Earnings Labs

Rithm Property Trust Inc. (RPT)

Q4 2018 Earnings Call· Fri, Feb 22, 2019

$14.23

-1.52%

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Transcript

Operator

Operator

Good day everyone and welcome to the Great Ajax Corp Fourth Quarter and Year-End 2018 Financial Results Conference Call. All participants will be listen only mode. [Operator Instructions] Please note that today's event is being recorded. I would now like to turn the conference over to Lawrence Mendelsohn, CEO. Please go ahead.

Lawrence Mendelsohn

Analyst

Thank you very much. Thank you everybody for making the time to join our Great Ajax's fourth quarter and year-end 2018 conference call. I want to have everybody to a quick look at Page 2, our forward-looking statements disclosures and with that we can move on into the presentation. Before I get to on Page 3, I just want give you a brief introduction. Overall, we had a very successful net asset value and intrinsic value building quarter in many facets of our business and our investment as well. We've bought loans at good prices and good price to collateral values, while at the same time expanding our seller base. We added nearly 600 million in co-investment joint ventures with the credited institutional partners. We close three securitizations with good pre-arranged executions, both in cost of funds and advance rates, and these are completed despite the large pick-up and structured credit markets in November and December. The joint ventures also have more value effect than just income. We own a significant percentage of our servicer and our servicer's value increases materially from servicing loans for these joint ventures. Other than noise from interest expense on prefunded debt for our December acquisitions to lock in low cost of funds, uncertainty, and our typical expected ROE or impairments as required by GAAP and the little bit of noise from few loans in our 2014 NPL acquisitions, all of which I'll discuss during this call. The quarter was all positive and this continues to be the case in first quarter of 2019 as well. And with that, let's jump right into Page 3. Our loan sourcing network is really, really, really important, I can understate it to our ability to acquire the types of loans we want and that the prices that we…

Operator

Operator

And we will now begin the question-and-answer session. [Operator Instructions] And today's questioner will be Timothy Hayes with B. Riley FBR. Please go ahead.

Timothy Hayes

Analyst

My first question. Can you just comment on the pace of JVs going forward? You touched on 1Q so far, but just in your normal going forward. And can you also touch on where the supply of loans is coming from?

Lawrence Mendelsohn

Analyst

Sure. The supply of loans is coming from -- might be a question to first. The supply is coming from three different places. Number one is banks and banks operate out in two different reasons. One is large banks who still have significant RPLs on their balance sheet 10 years later, and who see that home price depreciation has allowed them to be able to sell loans and recover the reserves they took many years ago. They don't get back pars but they are able to recapture reserves and get yield out best. And the other source is from banks is the consolidation you're seeing in the banking sector almost every merger has target bank as they target not that buying banks, acquiring banks that wants target bank to take certain assets off their balance sheet as part of sale. And as a result, we are out to take a look at those and our target bank portfolios to provide liquidity around acquisition closing. The buying bank when it acquires the target bank effectively gets to take a one-time charge and they can put any losses that selling banks the target bank has from selling those into that one time frame. So, those are the kind of the bank reasons. We've been told by the banks obviously consolidation is continuing at a pretty rapid pace. So, we've been told by the larger banks as well that they expect to be extremely large sellers at least for another 18 months, so that will be a significant amount of supply. Number two is originators. We buy a fair amount of chunks -- not in $100 million slugs, but in smaller slugs what I'll call agency kick out where borrower A got a Fannie Mae loan within the 30-day period were originator was…

Timothy Hayes

Analyst

And I'm going to keep building off of, of that last part there. Of the three, just three JVs this quarter, were those across three different separate institutional partners? Were they all the same partners? And can you maybe talk about how many partners you currently have and the amount of potential partner you are talking to today?

Lawrence Mendelsohn

Analyst

We have four partners that we've already done transactions with. All the ones in December were with the one partner, and but we've had four that we've done transactions with, and we have two others who have reached out to us and we have made -- that we have also made large pool of bids both with the agencies and some large banks as well.

Timothy Hayes

Analyst

And so I assume that the loans you've agreed to acquire so far in the first quarter that you just mentioned and identify that would be acquired to JV or all going towards new JVs and not any of the existing one?

Lawrence Mendelsohn

Analyst

The small balance commercial loans and properties are all our own the -- if you see acquisitions close, the 8.5 million of RPLs are not in the JV the small balance commercial loans are not in JV and acquisitions under contract. If you see the 299 million of RTLs about 35 plus about 270 of those are in joint ventures and about 30 or not and in NPLs all of the NPL or one transaction as a joint venture.

Timothy Hayes

Analyst

And then you talked about the performance of the loans and it sounds like your expectations for cash flow are continue increasing despite the seasonal headwinds in the fourth quarter and other blips there. How do you see…

Lawrence Mendelsohn

Analyst

It's really in October and November cash flow pay-offs were the same, it's really just pay-offs slowdown in December and that happens every year. And I guess people are buying gifts rather than paying up their mortgage.

Timothy Hayes

Analyst

I guess that works for some. But how do you -- my question there is, how do you see the dividend is trending in 2019? And how do you think about dividend coverage? Because it seems like you would have been well within the re-requirements without the special this year, but you paid it anyway and so as you goal to pay out near 100% of taxable income?

Lawrence Mendelsohn

Analyst

I think we would expect the taxable income to increase over the course of the year and to be probably ahead of last year's taxable income, particularly given where the value is on some of these loans. I would imagine that sometime in 2019 similarly to 2018, we will sell some loans or at least look at buying some loans. If you remember we sold about 90 million of loans in September of 2018 and had about a $5.5 million gain of which taxable was a million -- or about 2.5 million of it. And I would anticipate that we will look at selling loans again, probably not Q1 but during 2019 is when we look at the migration chart 24, 24 NBA current loans are basically part of loans in today's world, and we would look at selling some side-by-side to doing greater transactions and funding and cheaply with that over long time and kind of do a comparison.

Operator

Operator

[Operator Instructions] And our next questioner today will be Steven Delaney with JMP Securities. Please go ahead.

Steven Delaney

Analyst

I wanted to ask you about the small balance properties. I know it's in the lot of dollars, but obviously it's kind of ties in definitely with the small balance lending as well in terms of your valuation analysis. Just before you brought in the fourth quarter and the three that you're looking at, and it appears there sort of in the $2 million to maybe $3 million price range. But could you talk about the property types I mean are they mostly multifamily? And if you're buying these, what kind of occupancy situation and are you having to get in and put some cap improvement in and then lease or you're buying things that have leases in place?

Lawrence Mendelsohn

Analyst

Sure. It's very much like our small balance commercial loan strategy similar locations about 6 or 8 markets very urban with the, what I'll call it 4 to 10 year horizon, not what's the neighborhood that is changing right now, but what's the next neighborhood to emerge. So I think for people in New York think of Bedford-Stuyvesant 12 years ago rather than Bedford-Stuyvesant 3 years ago or 4 years ago.

Steven Delaney

Analyst

Right.

Lawrence Mendelsohn

Analyst

So, we are looking for those neighborhoods and space on the bunch of analytics we run, based jobs growth and demographics and age and things like that. The typical properties either going to be a small multifamily somewhere between 8 and 4 years, depending on the market, in some places 40 units is 3 million or 2 million, in some places 40 units is 5 million in some places 40 units is 25 million, right. But for us, it's they are going to be 30 to 40 units. I would say most of them are probably less than 25 units. $We are buying them substantially least with what we would consider to be below market lease but also properties that have need a little bit of love but not a lot of love is the way I would describe them that they're really location driven and it's a kind of what I'll call an alpha investment based on location as opposed to just straight income today.

Steven Delaney

Analyst

And what kind of target cash on cash return do you have when you look at as that kind of property?

Lawrence Mendelsohn

Analyst

Depending on what it is and how tenant dependent on it is. We buy them anywhere between the 5 and an 8 cap.

Steven Delaney

Analyst

Got it, it's a cap rate. Okay, and thanks for the comments, Larry.

Lawrence Mendelsohn

Analyst

Some of it depends on what we think the upside to the property is versus on a relative comparison basis, and this is some of…

Operator

Operator

And our next questioner today will be Kevin Barker with Piper Jaffray. Please go ahead.

Peter Stettler

Analyst

It's actually Peter Stettler on for Kevin. A lot of my questions have been answered but just maybe a two quick ones. As it relates with the February securitization debt sales, I was wondering what your net exposure to those securities are following the sales?

Lawrence Mendelsohn

Analyst

Say, it again I'm sorry.

Peter Stettler

Analyst

So, on the debt securities -- selling debt securities…

Lawrence Mendelsohn

Analyst

Yes, the debt securities we sold in February?

Peter Stettler

Analyst

Right, I was just curious about what the net exposure to those securities are following the sale?

Lawrence Mendelsohn

Analyst

Sure. So, we in our 2000 -- one of the things about our joint ventures as we create three classes of bonds, we create our joint ventures and what I'll call in ABC structure where the A is just a senior bonds, the B and C are stapled together. The B is a mezz with an outside coupon. We've put a 5 in quarter coupon on the B and the C is the equity certificate. And in, we as the risk retainer in the JV are always required to hold at least 5% of all three classes. But for example, in our 2018 E&F transactions, we kept 20% but then in early February, we sold 15% of our class A bonds in those two securitizations prior at a cost to look at a premium for the insurance price. So, as a result, they actually selling them lower to the cost of funding to us, but they are just as if definitely issued basically senior bonds like selling them rather than holding them. So, there is no -- there will be no difference and if we just sold them in the first place and as issued as opposed to kept 20% and then sold them later. One of the ways we've structured the JVs is, we and our institutional partners can do anything we want with the class As. We want to go sell and we can, if we want to borrow against we can. But the class B and Cs, we have a right of first refusal on the institutional partners bonds, if they ever want to sell.

Peter Stettler

Analyst

Got it. That's helpful.

Lawrence Mendelsohn

Analyst

And we retained all of the call rates of the bonds without solely.

Peter Stettler

Analyst

And then, are you able to quantify the potential incentive fee that the manager could earn, if I think if the returns exceed I think if 8%?

Lawrence Mendelsohn

Analyst

The answer is, yes. It's not particularly material. It's probably but right now it's perhaps earned somewhere between $100,000 and $130,000.

Operator

Operator

[Operator Instructions] And there looks to be no further questions, so this will conclude our question-and-answer session. I would now like to turn the conference back over to Lawrence Mendelsohn for any closing remarks.

Lawrence Mendelsohn

Analyst

Great, thank you. Thanks to everybody for joining us on our fourth quarter and year-end 2018 conference call. Feel free to reach out to us, if you have any additional questions over the coming days or weeks, and we're always happy to talk about Great Ajax and the manager and servicers' relationship and expertise, and I hope everybody has a good day and will talk to you soon. Take care.

Operator

Operator

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