Good day and thank you for standing by, and welcome to the Great Ajax Corporation Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Lawrence Mendelsohn, CEO. Sir, please go ahead.

Thank you very much. Welcome everybody to the Great Ajax Corp., Second Quarter 2021 Conference Call. Also here with me are, Mary Doyle our CFO, and Russell Schaub our President. Before we get started, I just want to have everyone quickly take a look at page 2, the safe harbor disclosure of the presentation. And with that, we can go on to page 3 and begin. As an introduction, the second quarter of 2021 was a good quarter. Our overall corporate cost of funds further decreased, by approximately 25 basis points. And our asset-based cost of funds decreased even more, after decreasing nearly 50 basis points in Q3 of 2020, 26 basis points in Q4, 2020 and 30 basis points in Q1 of 2021. Our cost of funds has continued to decrease in the third quarter of 2021 as well. A significant increase in loan performance and loan cash flow velocity continued. And it's also continued into the third quarter of 2021. This continuing increase in loan cash flow velocity has led to an additional acceleration of income on loans during Q2 of 2021 of $4.7 million, as the present value of cash flow and payoff proceeds exceeded expectations. We continue to be in an offensive position and in Q2 we purchased a significant amount of loans, primarily joint venture structures, at good prices and good locations, and at low percentages of the underlying property values. The prices we paid are materially lower, than when mortgage loans are currently selling today. At June 30th 2021, we had approximately $88 million of cash and more than $300 million of unencumbered bonds, unencumbered beneficial interest and unencumbered mortgage loans combined. As of July 31 2021, we still have approximately $88 million of cash and still have a similar amount of unencumbered bonds,…

[Operator Instructions] Our first question from Kevin Barker of Piper Sandler. Please ask the question.

Hey Larry how are you doing?

Yes. And how are you, Kevin?

Good. Congrats on a good quarter. It looks like a very strong quarter.

Busy it was a busy quarter.

Very busy. When we think about the pricing changes that you're seeing by refi calling a bunch of your securitization reissuing from the securitizations a very strong trajectory there on interest expense and pretty strong commentary as well. Can you give us an idea of like where you think interest expense, could drop to on a run rate basis after you've done the majority of these cleaner calls or at least calling the securities that you see out there today?

Sure. We have a couple more 2018 securitizations and the number of 2019 that we can already call. Those have coupons anywhere between 3% and 4.5% and we can issue now all-in sub-2%. So we would expect that additional calls in these securitization would get us somewhere between 150 and 200 basis points of savings for each call.

Okay. So on a net basis when we think about your total funding cost across all different -- not only securitizations, but other forms of financing what orders of magnitude do you think you could see your interest expense drop to by the start of 2022 relative to what we saw on a run rate basis versus 2020?

Sure. So if you look at now our profile -- well if you look at now our total cost of funds -- overall cost of funds excluding our convert is in the low 3s. Excluding our convertible bond that could go down by at least another 100 basis points from the refinance everything maybe a little bit more than that.

Okay. That's a pretty strong result. And then what about -- and you also had positive commentary on the interest income side as well. Could you obviously talk about that on the top line and the potential run rate that you could see and the increase in potential yields that you're talking about?

Yes. Since we buy loans at discounts so interest income shows up in kind of two different places. One, it shows up from regular monthly payments; and two from captured discount. You see on the loan side, it's more direct. When we own the securities side, we have both debt securities and beneficial interests. Beneficial interest you see it more in accretive value, because they don't get direct cash flow until you call the deal. We're on the loan side you get it every single month. In the debt securities and beneficial interest side, you got a debt securities coupon, but you turbo Class A principal before you get that. So on the interest income side, you'll see it pick up -- obviously, more prepayment is good more monthly cash flow is good. Cash flow velocity is still pretty stable. Also we increased our portfolio pretty considerably in the late second quarter, and we'll do so even more in the third quarter with the purchases of loans. So, we would see income -- interest income pick up from those new purchases that came on in June, July and August really start to pick up in late Q3.

Got it. Okay. And then so that's obviously helping out your provision expense as well, right?

Yes, it's kind of funky, because we buy loans at discounts it's -- the concept of a provision is a little bit different. What you do is you have a modeled expectation of how much of that discount you're going to collect. And what we're finding is we're collecting significantly more than we expected of that discount capture.

Okay. And then just one more before I get back in the queue. You raised the dividend again. Your taxable is running fairly high. Can you remind us of your capital allocation policies going through the end of the year here? How do you think about that dividend relative to the amount of taxable income you're producing right now?

Well, at the minimum we have to pay 90% of taxable income and that includes the preferred dividend. I think our Board will bias back to a higher dividend. But on the flip side, they want to make sure there isn't another March and April of 2020 that comes out of the blue and affects dividends. So they want to do it over a long steady predictable tenor as opposed to all at once.

Okay. Do you feel like you're going to be forced to do something? Here is your…

If the taxable income continues to dissipate, we have no choice, correct.

Yes. All right. Thank you very much.

And our next question is from Eric Hagen of BTIG. You may ask your question.

Hey, good afternoon. Hope you guys are well? I have a few question here on prepay speeds and cash flow velocity. I guess the question is focused on the folks that haven't found an opportunity to refinance. And I guess what the opportunity looks like for them specifically as it relates to the potential for mortgage rates to go up?

Sure. So we've seen -- so we spend a lot of time tracking prepayments sources of prepayments and where the payoff wire comes from. And we found different break points based on different absolute dollars of equity and different delinquency history. And one of the things we found is that a real turning point is about $130,000 of equity and for our borrowers that have been more than 180 days and have more than $130,000 of equity we see a lot of their payoffs from selling their home and moving, as opposed to just refinance. We see a significant refinance in certain markets for example in Texas and in Florida. But for example, more of a higher percentage of our California payoffs are sales versus refinances. So a lot depends on characteristics of the loan itself location of the loan itself. But the lion's share of payoffs on our over 180-day delinquents are loans over $130,000 of equity and it's the sale of the home as opposed to a refinance of the home. And we see that kicks in even more so when you get to about $220,000 of equity that is almost overwhelmingly sales of the home versus refinance. Where we -- in our 12 of 12 and 24 of 24 the higher percentage is refinancing. Keep in mind that our weighted average coupon on portfolio is still in the mid-4s. So we saw from a mortgage rate kind of refinance competition if you think you need at least 0.5 point or one point reduction to be worthy of refinancing, as long as mortgage rates stay under about 350 or 360 our borrowers are still more than one point away from the average coupon on our loans -- or the effective coupon on our loans. But we still see significance from the resale -- or from the sale of properties rather than just from refinance. So I would say, it's more a function of whether you believe in the stability of home prices for those loans rather than the stability of mortgage rates. Now that being said there may be some from a buyer's perspective of the property that our delinquent borrower is selling. The buyer might care about mortgage rates to get to that price, but that's more of an HPA question than just a rate question.

Right. That was good detail. Thank you. And then a couple of questions on the activity since quarter end. Can you talk about how you're financing the package of NPLs that you're buying? And how much capital you expect to allocate to that transaction? And then I'm also just looking at the purchase price on the RPLs that looks like maybe 81% of par and then the NPL is at 98% of par. I'm just trying to square the difference there.

So it depends on two things. One the seller their need for liquidity and also what the actual owing balance is. So on the NPLs the -- while the -- it may be 98% of UPB. It's only about 91% of the -- or 92% of the actual owing balance, because in NPLs we get all prior servicer advances and all past due interests without having to pay for it and that's part of the owing balance. So -- and we also expect a significant amount of those to re-perform based on the absolute dollars of equity that those loans have. So we look at them almost as bad RPLs versus NPLs or sub-performing RPLs versus NPLs, from an expected performance given the locations and the characteristics of the loans themselves. But loan price is definitely a function of -- we get calls just before ends of quarters all the time from people that are looking to sell loans who need liquidity and they need it before the end of the quarter. So there's a different price for a loan where someone needs six days closing versus where someone needs six weeks closing.

Got it. That's helpful. And how about the financing and how about the financing...

On the finance side, we will take down the August closings into a non-mark-to-market repurchase facility and we will likely call one or two-old securitizations and put these into one of those re-securitizations in either late Q3 or Q4.

Got it. So just trying to understand how much capital would be assigned or allocated to the -- is it $0.5 million?

So figure -- on day one about 25%.

Okay

And then once securitized about 15%.

Got it. Thank you. Thanks for the color.

Sure.

And sir, our next question from Matthew Howlett of B. Riley. You may ask your question.

Good morning. Thanks for taking my question.

Sure. Absolutely.

Sorry, I look at the balance sheet and you get the JV retained interest that's growing and then loans have been flattish down a little bit. Remind me again, what's the economic to Ajax from an economic perspective? I realize accounting recognition difference between servicing income and interest income. Is there any difference from an economic standpoint for doing it 100% or doing a JV and you take a partial interest back?

The only difference is the size of the underlying combined acquisitions. So, if we have four or five acquisitions that we know together are going to be $400 million or $500 million, we'll do those in a JV structure and we'll take say $100 million of it verticals and our joint venture partner will also take it. And then, we have rights of refusal on any time they might want to sell a piece of what they own. But on the flip side, this is why it's so important for us to own a 20% interest in our servicer, because as servicer you get servicing on all $400 million of it. So, we get kind of a little bit of extra piece from that as well.

Going forward --

I’m sorry.

Going forward, do you expect continued growth in the retained interest and outpacing the loan the whole loan or on balance sheet and equity or...

It's really a question of the number and size of each acquisition we make. So for acquisitions that are $20 million, $30 million, we do those ourselves. For acquisitions that are $230 million, we'll generally put them into a securitized joint venture structure, and then a deal where we just closed into a securitized structure. And then, it has similar economics overall to owning the loans directly. It's as if you bought -- it's really just a loan participation structure in a CUSIP form. So that, if we bought $200 million of loans into a joint venture structure and we were say 30% of it, so we'd have -- it's like having a 60% participation in our -- $60 million participation and our partner would have $140 million participation. We just put it into a CUSIP form because a lot of our joint venture partners want to be able to have securities mark-to-market daily for their funds.

Got it. And your partners are they institutional-quality...

They're all brand-named in the securitization and money management world, exactly right.

Got it, okay. And then, speaking of sort of value, so your servicer gets piece of that and that goes to your UPB and servicing. I mean the GAAP -- the low common GAAP you mentioned -- I mean with the book, it's materially -- GAAP looks materially below. I mean can you make more comments on what the low comp is here? How to think about the low comp?

Sure. Well, the easy way to think about it is the 20% interest we have in our manager and the 20% economic interest in our servicer, our total GAAP-carrying value is about $2 million.

For the manager and servicer?

Yes.

So it's not...

They're obviously worth more than that right?

Right. And the loans the managed -- do they worth more?

And the loans, if you look at our cost basis of loans, which is sub-90 and in the loan market it's all over par, right?

Right.

And beneficial interests are just a CUSIP form of loans. So the easiest way to think about beneficial interest is, if you know the UPB of the loans underlying beneficial interest, it's UPB times market price of loan minus A, minus B would be effectively the value there. And obviously our cost basis is materially below that if all the loans are worth over par.

Got it. Great. Okay. Got it. Thanks for that. And then, if you're buying back, you're still buying back that convertible debt?

Yes, we still are right.

And I guess the last thing is that amortization of that put right, I mean that at some point that's going to go away. Can you just remind how? I mean what part of...

Yes. One, when it goes away -- sure, there's two ways it could go away either we can just pay it in cash or we can pay it in shares or a combo of cash and shares. And if we pay with shares then the whole liability on the balance sheet goes to zero, and then you have more shares. Or you can just pay it in cash and then that liability goes away and you have less cash or you can pay it in some combination. We can call that put right in 39 months from April of 2020. So that's summer of 2023.

Certainly, got it. Okay. Got it. I mean, obviously – I think it clearly makes sense to go do that as the business –

We actually have had – we have had some discussions with the put right owners there's three of them about paying a small premium to extinguish the put right, and just go on versus waiting until and we're – had some premium discussions. I wouldn't say that, will happen or not happen. It's too early to kind of have an inkling on that, but I met with the owners two weeks ago of the put rights, and had that – started that discussion.

So that would be really interesting, but please keep us updated on that.

Sure.

Thanks a lot Larry.

And so we have our question from Stephen Laws of Raymond James. You may ask your question.

Hi, good afternoon, Larry.

Hey, how are you?

Good. Long time, hope you are doing well. Congratulations on the nice quarter.

Yeah.

I was a little late with some overlap on some calls, but glad to make most of the discussion. And I just wanted to follow-up on slide 8. You talked about the attractive market share and are there any other markets now that you're starting to see become an opportunity, either due to population migration shifts, demographic changes, sunbelt and southeast, your graph obviously mentioned a lot. But are you seeing any other markets that you think you may move into?

We absolutely are and have increased some allocations in certain markets, but they're not big enough markets that you should ever have an enormous amount. So some of those markets are like Nashville, Birmingham, we – once COVID started, we started seeing – we started getting nervous about Las Vegas, because if there was any market where you would expect no travel to have a material effect on economics that would be the market. And – but what we've seen is significant numbers of home sellers especially from California moving to Las Vegas, and we've seen a significant increase in home price demand and home prices in Las Vegas. So we started expanding there a little bit maybe about seven, eight months ago. But given how fast prices have gone up there it will never become a significantly material part versus where it was in our portfolio say in 2009 or 2010 from acquisitions. But Birmingham and Nashville, we definitely also increased our Charlotte and metro areas of Charlotte, in terms of the acquisition side. The other markets, where we've tried to get more involved, but we found it almost impossible are places small parts like Jackson Hole, and Wyoming and some parts of Montana and things like that. But those, one, could never be big markets. And two, it's very hard to find any aggregation like scalability in those markets. And one of the things that matters is it has to be a market that, we think has positive demographics positive data pointing to improvement there, but it also has to be to some extent scalable. And there are some markets that are not scalable. But right now, I'd say that, they aren't on this map probably the ones that we're – we've spent a lot of time with is Charlotte, Birmingham and Nashville.

Great. Larry, really appreciate the color on that. And glad to hear, you go well. Take care, mate.

Thanks, you too.

And that would be our last question for this call. I'll turn the call over to Mr. Mendelsohn for your closing remarks.

Thank you everybody for joining us in our second quarter of 2021 conference call. Feel free to reach out to us, if you have additional questions. And Q3 has been busy already, and we look forward to welcoming you back again after the end of Q3 for our next conference call. And with that, everybody have a good night.

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