a material change in credit spreads on mortgages, you'll see rates even lower maybe in June than they are now, which would even accelerate prepayment into the summer to however is the part that the the leveraged-loan high-yield market is showing that the mortgage Market isn't showing which is credit spreads of actually widened significantly and high-yield bonds and leveraged-loan actually sold off a little bit even though rates it rallied and the number of Leverage loan transactions have been pulled and that is what does the Fed rate cut actually mean and about economic slowdown. And what's the is the multiplier effect to read the faults in RPL and from that based on the purchase prices that we have of our our our PLS and PLS basically in the low 60s on property value life more defaults would actually increase our yield
in the near term and increase taxable income in the near-term, but on the flip side it would decrease nav on the
Related loan so that it would provide you it would raise yield but for a shorter period of time effectively and you'd be less allows you to suck the loan vs. Uh have the loan effectively prepaid through default. You know, our plz do have versus kind of a newly originated Fannie mortgage or Freddie mortgage. Let's do have a higher kind of read default multiplier effect relative to small- changes in GDP. Then do a Fannie Mae loan. You know our payday loans were all at some point in the last ten or eleven years not performing for a period of time and they're a little more subject to a multiplier effect than a newly originated Fannie Mae loan, but on the flipside that would actually increase our yield Thursday. It would negatively affect the total intrinsic value of the line.
Got it. That's that's helpful a lot of detail there. And so just in you know, putting that all together, how do you think about your dividend here given the trajectory of of taxable income that you've kind of laid out despite, you know, the gaap earnings not covering the dividend this quarter. Well, well, the the reality is is over. We're not going to have a choice of dividends going to go up because we have a fifty to sixty million dollar Gap tax difference and the intrinsic value would suggest that that gets matched up over time whether that's driven by prepayment sales combination of both or read The Faults that um, I would predict all three months but what the relative amounts versus right now that is a little harder to determine and takes a little more kind of uh of this cycle to figure out but I don't suck.
I think our boards for
Be comfortable with this being kind of being the floor on the dividend as opposed to being the ceiling on the dividend got it. That's helpful. Thanks, and then I'll ask one more and how back in the queue but um, can you touch on the recent Market volatility, you know, you mentioned that the pipelines being bolstered by Cecil going into effect. But are you seeing any impact on your pipeline off the recent volatility? Are you seeing more cautious or for selling in are you able to get assets and more attractive yields? Sure. We're we're seeing a couple different things some through them by Cecil the same because the smaller Banks is not as big a deal yet because it's not as enforceable as it is for the larger Banks, but the will see it from the smaller Banks later this year from the bigger Banks. The bigger banks have been large salaries for about a year now and they continue to be large Sellers and Cecil is one of the two reasons the other is in the very flat curve environment the larger Banks use selling some of these loans we're Thursday.
Capture reserves and capital ratios and they can manage earnings, you know, if you sell a big enough pool big enough number of loans, you can manage earnings by a half percent of a cent for the larger banks in any quarter. So we're home.
Really seeing that also in what the larger banks are selling and they're selling specific kinds of pools. Um coming from that phone number to we're seeing a couple of different reactions from the marketplace on the loan buying side. We see some buyers especially off very very very large funds who raised a lot of money as almost Panic buyers and the price is merely just an Arbitrage to where they think they can get a rating agency enhancement levels as opposed to what's the value of the loans and as a result. They're just playing spread game as opposed to a value game on the other side. We've seen a lot less total buyers as most people don't have the cost of funds that someone like we have or the analog
Or the relationships for that matter of being able to negotiate loans in smaller pools and in subsets and direct transactions with with institutional sellers, whether they Banks and funds so we're seeing a little bit of both. We're seeing kind of panic selling or Panic buying from people who are afraid they're going to miss out and not seeing uh-huh which by the way, if you're long loans you'd like that like we are at Big discounts, but on the flipside we're seeing those buyers very focused on pools a hundred million and larger and we see almost no one paying attention to pools that are kind of called forty million Thirty million in smaller anymore. It's it's the over the last three or four years the smaller buyer really gone away.
Got it.
Okay, great. Well, thanks again for taking my questions. Sure. Sure.
Our next question Steven laws with Raymond James.
Hi, good afternoon, Larry. Hi Steve. How are you? Good yourself? Good good, I guess two things going on one page you mentioned better performing loans. So those would that would warrant, you know increasing the leverage behind that but I believe the JV investment to retain the Securities and that's not Consolidated on your balance sheet so much lower levels associated with that. So, how do we think about those things trending or we are we in a good spot currently and we're just going to see a little bit of a shift in in mix here are kind of how do we how do we think about Capital allocation across those two strategies going forward? Sure sure. I think the JV will increase faster than Direct Loans will
and part of that is
And for JB's part of that is by owning 20% of the manager and servicer. We pick up additional Revenue in other ways from our equity invests in those entities in the JV structures. Um, the other piece though is both in javies and Loans from RJ, these are structured and securitization structures and wage take those Securities and we can't bundle them in securitize them or we can bundle and we or we can individually Finance each security and the cost of that financing has come down dramatically as both libraries come down. And as we created you Security's financing facilities the and in rated securitization land with swap rates where they are kind of package sent a new Triple A Bond deal will be right around $2 and change per cent, which is 70 or 80 basis points lower than it was three or four months.
so
We can continue to get you know with our cost basis about 89% of upb if we wanted to sell through single a we could probably get six or seven times leverage kind of in today's market sub two and a half percent and on a repurchase facility basis with Libor now down 3 month Libor down to 1:15 or 1 I think about 120 120 you're going to see financing facility cost come down dramatically as well since live with gone from effectively down forty or fifty basis points in the last three months off so that over time uh and lenders for better for worse are getting more aggressive. You know, if you're if you're a big bank right now, it's very hard to earn spread and there's been a lot of pressure put on to expand the repo facilities and both both by lowering costs and increasing Advance rate too early more spread at the banks and we're seeing that phenomena as well. Now that being said, you know dead.
The mortgage industry goes in cycles that it never learns from so we're we always like that opportunity set that it creates.
Sure, I appreciate the colors are Larry males and and you know, second question have this afternoon the stock buyback you announce our authorized off. How do you think about the current valuation versus what you view as intrinsic nav that reflects the value for the service or the manager ownership and and other things aren't reflected in a a gap Book value number that you know, you know, how do you view the the discount interested in a V versus the opportunity for Returns on new Investments using that Capital sure sure. There's a couple of different pieces actually used ratm a little bit in Q4 when the stock was around fifteen fifteen sixty and not not out of necessity. We just could sense from sneaking some are the commodity pieces. We follow some of the shipping pieces. We follow and some of our long-time investors who have industries that uh are across multiple continents.
You could see that there was going to be something going on in.
The first quarter we didn't know it was going to be caused by a virus, but you could see that uh, some of the things we follow were indicating that you want to have liquidity in the first quarter. So we use the ATM a little bit to create some liquidity you get ready for the first quarter as you can see from what we're buying at the end of March, you know, a lot of people needed some liquidity in the first quarter the page now with the stock Down based on what's going on in the market. We think that it makes sense to buy some stock in June and we're also likely to buy some of our convert and given the cost of capital to the company is so much lower than where the convert currently trades. So, um, uh, we're also likely to buy some of the converging in in the open market as well.
Great. Thanks for the comments to take care. Sure.
This concludes our question-and-answer session. I would like to turn the conference back over to Lawrence Mendelson for any closing remarks.
Thank you everybody for joining us on the great Ajax fourth quarter 2019 and year-end 2019 conference call. We appreciate the time given super Tuesday if Fed rate cuts off Iris and all the other things going on in the world at this time. And if you have additional questions, feel free to reach out to all of us here. We always like talking about our business hours. Thanks and have a good night. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.