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.…

[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…

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.