Please standby, we are about to begin. Good afternoon, ladies and gentlemen, welcome to the Great Ajax Corporation Q3 2022 Financial Results Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers' prepared remarks there will be a question-and-answer session. [Operator Instructions] And now, I'd like to turn the call over to the Great Ajax, Chief Executive Officer, Mr. Larry Mendelsohn. Please go ahead sir.

Thank you very much. Thank you very much everybody for joining us on the Great Ajax third quarter earnings call. I apologize for my voice. I'm getting over some laryngitis of the last few weeks. So it may come and go a little. Before we get started I want to point you to Page 2 of the presentation, the Safe Harbor disclosure and disclosure regarding forward-looking statements. And with that we can get – jump to Page 3, the business overview and an introduction regarding the third quarter. Q3 was what I would call a patient quarter. However, there is some noise in the Q3 income statement numbers, which makes it a bit confusing and we'll walk through this on today's call. Loan performance increased and loan cash flow velocity from property sales continued and has also continued into the fourth quarter of 2022. Repayments from borrower refinancing declined as you would expect. The significant cash flow velocity from the mortgage loans and mortgage loan JV structures increases income acceleration through the requirements of CECL, but it also rapidly paid down our loan and securities portfolio as well as the associated asset-based financing, which can also reduce net interest income and the return on equity. At September 30, we had approximately $73 million of cash as well as significant amount of unencumbered securities and loans. And in Q3, we repurchased $66 million face amount of our preferred shares and the associated warrants. While these repurchases create a one-time charge, it creates very significant savings going forward beginning in Q4. Our managers' data science guides the analysis of loan characteristics and geographic market metrics, which you'll see later are really important for performance and resolution pathway probabilities and its ability to source these mortgage loans through the long-standing relationships it's developed…

Thank you Mr. Mendelsohn. [Operator Instructions] And we'll take our first question this afternoon from Kevin Barker of Piper Sandler.

Hi, guys. It's actually Brad Capuzzi on for Kevin Barker. I hope you're feeling better.

Thanks.

I just had a quick question what do you expect for run rate operating EPS relative to the operating income reported today?

To some extent it depends on kind of movements in swap rates but -- and SOFR, but we have increased our balance sheet materially at the end of October and rates have gone up a little bit. That being said, prepayments on delinquent loans continued pretty much at the same level perhaps even a little higher than what we saw. So I wouldn't expect that that much difference other than there'll be some fluctuations based on what the what I'll call December prepayments or December prepayments tend to be a little less predictable.

Awesome. And then -- yes. And then one...

Yes, we've had December is where prepayments were really high we've had December where prepayments were average. So but we'll run a thought probably in another two weeks to three weeks looking for homes that are listed to give us a feel for December 31 prepayments.

Awesome. And then one follow-up. I know you touched on this a little bit but can you quantify the impact of higher short-term rates and when the offsets from the higher asset yields are starting to flow through?

Sure. The higher – the Ford joint venture that we bought at the end of October has higher yields. In fact it's significantly higher yields in a recession than it has in a boom economy because of the LTVs and locations and the amount of equity and what would cause prepayment rates – prepayment rates would change. But the – so we'll see an increase in yield from that investment. Existing yields should go down I would say marginally not considerably just because just extension [ph] performance. And I would say obviously, our securitization funding is – that doesn't change, we'll see some increase in our debt securities funding costs based on changes in SOFR, but even that has a lag effect because of royalties. So a lot depends on how many more assets we put on between now and the end of the quarter. That being said, we've been – we're pretty patient only buying things that we really can't resist because we think there's going to be the opportunity sets going to increase not decrease over the next three months to four months.

Awesome. Thanks, Larry. That's it for me.

Sure.

Thank you. We'll go next now to Eric Hagen of BTIG.

You got Eaton Sadie [ph] on for Eric tonight.

Sure.

Just a couple from me. What do you see as catalyst for RPL spreads to tighten right now? Is there anything specific to the behavior outlook for RPLs, which would support more tightening as compared to other mortgage credit?

Sure. Yes. So let me kind of separate RPLs a little bit from what I'll call new non-QM origination. RPLs especially in large pools are trading actually tighter than where the structured finance market is trading. Fannie sold a pool of RPLs sold four pools of RPLs we bought the sloppy pay pool. But the two regular paying pools traded in a yield of below 6s back in – and this was in late September, early October. And those were kind of $300 million $400 million $500 million pools that – and they were lower LTVs. So in loan land, there's clearly a distinction being made between what I call lower LTVs and higher LTVs. And for example – and one of the things we're seeing in the non-QM space a little bit in loans is we're seeing that kind of the LTVs are going up and the properties – it seems that the aging LTVs are really 85 to 90s not 80s. So there's a little more what I'll call property credit risk in those than in kind of larger very seasoned RPL pools. That being said, RPL pools of smaller amounts, spreads are much wider, although still tighter than where we would necessarily expect them. The structured finance market is a little bit broken. This – the unrated market which is more kind of NPL RPL is – most of the investors have outflows. So that's kind of a market that doesn't have much liquidity. One of the reasons why we spend so much time working with rating agencies be able to do deals with 40% NPLs as AAA-rated structures is because we could see that coming in and that's why we did two rated deals early in the year – in middle year April and June rated NPL deals. The rated market is also a bit choppy and illiquid, although there's definitely a difference between who the issuer is. We've seen – we have a group of what I'll call regular investors who know our shelf and know how we think and also who co-invest with us in joint ventures and they still have been kind of regular buyers in our securitization structures. But the credit spreads widened dramatically and I'm not sure it necessarily reflects what the true credit – the probability of A -, RPLs not getting paid in full are pretty remote absent high LTVs. For us our LTVs in our securitizations and loans are in the 40s high LTVs for us is 55%. So -- and purchase price to LTV is 39% to 40%. So it's in the pool we just bought in our joint venture. So, we're kind of making sure we buy things that we're almost indifferent as to what happens in the economy.

How sensitive do you think distressed or reperforming borrower -- borrowers will be to lower home values? Does the fact that they've bonded in the past make them more sensitive to certain factors now?

Yes. That's -- yes, RPLs the R stands for reperforming which means sometimes in the past 15 years, they were not paying. And they tend to be a little more -- a little more multiplier effect than a brand-new loan. The other thing is that, if you look at our loans, our loans have an average origination date it's about 15 years or 16 years ago for kind of pool high. Our portfolio goes from say 1994 origination, all the way through 2022 origination. But on average, they have -- they were originated back in 2007. So one of the things we see significantly is, especially in a declining home price environment is acceleration of selling by empty nesters. And so, if you look at our portfolio, the percentage of empty nesters is about 50% of our portfolio. And by 2028, if our portfolio is stagnant, the percentage of empty nesters is 70% of our portfolio. So -- and they are much more sensitive to declining home prices because, if you were a borrower, who had previous delinquency and HPA in the last three years caused you to have significant equity that you didn't previously have in a declining home price environment, you actually accelerate the probability of selling your home to make sure you capture that equity.

Got it. That's a great color. Really appreciate it. Thanks.

Sure.

We'll take our next question now from Matt Howlett of B. Riley.

Thanks, Larry. Good afternoon. Question, did I hear you correctly, what the yields are being negatively impacted by the phenomenon of an NPL carrying and being longer duration given it's performing?

Yes. The -- when loans become regular paying, they have -- they can become -- they don't always become longer direction, but they -- I would say on average, they become a little longer duration than say a loan that stays delinquent, because the -- in today's market, a loan that keeps paying is less likely to refinance than it would have say two years to three years ago or even 12 months -- nine months ago. So, in today's interest rate environment, a loan that becomes a 12-month, 24-month paying, is less likely to do a rate term refi. So -- but because of the -- what I'll call like I mentioned before, the kind of the empty nesters scenario, we still see a significant amount of prepayment from property sales of performing loans. It's just not quite as predictable as it is for more delinquent loans.

Got you. Okay. I was just -- typically that's a good thing for your business model you get...

Yes, it's -- one of the things -- one of the oddities of kind of the last six months is typically, you -- a nonperforming loan becomes performing becomes more valuable, now a nonperforming loan becomes performing somehow becomes less valuable.

That's absolutely incredible. Okay. It just takes you longer to I guess just -- I mean collection I mean, it doesn't really destroy the long-term value of it, it just takes you a little bit longer and how I think about it right?

Right. In fact, when they're reperforming, you get over the life of loan, you get more total cash flow.

Right.

And you collect the regrade from the delinquency just like you do when it doesn't perform, but you collect more cash flow than you would have if it didn't perform, but you collected over a long period of time on average.

Got you. Got you.

Which a year ago was probably not a distinguishable difference?

Right. Good. Interesting dynamic. Thanks for pointing that out.

Yes.

Larry, I mean you were active in October, it's great to see the deals. When I think of in the next or call it just two quarters I mean, we've heard from some other people that are in your space anything sort of pipelines are clogged and things are going to get just sold out from originators that can't securitize, can't get things out. I'm assuming that's -- when I look at your business with NPLs as RPLs, I guess it sort of kick out loans, whatever you want to call it. I mean, but the sense is there's going to be a lot of supply. But do you intend -- that's great to your business? Do you think that's going to happen? I mean or do you think at some point there'll just be more loan sales from banks from Fannie Freddie? And then, where prices are going, do you feel like you're going to just need to use less leverage already under levered, but do you feel like you can start to buy things even with no leverage at some point?

The answer is yes. We think the opportunity set is actually forming. Certainly, on the origination side, we think there's going to be some opportunities to be, a, what I'll call lifeline or to be – to potentially acquire an originator, who can do specific things like if nothing else work on refinancing some delinquent borrowers and things like that. But we also are seeing for example in commercial land, we're seeing the community banks basically exit like commercial bridge business and the commercial bridge with renovation financing line of business. And we're seeing that business being harder and harder for people to get financing facilities, or even originators to fund material amounts of it. Having a permanent balance sheet and having joint venture partners, we can aggregate a significant amount of that. And that is rapidly becoming, what I would call an unlevered double-digit yield business, with points and fees. And so we're spending a lot of time. That's something we've done for years and years and years and years, but the – it got so competitive at rates that we didn't understand in 2020 – late 2020, 2021 and early 2022 that we kind of step back a little. But that's something where we think there's going to be significant opportunity. It's – we can see it coming. We're starting to see some opportunities that we're evaluating with our joint venture partners. And we've had three or four joint venture partners interested in it reached out to us about being able to expand that. So we think that's going to be an opportunity set as well. And we think that you will see – despite what the Fed said yesterday, we talk to borrowers every day. The recession has already started for a lot of borrowers. And so we think, there's going to be some delinquency opportunity – purchase opportunities that will start to kick in probably still three months or four months away but it's coming.

Yeah. I forgot about Great Ajax capabilities come – with Gaea in the commercial space and that could be just significant with all the bridge loans what we're seeing in terms of –

We've had a couple of private equity firms reach out to us about structuring joint ventures, where they can put money to work and pay fees to Great Ajax, and to Gaea to help put assets together and oversee them for them and things like that as well as that's really Great Ajax comes in. Yeah.

So that's a significant opportunity. And the first thing you said with the origination strategy that could be interesting too. I mean, it's exciting time of your business. You're always sort of counter-cyclical and it's – you're really positioned to take advantage of this. I mean, it's nice to see you're cleaning up the balance sheet too. That put your ability to spend that's sort of accounting drag that's going to go lower, right, as you extinguish some of that I mean that fair value address –

Yeah. Yeah. Well, let's put it this way, we did $110 million of notes. Just the $66 million of preferred that we retired more than offset 100% of the interest on the $110 million of notes.

Unbelievable. That's…

We'll, acquire even the preferred and the retiring put options that by itself more than covers just the interest on the notes. Plus, we have cash left over from that for acquiring things.

Right. Well, mainly for the – working on the balance sheet during this time we'll wait for an update, but we look forward to the progress you're making. Thanks a lot Larry.

Yeah. That being said, with the economic environment and the broking markets, it's not quite as fun as it used to be.

Right. I hear that, where the yield curve is and with the Fed being aggressive, I certainly hear that.

Yeah. Yeah. But one thing, we've definitely heard from our borrowers is that the recession has already started.

Absolutely. Thanks for that.

Yeah.

Thank you. [Operator Instructions] And Mr. Mendelsohn, it appears we have no further questions this afternoon. I'll turn the conference back to you for any closing comments.

Thank you very much everybody for joining us on the Great Ajax third quarter 2022 earnings call. I apologize I was difficult to understand, with my voice. But I appreciate you putting up with it. And thanks again for being on. And if you have any questions feel free to reach out to us. We're happy to discuss anything we can. And with that, have a good evening.

Thank you Mr. Mendelsohn. Again, ladies and gentlemen that does conclude the Great Ajax Corporation Q3 2022 earnings conference call. We'd like to thank you all so much for joining us, and again, wish you a great evening. Goodbye.