Q1 2022 Great Ajax Corp Earnings Call

Indirectly purchased loans outside of joint ventures by the amount of the servicing fees, but the GAAP 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 over 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 ended joint venture structures and NPL purchases have increased relative to RTL purchases.

Two years ago, we mentioned that we expected COVID-19 related.

Events would negatively impact the percentage of $12 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 who have experienced material increases in absolute dollars of equity and we are in specific geographic areas.

These patterns along with increases in housing prices and housing demand stability in certain markets that we have concentration 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.

Unallocated loan purchase discount reserves in the first quarter and similarly, the reserve releases and each of the previous four quarters.

Approximately 25% of our full lane payout 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 purchased loans at discounts. This can reduce percentage yield on our loan portfolio and interest income.

Loans that are not regular monthly pay status tend to have materially shorter durations.

We have seen and can you 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 shortened 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 re securitize at low cost of funds.

We have already called our 2019 securitization transaction in the fourth quarter of 'twenty, one and called in re securitize, our 2018 and 2018 GE joint venture Securitizations in April of 2022.

Net income attributable to common stockholders was $3 6 million or <unk> 15 per share after subtracting out 195 million of preferred dividends. There are a couple of 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 'twenty, one and $3 7 million in Q3 of 'twenty, one cash flow in excess of expectations continued to increase in April .

So far in 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 for $2 8 million in Q4 of 2021.

The biggest difference.

That is primarily a timing effect rather than economic effect comes from the calling of our 2000, AT&T and AT&T unrated joint venture Securitizations and the re securitization of the underlying loans into 2022.

AAA rated agency securitization agency rated securitization.

Since 2018, DMG, where 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.

And the April 2014, 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 14th than on December 31, 2021, because of this at March 31, we've taken impairment equal to the difference between the secured.

He is carrying value and the market values in April versus December 31 of $397 million.

What is unusual is the loans are transferred from our two 2018 joint venture Trust 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 GAAP.

It would go through book value, whether or not it's a sale under GAAP 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 doubled 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 33 per share.

It would be <unk> 40 per share that would be distributable.

Taxable income in first quarter was primarily driven by continuing increases in prepayment, especially for nonperforming 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.

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 in joint ventures, and unencumbered mortgage loans.

The available cash and available asset back leverage provides us a good position for loan and other asset type purchases share repurchases and liability repurchases.

In January 2022, we invested in 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 investing value real estate that invest in triple net lease veterinary clinic properties multifamily.

Properties and multifamily repositioning mezzanine loans, we owned approximately 22, 2% of Gaia.

<unk> is managed by a subsidiary of our manager and we owned at 19, 8% interest in our manager at a near zero basis.

We think <unk> has a great deal of Optionality in the Guy who 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 guys' mezzanine repositioning loans also have equity participations.

In the underlying collateral properties.

Approximately 73, 5% of our portfolio by <unk> made at least 12 of their last 12 payments compared to only 13% at the time of loan acquisition.

This increase from 72% in the fourth quarter of 'twenty, one despite buying a significant amount of npls in late Q3, and Q4 of 2021.

If we flip to page five we talk about the loan portfolio.

<unk> represent approximately 89% of our loan portfolio at March 31.

<unk> represented 96% at June 32021.

We primarily purchase RTL to that made less than seven consecutive payments and npls at a certain loan level and underlying property specifications that our analytics suggest we do positive migration and more prepayment on average.

Yeah.

On page six we continue to buy lower LTV loans, our overall RPM purchase price is approximately 45% of the underlying property value and 80, 875% of <unk>.

We have always been focused on loans with lower ltvs with certain absolute thresholds of dollars of equity and target geographic locations and the current times of rising rates and the potential for market disruption. This becomes even more important for our pls and npls.

On page seven for Npls on our balance sheet. Our overall purchase price is 90% of <unk> 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 <unk>. 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 have seen consistent payment and performance patterns from loans in these markets and consistently strong prepayment patterns. However.

Over over the last nine months, California has gone from being approximately 30% of our portfolio to about 26% of our port.

Florida prepayments have also increased significantly we purchased an NPL portfolio of approximately $85 million in late Q3 of 2021, and 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 'twenty to these loans have far outperformed expectations.

We continued 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 and paying loans.

We're expected to receive significant timeline extensions as a result of Covid moratoriums.

This would typically negatively affect yields untrue nonperforming loans as extended resolution timelines can lead to more property tax insurance legal and repair expenses.

Were in the past five quarters and continuing into Q2 2022, so far we've seen a significant increase in prepayment of nonperforming loans actually shortening duration.

Subsequent events as I discussed earlier on April 14, 2022, we called and re securitized our 2018 D. In 2018, GE joint ventures into a rated 2020 to a joint venture structure with the same third party institutional joint.

Venture partner.

We owned 23, 8% of the Securities and Trust certificates from the trust is it similar to our ownership in 2018 D. In 2000 Atg.

2022, eight acquired 811, Rtl's and Npls <unk> of $215 5 million underlying property value of $518 million.

The AAA through single a rated securities represent 71, 9% in <unk> and <unk>.

The underlying bonds carry a weighted average coupon of 347.

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 2022 under U S. GAAP.

We've agreed to purchase approximately $11 million <unk> of Npls in our Pls and seven transactions subject to due diligence.

The purchase price for the loans is approximately 99% of UBB approximately 92% of the total loan balance, including arrears, approximately 44% of the value of the underlying properties.

On May five we declared a dividend of <unk> 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 discount due to the present value of cash flows in.

In excess of our modeled expectations declined marginally by about 3%.

Income from loan purchase discount that gets accelerated under CSO can reduce yield on loans in the future since a portion of the unallocated loan discount gets captured earlier under Cecil.

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 interest is how our interests in our Jv's are presented under GAAP.

As our <unk> increase as they did in 2020 in 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 two times average asset level debt for the quarter was also two two times.

Our total average debt cost was slightly lower in the first quarter versus Q4 'twenty one.

This is primarily the result of double paying some interest as a result of the timing gap between the purchase of the loans and the calling of our 2019 <unk> securitization structure in Q4 that.

That we discussed on the Q4 2021 quarterly call.

Similar to the 2022 eight AAA rated structure for Npls were 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 in 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 its financing on class a one senior.

Bonds in our joint ventures.

At March 31, we had 142 million face of unencumbered bonds as well as $139 million NPV of unencumbered equity certificates and $40 million NPV 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.

Thank you very much Mr Mendelson.

The amount and timing questions or comments simply press star one.

My question has been answered you cannot move yourself from the queue.

Star one and subsequent time.

And we'll pause for just one moment.

Okay.

With our first question from Kevin Barker of Piper Sandler.

Thank you very much good evening Larry.

Hi, Kevin how are you.

Doing well.

So.

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.

Sure.

Sure.

<unk>.

At the end of the first quarter versus today at the end of or today.

And the first quarter was $12.

So.

First versus $12 31, our net asset value was down.

At March 31 pretty marginally.

The first two weeks of April <unk> seats.

Especially today rates come up a little bit so.

It would be a little lower but.

<unk> book is just under 16 net asset value probably was around high <unk> or 'twenty at the end of the year.

We'd expect.

It's still in the 19th particularly given the value of the servicer and the.

Yes.

Manager and as you might imagine you've seen kind of MSR valuations increased dramatically the servicer has.

Non terminable contracts, except for cause so the kind of the value of the services contracts has increased as well.

Okay and so.

I think you alluded to a private equity investment in the servicer.

The servicer in more detail.

Yes. The servicer just looking is just starting to have some.

<unk> about a private round of equity at the servicer as part of its been.

Working on some automated programs and building them out and offering them.

Two customers.

Customers, we've had some of our joint venture partners as the servicer and vacant specifically build things out for their balance sheet for them to be balance sheets as well.

So.

We're.

Just starting that for the servicer.

<unk>.

I won't say preliminary stages, but maybe a step past that.

Would that be a type of event that would require.

Recognizing a realized gain or some type of mark on the.

Position that.

Okay, 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.

Too early to tell its more than it would be more than our current basis on evaluation Thats for sure.

It would probably not trigger great Ajax booking a gain or a march 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 10-Qs.

Okay, and then can you just remind us what the cost basis of the mistaken that servicers today.

We own 8% plus have three sets of warrants at different valuations for another 12% at a total cost basis of $2 8 million.

Okay sure.

On a cost basis of 20% to putting them alright, alright, great. Thank you for taking my questions.

Sure.

Thank you the next Nazi Eric Hagen with <unk>.

Hey, Thanks. Good afternoon, just a couple for me I think on the servicing how much did it contribute to earnings last quarter stripping out any kind of onetime marks if you will and then.

Cash position.

Go ahead go ahead Im sorry.

And my second question is just kind of what kind of cash position do you see yourselves.

Running in this environment.

I think you can comment on the status of your liquidity position.

It feels good.

Sure.

On the for the servicer, the servicer add a small amount of income however, because of mark to market because of mark to market of the stock. It owns in great Ajax that would have a negative effect in the pass through.

From a.

Liquidity perspective of 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 that.

Being said, we have a lot of flexibility on unencumbered assets that we can 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 execution, we're getting done versus where loans to.

To the extent they actually did get transacted in we're transacting didn't make enough economic sense for in a volatile environment for that limited spread.

There's going to be better opportunities.

Ahead for that.

That's interesting color and I appreciate that and then we're home home price depreciation and affordability being kind of the.

Focal points in many ways for our market.

Feel like we will see things like subordinate liens and other types of.

Financing.

Increase in is that an opportunity.

Thank you Phil.

The answer is yes, I would expect that closed end and heat and HELOC seconds will become a bigger thing.

As.

Where if rates were low you would've seen more trade up owners of houses selling their house buying a more expensive house and getting an inexpensive alone, but with higher rates. We would expect those same buyers to use helocs and do renovations and things like that.

I also think that Youll, similarly in consumer and home improvement loans.

<unk>.

And also potentially.

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.

We will definitely be different market by market based on a number of different factors from some which are economic.

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.

<unk>.

And some of it is the number the percentage of homeowners that refinance into very low rate loans that effectively.

Moves the mobility of their living or Theyre, moving for a while and keeps that house off the market for considerable period of time, so and thats different market by market.

Thanks for the color appreciate it.

Sure.

Thank you and just a reminder, ladies and gentlemen installed <unk> further questions.

[laughter].

And Mr. Nielsen It appears no further questions or comments by Keith in closing time.

Okay.

Thank you very much everyone for joining us on our first quarter 2022 earnings call through 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.

Thank you Mr Minister, Ladies and gentlemen, again that will include today's <unk> Corporation first quarter 2022 financial results call. Thank you all so much for joining us for this you all a great remainder of your day.

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