Rithm Property Trust Inc. (RPT) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Great Ajax Corporation's First Quarter 2018 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded. With that, I'd like to turn the conference over to Larry Mendelsohn. Please go ahead.

Thank you very much. Thank you for joining us on our first quarter 2018 quarter-end call. I'd like to -- before we get started, have you take a quick look at page 2, our Safe Harbor disclosure and discussing the forward-looking statements with regard to this presentation and any Q&A. And with that, I will jump right in. As first quarters go, this was pretty typical of a first quarter in January and February and then March, it got very busy. Usually, first quarters are one of the two slower quarters of the year, usually quarter one and quarter three are slower, and quarter four and quarter two are busier. And January and February followed that trend and March picked up dramatically, as will -- even more so than usual, as we will discuss later on in the earnings discussion and the subsequent events. But in March, we agreed to buy a lot of loans and did a lot of due diligence for closings in April, and also for closings this week and next week. With that, I will jump to page 3 and give you a quick overview of our business and any changes. One of the most important things is where we get loans, how we find them, our sourcing network is extremely important to our ability to acquire the types of loans we want and at the prices we pay relative to other people. We frequently [owe] [ph] liquidity providers to funds and to banks, who have balance sheet issues or ratio management to do, and you will see from what we have acquired and what's coming through in April, May and June, or in May and June now, at the prices and the loan-to-values and the types of loans. Our managers' proprietary analytics, also very important. We spent a lot of time analyzing data to determine the target loan characteristics we want. We don't to be an index fund of loans, based on where loans exist. We only want to own loans that we actually want to own, and we use a lot of this data analysis to forecast patterns of what's going to happen in loans and what's going to happen in properties in certain markets, and as well as demographics and rents and things like that. Not only does the data analysis help drive the loan acquisition strategy, but it's really helpful as well in driving loan servicing strategies and predictions of outcomes, loan-by-loan-by-loan. Makes us a lot more efficient, and also it gives us the ability to buy loans that based on pattern recognition that we built, other people don't necessarily see or understand. Having a captive affiliated servicer is really important. Our servicer and our closeness to our servicer really helps create outcomes and loans that other people don't get. As of the end of January, we now own an interest in our servicer and we also have warrants to acquire more of our servicer, and as our JV structures get bigger and bigger, which they have done in April, and will also be in June, also we get an extra benefit through increasing servicer valuation as well and the brand of the servicer -- that the institutional joint venture partners rely on. It's very important and it's good for the overall value of the servicer, and it's good for both our interest in the servicer as well as our warrants in the servicer. We use moderate non-mark-to-market leverage. You will see, as we go through this, at our ending leverage at the end of Q1 is actually lower than the end of Q4, and lower than the average leverage throughout Q1, even though we were pretty busy, but that's something that we will talk a little bit more about. If we jump to page 4 and the highlights; first, in the quarter, we bought $17.5 million of re-performing loans. We only bought re-performing loans, we didn't buy any non-performing loans in Q1. Our purchase price was approximately 89% of the unpaid principal balance, but it was only 54% of the underlying property value. So very low, relative to property value, good average property values. We also bought an apartment building in Phoenix, a 32 unit apartment building for about $100,000 per unit, in an area of Phoenix that we believe has significant upside, and in the urban location. From a revenue interest and net interest income, there is a lot to talk about today. First, interest income about $25.5 million, net interest income of about $13.1 million, and $0.41 a share of earnings. Some important factors to talk about, when we talk about interest income and net interest income. Net interest income increased some. We had more loans on average for the quarter. But the yields on our loans were down approximately 30 basis points, and this is going to be an odd thing. They are down 30 basis points due to overperformance. It's an unusual concept in a trade-off. Monthly performance on the loans is significantly better than our expectation, and that causes yield to decrease. We receive significantly more cash load, but duration extends, because far fewer loans than expected are defaulting. So we have the unusual problem of too many loans are paying, that continues, and you will see from the collections and the way leverage changed in this quarter, that the performance level is even significantly better than even three months ago. We receive so much more cash flow, that our Q1 quarter end leverage is lower than our quarter average leverage during Q1, and lower than our Q4 2017 ending leverage. In addition, our cost of funds declined as well, despite an increase in LIBOR, and we will talk a little bit more, as we see another securitization structure that we did in April as to what this overperformance of loans really enables us to do on the financing side. Also, in these numbers, is an REO impairment of approximately $400,000. Although that's offset a little bit by about $500,000 of REO sales gains. We talked before on some calls, that REO impairment happens first under GAAP, is when you get the REO at foreclosure, you have to make that determination, and sales gains happen later, when you sell REO. So sales gains always have a lag versus taking the impairment. Our REO portfolio overall continues to have expected future gains on a net basis, net of any existing or future impairments that we are aware of. But remember, gains always come second, and REO impairment always comes first. Other highlights, taxable income, significantly higher than last quarter, $0.37 a share. Interest income as well as payoffs, as well as tax gain from loan modifications, so not GAAP gain from loan modifications but tax gain from loan modifications. The GAAP income comes from those over time. Book value of 50.53, cash collections of $50.5 million in a quarter, $23 million of that is payoffs. If you were to annualize the collections, it would be about $200 million, a little more than $200 million, which is approximately 18% of the entire basis of our loans. So it's really a remarkable amount of collected money. And to give you even kind of more -- a bigger sign of that, over a three day period, March 30, the last business day of the quarter, as well as April 2 and April 3, the first two business days of the second quarter. On those three business days, we had combined payoffs of approximately one half of 1% of our entire portfolio in three business days. So it's looking like Q2 payoffs and Q2 cash flows following on from the velocity of Q1. At the end of the first quarter, we had $47.5 million of cash and we had, on average $51.5 million of cash throughout the quarter. It's pretty remarkable that our leverage actually went down during the quarter, but our cash amount stayed the same, because our collections were so high and having an average of $51.5 million of cash during the quarter. While it's great for future acquisitions and capital availability, it does hurt your interest income number having that much cash versus having less cash. Quarter end leverage ratios, asset level 2.8, corporate level 3.1, those are both down from the end of Q4. Leverage declined during the quarter, but our cash balance is unchanged. Having so much cash decreased the income a bit, but it also -- all the cash flow decreased our leverage, while at the same time, we still maintain the same amount of cash. It was kind of an unusual set of overlapping items. January 26, we talked about this as a subsequent event in our call a few months back. On January 26, we closed the first step of a two step transaction acquiring an 8% interest in our loan servicer. We acquired 4.9% in late January, another 3.1% will close at the end of May. We also acquired warrants on additional 12% of the servicer, so we can capitalize on the optionality, a value created at the servicer and at the brand that the servicer is creating for itself. Our portfolio on page 5, we are still about 96.5% re-performing loans and about 3.5% non-performing loans, but that will change a little bit, as we will see later in the presentation in later Q2. On the REO side, REO for us is principally held for sale, and then we will turn it to cash over a relatively short period of time. At 331, we did have 15 rentals, primarily multi-unit buildings, including the 32 unit multifamily in Phoenix that we purchased in January of this year. But for the most part, OREO is held for sale, and we expect to turn it to cash and reinvest it. On page 6, when we look at our re-performing loan portfolio, it continues to grow. We continue to buy lower loan-to-value loans within the overall RPL purchase. Our purchase price represents 62% of property value and approximately 83% of principal balance. This price of property value doesn't include any appreciation that happened since acquisition. So our belief is that our price is actually significantly below the 62% of property value. We continue to play offense and defense at the same time in the world we live in, as well as typically in financial markets, defense is harder than offense, and we found that a methodology to play defense and offense at the same time, and it works well, and what it allows us to do on re-performing loans, is from a performance level, if a loan doesn't pay, it actually can make our yields go up, rather than down, although we would always like our loans to pay. If you look at the progression of our re-performing loan portfolio down in the bottom graph, you see March 31, 2018, our purchase price of property value is 62% versus a year ago, it was 65%, versus two years ago, it was 66% versus three years ago, it was 68.5%. So our purchase price to REO has come down. Purchase price of property value has come down significantly, and that's without actually including home price appreciation. That's just straight, the way we buy loans and the kinds of loans we source. On the NPL side, our NPLs have continued to decline in absolute dollars. However, as part of the joint venture, we will talk about in a few minutes, we expect to acquire some additional NPLs in June of 2018. During the quarter, we had 45 foreclosures, of which 18 of the 45 properties in the foreclosure sales, sold directly to third parties for cash. That gets accounted for through loan pool accounting, but it never actually turns into a property we own. So it's as if it's a type of loan pay-off, but 27 of the properties became REO. We also sold 27 REOs in this quarter. So on a net basis, we have the same number of REOs that we had the quarter before, from that perspective. Where are our loans? Well, California continues to represent approximately 30% of our overall portfolio, and Southern California is about 75% of the 30% or about 22% of our entire portfolio. We are seeing very consistent payment and performance patterns for loans in California, especially in California urban centers, like San Francisco, Los Angeles, parts of Orange County and San Diego County, and we find that loans with certain characteristics in California are very predictable into what they will do. Probably, the only item that's potentially different in the future is, we continue to evaluate Indianapolis. We have been looking at it for a few months now. We started looking at it late in Q4, and we are still in the data gathering, and we have made a number of visits there, with feet on the ground, to determine whether or not it should become one of our target markets. On page 9, our portfolio migration; the numbers here are unbelievable. I don't have another word that I can describe it with. So $955 million UPB of our portfolio is 12 of the last 12 payments are better. That's up approximately $300 million from Q4 of 2017. Okay. In addition, $1.06 billion is 7 of 7 or better, and the significance of 7 of 7 is, the analysis of data on loans that we buy. So going back to -- early on when buying loans, subsequent to the -- or all the way up to now, the loans we buy have specific characteristics that are data driven, and what we find, is that once the loan hits that cusp point of 7 consecutive payments, that loan, 91% of the time gets to be 12 of 12. And so, when you think about it, we have $955 million plus another of 12 of 12 or better, plus another $108 million or $109 million of 7 for 7, which have a 91% chance of becoming 12 of 12 or better. So our expectation is that, we are going to wake up in six months, and other than loans going up because of payoffs, we are going to have close to $1.1 billion of our portfolio being 12 of 12 or better, and over $600 million being 24-24 or better. Really remarkable in terms of performance. That goes back to when we bought these loans. We knew the 7 of 7 cusp, but getting to 7 of 7 is the hardest part, and what we have found is that so many loans have well overperformed our expectation that we are getting to the point where every loan or the lion's share of loans are just paying every month. In addition to increasing the cash flow and NAV, this payment pattern, the significant outperformance of these loans, because of the payment pattern, lowers our asset base cost of funds over time. We have seen, from the three securitizations we did in December of 2017, that the cash flow velocity on our loans enables us to push up the advance rates, and at lower cost than the previous years. And on the next slide, you'd be able to see that our total average debt cost declined 20 basis points in Q1 versus Q4, despite the fact that there was a significant increase in LIBOR. So we look at some metrics on page 10, and on page 10, what we have done is, you may recall, we did a significant joint venture in late 2017 with BlackRock, that was a 50-50 joint venture, which requires us to consolidate it. So what we have done -- and Q4 would have been the first quarter of consolidation. So what we have done is, we have shown Q2 and Q3, and then we are showing the deconsolidated Q4 and the deconsolidated Q1 to tie them back to the consolidated, we actually put in an extra page on the next page, to show both consolidated and deconsolidated. But if you look at the deconsolidated, so you can see a rolling four month period, you will see the average loan yield has gone down from about 9.4 to 8.6 over a year, primarily, because of performance. Material increase on loan performance continues to extend duration, but it's dramatically increasing cash flow and that cash flow is over a longer period of time. When comparing yields in the market though too, for larger pools or 12 of 12 loans, and this is great for NAV creation, because yields in the market are significantly lower than these yields for 12 of 12. Also, one thing to keep in mind, is that our yield calculations don't permit us to calculate principal above 100 LTV. So if we have loans that are 100 LTV or higher and they are paying monthly payments of principal, we are not getting income on that in our model, until they go below 100 LTV, because we can't take income for principal we didn't expect to collect. So a well performing high LTV loan actually hurts yield versus helps yield, it's a very unusual GAAP pool accounting piece that we comply with, and it's part of the modeling. If you look at asset level debt cost, it has come down as well, and if you look at total average debt cost, on our entire balance sheet, it has also come down from Q4, as well as from Q3. If you look at the non-interest operating expenses, you will see those are up a small amount. That's primarily driven by two things, one is, interim servicing fees to the previous servicer for loans in our 2017 D transaction. That joint venture that we closed in the last two weeks of December, we had to pay the previous servicer interim servicing fees, and that shows up in January, and those are large number of loans. And number two, is property valuation expense on loans in our credit facility -- in our credit facilities, plural, at our JPMorgan and Nomura facilities, require updated property values that we show often, and all those occurred in one quarter. Quarter ending leverage, if we go at the bottom, quarter ending leverage is 2.8 times, and at the corporate level, including our convertible bond is 3.1 times. We are running 10.5% return on average equity with 2.8 times leverage, which I think is not typical in the mortgage REIT world, that's for sure. Page 11 is the reconciliation that we are required to do, since we deconsolidated on page 10, we reconsolidated on page 11. So that everybody can see the tie-out, and then I will jump to page 12, because there is a lot going on. On April 26, we closed another joint venture, our 2018-A bond structure. It included a $160 million of UPB, of which 80% were senior bonds or about $128 million, and the balance was an equity certificate. One thing that made this a very unusual structure, is that at the time of closing on April 26, 90% of the structure was set up as a pre-funding account. So only about 10% of the money was spent on the day of closing to buy loans and the remaining 90% can be used to buy loans until the 10th of June. The senior bond was done at a 3.85% coupon at-par, with no interest rate step-up during the life of the senior bond at all. So similar to our 2017 D, with no step-up over the life and an 80% senior, the 2017 D, we pushed the envelope by having about 40% pre-funding account. The 2018-A, we pushed the envelope by having a 90% pre-funding account. You can see on the left hand side of this page, the loans that we expect are going to go into that pre-funding account. You will see the first is what closed on the 26 into the structure, and then the next two batches, the $138 million in RPL and $5.8 million of NPL are expected to close during the month of May or early June into the structure, totaling about $160 million. If you look at the purchase prices to the collateral value of the RPL, 61.8% and 57.1%, and then if the NPL is 39.6%, you will really see that we are continuing our pattern of low LTV loans and low purchase price to property value. The big difference though, is that people and bond investors have become so comfortable with the way we do due diligence and the way we find loans and the way we value loans, that they are willing to set up a 90% pre-funding account for loans to be identified to go into the pool. In addition to that, we have a new joint venture that we expect to close in the second week of June, that will be our 2018-B structure. And that, as of right now, will have about $124 million of non-performing loans. The purchase price to collateral on those is about 63% of collateral. The average property value in those non-performing loans is about $300,000. So the average discount to property value of the purchase price is about $111,000 of, what I will call, comfort zone or protection in the purchase price. Separate from the JVs, we have about $18 million of re-performing loans that we expect to close in the next few weeks. Again, if you look at the price to collateral, it's about 60% of the underlying property value. Again, low price to property value, we continue to play defense and offense at the same time. On April 26, that's the joint venture. We just talked about 2018-A. We also, as part of our press release today, our board declared a dividend of $0.30 payable to stockholders of record on May 15, on May 30 payday. Taxable income was $0.37, in excess of the $0.30, our board is certainly comfortable with the $0.30 dividend, and as we see the next few quarters, they will take a look as to whether that dividend should be improved, based on continued payment performance of the loans, as well as loan modifications in any fee income we might have. On page 13 and 14, are the statements of income and balance sheets, and rather than go through those in detail, I will be happy to open it up for questions.

[Operator Instructions]. Our first question today comes from Tim Hayes with B. Riley FBR. Please go ahead.

Hey Larry. Good afternoon here.

Hi, how are you?

Good. Doing well, thank you. Can you just talk about your kind of the -- how the strategy differed between the new JVs you have entered into, and how you view executing on new JV versus on balance sheet investment? And then just, how you plan to allocate investment between all these vehicles?

Sure. Depending on the JV itself and what loans are identified, our JV partners -- some have different yield goals or different performance goals, or they are looking for loans with different pay histories than we might be, and in some cases, we will take a much smaller share and in some cases, we will take a larger share of JV. One of the reasons why it was so important for us to make an investment in the servicer and have warrants, even more importantly, than just the investment, but have warrants on the servicer, is because these JVs also can have a material impact on the valuation of the servicer itself, and because clearly, from the JVs, these institutional investors see our servicer as a real performance brand in servicing land. And in fact, the servicer has delivered those results to them. So the JV has provided us the ability to see more loans. I mean, in some cases, some of these institutions will see a portfolio that we don't see, and will bring it to us. So that we can do the analysis for them, to help them understand what we think will happen with the loans. So it helps us see loans that we don't see before. It helps us -- have the servicer have more access to servicing loans for these institutions, and we and all these JVs get to choose how much equity we wanted to put into each one. It's not preset. For example, in the 2018-A transaction, we had two institutional institutions, name brands in that transaction, and we only retained a 9.5% interest. And in the December 1, we retained a [15%] [ph] equity interest, and in the June JV, the 2018-B, our expectation is it will be about 20% of that transaction. So it kind of gives us a benefit to have -- to decide how much we want to do ourselves. We are the operating partner. We are the ones with the rights to call the structures or to sell loans off the structures after two years, and we are also the ones who do the due diligence and negotiate the prices for everybody, and we also have our affiliated and captive servicer, who gets to manage these loans on a daily basis for us. So we get to know a lot about them. It also gives us the ability to have very cheap financing with 80% senior bonds, with low coupons and no step-ups for loans that we want to acquire. So it lowers our cost of funds, gives us more optionality as to what we want to buy, versus buy less of, and it also increases the value of the servicer that we own 8% and have warrants on another 12% at the same time. So we kind of -- it kind of helps us in three different ways, and in REIT land, everybody thinks that you are always going to raise capital, and what we find is that we can create significant multiple value on other pieces here. We own 20% of the manager. So it gets value. We own upside on 20% of the servicer. So it gets value, plus we get to pick and choose when we went and how much of our own balance sheet we want to use.

Yes. Thank you for all that. Makes a lot of sense. And on the subsequent event page, you show they are acquiring some NPLs and you talked about on the call a little bit. And it looks like it's going mostly to the JV, but do you see Ajax balance sheet taking on more NPLs, are you seeing better relative value there, or is it really just more in line with the strategy that your partner is looking for?

No. These NPLs, the one thing we liked about these NPLs that were different than most of the NPLs we see, is one, these NPLs were pretty far along in the process. And two, they had much higher average property value than we are used to seeing in NPL pools. We are used to seeing in NPL pools, properties that are worth under $150,000 and they tend to be similar to what you see in the HUD pools. And these pools are a much more Fannie Mae and Jumbo type loans. So better property values and further along in the process. So with our purchase price, we are able to buy them at a price where we have about $111,000 of discount. And NPL land is really kind of a fixed cost resolution business. So you want as much absolute dollar margin as you can have, not percentage margin. So 63% of $300,000 property is a lot cheaper than 50% on an $80,000 property, or $100,000. So we like the price to the property value, and we like the -- how far along they are in the process. We can decide how much we want in this pool, up to 50%, and my guess is that, we will choose to be 20% or 25%, just because I think that more loans will ultimately end up going into this pool, to the extent that we identify them prior to mid-July, because we will set this up with a pre-funding structure also, most likely.

Okay. Got it. Thank you.

And then, if you see the non-joint venture pending acquisitions, those are all RPLs, low purchase price, relative to property value with coupon in the mid-5s and high percentage California. So those RPLs really fit our existing portfolio almost as if you were just pasting it on top.

Right, right. Thanks for all that Larry. And then, one more for me; you talked about on your last call, potentially calling about 2016-A securitization, and just wondering if you are still thinking about doing that, then if you do, just kind of how much cash you think you could potentially pull out and the type of expense savings you could see there?

Sure. If we were to call that, we would pull out probably about $30 million to $40 million, and if we were to resecuritize it with some other loans, we could probably lower the direct funding costs on those assets by about three quarters of a percent.

Got it. That's really helpful. Thank you for taking my questions.

Sure. So it wouldn't be three quarters of a percent on the $30 million or $40 million. The $30 million or $40 million will be net cash. It would be on the face amount of the bond's rate.

Got it.

The next question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Hi. Good afternoon Larry. Following up a little bit on Tim's questions with regards to the loan pipeline as well as your comments, the call on seasonality; can you maybe talk about the pipeline, what you are seeing? I appreciate the color you gave on the NPLs, with regards to absolute dollars as opposed to percentage of property values a second ago. But you know, looks like for the quarter, you closed about roughly the amount you talked about in early March, as having done in January and February, subsequent events here. Really point more towards agreements in place to close loans here this month. So can you talk about the pipeline, and kind of how we should think about the portfolio building or investments being closed, as we move to the remainder of the year?

Sure. Second quarter and fourth quarter tend to be the two busy quarters. You usually start seeing the Q2 loans in mid-March. A lot of banks have June 30 regulatory capital dates, and we find that a lot of funds like to get some liquidity at June 30 as well, for whatever reasons they have. There is others that in June 30 under contract date, so second quarter closings tend to roll in to -- at the latest, mid-July, maybe call it the 15th or 20th of July, and then, it gets slow again, obvious to end-September for closings. I would expect, that this 123 plus 18, so 141 -- the 18 should close in the next couple of weeks. The 123, our expectation is that it will be a second week of June closing, and that we will probably set up a pre-funding account to buy some other loans that we identify between now and the second week of June, that would close sometime between the second week of June, and the 15th of 20th of July. We were very close to adding on about $100 million of re-performing loans -- but couldn't come to an agreement, as of two hours ago. So I don't know, what will happen with those. But, at any point in time, we are probably looking at somewhere between 6 and 10 different loan pools that are anywhere between $0.5 million and some $100 million. So I would anticipate that there will be a number of pools, in addition to these, that will identify during the month of May, that would close in the second half of June or early July.

Great. That's helpful. And one smaller question to the other income line; looks like that doubled sequentially higher than the run rate. Is this at a new level that's appropriate, or can you talk about what went into that $1.5 million of other income this quarter?

Yeah. There is a -- let me just pull out the income statement real quick. So apples-to-apples. So one thing that happened to other income, as we added a number of fees paid based on loan modifications, which was a pretty material amount. Let me look, because I have some notes written exactly on that. We had some -- about $500,000 of REO gains. But keep in mind, the real state operating expense has $400,000 of REO impairment. So the net REO gain is $100,000, so you kind of have to net those two numbers. But you should see continued other income of REO gains become pretty regular, because we are getting to a point now where we are selling a lot of REO each quarter, and the impairment happens before. The other big thing, is that in the last quarter, you had deferred issuance costs of $900,000 from calling a securitization, which we didn't have. So that was something in the last quarter. So you didn't have $900,000 of expense related to that. The other thing is that HAMP fees, so the Home Affordable Modification Program. When you finally get borrowers to have paid 12 consecutive months on a loan mod, you are entitled to some fees, and you could see it from the performance of our portfolio, that we would expect to get more fees in the future also.

Great. Appreciate the color on that. Thank you very much.

Sure. In our yield models, we don't have any fee income. So that's all just gravy.

Okay. Fantastic.

The next question comes from Scott Valentin with Compass Point. Please go ahead.

Thanks for taking my question. Just with regard to -- two things, one on the overall margin, Larry, you pointed out cost of funds is coming down, as you refinance high cost debt. Yields are down because of duration extension, so that means cash use are up, but yields are down. Just wondering, going forward how to think about you getting excess cash flow. Is that more like it's reinvested in the business, obviously, but is there room now to maybe -- is it apprehensive for a buyback of stock, you are trading below book values, it makes sense to do that, given the JVs now are another avenue of kind of funding now, as you up on [indiscernible] the capital markets to grow. Just wondering how you think about the whole capital management strategy, in light of JVs that provide the capital flexibility and the higher cash flow you are seeing off the portfolio?

Sure. Kind of first thought would be, from our board's perceptive, is to find additional assets that we think are cheap and have good long term value. I think that, a number of our large shareholders tell us that they would prefer us not to really buy back stock, because it would decrease the market cap, and they would absolutely like the market cap to be a little bit bigger, and they think, if we were a little bit bigger in market cap, that it would trade at a better value. I can't prove whether that's true or not true, but that we fairly heard that from a number of our larger shareholders. To the extent the taxable income keeps -- stays up at these levels, obviously we'd have to increase the dividend relative to that taxable income. The other thing that our board -- given that they think we are going to have significant cash flow coming off the loans and available debt capacity on the structured credit side, on the securitized bond market, is they have us actually looking at -- are there other platforms that they think are -- on a cheap basis also, where we could look at those as asset acquisitions as well, rather than just individual loans. And so, they have a -- I feel bad for Mary and her group, because Mary Doyle, our CFO is here, because they have her running dozens of scenarios based on different assumptions for different kinds of investments. And so they are working hard. There is a lot of interesting opportunities out there, both on the individual loan side, the property side, the bridge financing side and commercial, the redevelopment side for providing financing and commercial, as well as, there are some asset based platforms that we could look at as well, where we understand the underlying assets. So it's not about -- I don't want you think, we are looking to be an operating company, but we do see that there is places that we can buy assets, not just from our current sources.

Okay. Fair enough. Then just, you brought up the taxable earnings, and for a while there, I think for the last I think 4Q and 3Q, taxable earnings were below GAAP, and now it's kind of flipped. Just wondering, it is GAAP tax timing, I understand that. But just wondering, how you think of taxable EPS going forward, because one of the concerns that people look at, is the optics of having taxable EPS below your dividend, just again, the trends you see in taxable EPS going forward?

Sure. Given the amount of cash flow we are having, taxable EPS mathematically has to go up over time. Just from the payoffs, think about every time there is a payoff, the discount becomes taxable EPS. The purchase discount becomes taxable EPS. Every time you foreclose on the loan, that foreclosure becomes a taxable event. One of the reasons why your taxable income was going down, was because we had less and less NPLs, so we had less and less foreclosures. I would expect that, as part of buying $215 million of non-performing loans, that you will have a little more early taxable income generation from those throughout the second half of 2018 and certainly, 2019, what you see from NPLs is taxable income tends to peak about 9 to about 21 months after the NPLs themselves are acquired. These NPLs are a little later staged than typical NPLs, so maybe that's 6 to 18 months, rather than 9 to 21 months. But time will tell on that. But just the sheer velocity of cash flow coming off our loans. At the end of the day, if you stop growing, when you have no loans left, tax and GAAP have to be the same. So tax has to grow considerably. That being said, if loans paid for 30 years and never miss a payment, tax is to contractual maturity and GAAP is to expected life. If you didn't expect them all to go to 30 years, you would have a lot of taxable income at the end and GAAP income a little earlier. But I don't think all of our loans are going to 30 years.

Okay. Then one final question; on the last call, I think I guess [indiscernible], the amount of work that Mary has to do. You guys review in 24 different scenarios under the new tax law, to figure out. Just wondering the progress on that, that process?

Yes. And the good news is, the board took those scenarios and they only gave her about seven more or eight more to do. So that's progress. But I think that, the Board will make a decision, I am expecting at the July board meeting. Theoretically, if they were to decide to ever not be a REIT, they would make that decision, they got to make that decision prior to filing the tax return, as opposed to on the day that you decide. That being said, a lot depends on some of the different scenarios they have asked to run, and the -- having a kind of a defensive ability, to the extent that tax law gets dramatically changed to a couple of years from now, which isn't a zero probability and you need to have, in place, the ability to re-REIT, if you ever were to do REIT. And that's pretty complicated, and don't know how easy that will be to figure out between now and July.

Okay. Thanks very much.

When you get into the complicated tax world, it requires spending a lot of time with our tax people at Deloitte, as well as mixing these different scenarios, as to -- if the tax law changed, what would be the changes that would be really bad and what would be the changes that would be okay. And just protecting yourself against any of that. So I think different Board members have different opinions. I don't think at this point, there is 100% unanimity on either side.

Okay. Thank you.

And our next question comes from Lazar Nikolic with JPL Advisors. Please go ahead.

Hi. Thanks for taking my call.

No worries at all. My pleasure.

I am an investor in Ajax. Is every call -- several consecutive conference calls, I don't know, several quarters ago, you went through this exercise, where you tried to estimate the NAV of the company, based on observable trading prices of subordinated bonds, that was actually comparable to your net assets. And if I remember correctly, you came up with the value of $18 plus per share. So given this number, I am a little bit puzzled, as to why you have issued shares at 14 handle [ph] per share in Q4 2017 to a single buyer. On the call, you had kind of made it seem like, aah, it wasn't a big deal, we did it, we didn't have to do it. I mean, this is more than 20% discount to your own NAV estimates, and from a shareholder standpoint, it's a little troubling, if we keep getting diluted at such huge discounts. So I would appreciate your thoughts on that.

Yeah. We issued out 5 million at about $14.60 in Q4, almost all of it to one buyer in a reverse enquiry. The board wanted to do it, because they looked at it as we did an add-on to the convert, and at the time, they did no convert, they wanted to do about a third of the add-on, also in equity. But so long as the combined exercise price of the convert, and the equity issued was approximately $15.35, which was the then book value. So they wanted the mix to be approximately book of where the convert was issued, because the convert was issued at a premium in August and the $5 million of equity. Absent that, they would not have issued the $5 million.

I see. So going forward, you don't foresee issuing equity anywhere near the current valuations, is that right?

No.

Okay.

If we did, I would be the buyer.

Yeah. But I mean, diluting the shareholder pool at large discounts is always a bad idea. Another question I have --

I do. Hang on one second, I agree with that, although I would say one thing, is that, it does depend what you do with the money. So for example, if someone said -- if we saw an opportunity that we thought we could make 40% a year on for three year or four years, we might be willing to issue little bit of equity to make that acquisition. But if someone said, if we saw an opportunity that we thought we are going to make 8% for four years, we wouldn't issue equity.

Right. But even though in this situation -- even in this situation, you could make 40%?

That's it. 40% on unlevered. Issuing a little bit of equity would actually be accretive to earnings, not necessarily dilutive, even if you were diluting book value, it would be accretive to earnings, and ultimately the book. Just like, if you issued equity at $18 and you invested it in cash, I would say, it would absolutely be dilutive.

Right. No I understand that. But I mean, there is a [indiscernible] capital, couldn't you sell the subordinate bonds and crystallize $18 a share NAV, and then we deploy that in 40% returns. [Indiscernible] issuing equity.

Yes. I 100% agree with that. Yes.

Okay. All right. Well thanks for your answers. I hope there won't be future dilutions of this kind of magnitude. Thank you.

Yes. I am a large holder too.

At this time, this will conclude the question-and-answer session for today. So let me turn the conference back over to Larry Mendelsohn for any closing remarks.

Thank you everybody for joining us on our conference call to go through first quarter of 2018. Second quarter is already very busy, and we are looking forward to early August, when we have our conference call for second quarter ending June 30. And we are around, if anybody has particular questions, we are happy to answer.

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