Q2 2018 Earnings Call Transcript

Published:

  • Operator:
    Good afternoon, everyone, and welcome to the Great Ajax Corporation Second Quarter 2018 Financial Results Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Lawrence Mendelsohn, CEO. Sir, please go ahead.
  • Lawrence Mendelsohn:
    Thank you very much. Thank you, everybody, for joining us on the Great Ajax Second Quarter Conference Call. Before we get started, I just want to point everybody to Page 2 in the presentation, the Safe Harbor disclosure about future statements. And with that, I'll get started on Page 3. We had a very successful value-building quarter. We bought loans at good prices. We expanded our loan seller base. We created $220 million of coinvestments with institutional partners, including executing two securitizations at very good, well, better-than-market outcomes. Closed - we also closed the second stage of our investment in our servicer, Gregory Funding, and we, most importantly, increased our net interest margin. Other than some expected REO impairments that we talked about last quarter and we'll talk about again this quarter, the quarter was all positive. With that, on Page 3, you'll see that we closed six transactions in Q2 that does not include 2018-A and 2018-B securitizations we did with institutional partners. If you add that in, it's significantly larger, and we'll talk about that in a few minutes. But our sourcing networks is really important. You'll also see that in our subsequent events how many different transactions are coming in Q3 from a number of different sellers - new sellers. Our sourcing network allows us to find loans we want in the locations we want and at the prices we pay relative to others. We couldn't do what we do if we didn't have such a broad and diverse sourcing base. And we certainly couldn't do the number of transactions and the smaller transactions that we do. We keep growing our analytics group. We analyze, it seems like, infinite - this large amount of data to determine target loan characteristics and to develop pattern recognition algorithms for these loans that we're looking for. This helps drive both the acquisition strategies, but it also helps drive the servicing strategies that we use, and you'll see that - the success of that in our migration charts later in this presentation. I mentioned about our servicer. We now own 8% of our servicer, Gregory Funding. We have warrants on another 12%. We closed the second part of that transaction in late May. We think the servicer has significant value optionality. And as a result, the warrants were extremely important to our outside directors as part of the negotiations. And we think the optionality, especially given the growth of our institutional coinvestment partners, we think that optionality is sooner rather than later. We use moderate nonmark-to-market leverage. And for the second quarter in a row, our leverage actually decreased versus both Q1 '17 - or Q1 '18 and Q4 '17. If we jump to Page 4, our quarter highlights. Outside of the coinvestments with our institutional partners, we bought about $15 million of RPLs. Purchase price of UPB was about $92 million. The purchase price of property value was about $57 million, a pretty good weighted average coupon in good locations, and we're excited to have those. Interest income was up. Considerably, net income of $7.5 million and earnings per share of $0.40. There's several important pieces to understand in the per share earnings map of Q2
  • Operator:
    [Operator Instructions]. Our first question today comes from Tim Hayes from B. Riley FBR.
  • Timothy Hayes:
    First question, the UPB of loans committed to the JVs this quarter just kind of looks a little bit lower than expected - or than I expected. Just - I know some loans are going to be kicked out, but it just seems more than usual. Am I wrong with that assumption?
  • Lawrence Mendelsohn:
    No, no.
  • Timothy Hayes:
    But if not, kind of what happened there?
  • Lawrence Mendelsohn:
    In the April transaction, originally, it was going to be about $30 million more loan - $30 million UPB more than that. And when we did the due diligence and went to look at all the houses, we came to the conclusion that the seller wasn't necessarily completely upfront with the evaluations.
  • Timothy Hayes:
    I'd love to see that.
  • Lawrence Mendelsohn:
    So it goes - and it's one of those things where it goes back to nobody cares like the people whose money it is. You have to go look at the houses.
  • Timothy Hayes:
    All right, okay. And so was there an earnings headwind to this quarter just from the kind of expenses incurred from the diligence you did on those loans versus not actually earning any interest on them?
  • Lawrence Mendelsohn:
    Yes. I mean, it wasn't as bad as it would've been had we been 100% owner of those loan versus had third-party coinvestors with those loans. But we did have costs related to those loans that we paid our share for loans that never happened, yes.
  • Timothy Hayes:
    Got it, okay. And you mentioned that your taxable income is tracking well ahead of the dividend at this point. And it seems like cash flows and foreclosures, both of which triggered taxable earnings, should be going up. Just what do you feel you need to see before raising the dividend? Is it just kind of getting another quarter under your belt to see how 3Q shakes it out before saying, are we really going to do this? Or what else are you looking to see?
  • Lawrence Mendelsohn:
    Yes, taxable income is a little harder to predict because timing of things, the date things occur matter, like the dates of foreclosure or the dates of a reinstatement, things like that, or dates of a modification. But I think if third quarter comes in as a similar taxable income level, which we don't have a reason to believe it would be materially different, I think that would be a likely decision-making point regarding the dividend.
  • Timothy Hayes:
    Okay. And would you ideally be looking to pay out closer to 90% of taxable or closer to 100%?
  • Lawrence Mendelsohn:
    Obviously, not less than 90%. I don't think our board will be prepared to pay 100%. But obviously, not less than 90%.
  • Timothy Hayes:
    Okay. And then my last question here. I know you guys had a board meeting in July. Just wondering if there were any main takeaways there. Were there - were you given the green light to pursue any strategic alternatives or vice versa?
  • Lawrence Mendelsohn:
    It was a long board meeting. The answer is yes on a number of different fronts. One is they want us to pursue growing our urban mixed-use and small multifamily property portfolio. They look at it almost like single family to rent, but more scalable because of density in specific urban locations. And those locations match up with great overlap over the locations of our residential portfolio already. So we have intimate knowledge of those spots, and we have feet on the ground that - and a lot of data to drive the particular kind of neighborhoods and blocks within the neighborhood. So they would like us to grow that part of our business. They like the securitization executions and like our coinvestments with our institutional partners, who also are large bond investors in securitization markets as well. And we've - a couple of additional institutions have seen those transactions and reached out to us kind of out of the blue about joining in and growing that part of our transactional business as well. Keeping in mind that, that was one of the reasons - demand for that structure from institutional investors is one of the reasons why our board insisted that before permitting it, they wanted to own a piece of our servicer with optionality through the warrants. They - we also had discussions about kind of the REIT market in general, REIT structures and the way REITs trade and have looked at maybe in the open market buying some shares of either public or private REITs that we think are at significant discounts to the asset values.
  • Timothy Hayes:
    Okay. Yes, that's a lot that you guys talked about, I'm sure. And so at...
  • Lawrence Mendelsohn:
    Yes. The other thing that we talked about is we spent a lot of time talking about the New tax code and the opportunity zone pieces of the new tax rate and investments and potential investments for being able to source some assets a little less expensively because of the tax advantages to a seller because of opportunity-zoned entity structures, and the board authorized us to set up an opportunity zone entity underneath the Great Ajax operating partnership as well.
  • Timothy Hayes:
    I'm sorry, can you just repeat that last sentence? I kind of just cut off a little bit.
  • Lawrence Mendelsohn:
    Yes, yes. The board has authorized us - actually, told us to go set up an entity underneath Great Ajax operating partnership for investments in tax advantaged opportunity zones as - which would also give us the ability to be able to source some properties cheaper because sellers have significant tax advantages both from the sale of their property and from partnership units in an opportunity zone.
  • Timothy Hayes:
    Okay, understood. And - but did - is it safe to say at this point that Great Ajax is not pursuing a C Corp conversion?
  • Lawrence Mendelsohn:
    We're not pursuing it at this time. I think our board wants to see more time go by into the new tax rules, maybe see it in election in November and see what the mood is. And also depending on how the growth of the property portfolio in urban centers and the opportunity zone to take all that in kind of strategically over time rather than just deciding in parts.
  • Operator:
    [Operator Instructions]. Our next question comes from Pierce Dever from Piper.
  • Pierce Dever:
    Hi, my questions were all answered. Thanks for the time.
  • Lawrence Mendelsohn:
    No worries.
  • Operator:
    [Operator Instructions]. And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call back over to management for any closing remarks.
  • Lawrence Mendelsohn:
    Thank you very much for joining us on our second quarter conference call. We're always around to answer questions if - to the extent you have them. And we love talking about our company. It's an exciting time with a lot of opportunities going on. We appreciate you joining us very much. Thank you.
  • Operator:
    Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.

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