Great Ajax Corp. Q1 2023 Earnings Call
Yeah.
Okay.
Yeah.
[music].
Well good day, everyone and welcome to the Great Ajax Corp, Q1, 2023 financial results conference call. At this time I would like to hand things over to Mr. Larry Mendelsohn CEO. Please go ahead Sir.
Thank you. Thank you everyone for joining us for our first quarter 2023.
Investor call.
Before we get started.
I'd like to point out page two the safe Harbor disclosure.
Forward looking statements.
I apologize for my voice.
<unk> importantly, this way right now.
Okay.
Before we get started.
I wanted to give you a little introduction Q1 of 2023 was as expected predominantly as we discussed on March 2nd call.
Couple of things to note before we get into the details though.
In the first quarter loan performance continues to increase and loan cash flow velocity for reinstatement on delinquent loans and from sales of phones by borrowers, particularly in March. This continued into the second quarter of 2023, as well as prepayments and borrowers refinancing the mortgages. However continue their slower pace as you would expect.
The range of the payment performance of our mortgage loans and mortgage loans in our JV structures in excess of our modeled expectations at time of acquisition.
Loans purchased at a discount to the ECB has increased previous GAAP income by accelerating the purchase discount accretion because of required application of seasonal.
This then reduces forward GAAP interest income and return on equity thereafter, however, the increase in cash flow velocity in the first quarter, particularly in March.
Has increased even the post seasonal GAAP yields a bit we've seen this in the second quarter as well so far.
At March 31, we had approximately $49 million of cash as well as a significant amount of covenant securities and loans, which I'll point out later in the table.
On page three business overview.
Our managers data science guides, our analysis of loan characteristics and the geographic market metrics for performance and resolution probabilities and the ability to source. These mortgage loans through longstanding relationships has enabled us to acquire loans that we believe have material profitability of prepayment and your long term continuing.
<unk> performance.
We've acquired loans and 378 different transactions since 2014.
Three transactions however in first quarter of 2023.
We own 19, 8% of the equity of our manager at zero basis, and we do not mark to market of ownership interest on our balance sheet. As a result, our book value does not reflect the market value of our almost 20% interest internal I think management has great Ajax, which resulted in recording a material GAAP capital gain from our 19.
8% interest in our manager.
Additionally, our affiliated servicer Gregory funding provides a strategic advantage in nonperforming and non regular paying loan resolution processes and timelines and a data feedback loop for our manager's analytics and.
In today's volatile environment, having our portfolio teams and the analytics group that the manager working closely with the servicer is essential.
Certainly seeing the benefit of this with the significant increases in loan performance are consistent prepayments.
Property sales by borrowers, especially for delinquent loans and with our Triple a rated structures that permit up to 40% of moments to be greater than 60 days or more delinquent at the time of securitization.
Like our 20% interest in our manager we now have 21, 6% economic interest in our servicer at a very low basis as well in January we increased our direct ownership into the parent of our servicer from 8% to nine 6%. We also own warrants for an additional 12%.
We don't Mark to market, our equity interest in the service of our on our balance sheet either our servicer is currently evaluating a private equity round as part of rolling out some new data technology, driven programs through strategic joint ventures, and MSR joint ventures as well.
We still have low leverage.
At March 31, our year end corporate leverage was three three times our quarter one.
Asset based leverage was two six times.
Okay.
We own 22% equity interest in Gaia real estate core guidance currently of private equity real estate, primarily invested repositioning multifamily properties in specific markets and the triple net leased freestanding veterinary clinic properties in conjunction with several large national veterinary practice aggregators.
We carry our guide interest on our balance sheet to lower of cost or market Guy had completed an additional round of equity in the first quarter of 'twenty two at a premium to our carrying value, but our balance sheet income statement do not reflect any market.
We currently expect guide to raise additional equity and ultimately become a public company. The current environment of bank runs in commercial real estate loan opportunities create significant optionality for guidance.
Yeah.
On page four just some highlights for the quarter.
Net interest income from loans and securities, including <unk> 6 million of interest income from the application of seasonal was approximately $4 1 million in the first quarter.
Our gross interest income, including $2 6 million from the application of seasonal was $18 5 million.
There are three reasons why GAAP gross interest income is lower.
First we had approximately $50 million lower average interest, earning assets on balance sheet in the first quarter versus the fourth quarter of 'twenty two.
Second we're continuing to have significantly more delinquent loans are expected to become performance as.
As delinquent loans become performing they provide more cash flow, but over a longer period.
Since we buy loans at a discount this increase in performance can extend.
Expected duration, which lowers yield power.
However, in a recession ended declining house price environment low LTV loans.
Provide a material head is increased delinquency shortened duration and significantly increases corresponding yields.
The third reason for lower interest income in the design of seasonal seasonal was primarily designed for banks with loans with a par basis, so that accelerating reserved capture came after a right Jeff.
We established an allowance under Steve So when we acquire new pools of loans, if the NPV of below tools contractual cash flows is greater than the NPV of our expected cash flows and that allowance is allocated to part of our purchase discount.
And do you expect the cash flows on those loans increases in subsequent periods. We are required to reverse the related allowance into interest income.
This immediate recognition of the increase in the change in cash flows reduces future yields and discount accretion.
We also accelerated discount accretion on loans paying full.
Despite the application of diesel yield on interest, earning assets increased levels due to increased prepayment and reinstatement, particularly in the month of March.
Our GAAP item to keep in mind, though is that interest income from our portion of joint ventures shows up in income from securities non interest income from loans.
For those for these joint venture interests servicing fees for securities are paid out of securities waterfall. So our interest income from joint ventures is net of servicing fees. Unlike interest income from loans, which 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 joint ventures 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 March 31, 81, 3% of our loan portfolio by <unk> made at least 12 of the last 12 payments for 74% at June 30 of 'twenty, two and 79, 6% at December 31 of 2000.
This compares to 13% at the time, we purchased <unk>.
Our NPL purchases over the last 15 months increased materially relative to RPI 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 related income recognition of <unk> 6 million of unallocated loan purchase discount reserves under seasonal in the first quarter.
And the additional reserve Recaptures, we've had in each of the previous eight quarters.
While loans become regularly pain produce higher total cash flows over the life of oil and on average they can extend duration and because we purchase loan discounts. This can reduce percentage yield on the loan portfolio and interest income.
Loans that do not migrate to regular monthly pay status typically have materially shorter durations and therefore result in higher yields.
We are seeing that prepayments from property sales for both regularly paying and non regular paying loans is continuing and EBIT increased.
Our weighted average cost of funds in the first quarter was higher than the fourth quarter by approximately 40 basis points. Most of this comes from the remaining floating rate repurchase agreements as well as getting ready for securitization and some joint venture securities repurchase agreements and related increases in <unk>, we expect a significant percentage.
And floating rate funding will be reduced through rated securitizations in Q2. The other reason weighted average cost of funds are up to.
Because as we've de Levered the unsecured debt that we issued in late August becomes a higher percentage of our total debt outstanding which increases the weighted average cost of funds.
Net income attributable to common stockholders was negative $7 9 million or <unk> 34 per share.
There are several items of note items of note and impact on earnings in the first quarter.
To make dilutive easier to follow will be the table. The <unk> gap to operating income on page 16 of this presentation as well as in our 10-K.
Operating earnings was negative $2 $1 billion or <unk> <unk> per share taxable income net of preferred dividends was five cents a share.
Taxable income decreased in the first quarter for two primary reasons first significant increase in monthly performance in delinquent loans, which extends taxable income yield duration, even more than GAAP yield duration as taxable income for performing loans is based on contractual duration of the loan so if a.
<unk> has 38 years remaining to maturity taxable income comes in equal installments over 30 years and less of a loan prepays.
Second we saw prepayments increase on performing loans, which typically have a higher tax basis relative to prepayment on nonperforming loans.
Taxable income is not affected by the seasonal related reserve recapture so when we actually receive cash payments from borrowers and capture purchase discount because of larger the contractual payments it creates taxable income.
This is the first quarter, where we've seen significant increase in property sales for performing loans versus delinquent loans.
We recorded a loss on investments and affiliates of $100 as a result of the flow through of the Mark to market decline in price of our common shares owned by our manager in the first quarter.
Our manager receives a significant portion of its management fee and shares and changes in market value of those shares flows through to us based on our 20% ownership interest percentage.
Other income declined as we recorded 3 million loss from the sale of class a senior debt securities and one of our joint venture transactions in February as we discussed in our subsequent event section in our March 2nd earnings call too.
$2 $2 million of this was already reflected in book value at December 31, and.
And our joint venture structures, we and our partners by loans into multi tranche securitization structures and we each retain the pro rata vertical slice of each tranche of securities, including the equity tranche.
The class a senior is usually the lowest coupons and is priced at market and finding yield at that time.
This class a senior bond, thereby have a low coupon and had negative carry from repurchase agreement funding. It made sense to sell the class a senior security and redeploy the capital for higher returns.
Book value per share was $12 58 at March 31.
Book value decreased primarily by our GAAP loss and dividends paid with an offset from a positive mark to market adjustment of our joint venture debt Securities.
The table on page 17 in this presentation is detailed change in book value.
We do not mark to market in our ownership interest in our manager and servicer and a close to a zero basis on their balance sheet their market values are significantly above zero, but book value would not reflect that.
In February we refinanced our unrated 2019, EEG in Asia Joint ventures into Hff's mortgage loan Trust 2020, 382023, as a rated joint venture structure, we retained 5% of the AAA securities as required by vertical risk retention rules and 20% of the <unk>.
Double H B rated securities and equity of the structure.
At March 31, we had approximately $49 million of cash and for Q1 of 2023 with an average daily cash and cash equivalent balance of approximately $50 million we.
We had approximately $44 million of cash collections in the first quarter.
At March 31, we also have significant.
The amount of unencumbered Securities Securities from our Securitizations and joint ventures, and unencumbered mortgage loans and we will discuss this more in detail on page 12.
Approximately 81, 3% of our portfolio by <unk> made at least 12 of their last 12 payments.
Their new small fraction of it at the time of loan acquisition.
This increased from 79, 6% at December 31.
And June 30 of 74, 2%. This is despite buying significantly more npls and Rps for the last 15 months.
This increase was life of loan cash flow, but the duration extension reduces yield and interest income in the current quarter as more purchased delinquent loans re performed rather than prepay or default. This lowest current task will occur as well.
Purchased if.
If we go to page five.
Purchased Rps represents approximately 89% of our portfolio at March 31.
They represented 96% a year earlier.
We primarily purchase Rps to the Midwest and secondly, seven consecutive payments.
And npls at a certain loan level and underlying property specifications better analytics suggest lead to positive payment migration early property sales and related prepayments on average.
We typically buy well seasoned lower LTV loans.
Since November 'twenty, two we've seen residential loan prices increase materially.
Especially for regular paying loans, but also for nonperforming residential loans.
For residential loans, we continued to see stronger performance than expected in our portfolio. However, given the increase in interest rates credit tightening and the potential for material economic slowing we would expect an increase in delinquency and default at some point and therefore, an increase in availability of sub performing and nonperforming loans.
As a result, we have been hesitant to be aggressive in residential loan acquisitions, as we expect a better opportunity acceptable develops.
One thing we have seen is a significant home price appreciation and the resulting material increase in absolute dollars of equity made borrowers more engaged and financially attached to their properties and therefore more determined to maintain regular payments.
Historically, we have frequently seen mortgage borrowers paid credit cards, and auto loans and Helocs before paying first mortgages in times of financial stress. However.
However, as a result of significant increases in absolute dollars of equity for older loans. We are now seeing increased delinquency for their credit cards and auto loans and the opposite for their first mortgages.
Commercial real estate loans have not fared as well and we are beginning to see opportunities.
We believe there will be significant opportunities of sub performing and nonperforming commercial real estate loans in many markets as we get later into this calendar year and thereafter.
As we mentioned on the third quarter and fourth quarter 2022 earnings calls, we see one of the material market risk as the fed breakeven the system.
We have seen the preview of this in the last few months and is having a less talked about effect on mid size and sub mid sized bank liquidity and loan portfolio performance.
They frequently at higher percentages of their loan portfolios with commercial real estate exposure.
We are beginning to see CRE loans for sale from these institutions and expect up opportunities that will grow.
We also expect that resulting bank consolidations will stimulate this as well.
We have joint venture partners that would like us to find a 1 billion plus dollars of commercial opportunities as they develop.
From these same banks, we are seeing agency and non agency MSR is being put up for sale and sub $1 billion UTV increments as well as large MSR offerings, some larger banks that originators.
As these banks Woodford predictable liquidity they are marketing MSR as MSR sales take two to four months to sell.
One thing to note. However, as many of these small offerings now are not actually trading is the MSR bids are below current market value at these specs.
We think there is also going to be significant MSR opportunity set and having Gregory is a servicer and only 21, 6% economic interest in it will be beneficial we are in discussions with several institutional MSR investors on joint venture structures.
Okay.
On page six.
We own lower LTV loans, but we did not buy many months in the first quarter.
Our overall RPM purchase price is approximately 42% of current property value and 90% of UPC. We've always been focused on loans with low ltvs with certain threshold levels of absolute dollars of equity and in targeted geographic locations.
This has become even more important in a recessionary environment.
Okay.
On page seven.
Since the third quarter and fourth quarter of 2021, we significantly increased our NPL purchases versus Rps.
Npls on average can have shorter durations in our pls.
Npls on our balance sheet, our overall purchase price was 89% of <unk>, 84% of the own balance, including <unk> and 47% of property value.
As a result of the low loan to value and higher absolute dollars of equity on average for our NPL portfolio. We are seeing significant reinstatement REIT performance on our Npls.
As I mentioned earlier for both <unk> and Npls purchasing age low LTV loans at 50% discount to property values and that a significant absolute dollars of equity provides a natural credit hedge to housing price declines and recession, as resulting increases in delinquencies shortened duration and increases correspond.
<unk> yields quite materially.
On page eight at March 31, approximately 78% of our loans were in our target markets.
California continues to represent the largest segment of our loan portfolio at approximately 22%.
However, California has been nearly 40% of all prepayments in 2021, 2022 and first quarter of 2023.
Our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties.
Okay.
Florida represents approximately 17% of our portfolio in Miami Dade Broward and Palm Beach counties are approximately 75% of that.
We continue to see demand for homes in our price range targets in our markets both through potential homeowners and single family rental buyers.
On page nine at March 31, approximately 81, 3% of our loan portfolio made at least 12 of the last 12 payments as compared to under 74, 2% a year ago.
Approximately 72% of our loan portfolio made at least 24 over the last 24 compared to 69% three months ago.
Over 83% has now made at least seven consecutive payments.
This compares to a small fraction to timing purchase.
The significant increase in multi performance is more notable given that sits.
Q3 of 'twenty, one we purchased primarily mpls rather than Rps.
Much of this is likely due to Gregory funding working with delinquent borrowers on a personal basis and to absolute dollars of home depreciation as our target markets are significantly determined by data analytics that predict forward home price depreciation for each market in dollars.
Historically, we have seen that when our purchase loans reached stepping consecutive payments.
They typically get to 12 consecutive payments more than 92% of this time.
Seven consecutive payments have been the statistical turning point.
Subsequent events on page 10, we have 18 million UTP of RPM and Npls under contract at a price of approximately 83% of ETB and 54% of underlying property value. We expect these to close in the next week.
We declared a cash dividend of <unk> 20 per share to be paid on may 31 to holders of record on May 15, we expect that taxable income will likely exceed GAAP income as a result of seasonal as cash yielding loans exceeds diesel impacted GAAP yields out loans to.
To the extent the fed continues significantly raising rates the impact on remaining floating rate financing will have some offsetting effect on taxable income.
However, credit tightening and resulting recession, who will likely increase taxable income by shortening loan duration and Securitizations. We have in the pipeline will replace more expense of floating rate funding and thereby likely increase taxable income also.
We also see investment opportunity set brewing as a result of the recession risk and banking sector risk issues as well.
Yes.
On page 11, some financial metrics average loan yields and average yields on beneficial equity interest in our joint ventures increased level, primarily due to significant lower cash flow in March and also so far in April .
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 GPS are presented under GAAP.
And have increased in 2000, 2021, and 'twenty two relative to loans.
Since we purchased loans at a discount the increased street performance as delinquent loans maturing in excess of expectations can extend duration and reduced yield the significant absolute dollars of equity for our loans. Both from the types of loans, we buy in the home price appreciation in our target markets on average.
Both accelerated prepayment from home sales on delinquent loans and less material re performance in excess of expectations, which reduces ongoing yield for loans purchased at a discount.
The sale of underlying properties by borrowers with delinquent loans with certain minimum absolute dollar amounts of equity and underlying geography, and borrower demographics has been steady, but it was marginally lower in January and February and it has increased again in March and April .
Leverage continues to be low, especially for companies in our sector. We.
We ended the first quarter with asset level debt of $2 16, which is lower than it was at year end 'twenty two.
Our total average debt cost was higher in Q1, primarily the result of rising sofa base rates for repurchase agreement funding and the issuance of our unsecured notes in August since they are a higher percentage of total outstanding debt is after debt paydown from loan prepayments.
Fixed rate securitized debt at March 31.
More than 60% of our total debt, we expect fixed rate debt to continue increasing as a percentage of our total debt as we have three securitizations in the pipeline.
So far in 'twenty, three we have seen a significant recovery and securitize senior bond credit spreads relative to the fourth quarter as well as in rate levels rates levels for those bonds.
On page 12, our total repurchase agreement related debt at March 31 was approximately $418 million down from $446 million at December 31.
$209 million was non mark to market nonrecourse mortgage loan financing and a $198 million was financing primarily on class eight one senior bonds in our joint ventures with remaining expected life of less than two years.
We also have significant unencumbered assets, we expect the amount of our floating rate debt to continued declining relative to fixed rate debt significantly now that securitization markets are more function.
Okay.
And with that ill be happy to answer any questions anybody might have.
Thank you, Sir ladies and gentlemen, if you have any.
Tim Please press star one on your telephone keypad. Once again that is star one if you have a question we'll pause for just phenomenal.
Okay.
I'm going to ask a question it comes from that.
Really.
Yeah.
Alright, Thanks for taking my question.
Absolutely.
Let me take by the comments on.
Your expectations on the residential and of course, the commercial loan market.
Just walk me through.
Loan residential whole operation is still well bid but.
Do you think theres going to be.
When these banks are selling of any have already started and what do you think the catalyst is too.
You would see sort of more supply come out I mean, when you think you'll come out.
What do you think.
Prices can go I mean can you do you think you could get unlevered yields.
When you turn these whole loans and commercial I mean, some people are out there, saying 15% to 20%.
What type of products are we talking about if you believe that's the case.
Sure.
It depends on the specific type of commercial I don't think youre going to see unlevered teams in residential.
You will however, I think see more supply as delinquency increases as it leaks from credit cards into single family and SEC Bank consolidation because one of the things we've seen both the residential and commercial over the years is when bigger bank by smaller banking once they're classified assets off the balance sheet, a solid bank before.
Closing.
And that way you can flush through the loss in the purchase price at a one time charge.
Right right.
Alright.
<unk> commercial.
Depending on what it is.
And what kind of liquidity risk profile. It has so for example on $500 million office buildings.
People are going to need to make a lot more than it will off of.
Bye.
Our portfolio of business purpose.
CR loans for example.
So.
But I think youre going to see significant opportunities definitely double digit unlevered.
In some.
Strip mall.
Loans in some mixed use loans youll see them in some urban office not just loans that youll see double digit teens Unlevered no question about that.
When will you start to see that we're starting to see it leak as banks are looking for liquidity.
Although the one thing we're seeing is that the banks are selling the things they can sell the quickest.
And the closest to their current mark versus other things.
But we think that probably in <unk>.
Q3, Q4 and 2024.
It's really going to be.
Start.
Picking up.
Probably 2024 and more so over the 2023.
It depends on the number of waves is how I'd describe it as.
What's going on in banking land.
One of the things we've seen like a 94% 98 or an OE is everything with multiple waves that window over periods of time.
Question is how many and how long and what the severity.
Between the mall so it's.
It's a pretty interesting time, and we certainly have had a bunch of our big institutional partners.
And.
Bond investors.
Reach out to us we've setup kind of here's what we quantified together type structures.
Okay.
Okay.
I'm, assuming on the residential side you'd look to the securitization market you have it open.
Yes, it's open to you I'm, assuming these are private deals that youre doing we just give us an update on the state of.
Securitization market and D&O.
It's still what's your outlook for it I think it's getting better because it'll anchor commitment.
So the triple H have tightened and obviously the treasury curve has.
I'm, Andrew significantly what I'll call kind of a three year four year type expected lives and most of our triple aim that we issue our expected lives between.
Call It high twos at four years.
That goes to a couple of those and rates have come in dramatically and AAA spreads tightened. So the transaction. We did in February we did at plus 152 expected LIFO I think three four years.
<unk>.
That market has been pretty strong for our <unk>.
We have what I'll call a retinue of group of buyers.
442 of the three deals.
<unk>.
80% of the seniors are creased subscribed.
So it's really the other two of the three deals the other 20% in the third deal which is actually the first of all we're going out with.
We'll just bring up to fully to market.
Got you.
Got.
Thanks for the color. It makes it it makes a lot of sense and I guess the last one.
Larry.
I guess a phenomenon of the prepayments I think you said are starting to pick up in March and I get this phenomenon, what's going on what with the way the yields are on the performing lines are weighing on your taxable gap and even more so your taxable income and of course you have the <unk>.
The repo, which is just about probably done here the fed.
Probably dani if not probably going to be cutting.
And our next move.
Sooner rather than later my question to you is how should we look at taxable income in and.
And the dividend how do we think about sure that trajectory for the rest of the year.
Sure. So taxable income when you think about prepayment prepayment on performing loans. Okay. Since we have a higher tax states to sub performing loans actually generates less less taxable income and prepayment of nonperforming loans.
No.
Alright, which which is.
So it's really.
You pay more for nonperforming loans.
<unk> loans, if you pay more for performing loans <unk> loans at a high tax basis prepayment and capture less discount sooner and the taxable income from prepayments all about the tax discount to tax spaces.
So the.
Yes.
One of the thing is it's weird is for a taxable income when loans pay like clockwork.
You take it.
Over the contractual life of the loans, Unlike GAAP, which is over the expected life of the world.
And prepayments just accelerated so that rate until a loan prepays are 360 month, low and youre, taking one to $3 60 as of tax basically are absolutely Sydney based on the principle that species, which has very little in the early years.
They're going to be battling out with pre Brexit regardless.
<unk> added deal document securitization transaction and then we have other pools of loans, where every time you get a payment you basically.
Tentage discount and at great literally.
180 months market over 701 hundred 80, right. So it's nothing that's unexpected lifelike gap so when loans pay like clockwork taxable income is less and when loans don't pay and you also can get big lumps from for example, liquidations or property sales that accelerates taxable income and unlike.
GAAP, but that our taxable income we are required to fix <unk> and prepayment assumption at closing in may not change of NOI.
Right unless the loan goes away Upsilon February right. So, it's unlike GAAP, where as borrowers change behavior expected life changes and tax.
<unk> doesn't change.
I guess at some point.
I'll have to converge right, yes, yes.
When both lines both loans are gone they are the same.
Great.
Right.
The borrower pays off tax and GAAP are the same for that loan.
Right.
Greg get more velocity it right it sounds like product when it comes to.
Absolutely, but that's what they should be moving up and we get more velocity.
I would say so we fall starting in late 'twenty, one and we started buying specifically low LTV high absolute dollars of equity nonperforming loans, because we thought that recession was going to come and that would cause more delinquency and shorter duration and you pick up disk.
Faster.
Hey.
Yes.
What we didn't anticipate is there so much HPA would change borrower behavior and caused them to pay their mortgage before their credit cards or auto loans and their key locks because if you look historically, it's usually the other way around you pay your revolvers first so you've always maintained access to credit and you paid your.
Carloads that you have the right to work and what we've seen in our borrowers is credit card delinquencies increased HELOC delinquency has increased auto loan delinquencies increase and mortgage delinquencies decrease.
So we see no RK Morris.
Yes, so our npls as a result.
We have become extremely performing.
Decreases taxable and decreases gap.
Right.
Be it the other way around.
Right.
Okay.
Thanks for the explanation I sort of look forward to.
Right around the growth here with the environment. Thanks, a lot. Thanks Riyadh.
We're getting a lot of.
We think that commercial is going to be a significant opportunity.
Into brewing right now it is not completely here, yet, but it's coming you're starting to see it and it's going to increase in velocity.
That's pretty clear.
Currently a lot of the big investors like no like Starwood has made the same statement as some others.
They obviously look at much bigger.
Type properties than we do we'd like diversification in specific locations and things like that.
But.
There's going to be significant opportunity commercially thing as.
As well as in Msr's, we're working with a bunch of MSR funds about joint venturing on Msr's and have Gregory to be the sub servicer and MSR right.
And on those units really put any capital for a lot of that is just the third party right and you guys get.
Thanks.
Right and those third party would be 95%.
Wow that could be it could be an incredible.
Incredible in terms of the accretion too.
Hey, Jack.
Yes, yes, we looked at them to be up to the kind of forward market value of.
Gregory as well.
Right what channels, 20% Thats exactly right.
Thanks, a lot Larry I really appreciate it sure absolutely absolutely.
A reminder, that is star one if you have a question, we'll hear from Eric Hagen Ti.
Hey, how are we doing.
Okay got it.
Got it thank you.
Got a couple here.
Just how are you thinking about the severity of losses in this environment versus say a year ago or even win rates.
Spreads are tighter just in general and how does that drive how aggressive you got especially on the JV structure is where it sounds like youll be maybe the most active hopefully you can also talk about some of the sources of leverage in the JV structures.
And then the second.
Second kind of question here the warrants that you hold on the servicer.
What are the conditions by which you think you exercise those warrants.
Sure Okay. So.
So let me answer the last one first because that's the simplest answer based on valuations. So that you would exercise them in a monetization event.
Or in case of a special dividend.
Okay. Okay.
Okay. Thanks for your basement yet.
Or kind of loss severities in residential land for our portfolio, we tend to buy it.
About 50% plus discounts to market that property market value.
<unk>.
And we tend to like having at least $130000 of equity on average.
Among kind of target equity dollars amounts of equity.
So that.
If you have a 20% across the board decline in home prices and if you had 100% default of our portfolio.
It would actually increased unlevered yields by 350 to 400 basis points in our portfolio.
Because of duration changes because for most of our portfolio.
A default is a prepayment at par.
Actually part plus Arrearage.
The the.
The biggest risk I think in residential.
Is much newer we've seen a number of pools of loans of more what I'll call new origination.
They're kind of ltvs, but when we look at the properties, we really think the kind of 90 to 92 ltvs.
And we think that there is more delinquency, there's more loss severity risk in those.
And then there is in kind of the things we own and we have been somewhat hesitant to be out buying kind of.
Brand new.
To push the envelope LTV.
Alternate document stuff and things like that.
Just because we think there is going to be some increase in loss severity for newer versus older loans that have had the benefit of HPA.
The.
On the commercial side, we think there's going to be significant loss severity in the commercial side and that loans are going to have to traded material discounts. We're obviously very focused on buying these two property value and we haven't kind of fundamental ruble is that you have to buy the loan at a discount to what you would be willing to buy the <unk>.
On the commercial portfolio.
Because one thing.
I don't have in commercial to the extent that you have in residential.
In the foreclosure of the residential there is a lot of single family rental buyers that buy in at foreclosure sales, especially.
Moms and pops that by a foreclosure sale.
You don't have moms and Pops doing that in commercial land and you don't have moms and Pops in $20 million office land.
So that's going to have to be more institutional.
And it's less predictable and less liquid and.
So it creates a little bit more severity.
So.
From a opportunity set we might get.
Because the more thinking it requires you to do the more opportunity there is.
And the less liquidity there is the more opportunity there is is it.
Going inside.
In residential land, where we we kind of want to wait for it to Mel to little bit before we get too involved.
Always appreciate your perspective, Scott. Thank you very much sooner.
Inc.
Yeah.
And everyone. At this time there are no further questions I'll hand things back to our speakers training additional or closing remarks.
Thank you everybody for joining us for our first quarter presentation.
Apologize for being the same time, it's apples call.
But.
Feel free to reach out if you have questions.
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And look forward to talking to you over the next few weeks and best regards.
Once again, everyone that does conclude today's conference. Thank you all for your participation you may now disconnect.
Over the next few weeks.
Best regards.