Good afternoon, ladies and gentlemen. Welcome to the Great Ajax Corporation Q3, 2023 Financial Results Conference call. At this time, all participants are in a listen only mode and please be advised that this call is being recorded. Now, at this time, I'll turn things over to your host, Mr. Larry Mendelsohn, Chief Executive Officer. Mr.

Mendelsohn, please go ahead..

Thank you. Thank you, everyone, for joining us for the Great Ajax Corp. third quarter call. Before we get started, I want to just point out, page number two, the Safe Harbor Disclosure. Along with me on this call are Russell Schaub, our President, Mary Doyle, our CFO.

As I'm sure you have seen, there are several corporate and strategic developments in Q3 2023 and into Q4 2023, which we will discuss a bit later in this call. In Q3 2023, loan performance declined by a small amount as did loan cash flow velocity from reinstatements on delinquent loans and from sales of homes.

The slight cash collections decreased from home sales and reinstatements is primarily seasonality-based. Pre-payments from borrowers refinancing their mortgages continued their slower pace as you would expect given current mortgage rates. The small rise in delinquency is primarily the result of softening economic conditions.

The regular payment performance of our mortgage loans and mortgage loans in our joint venture structures from non-performing loans can extend duration and decrease yield. As a result, the small decline in monthly performance actually can increase yield going forward.

At September 30, we had approximately $64 million in cash as well as significant amount of unencumbered securities. If we move to page three, the business overview. Our manager's data science guides the loan characteristics and geographic market metrics for performance and property value change.

The manager sources loans through long-standing relationships. We've acquired loans in 383 different transactions since 2014, only two small transactions in the third quarter. We have a 19.8% equity interest in our manager.

We believe our affiliated Servicer, Gregory Funding provides a strategic advantage in special servicing and provides a data feedback loop for our manager's analytics.

We have certainly seen significant increases in loan performance and our servicer's performance has enabled us to have AAA rated structures that permit up to approximately 40% of loans to be more than 60 days delinquent at the time of securitization.

Like our 19.8% equity interest in our manager, we have a 21.6% economic interest in our servicer between shares and warrants. Our servicer's currently is rolling out some new data and technology-driven programs through strategic joint ventures and MSR joint ventures. Its first MSR joint venture is expected to close in December.

We own a 22% equity interest in Gaea Real Estate Corp. Gaea is an equity REIT that primarily invest in repositioning multi-family properties in specific markets and in triple net lease freestanding veterinary clinic properties in conjunction with large national owners of veterinary practices. Gaea internalized its manager effective September 1, 2023.

We carry Gaea, our Gaea interest on balance sheet at the lower of cost to market. We expect Gaea to raise additional equity. The current environment of bank credit tightening and CRE loan disruption creates opportunities and optionality for Gaea.

On page four, net interest income from loans and securities excluding interest income or expense from the application of CECL was approximately $3 million in Q3. Our gross interest income excluding the application of CECL was $17.9 million versus $18.3 million in Q2.

The principal reason gross interest income declined is that we had approximately $54 million lower average interest earning loans and securities on balance sheet in Q3 versus Q2. We continue to have significantly more delinquent loans than expected become performing.

As delinquent loans become performing loans, they provide more cash flow but over a longer period. Since we buy loans at a discount, this increase in performance can extend expected duration, which lowers yield.

However, in the case of a recession and a declining housing price environment, our low LTV loans provide a material yield and cash flow hedge as increased delinquency, shortens duration, and corresponding yields increase materially.

For the first time in several years, we had a slight uptick in delinquency which has a positive effect on forward yields if it continues. A GAAP item to keep in mind is that interest income from our portion of our joint ventures shows up an income from securities, not interest income from loans.

For these joint venture interests, servicing fees for securities are paid out of securities waterfall, so our interest income from joint venture securities is net of servicing fees, unlike interest income from loans, which is gross of servicing fees.

As a result, since our joint venture investments have been growing faster than our direct loan investments, GAAP interest income will be lower than if we directly purchased loans outside of joint ventures by the amount of the servicing fees, and GAAP servicing fee expense will decrease by the corresponding offsetting amount.

Important part of discussing interest income is the payment performance of our loan portfolio. At September 30, 81.2% of our loan portfolio by UPB made at least 12 of the last 12 payments, versus 82.3% at June 30, and also versus only 74.2% at June 30 of 2022. This compares to 13% at the time we purchased the loans.

Our non-performing loan purchases over the last 21 months increased materially relative to our re-performing loan purchases. Significant increases in housing prices in 2021, 2022, and rising interest rates in 2022 and 2023 incentivize these elevated monthly payment patterns, which leads to longer duration and lower yields.

The slight uptick in delinquency in Q3, if it continues, should have a positive effect on unlevered yields.

While loans that become regular paying produce higher total cash flows over the life of the loans on average, they can extend duration, and because we purchased loans at discounts, this can reduce percentage yield on the loan portfolio and quarterly interest income.

Loans that do not migrate to regular monthly pay status typically have materially shorter durations, and therefore result in higher yields. Our weighted average cost of funds in Q3 was about the same as Q2. Net income attributable to common holders was negative $6.1 million or $0.25 per share.

There are several items of note that had an impact on earnings in the third quarter. To make it a little easier to follow, we have a table that ties GAAP income to operating income on page 16 of the presentation, as well as in our 10-Q. Operating earnings was negative $2.3 million or $0.09 per share.

Taxable income net of preferred dividends was minus $0.06. Taxable income decreased in Q3, primarily of the continued high level of loan re-performance. Tax for regular paying loans is based on contractual life, typically 30 years, rather than expected life.

If delinquency increases and actual duration becomes shorter than contractual duration, taxable income increases. We recorded a loss on investments and affiliates partly as a result of the flow-through of Gaea's one-time manager termination fee, paid as part of Gaea's internalization that is effective September 1st.

There are few one-time and unusual items in the Q3 2023 numbers. In July, we and our JV partner called eight joint venture securitizations and re-securitized the underlying loans into our 2023-C AAA rated JV securitization and our 2023-B unrated JV securitization.

This resulted in $1.3 million GAAP for the non-cash charge that we then collect back over the remaining life of the underlying loans. Since the eighth called securitizations were joint ventures in which we owned a 20% interest, they were not consolidated on balance sheet as loans. It held legally and under GAAP as securities and beneficial interests.

In the July 2023 re-securitizations to the new AAA rated structure and unrated structure, we continue to own the same percentage, but the securities mark-to-market is lower. Because of this, in Q2 we took an impairment equal to the difference between securities carrying values and market values in June of 23 of $8.8 million or $0.37 per share.

But since the transaction is closed in late July, we subsequently added $1.3 million to this charge in Q3. The loans from the eight JV securitizations that were called are transferred from their eight joint venture trusts to new joint venture trusts with the same partner owning the same percentages in each.

We and our 80% partner agreed to sell the loans in the form of an exchange of securities which triggers a non-cash loss under GAAP. There is no difference in expected cash flow on the underlying assets and we expect this mark-to-market non-cash loss amount is fully recaptured over the expected life of the 2023-B and 2023-C trusts.

This also doesn't affect taxable income. We also sold an unrated Class A senior bond in one of our joint ventures and recognized a $400,000 loss. The $400,000 was already reflected in book value. Book value per share was $11.07 at September 30.

Book value decreased primarily by our GAAP loss and dividends paid with an offset from positive mark-to-market adjustment of our investment in JV debt securities. We also issued some shares to our ATM. There is a table on page 17 that details the changes in book value.

At September 30, we had approximately $64 million of cash and for Q3 we had an average daily cash and cash equivalent balance of approximately $53 million. We had approximately $40 million of cash collections in the third quarter.

At September 30 we also have a significant amount of unencumbered securities from our securitizations and joint ventures and unencumbered mortgage loans which we'll discuss in more detail on page 12.

Approximately 81.2% of our portfolio by UPB made at least 12 of their last 12 payments compared to a small fraction of this at the time of loan acquisition. This decreased from 82.3% at June 30. Re-preformance increases life of loan cash flows, but the duration extension reduces yield and interest income in the current quarter.

As more purchase delinquent loans re-perform rather than prepay or default, this lowers current taxable income as well. On page five, purchase RPLs represent approximately 89% of our loan portfolio at September 30. Purchased RPLs represented approximately 96% 18 months ago.

We primarily purchased RPLs that have made less than seven consecutive payments and NPLs that have certain loan level and underlying property specifications. We typically buy well-seasoned lower LTV loans with a targeted amount of absolute dollars of equity. For residential loans, we continue to see stronger performance than expected in our portfolio.

However, given the increase in interest rates, credit tightening, and the potential for material economics slowing, we would expect an increase in delinquency and default at some point. We have seen a small increase in delinquency in our portfolio in Q3.

As a result, we have been hesitant to be aggressive in residential loan acquisitions as we expect a better opportunity set will develop.

One thing we have seen is that significant HPA and the resulting material increase in absolute dollars of equity coupled with rapidly rising mortgage rates made borrowers more engaged and financially attached to their properties and therefore more determined to maintain regular payments.

Historically, we have typically seen mortgage borrowers pay credit cards and auto loans and HELOCs before paying first mortgages in times of financial stress.

However, as a result of significant increases in absolute dollars of equity for seasoned loans, we're now seeing increased delinquency for their credit cards and auto loans and less so for their first mortgages. Commercial real estate loans have not fared as well, and we are beginning to see opportunities.

We believe there will be significant opportunities in sub-performing and non-performing commercial real estate loans and bridge loans in many markets as we get into 2024. We've seen a preview of this in the last few months and is having a less talked about effect on midsized and subsidized bank liquidity and loan portfolio performance.

They frequently have higher percentages of their loan portfolios with CRE exposure. We're beginning to see commercial real estate loans for sale from these institutions and expect that opportunity set will grow. We have joint venture partners that would like us to find significant dollars of commercial opportunities.

On Page six, we own lower LTV loans. Our overall RPL purchase price is approximately 41% of current property value and 91% of GPV. We've always been focused on loans with lower LTVs with certain threshold levels of absolute dollars of equity in targeted geographic locations.

On Page seven, since Q3 and Q4 of 2021, we significantly increased our NPL purchases versus RPLs. NPLs on average can have shorter duration than RPLs. For NPLs on our balance sheet, our overall purchase price is 90% of GPV, 85% of total owing balance, including arrears, and 45% of property value.

As a result of the low loan-to-value and higher absolute dollar of equity on average to our NPL portfolio as well as rapidly rising mortgage rates, we have seen significant reinstatement and re-performance on NPLs.

As I mentioned earlier, for both RPLs and NPLs, purchasing seasoned loan LTV loans at 50% plus discount to property values, the significant absolute dollars of equity provides a natural credit hedge to housing price declines in recession as resulting increases in delinquencies shortens duration and increases our corresponding yields materially.

On Page eight, at September 30, approximately 78% of our loans were in our target markets. California continues to represent the largest segment of our loan portfolio at approximately 22%. However, California has been nearly 40% of all prepayments in 2021, 2022 and so far in 2023.

Our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties. Florida represents approximately 17% of our portfolio and Miami-Dade Broward and Palm Beach counties are approximately 75% of that.

We continue to see demand for homes in our price ranges in our target markets, both from potential homeowners and single-family rental buyers. On Page nine, portfolio migration. At September 30, approximately 81.2% of our loan portfolio made at least 12 of the last 12 payments as compared to 82.3% at June 30 and 74% 15 months ago.

Approximately 77% of our loan portfolio made at least 24 of the last 24 compared to approximately 69% at December 31 and 72% 6 months ago. Approximately 83% have made at least seven consecutive payments. This significant increase in monthly performance is more notable, given that since Q3 of 2021 to be primarily purchased NPLs.

Historically, we have seen that when our purchase loans reached seven consecutive payments, they typically get to 12 consecutive payments more than 92% of the time. Seven consecutive payments has been a statistical turning point.

On Page 10, average loan yields declined marginally and average yields on beneficial equity interest in our joint ventures increased a little, primarily due to less prepayment in loans and slightly more delinquency in joint venture loans.

For debt securities and beneficial interests, remember that yield is net of servicing fees and yield on loans is gross of servicing fees. Debt securities and beneficial interest is how our interest in our JVs are presented under GAAP, and an increase on balance sheet relative to loans since 2020.

Since we purchased loans through the discount, the increased monthly pre-performance of delinquent loans in excess of expectations can extend duration and reduce yield.

The significant absolute dollars of equity for our loans, both from the types of loans we buy, home price appreciation in our target markets that magnifies this absolute dollars of equity, and rising mortgage rates led to material re-performance in excess of expectations. Our leverage continues to be low, especially for companies in our sector.

We ended Q3 with asset level debt of 2.5 times down from 2.7 times. Our total average debt cost was slightly higher in Q3. This is primarily the result of the issuance of our unsecured notes in August of 2022 since they were a higher percentage of total debt outstanding since asset-based debt paid down as our loan portfolio holdings declined in Q3.

Fixed rate securitized debt and fixed rate corporate debt at September 30 are approximately 65% of our total debt. On Page 11, our total repurchase agreement debt at September 30 was approximately $392 million versus $430 million at June 30.

$204 million of this was non-mark-to-market, non-recourse mortgage loan financing and $178 million whose financing primarily on Class A1 senior bonds in our joint ventures with the remaining expected lives of sub two years. We also have significant unencumbered assets.

We expect the amount of our repurchase agreement debt to continue declining relative to fixed rate securitized debt. On Page 12, we have a very small number of NPL and RPL acquisitions under contract. As I mentioned earlier on the call, we believe the opportunity set will expand.

We are starting to see a material opportunity set in commercial real estate loans growing as a result of recession risk and banking sector risk issues. We are also seeing opportunities in commercial real estate bridge financing and repositioning financing. This year-to-date, we have distributed $0.65 per share in dividends.

We declared a cash dividend of $0.11 per share to be paid on November 30, 2023, to stockholders of record November 15, 2023. We reduced our dividend in order to focus on book value and maximizing stockholder value overall.

This decision follows the announcement of the mutual termination in late October, of our merger agreement with Ellington Financial. The termination was approved by both companies' Boards of Directors after careful consideration of the proposed merger and the progress made towards completing the transaction.

The details of the $16 million termination payment are disclosed in our press release last month. Ellington Financial holds approximately 6.1% of our stock, and it remains a securitization joint venture partner.

Also, we disclosed in our earnings press release today, which I refer you to, and as part of our board's regular assessment of our business and strategic direction, among other things, the Board engaged a financial adviser to assist us with thorough evaluation of strategic alternatives.

We don't intend to comment further on this process until disclosure is necessary or advisable. This concludes my comments for our third quarter earnings call. We appreciate you joining us today.

As I noted earlier during my remarks, given the ongoing strategic review process, we will defer taking questions, and we'll provide additional updates or make additional disclosures as needed. Thank you very much again for joining us, and we appreciate your interest in Great Ajax Corp..

Operator:.