Q4 2020 Great Ajax Corp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to the Quake Ajax Corp, Q4, 2020 earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
And then when share require assistance during the conference. Please press Star then zero on your Touchtone telephone.
I would now like to turn the conference over to your host CEO, Mr. Lawrence Mendelsohn.
Thank you very much. Thank you everybody for joining the great Ajax fourth quarter 2020 earnings call.
Before we get started I just wanted to point out everybody on page two of the presentation to safe Harbor disclosures.
And with that we can get going I'm going to do a quick introduction before we get to page three.
So the fourth quarter of 2020 was a good quarter and a lot of ways. Our overall corporate cost of funds decreased by approximately 27 basis points and our asset base cost of funds decreased by even more than that and thats after decreasing nearly 50 basis points in Q3.
And in Q1, so far it's continued to decrease even more.
Our loan performance and cash flow velocity increased significantly which has continued into the first quarter as well this.
This increase in loan cash flow velocity led to an additional reversal of previous credit loss provisions.
We continue to be in an offensive position at December 31, 2020, we had approximately $107 million of cash and a significant amount of unencumbered bonds unencumbered beneficial interest in unencumbered mortgage loans to.
As of March one 2021, we have approximately $145 million of cash and still have unencumbered bonds beneficial interest in mortgage loans.
The significant cash balance does create a bit of an earnings drag and the significant cash flow philosophy from a mortgage loans and mortgage JV structures reduces our loan and securities portfolio leverage. We are however, well equipped for volatility in the investment potential it creates and we have a number of opportunities in our pipeline that we're working on.
And with that let's jump to page three.
It's really important to understand our manager strength in analyzing loan characteristics and market metrics for <unk> performance and pathways.
And its ability to source. These mortgage loans enables us to acquire loans that we believe have a material profitability of long term continuing REIT performance.
We've acquired loans and 326 different transactions since 2014, and 12 transactions in Q4 of 2020.
Additionally, we believe having an affiliated servicer provides a strategic advantage in nonperforming and non regular paying loans resolution processes and timelines and a data feedback loop for our manager's analytics.
In today's volatile environment, having our portfolio teams and analytics groups 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 in Q3 and Q4 of 2020 with a significant increase in loan cash flow velocity and credit performance. Despite all the pandemic related headwinds.
The analytics and sourcing of the manager and the effectiveness of our affiliated servicer also enabled us to broaden our investment reached through joint ventures with third party institutional investors.
Our December 31, 2020, corporate leverage ratio was two one and our fourth quarter 2020 average corporate leverage was two two.
Our fourth quarter 2020 average asset base leverage was two times and at December 31 asset base leverage was one nine times.
Our leverage would have declined. Additionally from Q3 2020, but we closed on an $876 million joint venture with two institutional investors on September 25 in which we invested $83 4 million and our manager and our servicer oversees this joint venture.
We also have an investment in <unk> real estate Corp, a REIT that invest in multifamily properties multifamily repositioning mezzanine loans and triple net lease veterinary clinic real estate we.
We expect Gaia to grow materially in 2021.
And with that I will turn to page four highlights for the quarter.
Net interest income from loans and securities, including a $7 6 million partial reversal of COVID-19 related loan and credit losses and keep in mind. This is $6 6 million after deconsolidation about $1 million to Noncontrolling interest was approximately $21 9 million.
In the fourth quarter, we had only a small increase in our average balance of mortgage loans securities and beneficial interest primarily due to prepayment or $83 $4 million investment in our joint venture loan acquisition that closed September 25th was on balance sheet for all of the fourth quarter for us only five days in the third quarter. So we received a material benefit.
<unk> through earnings from this in the fourth quarter.
This JV shows up in quarter end balances as securities investments, our gross interest income excluding reversal of loan loss provisions increased by $1 2 million and our interest expense also declined by 900000.
One GAAP item to keep in mind as net interest income from our portion of joint ventures shows up in income from Securities net interest income from loans.
For these joint venture interest servicing fees for securities are paid out of securities waterfall. So our interest income from 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 are growing faster than our direct loan investments GAAP.
Interest income will grow more slowly than if we directly purchase the exact same 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 performance of our loan portfolio.
At December 31, 2020, approximately 72% of our loan portfolio by <unk> <unk>.
At least 12 of the last 12 payments as compared to only 13% at the time, we purchased the loans.
And our first quarter 2020, Investor call, we mentioned that we expected the COVID-19 related economic environment with negatively impact the percentage of 12 of 12 borrowers in our portfolio.
Thus far the impact on payment performance has been less than expected and the percentage of our portfolio that is 12 months 12 months has been quite stable.
Additionally, we have seen significant prepayment from a material subset of our COVID-19 impacted borrowers that had significant absolute dollars of equity.
And we're in strong home price appreciation locations.
The continuing strong and regular payment pattern and the prepayment pattern of certain previously delinquent loans led to the $7 6 million again, $6 6 million after netting out for consolidation.
<unk> of our provision for credit losses.
While regular paying loans produce higher total cash flows over the life of the loans on average they can extend duration and because we purchased loans for discounts. This can actually reduce percentage yield on the loan portfolio and interest income.
However, regular paying loans generally increase our net asset value and we will talk about this later on the call.
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 expected that this duration reduction would be less than typical due to the impact of COVID-19.
As I mentioned earlier most of our loans were purchased as non regular paying loans and the borrowers our servicer and portfolio team at our manager has worked together over time to reestablish these loans as regular pain.
We also expect that given the low mortgage rate environment and the stability of housing prices that higher prepayments will likely continue on both regular paying and non regular paying loans.
Our corporate cost of funds in Q4 2020, it was lower than Q3 by 27 basis points.
It was primarily due to spread reductions on our repurchase per dose facilities as well as a full quarter of the rated securitization. We completed in mid Q3 2020.
We expect our cost of funds trends to continue decreasing materially, especially since we called two of our older Securitizations and re securitize the underlying loans in mid Q1, 2021 and will likely do so with others in the next few quarters.
Okay.
Net income attributable to common stockholders and basic earnings per share.
Was $10 8 million or <unk> 47 per share after subtracting out $1 9 million of preferred dividends and $1 6 million of income attributable to non controlling interests.
A couple of other things to note.
We recorded a small amount of flow through equity method income from our manager and servicer in the fourth quarter, primarily due to some mark to market pickup on shares owned by our manager and servicer.
Our manager and servicer combined owned approximately one 1 million shares of our common stock and we own 19, 8% of our manager and 8% of our servicer. This increased income by approximately 335000.
Or a bit more than <unk> <unk> per share.
We expensed approximately $1 7 million relating to the GAAP required accrual of the warrant put rights from our Q2 2020 issuance of preferred stock and warrants.
And we also repurchased approximately 50000 shares of our common stock at an average price of $9 a share in the fourth quarter.
Book value was $15 59 at December 31, 2020 later in this call. We will compare at December 31 book value and December 31 fair value estimates.
As a spoiler alert December 31 fair value estimates are materially higher than book value.
Taxable income was <unk> 47 per share taxable income in Q4 was driven by several factors, including gains on some clean pay loans going into our January 2021.
Dash, a rated securitization as well as the significant increase in prepayment, especially for delinquent loans do.
Delinquency loans, usually generate tax gains at the time of foreclosure and the creation of related Oreo and then tax losses at sale of Oreo.
Less Oreo creation typically leads to less taxable income.
However, we saw many delinquent loans prepay and generate tax gains. Additionally, as our cost of funds decreases we see a decline in interest expense as well, which increases taxable income.
Yes.
At December 31, we had approximately $107 million of cash and for Q4 2020, we had an average daily cash and cash equivalent balance of approximately $129 million.
We had $64 million of cash collections in the fourth quarter, which annualized is approximately 17% of the book value of the underlying assets.
Our surplus cash definitely tempers earnings, but this provides us with significant optionality and the remaining earnings drag should decrease as we get the cash invested over time.
As I mentioned earlier in this call at December 31, we had approximately 240 million face amount of unencumbered securities from our Securitizations and joint ventures, and approximately 49 million <unk> of unencumbered mortgage loans and as of March one 2021, we have approximately $145 million of cash on hand.
As I mentioned earlier on the call approximately 72% of our portfolio by <unk> made at least 12 of their last 12 payments compared to only 13% at the time of loan acquisition I'll discuss the importance of this in greater detail when we get to pages nine and 17 of this presentation.
If we go to page five.
We continue to be primarily <unk>, driven with purchased Rps, representing approximately 96% of our loan portfolio. We primarily purchase <unk> that have made less than seven consecutive payments and strive for positive migration of these purchased Rps.
And on page six where it breaks down our pls and portfolio growth, we continue to buy and own lower LTV loans.
Our overall <unk> purchase price is approximately 53, 8% of the underlying property value and 88% of <unk>.
On page seven purchased Npls have declined over time relative to the total loan portfolio for.
For Npls on our balance sheet, our overall purchase price of 78, seven percentage <unk> and 56% of property value.
Our target markets on page eight cash.
California continues to represent the largest segments of our loan portfolio, our California mortgage loans are primarily in Los Angeles, Oregon, Our 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.
We've also seen consistent prepayment patterns, even more so in recent months since may of 2020, California prepayments represent 10% more than California is as a percentage of our portfolio.
We removed Las Vegas is a target market during the first quarter of 2020 mortgages in Las Vegas are currently a small percentage of our portfolio. Unlike five years ago.
Our analytics suggested that COVID-19 would have a material economic impact on Las Vegas, given its tourism focus and the economic multiplier effect of that.
This would be partially offset by state income tax related transitions that we're seeing from southern California prepayments.
We do however, expect Las Vegas market to bounce back materially as COVID-19 vaccine success accelerates.
For keeping a close eye on Houston as the combination of COVID-19, and oil industry struggles and now recent weather disruptions are having a significant 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, we only added Houston to our target portfolio.
<unk> locations in the second half of 2019, so it still remains a very small percentage of our portfolio.
We had been seeing material negative effects from the new tax law Salt provisions in New York City Metro and in suburban New Jersey, and Southern Connecticut home values and home sales liquidity.
We've seen a quick positive turning and liquidity in these suburban locations as a result of COVID-19, as New York City apartment dwellers look for suburban residences.
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.
<unk> non movers data such as United Van lines of new haul data suggest.
That HPA should be relatively muted in these parts.
Related to this we've also seen demand for homes and home rentals, increasing parts of Florida as well as the Phoenix, Arizona, Dallas, Texas, and Atlanta, Georgia Metro areas, we're seeing the strength, primarily in single family homes and much less so for condominiums.
On page nine we have a chart for portfolio migration at December 31, approximately 72% of our loan portfolio made at least 12 of the last 12 payments, including approximately 65% of our portfolio that made at least 24 of the last 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-19. This effects for the yield on true nonperforming loans is extended resolution timelines can lead to more property tax insurance and repair expenses. This is why we earlier in 2020 took additional provision.
<unk> for credit losses, because of COVID-19.
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 over time, while it's 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 less than anticipated and we have seen demand for homes in our target markets increased materially.
Cash flow velocity on the loans increased materially and prepayment on impacted loans increased materially.
12 for 12 loans in today's low market trade at much higher prices than our cost basis, they traded well over par.
As a result, our portfolio and related implied corporate NAV estimates are materially higher than GAAP book value, which presents our loans at the lower of market our amortized cost.
Subsequent events.
It's already been a busy first quarter.
Subsequent to December 31, we purchased approximately $3 8 million <unk> of residential and small balanced commercial first mortgage loans in three transactions the purchase price for the loans was 98% of <unk> and 40% net value. We have another approximately $54 5 million UTP of loans under contract in eight transactions that are.
Subject to due diligence the purchase price is approximately 86% of <unk> and 57% of underlying property value.
In January we repurchased $2 5 million principal amount of our convertible notes for a purchase price of $2 4 million.
We also closed two securitizations moments a rated securitization transaction of cleaner paid rtl's in late January we issued $175 million of AAA through Triple B Securities with respect to $206 5 million <unk> of loans or 84, eight percentage <unk> with a weighted average yield.
Of 132% now.
Now keep in mind three triple B on these loans, we received 84, 8% of <unk>.
And we are buying loans at 86% of UCB.
The second was an unrated securitization transaction of less clean paying our pls and Npls in mid February we issued 216 million principal of class a senior bonds equal to 75% of <unk> of $287 9 million at a yield of 225%.
We declared a cash dividend of <unk> 17 per share to be paid on March 31, 2021 to holders of record on March 18 2021.
Based on taxable income estimates, we would expect that our dividend would likely increase during the year 2021.
On page 11, some financial metrics I would like to point out.
Average loan yields excluding reserve capture remained relatively constant.
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 <unk> are presented under GAAP.
As our <unk> increase as they did in 2020 relative to the loans for GAAP reporting will show lower average asset yields by the amount of the servicing fees.
Yields on debt securities and beneficial interest however, net of credit reserve captured still increased in Q4 of 2020.
Our leverage continues to be low, especially for companies in our sector. We ended Q4 2020 with asset level debt of one nine times and accurate average asset level debt for the quarter was two point out.
Our asset level debt cost of funds was lower in Q4 than by Q3 by 70 basis points and the cost of our asset level debt has further declined in Q1 of 2021.
As we get our surplus cash invested we should see material increases in interest income and net interest income even more so.
Securities and loan repurchase agreement funding on page 13.
Our total repurchase agreement related debt at December 31 was approximately $595 million of which $160 million was non mark to market mortgage loan financing and just under $300 million was financing on class a one senior bonds in our joint ventures.
As of March one total repurchase agreement funding its considerably lower as a result of prepayment and securitization.
At December 31, we had $149 million face of unencumbered bonds as well as $91 million <unk> of unencumbered equity certificates and $48 million UBB of unencumbered mortgage loans combined with a $107 million in cash at December 31, and now Thats a $145 million of cash at March one we significantly.
Resources for being on offense and for defense.
And now for the fair value balance sheet.
Talked about.
Coming up on page 17.
As I mentioned earlier on the call we estimate that the fair value of our balance sheet equity is materially higher than our book value. The explanations and discussion of fair value are included in note six in our 10-K.
We invested in mortgage loans at discounts to <unk> based on our manager's analytics, our servicer works with borrowers and helps get loans back on track when they become regular paying loans they become significantly more valuable.
Our GAAP balance sheet shows our mortgage loans at the lower of amortized cost or market.
Based on current performing loans market prices, we estimate that the fair value is approximately $120 million higher than fully diluted book value an increase of approximately $20 million from Q3 2020.
Our estimate of fair value fully diluted book value per share at December 31 is $19 54 per GAAP book value of $15 59.
This also excludes any fair value pick up we get from owning equity in our manager and equity and warrants in our servicer.
And with that I'd like to open up for any questions.
And.
Feel free to to ask what you would like.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your attention down for that.
Thanks for your question, that's been answered Columbia lease to remove yourself from the queue. Please for Penske.
Our first question is from Andrew Hagen from <unk>. Your line is open.
Hey, how are you guys.
On the RPM purchases since quarter end that are still in diligence or those seasoned loans or the newer issues scratch and dent.
Carter.
I gotcha.
Okay and then you mentioned you mentioned you got you.
Do you expect prepays to pick up I'm, just curious with the right instead of it looks like for a re performing borrower.
Especially the season borrowers with presumably low Ltvs does just what does the access to capital looks like and how much.
How much does the previous delinquency plan that rates that they get.
And then on the last one can you just talk about the amount of securitized debt that you have that callable. This year, where you might be able to re securitize that collateral and how stable the funding costs for IP.
Yes. Thanks so.
So.
I'll do the last one first because it's the simplest.
We have about five additional securitization I'm sorry, three additional securitizations plus for joint venture Securitizations that are callable already.
That we likely will call some of this year and re securitize.
And to the extent that that happens it would reduce cost of funds versus those transactions of somewhere between 120 to 200 basis points per year.
Okay.
Thank you.
Sure.
Sure on the on the prepayment side.
The weighted average coupon on our portfolio is in the mid force.
And the weighted average LTV is pretty low the other thing is that for us LTV.
Is a little less important than what we considered.
I'll call absolute dollars of equity so that 80, LTV or a 60 LTV on a $70000 per house is different in terms of prepayment probability than a $600000 house.
And as a result for our portfolio tends to have larger loan balances closer to about 200000 average balance.
300000 average home value.
So we're seeing continued.
Prepayment the other thing is because of our target markets are borrowers tend to have more than average HPA in their houses and one of the things we've seen we've seen two things one is.
Long term clean pay loans had been prepaying, particularly if they have more than about $130000 of equity and they're prepaying, partly for refinancing and partly for sale.
Delinquent loans are mostly prepaying because of sales. So one of the things. We found is if you're if you're a pandemic impacted borrower.
And you have 150 or 200000 of equity we've seen a lot of people rather than wait for stimulus funds or deal with income issues. We've seen a lot of people in our portfolio sell their homes in certain markets, but theres been a lot of home price appreciation and put $200000 in the bank.
And that's a pattern that we have seen continue in Q1 as well.
And would continue to expect that.
Fantastic and then.
And then the loans in the first quarter.
About 20% of them are scratch and dent of new origination and the balance are season loans.
Great. Thank you so much surfing.
As a reminder, that as far as one to ask great questions.
Your next question is from Randy Binner from B Riley Your line is open.
Good evening. Thanks, I, just had a couple of higher level questions.
Net cash number you quoted the $145 million was that at year end or is that now and that's margin once you wanted to.
107 at year end $1 45 at March one.
So it's higher so I guess the follow up there just license for two.
Two reasons one.
Prepayment, continuing which increases cash flow velocity and money to us.
And two.
<unk>.
Two securitizations lowering cost of funds.
And also we effectively re levering older Securitizations.
To affect what I'll call a equivalent of much lower cost cash out refis.
And the third thing is with cost of funds going down more cash interest spreads.
That we receive.
What could what can you reasonably run that at the cash number meaning.
Well I understand now why tire.
What number could that run added just to kind of understand what the drag is in dollars and cents.
Well, let's put it this way so when.
<unk> a period of we acquired loans in the Eighty's right.
They're typically sloppy pay loans, we get 72% of them to become clean pay where we can issue AAA through triple B and get 84, 5% through Triple B, which means we have somewhere between zero and $5, 5% cash remaining.
Cash basis in the loans securitize AAA through Triple B.
At a one three yields versus purchase yield of somewhere between six and seven 5%.
So on loans that we get performing the ROE on cash is enormous over a two year period of time.
On loans that we don't get performing.
You would expect it to run at about an unlevered six or six 5% with the most leverage you would put against it it probably for a five times in the securitization and less in that along the way so but that being said you always have cash on hand for two reasons, one because crazy things can happen.
March and April of 2020, and you want to be able to go on offense non defense when that happens.
And number two is we frequently see opportunities.
Where someone needs and execution in a very short period of time and thats not likely financeable during that short period of time, but over a period of time. So so we'd like to have.
Cash on hand for offense and defense.
Well called value oriented loan investor that.
Based on analytics that then that makes us believe with our servicing capability and the analytics that loan is likely to be worth considerably more 12 months or 18 months later.
And then just one more that was really helpful.
So given the move higher interest rates recently.
Do you think you are more likely to be on offense or defense.
But are you.
Media coverage on all of this but.
What's your take on what's what's moved in the mortgage market. So far from a rate perspective, I think that where we've seen loan prices.
Hi.
They seem to not have.
I noticed the rise in call it seven plus year duration rates.
We think that it has not affected loan prices yet we do think however that there is a tipping point.
There will be a significant opportunity that it creates it's just not yet.
Okay.
Fair enough. Thanks, a lot sure.
As a reminder, that is garnering one to ask a question.
Okay, and I am showing no further questions at this time I would like to turn the conference back to CEO for so long, it's been Dawson for any additional or closing remarks.
Yes.
Thank you everybody for joining the great Ajax fourth quarter 2020 earnings Conference call. We appreciate you, taking the time and hope everyone stays well and safe and healthy during.
During the coming months and we look forward to talking to you again in our Q1 call in a few months.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day.
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