Ladies and gentlemen, thank you for standing by, and welcome to the Great Ajax Corp First Quarter 2020 Earnings Call. [Operator instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lawrence Mendelsohn, CEO. Thank you. Please go ahead.

Thank you very much. Thank you, everybody, for joining us on our first quarter 2020 earnings conference call. I want to point you to, on Page 2, the Safe Harbor disclosure and discussion of forward-looking statements. And with that, we can move on to Page 3 and the business overview. Before I get into too much of the presentation, I want to do a brief introduction. First quarter of 2020 was a noisy one, predominantly because of the fixed income market conditions and the economic environment in the month of March. January and February were good net asset value-building months. In March, we navigated through the volatility, closed on joint venture loan investments that were purchased through a pre-funded securitization structure, and set ourselves up for Q2 and beyond. And we'll discuss more about this later on the call. One thing I do want to add, though, is volatile environments like this that we've seen in the last few months really show how important it is and how strategic it is in having our directly aligned operating and loan servicing platform. And with that, I'll jump into Page 3. Our manager strength in analyzing loan characteristics and market metrics for reperformance probabilities and the pathways and its ability to source these mortgage loans in target locations through privately negotiated transactions really enables us to accumulate loans that we want in places that we want them. We've acquired loans in over 300 transactions since 2014. Additionally, we believe having an affiliated servicer provides a strategic advantage in non-performing and non-regular paying loan resolution processes and the timelines. In today's volatile environment, having our portfolio teams and our analytics group at the manager work closely with the servicer is essential to aim to maximize returns and NAV for each asset, loan-by-loan, property-by-property.…

[Operator Instructions] Your first question comes from Tim Hayes with B. Riley FBR. Your line is open.

Hi, Larry. This is actually Mike on for Tim. So my first question: have you seen any impact on RPL or NPL supply, given the spike in forbearances and the impacts CECL is having on the banks? Just wondering if you're able to acquire any assets at more attractive yields than you were, I guess, in the fourth quarter.

The answer is yes, yes, and yes. We're clearly seeing a lot of supply of loans right now. A big chunk of that - it's not come from the banks yet, but it will - a big chunk of it has come from people as it relates to margin calls, and we're seeing it from dealers who've been asked to find buyers for loans. Number two, we're seeing it from a lot of originators, particularly in non-QM business purpose and fix-and-flip flip markets who are having warehouse lender issues. They tend to be smaller pools. I would call them, on average, between $10 million and $40 million, the ones from originators. And we expect that, after this June 30th, we will start to see a lot more coming from banks, and especially prior to 12/31. For smaller banks, CECL has been delayed, and we anticipate that the smaller banks really won't get going on selling some loans until later in the year. And we also expect, on our community bank front, and we'll see a lot of smaller commercial mortgages come out later in the year as well.

Thank you. That's very helpful. And kind of just given the deterioration in residential credit, the expectations for that, what's the sentiment toward - or demand like from your JV partners? Has it improved or how has it changed since February, the first half of March? Are they cautious or has the volatility created opportunities?

Sure. I would say from March 5th - or about March 25th to about April 15th, it was in suspended animation. Since about April 15th or 20th, it is go find me as many loans as you can find. So very different. There's like a 20- or 25-day period where there was just structure illiquidity, and I think a lot of people saw that at the end of March and the beginning of April especially, so the last 10 days of March and the first 10 or - days of April. Now, there seems to be a fair amount of inflow into fixed income land, and we've had - a number of our JV partners ask us to find loans and create structures.

Thank you. That's helpful. And just one more from me, so subsequent to quarter-end, you did the $80 million private placement. I'm just curious how much of this capital has been deployed? And then, as a follow-up to that, is the dividend set at a level that reflects earnings power as you redeploy proceeds from the preferred offering?

The dividend - well, I'll answer the dividend question first. The dividend question is - it's set based on an expectation of kind of taxable income, assuming only a small amount of the money is put to work. That being said, taxable income in an environment like this is pretty hard to predict. We don't want to bet on putting all the money to work. One of the things that I'm hoping that a lot of people learned in the last 10 days of march and the first 10 days of April is that there's a lot of volatility that can happen in a short period of time, and as a result, we want to be patient in putting capital out to work because we - until we know whether this is the second inning, the fourth inning, or the sixth inning.

Got you. That's helpful. And then any idea just how much of that capital has been deployed?

Only a small amount thus far.

Our next question comes from Kevin Barker with Piper Sandler. Your line is open.

Thank you. Good evening. Good afternoon. Just a follow up on some of his comments about being patient and put capital to work. I mean, do you feel like the market has come back too quickly, just given spread tightening that we saw and where the underlying credit would justify some of those prices?

I think in certain subsegments of the market, it's come back. I mean, some of it - I mean, we're nowhere near where we were, say, in February, but it is improved to some extent since late March, I would say, by maybe a third of where it got to in late March. That being said, we - I think there's still potentially significant volatility in markets, and that we don't want to jump in and say this is the time where you should be getting in, all in, and taking the risk that there's not going to be another time. We think that there's a whole bunch of different opportunities that can present themselves in different seller types who, for regulatory reasons or liquidity reasons, over time they'll have differing circumstances. And in Banking Land, community banks and the larger banks will also have different time periods in what they're trying to accomplish, or need to accomplish, based on regulatory frameworks and economics. Originators, same thing, but we've seen less - other than in what the Fed is buying, and we've seen less dramatic recovery for most things. That being said, senior bonds have come back significantly.

Right. And then, just to follow up on your comments about prepay speeds picking up and then slowing down, and then you're not sure what's going to happen there. I mean, maybe could you pick up in prepay speed actually be a good thing in the near-term as it increases your cash, and it allows you to eventually put that cash to work at more attractive yields maybe in the later of the year when you start to see more product be put to work. So maybe in the near-term, you put the cash to work in joint ventures where there is liquidity, and then put more on the balance sheet later in the year, just given the pickup in prepay speeds?

Yes, I think that's right. We do expect that prepay speeds will increase pretty materially, given where mortgage rates are and given, so far, the stability. In fact, home prices on average are probably up a little bit in the last few months rather than down. So we do think prepayment speeds, those will pick up materially. Our California speeds really haven't changed much. They haven't had the decline like some other states have but we anticipate they'll pick up. Also, we buy loans at discount, so prepay speeds actually raise yields pretty significantly and raise taxable income for us, as well as giving you cash to put to work and paying down these securitizations that you can call and issue a new securitization, effectively refinance as well. And that would correspond to kind of what we think is you really have to have what I'll call a 18-month to three-year mentality in this environment versus the quarter-to-quarter mentality.

Okay. Okay. And then, given what you're seeing in some of the respective markets that you mentioned, would you expect recovery values on deposit loans be fairly resilient or are you fully expecting some significant declines of recovery values, just given the economic softness we're seeing out there?

So, in the reserve we took, we built in some economic decline in the recovery values. That being said, we've not seen it in actuality in any material aspect thus far. We've actually seen, to some extent, the opposite in terms of the liquidity in homes as well as increase in prices. What we have built in that reserve reflects an assumption of a little more delinquency and some home price decline in - related to loans that go delinquent. So that being said, we've not necessarily seen it in actual outcomes yet.

Okay. And then, obviously, you're acting almost like a special servicer on a large portion of your loans. Have you - how have deferrals, or maybe forbearance, have changed from where your baseline was and where it is now?

Well, it's interesting, because we bought these loans, on average, where only 13% of them had made 12 consecutive payments. And we got it up to 76%, and it's 74% now. And so, I would say we probably didn't expect it to get to 76% when we bought them with only 13% 12 for 12. So far, the requests for forbearance have been less than we would have anticipated, and certainly less than what the HSEs have seen and what - the numbers we've seen in the press. And I think that in total forbearances so far, it's been a relatively limited number. I would say total for forbearances so far are about less than 5% of our portfolio. And actually - yes, total forbearances so far are less than 5%. And even then, only 2% have actually not paid during that period. So, we would anticipate that number will now increase, and we've built that into the model and to the reserves. But that being said, we've been, I want to say, a little bit pleasantly surprised that it's more muted than we anticipated. And so, the one thing I will also add is, and this is a little disappointing, is that 5% to 10% of the calls we're getting requesting forbearance, the people, in fact, have not been affected, and they're just not - wanting to not pay. So part of the special servicers are making that delineation as well.

So how does the 5% compare to your baseline typical forbearance rate?

We built in that that 76% number will decline by about 25%.

There are no further questions at this time. I'll now turn the call back over to management for closing remarks.

Thank you, everybody, for joining our March 31, 2020 first quarter earnings conference call. I appreciate calling in and the questions. Feel free to reach out to us if you have additional questions over time, and we're always happy to talk more about our business. And with that, everybody stay healthy and we'll talk to you over time.

This concludes today's conference call. You may now disconnect.