Good day, and thank you for standing by, and welcome to the Great Ajax Corp. Q1 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lawrence Mendelsohn. Please go ahead.

Thank you very much. Thank you everybody for joining us for our First Quarter 2021 Conference Call. Before we get started, I'd like to just point out page 2 with the Safe Harbor disclosure for you all to read it at your leisure. And then with that, we can jump to page 3, the business overview. Q1 2021 was a very good quarter in many ways. Our overall corporate cost of funds further decreased by approximately 29 basis points, and our asset-based cost of funds decreased by even more. Our cost of funds has continued to decrease into the second quarter of 2021 as well. Our significant increase in loan performance and loan cash flow velocity continued from Q4 and has also continued into the second quarter of 2021. This increase in loan cash flow velocity led to an additional acceleration of purchase discount on loans that paid off during Q1 of 2021 of $5.5 million, as actual payoff proceeds exceeded expectations. We continue to be in an offensive position. At March 31, 2021, we had approximately $137 million of cash and a significant amount of unencumbered bonds unencumbered beneficial interest and unencumbered mortgage loans as well. As of April 30, 2021, we have approximately $144 million of cash, and still have a significant amount of unencumbered bonds beneficial interest in mortgage loans. The significant cash balance does create earnings drag, and a significant cash flow velocity from our mortgage loans and mortgage loan in JV structures reduces our loan and securities portfolio leverage. We are however very well equipped for volatility and the investment potential it creates, and we have good opportunities in our pipeline as we'll talk about later in this call. Our manager strength in analyzing loan characteristics and market metrics for reperformance probabilities and reperformance pathways…

Thank you. [Operator Instructions] We have our first question coming from the line of Kevin Barker with Piper Sandler. Your line is open.

Good afternoon, Lawrence. How are you doing?

Hi, Kevin. How are you?

Good. So, you took another sizable negative provision today, I mean this quarter. It seems obviously with home prices rising, prepayment is high that provision might sustain itself or at least your very strong credit. Could you just give us a little bit of additional color on the outlook for the provision expense and then your expectations, just in general, for credit within the quarter.

Sure. So, when we -- since we buy loans at discounts, so let's say we buy a loan -- let's say we buy a loan at a $90 price, in that $90 we have an expectation for how much of $90 or higher we're going to collect. To the extent, we think it's only going to be 95% collectible, we will effectively have a 5-point discount and then a 5-point allowance except we didn't pay for the allowance. If the loan prepays we pick up the five points we expected plus the five points we didn't expect. Okay? Plus any additional interest or fees or arrearage things like that, okay? Because we buy loans at discounts HPA has made it so that what we've actually been receiving in payoffs is materially higher than what we would have expected and hasn't been part of our amortization of discount in prior quarters, because we didn't expect to receive it. Home price appreciation has made considerably more of our loans -- loan total UPB and arrearage collectible than previously, but we're taking it through income to the extent we've actually received it as opposed to we proposed to receive it. So, the $5.5 million in this quarter that we took through interest income and the $8 million last quarter, that's from money actually received that we did not expect to receive from the loans that made those payments. We would expect that to continue as we've seen so far in April and early May and into Q2 and the pace of that does to some extent depend on stability of home prices. Home prices have gone up so much that we don't expect it to decelerate in any material way until there's almost like a burnout effect of people who just -- no one who wants to sell their home anymore. We have seen certain triggers. We've spent a lot of time looking into the weeds analytics of which loans are prepaying and what are the characteristics of them. And we have seen certain, what I'll call behavioral economics 101 turning points that we've noticed in those -- in the analytics that once loans hit certain amounts of absolute equity, when they're delinquent they prepay on average. And we've seen the similar reperformance that once loans go from having little equity up to more equity over a certain threshold they're much more likely to reperform as well as a result of home price appreciation. So, to the extent that you think there's more HPA coming, these numbers will keep steady and perhaps increase. And if you think home price appreciation just stays where it is, we would think that these numbers will be pretty level for a while.

Okay. I think…

That was a very long answer, sorry.

That was very thorough. I appreciate it. So, on another topic, the RPL purchase that you announced the -- of nearly $800 million. It's a very large transaction for you guys.

Yes.

It's -- could you just detail the -- how much of the joint venture, you're owning? And also, what's the impact going to look like here on the income statement and balance sheet, just given the joint ventures are a little bit different than how we look at the loans that are on balance sheet. So any color you can provide there would be really helpful.

Sure. So in that $800 million, there's a number of different purchases. The largest is about $770 million, which is a joint venture. We will be 12.6% of that joint venture, so just under $100 million. With two other parties, the -- and it's a single seller, the expectation is that will close in mid to late June. So, we won't receive material income from it this quarter, but certainly will beginning in Q3. The other purchases are of RPLs are directly ours and then we also have another $100 million of NPLs that we're purchasing with one of our institutional partners in a joint venture as well and we'll be 20% of that joint venture.

Okay. And so when we think about so $100 million...

So those will show up – I'm sorry. Yes correct and those will show up in securities and beneficial interest not in loans. Even though we effectively own loans, we will own them in a joint venture structure so they'll show up in securities and beneficial interests. And about $30 million or $40 million of it will show up in loans of that total, $900 million call it $800 million plus $100 million.

Okay. And so what's your expected impact from net interest income?

We'd expect net interest income to increase pretty dramatically since we have plenty of cash on hand that we can fund it without having any material interest expense. So it will be a significant increase in revenue – interest revenue without any material increase in interest expense.

Given there's a limited discount to UPB can you size up the weighted average...

Yes these are classic loans that we buy where they're relatively sloppier paying loans. So if you look at the RPLs the purchase price is 54% of property value. The average equity in the homes is about $140,000 per home. So we – and the average arrearage is a little less than six months. So as a result there's about – including advances that we don't have to pay for and arrears that we don't have to pay for the owning balance is actually approximately 103 or 103.25 [ph] not 100. So we're paying 97.5 of 100 but really only 95% of the owing amount. The coupon is above 4%. And because of the amount of equity we would expect these loans to be shorter duration than they otherwise would have been say two years ago.

That’s very helpful. Thank you.

We have our next question coming from the line of Eric Hagen with BTIG. Your line is open.

Hey, thanks. I've got a couple. Do you have an expectation or even just a ballpark of how much taxable income you might generate going forward as a result of the faster paydowns and lower interest expense you discussed? And do you see it creating a situation, where you need to distribute a special dividend at the end of the year? And the second question is on the package of RPLs that you were just talking about maybe I could ask it in a more kind of clear fashion. I mean what's the return on equity that you expect from that transaction?

Giving – well, we don't need to – because of the amount of liquidity we have we don't need to finance it in the beginning. So the return on equity will be lower because it will be delevered. Once we finance it, we would expect that return on equity to be somewhere low to mid-teens.

Got it. Okay.

Okay? The – from a taxable income perspective you see our Board increased our dividend from $0.17 to $0.19 a quarter. They did that because of their expectation that taxable income will continue to be relatively stable or rising. They tend to be relatively conservative with quarterly dividends so that like you have in March or April of 2020 where – when strange things happen, they don't want to have to reduce dividends materially. So they like to have kind of a consistent predictable dividend. My gut feels, if there's a need – if they start to feel a need for the special dividend, they would raise the quarterly dividend to try to make a special dividend less of a percentage of the total. And they would rather have a higher regularly quarterly dividend once they get comfortable that that's a completely stable predictable number. So this is kind of the first step towards that from a conservative position. They didn't want to increase it too rapidly but I think they all believe that the quarterly dividend over time will need to increase.

Thank you.

Thank you. There are no further questions at this time. Turning the call back over to the presenters for additional comments.

Thank you everybody for joining our first quarter conference call for Great Ajax Corp. Feel free to reach out if you have questions. And thanks again for attending and have a good, Thursday night.

This concludes today's conference call. Thank you for participating. You may now disconnect.