Rithm Property Trust Inc. (RPT) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Great Ajax Corp. Q4 2020 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, CEO, Mr. Lawrence Mendelsohn.

Thank you very much. Thank you everybody for joining the Great Ajax fourth quarter 2020 earnings call. Before we get started I just want to point out everybody on page two of the presentation the safe harbor disclosures and with that we can get going. I am going to do a quick introduction before we get to page 3. The fourth quarter of 2020 was a good quarter in a lot of ways. Our overall corporate cost of funds decreased by approximately 27 basis points and our asset base cost of funds decreased by even more than that and that's after decreasing nearly 50 basis points in Q3 and in Q1 so far it's continued to decrease even more. Our loan performance and cash flow velocity increased significantly which has continued into the first quarter as well. This increase in loan cash flow velocity led to an additional reversal of previous credit loss provisions. We continue to be in an offensive position. At December 31, 2020 we had approximately 107 million of cash and a significant amount of unencumbered bonds, unencumbered beneficial interests and unencumbered mortgage loans too. As of March 1, 2021 we have approximately 145 million of cash and still have unencumbered bonds, beneficial interests and mortgage loans. The significant cash balance does create a bit of an earnings drag and the significant cash flow velocity from our mortgage loans and mortgage JV structures reduces our loan and securities portfolio leverage. We are, however, well-equipped for volatility and the investment potential it creates and we have a number of opportunities in our pipeline that we're working on. And with that let's jump to page 3. It's really important to understand our manager's strength in analyzing loan characteristics and market metrics for re-performance and pathways and its ability to source these mortgage loans enables us to acquire loans that we believe have a material probability of long-term continuing re-performance. We've acquired loans in 326 different transactions since 2014 and 12 transactions in Q4 of 2020. Additionally, we believe having an affiliated servicer provides a strategic advantage in non-performing and non-regular paying loan resolution processes and timelines and a data feedback loop for our managers’ analytics. In today's volatile environment having our portfolio teams and analytics groups at the manager working closely with the servicer is essential to maximize performance probabilities loan by loan by loan. We've certainly seen the benefit of this in Q3 and Q4 of 2020 with a significant increase in loan cash flow velocity and credit performance despite all the pandemic related headwinds. The analytics and sourcing of the manager and the effectiveness of our affiliated servicer also enabled us to broaden our investment rates through joint ventures with third-party institutional investors. Our December 31, 2020, corporate leverage ratio was 2.1 and our fourth quarter 2020 average corporate leverage was 2.2. Our fourth quarter 2020, average asset-based leverage was 2 times and at December 31 asset-based leverage was 1.9 times. Our leverage would have declined. Additionally from Q3, 2020 but we closed on an 876 million joint venture with two institutional investors on September 25 in which we invested 83.4 million and our manager and our servicer oversee this joint venture. We also have an investment in Gaia real estate court a REIT that invests in multi-family properties; multi-family repositioning mezzanine loans and triple net lease veterinary clinic real estate. We expect Gaia to grow materially in 2021. And with that we'll turn to page 4, highlights for the quarter. Net interest income from loans and securities including a 7.6 million partial reversal of COVID-19 related loan and credit losses and keep in mind this is 6.6 million after deconsolidating about 1 million to non-controlling interest was approximately 21.9 million. In the fourth quarter we had only a small increase in our average balance of mortgage loans securities and beneficial interests primarily due to prepayment. Our 83.4 million investments in our joint venture loan acquisition that closed September 25 was on balance sheet for all of the fourth quarter. There is only five days in the third quarter. So we received a material benefit through earnings from this in the fourth quarter. This JV shows up in quarter end balances as securities investments. Our gross interest income excluding reversal of loan loss provisions increased by 1.2 million and our interest expense also declined by 900,000. One GAAP item to keep in mind is that interest income from our portion of joint ventures shows up in income from securities not interest income from loans. For these joint venture interests servicing fees for securities are paid out of the securities waterfall so our interest income from joint venture securities is net of servicing fees unlike interest income from loans which is gross of servicing fees. As a result since our joint venture investments are growing faster than our direct loan investments GAAP interest income will grow more slowly than if we directly purchase the exact same loans by the amount of the servicing fee and GAAP servicing expense will decrease by the corresponding offsetting amount. An important part of discussing interest income is the payment performance of our loan portfolio. At December 31, 2020, approximately 72% of our loan portfolio by UPB made at least 12 of the last 12 payments as compared to only 13% at the time we purchased the loans. In our first quarter 2020 investor call we mentioned that we expected the COVID-19 related economic environment would negatively impact the percentage of 12 of 12 borrowers in our portfolio. Thus far, the impact on payment performance has been less than expected and the percentage of our portfolio that is 12 of 12 has been quite stable. Additionally, we have seen significant prepayment from a material subset of our COVID impacted borrowers that had significant absolute dollars of equity and were in strong home price appreciation locations. The continuing strong regular payment pattern and the prepayment pattern of certain previously delinquent loans led to the 7.6 million, again 6.6 million after netting out for consolidation reversal of our provisions for credit losses. While regular paying loans produce higher total cash flows over the life of the loans on average, they can extend duration and because we purchase loans at discounts this can actually reduce percentage yield on the loan portfolio and interest income. However, regular paying loans generally increase our net asset value and we'll talk about this later on the call, enable financing at a lower cost of funds and provide regular cash flow. Loans that are not regular monthly pay status tend to have a shorter duration. However, we expected that this duration reduction would be less than typical due to the impact of COVID-19. As I mentioned earlier most of our loans were purchased as non-regular paying loans and the borrowers our servicer and portfolio team and our manager have worked together over time to re-establish these loans as regular paying. We also expect that given the low mortgage rate environment and the stability of housing prices that higher prepayments will likely continue on both regular paying and non-regular paying loans. Our corporate cost of funds in Q4, 2020 was lower than Q3 by 27 basis points. This was primarily due to spread reductions on our repurchase facilities as well as a full quarter of the rated securitization we completed in mid Q3, 2020. We expect our cost of funds trend to continue decreasing materially especially since we called two of our older securitizations and re-securitized the underlying loans in mid Q1, 2021, and will likely do so with others in the next few quarters. Net income attributable to common stockholders and basic earnings per share was 10.8 million or $0.47 per share after subtracting out 1.9 million of preferred dividends and 1.6 million of income attributable to non-controlling interests. A couple of other things to note. We recorded a small amount of flow-through equity method income from our manager and servicer in the fourth quarter primarily due to some mark-to-market pickup on shares owned by our manager and servicer. Our manager and servicer combined own approximately 1.1 million shares of our common stock and we own 19.8% of our manager and 8% of our servicer. This increased income by approximately 335,000 or a bit more than $0.01 per share. We expensed approximately 1.7 million relating to the GAAP required accrual of the warrant put rights from our Q2, 2020 issuance of preferred stock in warrants and we also repurchased approximately 50,000 shares of our common stock at an average price of $9 a share in the fourth quarter. Book value was 1559 at December 31, 2020 later in this call we will compare December 31, book value and December 31 fair value estimates. As a spoiler alert December 31 fair value estimates are materially higher than book value. Taxable income was $0.47 per share. Taxable income in Q4 was driven by several factors including gains on some clean pay loans going into our January 2021 dash a rated securitization as well as the significant increase in prepayment especially for delinquent loans. Delinquent loans usually generate tax gains at the time of foreclosure and the creation of related REO and then tax losses at sale of REO. Less REO creation typically leads to less taxable income. However, we saw many delinquent loans pre-pay and generate tax gains. Additionally, as our cost of funds decreases we see a decline in interest expense as well which increases taxable income. At December 31, we had approximately 107 million of cash and for Q4, 2020, we had an average daily cash and cash equivalent balance of approximately 129 million. We had 64 million of cash collections in the fourth quarter which annualized is approximately 17% of the book value of the underlying assets. Our surplus cash definitely tempers earnings but this provides us with significant optionality and the remaining earnings drag to decrease as we get the cash invested over time. As I mentioned earlier in this call at December 31 we had approximately 240 million base amounts of unencumbered securities from our securitizations and joint ventures and approximately 49 million UPB of unencumbered mortgage loans and as of March 1, 2021 we have approximately 145 million of cash on hand. As I mentioned earlier on the call approximately 72% of our portfolio by UPB made at least 12 of their last 12 payments compared to only 13% at the time of loan acquisition. I will discuss the importance of this in greater detail when we get to pages 9 and 17 of this presentation. If we go to page 5 we continue to be primarily RPL driven with purchased RPLs representing approximately 96% of our loan portfolio. We primarily purchase RPLs that have made less than seven consecutive payments and strive for positive payment migration of these purchased RPLs. On page 6 where it breaks down RPLs and portfolio growth we continue to buy and own lower LTV loans. Our overall RPL purchase price is approximately 53.8% of the underlying property value and 88% of UPB. On page seven purchased NPLs have declined over time relative to the total loan portfolio. For NPLs on our balance sheet our overall purchase price is 78.7% of UPB and 50.6% of property value. Our target markets on page 8 California continues to represent the largest segments of our loan portfolio. Our California mortgage loans are primarily in Los Angeles. Oregon or Orange and San Diego counties. We have seen consistent payment and performance patterns from loans in these markets. Performance in southern California has far outperformed expectation during the COVID-19 pandemic. We've also seen consistent prepayment patterns even more so in recent months. Since May of 2020 California prepayments represent 10 percent more than California is as a percentage of our portfolio. We removed Las Vegas as a target market during the first quarter of 2020. Mortgages in Las Vegas are currently a small percentage of our portfolio unlike five years ago. Our analytics suggested that COVID-19 would have a material economic impact on Las Vegas given its tourism focus and the economic multiplier effect of that debate. This would be partially offset by state income tax related transitions that we're seeing from southern California prepayments. We do however expect the Las Vegas market to bounce back materially as COVID-19 vaccine success accelerates. We're keeping a close eye on Houston as the combination of COVID-19 and oil industry struggles and now recent weather disruptions are having a significant impact. It has not spilled into the single family homes market as much as the apartment market thus far but we have trimmed back Houston targets. We only added Houston to our target portfolio locations in the second half of 2019. So it still remains a very small percentage of our portfolio. We have been seeing material negative effects from the new tax loss SALT provisions in New York City metro and in suburban New Jersey and southern Connecticut home values and home sale liquidity. We've seen a quick positive turn in liquidity in these suburban locations as a result of COVID-19 as New York City apartment dwellers look for suburban residences. It's too early to tell though whether this is a short-term phenomena or a longer-term change in lifestyle as a result of COVID-19. National movers’ data such as United Van Lines and New Haul data suggest that HPA should be relatively muted in these parts. Related to this we've also seen demand for homes and home rentals increasing parts of Florida as well as the Phoenix, Arizona, Dallas, Texas and Atlanta Georgia metro areas. We're seeing this strength primarily in single family homes and much less so for condominiums. On page 9, we have a chart for portfolio migration. At December 31 approximately 72% of our loan portfolio made at least 12 of the last 12 payments including approximately 65% of our portfolio that made at least 24 of the last 24. Again this compares to approximately 13% at the time of purchase. Non-paying loans which usually have shorter durations than paying loans get timelines extended as a result of COVID-19. This affects the yield on true non-performing loans as extended resolution timelines can lead to more property tax insurance and repair expenses. This is why we earlier in 2020 took additional provisions for credit losses because of COVID-19. Since we purchased most of our loans when they were less than 12 for 12 payment history our servicer has worked with most of our borrowers over time. While it's too soon to understand the full impacts of COVID-19 on home prices and mortgage loan performance so far the impact out of portfolio has been less than anticipated and we've seen demand for homes in our target markets increase materially. Cash flow velocity on the loans increase materially and prepayment on impacted loans increase materially. 12 for 12 loans in today's loan market trade at much higher prices than our cost basis. They trade well over par. As a result our portfolio and related implied corporate NAV estimates are materially higher than GAAP book value which presents our loans at the lower of market or amortized costs. Subsequent events. It's already been a busy first quarter. Subsequent to December 31, we purchased approximately 3.8 million UPB of residential and small balanced commercial first mortgage loans in three transactions. The purchase price for the loans was 98% of UPB and 40% on value. We have another approximately 54.5 million UPB of loans under contract in eight transactions that are subject to due diligence. The purchase price is approximately 86% of UPB and 57% of underlying property value. In January we repurchased 2.5 million principal amounts of our convertible notes for a purchase price of 2.4 million. We also closed two securitizations; one was a rated securitization transaction of cleaner pay RPLs in late January. We issued 175 million of AAA through BBB securities with respect to 206.5 million UPB of loans or 84.8% of UPB with a weighted average yield of 1.32%. Now keep in mind through BBB on these loans we received 84.8% of UPB and we are buying loans at 86% of UPB. The second was an unrated securitization transaction of less clean paying RPLs and NPLs in mid-February. We issued 216 million principal of class senior bonds equal to 75 of UPB of 287.9 million at a yield of 2.25%. We declared a cash dividend of $0.17 per share to be paid on March 31, 2021 to holders of record on March 18, 2021. Based on taxable income estimates we would expect that our dividend would likely increase during the year 2021. On page 11, some financial metrics I'd like to point out. Average loan yields excluding reserve capture remained relatively constant. Remember that yield on debt securities and beneficial interest is net of servicing fees and yield on loans is gross of servicing fees. Debt securities and beneficial interest is how our interests and our JVs are presented under GAAP. As our JV's increase as they did in 2020 relative to the loans the GAAP reporting will show lower average asset yields by the amount of the servicing fees. Yields on debt security are a beneficial interest however net of credit reserve capture still increased in Q4, 2020. Our leverage continues to be low especially for companies in our sector. We ended Q4, 2020 with asset level debt of 1.9 times and average asset level debt for the quarter was 2.0. Our asset level debt cost of funds was lower in Q4 than by Q3 by 70 basis points and the cost of our asset level debt has further declined in Q1 of 2021. As we get our surplus cash invested we should see material increases in interest income and net interest income even more so. Securities and loan repurchase agreement funding on page 13. Our total repurchase agreement related debt at December 31 was approximately 595 million of which 160 million was non-marked to market mortgage loan financing and just under 300 million was financing on class A1 senior bonds in our joint ventures. As of March 1 total repurchase agreement funding is considerably lower as a result of prepayment and securitization. At December 31, we had 149 millionth face of unencumbered bonds as well as 91 million UPB of unencumbered equity certificates and 48 million UPB of unencumbered mortgage loans. Combined with 107 million in cash at December 31, and now that's 145 million of cash at March 1 with significant resources for being on offense and for defense. And now for the fair value balance sheet that I have talked about uh coming up on page 17. As I mentioned earlier on the call we estimate that the fair value of our balance sheet equity is materially higher than our book value. The explanations and discussion of fair value are included in note 6 in our 10-K. We invest in mortgage loans at discounts to UPB based on our managers’ analytics. Our servicer works with borrowers and helps get loans back on track. When they become regular paying loans they become significantly more valuable. Our GAAP balance sheet shows our mortgage loans at the lower of amortized cost or market. Based on current performing loan market prices we estimate that the fair value is approximately 120 million higher than fully diluted book value an increase of approximately 20 million from Q3, 2020. Our estimate of fair value fully diluted book value per share at December 31 is $19.54 for scalp book value of $15.59. This also excludes any fair value pickup we get from owning equity in our manager and equity and warrants in our servicer. And with that I'd like to open up for any questions and feel free to ask what you would like.

[Operator Instructions] Our first question is from Eric Hagen from BTIG. Your line is open.

How are you guys. On the RPL purchases since quarter end that are still in diligence are those season loans or are they newer issues scratch and I got a color there. And then you mentioned you got, you expect pre-pays to pick up. I'm just curious what the rate incentive looks like for a re-performing borrower especially the seasoned borrowers with presumably low LTVs what does the access to capital look like and how much does the previous delinquency play in the rate that they get and then on the last one can you just talk about the amount of securitized debt that you have that's callable this year where you might be able to re-securitize that collateral and how stable the funding cost might be. Thanks.

Yes. So I will do the last one first because it's the simplest. We have about five additional securitizations. I'm sorry three additional securitizations plus four joint venture securitizations that are callable already that we likely will call some of this year and re-securitize and to the extent that that happens it would reduce cost of funds versus those transactions of somewhere between 120 to 200 basis points per year.

Great. Thank you.

Sure. On the prepayment side the weighted average coupon our portfolio is in the mid-fours and the weighted average LTV is pretty low. The other thing is that for us LTV is a little less important than what we consider what I call absolute dollars of equity. So that a 80 LTB or a 60 LTV on a $70,000 house is different in terms of prepayment probability than a $600,000 house and as a result our portfolio tends to have larger loan balances closer to about 200,000 average balance and three hundred thousand average home value. So we're seeing continued prepayment. The other thing is because of our target markets our borrowers tend to have more than average HPA on their houses and one of the things we've seen, we've seen two things. One is long-term clean pay loans have been prepaying particularly if they have more than about 130,000 of equity and they're prepaying partly for refinancing and partly for sale but delinquent loans are mostly pre-paying because of sale. So one of the things we found is if you're pandemic impacted borrower and you have 150,000 or 200,000 of equity we've seen a lot of people rather than wait for stimulus funds or deal with income issues we've seen a lot of people in our portfolio sell their homes in certain markets but there is been a lot of home price appreciation and put 200,000 in the bank and that's a pattern that we have seen continue in Q1 as well and would continue to expect that.

Fantastic.

And then the loans in the first quarter about 20% of them are scratch and dent of new origination and the balance are season looks.

Great. Thank you so much.

Sure thing.

[Operator Instructions] Your next question is from Randy Binner from B. Riley. Your line is open.

Hi, good evening. Thanks. I just had a couple higher level questions on the cash number you quoted the 145 million. Was that a year-end or is that now and –

107 year end, 145 at March 1.

So it's higher. So I guess a follow-up there is just –

Two reasons. One prepayment continuing which increases cash flow velocity and money to us and two securitizations lowering cost of funds and also re-effectively re-levering older securitizations to affect what I will call the equivalent of much lower-cost cash-out revise and the third thing is with cost of funds going down more cash interest spread that we receive.

What could you reasonably run that at the cash number meaning if I would if I thought well I understand now why it's higher. What could, what number could that run at it just to kind of understand what the drag is in dollars and cents?

Well, let's put it this way. So when over a period of we acquire loans in the 80s. They're typically sloppy pay loans. We get 72% of them to become clean pay where we can issue AAA through BBB and get 84.5% through BBB which means we have somewhere between zero and 5% cash remaining cash basis in the loans securitize AAA through triple BBB at a 1.3 yield versus a purchase yield of somewhere between 6% and 7.5%. So, on loans that we get performing the ROE on cash is enormous over a two year period of time. On loans that we don't get performing, you would expect it to run at about an unlevered 6% or 6.5% with the most leverage you'd put against it probably four or five times in the securitization and less than that along the way. But that being said you always have cash on hand for two reasons. One because crazy things can happen like March and April of 2020 and you want to be able to go on offense not defense when that happens and number two is we frequently see opportunities where someone needs an execution in a very short period of time and that's not likely financeable during that short period of time but over a period of time. So we'd like to have cash on hand for offense and defense and be what I call value-oriented loan investor that based on analytics that we make, us believe with our servicing capability and the analytics that loan is likely to be worth considerably more 12 months or 18 months later.

Then just one more. That was really helpful. So given the move higher interest rates recently do you think you're more likely to be on offense or defense meaning are you I think a lot of media coverage on all this but just what's your take on what's moved in the mortgage market so far from a rate perspective?

I think that where we've seen loan prices they seem to not have noticed the rise in call it seven plus year duration rates. We think that it has not affected loan prices yet. We do think however that there's a tipping point and there will be a significant opportunity that it creates. It's just not yet.

Okay. Fair enough. Thanks a lot.

Sure.

[Operator Instructions] And I'm showing no further questions at this time. I would like now to turn the conference back to CEO, Mr. Lawrence Mendelsohn for any additional or closing remarks.

Thank you everybody for joining the Great Ajax fourth quarter 2020 earnings conference call. We appreciate you taking the time and hope everyone stays well and safe and healthy during the coming months and we look forward to talking to you again in our Q1 call in a few months.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation and have a wonderful day.