Good afternoon, and welcome to the Great Ajax First Quarter 2019 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lawrence Mendelsohn, Chief Executive Officer. Please go ahead..

1 in Dallas, 1 in Baltimore, 1 in Raleigh, and about $22 million of which are re-performing loans. You can see the purchase price on the RPL is 84% and the price/collateral value, 56%, which is over and over and over as our network of sellers and the analytics we do that it allows us to be able to do this. We've had a pretty busy Q1 so far.

There's a lot of things that we'll be looking to offload some assets before June 30, and it's still pretty early in Q2. But it's important to see the pattern of we just keep buying loans at approximately the same prices with the similar composition and collateral value percentage.

Our Board announced -- declared a dividend, $0.32, payable on May 31, 2019 to shareholders of record on the 17th. You may think about that relative to $0.11 of taxable income from our Board's perspective given the underlying NAV of our assets.

They're pretty confident that the taxable income number versus the dividend will be -- the dividend will be maintained as is. So the -- with that, we'll go to Page 11, financial metrics. And this is -- there's 2 slides. The first one is where I'll focus, which is excluding the consolidation of a couple of our joint ventures.

We have 2 of our joint ventures which we are still required to consolidate. We own more than 20% of those joint ventures, which make it a little confusing, but there's a couple of topics I want to mention. Average loan yield, you'll see, is 8.7% versus 8.5% in Q4. Yield on loans is net of any impairment.

So in Q4, we had more impairment than in Q1, but we still had some impairment. You'll see in Q3 we had almost no impairment, so the yield is higher. So our yields on our loans have been relatively constant. Impairment's the only deviation in any of the quarters for the most part.

If you look at average yield on debt securities, that 7.3%, remember that is net of the servicing fee of approximately 80 basis points. Debt securities is how our interests in our JVs are presented for GAAP accounting.

As our JVs increase, which they have materially in Q4 and Q1, the GAAP reporting of that servicing, unlike loan interest income, distorts the average asset yield lower and the related ratios to that.

So the average total asset yield of 8.5% is also distorted a little bit lower because of the 7.3%, which is net of about 80 basis points of servicing relative to the cost. If you look at our average debt cost, it's really the difference is two things. One is rounding between a number just over 5.1 and a number just under 5.2.

Number two is we put on some 6-month repurchase agreements on a non-mark-to-market basis in the fourth quarter to deflect any movements in volatility that we saw in late fourth quarter and first quarter. We put them on six-month agreements. six-month LIBOR was higher than it is now.

And when those roll, which they are in April and May, repo funding will come down by about 20, 25 basis points on those related repos. If you look at our ending leverage and our average leverage, they're pretty consistent ending leverage.

It's the same as it was at the end of the year, 3.6 times including convertible -- our convertible debt and our asset-backed debt. The convertible debt's unchanged versus year-end. The asset-backed debt is 3.2 versus 3.3.

With so many loans paying every single month, as we saw on the migration chart, we're comfortable with a little more asset base leverage, although in Q1, total leverage didn't increase and our asset base leverage was basically the same as well.

But we do have capacity and room and comfort given our portfolio performance of increasing asset base leverage a bit more. With that, the last two pages are our quarter end financial statements, and I'm happy to take any questions anybody might have..

[Operator instructions] The first question comes from Tim Hayes with B. Riley FBR..

This is actually Mike Smyth on for Tim. So the first question I had, I was wondering if you could provide a little more color about the amount of RPLs purchased. It's a little bit less than what was announced for 1Q on the prior earnings call.

So I was just wondering if this is due to some type of fallout or if the pipeline was just getting pushed out due to volatility? Or if you can provide any other color here would be helpful..

Sure. It was --- what we closed at the end of March was -- had some due diligence fallout based on seller documents that we thought would potentially make loans not enforceable in certain states. And as a result, we choose not to purchase them because of that. So, really, due diligence more than anything else..

Got you. And how often does that happen? Is that something that we should be kind of....

It depends different sellers, we have different pull-through rates.

If you look at, for example, December 31 in our 2018-F transaction, there was a prefunding account for about $100 million of nonperforming loans, and we pulled through $60 million of those in Q4 because the documentation from the seller was so poor that we decided that it wasn't economically intelligent to make the acquisition of 100% of the loans.

So that's having 40% fallout is an enormous amount. Typical is probably 3% to 5% fallout..

Got you. That's helpful. And then another question, I was wondering if you could talk a little bit about your outlook for JV formation for the remainder of 2019. So noticed the pace was just a little bit down relative to the fourth quarter.

So I was wondering if this is volatility related or just due to timing, or if you can provide some additional color here, that would also be helpful..

Sure. Sure. The demand for joint ventures has increased dramatically. We have seen a little bit more, for larger pools, prices increasing. And as you can tell from kind of what we do, we are very not just priced to UPB, but extremely priced to collateral value, and we want specific kinds of collateral.

So we have relationships with a bunch of big banks and funds who we have the ability to negotiate with, and one of the things we've seen is they all have huge pipelines of what they want to get rid of. So it's really a function of when they're going to when they're sellers as opposed to when we're buyers..

Got you. That's....

But we've been told by 3 banks that they, over the next 18 months, have combined somewhere between $25 billion and $40 billion that they're going to sell..

Got you. That's helpful..

Of RPLs. The we've also seen that the agencies are large sellers, and we also have a couple of aggregation structures. We're actually in the documentation phase of a $300 million aggregation structure for small-balance commercial mortgages..

Got you.

Is there any other color you could provide there?.

I would expect that we'd be in buying -- ready for buying probably sometime in mid-June. And yes, it's us and an accredited institutional investor. We'll be 25%. They'll be 75%. And we have a credit facility ready to go for when we get the documentation done for that structure..

Awesome. Sounds good. That's also great color. And then just one last question. I was wondering if you can provide an update on Gregory. So you mentioned it's the value has increased since the investment.

But I was just wondering if you can provide any color compared to the fourth quarter and just kind of how revenues are trending compared to the fourth quarter as well..

Sure. Revenues at Gregory continue to increase. We've also expanded on the software development side at Gregory to build out technology even more especially in the tenant and property management side. We expect additional joint ventures and third-party servicing to continue to increase over time.

We've been approached by a number of third parties actually seeking to make investments in Gregory, which kind of -- maybe we should've expected it but we didn't really. So all the things we keep hearing about Gregory are all positive, and the results they're having on loans is remarkable..

Awesome, thank you. That's good color.

Would you be able to provide a number on the change in value compared to the prior quarter?.

It's like me telling you, "Oh, this is what I think Uber is worth", right? I don't know other than -- Gregory is -- effectively, 20% of the economics are owned by Great Ajax and another 25% -- and then 2 institutional investors have about 20% or 25% each and then the original Aspen also has about 25%.

And I don't know how each party values their own investment on a mark-to-market basis. But my own feeling is that the valuation of Gregory is probably at least 50% higher now than it was in first quarter of 2018.

And the question is different -- based on different strategies, we would consider different -- I think Gregory would consider different perhaps investment ideas from third parties. But we've been approached by a number of -- Gregory has been approached by a number of them and it's been interesting..

The next question comes from Scott Valentin with Compass Point..

Just with regard to the margin, I guess it declined obviously from several quarters ago but seems to be stabilizing.

Is that a fair outlook going forward? The market should run at 3.4% level, 3.5% level?.

Yes, I think that over the next quarter or 2, cost of funds will come down a little because 6-month repo in Q4 was a lot more expensive than where repo would be or replacing it with securitized funding would be. So I would think that cost of funds would come down a little bit in Q2 as well as Q3, and I think that yield on loans is pretty stable..

Okay. Okay. That helps.

And then on the SOX expense, is that a onetime event? Or is that something you'll incur the next several quarters?.

Yes, it's -- well, it's part -- that's a portion of a larger amount, but the first year is more than successive years..

Okay.

So that will be the first -- so that $250,000, that represents the first year's expense?.

Yes, first year's -- no, the $250,000....

It's the incremental cost. Obviously, as Great Ajax grows and adds more joint ventures and more joint venture partners, our audit fees are increasing because we're becoming more complex and there's more to audit..

But not -- but -- so if Great Ajax were to grow unbelievably in the next 12 months, it would be $250,000 more expensive. So maybe a small part of that will be ongoing but not the entire amount for sure..

The CFO of Great Ajax failed to properly, accrue throughout the year, so you can blame me for that one..

But it was more funding an emerging growth company..

Fair enough. And then just, Larry, you talked about the embedded value in the company, and I think a lot of investors have acknowledged that the servicer, the investment manager, there is value there.

But how does the Board intend to unlock that value? I mean I know you guys can speak to it, you can put it on paper, but I think investors are trying to figure out when does that -- when is it possible for that value to get unlocked?.

Sure. Well, a couple of things. One, just in the value created by the servicer from the migration of the loan portfolio.

Stranger things have happened than us maybe selling some loans because if you continually buy loans in the 80s and when they become 12 of 12 at par, at some point, you ought to be a little bit of a seller at par and continue to reinvest in the 80s. So I think that's one of the things our Board would say.

Now in REIT, rules restrict how much you can sell on any given year and things like that. So it's a -- there are limitations and restrictions, but that does make economic sense.

From a straight manager servicer perspective, I think the REIT board, when they made the investment, they made it as part of allowing them to go service for -- the servicer to go service for other people and servicing these joint venture structures. That really kicked off the joint ventures.

And since that, just kind of the Board permitting Gregory to do that as part of the initial investment in January of 2018, those joint ventures are probably $1.5 billion or $1.6 billion since then, actually maybe a little more than that.

And from commitments from joint venture partners, if we can find all the assets, that could probably triple over the next year or two. And really it's going to be more of a function of us finding the right assets and continuing to service them in the way we service them.

And then number three, we've had a number of people reach out to us purely just as third-party servicers because of the way they've seen our securitizations in loans and our securitizations perform.

So kind of that combo and, for lack of a better term, kind of brand getting around, we've had a number of firms reach out about making investments in Gregory to allow it to get bigger and to also potentially acquire other servicers because of the ability to create efficiency and stronger analytics.

So the Board and the management of the servicer are going to be busy over the next 18 to 24 months..

Okay. All right. And then one follow-up question just on other income. I guess is there -- that's grown dramatically from a year ago. It's been roughly flat linked quarter but still at a pretty high level.

What's flowing through there? Is that service-related income or -- I think $1.1 million -- I think it's $1.1 million last quarter, but it's up from like $400,000, $500,000 last year, prior two quarters?.

Sure. Some of it is rent coming from properties. Some of it is late fees. As our performing loan portfolio grows, we're -- one thing that's different about Gregory's contract and Gregory's mentality is typically you see the servicer gets late fees.

And one of the things we've never understood is why should the servicer be better off because if the borrower pays the 17th of the month than the 1st of the month, you want everybody to pay the 1st of the month. So as a result, all late fees go to Great Ajax. They don't go to the servicer.

So as the portfolio expands, late fees obviously expands from paying loans -- the more loans that pay every month -- that pay between the 17th and the 31st, Great Ajax makes extra other income. So it's the rental income as well as late fee income that comes through the other income item..

[Operator Instructions] The next question comes from Kevin Barker with Piper Jaffray..

Mary, on the -- in the interest income and some of the stuff up there, how much of the interest income was related to accretion versus actual cash? It seemed like [there's accretion in certain periods], but I know you explained some of it earlier.

But can you give a little more color around that?.

50-50 these days..

Yes, it's....

Cash is probably greater..

Cash is actually greater than accretion..

Yes..

Okay.

How much was accretion this quarter offhand?.

Mary?.

[Indiscernible] tomorrow..

Mary is here and looking through the key draft, but it will actually be detailed in the Q when it gets filed tomorrow..

Yes. You'll see in the statement of cash flows, you'll see the noncash portion. And then on the accretion tables, you'll see the total..

But accretion -- the accretion is a much smaller percentage than cash..

Right.

So it would seem like prepayment fees were relatively high this quarter, right?.

No. They were actually pretty slow in Q1 relative to what you -- Q4 was slow, Q1 was a little slower and some of that was the volatility in Q4. Some of it seasonality. We see a lot less prepayment in December and January because of holidays. We also, with the government shutdown, it was a little bit dysfunctional mortgage market.

But one thing we have seen is since about late March, early April, prepayments have picked up pretty materially particularly in certain states like California..

So is that on NPL portfolios that have been performing for well over 12 for 12 of added capacity to refi....

What we're it in two places. We're seeing it in paying RPLs that are 12 for 12. The other place we're seeing it is we're seeing empty nesters selling. And in different states with different absolute dollars of equity, the thresholds are different.

So but these certain specifications we've identified that we can forecast percentages of empty nesters selling now based on backtesting. We've had a bunch of loans that had been modied 4 years ago by a previous owner that were 2.5%, 3%, 3.25% interest rates and we couldn't figure out why they were prepaying.

So we started backtesting them and we found them to be have commonality of empty nester, and then we started backtesting those characteristics of the empty nester to come up with a pattern of which loans would prepay that had arbitrarily low interest rates..

Well that will be a good time for the housing market. All right. All of my other questions have been answered..

This concludes our question-and-answer session. I would like to turn the conference back over to Lawrence Mendelsohn for any closing remarks..

Thank you very much for joining our first quarter financial results conference call. We appreciate your time and listening in the questions. And if you have any questions, feel free to give us a call or reach out to us. We're always happy to talk about Great Ajax. And with that, I hope everyone has a good evening..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..