Good day, and welcome to the Great Ajax Second Quarter 2019 Financial Results Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Lawrence Mendelsohn, Chief Executive Officer. Please go ahead.

Thank you very much, and thank you, everybody, for joining for the Great Ajax second quarter conference call. I want to do a quick reference to Page 2, the safe harbor disclosure and forward-looking statements. And with that, we can jump right in. A quick prelude, Q2 2019 was another very good quarter. We bought loans from multiple sources at very good prices, sold approximately $200 million of primarily non-clean-pay loans into a joint venture with good institutional partners at good prices. And we continued to improve the rates in terms of our asset-based financing. The market value of our assets continues to increase, and we believe net asset value and intrinsic value grew materially in Q2 2019 and has continued to grow in Q3 2019. One of the core pieces of our business is the sourcing of product. We've made 284 acquisitions since inception of Great Ajax, and we closed 11 transactions in the second quarter. Our loan sourcing network is very important to our ability to acquire the types of loans we want at the prices we want. Our sellers are banks, originators and funds. You can definitely see this in the prices we paid for our loans in Q2 of 2019. And all of the 11 transactions in this quarter, in quarter 2, were private transactions. None of them were public auction transactions. We use our manager's proprietary analytics to price each mortgage pool on a loan-by-loan, asset-by-asset basis. We analyze a large amount of data to determine target loan characteristics to develop pattern recognition algorithms for pricing and servicing loans. Third parties and JV partners rely on our managers' analytics and oversight as a service. We own 20% of the equity of our manager at zero basis. As a result, its value does not show up…

[Operator Instructions] Our first question today will come from Tim Hayes with B. Riley FBR.

Larry, a couple of questions here. My first one, you pointed out that taxable income is running well ahead of the quarterly dividend run rate so far in the first half of the year. I know there are a lot of moving parts that drive taxable income. But at this rate, do you expect you'll have to pay out more than the $0.32 run rate suggests? And would you be more inclined to raise the quarterly dividend, pay a onetime dividend or maybe pay periodic supplementals or some kind of combination of those if you were to pay out more than what you're running at right now?

Sure. I think our Board is predisposed to probably increasing quarterly versus special. Some depends -- some of that depends on what the continuing market environment looks like. Clearly, in the last 2 months, we've seen an increase in prepayment. You'll see, from just the rally in probably the last week or 2, 60 days from now an additional prepayment ramp-up. And so as a result, I think our Board, the only reason they didn't increase the dividend this quarter is they just want to see how the chaos in the world plays out for another month or 2.

Okay. Okay. Understood. And then, obviously, the loan sales were driving taxable income this quarter. How do you see the pace of additional loan sales playing out over the rest of the year or maybe in 2020? Was this just a one-off opportunity to maybe capitalize on a good opportunity? Or do you foresee additional loan sales supplementing investment and generating more taxable income in the coming quarters?

Sure. Probably both loan sales, perhaps not the number of loans. In this particular sale, it was primarily non-clean-pay loans, and a substantial part of our remaining -- portion of our remaining loans are clean-pay 12 for 12 loans, which actually have materially higher value. As you can see from our rated securitization, we decided with this $200 million of clean-pay loans, we looked at selling it, and we decided to securitize it instead and capture $2 million to $2.5 million less funding cost per year on those loans versus just selling it outright. And then if we had sold those loans, realistically, we have been forced to pay a very large special dividend. The -- selling the non-clean-pay loans, these were all loans that we had owned for at least two years, in some cases, four or five years, and we were not able, for the most part, to get them to be clean pay. And as a result, we didn't see the intrinsic value. It was going to jump 10 points from a non-clean pay. But relative to our basis, we still had substantial built-in gain. And we decided to sell it to a JV, and we, post sale, have owned one third of the joint venture. So it was a sale where we got good prices and where we also still have -- still own one third of the upside.

Got it. Okay. That makes sense.

Yes.

And then you've acquired -- or agreed to acquire a very small amount of RPLs so far in the third quarter. But I believe this is the first time I've seen -- or maybe I just don't remember, but first time I've seen you acquire RPLs at a premium to UPB. Just given your size and your relationships and your ability to enter into these privately negotiated transactions, you've always been able to buy RPLs at a discount. Has competition led you to -- is it a function of that? Or are these just really clean loans? Or either way, what's the thinking behind this?

Well, our purchase price -- for our Q3 acquisitions, our purchase price is 92.7% of UPB.

I must have misread something there.

Yes. So we have $163 million UPB, 92.7% purchase price, underlying collateral value of $273 million, so the purchase price is about 92.7% of UPB and about 55% on collateral value for our Q3 acquisitions. Again, this is another -- this group of transaction is privately negotiated and is about 55% California loans.

Okay. Yes, sorry about that. I must have picked up a wrong data point there but -- okay.

Sure.

And just one more from me, and then I'll hop out. But can you just give us some of the characteristics around the 6 properties acquired in the third quarter? I'm assuming they're all multifamily, but what level of transition, which geographies are they in or adjacent to qualified opportunity zones? And then any comments around what you expect stabilized value of those properties to be relative to your purchase price would be appreciated?

Sure. Sure. They are in Dallas, Boston, one in Saint Paul, Minnesota. They are the -- at purchase price, depending on which one, three of them are approximately 8 cap purchase price, and the other two are approximately 6 to 6.5 cap purchase price. The three that are eight cap, we will clip coupons for a while and get good financing. And it's a credit tenant. For the 2 multifamily, the one in -- the two multifamily, they are -- probably we'll do some repositioning not on day 1 but probably sometime a year or two in. And we think that, over time, they will be closer to 12 cap on cost versus a 6.25 to 6.5 cap on costs. So they're kind of long-term investments, three which provide significant income production -- I guess 4 that will provide significant income production and two which will provide some income production plus some benefit from repositioning over time. So we're pretty excited. None are in opportunity zones. One, however, is pretty much adjacent to an opportunity zone. One of the things we found is prices in opportunity zones have gone up pretty materially just because they're in the zones. And we found that small multifamily near opportunity zones, the people who live in the apartments don't care if they're in the opportunity zone. Only the owner does. And as a result, the adjacent to the opportunity zones, the rents increase in value as the opportunity zone actually gets developed.

Right. Right. No, I know that's the theme that we've -- or you've kind of talked about in the past. So just wanted to see if that was still the case. But I'm going to hop back in the queue.

Sure.

Our next question will come from Kevin Barker with Piper Jaffray.

You said -- what was the total taxable income for the first 6 months? Because I believe you said $0.86. Would that be right?

Yes, $0.86 for the first 6 months.

And then I had what -- well, in the first quarter, I had $0.23, and then you had $0.75 in the second quarter, so I must be getting that wrong, right? So -- okay. So $0.86, all right. And then...

Yes. So taxable income for the first 6 months is $0.86. So $0.11 in Q1 and $0.75 in Q2.

Got it. Okay. Clear about that. And then in regards to the net interest income and the cadence going forward, given the sale of the portfolio and then the moving parts, the $1.8 million that you talked about earlier, how do you think about getting back to the first quarter run rate given the portfolio sale and then the acquisitions you made so far going into the third quarter?

Sure. A couple of things. One, financing costs have come down pretty materially so far in Q3 just because of, if nothing else, the 40 basis point reduction in LIBOR plus 120 basis points on the loans in our 2019-D securitization. We also acquired $90 million of loans on the last business day in the month of June, so we didn't really get much benefit -- income benefit from it that we'll get in the second quarter. So the combination, my kind of prelim guess is it looks pretty good. The other thing that's happening is prepayment, as you might imagine, is coming in faster than we would have anticipated given what's going on in the interest rate market, which means we capture discount faster than we would have modeled when we bought the loans.

So we're going to see a little bit faster gains coming off. So when you look at...

Yes. Well, we'll see the prepayment generates some taxable income, but it also causes a shorter expected life. So you take the discount to a shorter expected life as a result.

Right. Right. Okay. So are you expecting...

So we would expect duration short -- we would expect duration to shorten on the loan side of the portfolio while, at the same time, the funding cost of the portfolio is going down.

Okay. I'm assuming you're letting these refinance away most of them, right? Or you...

Yes, yes. That's right. Yes.

All right. And then as far as leverage is concerned, I believe you mentioned to be a little more conservative given the current environment, or are you willing to bring down the leverage?

Leverage came down because of so much prepayment in the quarter as well as some of the sale proceeds of the loans paid down more than the allocated financing the pre-existed on those loans. The -- by choice. The securitization that we did in July 2019-D will increase leverage up a little bit. But as a whole, leverage is lower than it was in Q1.

Okay. And then just a bigger picture...

That is as you've seen that in the space.

Yes. You have fought between. So when you think about just bigger picture, there's been a lot of volatility in the market, right, a lot of uncertainty. And people are seeing housing slowing down and so forth. But when you look out, especially in your markets, in particular, what are you seeing within these properties and the bids for those properties and, just the overall, the pulse of the market within your markets today?

Sure. So you have to break down each market into deciles 1 through 10. And a decile 5 in New York is a different price range than a decile 5, say, in Indianapolis, right? What we're seeing is that deciles 4 through 6.5, 4 -- maybe even through 7, that market in our markets is pretty stable and probably still going up a little bit. And especially kind of what I'll call deciles 4 and 5, if you put a house on the market, it goes pretty quickly. Deciles 8, 9 and 10, especially 9 and 10 in 4 to 5 states have had a clear slowdown. And we've seen it probably most profoundly in New York, New Jersey, Connecticut and Illinois. We've seen it less in California than we anticipated, but most of what we own in California is in deciles 4, 5 and 6 for those markets, and we've seen that to be a very liquid market. And in fact, we see a lot of single family to rent buyers in that market in deciles 4 and 5 so -- which adds additional liquidity. The shrinkage in mortgage rates which causes monthly payment to be cheaper and certainly in deciles, call it, 1 through 5, 1 through 6, monthly payment matters a lot. The decline in mortgage rates is definitely going to provide more stability, assuming it doesn't correspond with a material increase in unemployment or something like that. The decline in mortgage rates will have a positive effect on the liquidity and stability in kind of deciles, call it, three through six in each of those markets as monthly payment comes down significantly. You'll see more people are able to qualify in a DTI basis because the payments are lower in number even though their income might be unchanged. So as long as there's no real hits to borrower income, we still think that kind of deciles 6.5 and under are pretty firm in our markets. Deciles 8, 9 and 10, we stay away from. And we think that we're not bullish on that.

Okay. And you mentioned the single-family REIT rental purchases.

Yes.

Are you seeing those as like going head to head as a competitor or more just like a stabilization of the market overall?

As a stabilization, it's interesting, every single foreclosure sale we've had in California in the last 2 months, the buyer for full credit bid on one of our loans -- on our loans that we foreclosed on has been a single-family rental buyer, every single one.

[Operator Instructions] At this time, there are no further questions in the question queue, and I would like to turn the conference back over to Lawrence Mendelsohn for any closing remarks.

Thank you very much for joining our Great Ajax second quarter earnings conference call. Feel free to reach out if you have questions, and have a great evening and the rest of the week. Thanks very much.

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