Rithm Property Trust Inc. (RPT) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Great Ajax Corp. Second Quarter 2017 Financial Results Conference Call. [Operator Instructions]. And please note that this event is being recorded. I would now like to turn the conference over to Larry Mendelsohn, Chairman and CEO. Please go ahead, sir.

Thank you, very much. Thank you, everybody for joining Great Ajax’s Second Quarter 2017 Conference Call. We appreciate everybody on the line. Before we get started, I want to point out the Safe Harbor disclosure for forward-looking statements on Page 2 of the presentation. And with that, we can start talking about our business and the quarter we just concluded. Kind of at the top-level, in general, a pretty good quarter in terms of the underlying economics of our business, NAV creation, portfolio growth and lower funding costs. But we also did you have, as you see, some GAAP noise from calling our 2015-A securitization a year early, that was $0.01 to $0.15 a share and REO accounting requirement similar to fourth quarter 2016 of about $600,000. There is also been continuing positive developments in loan markets as a whole and some extremely positive developments in the securitization markets overall. With that, on Page 3, I'll give you a quick business overview of where we are. We continue to have over 90% of our acquisitions since inception being privately negotiated. In Q2, it was more of the same, except 19 transactions, a big change over first quarter of this year. Our sourcing network is really important, in our ability to acquire the types of loans we want – in the markets we want them and the prices we pay. When we get to the highlights page, I'll talk a little bit more about the loans that we bought, and you'll be able to see really how they fit our Grand Master plan. The managers proprietary analytics, large amounts of data, we spent a lot of time analyzing where we want loans, what markets, what MSAs and as well as what target characteristics of those loans we want, and in terms of forecasting performance. Affiliated Service or Gregory Funding, looks at loan by loan and asset by asset in terms of bringing it out. Just as in aside, I know, we mentioned a few times that the outside directors have hired to and have likely to do to an evaluation on the servicer about potentially making a small investment in the servicer, who have likely delivered to the outside directors there report any outside directors have formed a committee to evaluate it. And we expect to have some premium feedback from that committee before the end of summer. We like moderate leverage. We don't like extreme leverage. We really like non-mark-to-market leverage, which is how we structure most of our repurchase agreements and all of our securitizations. This quarter, we issued some convertible debt, in late April of 2017. So, we now separate what I'll call asset level leverage, which is securitization or REPO financing versus corporate leverage which also adds in the convertible bonds. So just at the asset level it is about 2.63. So leverage did not increase that materially at the asset level, and corporate leverage of about 2.91, including the $87.5 million of convertible bonds. That being said, we used common convertible bond proceeds to acquire a lot of loans in the second quarter. So, we have a fair number of un-levered loans as well as cash on hand. We've done nine securitization since our inception. We did another one in 2017-A in the second quarter. We like non-recourse fixed rate funding. We have a great group of bond investors. I can't say enough about how helpful and positive and they are. Many of them either co-invest directly in loans with us or we're in the process of putting that together with some. The 2017-A securitization, which I just mentioned, included some new loans as well as all the loans in our 2015-A securitization that we called early. We have increased the leverage on those loans and decreased the funding cost versus 2015-A by more than 1% per year on all those loans. On Page 4, I will talk more just about the quarter, probably the biggest highlight is we purchase price of $210 million on almost $250 million of re-performing loans. Even more remarkable than that is the underlying collateral value of $357 million on those loans. So when you think about 19 transactions, the purchase price of 84% of UPB, but even more remarkable, the purchase price of 58.7% on the underlying property value. And we'll talk a little bit more about that as we look at our portfolio details in the next few pages. We issued $87.5 million of convertible notes, $7.25 coupon, convertible at $15.37 in the quarter. We also issued a 2017-A securitization. It was $140 million of senior bonds at 3.47%. The net increase in debt of that $140 million was only $98 million since we called our 2015 A-deal and we paid down the related debt for those loans, as well as some related debt for some of the other loans in the securitization. Probably the most interesting thing about the securitization aside from its a four percentage point cheaper than the 2015-A was of the $140 million of senior bonds, $50 million actually funded a pre-funding account for loans not yet acquired. And it was an account value for about 30 days of future acquisitions, and we funded about 49 point something million over the $50 million for loans bought after the securitization, but directly funded into the securitization. Pre-funding accounts are something that really haven't been seen in a very long time. And we're really happy that our bondholders have enough confidence in us that they're willing to create bonds secured by loans not yet purchased and gave us 30-plus days to add to the underlying mix. From a net income basis and an interest income basis, interest income of $21.7 million, net interest income of about $12.4 million. That was rise partly due the loans we bought. On the flipside, the early call of our 2015-A deal, we had remaining 218,000 of differed issuance cost. We called the deal one year earlier than, I think, is mandatory, and we accelerated the amortization at 218,000 instead of taking it to over the following 12 months we took it all upfront. We have a 600,000 REO impairment. I'll talk more about that as we get through the presentation with some detail on Page 10. But it's very similar to our December impairment. These are different REO they came in over the first six months and you will see that we have significant built-in gains in other REO. And then, close to $1 million of just plain timing difference issuing a convert of $87 million in late April and closing loans in late May and June. So the amount of interest you earn of the loans is less than the convertible, especially since the loans weren't yet levered up to increase the number of loans relative to convert in a short period of time. So that's nearly timing difference. We’ll see that change over Q3 and Q4 pretty materially, particularly as we continue to acquire loans. If we jump to Page 5, you can really get a feel for our portfolio. Last quarter we were about 93% performing loans. Now 95% of our portfolio is re-performing loans, 5% non-performing loans. If you look at from a property value perspective, we have significant excess property value relative to our loan portfolio. In REO front, we have $42 million of market value REO. That’s our REO, both ROE held-for-sale, which we’ll see on Page 10, but also some REO held for rental, which is typically multi-unit small balance properties that we have on our balance sheet. On Page 6, we have a little more detail about our re-performing on portfolio. For RPL, we continue to be very focused on buying low LTV loans. We've started that in February of 2015 and have continued. And the overall purchase price of our RPL portfolio is 62.8% of the initial underlying collateral value in 80.8% of the UPB. Just as an aside, at December 31, our overall purchase rate was 64.8%, and it's now down to 62.8% because of purchases we made this year. So we continue to lower our purchase price relative to the underlying property value. It's sort of playing offense and defense at the same time. And given the strength in housing prices it’s something that we think makes a lot of sense. And you'll see when we talk about taxable income that this low LTV approach is having material effect on increasing total cash flow from the loans and also accelerating prepayments. On the non-performing side, it continues to shrink, shrink by about 20% quarter-over-quarter, on a carrying basis. Our purchase price to collateral is 55% on non-performing loans and to UPB about 62%. Purchase NPLs continue to decline as a percentage of our portfolio and in absolute dollars. And we think we have a pretty low cost in them. That being said, we still don't believe that non-performing loans going forward are as good an investment opportunity as the re-performing loan market is. From a portfolio perspective, the map hasn't changed, although there is probably one little change that we could add, and that's in Houston. While we are close to adding Houston back as a residential market, we have added it in as a small balance commercial loan and property market for our portfolio. And we are working on some loan acquisitions on some small balance commercial and some property as well in the Houston market. California continues to be our biggest market, nearly 30% of our overall portfolio is in California. And 75% to 80% of that is in Santa Barbara, south to San Diego. So, Southern California, we still like the dynamics of that market. We like the attractiveness of the timeline in case of loans stop performing and the stability of property values in that market as well as the job market. On Page 9, I'll talk a little bit about our portfolio migration. We introduced this last quarter to give you a feel as another way of thinking about NAV, but also kind of how we buy loans and what they turnout to be and what they turn out to be worth. So we focus much more on buying loans that have made somewhere between four and seven and four and eight payments. And this is a chart that shows what those loans have done after we've owned them. So this chart shows payments to us. It does not show payments made to previous servicers. So we bought a loan that was seven of seven, it wouldn't show up as 12 of 12 here until made 12 payments to us. So we have to actually make 19 payments in that case. So, this really just shows, our payments to us, because of that anything that’s 12 for 12 we would have had own for 12 months already. So if it wasn't purchased prior to July of 2016, it couldn’t be 12 of 12. One of the things it shows is that about $530 million of our portfolio was now 12 for 12 or better to us, that's up $55 million from quarter-end March, 2017. So the end of last quarter, it’s a $55 million quarter-over-quarter. If you were to add-in payments to the previous servicer as well, that 12 for 12 number would be over 70% of our portfolio, which is actually pretty remarkable performance. Now even then it still wouldn’t take into account anything really bought this year because there couldn't have been more than a few payments to us because of the time it takes to servicing transfer. So for example, the $250 million of UPB we bought this quarter, couldn't possibly be in this table at even 12 for 12 and barely at even 7 for 7, only a small portion would be at the time of acquisition. So that's number one. If we think about what this means for our portfolio of 12 for 12 – large portion of 12 for 12 now traded extremely higher prices. We actually saw $900 million portfolio traded last week at about 106 of the accruing balance it traded to a sub-4% yield. And we saw another pool of about $400 million trade at approximately 4% yield. When you think about our portfolio of loans that we bought somewhere between 4 of 4 and 7 of 7, we didn't buy those anywhere close to a 3% and 3.25% or 4% yield. So have a material built-in gain when these things become 12 of 12. And in some cases, if you look at our purchase price of approximately 81 or so on UPB, it could be as much as 10 or 15 points in some cases. When we buy 6 of 6s and 7 of 7s and become 12 of 12s, and when they become 24 of 24s, they trade at a very high price. So part of just the value creation is loans paying, part of loans paying is our ability to analyze data-target specific markets and target specific loan characteristics that we think will add to payment. Okay. But in addition to increasing just the NAV of the underlying loan portfolio, these payments actually create a significant amount of cash flow. And when you think about cash flow, we collected $44 million off of our portfolio in this quarter. When you think about what $44 million means on an annualized basis that's $170-plus million or almost 70% of the entire carrying cost of our portfolio, which is a significant amount of cash flow from a loan portfolio with a 4.5% coupon. We’ve definitely seen that have several effects for us. One, aside from increasing NAV, increasing taxable income, increasing cash flow, it also has helped us lower our cost of funds. We saw just in this quarter, we are able to on the re-securitized and newly levered loans reduce our cost of funds by 1% a year. We're working with a rated deal structure would target some time in Q4 that we think would further lower our cost of funds on another $200 million or so of underlying loans, perhaps as much as 1.25% to 1.5%, and also provide more leverage than we currently get in our unlevered – our unrated securitizations or our repurchase agreement facilities. And lastly, when we talk about where 12 of 12s and 24 of 24s sell in the open market, subject to REIT rules, we may very well sell some of our 12 of 12s our board has given us permission subject to the REIT rules and the annual and three-year averages to go out and explore selling small percentage of our portfolio that comply with the REIT rules and redeploy the proceeds in more 4 of 4 to 7 of 7 loans. On Page 10, as promised, I want to talk about the real estate owned that's held-for-sale. This page does not include real estate that is out for rental that is currently being rented. This is just our real estate owned held-for-sale, you can see then on a net liquidation basis, we expect to have about $34 million of net proceeds. That's not a gross number, that's a net number versus our carrying value of about 29.7%. So even after the $600,000 impairment, we expect that we have a built-in gain of about $4.4 million. That's actually a little bit higher than our expected built-in gain of about $4 million from December. So in our overall REO portfolio that's for sale, we believe we have material built-in gains. That being said, GAAP doesn't allow us to use built-in gains to offset built-in losses so we take the built-in losses as we determine them, rather than as we sell properties GAAP requires us to take our gains when we sell those underlying properties. As you might imagine, our experience over the years with especially with nonperforming loans is that the REO. You take back first rather than last is the tail. So tail is better REO and what comes first is worst REO, it tends to be higher LTV loans with less engaged borrowers either lower or negative amounts of equity. That's what tends to become REO first. They tend to be in worst condition. And they are generally the lower relative market value properties in whatever MSA they're in, as REO goes in our portfolio. For the very best REO, with the most equity in a foreclosure, it usually sells to a third-party after foreclosure sale. That is not in REO sale for our accounting, that's actually a loan payoff because we never take the REO. So that gets buried in pool accounting as a loan payoff. So the REO that you'll see here is either the tail, which happened first or it’s the second best REO rather than the first best REO that you usually see come on the nonperforming loans. That being said, GAAP doesn't allow you to market to market, the goods only the bads unless you go into market to market, 100% of the assets on your balance sheet. And we think that that would be volatile in any given time. And it would be less informative about our overall company performance. On Page 11, similar to looking at portfolio migration and performance as a way of thinking about NAV, we also say let's let a true third-party, the bond market, the structure credit market decide what our portfolios worth. And we took our last securitization that we did in May of this year, May 25 to close. And you'll see that we have actually able to increase our subordinate bonds by another 2% up to 12% total versus 10% total. We still hold all our subordinated bonds. We haven't sold any subordinated bonds yet. And we kept the senior the same, but its 3.5% or 3.47% instead of 100 basis points higher all-in yield. So this is all updated our entire portfolio as if we had securitized them in our last two securitizations and what the structure credit market forecast our portfolio was worth. It has kind of an interesting sidebar as to what it means to return on equity. If you think a return on equity, if you were to sell our subordinate bonds and just keep the residual, the equity Trust Certificate, which is equal to 23% of the UPB of the portfolio. The equity basis would be approximately 3.5% of the portfolio. So we would own 23% of the UPB with 95% RPLs that are outperforming expectations on a cash flow basis, and we would own it for 3.5 points. So on a kind of the implied leverage basis it's effectively equivalent having 96.5% leverage, if we were to sell our subordinate bonds or B-1s and B-2s, and still on 23% UPB. Also given where we've taken kind of an average of where we think the equity Trust Certificate is worth based on some third-parties, we've had people offer us higher than 40% but we use that number as a – in the presentations historically. We didn't want to put in a higher number and just add to the NAV. But if you look at it, its almost $3 a share, but $2.89 implied NAV increase over our $15.49 book which implies about $18.38 of implied NAV from structured credit, again, this is not our opinion, this is another way to look at it just like portfolio migration where we are actually looking to third-parties to give us an understanding of what the implied NAV of our portfolio is. Subsequent to quarter-end, as usual, a lot going on, we have about $30 million of RPL acquisitions that will close in the next few weeks, 88 loans and two transactions. Again, you'll see purchase price about 80% UPB, price to collateral value about 63%. You can see that the loans are underlying around 75 or 80 LTVs so again focused on lower LTV loans and low purchase price at the underlying collateral value, those closed. We also have, I'm sorry, those were July closings. And then in August, we have another $3 million scheduled to close. Those actually for the summer, a lot of loans that are out there that we're seeing were a little surprised by it. It's not usually what we see, summer tends to be slower quarter on the acquisition front, but it seems to have little more energy than we traditionally see. On the small balance commercial front, we've already closed $1.7 million. We're looking at three more small balance commercial loans of another $3 million, $3.5 million. We would expect to see more funded this quarter as well. As part of the small balance commercial piece, we are in the documentation phase with a large institutional fixed income investor on a JV to grow the small balance commercial platform. And with any luck in the loyal cooperation that will move forward pretty quickly. So let's talk about the dividend. We talked about cash flow, we talked about taxable income being $0.39 and in Q1 taxable income was $0.38 combined that $0.77. Our Board decided to raise the dividend to $0.30, record date August 15, pay date August 30. $0.30 plus $0.28 last quarter is $0.58. As a REIT, we're obligated to pay under REIT rules 90% minimum of taxable income 90% of $0.77 is more than $0.58. Our Board likes to be predictable, doesn't like to make large jumps in dividends. Taxable incomes are a little harder to forecast than GAAP income is because of level yield accounting is not have tax works. So as a result, our expectation, not a guarantee, but our expectation is that the dividends will have to go up as taxable income continues to increase from cash flow. And that absent some material change in taxable income. We’d expect the trend in the dividend to continue. On Page 13 and 14, our income statement and balance sheets. This is the first quarter that basic and diluted are slightly different because we have a convertible bond. Again, that we issued in late April of 2017. And with that, I’m happy to open up to anybody with any questions and happy to talk about what we're doing.

Thank you. [Operator Instructions] And your first question will be from Jessica Levi-Ribner from FBR.

Hey guys this is Tim for Jessica. Thanks for taking my questions. Thanks for the dividend policy. It sounds like, I pretty much kind of know the answer of this one already but, so it’s seemingly that, that quarterly dividend is likely to going up so long as there is big discrepancy between taxable income and the dividend just based on the REIT rules. But is that something that you and the board would kind of rather see that quarterly dividend to go up rather than do a special kind of true up at year-end?

I think our bias is to have the quarterly dividend, trade up, kind of trade it's way up, work it's way up, rather than have a special dividend. I think there is a realistic chance that there could be some special dividend either way this year. But our expectation based on our most recent Board meeting a few weeks ago or weeks ago is that the directors expect that the dividend will continue to move its way up rather than have just a giant jump.

Okay, thanks and you’d mentioned a couple of initiatives in terms of REO sales and potential 12 for 12 loan sales. And so between kind of the capital freed up from those asset sales and the cash we have on hand left from the convert. Just what's your – how much dry powder you have available today and what is that mean for you, what's your capacity around acquiring RPLs in investing SBC loans right now?

If you just take kind of our un-levered loans that we could always put that on in our ability to get some leverage from a rate of securitization and cash on hand, our RPL powder by itself is probably another $150 million. So if you think about just the convert itself, that probably gave us the ability to buy somewhere between $300 million to $400 million, assuming we levered it in a securitization structure at three times, we traditionally get about 3.5 to 3.9 times in a senior bond. But if you just assume three times, that gets us somewhere around $350 million or so. So, we have plenty of dry powder. We have the ATM in place, we’ve never used it, we've no plan on using it. And I think the convert was done when it was done for a specific reason because we had 200 plus million of loans under agreement to be repurchased. And we wouldn't think about raising capital absent having another $200 million to $300 million to buy.

Okay, that is really helpful thanks. And then one more just around the JV you had mentioned. Is there any preliminary talk as kind of size or contribution to that? And if you could just talk about the SBC market a little bit, the dynamics you're seeing versus kind of larger balance stuff why you like the space.

From an SBC perspective, our space is really what I call $500,000to $5 million but even more so probably $500,000 to about $3 million. It is predominantly inter-city, its predominantly has a residential component may not be straight multi-family. It may be ground floor retail with apartments above, some kind of mixed-use. We tend to do, what I'll call moderate transitional lending. Someone's acquiring a building they need 60% loan and they get another $500,000 over six months to renovate some of the units or could get use money to get retail tenants things like that. We think it's a pretty attractive market. It works well in many of the markets that we are already concentrated in our portfolio LA, Phoenix, Houston, Miami, Atlanta, Washington DC and Queens and Portland few other cities. From a pure size perspective, we think it's a pretty significant market and one that we can ramp up in those cities. And we want to have concentration because just like everything else we would like to have our own people on the ground and having specific targeted markets and concentration helps that mix turnout better. From a JV perspective, each party is looking to contribute $75 million of equity, and we have two investment banks that were pretty far along in discussions that are willing to provide two to one leverage against that. I think that to fully fund I mean if each party did $50 million lever two to one so call it $300 million, so that’s in full throttle, that's probably a two year investment cycle, not a one year investment cycle or maybe an 18-month investment cycle but it is not a 12-month investment cycle. And if we do it as $150 million, at $450 million makes it at 2.5 year investment cycle. Absent buying any pools of small balance commercial that would just be straight kind of semi- origination where we're providing the financing either at the time of the loan or shortly thereafter in the next few weeks. There are community banks who are under a lot of pressure to actually exit that market from the regulators. So there is opportunity to buy pools of those loans also. And we're actively out talking to banks that we deal with and that we get refer to by some of our institutional investors for discussions about buying some of their small balance commercial. The other thing we had discussions with a number of banks is kind of the built-in leverage concept that A and B structure where we actually own the loan and sell a senior participation to a small bank. And at a lower rate effectively its built-in, it's financing for us. And for the bank, its much better capital treatment senior debt. So that's another avenue we're exploring with a number of banks in these markets as well.

Thanks for the color.

Sure

The next question will be from Steve Delaney of JMP Securities. Please go ahead.

Thanks. Hey good afternoon Larry. And thank you also, I’ll echo Tim’s comment. Thank you for the dividend hike. We had not projected that until the fourth quarter. so you are making us look good here. So listen, I heard something new and maybe because I wasn't listening close enough last quarters calls, but I am intrigued by the conversations the Board is having about the possibility of purchasing an interest in your dedicated service or Gregory. Could you just clarify that, I know it sounds like its nothing you can talk about in specifics, but where did that initiate? Is it the Board of Great Ajax that is making that request. I'm just curious how that all came about. But it sounds like it would be a very shareholder friendly move with respect to Ajax shareholders?

I think that is true. The outside directors of Great Ajax started asking about the possibility of investing Gregory probably about a year ago. And one of the things that made them really interested aside from the fact that they think it's a good alignment of interest because Gregory is captive. They saw that there was a number of institutional structured bond investors who wanted to buy loans with us and have Gregory be the servicer. As a result of that, they thought that as Gregory is captive that if there was going to be a time to invest in Gregory, it would be before you allowed Gregory to go do that rather than after, number one. Because you could put Gregory across the inflection point. Number 2, they look at it as kind of a strategic investment that gives Gregory the ability to invest more in its own infrastructure as well as cause Great Ajax kind of the Gregory's – the interest of these institutional investors structured credit investors have in using Gregory as a servicer, has enabled Great Ajax to see a lot of one loan that these institutional investors may have been seen that we were not. And two, it may be institutional investors willing to be more aggressive in our securitizations. For example, you don't see too many $50 million pre-funding accords in securitizations that are six times or seven times oversubscribed to buy loans that we haven't yet purchased. Right you don’t see – that's something …

That was something that you did back in the CLO days, right pre crisis.

That’s exactly right. And so you don’t see that. And our structured credit investors have enough confidence in us buying loans and in Gregory servicing them. But they want more bonds and are willing to do a pre funding account because they know what we will buy, and they know how Gregory will service. So it gives us execution benefits in our bonds. It gets us to see loans that we may not see that the large institutions do see. It gets them to want to do those JV partners with us in order to Gregory, to them service those loans for them. So the outside directors, they're very – one of the things we did when we set the Great Ajax we wanted newly, sophisticated business savvy directors.

Sure.

And these directors kind of look at it and say, no, if there is a time to do it, let's do it, and they hired [indiscernible], probably about five or six months ago. I think, in January, to do evaluation that was delivered to them a couple of weeks ago. At the Board meeting, last week, they formed a committee of outside directors to work directly with [indiscernible] and that evaluation to put together what they think they're willing to do. And preliminary told us, preliminarily told us that they would come back approximately late August.

Okay, that’s great. That’s wonder color and background. I really appreciate that. Just from where I sit as an analyst, I think, that would be – we were aware of this the institutional accounts that you have that are going on and assume that Gregory was doing work for those other parties. So it does raise the question of who's benefiting there or possibly could be attention be directed. So we get it. Yes. And then if you could on the securitization market, and we're seeing, obviously, credit spreads come in, in a lot of markets, but you wouldn't think the RPL market would be the necessarily the first one to tighten so much. But just in the very general sense, Larry, so if you look where you are today versus maybe let's go back to the 2015 you just called, you're paying more for loans today on a price to UPB. But my question is, if you look at the big picture, would you say that the terms within the securitization market have largely offset the higher cost base that you have in your loans and therefore, a lower yield. Are you getting close to the same sort of targeted levered ROEs in today's securitization market that you are able to get say one to two years ago when loans appeared to be cheaper on an uncovered basis?

Sure. So if you look at kind of apples-to-apples of where we're buying loans right now versus where we bought them two years ago. And when I say apples-to-apples two years ago we were buying a little bit higher LTV loans versus now we're buying LTV loans.

Yes understood.

So some of the purchase price increase is really driven by the safety of the loans we're buying as opposed to changes in loan prices for say four of four or seven of seven loans. The biggest changes in the loan prices are really in the clean pace that are 12 of 12 or better close to 12 of 11 or 11, or something like that. With securitization market itself, however, especially on senior bonds, have tightened enormously. For example, if you look at rate transactions, AAA securitization, AAA bonds now, UC trading at 85 over treasuries on 3-year, 3.5-year basis. So you're talking about bond yields like 265 on AAAs and you're seeing leverage on BBBs, in some cases, all the way up to 80% of UPB and the BBB maybe in the mid-3s. So if you're seeing all in, people getting 75%, 80% to UPB, not the cost of UPB in the low 3s, plus expenses. So and we look at it, our securitization market has gone from basically 65 at kind of 490 all-in and we're on unrated basis to 65 at 390 all-in. So we're saving – and that 65% UPB, if you think of our cost of 80% of UPB, I think, our all-in cost is 80.8 on UPB. So if you think of our cost on reperformer of 80.8. What tells is that we're getting about 4.5x leverage at 3.9% fixed all in, including expenses, amortization of issuance costs, everything, and the 347 senior bond. In a rated structure, we think we can reduce that by another 0.5 point and actually, increase leverage from 65 to in the low 70s and that's of UPB. So that would be called six to one leverage in the low 3s plus expenses or high 2s plus expenses. So may be at 3.5 all in at six times leverage. So the securitization…

And you’re thinking – you’re talking about…

I’m not…

Did I hear you say earlier – you're talking about possibly a rated deal at the end of this year?

Yes in Q4 is kind of what we’re targeting. Unfortunately, we don't get to decide when we do it. Working with the rating agencies.

I understand.

Since this is our first transaction. We also don’t want the first one to be the biggest one because the first one has the worst execution, not the – of all the deals we do now.

Exactly.

But our expectation is very significantly better than our unrated deals. It won't have any step-up requirements. It will be permanent financing. It'll be match-funded. And we think it lows our all-in costs an additional 0.5% on top of the 1% we already saved on the last deal. So it's – the securitization market, the structured credit markets are really tied. Part of it is, there is no supply. I mean, if you think about kind of non-agency mortgages, it's a market that in 2008 was $2.8 trillion and today is $400 billion or something or – shrinking by $10 billion to $12 billion a month net. So there is very little new supply, and a lot of demand for yield. And the one thing I'll say is that all the investors that we deal within our structured bonds are pretty smart thorough diligence people. And they get the difference like Gregory makes in our data analytics and buying strategies make versus kind of just buying $1 billion polls and doing things.

Okay, really appreciate the comments. Very helpful Larry, thanks.

Thanks Steve.

The next question will come from Robert Dodd of Raymond James. Please go ahead.

Hi Larry.

Hi Rob.

Most of my questions have been answered. On the potential for the 12 for 12 stock selling that you mentioned, the Board's given approval, et cetera. would it be fair to say that one step, and obviously, that as you pointed out as we go that how long if he held things excess, what is it fair to say that once that starts that would become an ongoing process or is that the tool looking at pool selling that and then stepping back away from that market again for a while. Or is it just going to be.

I think that they see it as part of an overall strategy where you securitize some, you finance some, you sell some as opposed to necessarily targeting a specific amount of selling. The REIT rules, you have holding time period requirements and you have three-year average total sales of, I think, 10%, with no more than 20% in any one year. And you never want to be up to your limit because in case you see something that makes your mouth water, you need to be able to sell something in case you have to redeploy. So we always want to have some question. That being said, if the Board does like where the 12 of 12 and 24 of 24 market is transacting right now versus where we buy loans. And they have access to explore sale of somewhere between 6% and maybe 7.5% or just to give us at least 3% or 4% built-in room under the REIT rules of our portfolio just to explore it. So we'll start working on that probably in August or early September, we'll actually start putting together perspective pool. We want to have – our preliminary information back in the rating agencies before we were to decide what that perspective pool will be.

Okay, got it. Thank you. And then one, I’ll ask on seasonality of acquisition. You gave some color at the beginning, Q3 looks like it's more active than normal for summer period. I mean, stepping back for a second, I mean you look at Q3 last year was huge, right but that was an anomaly, right. The Q3 a year before are not as huge.

That was an anomaly of specific – two specific sellers looking for timeliness of liquidity.

Right. So if I can put you on the spot, not for specific numbers, but in a hypothetical year, how much – if you're going to buy $100 million a year, roughly what do you expect, it's not going to be 25, 25, 25, 25, right, where would you expect the – kind of relative scale and activity to kind of shakeout on average on in any given year?

Sure. Third quarter and first quarter are the two slowest. And sometime – and when we have surprises of volume, it's usually in the third quarter, not the first quarter. Usually, a positive surprise in the first quarter is because something didn't get done year-end because the seller couldn’t do something. And then it gets into the first quarter. We usually see acquisitions pick up kind of March through July. So we are a little bit in August, September tends to be a little quieter and then we see October, November, December busy. January usually the first two weeks are busy, after that it's slow until the 1st of March.

Got it. Very helpful. Thank you. Its just a one of the tricky part of the business.

Some of it has to do with timing of bank capital ratio, some of it has to do with sellers those being around versus being on vacation, some of it has to do with what sellers are outraising new funds, some of it has to do with what sellers are trying to earn carry by a certain date, some of it has to do with sellers that trying to get to a mark, some of it has to do with banks regulatory capital ratios. For example, we get a call from a bank and they need execution by a very odd date, it means that their regulators are coming in for an exam a week or two after that odd date.

Right, right. Yes, I got it. And I'll ask you one on the dividend. And again thank you for the color, you mentioned the possibility of a special because obviously the way the tax is going, the way the dividend is, there maybe a special – would you – this may be more detail than the one you gave, but would you expect if a special were to occur, it would occur in calendar 2017 or would it being in 2018 like some of you got some timing you have flexibility on the shareholders that necessarily benefit?

Our expectation based on preliminary discussions with tax folks is likely would be December rather than January.

Okay. Got it. Appreciate it. Thanks a lot and congratulations.

Thank you.

The next question will be from Kevin Barker of Piper Jaffray. Please go ahead.

Hi Larry, I just had a…

Hey, Kevin.

Did you please go back through how you get to the $0.58 number you quickly went through at the end of the prepared remarks. But you can just go back through that?

The taxable income versus the dividend, so dividend in Q1 was $0.28, dividend in Q2 to be $0.30 so that’s $0.58, taxable income in Q1 was $0.38 and Q2 was $0.39 so that’s $0.77. REIT requirement so far this year would be 90% of $0.77 or $0.70 and so far we will have paid out $0.58.

Got you. So obviously there’s a big difference between what you have there and what the future will look like?

If tax rate income continues with that rate, that numbers get – that difference gets bigger rather than smaller. Correct.

Okay, all right. And I appreciate the comments earlier which hones in on the timing. And then in regards to your NAV, I know, there is some disclosure it's been a couple of quarters where we've seen a decline in the NAV. Can you help us understand what the puts and takes and why the NAV is declining and then your outlook for it? Thanks.

Sure. The number one reason is our focus on much lower LTV loans. So as a result, we're paying a little more as a percentage of UPB less on property value, but more on UPB. And since the securitization structures are based on percentages of UPB, that actually gives us a little less leverage, rather than a little more average from senior bonds. So as a result, the built-in NAV is a little bit lower because of the kinds of loans that we're buying. That being said, it's a little misleading because the kinds of loans we're buying are cash flowing so much more than the loans we used to buy. And which makes them from a total cash flow perspective significantly more cash flow generating and it would make the senior debt go way faster. So which would increase the PV of the resid – that's why I said based on the new loans we buy, we've had people who would value that resid materially higher than $0.40, but we kept that $0.40 so that its consistent. I would argue that $0.40 on the resid value is probably closer to $0.60 or $0.65 maybe even $0.70 in today’s loan pricing market.

So it's entirely a reflection of the change in strategy towards cleaner credits and primarily the difference.

Yes.

And obviously that will change the discounted cash flows where there were potential cash flows that could be generated from those differences.

So what would happen is we haven't changed that $0.40 value on the resid, but every $0.10 on the resid value is $1.5 of NAV.

Okay, all right. That’s all, really helpful. Thanks, Larry.

Okay.

And that concludes the question-and-answer session. I would like to hand the conference back over to Larry Mendelsohn for his closing comments.

Thank you, everybody for joining our second quarter 2017 earnings conference call. We'll be around for most of the rest of the summer and available to, if you have more questions feel free to contact us. We're always happy to talk about our business. Appreciated again, thanks for the support over the years. And we look forward to talking to you in the future.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.