Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Great Ajax Corp. Second Quarter 2022 Financial Results Conference 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] I would now like to turn the conference over to Larry Mendelsohn, CEO. Please go ahead.

Thank you very much. Thank you, everybody, for joining us for the Great Ajax second quarter 2022 conference call. Before we get started with the presentation, I’d like to point out Page 2, the Safe Harbor disclosure for all the things we talked about. On Page 3, a quick introduction and then business overview. Q2 2022 was a good quarter. However, there’s quite a bit of noise in the income statement numbers, which makes it a bit confusing, but we’ll walk through this on today’s call. Loan performance and cash flow velocity continued and has also continued into the third quarter of 2022 as well. The significant cash flow velocity from our mortgage loans and mortgage loan JV structures increases income acceleration through the application of CECL, but it also rapidly pays down our loan and securities portfolio as well as the associated – and the associated asset-based financing, which can also reduce income and ROE. At June 30, we had approximately $52 million of cash as well as a significant amount of unencumbered securities and loans. In the second quarter, we used cash on hand to repurchase $25 million face amount of our preferred shares and the associated warrants. While these repurchases create a one-time charge, it will create very significant savings going forward. We also repurchased approximately 475,000 common shares with cash on hand. On Page 3, business overview, our managers data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution probabilities and its ability to source these mortgage loans through longstanding relationships enables us to acquire loans that we believe have a material probability of prepayment and long-term continuing re-performance. We’ve acquired loans in 362 different transactions since 2014 and six transactions in the second quarter. We own approximately 20% of…

[Operator Instructions] And the first question is from the line of Eric Hagen with BTIG. Please go ahead.

Thanks. Good afternoon and hope you guys are well. I think [indiscernible] sure, thanks. You guys mentioned buying back your debt. I’m curious how you think about that relative to buying back stock. I’m also wondering if you’ve ever thought about repurchasing your securitized debt, which trades in the market. I imagine that you find the senior part of the RPL capital structure is pretty cheap right now. So I just want to hear how you think about that. Thanks.

Sure. So the answer is yes, all of the above. We’ve already repurchased another $5 million of the preferred and warrants. We have authorization to repurchase more common shares depending on price level. We have also – we’re in negotiations to repurchase additional preferred and associated warrants. And we do agree that the Class A1 unrated notes that are out there from some of our previous deals where that marketing credit spreads have gone doesn’t make economic sense relative to where loan prices are, loan prices credit spreads have not widened nearly as much as unrated seniors on the exact same loans. So one thing we have looked at knowing that we will call some of our securitizations over the next year or so is perhaps buying the seniors at a discount in the open market. We’ve never sold any NAVs, so we own all the NAVs still, but seniors, given where they trade at discounts and given that we know we might call deals, we are looking at buying those in the open market to the extent they become available.

That’s interesting. That seems like it could be really attractive. I appreciate it. Thanks for the comments.

Sure.

Your next question is from the line of Kevin Barker with Piper Sandler. Please go ahead.

Thank you. Hey, Larry. So can you – sorry, I missed the very beginning of the call, but the impact of getting rid of the warrants and some of the debt. Could you help us understand the – quantify what you’re going to see on a go-forward basis from this transaction, how to think about it from there?

Sure. So for retiring the $25 million that we retired in Q2. That will save us approximately $1.125 million per quarter or about $4.5 million per year. And then we acquired another $5 million in last week, and that will save us an additional about $900,000 a year. So the two together will save us about $5.4 million beginning in Q3, $5.4 million annually beginning in Q3. We are in negotiations to buy additional amounts as well.

Okay.

And we’ve been using cash on hand to do it thus far. We have thought about using debt to acquire it and retire it because it’s significantly cheaper. And the – while the earnings wouldn’t be 100%, they’d still be significant.

Okay. Great. And then you have quite a bit of taxable income over the last four quarters, put in a position that you might have to make a decision here given your dividend is – was it roughly a little over $0.60 below the taxable income? What are your plans on capital deployment given that situation on taxable income versus dividends paid?

Sure. So dividends, we make a – we have to make a decision regarding 2021. 2022, we still have significantly more time for those decisions. That being said, we increased the dividend modestly in this quarter. We know that there’ll be additional dividends that we’ll likely have to distribute either through increase in the quarterly dividend or through a combination of increase of quarterly dividend and the special. The other question is, given the opportunity set that some disruption in markets might provide we may be willing to pay a little bit of corporate tax to then put that money to work at very high returns should that – should the disruption occur. So that’s the reason why our Board has taken the position is let’s just kind of see how things play out as we get closer to elections. To see whether we should distribute all of it or some of it and pay a little bit of tax and keep some of it effectively as retained earnings to put to work in a disruptive market should that occur prior to elections.

And when you said that statement, are you looking at assets in particular? Or do you see it as whole companies as a potential?

We see it in both. The – I wish I could fully predict the future. But to the extent that there’s disruption, we would look at assets we’d be – we would look at being a liquidity provider we would look at in our joint venture structures, assets and being a liquidity provider to third parties, and we’d also look at full acquisitions. We think that there potentially could be some opportunities in that market.

Okay, great. Thanks for taking my question, Larry.

Absolutely.

Your next question is from the line of Matt Howlett with B. Riley. Please go ahead.

Hey Larry, just to follow on those comments, I mean, why haven’t loan spreads widened? And then are you expecting a negative HPA? Do you think there’s going to be increases in delinquencies or just – can you just go a little bit over the outlook?

Sure, sure. So the only place – loan spreads have widened versus, say, a year ago, but they haven’t widened nearly as much as credit spreads – credit spreads and loans haven’t widened nearly as much as credit spreads in bonds that people would issue to finance those loans. It’s kind of a strange phenomenon. Some of it has to do with capital ratios at banks and insurance companies because of markdowns on existing security asset – securities assets. We’ve seen insurance companies become aggressive buyers in certain portions of the market, particularly in some of the non-QM spaces. We’ve also seen – and we’ve seen, for example, in the unrated world, a lot of the buyers were open-end bond funds that have had redemptions so they don’t necessarily have material money to put to work versus managing liquidity. So for lack of better term, the – what I’ll call the senior securitization market is a little bit structurally broken as opposed to there’s more risk in the securities. We’ve seen some were – Fannie Mae has sold some loans, and we’ve seen some larger loan sales where the loans trade at a 75 or 100 basis point tighter yield than where a 75% senior bond backed by the same loans would trade, which is not something that you see very often.

So Larry, what the outlook do you think this will normalize spread, I mean, obviously, you guys have a rate position to buy loans cheap. Do you think things are going to cheapen out any view on how just delinquencies? Are you starting to see any pickup?

So we’re not seeing more delinquency in our portfolio, but our portfolio was not like an index fund. Our portfolio, we had significant absolute dollars of equity, which we’ve seen is far more important for delinquency than LTV. So our portfolio, we’ve seen the opposite. We’ve seen less delinquency because borrowers, the HPA over the last 18 months has given borrowers so much more dollars of equity that they’re significantly more protective and determined than they were maybe 1.5 years ago or two years ago. And as you can tell from the effect it’s had on our loan yields by extending duration, it’s significantly more than we ever would have expected these loans would re-perform. The – we see it – we’re starting to see appraisal of the new origination being pushed a little bit. We’re starting to see some of the things on the fringe that I think will cause some – maybe some cheapening of loans. But the real issue is that the securitization system is a little bit broken, particularly in the unrated world. Now one of the reasons for us – we’ve been fortunate that our loans have done so well and our servicer has such a good kind of performance reputation that DBRS now allows us to do AAA-rated securitizations with up to 40% of the loans being more than 60 days delinquent or non-performing. And that really helps us kind of avoid the unrated senior issuance market.

That’s interesting. Okay, that’s interesting. You guys are well-positioned when things do start to come out in terms of supply. And then I want to ask about, freeing up your leverage is below obviously, you’d go higher, but you could also free up some cash via Gaea. Is there an update on an IPO or...

Yes. Gaea is actually running a couple of different pathways. They are working on a IPO filing, although the markets for IPOs aren’t significantly good right now, but it creates optionality by basically getting it through the process so that sometime in the fall or Q1, we can just decide – it’s also looking at an additional private round in conjunction with some other things. It’s also been approached by three specs who are interested in rolling it in. So we’re having kind of all three parallel paths on Gaea. And I don’t know which one is the most likely, but we’re running all three paths in parallel.

And you have the option of selling. I mean, at some point you could do...

Yes. If we’re a public entity, we would probably have a 90-day lockup. But if we are a public entity, we could create liquidity. We also could just – it would also be marginable if it was a public entity as well.

Great. And last question. Thanks for the operating EPS. I mean I know there’s a lot of noise going through the income statement. And I think I’ve asked this before, but we look at taxable and operating. I mean, at some point, they have to converge. What do you encourage investors to focus on?

The tax is kind of the closest reference we know to kind of follow the cash.

Right.

Right. The GAAP has all kinds of other kind of gap required. For example, CECL it’s clear from kind of the way we’ve had to use it and implement it. CECL was not designed for people who buy loans at discounts. It was designed for banks to originate loans at par. And so CECL creates noise quarterly for us but it doesn’t necessarily – we don’t necessarily learn anything from it. The – we follow the cash is really what we learned from and follow the delinquency. And we’ve seen our loans significantly outperform on a monthly basis, far above our expectations. Some of that has been driven by the very high levels of HPA in our target markets over the last 18 months. And we – I know you’re going to find this hard to believe, but we don’t have a loan purchase model that assumes 25% annual appreciation in properties so...

I can understand that. I think [indiscernible]

Yes. Yes. So as a result, we – the amount of re-performance of loans typically, when you look at non-performing loans, they kind of break into three patterns. They either sell and pay off and put a lot of cash in the bank, they re-perform or they do something in between. We’ve seen in our target markets with the HPA, we don’t have any of the something in between. It’s only sell and put a lot of cash in the bank or just pay every month like clockwork.

Makes total sense.

Yes.

Thanks, Larry. I really appreciate it.

Sure.

And at this time, there are no further questions. I will turn the call back to Larry for any closing remarks.

Thank you, everyone, for joining our Great Ajax second quarter 2022 earnings call. We look forward to talking to you in the future and keeping our head down and just keep doing what we do. We appreciate your confidence in us, and thanks for joining in.

Thank you all for joining today’s call. You may now disconnect.