Q2 2023 Great Ajax Corp Earnings Call

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Good afternoon, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the Great Ajax Corp, second quarter 2023 financial results Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige star one.

Lawrence Mendelsohn, Chief Executive Officer, you May begin your conference.

Thank you very much operator, thank you everybody for joining the Great Ajax Corp second quarter.

Conference call with me on this call are still shower, President Mary Doyle our CFO .

Before we get started I want to point you to page two of the presentation with the safe Harbor disclosure.

Yeah.

In the second quarter of 2023, well performance.

Increase as well as cash flow velocity for a reinstatement some delinquent loans themselves.

Particularly in the months of April and May.

This has continued into the third quarter of 2023 as well prepayments for borrowers refinancing their mortgages continued their slower pace as you would expect given current mortgage rates.

The regular payment performance of our mortgage loans and mortgage loans in our joint venture structures.

So our modeled expectations at the time of acquisition for loans purchased at a discount.

Effectively.

Our credit reserve Recaptures this increased previous GAAP income by accelerating purchase discount.

Because it requires allocation of Stifel.

And reduces forward GAAP interest income and return on equity thereafter, however, the increase in cash flow velocity in Q2, particularly in April and May This.

This increase evenly all in post seasonal GAAP yields.

In the second quarter.

Okay.

At June 30, we had approximately $40 million cash as well as significant amount of unencumbered securities loans. We currently have approximately $55 million of cash.

Page three of the business overview.

Our managers data science, guys me analysis of loan characteristics and geographic market metrics for performance.

Great probabilities and its ability to source. These mortgage loans through longstanding relationships has enabled us to acquire loans that we believe have a material probability of prepayment indoor long term continuing performance.

The acquired loans and 381 different transactions since 2014, including three transactions in the second quarter of 'twenty three.

Our affiliated Servicer Gregory funding provides a strategic advantage in nonperforming and non regular paying royalty resolution processes and timelines and a data feedback loop for a master's analytics. We've certainly seen significant increase in loan performance consistent prepayment from property sales, especially for delinquent loans and with our AAA rated structures.

Paid up to approximately 40% of loans to be greater than 60 days delinquent at the time of securitization.

We have a 21, 6% economic interest in our services.

Between shares and warrants.

Our services currently evaluating private equity round as part of rolling out some new data and technology driven programs through strategic joint ventures, and MSR joint ventures.

Our economic interest in the servicer was an important part of our Ellington financial merger agreement as described as aircrafts release of July 3rd.

We still have low leverage at June 30, our corporate leverage ratio was three four times.

Our Q2, ending asset based leverage was two seven times.

We also wanted to 22% interest in Gaia real estate court.

It is currently a private equity REIT debt, primarily invested in repositioning multifamily properties in specific markets and a triple net lease freestanding veterinary clinic properties in conjunction with large national owners of veterinary practices.

Gary our gaiam restore balance sheets, the lower cost or market.

Currently expect guidance to raise additional equity and ultimately become a public company.

The current environment of bank credit tightening and CRE loans disruption creates opportunities and more optionality for guidance.

Yeah.

And now for a discussion of the second quarter.

Net interest income from loans and securities excluding $2 8 million of interest income from the application of diesel was approximately $3 3 million in Q2, including recoveries from the application of diesel it was approximately $6 2 million.

Our gross interest income, excluding the $2 $86 million that we outpaced <unk> was $18 3 million.

Three reasons why GAAP interest income's, a little lower first we had approximately $23 million lower average interest earning loans and.

In securities on the balance sheet in the second quarter versus the first quarter.

Secondly, we are continuing to have significantly more delinquent loans and we expect it to become performing <unk>.

As delinquent loans become performing they provide more cash flow, but over a longer period since we buy loans at a discount. This increased performance can extend expected duration with slower to yield.

However, in the case of a recession and a declining housing price environment.

These loans provided material.

Yield and cash flow hedge as increased delinquency shortened duration and the corresponding yields would increase materially.

The third reason for lower interest income as the designer.

Seasonal was primarily designed for bank loans with a par basis, so that accelerating reserve recapture we kind of after a previous rate gap.

We establish it allows undersea sold when we acquire new pools of loans, if the NPV of a loan pools contractual cash flows is greater than the NPV of our expected cash flows and that allowance is allocated to part of our purchases.

If the expected cash flows on these 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 expected cash flows to reduce future yields and discount accretion.

Our GAAP item to keep in mind is that interest income from our portion of joint ventures.

It was up in income from securities non interest income from loans.

These joint venture interests servicing fees for securities are paid out securities waterfall. So our interest income from joint ventures is nevertheless, 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.

Purchased loans outside of the joint ventures by the margin servicing fees and GAAP servicing fee expense will decrease by a corresponding offsetting that.

An important part of discussing interest income is the payment performance of our loan portfolio at March 31, or I'm sorry at June 30, 82, 1% of our loan portfolio by week by ETP made at least 12 of the last 12 teams.

For 74% a year ago.

And 81% three months ago.

This compares to 13% at the time, we purchased loans.

Our NPL purchase over the last 18 months increased materially relative to RPM purchases.

Increases in housing prices in 'twenty, one 'twenty two helps maintain these payments prepayment patterns in these big increases in the present value of expected reserves and related income recognition of $2 $86 million of unallocated loan purchase discount reserves under seasonal in the second quarter.

Any additional reserve Recaptures, we've had in each of the previous nine quarters.

While loans that become regular paying produce higher total cash flows over the life of the loans on average they can extend duration and because we purchased loans at discounts. This can reduce percentage yield on our loan portfolio and quarterly interest income.

Loans that do not lie breakthrough 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 regular paying and non regular paying loans is continuing though.

Our weighted average cost of funds in the second quarter was higher than the first quarter by approximately 20 basis points. Most of this comes from the remaining floating rate repurchase agreements on loans getting ready for securitization and some joint venture securities repurchase agreements and the related increase in silver.

Net income attributable to common stockholders was negative $12 million or <unk> 51 per share. There are several items of note that had an impact on earnings in this quarter to make it a little easier to follow and we have a table that size GAAP income to operating income on page 16 of this presentation as well as in our 10-Q.

Operating earnings was negative $2 5 million or <unk> 11 per share taxable income net of preferred dividends was minus <unk> <unk> per share.

Taxable income decrease in Q2 for two primary reasons first the significant increase in monthly performance until loans to become performing loans extends taxable income yield duration, even more that extends GAAP yield duration as taxable income for performing loans is based on contractual duration now expected duration.

So taxable income for performing loans, typically 30 over 30 years, rather than the expected life.

Second in Q2, we saw prepayments increase our 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 to exploit them.

We recorded a loss on investments and affiliates, partly as a result of the flow through of the Mark to market decline in the price of our common shares owned by our manager in the second quarter. Our manager receives a significant portion of their management team shares the changes in market value of those shares closer to us based on a 20% ownership interest.

There are a few onetime and unusual items in the Q2 numbers in July .

We called eight joint venture Securitizations and re securitize, the underlying loans into our 2023.

And 2023 C securitization. The 2023 fee was an unrated joint venture securitization in 2023 C with a triple a.

Rated joint venture securitization.

This resulted in a June 30 gap, but not cash charge that we then collect back over the remaining life of the underlying loans.

Since the eight call Securitizations, where joint ventures in which we own 20% interest they were not consolidated on balance sheet as loans as held legally and under GAAP as securities and beneficial interests in.

In the July 2023, Securitizations to the new AAA rated structure and unrated structure, we continue to own the same percentage, but the securities Mark to market is lower because of this in Q2, we took an impairment equal to the difference between the securities carrying values and market values in June 2023 of $8 8 million.

Or <unk> 37 per share.

This story is the same as our 2022 JV securitizations in our Q1 'twenty three JV re securitization.

The loans from the <unk> JV Securitizations that recalls are transferred from their eight joint venture trusts sure two new joint venture Trust with the same partners owning the same percentages in each.

We and our lean our partner effectively sold the loans in the form of an exchange of securities from ourselves to ourselves, which triggers a noncash loss under GAAP.

It would go through book value, whether analysis sale under GAAP because of Mark to market change. There is no difference in expected cash flow and the underlying assets and we expect this mark to market noncash sale loss amount is fully recaptured over the expected life of the two security re securitizations.

This also doesn't reduce taxable income as we and our partner effectively sold the assets from ourselves to ourselves and is therefore, a refinancing rather than a sale for tax. So there is no tax impact it's only a sale for GAAP, because we own the JV loan assets in the form of securities.

Book value was eliminated six at June 30 book value decrease primarily by our GAAP loss and dividends paid for the offset from some positive mark to market adjustment and our investment in JV debt Securities. There is a table on page 17, the details the change in book value.

At June 30, we had approximately $43 million of cash and for Q2, we had an average daily cash and cash equivalent balance of approximately $43 6 million.

We had approximately $49 5 million of cash collections in the second quarter.

At June 30, we also have a significant amount of unencumbered assets unencumbered securities from our securitization through joint ventures, and unencumbered mortgage loans, which we'll discuss in more detail on page 12.

Approximately 82, 1% of our portfolio by <unk> made at least 12 over the last 12 payments compared to a small fraction of this at the time of loan acquisition.

This increased from 81% three months ago, and 74% 12 months ago, despite buying significantly more npls and rps since the middle of 2021.

We performance increased life of loan cash flows, but the duration extends to reduce yield and interest income in the current quarter.

As more purchase delinquent loans re perform RASM in prepay or default this materially lower taxable income as well.

As you probably all read or seen on June 30, we entered into a merger agreement with Ellington Financial Inc, and with Great Ajax shareholders would receive phase III OA chairs of Ellington Financial's stock per share of great Ajax stock subject to any adjustments as described in the merger agreement as well.

So potential cash distributions, depending upon certain potential repurchases of our securities prior to the closing the quarter for this was filed on August <unk>.

2023.

If we move to page five.

Purchased Rps represent approximately 89% of our loan portfolio at June 30.

15 months ago, they represented 96%.

We primarily purchase RFP also that Midwest and seven consecutive payments and npls at a certain loan level and underlying property specifications that our analytics suggest lead to positive payment migration property sales and related prepayment on average.

We typically buy well seasoned lower LTV loans.

For residential loans, we continue to see stronger performance as 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, although we have not seen an increase in delinquency, thus far in our portfolio.

As a result, we have been hesitant to be too aggressive in our residential loan acquisitions as we expect a better opportunity set will develop.

One thing we have seen is that significant HPA and the resulting material increase in absolute dollars of equity product was more engaged and financially attached to their properties and therefore are more determined to maintain regular payments.

Historically, we have typically seen mortgage borrowers take credit cards, and auto loans and home equity lines of credit before they pay their first mortgages in times of financial stress.

However, as a result of significant increases in absolute dollars of equity for season loans. We are now seeing increased delinquency for the credit cards and auto loans, but not for their first mortgages.

Commercial real estate loans did not fare as well and we are beginning to see opportunities there.

We believe there will be significant opportunities in sub performing and nonperforming commercial real estate loans in many markets as we get later into this calendar year and thereafter, we.

We have seen the preview of this in the last few months as having a less talked about effect on mid size and sub mid sized bank liquidity and loan portfolio performance.

Frequently have higher percentage of their own portfolios with CRE exposure.

We are beginning to see CRE loans for sale from these institutions and expect that opportunity set will grow. We also expect that bank consolidation will stimulate this as well.

We have joint venture partners that would like us to find significant dollars of commercial opportunities.

From the same banks, we're seeing agency and non agency MSR is being put up for sale and sub $1 billion of UTP increments as well as large MSR offerings from larger banks and originators.

As these banks look for predictable liquidity their marketing Msr's as MSR sales take two to four months to settle.

One thing to note. However, as many of these smaller offerings are now actually now not actually trading as the MSR bids are below the current market value.

Many of these specs.

I think there is also going to be significant MSR opportunity set and having Gregory is a servicer and owning a 21, 6% economic interest in it will be beneficial we have put in place join.

Joint venture structures with several institutional MSR investors.

We owned lower LTV loans in the second quarter, we purchased $16 3 million of Ipl's at 48% of property value and 82, 7% at <unk>.

Our overall RPM purchase price is approximately 42% of the current property value and about 91% at GBP. We've always been focused on loans with low ltvs with certain threshold levels of absolute dollars of equity and then target geographic locations. This is even more important for our pls in npls to the extent there is a potential risk.

Cessionary environment.

Since Q3, Q4 of 2021, and we significantly increased our NPL purchases versus Rps.

Npls on average can have shorter duration for.

Our npls on our balance sheet, our overall purchase price of 89% of <unk>, 84% of total loan 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 to REIT performance on Npls.

As I mentioned earlier for both RPM and Npls purchasing season, low LTV loans at 50% discounts to property values and that have significant absolute dollars of equity provides a natural credit hedge to housing price declines in recession, as resulting increasing increases in delinquency shortened duration.

<unk> corresponding yields materially.

Yeah.

Yeah.

Yeah.

At June 30, approximately 78% of our loans were in our target markets, California.

<unk> continues to represent the largest segment of our loan portfolio at approximately 22%.

However, California has been nearly 40% of our prepayments in 2021, and 2022 and so far in 2023.

Our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties.

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 ranges in our target markets, both from potential homeowners and rental buyers.

Okay.

As mentioned before June 30, approximately 82, 1% of our loan portfolio made at least 12 of the last 12 payments versus 74% a year ago, approximately 75% of our loan portfolio made at least 24 of the last 24 payments compared to approximately 69% at the.

End of 2022, and 72% three months ago.

Over 83% has now made at least seven consecutive payments.

The significant increase in monthly performance was more notable given that since the third quarter of 'twenty. One we primarily only purchased low LTV Npls Rps.

Much of this is likely due to Gregory funding working with delinquent borrowers on a personal basis and to absolute dollars of home price appreciation as our target markets are determined by data analytics that predict forward HPA for each market in <unk>.

Historically, we have seen that when our purchase loans reached seven consecutive payments. They typically get to 12 consecutive payments more than 92% of the time.

Seven seven consecutive payments has been the statistical turning point.

Okay.

We have a small number of NPL and <unk>, our acquisitions under contract as I mentioned earlier on the call. We are waiting for the opportunity set to expand we are starting to see an investment opportunity set drilling as a result of some recession risks and banking sector risk issues, particularly in CRE months.

We declared a cash dividend of <unk> 20 per share to be paid on August 31 to holders of record August 15.

As I described earlier on the call can be securitized eight joint venture securitization structures into two new joint venture securitization structures Ajax mortgage loan Trust 2023, and 2023 C. While these closed in July of 2023 and appear on our balance sheet in Q3 2023, the economics of these.

Transactions for gap show up in income statement for Q2 2023.

Okay.

Average loan yields and average yields are beneficial equity interest in our joint ventures increased a level, primarily due to significant loan cash flow in April and May.

Our 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 our interest in our joint ventures are presented under GAAP and have increased our balance sheet relative to loans since 2020.

Since we purchased loans at discounts increased re performance delinquent loans materially in excess of expectations and extend duration and reduce yield the significant absolute dollars of equity for our loans. Both from the types of loans, we buy and the HP in our target markets on average both accelerated prepayment from home sales and implement loans and <unk>.

Two material re performance in excess of expectations.

The sale of underlying properties by borrowers with delinquent loans with certain minimum absolute dollar amounts of equity in underlying geography, and borrower demographics has been steady but increase in April and May.

Leverage continues to be low, especially for companies in our sector. We ended Q2 with asset level debt at two seven times. Our total average debt cost was a little higher in the second quarter, primarily resulting.

From the rise of silver base rates for repurchase agreement and the issuance of our unsecured notes in August of 2022 since they were a higher percentage of total outstanding debt is asset based debt asset base that pays down from loan prepayments.

Fixed rate securitized debt and fixed rate corporate debt at June 30 <unk>.

Approximately 65% of our total debt.

Our total repurchase agreement related debt at June 30 was approximately $413 million $209 million was non mark to market nonrecourse mortgage loan financing and $193 million was financing primarily on class eight <unk> senior bonds in our joint ventures with remaining expected.

Lives of sub two years.

We also have significant unencumbered assets, we expect the amount of our floating rate debt to continue declining relative to fixed rate debt.

With that if anybody has any questions regarding the second quarter or other please let us know and happy to answer.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A.

And again, if you have any questions its star one on your telephone keypad.

Yeah.

Okay.

And we have no questions today I will now turn the call back over to Mr. Lawrence Mendelsohn for some final closing remarks.

Thank you everybody for joining our second quarter 2023.

Conference call in the Investor presentation feel free to reach out to what extent if any questions. We're always happy to.

Discuss our business and plans.

Hope everyone has a good evening.

This concludes today's conference call. Thank you for your participation you may now disconnect is happy to.

To discuss our business and plans.