Q1 2020 Earnings Call
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After the speakers presentation, there will be a question answer session.
Ask the question during the session, we'll need to press star one on your telephone.
Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Laurans Mendelson you. Thank you. Please go ahead.
Thank you very much. Thank you everybody for joining us on our first quarter 2020, <unk> earnings Conference call.
I want to point you to on page two the safe Harbor disclosure and discussion of forward looking statements.
And with that we can move on.
On page three and that business overview before.
Get into too much to do those nationwide brief introduction first quarter 2020 was a noisy one predominantly because of fixed income market condition and the economic environment in the month of March January and February were good net asset value building months in March we navigated through the volatility closed on.
Venture loan investments that were purchased through a prefunded securitization structure and set ourselves up for Q2 and beyond will discuss more about this later on the call. One thing I do want to add though is volatile environments. Like this we have that we've seen in the last few months really show how important it is and how strategic it is having our own directly.
Wind operating and loan servicing platform.
With that I'll jump into the page three.
Our manager strength and analyzing long characteristics in market metrics for re performance probabilities and the pathways and its ability to source. These mortgage loans in target locations through privately negotiated transactions really enables us to accumulate loans that we want in places that we want them we.
Acquired loans and over 300 transactions since 2014.
Additionally, we believe having an affiliated servicer provides a strategic advantage and nonperforming in non regular paying loan resolution processes and the timelines and today's volatile environment, having our portfolio teams and analytics group at the manager worked closely with the servicer is essential to aim to maximize return.
And and Navy for each asset loan by loan property by property.
The analytics and sourcing of the manager and the effectiveness or other are affiliated servicer enables us to broaden our reach through joint ventures with third party institutional investors as well [noise].
Okay, let's talk about the quarter.
In Q1, 2020, net interest income increased by approximately $900000 or approximately four cents a share.
This was almost entirely driven by a decrease in our cost of funds of approximately 21 basis points.
Most of our alone and joint venture acquisitions closed in March and were on balance sheet for approximately two weeks as a result, they did not produce material interest income in Q1 2020 for the quarter, we had a lower average balance of investments in mortgage loans, but a higher average balance of investments in joint ventures that our on balance sheet as securities and.
Beneficial interest.
A GAAP 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 interest servicing fees for securities are paid out of these securities waterfall. So our interest income from joint venture Securities is net of servicing fees.
Unlike interest income from our loans, which is gross of servicing fees.
As a result, as our joint venture interest have been growing faster than our direct loan investments GAAP interest income will grow slower than if we directly purchased the loans by the amount of the servicing fees and GAAP servicing fee expense will decrease by the corresponding offsetting amount.
An important part of discussing interest income is the payment re performance of our loan portfolio at December 31, 2019, approximately 76% of our loan portfolio by you PB made at least 12 of the last 12 payments as compared to only 13% at the time, we purchased the loans.
At March 31, 2020, approximately 74% of our loan portfolio by you PB made at least 12 of the last 12 payments.
We would expect the current cobot 19 related economic environment will negatively impact the percentage of 12 12 borrowers in our portfolio over the next few months the effect on interest income is difficult to quantify forecast. However.
While regular paying loans produce higher total cash flows over the life of the loans on average.
They extend duration and because we purchased loans the discounts this reduces percentage yield on the loan portfolio.
And interest income.
However, regular paying loans generally increase our navy enable financing at a lower cost of funds and provide regular cash flow.
Loans that are not regular monthly pay status tend to have a shorter duration.
However, we would expect that this duration reduction will be less than typical due to market conditions and the impact of cobot 19.
As I mentioned earlier most of our loans were purchased purchased as non regular paying loans and the borrowers our servicer and portfolio team have worked together over time to reestablish these loans as regular pain. We would expect is cobot 19 volatility reduces and the economic environment improves will again see that result overtime.
We also expect that given the low mortgage rate environment and the stability of housing prices. So far that prepayments will likely increase on both regular paying and on the regular paying loans overtime.
However, it's too early to predict the timing of these anticipated patterns.
We do anticipate however that given spread widening in financing markets that will likely not to continue to see material cost of funds reductions in the near term.
From a net income perspective.
Net income was <unk> point 4 million or two cents per share. There is a lot of noise. In this number so I will go through each material piece.
The biggest impact came from a 5.1 million or 23 cents per share provision for duration extension and potential credit losses. This allowance for losses on our loan portfolio and beneficial interest securities is driven by potential impacts from cobot 19, such as the expectation of borrower payment deferrals and.
Time and expenses, resulting from duration extension of resolution timelines. This reserve reflects the macroeconomic impactive Kobin 19 on mortgage loan in residential real estate markets generally and it's not specific to any loan losses or impairments in our portfolio. This is a non cash reserve and less later realized.
In the quarter, we took an impairment on current Oreo properties of approximately 900000 or about four cents per share.
This impairment is significantly larger than usual by approximately two cents per share. The bulk of this impairment is related to expected time delays in the marketing and sale of Oreo properties as a result of coated 19.
Such delays lead to more property tax insurance and repair expenses as well as delays in repairs and addictions due to restrictions. This is also noncash.
We accelerated the amortization of approximately $400000 or two cents per share of deferred issuance costs from the repurchase of approximately 12 million a face amount of our convertible bonds during the quarter. This is noncash.
We sold 26 small balance commercial mortgages with you PB of $26.1 million during the quarter for loss of $700000 or three cents per share the losses equivalent to approximately 2.7% of the Upi of the loans.
We recorded a 1.27 million or approximately six cents per share flowed through loss from the 331 2020, mark to market of our managers ownership of great Ajax common shares our manager owns approximately 650000 shares of our common stock and we own now.
18.8% of our manager so when the stock goes down in Q1 from December 31 to March 31, we take a pro rata share of the manager 650000 share markdowns. This is also noncash.
To sum of all these items is approximately 36 cents per share.
Taxable income was five cents per share the two leading drivers of lower taxable income were fewer foreclosures in Q1 2020.
And more Oreo sales as well as particularly slower prepayments in January and February.
Prepayments picked up in March, but we would expect them to slow down for a period of time as result of the impact of co with 19.
However, as I mentioned previously on this call. The current low mortgage rates, we would expect prepayments to increase at some point, we just can't predict the timing of any increase we expect the trend of fuel foreclosures. However to continue for a period as a result of cobot 90.
Book value per share declined from 15 80 at December 31 to 14 37 per share at March 31, 2020. This decline almost entirely reflects the effects of 28.4 million noncash mark to market adjustments to our debt securities.
Generally determined by marks provided by our financing Counterparties. This is a noncash adjustment as well. Additionally, subsequent to March 31. Most of these securities have increased in mark to market value.
At March 31, 2020, we had 31.2 million of cash and for Q1 2020, we had an average daily cash balance of 58.6 million.
At quarter end decline in cash related to approximately $28 million of margin calls related to our mark to market financing facilities for our debt securities.
Subsequent to March 31, 2020. Some of these margin calls have been reversed these debt securities primarily relate to our joint venture investments.
Total margin calls from loan financing however, during the quarter.
We are less than $200000 total.
At March 31, 2020, our total mark to market financing was approximately 285 million of which approximately 225 million was against class eight one debt securities. All securities are beneficial interest that we own our backed by loans, we purchased ourselves with joint venture partner.
Yes, and we retain the asset related rights. We also have approximately 50 million face amount of unencumbered triple B double b and single B.
Agency rated securities from our own Securitizations.
Our March 31, 2020, corporate leverage ratio increased a bit from 3.0 times at December 31, 2019 total dollars of outstanding debt has actually decreased during Q1 2020, despite our portfolio growth, but because book value declined as I discussed earlier debt as a percentage of book value.
<unk> increased average leverage during the quarter was three times average asset base leverage is 2.7 times currently we have approximately $115 million of cash on hand.
If we jumped to page five you can see that we continued to be primarily RPL driven with rpls, representing approximately 97% of our loans.
And importantly about Rpls on page six we continue to buy.
Lower loan to value loans overall, RPL purchase price of approximately 56% of the underlying property value and 87% of the unpaid principal balance.
And we look at our NPL portfolio on page seven.
Purchase npls have been declining in absolute dollars invested.
But for Npls on balance sheet, there at 73% of you PB and 51% property value.
We have a lot of built in.
Equity in our portfolio.
And our target markets on page eight, California continues to represent the largest segments of our loan portfolio, our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties.
We have seen consistent payment in performance patterns from loans in these markets. We've also seen consistent prepayment patterns, even in recent months, thus far the impact on our California loans from corporate 19, and its related economic effects has been relatively muted.
We removed Las Vegas as a target market during Q1 mortgages in Las Vegas are currently a small percentage of our portfolio and like five years ago, when we aggressively purchased loans in Las Vegas.
Lets Vegas was positively affected by the new federal tax law, and we saw significant appreciation and prepayment as a result.
Our analytic suggested cobot 19 will have a material economic impact on Las Vegas, given its tourism focus and the economic multiplier effect.
We're also keeping a close eye on Houston as the combination of Cobot 19, and oil industry starts struggles is having a material impact and is not spilled into the single family homes market as much as the apartment market, thus far but we have trimmed back Houston targets materially we only added Houston in the second half of 2019.
I mean, so it is very small percentage of our portfolio.
We had been seeing material negative effects from the new tax law in New York City Metro suburban New Jersey, and Southern Connecticut home values and Homesale liquidity, we have seen a quick turn and liquidity in these locations as a result of cobot 19, as New York City apartment dwellers with for suburban residences. It is.
Too early to tell whether this is a short term phenomenon or a longer term change in lifestyle target as results of cobot 19th.
On page nine.
At March 31, 2020, approximately 74% of our loan portfolio made at least 12 of 12 at the last.
12 of the last 12 payments, including 67% of our loan portfolio that made at least 24 of the last 24 payments.
This compares to approximately 13% at the time of purchase as rate is as result of the economic impact of covert 19, we've seen a small decline in these numbers. During Q1 2020, we had a 2% decline in loans as a percentage of our portfolio that our 12 12 payments are better we expect that this number will continue to be effect.
Good but as to ruin determined the materiality.
Since we generally purchase lower LTV loans and purchase price of property value averages in the high Fiftys percentage, we would expect the principal impact of a decline in regular paying loans to be duration extension as borrowers with loans that are paying but are not 12 months contractually current we'll have more difficulty refinancing.
Since we buy loans at discounts to face amount of view PB duration extension reduces the speed in which we received the discount on the effected loans and therefore the interest yield.
Cobot 19 duration extension can also affect the yield on true nonperforming loans as extended resolution timelines can lead to more property tax more insurance in more repair expenses.
Since we purchased most of our loans when they were less than 12 for 12 payment history. Our servicer has worked with most of our borrowers overtime.
While it's too soon to understand the full impacts of cobot 19 on home prices and mortgage loan performance. So far the impact on our portfolio has been less than anticipated we have seen demand for homes in our target markets generally increase.
On page 10 subsequent events.
Subsequent to March 31, 2020, we closed on a 123 million you PB of first residential mortgage loans through a joint venture that was pre funded in the securitization structure in early March 2020.
The purchase price for the loans was 92% of principal balance and 60% on value of the underlying property, we own a 20% interest in the structure and our joint venture partner and accredited institutional investor owns 80%.
We have declared a cash dividend of 17 cents per share to be paid on May 29, 2020 to holders of record May 15, 2020, as a result of cobot 19 uncertainty and the related economic impact taxable income is harder to forecast.
On April six 2020, we closed a private placement of $80 million of preferred stock and warrants, we think that the uncertainty of markets in the economic impact of Cobot 19 will lead to many value investment opportunities overtime.
We believe analyzing and investing in these opportunities will require patience, a durable balance sheet our value oriented total return investment focus and longer term holding period horizons.
We think the structure and the institutional accredited investors that invested provide us greater ability to invest in these opportunities as well as in larger joint venture opportunities and provide us significant flexibility.
Our current joint venture partners continue to work with us seeking investment opportunities and we anticipate additional joint venture transactions.
As well.
And briefly a few financial metrics on page 11 average loan yield declined by about 60 basis points, primarily as a result of duration extension from both paying loans and nonpaying loans as discussed earlier the principal effects were seeing from Copa 19 impact is duration exposure.
Engine.
The average yield on debt securities and beneficial interest shows the effects of the reserve for ship future losses that we expensed in Q1 2020.
And as a result is a negative GAAP number for this quarter at first quarter, but is not an ongoing not on an ongoing basis.
Also remember that yield on debt securities and beneficial interest 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 Jvs are presented under GAAP.
As our Jvs increase as they did in Q1 2020, the GAAP reporting will show lower yields by the amount of the servicing fees.
Our leverage continues to be moderate, especially for companies in our sector.
While the quarter ending leverage increased slightly it's because of our decrease in book value March 31, total book value March 31, total liabilities are lower than at year end 2019.
Yes.
At this point if anybody has any questions.
We're happy to answer to the extent we can.
As a reminder to ask a question you need to press star one on your telephone to try a question as the pounder hash key please standby heavily compiled acuity roster.
Your first question comes from Tim Hayes with B. Riley BR. Your line is open.
Hey, Larry this is actually Mike on for Ken.
So my first question is are you seeing any impact on RPL or NPL supply given the spike in for balance for branches and the impact seasonal is having on the banks just wondering if you're able to acquiring assets in more attractive yields than you learn I guess in the fourth quarter.
The answer is yes, yes, and yes.
We're clearly seeing a lot of supply of loans right now.
A big chunk of that it's not come from the banks, yet, but it will a big chunk of it has come from.
People as relates to margin calls and we're seeing it from dealers who been asked you'd go find buyers.
For loans.
Number two we're seeing it from a lot of originators.
Particularly in non QM business purpose and fix input flip markets who are having.
Warehouse lender issues.
They tend to be smaller pools, I would call them on average between 10 and 40 million.
Those are the ones from originators.
We.
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Expect that after June 30, we will start to see a lot more coming from banks and especially prior to 12 31.
For smaller banks goal has been delayed and we anticipate that the smaller banks really won't get going on selling some loans until later in the year and we also expect on the community Bank front, we'll see a lot of small commercial mortgages come out later in the year as well.
Thank you Thats very helpful accounted, giving a deterioration in residential credit or the expectations for that.
Sentiment and demand like from your JV partners has it improved or how to change since February the first half and marsh I'd caution serve as volatility create opportunities I.
I would say from March fit for about March 20-F, two about April 15.
It was in.
Great.
Suspended animation.
Since about April 15 to 20, if it is go find me as many loans that you can bite.
Gotcha, so a very different theres like at 20 or 25 day period.
Where there was just structural illiquidity.
And I think a lot of people saw that at the end of March into beginning of April, especially.
Say the last 10 days in March in the first tender days of April.
Now there seems to be a fair amount of inflow into fixed income land and we've had a number of our GP JV partners ask us to find find loans and create structures.
Thank you that's helpful and just one more for me to subsequent to quarter end you did the $80 million patent placement Im just curious how much of this capital has been deployed and then as a follow up to that is the dividends set annual level that reflects earnings power as you redeploy proceeds from the preferred offering.
The dividend well I'll answer the dividend question first the dividend question is set based on an expectation of kind of taxable income assuming only a small non to the money is put to work that being said taxable income in environment like this is pretty hard to predict.
We don't want to bet on putting all the money to work.
One of the things that I'm, hoping that a lot of people learned in the last 10 days in March in the first 10 days. The April is that there's a lot of volatility that can happen in a short period of time and as a result, we want to be patients in putting capital out to work because we until we know whether.
This is the second ending the fourth inning or the sixth inning.
Gotcha. That's helpful. And then any idea just how much of that capital has been deployed.
Only a small amount thus far.
Gotcha. Thanks, Thank you very much for taking my questions.
Again, if you would like to ask a question press star one anew telephone.
Our next question comes from Kevin Barker with Ascendiant. Your line is open.
Thank you.
Good evening and good afternoon.
Just a follow up on some some of those comments.
About being patient put capital to work.
Do you feel like the market has come back to quickly just given the spread tightening that we saw and where the underlying credit would justify from those prices.
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I think in certain.
Subsegments of the market, it's it's come back.
I mean some of it.
I mean, we're nowhere near where we were saying February but is improved.
To some extent since late March I would say by the maybe a third of where it got to in late March that being said.
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We think theres still potentially significant volatility in markets and.
And that we don't want to jump in and say you know this is a time where are you should be getting in all in and taking the risk that theres not to be another time, we think that.
There's a whole bunch of different opportunities that can present themselves from different.
Seller types, who for regulatory reasons or or liquidity reasons over time, we'll have differing circumstances and.
Banking land community banks, and the larger banks will have different time periods, and what they're trying to accomplish or need to accomplish.
Based on regulatory frameworks and economics.
Originators same thing.
But we've seen and.
Less.
Other than in what the fed is buying we've seen less dramatic recovery.
For most things that being said senior bonds have come back significantly.
Okay and then.
Yes, 12 on your comments about prepay speeds picking up and then slowing down and you're not sure what can happen there I mean.
You're going to pick up in pre speak prepay speeds actually be good thing in the near term as it increases your cash and allows you to eventually put that cash to work at more attractive.
Yields maybe in the later in the upper when you start to see more product we put to work.
In the near term you for the cash work and joint ventures, where there is no liquidity and then for more on the balance sheet later in the year, just given the pickup and prepay speeds.
Yes, I think Thats, where I think thats right. We do expect to prepay speeds will increase pretty materially given where mortgage rates are and given so far this stability in back home prices on average probably up a little bits in the last few months rather than gap.
So we do think prepayment speeds will pick up materially our California speeds are really havent changed much as they havent had the decline like some other state tab.
But we anticipate will pick up also you know we buy loans a discount so prepay speeds actually raise yields pretty significantly and raise taxable income.
For us.
As well as giving you cash to put to work.
And.
Paying down Securitizations that you can call in issue in new securitization effectively refinance as well.
So.
And that would correspond to kind of the.
What we think is you really have to have what I'll call eight a. 18 month to three year mentality in this environment versus a quarter to quarter mentality.
Okay. Okay.
And then given what you're seeing in some of the respective markets that you mentioned.
Would you expect recovery values on defaulted loans.
The fairly resilient or are you fully expecting some significant declines in recovery values.
Given the economic softness we're seeing out there.
So so any reserve we took we've built in some economic decline in recovery values that being said, we've not seen it in actuality in any material respect thus far we've actually seen to some extent the opposite in terms of.
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Though liquidity in homes.
As well as increase in prices, but we have built in that reserve reflects an assumption of a little more delinquency and.
Some home price decline.
In.
Related to loans that go delinquent so.
That being said, we've not necessarily seen it.
In actual.
Outcomes yet.
Okay and then.
Obviously.
You are acting almost like a special service from large portion your loans.
Yes, I have you.
However, deferrals or maybe forbearance.
Have changed from where are your baseline was and where it is now.
Well well, it's interesting because we bought these loans on average were only 13% of them had made 12 consecutive payments.
And we guided up to 76% and 74% now.
So I would say, we probably didnt expected to get to 76% when we bought in with only 13% 12 for 12.
All right so.
So far the request for forbearance have been less than we would have anticipated and certainly less than what the agencies obscene and what the numbers we've seen in the press.
And in total Forbearances so far.
It's been a relatively limited number I would say total Forbes forbearances so far.
Our a bad.
Less than 5% about portfolio and actually yes, total forbearances, so far less than 5% and even then only 2% has actually not paid during that period.
So it's.
We would anticipate that number will increase and we've built that into the model into the reserves.
But that being said we've been.
I want to say a little bit pleasantly surprised that is more muted than we anticipated now the one thing I will also add is and this is a little disappointing is that 5% to 10% of the calls we're getting requesting forbearance. The people in fact, if not been affected and they're just wanting to not.
Pay so.
So part is the special Servicers, making that delineation as well.
So how does the 5% compare to your baseline typical forbearance rate, we built and Thats at 76% number will decline by about 25%.
Okay.
All right. Thanks, taking my questions luck.
Sure.
There are no further questions at this time I'll now turn the call back over to management for closing remarks.
Thank you everybody for joining our March 31, 2021st quarter.
Earnings Conference call.
I appreciate.
Calling in the questions feel free to reach out to us. If you have additional questions over time, and we're always happy to talk more about our business and with that.
Everybody stay healthy and we'll talk to you overtime.
This concludes today's conference call you may now disconnect.
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