Q2 2019 Earnings Call
Good day.
Welcome to the Great Ajax second quarter 2019 financial results conference call and webcast.
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I would now like to turn the conference over to Mr., Laurans Mendelson, Chief Executive Officer.
Please go ahead.
Thank you very much and thank you everybody for joining us for the greedy check second quarter conference call.
I would want to do a quick reference to page two the safe Harbor disclosure and forward looking statements.
And with that we can jump right in.
A quick.
Prelude Q2, 2019 was another very good quarter, you bought loans from multiple sources at very good prices sold approximately 200 million of primarily non clean pay loans into a joint venture with good institutional partners at good prices and we continue to improve the rates in terms of our asset based financing.
The market value of our assets continues to increase and we believe that asset value and intrinsic value grew materially in Q2 2019 and has continued to grow in Q3.
[noise] one of the core pieces of our business is the sourcing of product. We've made 284 acquisition since inception, a great Ajax and we closed 11 transactions in the second quarter. Our loan sourcing network is very important to our ability to acquire the types of loans, we want at the prices. We want our sellers are banks originators and funds you can definitely see this in the prices we paid for loans in Q2 of 2019 and all of the 11 transactions in this quarter and a quarter two were private transactions none of them were public auction transactions.
We use our managers proprietary analytics to price each mortgage pool on a loan by loan asset by asset basis, we analyze a large amount of data to determine target loan characteristics to don't pattern recognition algorithms for pricing in servicing loans.
Third parties in JV partners rely on our managers analytics and oversight as a service we own 20% of the equity of our manager zero basis. As a result, it's value does not show up in our book value.
Similarly, our affiliates service or services loans asset by asset and borrower by borrower. Our Servicers performance has created significant and maybe increases to our loans as well as brand value and it's helped bring institutional investors to us as loan purchase partners and for third party servicing we own 20% of our servicer, including warrants since our investment in our servicer in the first quarter of 2018, our servicer has increased its portfolio by more than 50%.
Our goal is to maximize returns asset by asset by asset.
Yeah, using our analytics and driving that the both the acquisition and the management of the assets process, we use moderate non mark to market leverage average leverage including corporate level leverage for Q2 was 3.2 times and asset base leverage was 2.9 times over the quarter, our leverage decreased by approximately 10%.
Very and mortgage like mortgage riet like in this environment.
Quickly jumping to page four and talking about Q2 itself.
We purchased $90.7 million of re performing loans Rpls in 11 private transactions new loans were on our balance sheet a weighted average of 20 days. So very little income from these assets as they primarily as close in the month of June . However, the purchase price was 56% of property value and 85% of U.P.B. and we think just since those acquisitions added value as those loans have increased materially or.
Due to if nothing else market conditions.
Number two we sold 176.9 million of primarily non clean paying loans as of May one 2019 into a joint venture with two institutional partners for a gain of $7 million, we own one third of the new joint venture.
Parts of the proceeds were used to fund the call of our 2016 securitization on May 24, 2019 and to remove certain of these loans from their repurchase facilities.
As part of calling our 2016 securitization, we accelerated amortization of 182000 of deferred issuance costs. As a result of the transaction dates selling as of May one and paying down debt as of May 24, we didn't receive may or June interest income from the loans that were sold into the joint venture.
And we paid 24 days of May interest expense on the portion of the loans calls from our 16 C securitization and from the loan repurchase agreements. If we didn't sell the loans net interest income would have been approximately 1.8 million higher so economically the 7 million dollar gain equals approximately 5.2 million plus the 1.8 million of net interest income.
We ended the quarter with about a billion two of mortgage loans and $198 million of investments in debt securities and beneficial interest debt securities and beneficial interest as her we carry.
For GAAP, our interest in joint ventures, with our institutional partners. We also acquired one multifamily rental property for 2.3 million in Baltimore.
On the interest income side interest income was 20.1 million I noted already that net interest income.
From the loans put into the joint venture sold into the joint venture.
We lost two months of interest income on those and I'll go into a little bit more detail in a moment a couple of things to keep in mind regarding interest income and net interest income interest income from our portion of our joint venture shows up as income from securities not loans also since servicing fees for securities are paid out into securities waterfall. Our interest income from securities is net of servicing fees. Unlike interest income from loans, which is gross sub servicing fees as a result, as our jvs grow interest income will grow slower by the amount of the servicing fees and servicing fee expense will decrease by the corresponding offsetting amount.
Now more detail about the loans in the our joint venture.
Stated net income 13 million to 67 cents per share, including the gain on sale of loans to the joint venture.
If the loan sale had never occurred and we just earn net interest income on the loans and Didnt call. Our 2016 C securitization and we didnt.
Pay downs repurchase agreements to take the loans often put into the joint venture.
Basic earnings per share would have been approximately 43 cents.
Instead, because we did sell the loans at 67 cents.
Taxable income is 75 cents a share at the end of Q2, we have year to date taxable income of 86 cents a share.
Book value is 15 85 at June 32019, we collected about 60 million of cash in the quarter a predominantly from loans.
And our joint venture Securities. We continue to have significant cash off from our loan and from our joint venture portfolio.
And as you may have expected in the current interest rate environment prepayment has increased and cash flow continues to significantly exceed expectations average cash held during the quarter was approximately $50 million.
On page five you can see we continue to be primarily RPL driven.
RPL still make up the predominant portion of our balance sheet.
You will see that our Oreo was principally held for sale turns into cash over relatively short periods of time.
Oreo has increased over the last six months, but it's not increased from foreclosure or because we've been selling lesser yo instead, we purchased urban multifamily properties as our property portfolio grows we will also see an increase in our noninterest income.
As well.
And on the re performing loan side, we continue to buy lower LTV loans with overall RPL purchase price of approximately 62% of property value and 87% of unpaid principal balance.
In second quarter, we paid 56% of property value and 85% of you PB for 106 million you PB of loans, our purchase price to property value in our purchase price and we are a very low and.
Kind of goes back to one of our fundamental tenants is that.
Playing offense is easy playing defense as hard we have in our portfolio managed to play very good defense and have.
Offense.
As well.
On the NPL side Npls have been declining in absolute dollars invested for our NPL portfolio purchase price to property value is approximately 57%.
As you might expect higher LTV, npls become Oreo sooner and lower LTV npls become RTL later.
If at all as lower LTV npls are much more likely to become paying loans or to prepay entirely.
[noise].
We continue to have over 80% of our portfolio in our target markets.
We don't want to be an index fund and own loans were loans exist, we want to own them, where our data evaluation suggests.
There is stability and liquidity in home prices and there is.
Positive demographics and other data points, indicating.
Stability.
California continues to represent the largest segment of our loan portfolio, both in residential RPL and small balance commercial mortgage loans, our California assets are primarily while sandos Orange and San Diego counties, we're seeing consistent payments and performance patterns in these markets, particularly in California Urban centers. We've also seen consistent prepayment, especially for certain borrower characteristics subsets.
We actively seek.
The loans that match those subsets from banks and funds and originators.
We've added to our Houston, and Dallas investments as well as to our Houston Dallas infrastructure.
As well.
And one thing we are seeing.
Primarily we from the new tax law is having a material effect on higher end values in New York, Connecticut, New Jersey in Illinois, We're definitely seeing a decrease in value differences between higher and middle property value Deciles. So if you look at property values and and make them Deciles. One through 10 10 being the highest we have seen the principal effect being in Deciles eight nine and 10 and Weve seen the difference in price between say decile eight deciles five and six compact significantly.
Portfolio migration on page number nine very very very important.
And really kind of highlights.
What the data analysis, we do on the manager side and the way servicer analyzers and Servicers services loans, how much of a difference. It makes we have one point.
Approximately $1.2 billion of our loans are 12 of 12 or better only $230 million of this was 12 of 12, when we bought it.
For the loans that we buy based on our analytics and the way our servicer services. The loans. Our data suggests that once one of our loans become seven for seven there is a 93% chance that it becomes 12 for 12.
At acquisition, 12% of our loans were 12 of 12, the intrinsic value of our loans has clearly increased materially on average since we acquired them and since our servicer began servicing them.
In addition to increasing cash flow and net asset value. The significant outperformance of our loans also lowers asset based funding costs and increase the securitized bonds senior class advance rates as I will discuss on the next page our 2019 de securitization.
So clearly shows this premise.
We had a very busy Q2, and it's continued into Q3.
We continue to buy low LTV loans as purchase price the collateral value is 55% for our Q3 acquisition so far.
We expect the bulk of these already identified acquisitions to close in September .
We can we also continue to grow our urban centers small balance commercial property portfolio, we have approximately 18 million through six properties under contract in that asset class.
On July 26, we closed HX mortgage loan Trust 2019 D.
New rated securitization.
As I previously mentioned on the call. Our overall RPL purchase price is approximately 87% of view PB. That's an important number to remember because the advance rate on our newest securitization.
2019 D for just the AAA through single a was 81% of view PB with a weighted average cost of 3.01%.
As a result, we'll get more leverage through securitization these loans and our cost of funds on these loans declined by approximately 120 basis points versus repurchase transactions.
Dividend.
Board approved 32 cents a share to be paid on August thirtyth to common stockholders.
As of August 19 dividends for the first and second quarter add to 64 cents a share taxable income through the same period is 86 cents a share.
Some quick financial metrics to talk about on page 11 number one is yield on debt securities is net of servicing fee of approximately 80 basis points on debt securities basis.
Debt Securities, which is how our interest in Jvs are presented under GAAP.
As our Jvs increase the GAAP reporting of net services net of servicing unlike loan interest income distorts average asset yield lower and related ratios. So as a result.
The more debt securities we have.
It shows a lower yield but that is because of the net of servicing you can see from our average loan yield our average loan yields actually increased quarter over quarter.
With so many loans paying we're comfortable with a little more asset base leverage although Q2 leverage decreased by almost 10%. Our 2019 de securitization given the advance rate will increase leverage a bit and it also lower debt costs.
And we expect that the asset level debt costs will decrease in Q3 as a result of our 2019 the securitization.
Also as a result of decline in LIBOR on our repurchase agreements.
And with that.
Im happy to answer any questions anybody might have.
Thank you.
We will now begin the question and answer session.
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Our first question today will come from Tim Hayes with B. Riley FBR.
Please go ahead.
Hey, good afternoon, Larry a couple of questions here.
My first one.
You pointed out that taxable income is running well ahead of the quarterly dividend run rate so far in the first half of the year.
No there are a lot of moving parts that drive taxable income, but at this rate and do you expect you'll have to pay out more than.
The 32 cents run rate suggests and would you be more inclined to raise the quarterly dividend pay a onetime dividend or maybe pay periodic supplementals or some kind of combination. Those if you were to pay out more than what you are running at right now.
Sure.
I think our board is predisposed to probably increasing quarterly versus special.
Some depends some of that depends on what the continuing market environment looks like clearly in the last two months, we've seen an increase in prepayment.
You will see from just the rally in probably the last week or 260 days from now an additional prepayment ramp up and.
So as a result.
I think our board the only reason they didnt increase the dividend. This quarter is they just want to see how the chaos in the world plays out for another month or two.
Okay.
Okay understood and then obviously the loan sales for driving taxable income this quarter.
How do you see the pace of additional loan sales playing out.
Over the rest of the year or maybe in 2020 was this just a one off opportunity to.
To maybe capitalize on a good opportunity or do you foresee additional loan sales supplementing investment and generating more taxable income in the coming quarters.
Sure.
Probably.
Both loan sales.
Perhaps not the number of loans in this particular sale. It was primarily non clean pay loans and a substantial portion of our remaining what portion of our remaining loans are clean pay 12 for 12 loans.
Which actually have materially higher value.
As you can see from our rated securitization, we decided with this $200 million of clean pay loans.
We looked at selling it we decided to securitize instead and capture two to two and a half million less funding cost per year on those loans versus just selling it outright and then if we had sold those loans.
Realistically with import forced to pay.
A very large special dividend.
The.
Selling the noncore repaying loans. These are all loans that we've owned for at least two years in some cases, four or five years, and we were not able for the most part to get them to be clean pay and as a result.
We didn't see the intrinsic value you is going to jump 10 points from a non clean pay but relative to our basis. We still had some substantial built in gain and we decide to sell into a JV and we.
Post sale have only one third of the joint venture.
So it was it was a sale where we got good prices.
And where we also still have still on a third of the upside.
Got it okay that makes sense.
Yes.
And then youve.
Acquired or agreed to acquire a very small amount of our sales so far in the third quarter, but I believe this is the first time I've seen or maybe I just don't remember, but first I have seen you acquire appeals at a premium to U P. B.
Just given your size and your relationships and your ability to.
Enter into these private privately negotiated transactions, you've always been able to buy rpls at a discount.
As competition.
No led you to is it is it a function of that or are these just really clean loans are either way, what's the thinking behind this floor well our purchase price for our Q3 acquisitions. Our purchase price is 92.7, a view PB.
I must have misread something area. So we have about 163 million new PB 92.7 purchase price underlying collateral value of 273 million. So the purchase price is about 92.7% of you PB and about 55% on collateral value.
For our Q3 acquisitions.
Again this is another.
This group of transactions.
Privately negotiated and is about 55%, California loans.
Okay.
Yes, sorry about that I must have.
But wrong data point, there, but okay and.
Just one more from me and then I'll hop out, but can you just give us some of the characteristics around the six properties acquired in the third quarter I'm, assuming there are multifamily, but what level of transition, which geographies are they in or adjacent to qualified opportunities zones and then any comments around what you expect stabilized value of those properties to be relative to your purchase price would be appreciated.
Sure.
They are in Dallas Boston.
One in Saint Paul Minnesota.
They are we at purchase price, depending on which one three of them are approximately eight cap purchase price.
And the other two are approximately six to six and a half cap purchase price.
The three that are eight cap we.
We'll clip coupons for a while and get.
Good financing.
And it's.
Credit tenant for the two multifamily the one in.
The two multifamily.
They are.
It probably will do some repositioning not on day, one, but probably sometime a year or two when and we think that.
Overtime, they will be closer to 12 cap on cost versus a six and a quarter to six and a half cap on cost.
So they're kind of long term investments.
Three which provide significant income production I guess for that will provide significant income production in two which will provide.
Some income production plus some benefit from repositioning overtime. So we're pretty excited none are in opportunities owns one however is pretty much adjacent to an opportunity zone. One of the things. We found is prices in opportunities owns have gone up pretty materially just because they are in the zones and we found that.
Small multifamily near opportunities zones, the people who live in the apartments don't care. If they are in the opportunities zone only the owner does and as a result they.
Adjacent to the opportunities owns.
The rents increase in value as the opportunities own actually gets developed.
Right right and I know that the theme that weve or you've kind of talked about in the past. So just wanted to see if that was still the case, but im going to hop back in the queue, but thanks for taking my questions.
Our next question will come from Kevin Barker with Piper Jaffray. Please go ahead.
Hi, Larry.
Hey, Kevin.
You said what was the total taxable income for the first six months because.
Please refer to expedite good.
Yes, 86 for the first six months.
And then I had what.
Well first quarter at 23, and the 75 in the second quarter. So my I must be getting it wrong.
All right.
Okay. So 86, apart and then.
Excellent numbers is 86 cents.
11 cents in Q1 75 in Q2.
Got it okay.
And then in regards to the net interest income and the cadence going forward given the sale of the portfolio and then the moving parts. There 1.8 million that you talked about earlier.
How do you think about getting back to the first quarter run rate given.
The portfolio sale and then the acquisitions, you've made so far going into the third quarter.
Sure.
Couple of things one financing costs have come down pretty materially so far in Q3, just because of.
Nothing else the 40 basis point reduction in LIBOR, plus 120 basis points on the loans in our 2019 do securitization.
Uh huh.
We also acquired $90 million loans on the last business day in the month of June so.
So we didn't really get much benefit income benefit from it.
That will get in the second quarter.
So the combination my kind of prelim guess is.
It looks pretty good the other thing is happening is prepayment as you might imagine is coming in faster than we would have anticipated given what's going on in the interest rate market.
Which means we capture discount faster.
Dan we would have modeled when we bought the loans.
So we're going to see a little bit faster gains coming off so.
When you look at wells that we'll see we'll see the they.
Prepayment generates some taxable income, but it also causes a shorter expected life. So you take the discount to a shorter expected life as a result.
Right right Okay.
Yep.
There's been operation short, we would expect duration to shorten on the loan side of the portfolio. While at the same time the funding cost of the portfolio has gone down.
Okay. So.
I'm, assuming you're letting these refinance away most of them yet or you get it.
Okay, that's right.
Yes.
All right and then.
As far as leverage is concerned.
I believe you mentioned to be a little more conservative given the current environment or and willing to bring.
Leverage leverage came down leverage came down because of so much prepayment in the quarter.
As well as some of the sale proceeds of the loans pay down more than the.
Allocated.
Financing that preexisted on those loans the.
By choice.
The securitization that we did in July 2019, D will increase leverage up a little bit, but as a whole leverage.
Is.
Lower than it was in Q1.
Okay. Okay, and then just bigger picture that in this space.
[laughter] yeah.
You are important.
[laughter] so [laughter].
When you think about just bigger picture, there's been a lot of volatility the market right a lot of uncertainty and.
People are seeing housing slowing down and so forth but.
When you look out, especially in your markets in particular.
What are you seeing.
Within those properties and the bid for those properties and just the overall the pull for the market within your markets.
Sure. So so you have to break down each market into Deciles, one through 10, and a decile five in New York is a different price range that dial five say in Indianapolis right.
What we're seeing is that debt styles.
Four through six and a half fourth maybe even through seven that market in our markets is pretty stable and probably still going up a little bit and especially kind of good what I'll call Deciles four and five.
You put a house on the market. It goes pretty quickly Deciles, eight nine and 10, especially nine and 10.
In four or five states have already clear slowdown.
And we've seen that probably most profoundly in New York, New Jersey, Connecticut, Illinois.
We've seen it less in California than we anticipated, but most of what we own in California is index out four five and six.
For those markets and we've seen that to be a very liquid market. In fact, we see a lot of.
Oh single family to rent buyers in that market Index House, four and five so which adds additional liquidity.
Uh huh.
The.
The shrinkage in mortgage rates.
Which causes monthly payment to be cheaper and certainly industrials call. It one through five one through six monthly payment matters a lot.
The decline in mortgage rates is definitely going to provide more stability, assuming it doesn't correspond with a material increase in unemployment or something like that.
The decline in mortgage rates will have a positive effect on the liquidity and stability and kind of deciles.
Call it three through six in each of those markets.
As monthly payment comes down significantly.
You'll see more people are able to qualify and the DTA basis, because the payments a lower number even other income might be unchanged. So soon so as long as there is no real hits too.
Borrower income, we still think that.
Kind of desktop IL, six and a half and under our pretty firm in our markets.
Deciles eight nine and 10, we stay away from and we think that the.
We're not bullish on that.
Okay, and you mentioned the single family.
Rental purchases are you seeing on those is like a.
Well going head to head as a competitor or more is this like a stabilization of the market over as a stabilization. It's interesting every single foreclosure sale, we've had in California in the last two months the buyer for full credit bid on one of our loans.
On our loans that we foreclosed on has been a single family rental buyer.
Every single one.
Interesting.
All right, thanks, I'll get back in queue. Thanks.
As a reminder, if you would like to ask a question. Please press Star then one we will wait momentarily to assemble any further questions.
At this time there are no further questions in the question queue and I would like to turn the conference back over to Laurans Mendelson for any closing remarks.
Thank you very much for joining our great HX second quarter earnings Conference call.
Feel free to reach out if you have questions.
And.
Have a great evening and rest of the week, thanks very much.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.