Ladies and gentlemen, thank you for standing by and welcome to the Great Ajax Corp Fourth Quarter Fiscal 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Lawrence Mendelsohn, CEO, you may begin your conference.

Thank you very much. Thank you, everybody, for joining us for the fourth quarter and fiscal 2021 investor call. Appreciate you joining us. Before we get started, I just want to point out on Page 2, the safe harbor disclosure about forward looking statements. If we jump to Page 3, 2021 was a very productive year and Q4 2021 was another good quarter as well, although there’s a little bit of noise in the Q4 2021 income statement numbers that we’ll talk about on this call. A significant increase in loan performance and loan cash flow velocity continued and has also continued into the first quarter of 2022 so far. This continuing increase in the present value of loan cash flow and the resulting decrease in unallocated reserve discount in excess of modeled expectations led to an additional acceleration of income on loans during the fourth quarter of 4.2 million. In Q4, we purchased a significant amount of loans, both NPLs and RPLs with certain specific characteristics, in good locations and at low percentages of underlying property value. At December 31, 2021, we had approximately 84 million of cash and more than 300 million of unencumbered bonds and loans. The significant cash balance does create some earnings drag and while the significant cash flow velocity from our mortgage loans and our mortgage loan JV structures increases income acceleration, it also rapidly pays down our loan and securities portfolio leverage which can reduce ROE. Our managers’ data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution pathway probabilities. And its ability to source these loans through long standing relationships very much enables us to acquire loans that we believe have a material probability of long-term continuing re-performance. We’ve acquired loans in 352 different transactions since…

[Operator Instructions] Your first question comes from Kevin Barker with Piper Sandler. Your line is open.

Hi, Mary [phonetic]. Good afternoon, Larry.

Hi, Kevin.

So there’s a lot of moving parts here around the funding side, the right side of the balance sheet. Your funding costs have come down to roughly below 3% but I expected a little bit more rapid decline in interest expense. Could you talk about some of the moving parts, like the calling of securitizations and new securitization structure, and then the movement in interest rates recently, and how that’s going to impact your expectation for interest expense coming into, let’s say, the first half of next year.

Certainly, so in early November, our 2019 C was a structure where we owned one-third and we had a number of partners own the other two-thirds. In early November, we bought out their two-thirds interest. But we couldn’t call the structure until December 25. So we bought their interest and bought out the underlying loans and then the cash sat in the trust account to pay down the call on December 25. So as a result, we paid interest on buying out our partners’ interest and interest on the securitization for that gap [phonetic] period of time, which makes it look like our cost of funds is higher because we paid more interest on a similar average balance but we in fact, double paid on -- for a period of time for that call because we bought out their interest six weeks before we called the deal, right. And the securitization itself had a much higher coupon than the rate that we financed the loans at. We are financing the loans non-mark-to-market at 2.5% and securitization at a 3.9 coupon.

And it is about 4.5 all on yield [phonetic].

Yeah. So double paying the interest is what really caused our cost of funds to not look lower in the fourth quarter. Going forward, our cost of funds on our repo has increased a hair so far, I mean, very little if at all. We do expect that as fed increases, it will go up on the asset repo basis point -- four [phonetic] basis point with fed hikes, but we also expect that within the next six weeks, a chunk of that will be turned into fixed rated debt. So we’ll effectively lock in that financing for a long period of time. So on the floating rate side, we should be down to sub-300 million, about 250 million floating rate debt sometime in the next six weeks or so, assuming markets don’t come undone.

Okay. So taking that all into account, so what we’ll hear –

And that by the way -- and that will actually lower -- and that would actually -- for the securitizations, we call our 2019 securitizations, the lowest coupon is 390. And for our 2000 -- we have a couple 2018 that are in the force, so our expectation is our new securitizations will actually lower cost of funds on our -- the deals -- the securitizations we call and effectively lock into fixed rates not too different than our current repo rates on loans for a long period of time. So it’s definitely helpful to get these done.

Okay, so what was your run rate, cost of funds, let’s just say, at the end of the quarter?

At the end of?

End of 4Q because you’re a 2.94 during the quarter, but obviously there’s a lot of noise there. So like, what’s the exit rate basically on the year and then can we put the pieces together to figure out the change in repo costs combined with the change in securitization cost?

Right. So if you take out the double payment, our cost of funds in Q4 was the low 2.9, so a little a little bit lower than Q3. And I would anticipate that when we -- the securitizations that we call and re-securitize will lower our cost of funds further, but to the extent we still have, say about 250 million or 270 million of floating rate debt, that would be subject to fed rated increases.

So do you think…

So calling our 2019 securitizations probably lowers our cost of funds related to those by close to 100 basis points, calling and re-securitizing. We still would have 250 million or so of floating rate debt that would increase with each fed increase, assuming that doesn’t get securitized or turned into a structured at some point.

So in total, how much -- how many -- how much of your securitizations do you expect to call and re-securitize in the next two or three quarters?

All of our 2019 securitizations that are on balance sheets, other than 2019-D and 2019-F, which are rated long-term structures. Those are low cost --

Can you remind us how much UPB [Multiple Speakers].

So to 2019-C is 150 million, we have another 100 that we’re adding to that, so our next securitization will be a little under 250. So call it about 400 will be called between say now and June.

So 400 will be called but you’re probably going to increase the balance right, just given…

That’ll actually increase leverage, there’ll be -- the securitizations will be effectively cash out refis but at lower cost of funds securitization of securitization of about 90 to 100 basis points.

Okay. So despite setting -- so putting that together, it seems like even if we have 100 basis point move in fed rates on the $250 million repo balance, and the re-securitizations here should more than offset that, right. So you should see incremental declines of interest expense throughout 2022. Am I thinking that right?

Yeah, our goal is to be at least an offset and the question is, can we get them all called re-rated or rated and re-securitized quick enough. So that’s the goal and the goal is to call them all by June 30.

Okay. And then, on your interest income, what’s your expectation for the slowing of prepayment and the impact of that on the yield that you’re going to have?

Sure. So prepayment in January was actually higher than it was in Q4. Prepayment in February was approximately the same as it was in Q4. Our expectation is that the increase in mortgage rates won’t really show up in rate term refis until April or May, as people rush to refi right now, or they’re using what they locked in January or February to close on their refis right now, so we would expect a portion of the prepayment to slow come April, May but we’re not anticipating that much slowdown in prepayment of non-performing loans. We certainly -- for that we think you need to see negative HPA to really slow down materially.

Okay. All right. That’s all really helpful. Thanks for taking my questions. Sorry, go ahead. Go ahead.

Yeah, so the -- we do expect however that because CECL accelerates some of this, that as the loans keep paying, keep paying, keep paying, they have less discount now. So theoretically that decreases the long-term remaining yield on a loan that’s been affected by this the CECL re-capture [phonetic]. But we’re also -- where we’re buying loans now is cheaper than we bought them six months ago also.

Okay. And that’s really helpful. Thanks for taking my questions.

Sure.

[Operator Instructions] Your next question comes from Eric Hagen with BTIG. Your line is open.

Hey, thanks. How are you doing? Maybe a follow up on the prepay question. Can you confirm that slower prepays would also probably support lower taxable earnings and therefore potentially support less need to pay a special dividend at the end of this year, all things equal? And then…

Sure. Slower prepays would decrease taxable earnings if the loans also stopped paying regularly. So if they went from they were kind of not really paying and didn’t prepay, that would decrease taxable earnings but the taxable earnings from, if they just went from not paying to paying every month, it would decrease it by a lot less. So one of the things you’ve seen is so much of the prepay has come from non-performing loans, so if they stopped prepaying because they started paying, that would have a much more limited effect than if they stopped prepaying and just said, come after me for the next five years. You know what I mean? So, it really depends on the pattern. Right now, what we’re seeing is non-performing loans or delinquent loans are either reinstating and coming current and paying, or they’re selling their homes and paying off, and it’s really driven more by how much equity they had. We’ve seen that when they have between about 50,000 and 130,000 of equity, they’re more likely to reinstate and pay regularly and when they’re above 130,000 of equity, they tend to be more likely to sell and put a couple hundred thousand dollars in the bank.

Interesting. Thank you. I guess, a couple more. I mean, the line I think you hear from a lot of credit investors is that everything is “priced to perfection.” And so I guess what would you identify as maybe one or two things that offer upside to an investor in RPLs, which isn’t already priced into the asset.

Sure. Our whole approach is very different. It’s not about maximizing leverage and driving ROE and taking risk and playing the momentum game. Ours is much more about buying things in smaller transactions from many, many, many different sellers. I mean, we’ve done transactions of $300,000, we’ve done transactions of 800 million, with joint venture partners. So for us, it’s all about being a value investor in assets that meet specific criteria in terms of location, geography, coupon, LTV, absolute dollars of equity, and all kinds of other asset facts and collateral related facts. So as a result the other thing is we buy assets at discounts, not premiums, so it’s a kind of different mentality. We’re much more, I would say, HPA affected than we are borrower FICO affected. So, the risk in our portfolio is not a 10% decline in HPA or a 15% decline in negative HPA, it would be home prices go down 30% and that could have an impact on the credit risk. But for us, it’s not about being price protection, it’s being we are big believers in that offense is easy, defense is hard, so focus on defense and offense happens and that’s kind of been our mentality, which is why if you look at our stock over the last five years for non-agency REITs, it’s pretty much the number one performer for one year, two year, three year, four year, and five year. And a lot of it is our book value is higher than it was pre-pandemic, unlike most of other people in our sector whose book values are lower than pre-pandemic. It’s just a different approach.

Yep, that’s helpful. I guess one more, just on the REO impairments that you mentioned. Can you go into just a little bit more detail on that? Like what would drive that impairment in a period where home price appreciation is really robust?

Sure. So one of the things you see and some of it is GAAP accounting. So if you foreclose on a house, okay, if you propose on a non-paying mortgage loan, and it sells at the foreclosure sale to a third party, that’s a loan pay off, not an REO sale, okay. So we have a much lower percentage of REOs that we take back, our REO total has gone down dramatically. But to the extent that the REO when you get it back needs more repairs than you modeled by a significant amount, you would have to make those repairs and then sell the property and you could have a loss on that REO because of the damage that you encounter inside that property, okay. So it’s really -- vary REO by REO, we haven’t had an REO impairment in very long time and most of this impairment came from a couple of properties that had significant internal damage from which you come across occasionally, where a borrower just does it on purpose.

And it looks like -- just comparing period over period, it looks like it’s a bigger number, but in the fourth quarter of 2021, we actually had a recovery of [indiscernible]. So it looks like the change is bigger than the actual.

So it’s 200,000 different than the previous quarter, but not 200,000 in total.

Yep. Thank you guys very much.

There are no further questions at this time. I’ll turn the call back to Lawrence Mendelsohn for closing remarks.

Thank you, everybody, for joining us on our fourth quarter 2021 and year end 2021 investor call. Feel free to reach out to us, if you have any additional questions. We’re always happy to talk about our company and our business and glad to answer any questions you might have.

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