Q4 2022 Great Ajax Corp Earnings Call
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Speaker 1: I.
Speaker 2: Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the great AjaxCorp fourth quarter and year-end financial results conference call.
Speaker 2: All lines have been placed on mute to prevent any background noise.
Speaker 2: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to draw your question, again press star one. Thank you. It is now my pleasure to turn today's call to the speaker.
Speaker 2: over to Mr. Larry Mendelson, Chief Executive Officer. Please go ahead.
Speaker 3: Thank you, Grant. Thank you, everyone, for joining us for a great AJAXIS 4-quarter in your end of 2022 conference call. Before we get started, I'd like to point out page 2 on the presentation and the State Parliament disclosure report.
Speaker 3: With her here is Mary Doyle, our CFO , and also on the line is Russell Schaub, our President.
Speaker 3: A quick introduction before we get in. There's a couple of things to note before we get into the details. In Q4 2022, loan performance continued to increase in loan cash flow velocity from sales of homes by certain delinquent borrowers continued and has also continued in Q1 2023.
Speaker 3: Prepayments from borrowers refinancing continue to be slower, as you would probably expect.
Speaker 3: The regular payment performance of our mortgage loans and our mortgage loan JV structures in excess of our model of expectations at the time of acquisition for loans purchased at a discount to the UPB has increased previous gap income by accelerating purchase discount accretion because of the required allocation of CECL.
Speaker 3: This then reduces forward gap interest income and ROE thereafter but not taxable income.
Speaker 3: At September 30, we had approximately $47 million cash as well as a significant amount of unencumbered securities loans, and I will go through that in more detail later on this call. With that, we jump to page 3. For more information, visit G positional.org
Speaker 3: approximately 47 million cash as well as significant amount of unencumbered securities loans and I will go through that in more detail later on this call. With that we jump to page three for the business overview.
Speaker 3: Our managers data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution pathway probabilities. And its ability to source these mortgage loans through long-standing relationships enables us to acquire loans that we believe have a material probability of prepayment.
Speaker 3: and or long-term continuing re-performance.
Speaker 3: We've acquired loans in 375 different transactions since 2014 and three transactions and one larger one in Q4 of 2022. We own 19.8% of the equity of our manager at a zero basis and we do not mark-to-mark our ownership interest on our balance sheet.
Speaker 3: 0.8% interest in our manager. However, should we ever internalize the management of Great Ajax, Great Ajax would record a material capital gain from their 19.8% interest.
Speaker 3: Additionally, our billy-to-service search Gregory funding provides strategic advantage in non-reforming and non-regular painting loan resolution processes.
Speaker 3: closely with the servicer is quite essential.
Speaker 3: We have certainly seen the benefit of this with the significant increases in loan performance, our consistent prepayment from property sales, especially for joint loan loans. And with our 2022A and 2022B securization structures, and now our 2023A securization AAA rated structures that permit up to 40% of loans.
Speaker 3: be greater than 60 days or more delinquent at the time of securitization.
Speaker 3: Like our 20% equity interest in our manager, we now have a 21.6% economic interest in our servicer at a very low basis as well. We don't mark to market our equity interest in the servicer on our balance sheet either. Our servicer currently is evaluating a private equity round as part of rolling out some new data technology driven programs through strategic joint ventures.
Speaker 3: The data analytics and sourcing relationships of our manager and the effectiveness of our affiliated servicer also enables us to broaden our investment reach through joint ventures with third party institutional investors and thereby invest in larger transactions as well.
Speaker 3: The servicer's loan expertise is definitely appreciated by our JV partners, as several of our JV partners pay our servicer for providing third-party due diligence services for other transactions they may be working on and have hired our servicer to solve problems they may have with other servicers.
Speaker 3: We still have low leverage. As December 31, our year end corporate leverage ratio was 3.3 times. Our Q4 average asset base leverage was 2.7 times. And our market market leverage is primarily secured by class A1 senior bonds in our joint measures.
Speaker 3: We own the 22% equity interest in Gaia Real Estate Corp. Gaia is currently a private equity REIT that primarily invests in repositioning multi-family properties in specific markets and in triple net lease freestanding veterinary clinic properties in conjunction with large national veterinary practice owners.
Speaker 3: We carry our guided interest on our balance sheet at the lower of cost for market. Gaia completed an additional round of equity about a year ago at a premium to our carrying value, but our balance sheet income statement do not reflect any markup. We currently expect Gaia to raise additional private equity and ultimately become a public company in 2020.
Speaker 3: Our gross interest income, excluding 1.1 million from the outpatiacy, so is 18.4 million, which is approximately 1.6 million lower than Q3 2022.
Speaker 3: There are three reasons why gas growth is interesting because it is lower. First, we had approximately 35 million lower average earth interest learning assets on balance sheet in Q4 versus Q3 at 22.
Speaker 3: Second, we're continuing to have significantly more delinquent loans than expected become performing.
Speaker 3: As the link belongs to comfort for me, they provide more cash flow but over a longer period. Since we buy loans at a discount, this increase in performance can extend expect duration, which lowers yield.
Speaker 3: However, in a recession and declining housing price environment, low LTVs provide material hedge as increased delinquency, shortest duration, and corresponding yields will increase materially.
Speaker 3: The third reason for lower interest income is the design of CISIL. CISIL was primarily designed for loans with a par basis so that accelerating reserve recapture came after a right death. Because we buy loans into discount, requiring the acceleration of reserve recapture under CISIL,
Speaker 3: decreases the remaining purchase discounts to be treated over the life of the loan, which lowers forward gap yield for CECL.
Speaker 3: You have a gap yield under CECL for the required reserve recapture.
Speaker 3: A gap light is to keep in mind is an interest income from our portion of joint ventures shows up in income from securities and not interest income from loans.
Speaker 3: For these joint venture interests, servicing fees for securities are paid out at securities waterfall. So our interesting income for joint ventures.
Speaker 3: Securities is net of servicing fees, unlike interest income from loans, which is gross of servicing fees.
Speaker 3: As a result, since our joint venture and dust has been growing faster than our direct load investments, gap interest income will be lowered than if we directly purchased loans outside of joint ventures by the amount of the servicing fees. And gap servicing fee expense will decrease by the corresponding offsetting amount. An important part of discussing interest income is the payment performance.
Speaker 3: over the last 12 months increased materially relative to RPL purchases.
Speaker 3: 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 1.1 million of unallocated loan purchase discount reserves under CECL in Q4.
Speaker 3: and the additional reserve recaptures in each of the previous seven quarters as well.
Speaker 3: Also, approximately 60% of our full bone pales in Q4 and so far in Q1 as well were from the ones that were materially delinquent at the time of payoff.
Speaker 3: While loans have become regular repaying produce higher total cash flows over the life of loans, then you extend duration and because we purchased loans at discounts, this can reduce percentage yield out of loan portfolio and therefore interest income.
Speaker 3: Loans that do not migrate to regular monthly pay status typically have maternity short iterations.
Speaker 3: We are seeing that prepayments from property sales for both regularly paying and not regularly paying loans is continuing. Prepayments from rate term refinancing remain slow in Q4 for refinance eligible loans.
Speaker 3: Our weighted average cost of months in Q4 was higher than Q3 by approximately 100 basis points.
Speaker 3: Some of this comes from the issuance of our fixed rate unspeared notes in late August 22 and having this on balance sheet for a full quarter.
Speaker 3: Fed rate increases and related increase in silver increase the cost of our floating rate be purchased to green and finance.
Speaker 3: Net income attributable to common stockholders was negative $6.8 million or $0.30 per share. There are several items of note that had impact on earnings in Q4.
Speaker 3: To make the little easier to follow, we have a table that ties gap income to operating income on page 17 in this presentation as well as in our 10k.
Speaker 3: Operating earnings was negative $1.3 million or 5 cents per share. Taxable income, debt of preferred dividends was 21 cents per share.
Speaker 3: Taxable income is very instructive of the current cash economics of the portfolio.
Speaker 3: Taxable income was primarily driven by continued prepayment and related loan purchase discount capture from nonperforming loans and increasing monthly payment re-performance from nonperforming loans and regularly performing loans, offset by higher interest expense and lesser amount of loans and securities under balance. Taxable income is not affected by the CSO related reserve recapture.
Speaker 3: So when we actually receive cash payments from borrowers and cash or purchase discount, it creates taxable income. As a result, forward taxable yield, which is effectively cash loan yields, is higher than gap yields because of seasonal.
Speaker 3: 3. Recording the loss on investment in Australia is $300,000 or approximately $2 cents per share as a result of the flow through of the market to market decline in the price of our common shares owned by our manager and service service and keyboard. 3. Recording the loss on investment in the price of our common shares owned by our manager and service service and keyboard.
Speaker 3: Our manager receives a significant portion of their management fee in shares, and changes in market value of those shares flows through to us based on our 20% ownership interest percentage.
Speaker 3: Other income declined by almost $4 million as we recorded a $3.8 million loss from the sale of Class A senior debt securities in one of our joint venture transactions.
Speaker 3: 2.9 million of this was already reflected in book value in September 30th. This 2.9 million plus additional 900,000 loss for recognized income as a result of selling class-18 security and keyboard. In our joint venture structures, we are going to be able to purchase by loans into multi-transferatization structures.
Speaker 3: and we each retain a pro-rad of vertical slides of each tranche of securities, including the equity trots.
Speaker 3: The Class A senior is usually the lowest coupon and is priced at market coupon and yield at the time.
Speaker 3: This class A senior bond thereby had a low coupon and had a negative carry versus refurges funding and it made sense to sell the class A senior security and read the deploy to capital for a higher return.
Speaker 3: Both value for share was $13.00 in December 31 for a $13.75 in September 30.
Speaker 3: Book value decreased primarily by our gap loss, given its pay and market adjustment for our joint venture debt securities. There is a table on page 19 that details the change in Book value. Would you not mark the market ownership in our manager and servicer and opposed to zero basis on our value sheet, their market values are...
Speaker 3: above, or significantly above zero. At year end, we had approximately 48 million of cash. And for the fourth quarter, we had average 80 cash and cash equivalent balance of approximately 47 million.
Speaker 3: We have approximately 44 million of cash collections in Q4. As December 31, we also have significant amount of unencumbered securities from our securitizations, enjoyed ventures, and unencumbered mortgage loans.
Speaker 3: In late October , we co-invested with three third-party institutional investors and a joint venture to purchase approximately 293 million U.P. of low-L.T.V. to be?on in the cannot-fri ??, which we have not yet here yet, including all members of selfie
Speaker 3: The purchase price, including all joint venture formation expenses, was 86.7% of UPB and 39% of the underlying property values of $653 million.
Speaker 3: We own approximately 17.5% of the joint venture.
Speaker 3: Our affiliate loan service circuit Gregory funding is the loan service for the joint venture and wants to do delicious providers.
Speaker 3: Approximately 79.6% of our portfolio by UPP made at least 12 of their last 12 payments can spare to a small fraction of this at the time of loan acquisition.
Speaker 3: This increased from 73% at March 31 and 74.2% at June 30, despite buying significantly more NPLs than RPLs since 3rd quarter of 2021.
Speaker 3: This increases life of loan cash flow, but the duration extension reduces yield and interest income in the current quarter. If we go to page 5...
Speaker 3: Purchase RPLs represent approximately 89% of our loan portfolio at December 31.
Speaker 3: Purchase RBL's represent 96% a year earlier.
Speaker 3: We primarily purchase RPLs that have made less than seven consecutive payments and NPLs that have certain loan level and underlying property specifications that our analytics suggest lead to positive payment migration, property sales, and related prepayment on average.
Speaker 3: We typically buy well-seasoned lower LTV loans. Since November 2022, we have seen residential loan prices increase materially, especially for regular paying loans but also for non-performing residential loans.
Speaker 3: Commercial real estate loans have not fair as well and we're beginning to see opportunities. We believe there will be significant opportunities in self-reforming and non-reforming commercial real estate loans in many markets as we get later into this calendar year. For residential loans we continue to see stronger improvements in expected.
Speaker 3: However, given the increase in interest rates and the potential for material economic slowing,
Speaker 3: We would expect an increase in delinquency and default and thereafter an increase in availability of self-performing and non-performing loads.
Speaker 3: One thing we have seen is that significant home price appreciation and the resulting material increase in absolute dollars of equity may borrow as more engaged and attached to their properties and more determined to maintain regular payments. On page 6...
Speaker 3: We can continue to buy and own lower LTV loans. Our overall RPL purchase price is across only 42% of current property value and 90% of UPB. We have always been focused on loans with lower LTVs with certain threshold levels of absolute dollars of equity and in target geographic locations.
Speaker 3: This has become even more important for RPLs and NPLs as well in potential recessionary environments.
Speaker 3: On page 7, 6Q3 and Q4 of 2021, we significantly increased our NPL purchases.
Speaker 3: NPL purchases on average have shorter duration than our heels.
Speaker 3: For NPLs on her balance sheet, our overall purchase price is 89% of UBB, 84% of total owing balance, including a rearage, and 47% of property value.
Speaker 3: As a result of the low loan-to-value and higher absolute dollars of equity on average for our NPL portfolio, we have seen accelerated prepayment on NPLs as borrowers can turn significant equity into cash when they sell their property.
Speaker 3: We've also seen a significant increase in NPL rep performance. As I mentioned earlier, for both RPLs and NPLs, purchasing age low LTP loans at more than 50% discount surprofi values provides a natural head to housing price declines and recession.
Speaker 3: as resulting increases in the link with these short restoration and increases corresponding years.
Speaker 3: On page 8 of our target markets, at December 31, approximately 78% of our loans were in our target markets.
Speaker 3: California continues to represent the largest segment of our local portfolio at approximately 22%. However, California has been nearly 40% of all proponents in 2021 and 2022.
Speaker 3: Our California mortgage loans are primarily in Los Angeles, Orange, and San Diego counties.
Speaker 3: Florida represents approximately 17% of our portfolio and Miami-Dade, Broward, and Palm Beach counties are approximately 75% of that.
Speaker 3: Significant prepayment from property sales by borrowers with delinquent loans have continued in Florida.
Speaker 3: We also continue to see demand for homes at our price ranges in our target markets, both for potential homeowners and rental buyers.
Speaker 3: On page 9, at December 31, approximately 79.6% of our loan portfolio made at these 12 of the last payments is compared to 74.2% at June 30. Approximately 70% of our loan portfolio made at least 24 of the last 24 payments.
Speaker 3: 81.1% have now made at least seven consecutive payments.
Speaker 3: This comparison was small fraction of this at the time of purchase. The significant increase in monthly performance is more notable, given that since Q3 of 2021.
Speaker 3: small fraction of this at the time of purchase. The significant increase in monthly performance is more notable, given that since Q3 of 21, we have primarily purchased
Speaker 3: NPLs rather than RPLs. Much of this is likely due to Gregory funding working with the Lincoln Bar or some personal bases and to the home price appreciation as our target markets are determined by data analytics that predict forward HPA selection bias.
Speaker 3: Historically, we have seen that when our purchase loans reach seven consecutive payments, they typically get to 12 consecutive payments more than 92% of the time.
Speaker 3: 7 consecutive payments have been the statistical turning point versus 6 consecutive payments. The significant outperformance, particularly for purchased NPLs, at discounts to UPB requires us to accelerate reserves capture under a Cecil.
Speaker 3: This decreases forward gap interest yields and gap interest income. Taxable income, however, is based on the actual cash flow as opposed to T-SOL and significant requirements generates more taxable income over time as a result of more total cash to be collected.
Speaker 3: On page 10, in January we increased our ownership in the parent of our servicer from 8% to 9.6%. We also own warrants for an additional 12%.
Speaker 3: In late February , we refinanced three of our 2019 NPL and sloppy pay RPL joint venture security structures with the issuance of purple-a rated bonds through AJAX Mortgage Lone Trust, 2023-A.
Speaker 3: The AAA bonds are approximately 76% of UPB of the underlying loans.
Speaker 3: We retained a 5% required percentage of the AAAs and 20% of the AAAs through Equity Certificate tranches. Our joint venture partner retained an 80% vertical percentage of AAAA through Equity.
Speaker 3: In February , we sold the Class A Senior Bond in one of our joint ventures and recognized the gap loss of $3 million. $2.2 million of this was already in book value, so the marginal change is $800,000. Given the coupon in that Class A Senior Bond, first we purchased a great funding cost, it made sense to sell the bond, eliminate the negative interest carried, and reinvest the profit.
Speaker 3: as cash yields on loans exceed seasonal impact and gap yields on loans.
Speaker 3: To the extent the Fed continues significantly raising rates, the impact on remaining 40 rate financing will have some offsetting effect on tax flowing cut.
Speaker 3: On page 11, average loan yields and average yields on beneficial equity interests in our joint ventures decline primarily due to significant loan reproformance, which extends duration, and the acceleration of gap purchase discount recapture as a result of sea-cell requirements. For debt securities and beneficial interests, remember that yield is net of certain fees. For debt securities and financial interests, remember that yield is net of certain fees.
Speaker 3: and yield on loans as corrosive servicing fees.
Speaker 3: Dev security and beneficial interests, how our interests in our JVs are presented under gap. As our JVs increased as they did in 2020-2021 and 2022 relative to loans, the gap reporting shows lower average asset yields by the amount of the servicing fees. Since we first disclosed to the discount, the increased reproperformance of doing-
Speaker 3: and excess of expectations. The sale of underlying properties for delinquent loans with certain minimum absolute dollar amounts of equity and underlying geography demographics has been steady to slightly increasing as a result of rapidly rising interest rates and borrower nervousness regarding the potential of future equity declines.
Speaker 3: Leverage continues to be low, especially for companies in our sector. We ended Q4-22 with asset level debt of 2.7 times, and average asset level debt for the quarter was 2.7 times.
Speaker 3: Our total average debt cost was higher in Q4. This is primarily the result of rising face rates for refurchase agreement funding and the issuance of our unsecured notes in August of 22 that were outstanding for the full fourth quarter of 2022.
Speaker 3: 6th rate that currently December 31 is approximately 60% of our total debt we expect is rate debt to continue increasing as percentage of our total debt.
Speaker 3: So far, if you want to 2023, we've seen a significant recovery and secured a nice bottom of private spreads relative to 2-4 2022.
Speaker 3: On page 12, our total repurchase agreement related debt at December 31 was approximately 445 million down from 463 million to September 30 and 599 million at June 30. It is down again in Q1 so far.
Speaker 3: 212 million was not marked to mark the non-recourse mortgage loan financing and 222 million was financing primarily on class A1 senior bonds in our joint ventures.
Speaker 3: We also have significant uneven redacet.
Speaker 3: We expect the amount of our floating rate debt to continue declining relative to fixed rate debt now that securitization markets are more functional.
Speaker 4: with that
Speaker 3: I'd like to turn you over to the operator. We're happy to take any questions that people might have.
Speaker 2: At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad.
Speaker 2: Your first question comes from the line of Kevin Barker with Piper Sandler. Your line is open This is for actors you answer Kevin Barker Like considering the relative discounting stock
Speaker 3: Flexibility essentially buy in more stock or could you explore some other strategic options? The answer is we do. We want to be a little bit patient though. We actually repurchased a little in the quarter and so far in this quarter as well.
Speaker 3: We want to be patient though because we can smell an opportunity set of investments coming, probably in sequentially commercial first and residential second, and we want to make sure that we're always kind of ready to go for that. So we wouldn't want to re-purchase that to the extent that we're going to be able to do that.
Speaker 3: didn't permit us to then take a jump for an opportunity set, but we can both from a company perspective and from a capital perspective do that. Oh, thank you. And then just one follow-up. I know you talk about this a little bit, but you know, home prices of decline in some key areas in the country.
Speaker 3: Do you see any risks within your portfolio in those metro areas? And then do you see any potential opportunities with banks or other entities pull back in certain metro areas? Yes, we definitely see community banks pull back. We've seen them being under some regulatory pressure more so in commercial area than in the residential area.
Speaker 3: We from our markets, we've seen some home price decline, but not necessarily in places where we have significant habits for example our California for fully primarily orange and standard heat and counties which have been giving lots of that to stand up near San Francisco. The stepping said because of the owner long-
Speaker 3: increase the length of the sea because it's short restoration and we recapture the discount password. So we actually have a purpose to try to buy very low and LTV loans in markets where we think the length of the sea might increase. So it's as a what I'll call portfolio hedge.
Speaker 3: a duration hedge for Portfolio. We actually have seen modeled out that if you were to have really, really hard landing, they caused a 20% across the border decline in home prices and a 100% Portfolio default.
Speaker 3: It would increase home labor yields by about 350 basis points.
Speaker 3: would increase on leverage yields by about 350 basis points. Awesome. Thanks for taking the question.
Speaker 2: Sure. Your next question is from the line of Eric Hagen with BGIG. Your line is open.
Speaker 5: Hey, you got Ethan on for Eric tonight. Thanks for taking my questions. Are you seeing any opportunities in special servicing, either organically or by acquiring some smaller servicers?
Speaker 3: So the answer is more complicated than you probably want to know how we are seeing two things.
Speaker 3: We're seeing more opportunities of being have our servicer ask to do special servicing and to bring in as a problem solver for other servicing. But we've also been reached out to by a number of private equity firms about seeing if we be willing to sell the servicer.
Speaker 3: So, or could they make strategic investments to grow it because they want to go out and buy things, or they have other things they can have the service or do as well and grow it? So it's kind of both fronts right now.
Speaker 5: Got it. Thank you. I got one more. What's the lower bound for the amount of cash you feel comfortable carrying over the near term? And just on top of that, what would you need to materialize for you to raise your cash balance?
Speaker 3: We probably don't want to be under the low 40s in cash.
Speaker 3: We have a significant number of Class A senior bonds in our joint ventures that we could sell if we wanted, which would effectively raise cash, the equivalent of raising capital is 6% cost.
Speaker 3: So, you know, it's cheaper than equity, as you can imagine. But we always want to have kind of enough cash available to play deep in. So we probably want to be at a minimum in the low 40s.
Speaker 5: Got it. Okay. And just what's the most you've carried historically if you don't mind me asking?
Speaker 3: There's been a time that we've had 130, 140 million.
Speaker 2: Got it. Okay, that's all for me. Thanks guys. Sure. There are no further questions at this time. I will now turn the call back over to the CEO , Mr. Larry Mendelsohn.
Speaker 3: Thank you everyone for joining us on our Q4 and year end 2022 conference call. Feel free to reach out with questions. Did you have additional questions that we haven't discussed on the call? And again, thank you for attending the Q4 to...
Speaker 2: talking further in the back great HX. Ladies and gentlemen before participating this concludes today's conference call, you may now disconnect.