Rithm Property Trust Inc. (RPT) Q2 2022 Earnings Report, Transcript and Summary

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Great Ajax Corp. Second Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Larry Mendelsohn, CEO. Please go ahead.

Thank you very much. Thank you, everybody, for joining us for the Great Ajax second quarter 2022 conference call. Before we get started with the presentation, I’d like to point out Page 2, the Safe Harbor disclosure for all the things we talked about. On Page 3, a quick introduction and then business overview. Q2 2022 was a good quarter. However, there’s quite a bit of noise in the income statement numbers, which makes it a bit confusing, but we’ll walk through this on today’s call. Loan performance and cash flow velocity continued and has also continued into the third quarter of 2022 as well. The significant cash flow velocity from our mortgage loans and mortgage loan JV structures increases income acceleration through the application of CECL, but it also rapidly pays down our loan and securities portfolio as well as the associated – and the associated asset-based financing, which can also reduce income and ROE. At June 30, we had approximately $52 million of cash as well as a significant amount of unencumbered securities and loans. In the second quarter, we used cash on hand to repurchase $25 million face amount of our preferred shares and the associated warrants. While these repurchases create a one-time charge, it will create very significant savings going forward. We also repurchased approximately 475,000 common shares with cash on hand. On Page 3, business overview, our managers data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution probabilities and its ability to source these mortgage loans through longstanding relationships enables us to acquire loans that we believe have a material probability of prepayment and long-term continuing re-performance. We’ve acquired loans in 362 different transactions since 2014 and six transactions in the second quarter. We own approximately 20% of the equity of our manager at a zero basis, and we do not mark-to-market our ownership interest on our balance sheet or through the income statement. As a result, our book value does not reflect the market value of our 20% interest in the manager. Additionally, our affiliated servicer Gregory Funding provides a strategic advantage in non-performing and non-regular paying loan resolution processes and time lines. And it also gives us a data feedback group, enabling more analytics from our manager. In today’s volatile environment, having our portfolio teams and analytics group at the manager working closely with the servicer has been essential. We’ve certainly seen the benefit of this during the COVID pandemic and in 2022 so far with significant ongoing loan cash flow velocity and credit performance and with our 2022-A and 2022-B securitization structures, the first AAA-rated structures with up to approximately 40% of loans greater than 60 days or more delinquent and still rated AAA. Like our 20% equity interest in our manager, we have a 20% economic interest in our servicer at a very low basis. We don’t mark this to market in on our balance sheet either or in our income statement. Our servicer is currently evaluating a potential private equity round as part of rolling out a few new data and technology-driven programs. The data analytics and sourcing relationships of our manager and the effectiveness of our servicer also enabled us to broaden our investment reach through joint ventures with third-party institutional investors and thereby invest in larger transactions as well. The servicer’s loan expertise is definitely appreciated by our JV partners as several of our JV partners now pay our servicer for providing third-party due diligence services for other transactions they’d be working on. And they’ve also hired our servicer to solve problems they may have with other servicers. We still have low leverage. At June 30, our quarter and corporate leverage was 2.6 times and our Q2 2022 average asset base leverage was 2.2 times. Our corporate leverage increased as we used cash on hand to repurchase preferred shares and their associated warrants as well as common stock. We keep trying to increase asset-based leverage, but the significant cash flow from our loan portfolio offsets this. We own 22% equity interest in Gaea Real Estate Corp. Gaea is an equity REIT, they primarily invest in repositioning multi-family properties in specific markets and in triple net lease freestanding veterinary clinics. We carry our Gaea interest on balance sheet at the lower of cost or market. Gaea completed an additional round of equity in the first quarter of 2022 at a premium to our carrying value, but our balance sheet and income statement do not reflect any markup. We think Gaea has a great deal of optionality and that Gaea can grow materially. If we go to Page 4, highlights for the quarter. Net interest income from loans and securities, including $1 million of interest income from the decrease in the present value of expected credit reserves was approximately $11.7 million in the second quarter. Our gross interest income, excluding the $1 million income from the decrease in present value of expected credit reserves was $20.9 million, which is $2.3 million lower than the first quarter. This primarily stems from having $40 million less mortgage loans on balance sheet in the second quarter versus the first quarter and having significantly more delinquent loans than expected become performing. As delinquent loans become performing, they provide more cash flow, but over a longer period of time. Since we buy loans at a discount, this increase in performance extends duration, which lowers yield. A GAAP item to keep in mind, though, is that interest income from our portion of joint ventures shows up in income from securities, not income from loans. These joint venture interests, servicing fees are paid out of the securities waterfall. So our interest income from joint ventures is net of servicing fees, unlike interest income from loans, which is gross of servicing fees. As a result, since our joint venture investments have been growing faster than our direct loan investments, GAAP interest income will be lower than if we directly purchase loans outside of joint ventures by the amount of servicing fees, and GAAP servicing fee expense will decrease by the corresponding offsetting amount. An important part of discussing interest income is the payment performance of our loan portfolio. At June 30, approximately 74.2% of our loan portfolio by UPB made at least 12 of the last 12 payments as compared to less than 13% at the time we purchased them. Our NPL purchases over the last 12 months increased materially relative to RPL purchases. Increases in housing prices helps maintain these payment and prepayment patterns and leads to decreases in the present value of expected reserves and the related income recognition of $1 million of unallocated loan purchase discount reserves under CECL in the second quarter and also the reserve releases in each of the five previous quarters. More than 30% of our full loan payoffs in the second quarter and so far in the third quarter were from loans that were materially delinquent at the time of payoff. 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 reduce percentage yield on the loan portfolio and interest income. Loans that are not regular monthly pay status typically of materially shorter durations, we have seen and continue to expect the stability of housing prices will still drive prepayments from property sales for both regular paying and non-regular paying loans, and it also catalyzes monthly re-performance on previously delinquent loans. We have seen, however, that prepayment from rate term refinancing definitely slowed in the later second quarter for non-delinquent loans. Our weighted average cost of funds in the second quarter was higher than the first quarter by approximately 30 basis points. Given inflation and Fed rate increases, we would expect our cost of funds on adjustable rate repurchase agreements to increase over time. However, all of our other debt is fixed rate. Net income attributable to common stockholders was a negative $9.2 million or $0.40 per share, including paying approximately $2 million or $0.09 a share preferred dividends. There are several other items of note that had an impact on earnings in the second quarter. To make it a little easier to follow, we also have a table that ties GAAP income to operating income on Page 16 in this presentation as well as in our 10-Q. Operating earnings was $5.7 million or $0.25 a share. Taxable income net of preferred dividends was $0.36 per share. Taxable income is very instructive of the current cash economics of the portfolio. Taxable income was primarily driven by continued prepayment and loan purchase capture from non-performing loans and increasingly monthly payment re-performance from non-performing loans and regular performing loans. Our acceleration of discount allowance relates to credit performance and cash flow velocity in the second quarter was $1 million versus $3.9 million in the first quarter. And we expensed approximately $3.6 million relating to the GAAP required fair value accrual of the warrant put rights from our Q2 2020 issuance of preferred stock and warrants versus $3.2 million in Q1. This number will decline beginning in Q3, as I will describe shortly. There are a few one-time and unusual items in the Q2 numbers. You may recall from our Q1 earnings call that the calling of our 2018-D and 2018-G unrated joint venture securitizations and the re-securitization of the underlying loans into our 2022-A AAA agency rated securitization resulted in March 31 GAAP charge that we then collect back over the remaining life of the underlying loans. In June, we executed a similar transaction calling our unrated 2019-A and 2019-B JV transactions and re-securitizing into a 2022-B AAA agency rated securitization. Since 2019-A and 2019-B were joint ventures in which we owned a combined approximately 17%, it was not consolidated on balance sheet as loans, but held legally and under GAAP as securities and beneficial interests. In the June 2022 re-securitization to the new AAA-rated structure, we continue to own the same percentage, but the securities mark-to-market is lower in June than it was in March. Because of this, in Q2, we took an impairment equal to the difference between the securities carrying values and market values in June versus March of 2022 of $2.1 million. Like our April transaction, that was a refinancing of two 2018 JVs and recorded at March 31. What is unusual is that 2019 JV loans are transferred from our two joint venture trusts to our new joint venture 2022-B trust with the same partnership owning the same percentages. We and our partners effectively sold the loans in the form of an exchange of securities from ourselves to ourselves, which triggers a loss under GAAP. If it would go through book value, whether or not it’s a sale under GAAP because of mark-to-market change, there is no difference in expected cash flow on the underlying assets, and we expect this mark-to-market "sale" loss amount is fully recaptured over the expected life of the 2022-B trust. This also doesn’t reduce taxable income as we and our partner, effectively sold both assets from ourselves to ourselves and is, therefore, a refinancing rather than a sale for tax and there’s no tax impact. It is only a sale for GAAP because we own the JV loan assets in the form of securities. A larger one-time Q2 earnings charge but one that brings on significant savings beginning in Q3 is the repurchase of $25 million face of our outstanding preferred shares at a discount and the retirement of the associated warrants on common shares and warrant put rights. This requires us to recognize a $2.5 million charge from the acceleration of deferred issuance costs as well as $3.5 million charge for the acceleration of expense related to the warrants and the warrant put rates. The total one-time charge is approximately $6 million or $0.27 per share. Beginning in Q3, this repurchase should save us approximately $1.125 million per quarter or nearly $0.05 per share per quarter. We used cash on hand to repurchase the preferred and associated warrants and put rates. We also had a $1.8 million adjustment or $0.08 a share as a result of certain delinquent loans that were purchased at a discount significantly increasing re-performance in excess of our modeled expectations. Since we buy loans at a discount, this lowers yield and the present value of their cash flows. The re-performance was so far in excess of expectations that the lower PV number was below our cost. We recorded a loss on investments in affiliates of $400,000 or approximately $0.02 per share as a result of the flow-through of the mark-to-market decline in price of our common shares owned by our manager in Q2. Our manager receives a significant portion of their fee in shares and changes in market value of those shares flows through to us based on our 20% ownership interest percentage. Book value was $14.98 per share at June 30 versus $15.95 per share at March 31. Book value decreased primarily as a result of the acceleration of deferred issuance costs from the repurchase of preferred shares and extinguishment of the associated warrants and put rights and a $10 million mark-to-market adjustment of our joint venture debt securities. Additionally, as mentioned earlier, we took a $1.8 million fair value adjustment for duration extension for over re-performance of previously non-performing loans. We also paid a common dividend of $0.26 per share and preferred dividends of $0.09 per share during Q2. These changes were partially offset by $0.12 per share from the repurchase of common stock. Most of this book value change is non-cash other than the payment of the dividends and the warrant repurchase. There is a table on Page 17 that details the change in book value. Because we buy loans at a discount, the decline in loan market prices had not previously resulted in any impairment in the loan portfolio. Strangely, the first impairment is caused by previously non-performing loans over re-performing, thereby extending duration. Our book value at December 31, 2019, the last quarter pre-COVID and before the March and April 2020 market disruptions was $15.80 a share. Our book value is down a total of 5% since December 31, 2019, despite significant disruption and now much higher rates and lower asset prices. We do not mark-to-market our ownership interest in our manager and servicer and have close to a 0 basis on our balance sheet. They are worth significantly more than that. We believe our NAV continues to remain materially higher than the GAAP book value. In addition to the $25 million face amount of preferred and the associated warrants and put rights we repurchased, in the second quarter, we also repurchased approximately 475,000 shares of common stock at a weighted average price of $9.77 per share. At June 30, we had approximately $52 million of cash. And for the second quarter, we had an average daily cash and cash equivalent balance of approximately $60 million. We had $74 million of cash collections in the second quarter, which, while it’s a 13% decrease versus the first quarter, it’s the same as the average quarterly collections throughout 2021. As I mentioned earlier in this call, at June 30, we also have a significant amount of unencumbered securities from our securitizations and joint ventures and unencumbered mortgage loans. The available cash and available asset-backed leverage provides us a good position for loan and other asset type purchases, preferred and associated warrant repurchases as well as common share repurchases and liability repurchases. Approximately 74.2% of our portfolio by UPB made at least 12 of their last 12 payments compared to less than 13% of the time of loan acquisition. This increased from 72% in Q4 of 2021 and 73% in Q1 of 2022, despite the fact that we bought significantly more NPLs and RPLs since Q3 of 2021. On Page 5, our loan portfolio. Purchased RPLs represent approximately 89% of our loan portfolio at June 30. They represented 96% of our loan portfolio a year ago. We primarily purchase RPLs that have made less than seven consecutive payments, and NPLs that have certain loan level and underlying property specifications that our analytics suggest lead to positive payment migration and prepayments on average. On Page 6, re-performing loans, we continue to buy and own lower LTV loans, our overall RPL purchase price is approximately 43% of the current property value and 89% of UPB. We’ve always been focused on loans with lower LTVs with certain threshold levels of absolute dollars of equity in target geographic locations and the current times of rising rates and the potential for additional market disruptions, this becomes even more important for RPLs and NPLs. On Page 7, the NPLs in Q3 and Q4 of 2021, we significantly increased our NPL purchases. NPLs on average have traditionally had shorter duration than RPLs. For NPLs on our balance sheet, our overall purchase price is 89% of UPB, 84% of total owing balance, including arrearage and 50% of current property value. As a result of the low loan-to-value and higher absolute dollars of equity on average for our NPL portfolio, we have seen that rising home prices have significantly accelerated prepayment on NPLs, as borrowers can turn significant equity into cash. Under CECL, this can lead to greater interest income from the acceleration of unallocated credit reserve loan purchase discount. As mentioned earlier, we have also seen a significant increase in NPL re-performance. This increases total cash flow but extends duration and lowers ongoing yield. Our historical data suggests that once one of our loans makes seven consecutive payments, there’s a 92% chance of 12 consecutive payments. On Page 8, our target markets. California continues to represent the largest segment of our loan portfolio, although it is a smaller percentage than it was in 2021 due to rapid prepayment. In 2021, California was nearly 30% of our portfolio and is now approximately 24.5%. However, California has been nearly 40% of all prepayments. Our California mortgage loans are primarily in Los Angeles or in San Diego counties. Florida prepayments have also increased significantly. We purchased an NPL portfolio of approximately $85 million in late Q3 of 2021, in which all of the loans are secured by properties in Miami-Dade, Broward and Palm Beach counties in Florida. Since servicing transferred to our affiliated servicer Gregory Funding in Q4 of 2021, these loans have far outperformed expectations in prepayment from property sales, but even more so in monthly payment re-performance. We continue to see strong demand for homes in our target markets, although home price appreciation has slowed from previous record increases. On Page 9, at June 30, approximately 74.5% of our loan portfolio made at least 12 of the last 12 payments, including approximately 67% of our portfolio that made at least 24 of the last 24. More than 80% have now made at least seven consecutive payments. This compares to approximately 13% at the time of purchase. As I mentioned earlier, historically, we have seen that once a loan reaches seven consecutive payments, it typically gets to 12 consecutive payments more than 92% of the time. Subsequent events on Page 10. Subsequent to June 30, we repurchased an additional $5 million base amount of our preferred stock at a discount, along with associated warrants input rates. The expected annual savings from this repurchase is approximately $900,000 per year or $0.04 per share. We purchased approximately $5.7 million UPB of RPLs and four transactions. The purchase price for the loans is approximately 97% of UPB and approximately 40% of the property value. We’ve agreed to purchase subject to due diligence 5.7 million of UPB of RPLs in eight transactions and 400,000 UPB of NPLs in one transaction. The purchase price for the RPLs is 86.4% of UPB and 60% of the underlying property value, the purchase price for the NPL is 71.5% of UPB and 70% of property value. On August 4, we declared a cash dividend of $0.27 per share to be paid on August 31 to holders of record of August 15. Our taxable income was higher than this, and we still have a remaining distribution requirement for 2021 that we must determine by September of 2022. Given the volatile markets and the current economic environment, though we want to be patient. Average loan yields, excluding the accelerated income from CECL-related credit reserve declined. For debt securities and beneficial interest, remember that yield is net of servicing fees and yield on loans is gross of servicing fees. Debt securities and beneficial interest is how our interest in our JVs are presented under GAAP. As our JVs increase, as they did in 2020, 2021 and 2022 relative to loans, the GAAP reporting shows lower average asset yields by the amount of the servicing fees. Biggest piece of loan yield decline in Q2, however, comes from significant increase in monthly re-performance of delinquent loans far in excess of expectations. This has happened both in loans consolidated on our balance sheet and even more so for loans held in joint ventures that show as securities and beneficial interest on our balance sheet. Since we purchased loans at a discount, re-performance of delinquent loans materially in excess of expectations, extends duration reduces yield. The extreme home price appreciation in our target markets both accelerated prepayment from home sales on delinquent loans, which released reserves under CECL and led to material re-performance in excess of expectations, which reduces ongoing yield for loans purchased at a discount. This re-performance increases total cash flow but reduces yield. Leverage continues to be low, especially for companies in our sector. We ended Q2 with asset level debt of 2.3 times and average asset level debt for the quarter was 2.2 times. Our total average debt cost was a little higher in the second quarter versus Q1. This is primarily the result of rising base rates for repurchase agreement funding. Fixed rate debt is currently 60% of our total debt, and we expect fixed rate debt to increase as a percentage of our total debt. On Page 12, our total repurchase agreement related debt at June 30 was approximately $509 million of which $219 million was non-mark-to-market, non-recourse mortgage loan financing and $217 million was financing on Class A1 senior bonds in our joint ventures. At June 30, we had approximately $139 million face of unencumbered mezzanine bonds as well as $126 million UPB of unencumbered beneficial interest certificates and joint ventures and $29 million UPB of unencumbered mortgage loans. Combined with $52 million of cash at June 30, we have significant resources remain on offense and defense and to continue our stock and liability repurchases in today’s volatile environment. And with that, I’m happy to take any questions that anybody might have about the company, Q2 going forward, markets.

[Operator Instructions] And the first question is from the line of Eric Hagen with BTIG. Please go ahead.

Thanks. Good afternoon and hope you guys are well. I think [indiscernible] sure, thanks. You guys mentioned buying back your debt. I’m curious how you think about that relative to buying back stock. I’m also wondering if you’ve ever thought about repurchasing your securitized debt, which trades in the market. I imagine that you find the senior part of the RPL capital structure is pretty cheap right now. So I just want to hear how you think about that. Thanks.

Sure. So the answer is yes, all of the above. We’ve already repurchased another $5 million of the preferred and warrants. We have authorization to repurchase more common shares depending on price level. We have also – we’re in negotiations to repurchase additional preferred and associated warrants. And we do agree that the Class A1 unrated notes that are out there from some of our previous deals where that marketing credit spreads have gone doesn’t make economic sense relative to where loan prices are, loan prices credit spreads have not widened nearly as much as unrated seniors on the exact same loans. So one thing we have looked at knowing that we will call some of our securitizations over the next year or so is perhaps buying the seniors at a discount in the open market. We’ve never sold any NAVs, so we own all the NAVs still, but seniors, given where they trade at discounts and given that we know we might call deals, we are looking at buying those in the open market to the extent they become available.

That’s interesting. That seems like it could be really attractive. I appreciate it. Thanks for the comments.

Sure.

Your next question is from the line of Kevin Barker with Piper Sandler. Please go ahead.

Thank you. Hey, Larry. So can you – sorry, I missed the very beginning of the call, but the impact of getting rid of the warrants and some of the debt. Could you help us understand the – quantify what you’re going to see on a go-forward basis from this transaction, how to think about it from there?

Sure. So for retiring the $25 million that we retired in Q2. That will save us approximately $1.125 million per quarter or about $4.5 million per year. And then we acquired another $5 million in last week, and that will save us an additional about $900,000 a year. So the two together will save us about $5.4 million beginning in Q3, $5.4 million annually beginning in Q3. We are in negotiations to buy additional amounts as well.

Okay.

And we’ve been using cash on hand to do it thus far. We have thought about using debt to acquire it and retire it because it’s significantly cheaper. And the – while the earnings wouldn’t be 100%, they’d still be significant.

Okay. Great. And then you have quite a bit of taxable income over the last four quarters, put in a position that you might have to make a decision here given your dividend is – was it roughly a little over $0.60 below the taxable income? What are your plans on capital deployment given that situation on taxable income versus dividends paid?

Sure. So dividends, we make a – we have to make a decision regarding 2021. 2022, we still have significantly more time for those decisions. That being said, we increased the dividend modestly in this quarter. We know that there’ll be additional dividends that we’ll likely have to distribute either through increase in the quarterly dividend or through a combination of increase of quarterly dividend and the special. The other question is, given the opportunity set that some disruption in markets might provide we may be willing to pay a little bit of corporate tax to then put that money to work at very high returns should that – should the disruption occur. So that’s the reason why our Board has taken the position is let’s just kind of see how things play out as we get closer to elections. To see whether we should distribute all of it or some of it and pay a little bit of tax and keep some of it effectively as retained earnings to put to work in a disruptive market should that occur prior to elections.

And when you said that statement, are you looking at assets in particular? Or do you see it as whole companies as a potential?

We see it in both. The – I wish I could fully predict the future. But to the extent that there’s disruption, we would look at assets we’d be – we would look at being a liquidity provider we would look at in our joint venture structures, assets and being a liquidity provider to third parties, and we’d also look at full acquisitions. We think that there potentially could be some opportunities in that market.

Okay, great. Thanks for taking my question, Larry.

Absolutely.

Your next question is from the line of Matt Howlett with B. Riley. Please go ahead.

Hey Larry, just to follow on those comments, I mean, why haven’t loan spreads widened? And then are you expecting a negative HPA? Do you think there’s going to be increases in delinquencies or just – can you just go a little bit over the outlook?

Sure, sure. So the only place – loan spreads have widened versus, say, a year ago, but they haven’t widened nearly as much as credit spreads – credit spreads and loans haven’t widened nearly as much as credit spreads in bonds that people would issue to finance those loans. It’s kind of a strange phenomenon. Some of it has to do with capital ratios at banks and insurance companies because of markdowns on existing security asset – securities assets. We’ve seen insurance companies become aggressive buyers in certain portions of the market, particularly in some of the non-QM spaces. We’ve also seen – and we’ve seen, for example, in the unrated world, a lot of the buyers were open-end bond funds that have had redemptions so they don’t necessarily have material money to put to work versus managing liquidity. So for lack of better term, the – what I’ll call the senior securitization market is a little bit structurally broken as opposed to there’s more risk in the securities. We’ve seen some were – Fannie Mae has sold some loans, and we’ve seen some larger loan sales where the loans trade at a 75 or 100 basis point tighter yield than where a 75% senior bond backed by the same loans would trade, which is not something that you see very often.

So Larry, what the outlook do you think this will normalize spread, I mean, obviously, you guys have a rate position to buy loans cheap. Do you think things are going to cheapen out any view on how just delinquencies? Are you starting to see any pickup?

So we’re not seeing more delinquency in our portfolio, but our portfolio was not like an index fund. Our portfolio, we had significant absolute dollars of equity, which we’ve seen is far more important for delinquency than LTV. So our portfolio, we’ve seen the opposite. We’ve seen less delinquency because borrowers, the HPA over the last 18 months has given borrowers so much more dollars of equity that they’re significantly more protective and determined than they were maybe 1.5 years ago or two years ago. And as you can tell from the effect it’s had on our loan yields by extending duration, it’s significantly more than we ever would have expected these loans would re-perform. The – we see it – we’re starting to see appraisal of the new origination being pushed a little bit. We’re starting to see some of the things on the fringe that I think will cause some – maybe some cheapening of loans. But the real issue is that the securitization system is a little bit broken, particularly in the unrated world. Now one of the reasons for us – we’ve been fortunate that our loans have done so well and our servicer has such a good kind of performance reputation that DBRS now allows us to do AAA-rated securitizations with up to 40% of the loans being more than 60 days delinquent or non-performing. And that really helps us kind of avoid the unrated senior issuance market.

That’s interesting. Okay, that’s interesting. You guys are well-positioned when things do start to come out in terms of supply. And then I want to ask about, freeing up your leverage is below obviously, you’d go higher, but you could also free up some cash via Gaea. Is there an update on an IPO or...

Yes. Gaea is actually running a couple of different pathways. They are working on a IPO filing, although the markets for IPOs aren’t significantly good right now, but it creates optionality by basically getting it through the process so that sometime in the fall or Q1, we can just decide – it’s also looking at an additional private round in conjunction with some other things. It’s also been approached by three specs who are interested in rolling it in. So we’re having kind of all three parallel paths on Gaea. And I don’t know which one is the most likely, but we’re running all three paths in parallel.

And you have the option of selling. I mean, at some point you could do...

Yes. If we’re a public entity, we would probably have a 90-day lockup. But if we are a public entity, we could create liquidity. We also could just – it would also be marginable if it was a public entity as well.

Great. And last question. Thanks for the operating EPS. I mean I know there’s a lot of noise going through the income statement. And I think I’ve asked this before, but we look at taxable and operating. I mean, at some point, they have to converge. What do you encourage investors to focus on?

The tax is kind of the closest reference we know to kind of follow the cash.

Right.

Right. The GAAP has all kinds of other kind of gap required. For example, CECL it’s clear from kind of the way we’ve had to use it and implement it. CECL was not designed for people who buy loans at discounts. It was designed for banks to originate loans at par. And so CECL creates noise quarterly for us but it doesn’t necessarily – we don’t necessarily learn anything from it. The – we follow the cash is really what we learned from and follow the delinquency. And we’ve seen our loans significantly outperform on a monthly basis, far above our expectations. Some of that has been driven by the very high levels of HPA in our target markets over the last 18 months. And we – I know you’re going to find this hard to believe, but we don’t have a loan purchase model that assumes 25% annual appreciation in properties so...

I can understand that. I think [indiscernible]

Yes. Yes. So as a result, we – the amount of re-performance of loans typically, when you look at non-performing loans, they kind of break into three patterns. They either sell and pay off and put a lot of cash in the bank, they re-perform or they do something in between. We’ve seen in our target markets with the HPA, we don’t have any of the something in between. It’s only sell and put a lot of cash in the bank or just pay every month like clockwork.

Makes total sense.

Yes.

Thanks, Larry. I really appreciate it.

Sure.

And at this time, there are no further questions. I will turn the call back to Larry for any closing remarks.

Thank you, everyone, for joining our Great Ajax second quarter 2022 earnings call. We look forward to talking to you in the future and keeping our head down and just keep doing what we do. We appreciate your confidence in us, and thanks for joining in.

Thank you all for joining today’s call. You may now disconnect.