Q3 2022 Great Ajax Corp Earnings Call
In page for some highlights from the quarter.
Net interest income from loans and securities, including $1 9 million of interest income from the decrease in the present value of expected credit reserves under seasonal was approximately $10 5 million.
Gross interest income excluding from the decrease was about $20 million, which is about 900000 lower than in Q2.
This primarily stems from having approximately $60 million less average interest earning assets on the balance sheet in Q3 versus Q2, and having significantly more delinquent loans are expected become performing loans.
As delinquent loans become performing they provide more cash flow, but over a longer period. Since we five loans at a discount this increase in performance can extend expected duration, which can lower the yield.
However, in a recession and the closing and in the declining housing price environment, our low LTV loans provided material hedge as increased CPR and CER shortened duration and correspondingly increases yields materially.
Our GAAP item to keep in mind is that interest income for our portion of joint ventures shows up in income from securities not interest income from loans for.
For these joint ventures servicing fees for Securities are Paydown debt Securities waterfall. So our interest income from joint ventures is net of servicing fees and our interest income from loans is gross of servicing fees.
As a result, since our joint venture investments have been growing faster than our direct loan investments GAAP interest income will be lower than if we directly purchase loans outside of the human cancers by the amount of the servicing fees and GAAP servicing expense will decrease by the corresponding offsetting amount.
An important part of discussing interest income is the payment performance of our loan portfolio at September 30, almost 80% of our loan portfolio by <unk> made at least 12 of the last 12 payments for 74% at June 30, and compared to a fraction of this at the time, we purchased loans.
Our NPL purchases over the last 12 months increased materially relative to RTL purchases.
Previous increases in housing prices helps maintain these payment and prepayment patterns and leads to decreases in the present value of expected reserves and the related income recognition of $1 9 million of unallocated loan purchase discount reserves under seasonal in the third quarter as well as reserve releases under Cecil and each of the previous six quarters.
More than 50% of our full loan payoffs in the third quarter and continuing into Q4, we'll from loans that were materially delinquent when they paid off.
While loans that become regular paying produce higher total cash flows over the life of the loan extended duration and because we purchased loans at discounts that can reduce percentage yield on the loan portfolio and related interest income.
Loans that do not migrate to regular monthly pay status typically have matured and the shorter durations.
We're seeing that prepayments from property sales.
Especially for non regular paying loans is continuing or even accelerating.
Prepayment from rates for refinancing as you might imagine slowed in Q3 for refinancing eligible loans.
Our weighted average cost of funds in Q3 was higher than Q2 by approximately 80 basis points. Some of this comes from the issuance of our fixed rate unsecured notes in late August of 2022.
Given inflation and fed rate increase expectations, we would expect our cost of funds on the adjustable rate repurchase agreements increase over time all of our other debt is fixed rate, including our unsecured notes.
Net income attributable common holders was negative $16 million or <unk> 71, a share there are several items of note that had material impact on earnings in the third quarter to make it a little easier to follow we have a table of Hittite GAAP income to operating income on page 16 in the presentation as well as in our 10-Q.
Operating earnings was $3 1 million or <unk> 14, a share taxable income net of preferred dividends was 26 cents per share.
Taxable income is very instructive of the current cash economics of the portfolio taxable.
Taxable income was primarily driven by continued prepayment and related loan purchase discount capture from nonperforming loans and increasingly monthly payment performance from nonperforming loans and regular performing loans.
Somewhat offset by higher interest expense and $60 million less loans and securities on the balance sheet.
Our acceleration of discount allowance related to credit performance and cash flow velocity was $1 $9 million was $1 million in Q2, but first.
First $3 9 million in Q1.
We expense approximately $2 9 million related to GAAP fair value of accrual of the warrant put rights from our Q2 issuance of preferred stock and warrants for three six in Q2 and $3 2 million in Q1. This number will continue to materially decline in Q4 as well.
And a few one time unusual items.
A large one but one that brings us significant savings going forward as the repurchase of $66 million base for our outstanding preferred shares and the retirement of the associated warrants on common shares and the warrant put routes.
This requires us to recognize a $5 7 million charge from the acceleration of deferred issuance costs and issue discount as well as $8 8 million charge for the acceleration of expense related to the warrants and more input threats. The total onetime charges of approximately $14 5 million or <unk> 64, a share.
This repurchase more than offsets the cost of the $110 million secured note issuance in Q3 on a go forward basis.
As a result of the repurchase of preferred shares at less average equity going forward. The management fee will also be reduced by approximately $2 million a year.
We recorded a loss on investments and affiliates of 500000 or approximately <unk> <unk> a share as a result of the flow through of the mark to market decline in the price of our common shares owned by our manager and servicer in Q3.
Our manager receives a significant portion of their fee in shares and changes in market value of the shares flows through to US based on our 20% ownership interest percentage. Our servicer also owns a significant number of shares.
Book value was $13 75 at September $30 $40 98 at June 30.
Okay and decreased primarily as a result of the acceleration of deferred issuance cost 31 to the preferred and the extinguishment of the associated warrants and put rights.
We also paid a common dividend of <unk> 27 per share.
And preferred dividends at <unk> during Q3.
Book value changes noncash other than the payment of the dividends and the warrant repurchase there is a table on page 17, the details the change in book value.
We do not mark to market of our ownership interest in our manager servicer as close to a zero basis for these on our balance sheet.
Okay.
In late August we issued $110 million of our $8 <unk> unsecured notes.
A significant portion of which was used to repurchase preferred shares and their associated warrants and put rates. The remainder is to be used for general corporate purposes and investments as we see.
Some opportunities starting to present themselves, which we think will become more so over the next few quarters.
At September 30, we had approximately $73 million of cash and for Q3, we had average daily cash and cash equivalent of approximately $62 million.
We had approximately $58 million of cash collections in the third quarter.
As I mentioned earlier in this call at September 30, we also have a significant amount of unencumbered securities from our securitization to joint ventures, as well as unencumbered mortgage loans.
Approximately.
79, 6% of our portfolio by <unk> made at least 12 of their last 12 payments compared to a fraction of this at the time of loan acquisition.
This increased from 70, 373% in Q1 and 74, 2% in Q2, despite buying significantly more npls and <unk> since the third quarter of 2021.
On page five.
An overview of our loan portfolio purchase.
Purchase rpms represent about 89% of our loan portfolio at the end of Q3. They represented 96% at the end of Q3 last year.
We primarily purchased <unk> in the Midwest and seven consecutive payments and Npls that have certain loan levels and underlying property specifications that our analytics suggest lead to positive painted by accretion.
Property sales and prepayments on average, we typically buy well seasoned lower LTV loans.
On page six you can really see this.
We continue to buy and own lower LTV loans, our overall RTL purchase price is approximately 41% of the current property values.
We've always been focused on loans with lower loan to values with certain threshold levels of absolute dollars of equity and a target geographic locations.
This has become even more important for RP held in Npls in the last six to nine months.
On page seven.
In Q3, and Q4, we significantly increased up to 2021, we significantly increased our NPL purchases.
Npls on average have shorter duration in our pls.
Npls on their balance sheet, our overall purchase price is 47% of property value.
Represents approximately 70 per cent of our portfolio and southeast, Florida is approximately 75% of that.
Significantly themes from property sales have continued there.
Purchase and NPL portfolio of approximately $85 million in late Q3 of 2021 in which all of the loans are secured by properties in Miami Dade Broward and Palm Beach counties in Florida.
And servicing transferred to our service or Gregory funding in Q4 of 21. These loans are far outperformed expectations. Both in prepayment from property sales, but even more so than monthly payment three performance.
We continue to see demand for homes in our in our price ranges and our target markets.
On page nine you can see that it's September 30, almost 80 per cent of our loan portfolio immediately 12 in the last 12 payments compared to $74, 2% of June 3rd.
Almost 70% of made at least 24 of the last 24 payments.
More than 81% if now made at least seven consecutive payments.
<unk> two eight minimal fraction of that at the time of purchase.
Significant increase in monthly performance is more normal given that since Q3 of 21, we primarily purchase low LTV npls in other fields.
Historically as I mentioned earlier historically, we've seen that when our purchase loans reached seven consecutive payments, there's a 92% chance that they get to 12 consecutive games.
And subsequent events.
In late October recall invested with three third party institutional investors in a joint venture to purchase almost 300 million UVB very well L. T D sloppy pay mortgage loans.
Purchase price, including all joint venture formation expenses with $86 seven per cent of G. P. B.
Only 40% of the underlying property values of $653 million.
We own approximately 75% of the joint venture.
Alone service of Gregory funding is the loan servicer for the joint venture and was also the <unk> provider to the joint venture.
Ah November 3rd would be declared a cash dividend 27 cents per share to be paid on November 29th 2022, the holders of record on November 15th 2022 attached.
Taxable income in 2022, so far is higher than accumulated 2022 distributions.
Page 11, some financial metrics average loan yields excluding the accelerated income from Cecil related credit Reserve Ruby says, we're primarily unchanged average yield beneficial interest declined primarily due to significantly.
Performance.
Securities and beneficial interests remember the yield is net of servicing fees and yield envelope destructive servicing fees that securities beneficial interests are interested in our T V that presented number yet.
Gee these increases as they did in the last three years alone.
Recording shows lower average out the Eagles by the amount of the service increase.
We would expect <unk> decline a little in the cheapest before we expect this for loans consolidate our balance sheet alone joint ventures that show a security <unk>.
Since we purchase loans at a discount.
Re performs delinquent loans that surely in excess of expectation induration redo seal.
The significant absolute dollars of equity for hours on average.
Accelerated prepayment from home sale about delinquent loans, which release reserves after Cecil.
Which also reduces yields overtime.
In the future overtime. This re performance increases total castle.
<unk>.
The rise in interest rates strangely has accelerated the sell properties for are delinquent loans with certain hours two dollar amounts of equity and certain underlying demographics.
The borrower.
Leverage continues to be low, especially for companies in our sector. We ended Q3 with the asset level that is 2.7 times average asset level that for the quarter was 2.5 times.
Total average that comes with higher in Q3 Q2.
Primarily resolve the driving page rates repurchase agreements and the issues of our unsecured dose in August .
Right. That's currently approximately 60% of our total debt and is increasing as a percentage as our budget takes down.
[noise] October repurchase agreement related deaths September 30 was approximately $463 million down from $590 million at the end of June .
$237 million Mark to market nonrecourse mortgage loan financing $226 million financing primarily in a class in one senior phones John .
<unk>.
We also as you can see at the bottom of page 12 of significant unencumbered assets.
And with that if anybody has any questions I'm certainly.
Happiness answered.
And I know the answer.
Thank you Mr. Mandelson, ladies and gentlemen at this time, if you have any questions <unk> and if you find that your question has already been addressed you can remove yourself from the queue by pressing the star one again.
We'll take our first question this afternoon Brown, Kevin Barker Piper Sandwich.
Okay.
This is actually bad Tuesday on for curbing Barker.
I hope, you're feeling better I'm sorry.
What do you expect or run late operating EPS relative to the operating income report it today.
Uhm to.
To some extent depends on.
Movements and swap rates and so.
But we have increased our balance sheet materially at the end of October .
And rates have gone up a little bit.
That being said prepayments delinquent loans continued.
Pretty much at the same level, perhaps even higher than.
Than what we saw.
So.
I wouldn't expect that.
That much difference other than there'll be.
Some fluctuation based on what the.
Well cough December prepayment, sorry December prepayments tends to be a little less predictable.
Awesome and then.
Doctors work repayments were really high these at December .
Payments were average so.
We'll run a thoughts properly.
In another two to three weeks looking for homes that are listed to.
Give us a feel for December 31 prepayments.
Awesome and then I have one follow up.
Touched on this a little bit can you quantify the impact of the higher short term rates and when the offsets from the higher S at Yale subscribed to fly through.
Sure.
Hi.
The.
The joint venture that we bought at the end of October has higher yields.
In fact, it's significantly higher heels and recessions and it has a good economy.
Because of the Ltvs locations the amount of equity.
And what it can cause a prepayment rates.
Thanks for change, but the.
So we will see an increase in yield from that.
Investment existing yields should go down I would say.
Marceline considerably uhm.
Distribution extension performance.
I would say obviously are securitization funding.
That doesn't change we will see some increase in our debt securities.
Funding cause.
Are changes.
But even that has a lag effect because of royalties.
So.
A lot depends on how many more assets we put on between now again this quarter that being said, we were pretty patient only buying things that we really can't resist because we think there's going to be the opportunity to is going to increase not decrease over the next three to four months.
Awesome. Thanks.
Sure.
Oh.
Thank you. We go next statue are taken a b T I G.
Hey, you got a saggy on for Eric.
Sure. It's a couple from me.
What do you see as catalysts for Rpf's spreads tightened right now is there anything specific to the behavior outlook, <unk>, which would support more tightening as compared to other mortgage credit.
Yeah. So let me so let me kind of separate RPI with a little bit.
From what I'll call, new non QM origination.
Rpms, especially in large pools.
Trading actually tighter didn't wear the structured finance market.
No as Fanny sold a pool of art.
Four pools of archaeology bosses philosophy painful, but the two.
You were paying pools traded too.
And yielded below sixes.
Back in and this was in late September early October .
And those are the kind of three four $500 million pool.
And they were lower ltv's. So in lone land, there's clearly a distinction being made between what are called lower ltvs and higher LTV.
For example in one of the things we're seeing in the nine two m's space a little bit loans.
As we are seeing that kind of the.
Ltvs are going up.
And the properties.
It seems that the <unk> that really $85 90 is not eighties. So it is a little more will call property credit risks in those then in in the larger very seized in RTL pools.
That being said RPM pools of smaller amounts.
Stretch of much.
Much wider although still tighter than where.
We would necessarily expect them.
The structured finance market is a little bit broken.
The unrated market, which is more kind of Nplr appeal.
Is.
Most of the investors.
Close so that's kind of a market that doesn't have much liquidity one of the reasons why we spend so much time working with rating agencies be able to do deals with 40 per cent npls as triple a rated structures, it's because we could see that coming and that's what I needed to raise deals.
And the year.
Midland year April and June .
<unk> N P L deals.
G rated mortgage is also a bit choppy liquid.
Although there's definitely a difference between.
With the issuer as we've seen.
We have a group of one I'll call regular investors, we know our shelf and know how we think and also the co invest with us in joint ventures.
Still kind.
Regular buyers.
In our securitization structures, but.
The credit spreads widen dramatically and I'm not sure necessarily reflects what the true credit triple the probability of.
AAA rpms, not getting paid in full or.
Pretty remote.
Absent Hi, Ltvs.
Ross R. Ltvs securitization loans are in the forties.
Ltv's for Us is 55.
And purchase price to Ltvs 39 to 40, so it's.
We just bought.
Joint venture so.
We're kind of making sure we buy things that were almost indifferent as to what happens in the account.
From my.
<unk> do you think distress terror performing borrower borrowers will be at a lower home values does the fact that they are called it in the past like them more sensitive to certain factors now.
Yes, yes.
RP out the <unk> stands for Reperforming, which means sometimes.
In the past.
15 years, they were not pain.
And they tend to be a little more.
A little more multiplier effect then.
Brand new on the other thing is that if you look at our loans.
Our loans, even an average origination database, it's about 15 or 16 years ago.
Kind of cool.
Our our portfolio goes from 1994 origination all the way through 2022 origination.
But on average they have.
They were originated back in 2007, so one of the things we see significantly is especially in a declining home price environment is acceleration of selling by empty nesters and so if you look at our portfolio the percentage of empty nesters is about 50 per cent of our portfolio.
And by 2028 of our portfolio is that the percentage of empty nesters is 70% of our portfolio. So and they are much more sensitive to declining home prices. Because if you are a borrower who had previous delinquency.
And HPA in the last three years cause you to have significant equity you didn't previous behalf.
In a declining home price environment, you actually accelerate the profitability of selling your home to make sure you captured equity.
Got it that's a great color, but I appreciate it thanks.
We'll take our next question now for <unk>.
Oh.
<unk> good afternoon question correctly with the.
Yields are being negatively impacted by that the phenomenon of blood as an M P L caring and and you're paying longer and longer duration.
Performing.
Yeah.
The.
Loans to become regular pain.
They have.
They seem to be they don't always become longer duration, but.
I would say on average they become a little longer duration.
Say alone days delinquent because the in today's market alone keeps paying if less likely to refinance been it wouldn't have.
Two to three years ago.
Or even.
Nine months ago.
So in today's interest rate environment alone becomes 12 months 24 months paying.
Less likely to do a.
A return refi, so but because of.
Call you know like I mentioned before the end of the empty nester scenario.
You'll see.
A significant amount of prepayment from property sales are performing loans.
Not quite as predictable as it is for.
More delinquent loans.
Gotcha, Okay. Yeah I was just typically that's a good thing for your business model Yeah Yeah.
A as being one of the oddities of kind of over the last six months is.
Typically you know formula becomes performing becomes more valuable now non-performing moment becomes performing somehow become close by.
That's absolutely incredible.
Okay, well it just it just takes you longer I guess <unk>.
There's some really destroy the longterm value of it just takes a little bit longer than that.
How I think about it.
In fact, when they'd be performing you get over the life as long as you get more total cash flow.
Alright, and you collect the records from the delinquency just like you do when it doesn't perform.
But but but you collect more cash flow you would have didn't perform.
Collected over a long period of time.
Gotcha.
We got you, which.
Which a year ago was probably.
Not.
Just just.
Wishful difference.
Alright, good interesting interesting dynamic thanks for pointing that out yet.
You were active in October it's great to see you know see the deal to <unk> when I think of the.
The next thing you know call just two quarters you mean.
We've heard somebody somebody somebody at the other.
Basic dating sort of pipelines are clogged and and thanks for good to get just hold out from originators can't Securitise can't get things out.
Yeah, I look at your business <unk> kick out one would hope whatever you Wanna call it but.
There's there's gotta be a lot of supply, but do you do intense.
Great for your business.
That's gonna happen.
Or do you think it's helpful salesman.
Banks.
Then yeah.
Prices are going to feel like you guys just need to let the U to use less elaborate you already under elaborate but you feel like you can check to buy things even with no leverage at some point.
The answer the answer is yes.
We think the opportunity said, it's actually.
Forming.
Certainly on the origination side, we think there's going to be some opportunities to be.
What I'll call lifeline or to be.
To potentially acquire originator, who can do specific things.
Like if nothing else work on re refinancing some perfectly quick borrowers and things like that.
But we also are seeing for example in commercial land we're seeing.
The community banks basically exit.
Commercial bridge business and the commercial bridge width renovation financing my business.
And we're seeing that business being harder and harder for people to get financing facilities or even originators coupons material amounts of it.
Having a permanent balance sheet and having joint venture partners, we can aggregate.
Give you an amount of that and that is.
Who is rapidly becoming whenever we call an upper double digits.
Your business with points and fees and so we're spending a lotta time, that's something we've done for years and years and years and years, but.
Got so competitive at rates that we didn't understand in 28 2020 2021.
2022 that we kind of step back a little but that's something where we think there's going to be significant opportunity. It's it's we can see it coming you restarted we'll see some opportunities that we're evaluating with our joint venture partners.
And we've had three or four joint venture partners interest in it and reach out to us about being able to expand that.
So we think that's going to be an opportunity said.
As well.
And we.
We think that you will see.
Despite what the fed said yesterday, we talked to borrowers everyday.
The recession has already started for a lot of borrowers and so we think there's gonna be.
Some.
Delinquency opportunity purchase opportunities that will start to kick in probably still three or four months away, but it's coming.
Yeah.
I forget about the <unk> capability.
<unk> and the commercial space, so that could be.
With all the <unk>, we have similar patterns.
We've had a couple of.
Private equity firms reach out to us about structuring joint ventures.
Money to work and pay fees.
<unk> <unk> to help put acid.
<unk> together and oversee them for them and things like that.
As well as the drink.
Yeah, So that's a significant opportunity and the first thing you said about the origination.
You know to strategy that could be Joseph <unk>.
Tell me your best as you always have a counter cyclical and it and it.
Really position to take advantage of this I mean, it's nice to see you're cleaning up the balance sheet to.
Yeah, that's what I'm counting drag that's got like a lower rate English somebody that I mean that is.
Yeah, well, let's put it this way we did $110 million of notes.
Just the.
Uhm.
66 million.
Preferred that we retired more than offsets 100% of the interest on the hundred February notes.
Unbelievable.
That's great.
We require even the preferred.
Retiring put options that.
By itself more than covers just the interest on the notes plus we have cash left over from that for.
Acquiring things.
Right.
While I commend you for that for you know what's on the balance sheet. During this time.
We'll wait for an update but we look forward to the progress your bank and thanks a lot.
Yeah, Yeah that being said with the economic environment broken market, it's not quite as fun as it used to be.
[laughter].
Right I I hear I hear that with the yield curve is dangerous.
Dangerous, but I certainly hear that.
Yeah, yeah, but but the one thing we definitely heard from our borrowers is that the recession has already started.
Thanks for that.
Yeah.
Thank you, ladies and gentlemen, just a reminder, sarwan. Please for any further questions today.
Mr. Mendelsohn. It appears we have no further questions. This afternoon I'll turn the conference back to you for any closing comments.
Thank you very much everybody for joining us on <unk>.
Third quarter of 2022 earnings call I apologize, if I was difficult to understand with my voice, but I appreciate you putting up with it.
And thanks again for being and do you have any questions feel free to reach out to us.
I was happy to discuss anything we can.
Have a good evening.
Thank you Mr. Mandelson again, ladies and gentlemen, it does include the Great HD X Corporation Q3, 2022 earnings conference call, we'd like to thank you also much 20th and again wish you a great evening Goodbye.
[music].