Great Ajax [AJX] Conference call transcript for 2022 q1
2022-05-08 09:04:04
Fiscal: 2022 q1
Operator: Good afternoon, ladies and gentlemen, and welcome to the Great Ajax Corporation First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers’ prepared remarks, there will be a question-and-answer session. And at this time, I'll turn things over to our host, Mr. Larry Mendelsohn, Chief Executive Officer. Please go ahead, sir.
Larry Mendelsohn: Thank you very much. Thank you everybody for joining us for Great Ajax first quarter 2022 earnings call. I'd like to just have you take a quick look at Page 2, the Safe Harbor disclosures before we get into the meat of the call. Q1 2022 was a good quarter. There's some non-economic noise in the Q1 income statement numbers, which makes it a little confusing, but we'll walk through this on today's call. Our significant increase in loan performance and loan cash flow velocity continued and has also continued into the second quarter of 2022 so far. This continuing increase in the present value of loan cash flow and the resulting decrease in unallocated reserve discount in excess of modeled expectations led to an additional acceleration of interest income on loans during the first quarter of $3.9 million. The significant cash flow velocity from our mortgage loans and our mortgage loan JV structures increases income acceleration through the application of CECL, but it also rapidly pays down our loan in securities portfolio leverage, which can reduce ROE. At March 31, we had approximately $71 million of cash and more than $300 million of unencumbered bonds and loans. And the significant cash balance does create an earnings drag, but in today's environment, especially today in today's environment, we expect significant opportunities to invest in loans and related assets, as well as the repurchase of our shares and liabilities. If we move to Page 3, a quick discussion business overview, our managers’ data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution pathway probabilities and our managers ability to source these mortgage loans through longstanding relationships has enabled us to acquire loans that we believe have a material probability of long-term continuing reperformance and prepayment. We've acquired loans in 356 transactions since 2014, including four transactions in the first quarter. We owe 19.8% of the equity of our manager at close to a zero basis. And we do not mark-to-market our ownership interest on our balance sheet or through the income statement. Additionally, our affiliated servicer, Gregory Funding provides a strategic advantage in non-performing and non-regular paying loan resolution processes and timelines, and as a data feedback loop for our managers’ analytics. In today's world, having our portfolio teams and analytics group at the manager, working closely with the servicer is essential to maximize performance probabilities loan by loan by loan. We've certainly seen the benefit of this during the COVID pandemic and in the first quarter and second quarter so far of 2022. We've seen this with significant ongoing increase in loan cash flow velocity and credit performance and our 2022-A securitization structure is the first of its kind that I will discuss later on this call. Like our 20% equity interest in our manager, we have a 20% economic interest in our servicer at a very low basis as well. We don't mark-to-market our equity interest in the servicer either on our balance sheet or income statement, our servicer is currently evaluating a potential private equity round as part of rolling out a few new programs. 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. The servicer’s loan expertise is definitely appreciated by our joint venture partners. As several of them now pay our servicer, 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. We still have low leverage. Our March 31 corporate leverage was 2.4 times. Our Q1 2022 average asset-based leverage was 2.2 times. We keep trying to increase asset-based leverage but the significant cash flow from our loan portfolio offsets it. So let's talk about the quarter on Page 4. Net interest income from loans and securities, including $3.9 million interest income from the increase in the present value of cash flow in excessive modeled and unallocated reserves was approximately $18.6 million in the second quarter. Our gross interest income excluding that $3.9 million from the increase in cash flow to our reserve models was similar to Q4 and Q3 of 2021, but net interest income was $400,000 higher, primarily due to calling our 2019-C securitization and accelerating the amortization of remaining deferred issuance costs and paying double interest on the underlying loans for a period of time in Q4. However, our average asset-based step balance was $10 million higher in Q1 of 2022, even though our cost of interest was $400,000 lower. A GAAP item to keep in mind is that interest income from our portion of joint ventures shows up in income from securities, not interest income from loans. For these joint venture interests, servicing fees for securities are paid out of the securities waterfall. So 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 grows more slowly than if we directly purchase loans outside of joint ventures by the amount of the servicing fees, but the GAAP servicing fee expense decreases by the corresponding offsetting amount. An important part of discussing interest income is the payment performance on our loan portfolio. At March 31, approximately 73.5% of our loan portfolio made at least 12 of the last 12 payments as compared to only 13% at the time we purchased the loans. This is strong, even though in June, August, November, 2021, we purchased a significant number of NPLs in loans and in joint venture structures and NPL purchases have increased relative to RPL purchases. Two years ago, we mentioned that we expected COVID-19 related events would negatively impact the percentage of 12 borrowers in our portfolio. Thus far, the impact on regular payment performance has been far less than expected, percentage of our portfolio that is 12 of 12 is very stable. Additionally, we've seen significant prepayment increases from a subset of borrowers that experience material increases in absolute dollars of equity and were in specific geographic areas. These patterns along with increases in housing prices and housing demand stability in certain markets that we have concentration in, helps maintain these prepayment and payment patterns and leads to increases in the present value of borrower payments in excess of our modeled expectations and the related income recognition of $3.9 million of unallocated loan purchase discount reserves in the first quarter. And similarly, reserve releases in each of the previous four quarters, approximately 25% of our full loan payoffs in the first quarter were from loans that were materially delinquent at the time of payoff. While regular paying loans produced higher total cash flows over the life of the loans on average, they can extend duration. And because we purchase loans at discounts, this can reduce percentage yield on the loan portfolio and interest income. Loans that are not regular monthly pay status tend to have materially shorter durations. We have seen and continue to expect the stability of housing prices will drive prepayments from property sales from both regular paying and non-regular paying loans. We do, however, expect that prepayment from rate term refinancing will slow in the second half of the second quarter of 2022. Prepayment shortens duration and increases the present value of collectibility of a portion of the discount reserve in excess of our modeled expectations. Our cost of funds in the first quarter was effectively flat versus fourth quarter of 2021, given inflation and Fed rate increase expectations, we would expect our cost of funds on adjustable rate repurchase agreements to increase over time. However, we also expect to call several 2019 securitizations and resecuritize at low cost of funds. We have already called our 2019 securitization transaction in fourth quarter of 2021 and called and resecuritized our 2018-D and 2018-G joint venture securitizations in April of 2022. Net income attributable to common stockholders was $3.6 million or $0.15 per share, after subtracting out $1.95 million of preferred dividends. There are a couple other things to note. Our acceleration of discount allowance related to credit performance and cash flow velocity was $3.9 million in Q1 versus $4.2 million in Q4 of 2021 and $3.7 million of Q3 of 2021. Cash flow in excess of expectations continued to increase in April so far of Q2 2022. We expensed approximately $3.2 million relating to the GAAP required fair value accrual of the warrant put rights from our Q2 2020 issuance of preferred stock and warrants versus $2.8 million in Q4 of 2021. The biggest difference that is primarily a timing effect rather than economic effect comes from the calling of our 2018-D and 2018-G unrated joint venture securitizations and the re-securitization of the underlying loans into a 2022-A AAA-rated agency securitization – agency rated securitization. Since 2018 D and G were joint ventures in which we owned a combined approximately 23%. It was not consolidated on balance sheets as loans but held legally and under GAAP as securities and beneficial interests. In the April 14, 2022 re-securitization to the new AAA-rated structure, we continue to own the same percentage, but the mark-to-market is lower on April 14 than on December 31, 2021, because of this at March 31, we take an impairment equal to the difference between the securities carrying value and the market values in April versus December 31 of $3.97 million. What is unusual is the loans are transferred from our two 2018 joint venture trusts to our new joint venture 2022-A trust with the same partnership and partners owning the same percentages in each. We and our partner effectively sold the loans in the form of securities exchange from ourselves to ourselves, which triggers a loss under GAAP. It would go through book value, whether or not it's a sale under GAAP because of mark-to-market change. There is no difference in expected cash flow on the underlying assets. And we expect this mark-to-market “sale” loss amount is fully recaptured over the expected life of the 2022-A trust. This also doesn't reduce taxable income as we and our partner effectively sold the assets from ourselves to ourselves. And it's a refinancing rather than a sale. So there's no tax impact. Without this confusing income statement item, earnings would be $0.33 per share. Book value per share was $15.95 at March 31 versus $15.92 at December 31 of 2021. Book value increased primarily as a result of the anti-dilutive effect of our existing convertible notes, offset by a reduction in fair value of our debt securities of approximately $9.8 million. Because we buy loans at a discount, the decline in loan market prices since December 31, 2021 has not resulted in any impairment in the loan portfolio. The decline in the market value of loans does lower the implied NAV by potentially reducing some unrealized built in gain. We do not mark-to-market our equity interest in our manager and servicer and have close to a zero basis in them. They are worth more than that. We still believe NAV remains materially higher than our GAAP book value. Taxable income was $0.49 per share. After preferred dividends of the equivalent of $0.09 per share, it would be $0.40 per share that would be distributable. Taxable income in first quarter was primarily driven by continuing increases in prepayment, especially for non-performing loans, high cash flow velocity on performing loans and continuing lower financing costs. We saw many delinquent loans prepay in full and generate tax gains. Taxable income is very instructive of the current cash economics of the portfolio. At March 31, we had approximately $71 million of cash. And for the first quarter, we had average daily cash and cash equivalent balance of approximately $74 million. We had $85 million of cash collections in the first quarter, which is a 7% increase over the average quarterly collections in 2021. At April 30, we had $75 million of cash. As I mentioned earlier in this call, at March 31, we also had more than $300 million face amount of unencumbered securities from our securitizations and joint ventures and unencumbered mortgage loans. The available cash and available asset-backed leverage provides us a good position for loan and other asset type purchases, share repurchases and liability repurchases. In January 2022, we invested an additional $6.1 million in Gaea Real Estate Corp. as part of an additional $30 million private equity round. And now have approximately $25.5 million invested in Gaea Real Estate that invests in triple net lease veterinary clinic properties, multifamily properties, and multifamily repositioning mezzanine loans. We own approximately 22.2% of Gaea. Gaea is managed by a subsidiary of our manager and we own a 19.8% interest in our manager at a near-zero basis. We think Gaea has a great deal of optionality and the Gaea can grow materially. Many of the Gaea own triple net lease veterinary clinics have annual rent increases based on uncapped CPI, which is a pretty good way to hedge inflation. Additionally, several of Gaea’s mezzanine repositioning loans also have equity participations in the underlying collateral properties. Approximately 73.5% of our portfolio by UPB, made at least 12 of their last 12 payments compared to only 13% at the time of loan acquisition. This increased from 72% in the fourth quarter of 2021, despite buying a significant amount of NPLs in late Q3 and Q4 of 2021. If we flip to Page 5 and we talk about the loan portfolio, purchased RPLs represent approximately 89% of our loan portfolio at March 31. Purchased RPLs represented 96% at June 30, 2021. We primarily purchased 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 and more prepayment on average. On Page 6, we continue to buy and own lower LTV loans. Our overall RPL purchase price is approximately 45% of the underlying property value and 88.75% of UPB. We have always been focused on loans with lower LTVs with certain absolute thresholds of dollars of equity and target geographic locations. In the current times of rising rates and the potential for market disruption, this becomes even more important for RPLs and NPLs. On Page 7 for NPLs on our balance sheet. Our overall purchase price is 90% of UPB and 52% of property value. Purchase price represents approximately 84% of the total owing balance, including any arrears. As a result of the low loan-to-value and higher absolute dollars of equity on average for our NPL portfolio, we've seen that rising home prices have significantly accelerated prepayment and regular payment velocity on our NPLs as borrowers can turn significant equity into cash. Under CECL, this leads to greater interest income from the acceleration of unallocated reserve loan purchase discount due to the increase in present value of collected unanticipated cash flow. On Page 8, California continues to represent the largest segment of our loan portfolio. Our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties. We've seen consistent payment and performance patterns from loans in these markets and consistently strong prepayment patterns. However, over the last nine months, California has gone from being approximately 30% of our portfolio to about 26% of our portfolio. Florida prepayments have also increased significantly. We purchased an NPL portfolio of approximately $85 million in late Q3 of 2021, in which all of the loans are secured by properties in Miami, Dade Broward and Palm Beach counties in Florida. In Q4 of 2021 and in the first quarter of 2022, these loans have far outperformed expectations. We continue to see strong demand for homes and home rentals in our target markets. If we look at portfolio migration on Page 9. At December 31, approximately – at March 31, approximately 73.5% of our loan portfolio made at least 12 of the last 12 payments, including approximately 64.4% of our loan portfolio that made at least 24 of the last 24. This compares to 13% when we bought them. Non-paying loans, which usually have shorter durations than paying loans, we’re expected to receive significant timeline extensions as a result of COVID moratoriums. This would typically negatively affect yields on true non-performing loans as extended resolution timelines can lead to more property tax insurance, legal and repair expenses. However, in the past five quarters and continuing into Q2 2022 so far, we've seen the significant increase in prepayment of non-performing loans, actually shorten duration. Subsequent events as I discussed earlier on April 14, 2022, we called and resecuritized, our 2018-D and 2018-G joint ventures into our rated 2022-A joint venture structure with the same third-party institutional joint venture partner. We own 23.28% of the securities and trust certificates from the trusts. That's similar to our ownership in 2018-D and 2018-G. 2022-A acquired 811 RPLs and NPLs UPB of $215.5 million, underlying property value of $518 million. The AAA through A-rated securities represents 71.9% of UPB and the underlying bonds carry a weighted average coupon of 3.47. This is the first rated structure for a group of loans in which approximately 35% of the loans are greater than 60 days delinquent. Based on the joint venture structure of the transaction, we will not consolidate 2022-A under U.S. GAAP. We've agreed to purchase approximately $11 million UPB of NPLs and RPLs and seven transactions subject to due diligence. The purchase price for the loans is approximately 99% of UPB, approximately 92% of the total owning balance, including arrears and approximately 44% of the value of the underlying properties. On May 5, we declared a dividend of $0.26 per share to be paid in cash on May 31 to holders of record on May 16. On Page 11, some financial metrics, average loan yields, excluding the accelerated income from unallocated discount due to the present value of cash flows in excess of our modeled expectations declined marginally by about 0.3%. Income from loan purchase discount that gets accelerated under CECL can reduce yield on loans in the future since a portion of the unallocated loan discount gets captured earlier under CECL. 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 interest in our JVs are presented under GAAP. As our JVs increase as they did in 2020 and 2021, relative to loans, the GAAP reporting shows lower average asset yields by the amount of the servicing fees. Leverage continues to be low, especially for companies in our sector. We ended the first quarter with the asset level debt of 2.2 times. Average asset level debt for the quarter was also 2.2 time. Our total average debt cost was slightly lower. And the first quarter versus Q4 of 2021, this is primarily the result of double paying some interest as a result of a timing gap between the purchase of the loans and the calling of our 2019-C securitization structure in Q4. That we discussed on the Q4 2021 quarterly call. Similar to the 2022-A AAA rated structure for NPLs, we're working on two additional similar structures, one for the re-securitizations of two of our 2019 JV structures and one for some of our wholly-owned loans. These would likely result in lower cost of funds than the existing related securitization structures. On Page 12, our total repurchase agreement related debt at March 31 was approximately $522 million of which $221 million was non-mark-to-market mortgage loan financing. And $218 million is financing on Class A1 senior bonds in our joint ventures. At March 31, we had $142 million face of unencumbered bonds, as well as $139 million UPB of unencumbered equity certificates and $40 million UPB of unencumbered mortgage loans. Combined with $75 million of cash at March 31, we have significant resources for being on offense and defense and to expand our stock and liability repurchases in today's volatile environment. And with that, I'm happy to take any questions that anybody might have.
Operator: Thank you very much, Mr. Mendelsohn. We’ll take our first question this afternoon from Kevin Barker at Piper Sandler.
Kevin Barker: Thank you very much. Good evening, Larry.
Larry Mendelsohn: Hi, Kevin. How are you?
Kevin Barker: Good. I'm doing well. So could you – you made some comments about net asset value. I mean, it's come down from last quarter. Could you give an estimate of where your net asset value is today and where it was at the end of the first quarter?
Larry Mendelsohn: Sure. At the end of the first quarter versus today or at the end of – end of first quarter versus 12/31. So versus 12/31, our net asset value is down at March 31, pretty marginally. The first two weeks of April, you've seen especially today rates come up a little bit. So it would be a little lower, but if book is just under 16, net asset value probably was around high 19s or 20 at the end of the year. I would expect it's still in the 19s, particularly given the value of both servicer and the manager. And as you might imagine, you've seen kind of MSR valuations increased dramatically. The servicer has non-terminable contracts except for cause. So the kind of the value of the servicer's contracts has increased as well.
Kevin Barker: Okay. And so I think you alluded to a private equity investment in the servicer could you just…
Larry Mendelsohn: Yes, the servicer is just looking – it's just starting to have some discussions about a private round of equity at the servicer. As part of it's been working on some automated programs and building them out and offering them to customers, we've had some of our joint venture partners ask the servicer if they could specifically build things out for their balance for them to be balance sheets as well. So we're just starting that for the servicer and I won't say preliminary stages but maybe a step past that.
Kevin Barker: Would that be a type of event that would require a recognizing a realized gain or some type of mark on the position that that Great Ajax holds in the servicer? And if so, is there any way to quantify that at this point in time or is it too early to tell?
Larry Mendelsohn: Too early to tell, it's more than – it would be more than our current basis on evaluation that's for sure. It would probably not trigger Great Ajax booking a gain or a mark because it wouldn't be a public security but it would be something that we would have to put in fair value discussion in our 10-Qs.
Kevin Barker: Right. And then can you just remind us what the cost basis of the stake in the servicer is today?
Larry Mendelsohn: We own 8% plus have $0.03 sets of warrants at different valuations for another 12% at a total cost basis of $2.8 million.
Kevin Barker: Okay. So on a cost base of 20% at $2.8 million. Okay. All right. Great. Thank you for taking my questions.
Operator: Thank you. Move next now to Eric Hagen with BTIG.
Eric Hagen: Hey, thanks. Good afternoon. Just a couple from me, I think servicing, how much did it contribute to earnings last quarter like stripping out any kind of one-time marks if you will, and then cash position - go ahead...
Larry Mendelsohn: Go ahead, I'm sorry.
Eric Hagen: And my second question, just kind of – what kind of cash position do you see yourselves running in this environment? If you can comment on the kind of status of your liquidity position and how you feel about that, that'd be good. Thanks.
Larry Mendelsohn: Sure. For the servicer – the servicer had a small amount of income, however, because of mark-to-market of the stock, it owns in Great Ajax that would have a negative effect in a pass-through from a liquidity perspective, a Great Ajax was about $75 million of cash on hand, and a lot of unencumbered bonds. The volatility in the world means we'll probably keep more than we would have say nine months ago. That being said, we have a lot of flexibility on an unencumbered assets that we could always add more financing if there was a demand for additional liquidity or there was an opportunity set that was irresistible that we wanted to go by. We do think that there's going to be some – the volatility will eventually create some interesting opportunities that we'll be able to take advantage of. We were not aggressive loan buyers in the first quarter. We thought that where securitization executions were getting done versus where loans to the extent, they actually did get transacted in, where transacting it didn't make enough economic sense for, in a volatile environment for that limited spread. We think there's going to be better opportunities ahead for that.
Eric Hagen: That's interesting color. I appreciate that. And then with home price appreciation and affordability being kind of the focal points in many ways for our market right now, do you feel like we'll see things like subordinate liens and other types of financing increase. And is that an opportunity for you guys do you feel?
Larry Mendelsohn: The answer is yes, I would expect that closed end and HELOC seconds will become a bigger thing. As where if rates were low, you would have seen more trade up owners of houses selling their house, buying in more expensive house and getting an inexpensive loan, but with higher rates, we would expect those same buyers to use HELOCs and do renovations and things like that. We also think that similarly in consumer and home improvement loans and also in potentially on the credit card side. We do however, think that it's going to be very much subject to specific markets as opposed to everywhere like an index because we think the stability in home prices will definitely be different market by market based on a number of different factors from – some of which are economic, some of which are previous HPA in those markets. Some of which are absolute dollars of equity that people have in those markets versus other markets. And some of it is the number, the percentage of homeowners that refinance into very low rate loans that effectively removes the mobility of their living or their moving for a while and keeps that house off the market for a considerable period of time. And that's different market by market.
Eric Hagen: Thanks for the color. Appreciate it.
Larry Mendelsohn: Sure.
Operator: And Mr. Mendelsohn, it appears we have no further questions today. Turn the conference back to you for any closing comments.
Larry Mendelsohn: Thank you very much, everyone for joining us on our first quarter 2022 earnings call for Great Ajax Corp. Feel free to reach out if you have additional questions, we always like talking about our company and our business and thanks again for joining us.
Operator: Thank you, Mr. Mendelsohn. Ladies and gentlemen, again, that will conclude today's Great Ajax Corporation first quarter 2022 financial results call. Thank you all so much for joining us. I wish you all a great remainder of your day. Goodbye.
