Good day, and welcome to the Great Ajax Fourth Quarter 2019 and Year End Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Lawrence Mendelsohn, CEO. Please go ahead.

Thank you very much, and thank you, everybody for joining us for the Great Ajax fourth quarter 2019 conference call. Also, happy Super Tuesday to everybody. On Page 2, I just want to point out, before we get started, the safe harbor disclosure about some of the statements that we’ll be talking about. As an introduction, Q4 2019 was a very good net asset value building quarter. We bought loans from multiple sources, primarily closing in late December and we expanded our joint venture structures pretty significantly. We continued to approve the rates and terms of our asset-based financing enclosed, including closing our third rated long-term securitized bond structure and the first AAA rated structure for loans with all non-clean pay histories. The market value of our assets continues to increase and we will discuss further when we look at loan performance migration on this call and talk about a current market conditions. Intrinsic NAV grew significantly in the fourth quarter and it continues to grow even more so in the first quarter of 2020. And with that we'll jump to Page 3 and we'll do a brief overview and then get into the highlights of the quarter and year end. We continued to buy and privately negotiate transactions. We've made 297 transactions over our lifetime here at Great Ajax. We closed nine transactions in Q4 2019. Our sourcing network is very important to our ability to acquire the types of loans we want. Our sellers are more banks than ever before, originators and funds. We have seen an increase in selling from the larger banks as C-E-C-L. CECL has approached and is now in force and we expect later this year that will be the case with some of the smaller banks as well. We use our managers’ analytics…

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

My first question, I just want to touch on the trajectory of taxable income. You highlighted that you expect repayments to pick up given the move in rates and then, the REO held for sale portfolio continues to work its way down and the NPL portfolio is pretty small, so eventually you won't see as much net sales activity I guess there. Can you just maybe tie all that into the potential impact from today's fed cut and the impact that that might have on credit and cash flows and taxable income and when you really see taxable income starting to take off, especially as you do more JVs versus on balance sheet investments?

The taxable income is not that different from JVs versus actually owning the loans directly, because we still own the equity certificates in the joint ventures pro rata with our JV partners so we get our proportionate share. The big place for taxable income occurs is two places. One is just regular interest payments versus the cost of being in business and interest expense. And two, is capturing discount from our purchase price. If you look our tax basis purchase price is actually low -- our GAAP basis is 89 but our tax base is actually materially lower than 89 of UPB. So as a result, any acceleration of capture that discount generate significantly significant taxable income. Our tax GAAP difference is about 3.5 or 4 points. So on a 1.2 billion basis, call it, it's about 50 million, 60 million of tax GAAP difference right now. And that's largely because performing loans, you take tax in equal installments through contractual maturity. So on a 360 months loan, you take effectively one 360 each month where for GAAP purposes, you take it based on expected life of the loan you take GAAP income. So it creates a tax GAAP difference. Now, given where current interest rates are, we would expect given that the Fannie Mae par rate today is 2.56, we would expect a material amount of loan pre-payment occurring starting about 60 days from now, because of the time lag for loan originations and our weighted-average coupon on our performing loans is about 4.45%. The second thing I want to mention is that in 2019 forward, because we are building up this large tax gap difference, we working with Deloitte came up with a tax methodology where we can, from 2019 forward for loans acquired 2019 forward, closer match the tax and the GAAP on performing loans by creating the discount for tax purposes. It's not exactly identical for GAAP, but its closer and that will narrow the gap also as well as prepayment narrowing the gap. You know ultimately, tax and when a loan pays off tax and GAAP over the life of ownership, are identical. So that tax GAAP difference obviously closes at the time of payoff. Or if we were to sell a loan as well, which given we had a high percent of our portfolio is worth materially over par in this environment and probably since mid Q4, that's certainly something. Now REITs do have restrictions on limitations of what they can sell. So it's not like you just capture that all at once, but you capture some of it by selling some assets and some of it by making the interest rate spread materially bigger by refinancing existing facilities, and by the way less interest expense increases taxable income.

And I guess the one point of the question that maybe you could shed a little bit more light on is just the impact you expect the fed cut to have on cash flows…

So, there's two things that we can see from the fed cut, and we started getting based on some factors that we look at in our analytics and some of our long time investors’ owned businesses and the insights they provide. We started to see this kind of coming in mid to late fourth quarter, which is one of the reasons why we built up cash in the fourth quarter because we lined up plenty of liquidity for the first quarter and second quarter. If you look at the fed’s cut two things. One, you're clearly going to see based on the shape of the yield curve and where swap rates are and where new origination of mortgages are. I mean, you can get -- I got four emails today offering me 10 one arms at 2.7% IO. So, as a result you're going to see significant amount of prepayment get generated on a lag to today's markets and even more strangely, loans that were done several years ago call it three, four years ago when 30 year mortgage rates were 3.5% fixed and everybody was presumed to be completely immobile and to never refinance those loans now they can refinance those loans in the current market because the Fannie Mae par rate is now 256 versus the 350 that they're in. So we expect that we'll see significant prepayment as a result of where the curve is. And if you look at the euro dollar curve in four and three month LIBOR rates, you would expect that absent and material change in credit spreads on mortgages, you'll see rates even lower maybe in June than they are now, which would even accelerate prepayment into the summer. Number two however is the part that the leverage loan and how you…

Got it, that's helpful a lot of detail there. And so just putting that all together, how do you think about your dividend here, given the trajectory of taxable income that you've kind of led out despite GAAP earnings not covering the dividend this quarter?

Well, the reality is over time we're not going to have a choice the dividend is going to go up, because we have $50 million to $60 million GAAP tax difference, and the intrinsic value would suggest that that gets matched up overtime. Whether that's driven by prepayment sales, combination of both or re-defaults, that I would predict all three. But what the relative amount versus right now that is a little hard to determine and takes a little more kind of this cycle to figure out. But I don't think there is -- I think our Board's pretty comfortable with this kind to be in the floor on the dividend as opposed to being the ceiling on the dividend.

And then, I'll ask one more and get back in the queue, but can you just touch on the recent market volatility, you mentioned that the pipelines being bolstered by CECL going into effect, but are you seeing any impact on your pipeline from the recent volatility? Are you seeing more cautious or forced selling? And are you able to get assets and more attractive yields?

We're seeing a couple of different things, some driven by CECL because the smaller bank is not as big deal yet because it’s not as enforceable as traditionally the larger banks. But we'll see it from both smaller banks later this year. From the bigger banks, the bigger banks have been large sellers for about a year now and they continue to be large sellers and CECL is one of the two reasons. The other is in a very flat curve environment, the larger banks use selling some of these loans where they recapture reserves and capital ratios and they can manage earnings. If you sell a big enough pool -- big enough number of loans, you can manage earning by 0.5% or 1% for the larger banks in any quarter. So we're clearly seeing that also in what the larger banks are selling and they're selling specific kinds of pools coming from that. Number two, we're seeing a couple of different reactions from the marketplace on the loan buying side. We see some buyers, especially very, very, very large funds who raised a lot of money as almost panic buyers and the price is merely just an arbitrage to where they think they can get rating agency enhancement levels as opposed to what's the value of the loans. And as a result, they're just playing a spread game as opposed to a value game. On the other side, we've seen a lot less total buyers as most people don't have the cost of funds to someone like we have or the analytics or the relationships for that matter of being able to negotiate loans in smaller pools and in subsets and direct transactions with institutional sellers, whether they’d be banks and funds. So we're seeing a little bit of both. We're seeing kind of panic selling or panic buying from people who are afraid they're going to miss out and we're seeing which by the way if you're long loans you'd like that, like we are at big discounts. But on the flip side, we're seeing those buyers very focused on pools of $100 million and larger and we see almost no one paying attention to pools that are kind of call it 40 million, 30 million and smaller anymore. Over the last three or four years, the smaller buyers has really gone away.

Got it. Okay, great. Well, thanks again for taking my questions.

Our next question Stephen Laws with Raymond James.

Great, couple questions kind of thinking about leverage, I guess two things going on. One, you mentioned better performing loans so that would warrant increasing the leverage behind that. But I believe the JV investments you're taking the securities and that's not consolidated on your balance sheet, so certainly lower leverage associated with that. So how do we think about those things trending? Are we in a good spot currently and we're just going to see a little bit of a shift in mix here? Or kind of how do we think about capital allocation across those two strategies going forward?

Sure. I think the JV allocations will increase faster than direct loans will and part of that is demand for JVs. Part of that is by owning 20% of the manager and servicer we pick up additional revenue in other ways from our equity investments in those entities in the JV structures. The other piece though is both in JVs and loans our JV are structured in securitization structure so we can take those securities and we can bundle them and securitize them or we can individually finance each security. And the cost of that financing has come down dramatically as both LIBOR has come down and as we've created new securities financing facilities, and in rated securitization land with swap rates where they are kind of at 0.8%, a new AAA bond deal will be right around two and change percent which is 70 or 80 basis points lower than where it was three or four months ago. So we can continue to get with our cost basis about 89% of UPB if we wanted to sell through single A we could probably get six or seven times leverage kind of in today's market sub 2.5%. And on a repurchase facility basis with LIBOR now down, three month LIBOR down to 115 or 120 you're going to see financing still the costs come down dramatically as well since LIBOR come from effectively down 40 or 50 basis points in the last three months so that over time and lenders for better or for worse are getting more aggressive. If you're, big bank right now, it's very hard to earn spread and there's been a lot of pressure put on to stand or repo facilities and both by lowering costs and increasing advance rates earn more spread at the banks and we're seeing that phenomenon as well. Now that being said, the mortgage industry goes in cycles that it never from, so we always like that opportunity set that it creates.

Sure. Well, I appreciate the color there, Larry and details. And second question I have this afternoon, the stock buyback you announced are authorized. How do you think about the current valuation versus what you view as intrinsic NAV that reflects the value for the service or the manager ownership and other things aren't reflected in a GAAP book value number? So how do you view the discount intrinsic NAV versus the opportunity for returns on new investments using that capital?

Sure. There’s a couple of different pieces. We actually used our ATM a little bit in Q4 when the stock was around 1,550, 1,560 and not out of necessity, we just could sense from seeing some of our – the commodity pieces we follow, some of the shipping pieces we follow and some of our long time investors who have industries across multiple continents, you could see that there was going to be something going on in the first quarter we didn't know it was going to be caused by a virus, but you could see that some of the things we follow were indicating that you want to have liquidity in the first quarter. So we use the ATM a little bit to create some liquidity to get ready for the first quarter as you can see from what we're buying at the end of March, a lot of people needed some liquidity in the first quarter. Now with the stock down based on what's going on in the market, we think that it makes sense to buy some stock in and we're also likely to buy some of our convert and given the cost of capital to the company, so much lower than where the convert currently trades. So we're also likely to buy some of the converts in in the open market as well.

Thanks for the comments there Larry. Take care.

This concludes our question-and-answer session. I would like to turn the conference back over to Lawrence Mendelsohn for any closing remarks.

Thank you everybody for joining us on Great Ajax fourth quarter 2019 and year-end 2019 conference call. We appreciate the time given Super Tuesday, a fed rate cut, a virus and all the other things going on in the world at this time. And if you have additional questions, feel free to reach out to all of us here. We always like talking about our business, and thanks. And have a good night.

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