Earnings Labs

Rithm Property Trust Inc. (RPT)

Q3 2020 Earnings Call· Sun, Nov 8, 2020

$14.46

+0.66%

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Great Ajax Corp. Q3 2020 Earnings Conference Call. All lines are currently in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to hand the conference over to Mr. Lawrence Mendelsohn, CEO. Please go ahead, sir.

Lawrence Mendelsohn

Analyst

Thank you very much. Thank you everybody for joining us on the third quarter of 2020 Great Ajax Corp earnings call. We appreciate you joining in given all the other things going on in the world at this time. Before we get started, I want to just point out on page number two, our Safe Harbor disclosure and disclosure about forward-looking statements. And with that jump right into the presentation on page 3, I'll give you a little bit of an introduction before I get into it. Third quarter was a strategically good quarter in many, many ways. We increased our mortgage investments both directly and through joint ventures. We completed another rated securitization that provides much funded financing for the associated loans, in that securitization at a materially lower cost of funds. Our asset base cost of funds across the board decreased by nearly 50 basis points and has continued to decrease in the fourth quarter. And our loan performance and cash flow velocity increased significantly, which has continued into the fourth quarter as well. We continue to be in an offensive position with approximately $135 million of cash as well as approximately $149 million face amount of unencumbered securities and another $34 million of unencumbered mortgage loans. The significant cash balance does create an earnings drag and a significant cash flow loss from our mortgage loans and mortgage loan joint venture structures reduces our portfolio leverage, but we're well equipped for volatility and all the investment potential that that creates. And with that, we can jump right into our overview. It's very important to understand our manager strength in analyzing loan characteristics and market metrics for reperformance probabilities and pathways and its ability to source the mortgage loans for us enables us to acquire loans that we believe…

Operator

Operator

[Operator Instructions] The first question will come from the line of Mike Smyth with B. Riley Securities.

Mike Smyth

Analyst

Hey, Larry. How is it going?

Lawrence Mendelsohn

Analyst

Good. How are you?

Mike Smyth

Analyst

Good. Doing well. So my first question would be on JV activity. So it really picked up during the quarter. I was just wondering -- if you could provide some more color on what exactly drove the pickup. And any changes on pricing structure or how much you're retaining compared to pre-COVID JVs?

Lawrence Mendelsohn

Analyst

Sure. We acquired two pools of loans that we agreed to price on in August from Fannie Mae. And we did it with two institutional partners where we are the operator our manager oversees it and our servicer services it. The total purchase price was about $835 million. We took a little over a 10% interest. Our institutional partners took the remainder 89 point something. And if you look at where that purchase was done relative to the next Fannie Mae sale which occurred a month later, our purchase was about 5.5 points lower loan call it apples-to-apples than where the next Fannie Mae sale was. So it was kind of an ideal time because there was a lot of buyers still with liquidity issues during the summer. And as a result we were able to buy two pools: one, a pretty solid performing pool and the other, a pool that was very much in line with our target markets and property values and overall locations. And so we acquired that. That closed September 25. So we didn't get much benefit for it in the quarter. But obviously, starting September 25 we have earnings that will come from that -- our share $83 million investment.

Mike Smyth

Analyst

Okay. That's helpful color. And then any incumbents on your outlook for JV formation into the fourth quarter as we bridge your end?

Lawrence Mendelsohn

Analyst

Sure. We have demand for JVs that is right now so much capacity that it would be unlikely that we could ever fill it. Subsequent to that Fannie Mae sale, we've been contacted by six or seven additional partners who would also like to do joint ventures with us. So, it's all good problems. Now, the question is realistically, we can't find tens of billions of loans we can only find billions of loans. So, it's just -- it's a good position to be in but we could never take advantage of 100% of the demand for our JV services and our servicer.

Mike Smyth

Analyst

Got you. That's helpful. And then I think you mentioned last quarter that 15% of the portfolio is forbearance, but 80% had made regular payments. I am curious if I missed this but would you provide updated stats for this quarter?

Lawrence Mendelsohn

Analyst

We didn't -- in the presentation there will be updated stats in the 10-Q. And what you'll see is that the forbearance requirements have come down a little bit, but the -- and the payment of the loans has gotten better.

Mike Smyth

Analyst

Okay, cool. That's good to hear.

Lawrence Mendelsohn

Analyst

And a lot of it ties back to having lower LTV loans in what I'll call the middle decile ranges in our target markets. So, as a result the borrowers tend to have more equity and more savings because of the nature of the characteristics of our loans.

Mike Smyth

Analyst

Got you. Okay and then just one more for me. With the stock trading around 50% of book, what are your thoughts on buying back stock at current levels? Just kind of given your cash balance and outlook for the investing environment.

Lawrence Mendelsohn

Analyst

Two things. One we did buy some of our converts back at a discount and we do plan on in the open market buying some stock as well.

Mike Smyth

Analyst

Thank you for taking my questions Larry.

Lawrence Mendelsohn

Analyst

Sure.

Operator

Operator

The next question will come from the line of Stephen Laws.

Unidentified Analyst

Analyst

Hi, this is Tanner on for Stephen.

Lawrence Mendelsohn

Analyst

Hi, how are you?

Unidentified Analyst

Analyst

I'm good. First, could you -- you kind of maybe touched on this on the last couple of questions. But can you just talk about the competitive landscape for RPL acquisitions in general? And then where you're seeing -- I know you were talking about the target markets but where you're sourcing most of that assets lately?

Lawrence Mendelsohn

Analyst

Sure. So, for clean pay loans in large pools, the prices are very, very high, higher than they were in February when we thought they were high. A clean pay pool -- I mean I'll give you an example. The last Fannie Mae loans that traded with a 4% coupon and 80% LTV traded at -- almost $1.04. And so having -- our strategy we buy loans that aren't clean pay and we work and make them clean pay creates a lot of value and hence our portfolio becomes extremely valuable once we get them to be clean pay. The purchase price for less than clean pay loans it's really strange. The purchase price for true non-performers is also very high. What's in between non-performers and clean pay is probably where the greatest value is and that's where we spend most of our time focusing. It's very hard to buy pools since about early October. It's very hard. It's very large well-paying pools what I would call a value investment. It's really become a momentum investment and it's about your financing cost and structure and not about the loans themselves. For us, we've been buying a lot of scratch and debt. You can see in subsequent events $29 million of loans and a large number of transactions right $29 million UPB in 11 transactions. So, we've been buying a lot of scratching debt loans. One of the things we've seen is there's a lot of originators who are so busy originating agency loans that there's a higher percentage of loans that close and then the agencies don't buy to get kicked out for something. If those loans are fixable to be deliverable to an agency, they tend to -- they tend to trade in the high-90s so they can be…

Unidentified Analyst

Analyst

Got it. That's great color. And then just a housekeeping thing but could you walk through everything that's going into the other expense line on the income statement?

Lawrence Mendelsohn

Analyst

Okay. Let me pull out the income statement. Okay. The other expense line. Yes. So, the largest piece of that is about $1.7 million is the amortization of the warrant expense in our preferred with warrants. And then there's about $240,000 of insurance expenses. And then there's about $200,000 of amortization costs for shared grants to people who work for our manager and servicer about 100 is director grants. And then the balance are just licenses and internal audit expenses things like that. There's a table that details it in the 10-Q. The draft of the 10 that will be filed later today, which is table six other expense.

Unidentified Analyst

Analyst

Great. Thanks for taking the question.

Lawrence Mendelsohn

Analyst

Sure.

Operator

Operator

[Operator Instructions] The next question will come from the line of Kevin Barker with Piper Sandler.

Kevin Barker

Analyst

Hello.

Lawrence Mendelsohn

Analyst

Hi, Kevin.

Kevin Barker

Analyst

So I mean you mentioned you're going to buy back stock. Could you how much…

Lawrence Mendelsohn

Analyst

Yes.

Kevin Barker

Analyst

How much you have remaining outstanding with the stock that you could -- that you're authorized to do right now?

Lawrence Mendelsohn

Analyst

Sure. Our Board has given us what I would call a price and quantity range. But we have approval to buy back as much as about $20 million worth. And we can also buy back our convertibles bonds as well.

Kevin Barker

Analyst

How much of the convertible bonds can you buy back?

Lawrence Mendelsohn

Analyst

We could buy back all of them.

Kevin Barker

Analyst

Okay. And then with regards to the $20 million in stock I mean given where you're trading today it seems like you can get a lot more aggressive on buying back your stock. What are some of the hesitations that you have in doing something above $20 million in stock buybacks knowing full well -- there's liquidity issues and so forth?

Lawrence Mendelsohn

Analyst

Yes. So the only reason why it's $20 million for now is the Board wants to see how realistic it even is to acquire that in the open market with all the limitations given how illiquid our shares are, they all the limitations on daily volume and things like that. Number 2 is in REIT world when you buy back stock, you can't replace it. It's capital that's gone. And in a world of COVID-19 and lockdowns and political struggles and things like that and given the harshness of the call it market volatility that we saw in late Q1 and Q2, the Board wants to make sure that we can always play offense and defense not just offense or defense. So as a result they want to make sure that we always have capacity. So -- which is why they gave us a kind of a short-term -- "short-term" limitation to be then determined after that whether to extend or not.

Kevin Barker

Analyst

Okay. And then given the fair value of your assets which say was -- correct me if I'm wrong, $100 million above?

Lawrence Mendelsohn

Analyst

Plus the servicer and manager, right?

Kevin Barker

Analyst

Right. So I mean why my not accelerate sales of assets in order to cement the value of that fair value. I know you have…

Lawrence Mendelsohn

Analyst

Sure. We can do that. Right. There's REIT tax rate requirements, you can't sell more than 20% in any one year and a rolling 10% of tax basis over a three-year period, an annual 10% over a three-year period. So there are limitations. That being said some of our joint venture securitizations where we re-securitize by selling off bonds from those we will trigger gains and they will be sales of assets as well. Number three is when we get the liquidity, we also want to be able to put the money to work and get yield. And as a result, we want to make sure that there's plenty of -- we'll get more liquidity just from re-securitizing assets because they've delevered so much. So then the question is if we were to sell assets on top of that and get more liquidity, we don't want to have -- right now we have $135 million of cash and call it $200 some odd million of unencumbered assets. We don't have -- we don't want to have $400 million of cash and $200 some odd million of unencumbered assets. So we want to make sure that we can put the money to work relatively quickly as well.

Kevin Barker

Analyst

Okay. All right. And then on the non-controlling interest, can you detail some of the some of the main drivers on why it would increase or decrease relative to?

Lawrence Mendelsohn

Analyst

Sure. So it's all based on two of our joint ventures are consolidated on balance sheet. So when we have significant improvements or negative effects in those two particular joint ventures that are consolidated a portion of it gets allocated to the part of the JV that we don't own. So in this case this $4 million reversal of previous COVID-19 expected impact about $1 million of that is represented in a consolidated joint venture that we would have to allocate to the third party partner.

Kevin Barker

Analyst

Okay. So when we think about the reversal of the provision we should essentially net out a large portion?

Lawrence Mendelsohn

Analyst

Right. So it's really a $3 million reversal as our earnings go, $4 million as GAAP requires.

Kevin Barker

Analyst

Got it. Okay. Questions have been answered. Thank you. Thank you, Larry.

Lawrence Mendelsohn

Analyst

And one more thing, Kevin. So that $1 million does show up in controlling the -- as going to a controlling interest on our income statement. So it gets backed out when you get to net income.

Unidentified Company Representative

Analyst

To common.

Lawrence Mendelsohn

Analyst

Right.

Operator

Operator

And we are showing no further audio questions at this time.

Lawrence Mendelsohn

Analyst

Well, thank you very much everyone for joining us on our third quarter conference call. Feel free to reach out to us to the extent you have additional questions. We're always happy to talk about our portfolio and our business. And it's an exciting time for all of us here with all the optionality in our balance sheet and cash and unencumbered asset position. Thank you again and everybody have a good night.

Operator

Operator

This does conclude today's conference call. We thank you for your participation and ask that you please disconnect your line.