Great Ajax Corp (AJX) 2016 Q1 法說會逐字稿

Good afternoon and welcome to the Great Ajax Corp. First Quarter 2016 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Larry Mendelsohn, Chairman and CEO. Please go ahead, sir.

Thank you very much. I appreciate it. Welcome to the Great Ajax's first quarter 2016 conference call to talk about earnings and go through what's going on here. I have with me Russell Schaub, our President and also the -- runs our captive loan service, or Gregory Funding, and our new CFO, Mary Doyle, who is here for her first quarterly conference call. So we're glad to have everybody here. Before I get started, I want to cover the basis that our lawyers tell us I have to on page 2, the Safe Harbor disclosure about forward-looking statements.

Before I get too far into the presentation, I want to make some general comments about our quarter and in the month of April. A good quarter and a good month of April, both on an operating basis and even more importantly on a long-term strategic basis. Early in the quarter, there was quite a bit of market chaos. We talked about some of that on our year-end conference call in early March. So in the first quarter we played a little defense and drew on some funding from our credit facility early in the quarter. We did it for two reasons. One, we wanted to have plenty of cash during the quarter. And two, we wanted to be able to go on offense late in the quarter, which we did, as a result of the chaos.

As a result of those decisions, the end of Q1 and early Q2 have been quite good. From just volume, we're seeing more loans than ever before. It's given us the ability to be choosier than we've ever needed to be or wanted to be. But now we really get to pick and choose exactly what we want to buy, where we want to buy and who we want to buy it from. You will probably be able to see from our presentation that over the last three quarters on average, the prices we pay for loans has come down and you'll clearly see that in our subsequent events section. But probably the most overarching is, our business style is we just keep our head down and we just continue focusing on being a deep value buyer from private sourcing in very specific markets. We spend a lot of time analyzing and operating our business on a loan-by-loan basis and that's really the overarching feature of what we do. If we jump to page 3 from a business overview, our business really based on sourcing loans, long-standing relationships and privately negotiated transactions. Over 90%, and it continues to be over 90%, of our acquisitions are privately negotiated, not public auction. Since we started this Company, little less than two years ago, we've done 142 different acquisitions, 13 in Q1 2016 by itself. I cannot emphasize enough the importance of our sourcing. Throughout this discussion, I think you'll see that our sourcing network is very important to our ability to acquire the types of loans that we want in the locations we want them and at the prices we're willing to pay, which is materially lower than we see other people paying. It's also important to appreciate how valuable having our captive service, or Gregory Funding, is to the outcome of our loans and for our ability to have loan-by-loan data-point by data-point available to do analysis on purchases and driving the portfolio management of our loans. We spend a lot of time and effort and we do a large amount of data analysis figuring out in advance what loans qualities we want to own, and then we go find them. We don't sit and wait for people just to come to us.

Again loan-by-loan bids. We give people loan-by-loan prices, a typical transaction for us. We're seeing somewhere between 25 and 100 loans and we probably end up negotiating a subset out of that as opposed to buying an entire pool. Our goal is to maximize returns asset by asset. It's time consuming, it's a lot of work, requires us to keep our head down and be focused, but that's the way we do it. We use non-mark-to-market leverage, really important. It was very beneficial to us in the first quarter of 2016 and was probably non-beneficial to some other people. Our corporate leverage at quarter end was about 1.64 times. Average leverage throughout the period was about 1.58 times or 1.59 times. We've done five securitizations as of March, 31, but as we'll talk about in subsequent events, we actually closed our six securitization in early April and we'll go into more detail when we get to that section.

In Q1, we acquired about $50 million of UPB for about $37 million. All of that was re-performing loans. No NPLs purchase in the quarter. Our average purchase price was about 74% of principal balance and about 62% of the property value that underline those loans. Since early 2015, so about a year ago, we purposely focused on buying lower loan-to-value loans with underlying properties and what we call housing deciles 4.5 to 7.5. Now that decile range is different in terms of what the dollar value is market-by-market, but it's slightly below the median up to about half way to the top and with absolute dollars of minimum equity thresholds. So we found it's very important in lower LTV loans. It's not just enough, the LTV percentage, it's also important to have absolute dollars of equity. We find that from our analytics that performance and prepayment are not just tied with the LTV percentage, but to the absolute dollars of equity. We also find that LTV is a natural hedge to housing price declines. It's a natural hedge to slower economic conditions and as we'll talk more about, it's a natural hedge to re-default.

Additionally, nearly 50% of our loans on balance sheet are either arms or step rates and these provide a natural interest rate hedge as well. We're able to build this portfolio this way because of the way we source our loans. We owned about 3,400 loans for about $759 million of UPB. Net interest income was $10.8 million in the quarter. I want to talk a little bit about net interest income. Net interest income, you'll probably see, did not increase as quickly as it did in Q4 2015, I want to talk about why. There's three factors. One is we drew on our non-mark-to-market credit facility in early 2016 to have more cash for acquisitions later in Q1, but also to play defense during the early Q1 market crisis. It was a good time to have more cash and also as the crisis subsided and people had liquidity issues between their mark-to-market financing also the new risk retention rules, it was an opportunity for us to put cash to work really cheaply. You may notice that our 12/31/15, so our year-end 2015 and our 03/31/16 cash balances were both approximately $30 million, yet we bought loans for $37 million. So we effectively 100% financed these purchases. And we did that by pre-drawing on our line for them and we kept approximately $30 million of cash during the period. $30 million cash represents 12.5% of equity.

Second on the interest income we accreted issuance discount on our securitized bonds faster than previously. This is really a timing difference. In Q1 2016, we had more securitized bonds than in any previous quarter for the entire quarter. Also because of prepayment on some of those bonds required us to treat discount faster.

Third and this is also an important one, this is rather than on the liability side, this is on the asset side, we have lower-than-expected re-default in our RPO portfolio. This is really important because it has multiple effects. Less re-defaults tend to extend the duration of the underlying loans and hence reduces current period income. But on the flip side less re-default also increases total cash flow over the life of loans. So the higher money multiple on the loan versus IRR. And it also increases the market value of the underlying loan. Now we don't mark loans to market. But if we did, this lower re-default would actually cause us to mark the loans higher rather than lower. So it's a little bit of an unusual thing. Some of this trend of less re-default-than-anticipated I think can be explained by the fact that we've been purposely buying lower LTV loans with greater absolute dollars of equities, so as a result, borrowers have more equity optionality related to the underlying property. Some of it is better economic conditions, but we've seen, if we look at loan migration, we've clearly seen in our portfolio, a higher percentage of loans paying and a lower percentage of recidivism on our re-performing portfolio.

One thing, we'll talk about I want to mention here is we announced a dividend $0.25 to shareholders a record as of May 13. Having more loans paying rather than defaulting also slows taxable income. And that creates -- it's a timing difference, it's not an amount. In fact, probably over time increases the total amount of taxable income because of interest payments, but the performing loans we realize taxable income slower than we do on non-performing loans. Non-performing loans, taxable income occurs upon an event like a resolution or modification or foreclosure. And performing loans, it occurs over a longer period of time.

And lastly on page 4 -- actually two more things on page four, one, I want to talk about our joint venture partnership with DoubleLine. We closed the first transaction right at the end of March. This transaction is really somewhat of a blueprint and we expect additional transactions and have been in discussions over some additional pools already. From a pure what I'll call return on average equity perspective, we look at our overall income statement. For Q1 2016, return on average equity was approximately 13% given about 1.58 times average leverage and 12.5% of equity or $30 million of cash over the period. So not that much leverage, a lot of cash, which is a drag and still 13%. We have a pretty stable portfolio that we own at very low prices.

If we jump to page 5, little quick portfolio overview. The probably the highlight of this is really that our NPL portfolio is shrinking. We haven't really bought any NPLs in about nine months. You'll see REO increased a little bit. That really is just representative of NPLs declining, some of which became REO and the rest of which result, but NPLs were down to about 12% of our portfolio and performing loans are 87% of our portfolio now.

In terms of our combined portfolio, you can see that NPLs are down to only about $100 million of UPB. You'll see about an $11 million decline. So 11% of our NPLs resolved themselves during the first quarter of 2016. And we expect that trend to continue, if not accelerate. Now on the re-performing loan side, we really, really, really focus on lower LTV loans in very specific markets. We continue to have over 80% of our loans in about eight or 10 markets and we expect that to continue from the portfolios that we have under contract. And I'll show that the loans we're buying seem to -- our prices are getting lower also that in the last nine months, if you look at our RPLs, RPLs on our portfolio increased by $127 million net, while property value as of the acquisition date. So no HPA, just straight as of the acquisition date, property value increased by $216 million. So by close to double what our actual UPB increased by. So the net increase in RPLs has been at approximately 58% of property value. So you can see we're really buying RPLs low LTV loans at pretty low prices.

On the non-performing side, in the current environment, we just don't think that non-performing loans represent good relative value to re-performing loans. Our current NPL portfolio is $61 million cost. And based on property value at the time of acquisition, our cost is about 58% of property value. Again that assumes no home price appreciation. So if we were to include home price appreciation, our current cost is significantly less than 58% of property value. So we own NPLs, we own them cheap to property value but new NPLS, we don't think as good a value as the ones we already own.

A couple changes in our market concentrations. We definitely increased our loan portfolio in Portland, although on a net basis, slower than we would have anticipated because we've seen a number of pay-offs and a significant increase in pre-payment in Portland, Oregon. We've also increased our RPL portfolio in Brooklyn, particularly in two family, three family and four family properties in Brooklyn and California represents close to 30% of our overall portfolio and Southern California is about 75% of that.

Page 10 is my favorite page. It really describes the way we think. We are not as earnings-per-share conscious as we are, what's the implied NAV that we're building. Every time we buy something have we already created a value because we closed on it. And this slide is updated with our two most recent securitizations. The first one they are closed April 2016, just a couple of weeks ago and the one at the bottom of the page closed in October 2015.

And you can see that if we take our entire portfolio through March 31, 2016, we were just to re-securitize the entire portfolio at the execution we got two weeks ago. It would imply that we would own -- and we sold our subordinate bonds at current market price. It would imply that we would own our entire portfolio of loans for $12 million of actual cash and we would have almost $200 million of face amount of UPB equity. It implies a materially higher NAV, about $19.37. And if you look at our October securitization, which is very similar, we actually got a little bit higher attachment point in our April 2016 than we did in October 15, which I know people probably were a little surprised at given the chaos in the non-agency CMBS markets this year. That's still close to $19 a share NAV as well. So when we look at this, as we think of it on a return on equity basis, that if we sold everything and had $12 million equity basis, we'd own 26 points of UPB, of which, 87% are paying loans. So we feel pretty comfortable with the NAV building and value creation we're doing in our balance sheet and in the business and that's what we, from a business perspective, really focus on.

From our subordinate bonds, we financed approximately 35%, 40% of our subordinate bonds in the last four or five months. We've not sold any. We have no intention of selling any. We still have 60% or 65% of them without any financing. As you can see from this table, if we wanted to finance or sell subordinate bonds, it would create a lot of capital availability if we chose to go that route. Subsequent events. In April, we closed $32 million UPB of acquisitions, we paid 69% of that and it's 123 loans in six transactions. So six transactions just in the month of April. May, we already have under contract $47 million UPB priced to collateral values of about 59% in both April and May. All our acquisitions, our RPLs combined 17 different transactions just in the first two months between April close and May under contract.

More of the same. Low LTV loans and low LTV -- low LTV and low price to property value strategy continues. 17 transactions is really a testament to our sourcing advantage of loans relative to other people. Securitization Number 6, Ajax Mortgage Loan Trust 2016 - A closed April 11. When we drew on our credit facility in early Q1, we wanted to play defense to make sure that just in case the non-HD market didn't get any better that wouldn't affect us. If we had known in January what our execution would have been on April 1 pricing, we probably wouldn't necessarily have drawn on that facility. We got terrific execution, the highest senior attachment point we've done so far. The entire transaction took a couple hours start to finish for pricing and it was two times oversubscribed. So there is -- clearly, we're happy about the execution. It was the bigger securitization we've done to-date. And because of the purchase prices we had for loans, has come down in the last three quarters, the leverage from the senior bond only was 5.4 times our remaining equity basis in the loans. So all in all, a terrific transaction. We paid down our credit facility out of the proceeds and net of pay-down come closing on April 11, we were sitting on about $50 million of cash.

On page 12 and 13 we have the income statement and balance sheet. I've described most of them. And I'm happy to take any questions that anybody might have.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Paul Miller, FBR.

Hey guys, can you talk a little bit about, it looks like -- how you guys doing. You guys had great acquisitions, but it looks like you missed a streak in our numbers and it looks like it's because of the higher borrowing cost due to pulling down those lines early. Why did you have to pull down early? I thought if you have a line, you have access to that line throughout the quarter. Can you walk me through why you pulled them down early and what was the expenses associated with pulling them down?

There is two pieces to the higher interest expense. One is we pulled down money early and that's what I call absolutely defense. There is a discussion I have with the Board that there's a lot of chaos going on. We remember 2008 when dealers had problems and we didn't want to run into an issue where we want to borrow money, and the dealers don't want to lend money because of chaos. So we decided that we were going to go to the safe route and we pulled down a bunch of money on our line, it's a non-mark-to-market line. So once we pulled it down, it's safe. So we wanted to make sure that we could always pull it down.

One of things we've learned in 2008 by seeing the world was that committed lines are committed until someone says are not committed. And as a result, we decided to be liquid during that period of time. The non-agency CMBS market was chaos. If someone had told me that on April 1 we priced our securitization, no problem, be the biggest ever and we get the highest leverage attachment point. And that was guaranteed. We wouldn't have taken down the money in the beginning of the quarter. So that picked up interest expense. The other thing in our interest expense is, our first five securitizations, we issued seniors at a discount. We issued 3.875% coupon seniors, so they have a discount. And that discount gets amortized over the life of the bond.

The performance of the bonds would suggest that we accrete that discount a little quicker, as well as the expenses related to transaction a little quicker. So some of that additional interest expense is related to the faster accretion of the discount. So that's just a timing difference related to the total discount from issuing bonds. So if we issued a bond at say $98.5 price, you have to take that $1.5 in overtime. Depending on how the bond pays down. The faster it pays down, the faster you have to accrete it. So which means that -- so it's really just a timing difference as to when you accrete that discount. So we accreted that discount, the discount and the expenses related to previous securitizations because of bond paid down faster.

That's a good thing. We realized loans apart. Now the offset part is, because we pool account, we don't get an offsetting benefit from interest income.

So looking forward, should we model in a little higher, I definitely would model in higher growth, but also a little bit higher borrowing cost because this discount accretion?

I have Mary here. So I'm going to let Mary answer that question, because she's far more of an expert than I am.

I don't think you necessarily would assume it's higher. We did a pretty large securitization in the fourth quarter of 2015 and we saw the full benefit of that coming through in the first quarter where we didn't in the prior quarter. So we had some -- with much larger deals, we had higher debt issuance cost as well as the discount related to it.

So it's larger in absolute dollars, but not necessarily as a percentage of the total debt.

So now going forward, can you add to the portfolio where you are full and now it'd be these joint ventures where most of the growth comes from?

We're at the close of the securitization on April 11. We were sitting -- after paying down our lines, we were sitting on $50 million of cash.

Okay. So that's plenty of room to --.

We got plenty of buying power, right.

(Operator Instructions) Brock Vandervliet, Nomura Securities.

So I hear you loud and clear on the $50 million. Just -- longer term, is it still -- are we still kind of in the range of say $50 million to $70 million in acquisitions per quarter, or should we be ratcheting that down? I'm just trying to get a sense of -- clearly, Q1 was a low for a number of different reasons, but --.

Q1 was low for a number of reasons, some of which was sellers were scared to death they were going to get killed. We saw the combination of the chaos in non-agency CMBS, a bunch of repo providers cutting back repo to a lot of loan owners and the new risk retention rules, caused a bit of havoc. And I think that prices came down where some sellers couldn't really stomach it. Now if you look at just April and May together, okay, April and May together, we're already at $80 million UPB of acquisitions.

Yes, I see that.

Right. So June tends to be a big month for bank sellers because June 30 is an important bank capital date and April and May, April especially tends to be non-bank sellers. So it's been a pretty busy April and May.

I can see what looks around the corner is very strong. I'm just wondering Larry, whether there is any change in terms of the longer-term growth that we should be looking at, or --.

A couple things. One is we are seeing more loans than ever before from more sellers. And many of the sellers in April and May are sellers we've never purchased from before. In May, there's two or three banks that we've never purchased from before. The Number 2 is we know that a lot of very large banks plan to shrink their balance sheets over the next two to three years in very dramatic fashions and I have been told to be prepared for kind of short notice. Number 3, having our relationship with DoubleLine and a few other large investors have also reached out to us, enables us to also aside from just a regular business of doing 17 transactions in two months in April and May, that are $4 million or $5 million apiece. Aside from our regular business of that, it enables us to also when the BoAs of the world come with $100 million or $200 million or 300 million or $1 billion that we have an avenue for that as well, and a source of fee revenue also that goes through our system.

So we're actually pretty excited kind of on both fronts that we're seeing more than ever before in our regular business. And we have more ability to buy things we ordinarily wouldn't buy in our joint venture business.

Can you give any guide, if you will, on how quickly that JV could scale from here?

We've already looked at two other pools in the month of April separate, one of which we both decided was too dirty and we passed on. And one of which we put in a bid to the seller and it didn't trade. So we have talks with them pretty close to every day.

And there is a dual trigger there, both parties would have to agree to proceed.

It's a buy together, correct.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Larry Mendelsohn for any closing remarks.

I appreciate everybody taking the time to be on our call. It looks like one more question came up.

Sure, we could take. Mike Howard, AB.

Just one quick question here. Target -- could you help us think about now that you've been up and running and have had steady access to the debt markets, target leverage levels at the mix of RPLs that you're running and with the kind of debt financing that you've been able to achieve. Right now average leverage in the quarter still around 1.6 turns. What do you think is a reasonable --. So target kind of debt to equity you think that the investors should think about?

Sure. The more RPLs we own, the more comfortable we are with leverage. The more NPLs we own, the less comfortable we are with leverage. So I think from a Board perspective, we're a little more comfortable given how our portfolio has, one, evolved into being 87% RPLs and two, how more loans than we anticipated are paying. I think on average our Board is a little more comfortable with more leverage than they would have been say six or nine or 12 months ago. That being said, we don't love leverage. It's not -- leverage is valuable to our business, but not required, in terms of NAV creation. I think leverage will keep drifting upward. We're about 1.64 times, I think at March 31. With the securitization that'll drift up a little bit more probably up to about 1.69 times or something like that. So I would anticipate that leverage would creep each quarter. I think our Board of Directors with this RPL portfolio is probably pretty comfortable with it creeping up closer to 2 times. I think they would start to be a little more reactive as you get closer to 2 times.

Again there are no further questions. Actually, no, we do have a follow-up from Mr. Vandervliet.

Larry, could you just talk about on the dividend as a percentage of GAAP?

The dividend because so many loans are paying, the taxable income actually gets slowed down a little bit versus if more loans -- if we had more recidivism, you'd have more modifications in liquidations, which would generate more taxable income sooner as opposed to from market discount over time. So that's kind of the principal reason why taxable income hasn't jumped is because so many loans are paying and that delays taxable income.

GAAP is done on a pool accounting basis, so no individual loan makes a material difference to it in that regard. So as a percentage of GAAP, the more RPLs you have as a percentage of your portfolio, the more your taxable income will be a lower percentage rather than a higher percentage of GAAP because of the delay of taxable income on performing loans versus non-performing loans. The more loans that stopped paying, the faster taxable income grows and the lumpier it gets. So one of the benefits of performing loans is it's more predictable and less lumpy. But on the flip side, taxable income gets delayed a little bit versus a loan that defaults.

We from a strategic philosophy prefer to have loans pay. We like the predictability. We like the long-term ROE. We like the ongoing balance sheet. We like the reduction in reinvestment risk that it provides. And we like where we can purchase re-performing loans in our markets and from our sellers relative to where we think the non-performing loan market is and where the loans in the non-performing loan market are located. So as a result, that's really kind of from a dividend perspective. The dividend will -- as our balance sheet grows, it will grow. Dividend -- increased pre-payment does help the dividend, but it doesn't generate more GAAP income because GAAP income is on a pool basis. So unless you had just massive amounts of pre-payment, it wouldn't affect GAAP, but would affect tax. We have seen a little bit of increase in pre-payment, especially in lower LTV, higher value properties and especially on loans that are adjustable-rate mortgages.

Again, I'll turn it back to Mr. Mendelson as I see there are no further questions.

Thank you again for joining Great Ajax's first quarter 2016 earnings call. I appreciate your patience in listening and I appreciate all the questions. We're always here, if anybody needs more information and wants to talk to us, we're always happier to do what we can. And thanks again for being shareholders and also looking at our Company.

Thank you, sir. The conference is now concluded. Thank you for attending. You may now disconnect.