Q4 2020 Earnings Call Transcript

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  • Operator:
    Good afternoon, ladies and gentlemen, and welcome to the Great Ajax Corp. Q4 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. I would now like to turn the conference over to your host, CEO, Mr. Lawrence Mendelsohn.
  • Lawrence Mendelsohn:
    Thank you very much. Thank you everybody for joining the Great Ajax fourth quarter 2020 earnings call. Before we get started I just want to point out everybody on page two of the presentation the safe harbor disclosures and with that we can get going. I am going to do a quick introduction before we get to page 3. The fourth quarter of 2020 was a good quarter in a lot of ways. Our overall corporate cost of funds decreased by approximately 27 basis points and our asset base cost of funds decreased by even more than that and that's after decreasing nearly 50 basis points in Q3 and in Q1 so far it's continued to decrease even more.
  • Operator:
    Our first question is from Eric Hagen from BTIG. Your line is open.
  • Eric Hagen:
    How are you guys. On the RPL purchases since quarter end that are still in diligence are those season loans or are they newer issues scratch and I got a color there. And then you mentioned you got, you expect pre-pays to pick up. I'm just curious what the rate incentive looks like for a re-performing borrower especially the seasoned borrowers with presumably low LTVs what does the access to capital look like and how much does the previous delinquency play in the rate that they get and then on the last one can you just talk about the amount of securitized debt that you have that's callable this year where you might be able to re-securitize that collateral and how stable the funding cost might be. Thanks.
  • Lawrence Mendelsohn:
    Yes. So I will do the last one first because it's the simplest. We have about five additional securitizations. I'm sorry three additional securitizations plus four joint venture securitizations that are callable already that we likely will call some of this year and re-securitize and to the extent that that happens it would reduce cost of funds versus those transactions of somewhere between 120 to 200 basis points per year.
  • Eric Hagen:
    Great. Thank you.
  • Lawrence Mendelsohn:
    Sure. On the prepayment side the weighted average coupon our portfolio is in the mid-fours and the weighted average LTV is pretty low. The other thing is that for us LTV is a little less important than what we consider what I call absolute dollars of equity. So that a 80 LTB or a 60 LTV on a $70,000 house is different in terms of prepayment probability than a $600,000 house and as a result our portfolio tends to have larger loan balances closer to about 200,000 average balance and three hundred thousand average home value. So we're seeing continued prepayment. The other thing is because of our target markets our borrowers tend to have more than average HPA on their houses and one of the things we've seen, we've seen two things. One is long-term clean pay loans have been prepaying particularly if they have more than about 130,000 of equity and they're prepaying partly for refinancing and partly for sale but delinquent loans are mostly pre-paying because of sale. So one of the things we found is if you're pandemic impacted borrower and you have 150,000 or 200,000 of equity we've seen a lot of people rather than wait for stimulus funds or deal with income issues we've seen a lot of people in our portfolio sell their homes in certain markets but there is been a lot of home price appreciation and put 200,000 in the bank and that's a pattern that we have seen continue in Q1 as well and would continue to expect that.
  • Eric Hagen:
    Fantastic.
  • Lawrence Mendelsohn:
    And then the loans in the first quarter about 20% of them are scratch and dent of new origination and the balance are season looks.
  • Eric Hagen:
    Great. Thank you so much.
  • Lawrence Mendelsohn:
    Sure thing.
  • Operator:
    Your next question is from Randy Binner from B. Riley. Your line is open.
  • Randy Binner:
    Hi, good evening. Thanks. I just had a couple higher level questions on the cash number you quoted the 145 million. Was that a year-end or is that now and –
  • Lawrence Mendelsohn:
    107 year end, 145 at March 1.
  • Randy Binner:
    So it's higher. So I guess a follow-up there is just –
  • Randy Binner:
    Two reasons. One prepayment continuing which increases cash flow velocity and money to us and two securitizations lowering cost of funds and also re-effectively re-levering older securitizations to affect what I will call the equivalent of much lower-cost cash-out revise and the third thing is with cost of funds going down more cash interest spread that we receive.
  • Randy Binner:
    What could you reasonably run that at the cash number meaning if I would if I thought well I understand now why it's higher. What could, what number could that run at it just to kind of understand what the drag is in dollars and cents?
  • Lawrence Mendelsohn:
    Well, let's put it this way. So when over a period of we acquire loans in the 80s. They're typically sloppy pay loans. We get 72% of them to become clean pay where we can issue AAA through BBB and get 84.5% through BBB which means we have somewhere between zero and 5% cash remaining cash basis in the loans securitize AAA through triple BBB at a 1.3 yield versus a purchase yield of somewhere between 6% and 7.5%. So, on loans that we get performing the ROE on cash is enormous over a two year period of time. On loans that we don't get performing, you would expect it to run at about an unlevered 6% or 6.5% with the most leverage you'd put against it probably four or five times in the securitization and less than that along the way. But that being said you always have cash on hand for two reasons. One because crazy things can happen like March and April of 2020 and you want to be able to go on offense not defense when that happens and number two is we frequently see opportunities where someone needs an execution in a very short period of time and that's not likely financeable during that short period of time but over a period of time. So we'd like to have cash on hand for offense and defense and be what I call value-oriented loan investor that based on analytics that we make, us believe with our servicing capability and the analytics that loan is likely to be worth considerably more 12 months or 18 months later.
  • Randy Binner:
    Then just one more. That was really helpful. So given the move higher interest rates recently do you think you're more likely to be on offense or defense meaning are you I think a lot of media coverage on all this but just what's your take on what's moved in the mortgage market so far from a rate perspective?
  • Lawrence Mendelsohn:
    I think that where we've seen loan prices they seem to not have noticed the rise in call it seven plus year duration rates. We think that it has not affected loan prices yet. We do think however that there's a tipping point and there will be a significant opportunity that it creates. It's just not yet.
  • Randy Binner:
    Okay. Fair enough. Thanks a lot.
  • Lawrence Mendelsohn:
    Sure.
  • Operator:
    And I'm showing no further questions at this time. I would like now to turn the conference back to CEO, Mr. Lawrence Mendelsohn for any additional or closing remarks.
  • Lawrence Mendelsohn:
    Thank you everybody for joining the Great Ajax fourth quarter 2020 earnings conference call. We appreciate you taking the time and hope everyone stays well and safe and healthy during the coming months and we look forward to talking to you again in our Q1 call in a few months.
  • Operator:
    Ladies and gentlemen this concludes today's conference call. Thank you for your participation and have a wonderful day.

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