Great Ajax Corp (AJX) 2015 Q4 法說會逐字稿

Good afternoon, and welcome to the Great Ajax Corp Fourth Quarter and Fiscal 2015 Financial Results. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I'd now like to turn the conference over to Larry Mendelsohn, Chief Executive Officer. Please go ahead.

Thank you very much. Thanks everybody for joining us on our fourth quarter 2015 and our year-end 2015 investor call. I appreciate it very much. I want to point out on page 2, the Safe Harbor disclosure with regard to the call today.

Jumping to page 3 on our presentation, there's a few general comments I want to make before I get into the presentation, page by page, by page. Number one, a good quarter in a lot of respects, both from an operating perspective and very much so also on a strategic front. As you might imagine, there is a bunch of chaos in the market and chaos tends to be good for us. We're seeing a lot of loans. We're seeing loans from newer places that we haven't seen before, and we're able to be choosier than ever before in the loans we buy. Also, we're relatively boring folks, so we just keep our heads down and we continue focusing on deep value purchases in our specific markets and analyzing and operating in those loans and markets on an asset-by-asset basis.

One of the key pieces of our business is the way we source loans. It continues that over 90% of what we've purchased is privately negotiated, not at auction. Since the summer of 2014 when we started, we've done 129 different acquisitions and just in 2015, we did 77 different acquisitions, which as you might imagine is a large number. It requires heavy infrastructure and due diligence effort and the analytics in place to be able to go loan-by-loan during that acquisition process.

We used the proprietary analytics that we built over the years. We spent a great deal of time and effort figuring out in advance of finding loans what we want and what loan qualities we want and where we want to have them. We figure out loan-by-loan prices frequently. We're negotiating on a loan-by-loan basis with sellers. We vary rarely by an entire pool of loans from a seller, usually buying a subset based on loans that we want and the types of assets we want. The current market conditions have given us even more benefit in that regard than before.

We service our own assets who are captive that can only service for us, asset-by-asset, borrower-by-borrower, and sharing facilities there in this space next to us, gives us the ability to optimize and manage the loans on both a loan-by-loan and portfolio basis, day-in and day-out. We're pretty well leveraged. At year end, we were 1.58 times. At September 30, we are 1.42 times, so our leverage went up about 10% during the course of the year. On a multiple basis, we've done five securitizations. We get significant increase in leverage from just our senior bonds, about 2.48 times.

From a total balance sheet perspective on the liability side, we've got $377 million of liabilities at December 31, of which $270 million or 72% are fixed rate non-recourse securitized seniors, about $100 million exist is non mark-to-market financing facilities.

All right. I'll go through a couple of highlights for the quarter as well as the year. Number one, for the quarter, we bought about $62 million of UPB for $46 million. It was only on the balance sheet, an average of 28 days in Q4, which is a very few number of days. A lot of that has to do with sellers who need year end rather than throughout the period and that as you might imagine if you own loans for less period of time, you get to earn less income off of them, but on the flip side, we bought them really cheap, even cheaper than we would have anticipated. And number two, the fact that we own them is the most important thing that we're able to buy them as close to the number of days we owned them. We bought the performing loans, the RPLs, at about 63% of underlying property value, 75% of UPB and the non-performers, which were to a much lesser extent. We paid 64% on UPB, but only 58% of property value.

For the year, you can see we bought mostly performing loans at significant discounts and on a property value percentage, only 64% of property value that was our performing loan purchase price and non-performing loans 52%. It's really important to understand that since early 2015, we've been purposely focused on buying lower LTV loans in what I'll call housing deciles 4.5 through 7.5. So if you just put housing in deciles, 1 through 10, 10 being the most expensive, 1 being the lowest, we've been very focused on deciles 4.5 through 7.5, and loans with lower LTVs and just as importantly, absolute minimum dollar amounts of equity as a threshold. Our analysis and our performance suggest that loan performance and prepayment are not just tied to LTV percentage, but also very importantly the absolute dollars of equity underlying a loan.

The other thing is lower LTV loans are a natural hedge against housing prices and against the economic conditions that whether you think they're better or worse or will be getting better or worse, they're also a hedge against recidivism, by buying very low LTV loans, payment recidivism.

Additionally, nearly 50% of all of our loans are either ARMs or they're graduated rate coupons, where the rate automatically goes up. We've been able to build our portfolio of very low LTV loans and 50% ARMs or graduated terms. Because of the way we source our loans from so many different sellers on a private basis and are able to buy loan-by-loan-by-loan, rather than at auction, so it's very important to understand that the sourcing and the analysis we do really drives what we buy.

If you look at income, it's $0.53, a good quarter for relatively low leverage. Our cash balance at September 30 and our cash balance at December 31 are the same. So we carried cash equal to basically 15% of equity during the entire time period. If you look at the return on average equity for the period, for Q4, our return on average equity was 14.3% and that's with average leverage of 1.5 times, and I think if you look in the REIT land, you won't find too many 14.3 percenters with 1.5 times leverage and with $30 million average cash balance during the period.

For the full year 2015, we ran 11.64% return on average equity and our average leverage for the period was only 1.08 times. So again 14.31% for the fourth quarter with 1.5 times average leverage, 1.58 times period ending leverage.

We see a couple of continuing trends in our portfolio. One is more loans than I will say, quote-unquote, are expected, more loans are paying regularly than we anticipated. We've seen much lower recidivism than we anticipated from our loan portfolio. We talked about that on Q3 and that pattern has continued significantly. Some of this has explained by the fact that we've been purposely buying lower LTV loans with greater absolute dollars of equity. California continues to be in excess of 25% of our portfolio and South California being 80% of that.

The other thing we've seen as a continuation from third quarter and just as much so in fourth quarter is our prepayment pattern. What we found is that it's not lower LTV loans by themselves that are prepaying. What we're finding is it's lower LTV loans with greater than about $100,000 in absolute equity and most of those are also ARM loans that are prepaying. So we're seeing a lot of prepayment of one-year treasury, plus two and three quarter ARMs that have at least $100,000 of absolute equity, we're seeing those prepaid. What we're not seeing prepaid are lower balance loans, say $70,000, $80,000 balances with higher coupons, seven or eight coupons. Even if there is 70 LTV, we're not seeing those prepaid. We're seeing those continue to pay, but not prepaid. It's a phenomena that we're not used to seeing in mortgage land, usually in mortgage land, you see prepayment increase substantially with equity and with coupon, and we're actually not seeing it as a result of coupon or LTV percentage. We're seeing it with actually lower coupons, but with absolute dollars of equity.

If you look at our portfolio at December 31, you'll see that RPLs continue to increase as a percentage of our portfolio. NPLs, which were 16.6% of our portfolio at September 30, are now only 15% at December 31. So again, NPLs as a percentage of portfolio are declining.

And on page 6 on the UPB basis, you actually see a net decline in NPLs from June 30 to December 31 of $118 million down to $111 million.

On the re-performing on page 7, you can see we're focusing on lower LTV loans. If you look at the difference really between June 30 and December 31, in the last six months, our RPL portfolio increased by $94 million on a net basis while the property value as of the acquisition date, so HPA is zero, no home price appreciation included. So while the property value as of the acquisition date increased by $169 million versus only $94 million in UPB. So you can really see the change in what we're buying in the RPL portfolio. So the net increase in RPLs was only at 56% of property value purchase price.

Non-performing loans on page 8, you can see they're just declining. We don't have a lot to discuss about non-performing loans. We just think that in the current environment that non-performing loans don't represent good deep value relative to the re-performing loans that we're able to buy.

We've changed our markets slightly. If you look at our markets, we've added Portland as a focused market, particularly for small balance commercial and in smaller apartment buildings, especially. On the loan side, we've also taken Houston out. Houston, we still think that market is at least two years away. We've done a lot of analysis versus energy pricing, and we think that Houston come 2018 or 2019 is probably some place we are going to start looking, but not currently. But Houston is currently in our portfolio, it represents 0.5% of our portfolio. So at most, it's negligible.

On our building net asset value page, what you see in the top is, you probably saw this in our September 30 presentation also, this is updated to our December 31 portfolio, and it's a very similar theme that at the prices we pay for loans and the kinds of loans we buy and securitization executions we get, that if we were to sell our subordinated bonds, we would basically have no cash invested. If we just sold our subordinate bonds and we'd own somewhere between 25% and 27% of UPB for free. And when you think about that, you also I think of it in another way, as you think it not just in NAV form, but also return on average equity. So if we were to sell subs and our own 27% of our UPB for free, that would be an enormous number as return on average equity if we were to lever up some more versus where we are.

With regard to the subordinate bonds, we've financed two of our 10 subordinate bonds. We haven't sold any. We have 10 of them that we own without any financing of any kind. As you can see from these tables, if we wanted to finance them, if we want to sell the subordinate bonds, it would create material capital availability for us. Yes, it would increase our leverage, it would also create material capital availability.

In the first quarter so far, we've acquired or have under contract $56 million UPB of loans in 15 different transactions, with underlying property value of $67 million, so again continues buying more LTV loans. All the loans that are currently under contract are re-performing loans, none of them are NPLs and you can see that we're just continuing the same theme. Over 80% have to be in the markets that we target. From the previous slide, we like re-performing loans versus non-performing loans, we like low LTVs, lots of transactions from lots of different sellers where we get to pick and choose loan-by-loan-by-loan.

A couple other things I'd like to talk about, one is, we just received from the IRS our Private Letter Ruling that we applied for with regard to income from our Manager. The IRS has concurred that we'll be able to -- the income that we got from our 20% interest in our Manager will be good qualifying income for re-tests and not subject to the double taxation. Currently, we have our ownership in the Manager sitting in a TRS and we'll be exploring our options right now to remove that from a TRS and put that into the operating partnership, and no longer reserve for taxes for income relating to our 20% ownership in the Manager. So that's a significant positive.

Also subsequent, we have jointly agreed with a partner in the first transaction of a joint venture to buy approximately $120 million of re-performing loans from one seller at a purchase price of 55% of property value. As you can see again, very low LTV loans. We expect that post completion of this transaction at the end of March, we will own 5% interest in the loans. We and our partner will each own our pro rata share in the form of a security and our financing facilities, if we choose, we're eligible to finance that 5% interest, just like in any other loan, which is terrific for us. This is a blueprint for our JV with this big institution and we look forward to acquiring many other pools with them. The institution will be a paying of fees as part of the joint venture and Great Ajax will be receiving fees what upon non-servicing management fees with regard to these transactions. Again, scheduled to close at the end of March.

The last two pages are our income statement and balance sheet, I talked about a lot of the items here, and I'm happy to open up to any questions anybody might have.

(Operator Instructions) Paul Miller, FBR Capital Markets.

Hey, Larry, it's Thomas on behalf of Paul. On the JV stuff, obviously, there is some potential, there's potential to do a lot more deals like that. What pace can you do those at, and the fee that you collect, is that on the full UPB amount or is that on the percentage that you own of the JV?

It's on the full UPB amount. The fees are on the full UPB amount. Yes, the expectation is this is the first of many with this partner. They would like to invest significantly more in re-performing loans in particular. And they know us pretty well from having been one of our regular bond buyers and spend a lot of time here in Portland at our offices. So we're excited about it, and we think it's the first of many with them as part of a long relationship.

In terms of how much could we put to work, I think we could put to work quite a bit. They have a very big sight set and have indicated that to us, so I would imagine it would be a material multiple if this -- once we get this one finished. We're already looking at other pools together while this one is in the documenting process.

Okay. And then on the private letter, that's obviously a positive, just to be clear on what that actually does, that only impacts your -- that only reduces your tax liability, but doesn't necessarily change the income statement otherwise at Ajax, right?

Right, it doesn't change the income statement, other than we don't have to reserve for tax liability for that income. So that it would -- post-ruling, it would increase that we no longer have to reserve for tax liabilities, so it would increase income. It also makes it part of the qualifying income for any retest.

Okay. In your opening comments, you talked about some newer markets, obviously identified Portland is new on the map, but are there other places that you guys are focused on, and sort of where are those and what sort of drove you to them?

Sure, a lot of is demographics and other, what I'll call demographic and population statistics, job growth, schools, violent crime rates, changes in violent crime rates. So a lot of our market changes are what I'll call neighborhood-by-neighborhood. Probably the biggest change was more active in Portland, especially in small balance commercial. We've continued to materially increase our California exposure, not so much in Northern California as what I'll call Santa Barbara and South and not really inland from Southern California, so really Los Angeles, Orange and San Diego Counties probably have been the biggest increases in our portfolio percentages over the last six months, or even over the last nine months. But Portland, we added on probably October-ish as one of our important markets and Houston, which had been one of our markets, although we -- everything we saw, we ended up not buying, we officially removed it as one of our target markets about three months ago.

I would say we're -- while Dallas is still one of our markets, we're not openly looking to grow it versus just keep it steady state, whereas our other markets we're still willing going to grow. One thing I will say about in New York, we're looking -- we probably ratcheted it down one decile in what our targets are, just instead of saying deciles 4.5 through 7.5, we're probably deciles 4.5 through 6.5.

Brock Vandervliet, Nomura Securities.

In terms of the just the tempo of the acquisitions, it looks like your purchase UPB fell from $92 million to $61 million in the quarter, I know some closing as usually trickle over to the next one, is this just a seasonal issue in Q4?

Yes, fourth quarter is by far the hardest one for us to predict, because so much depends on what condition sellers are in year end and who their accountants are. We actually had a couple of sales where the seller accountants said as long as you close it by January 31 but [have it under] contract at December 31, we'll give you credit for December 31 sale, which is not something that we're accustomed to. But a couple of sellers were able to take that approach. They weren't big sellers, but they were sellers.

The biggest thing is that in markets like this, we get the pick of the litter. So when you have kind of, what I call for the lack of a better term, chaos, although it's not really chaotic, in loan markets like you're seeing in some of these sellers, you're seeing some sellers have certain issues or shelf life pressures, so that we're seeing some funds that are getting redemptions, things like that. We get the pick of the litter, so as a result we've been more choosy than even when we've been choosy. So as a result, our acquisition group has taken the approach we want to buy exactly what we want, not exactly what we're seeing and that's really been what I would say is the driving force. And fourth quarter is the hardest to predict because sellers have all kinds of different reasons to be sellers.

We're seeing first quarter, which is generally a relatively slow quarter, has actually been pretty busy as you can see. And that's -- I think some of that is leakage from fourth quarter and some of it is new sellers that we've not met, not done any transaction with before who are coming to us in the first quarter for liquidity reasons.

You can see from our first quarter purchases, the prices are pretty low.

Yes. And so Q1 purchases could be more in line with say Q3 than Q4?

I think that's true. We're looking at quite a bit right now and a bunch of sellers would probably want month-end March 31, the banks, especially, the funds tend to be less concerned about March 31 than they are generally November 30, December 31, and June 30.

And just separate one on the dividend, we've been expecting that to pick up. I noticed in the slides, it looked to be in line with taxable income for the quarter.

Yes. We --

I guess as a follow-up, you surely expect that to ramp further as --

The answer is, I would expect it to as taxable income, you know, the fact that we have so many performing loans makes taxable lag GAAP income. So I'd expect that as taxable income grows, the dividend will also. So last year, we were ahead of taxable income a little bit. So the Board took the position, let's try to match it a little bit more exactly going forward. Yes, we would expect it to ramp with taxable income. And we'd also expect taxable income to ramp just because performing loans lag GAAP, just by the nature of the tax rules.

(Operator Instructions). There are no further questions. I would like to turn the conference back over to Mr. Mendelsohn for closing remarks.

Thank you. Thank you very much for joining us on our call. We appreciate it. We're working hard and keeping our head down in doing what we think makes sense as deep value investors in the market that's somewhat ideal for deep value investing. So we're excited about the things we've accomplished in the quarter. We're excited about what we've acquired, we're excited about the JV we've put in place, and we're looking forward to 2016. And thanks again for joining the call.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.