Participants

Emma Boa; Associate General counsel; Great Ajax Corp

Michael Nierenberg; Chief Executive Officer; Great Ajax Corp

Tom Catherwood; Managing Director; BTIG

Stephen A Laws; Managing Director; Raymond James

Presentation

Operator

Good day and welcome to the Great Ajax third quarter, 2024 earnings call. All participants will be in listen-only mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then one on a touchtone phone to withdraw your question. Please press star. Then two.
Please note this event is being recorded. I would now like to turn the conference over to Emma Boa, Associate General counsel. Please go ahead.

Emma Boa

Thank you and good morning everyone. I would like to thank you for joining us today for Great Ajax's third quarter, 2024 earnings call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rhythm Capital and CEO of Great Ajax and Mary Doyle, principal Financial Officer of Great Ajax. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Great Ajax website, www.greatAjax.com. If you've not already done, so I'd encourage you to download the presentation. Now, I would like to point out that certain statements made today will be forward-looking statements. These statements by their nature are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC.
In addition, we will be discussing some non GAAP financial measures during today's call reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement.
And with that, I will turn the call over to Michael.

Michael Nierenberg

Thanks Emma, good morning, everyone and thanks for joining the great Ajax earnings call during the quarter. You know, our mission is continues to be pretty much the same as what we discussed on our prior earnings call, which is to slow down legacy, what I would call negative, negative carry residential assets and redeploying the capital into real cash flowing CMBS with the intent for the company to get breakeven as soon as possible from an earnings perspective, which we expect to happen by the end of Q1. Obviously, this is before dividends regarding the dividend. While the company does not make money today, we are hopeful that we will continue to earn our way out of this deficit while maintaining the current dividend of 8¢. Obviously, there are no guarantees as I mentioned in the past, our playbook will be similar to what we've done at Fortress and what some of the other large alternative asset managers have done in the past, which is to grow earnings while looking for a transformational opportunity to grow the company. And as I pointed out, we've done that before while we were at Fortress and that was in 2013 when new residential was born out of a legacy mortgage rate known as Newcastle.
Regarding the balance sheet. Today, we'll continue to unwind the legacy resi assets which are on balance sheet while attempting to maintain book value, book value during the quarter was 547 which is essentially unchanged from the 550 something number that was reported last quarter while saying that we, you know, we're just not going to give away many of these smaller assets that sit on the balance sheet.
So, you know, we'll be patient and again, we're going to continue to earn our, grow our earnings and earn our way out of this. When you look at other assets that sit on the securitization on the balance sheet, the largest portion or there are some legacy securitizations where the actual cost of funds is 2.68%. So, there's no reason to call those transactions and those will stay outstanding for a while regarding opportunities. We'll be patient. You know, this past week we bid on a billion dollars of assorted commercial real estate loans. About half were multifamily and half were office. Obviously, they wouldn't all go into this vehicle. But just to give you a sense, we are starting to see a little bit of movement and starting to see some of the banks come out with some assets while saying that we need to make sure that whatever transaction or transactions we do around this balance sheet or huge winners. So, we're going to be patient here and again and we'll continue to grow our way out of this earnings deficit with that. I'm going to now refer to the supplement which has been posted on, posted on the website page 3. Just so we're all on the same page. Great Ajax is, it's an externally managed what I would call real estate investment platform. We intend to change the name from Grade A to Rhythm Property Trust at some point in the fourth quarter. We'll be updating our websites and all the associated information that go along with that we took over the company or the management of the company in June of this year, June 11th to be exact and again, between that time and where we are now, we've made tremendous progress, cleaning up what I would call the legacy, the legacy position. That's that sit on the balance sheet.
When you look at this vehicle and we think about the market opportunity, think of it more from a go forward basis. It is, I look at it today as a clean platform. There's not much there. And again, I am confident that we are going to find the right transaction or transactions to transform this into, you know, a real winner. So patients investors will be rewarded. I think if you're patient here, when you look at how this is managed, you know, again, when we were all part of fortress new residential at that point was externally managed. The the rhythm team here continues to work aggressively on any and all opportunities around the space. And we have a very good team here. Going back to the Fortress Days, we started new residential with a billion dollars of capital. And today we're roughly $7.5billion to $ 8billion of permanent capital. So, a good success story.
And then again, you know, we when you look to the right side of the page, we're very committed to grow this vehicle, but we have to be smart about how we do that for third quarter. Financial highlights GAAP net income loss of $8 million or '18 cents per diluted share earnings available for distribution negative $5.4 million or '12 cents per diluted share. We declared a dividend in the third quarter of 6¢. I think I misquoted, I said 8¢ before. So it will be, we'll maintain that 6¢ dividend yield currently 7.2% at the end of 930 cash and equivalents sitting on balance sheet, $ 84 million of that $ 84 million. The way I would think about it is roughly 30 odd million is available for investment. Some of that money has already been committed. And then we're going to keep a roughly a $50 million reserve. And then stockholder equity is a little under $250 million.
If you look at the transformation of this company during Q3, we sold $ 85 million of residential mortgage loans generating a little under $'18 million in cash. Since the end of Q1, the company sold roughly 91% of its legacy residential mortgage loans that they've held for sale.
We also sold $ 62.7 million residential securities which generated $14 million of cash. And then during the quarter, the team deployed $100 million of or we actually closed in $100 million of notional amount of AAA CMBS at roughly a 12% leverage return. When you look to the bottom, you can see what's really left on balance sheet. Obviously, there's not a lot there. You could look to the middle part of the page. You can see the breakout of our commercial real estate investing. And then I think one of the more important things while small look at what we've done with net interest income as it went from million 6 and we've up 126% to $3.6 million closing at the end of three Q3 and again, going back to my earlier comments, we expect to run this company break even before dividends and hopefully we can cover the dividend no later than the end of Q1. When we look at the path to profitability. We've done a few things here as well. We moved all of the legacy. There was a bunch of red servicing that went to Show Point Mortgage, which is one of our wholly owned subs at rhythm. We drove servicing expense saves. Probably, I think by about, I think we lowered the servicing fee by about 30% or so. I think that's about the number we took all the financing. We went from full daily mark to market to either nonmark to market or non daily mark to market with margin holidays. And we improved our cost of funds by 28 basis points on sales. Again, we sold a significant portion of the legacy resy assets. This is not that much left there honestly to talk about ongoing initiatives, cleaning up some of the legacy stuff and then continue to look to source opportunities in the in the commercial space playbook. I'm not going to spend any real time on this. It's, it's everything we've been talking about. Look to the future. Clean up the, you know, the remaining small items that sit on balance sheet and redeploy capital. Look for that opportunistic, either deal or investments to recapitalize the company and that will come as we go forward here, as you look at the real estate sector, obviously, there's a lot of, there's a lot of talk about real estate commercial. Now, the time is now what I would say is we see a lot of opportunities or not opportunities I should say and there's, there's a lot of hair on a lot of the things that, that come out and you got to be really, really careful here and we are really, really careful here. We want to make sure that the transactions that we do or that we do contemplate are going to be obviously or going to be the right ones. And that first large transaction we do in this vehicle is can be very, very important. So we're going to be really patient. You're starting to see a little bit more flow come out of some of the, some of the banks I would say, but you know, we haven't seen a ton come out yet, but we'll continue to see more when we look at the portfolio on page 9 going forward. This is just a snapshot of what it could look like. It could look quite frankly, it could look like something totally different. But really what we're trying to do is create a portfolio, cash flowing portfolio which returns in, in kind of the low to mid 10s for the so called Great X or Rhythm Property Trust shareholders. We are obviously involved in the equity. That was part of the deal when we took over the manager. And we're all highly vested in in seeing the success of this company. So with that, I'll turn it back to the operator. We can open up to some questions. Thank you.

Operator

We will now begin the question and answer session. If you ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time, your question has been addressed and you would like to withdraw your questions. Please press star. And then two, our first question comes from Tom Catherwood with BT IG. Please go ahead.

Question and Answer Session

Tom Catherwood

Thank you and good morning, everybody, Michael, you know, rhythm has succeeded with a hidden where they (INAUDIBLE) strategy since its inception. Now that you've been digging in with Ajax, soon to be RPT. You know what segment or segments of the commercial real estate debt universe have the dislocation and miss pricing that match a rhythm type investing strategy.

Michael Nierenberg

Good morning. And thanks for the question when I'll give you an example of the portfolio that we bid on last week. I mentioned before, you know, there was some multifamily in there, there was some affordable housing. And then there was some office, the one thing that we need to be, you know, we have a large real estate team, both here and obviously sculptor has a, has a terrific real estate team as well. When we look at these different asset classes, you know, we need to focus what I would say on things that are truly cash flowing. So when we look at office, for example, did that fit his vehicle? The answer is no, we look at affordable housing. Does that fit his vehicle potentially? But what you could expect is on a lot of these loans and these loans that we bid on all were coming up again, debt or maturity walls over the next year or so. I think you're going to see more of the stuff come out of the banks that sit in the workout groups. That's really where we're going to focus. We're not going to go and do what I would say, large single property deals. That's not, that's not where we're going to focus. I mentioned before, you know, we've been buying some triple AC M BS that gives us that low double digit return that's going to, and they're, they're fairly liquid. So if we do come up with a strategy or come up with a portfolio of assets that we think makes sense, we could always rotate out of those. But I think it's going to be more on, you know, every the hot topic these days are data centers. Right. I mean, you know, when we look at data centers, the answer is yes, we just looked at a student housing deal that we're going to deploy a little bit of capital in. But I think for the main thing, it's got to be cash flowing. It's got to be extremely solid or we got to have the expertise around the house to be able to manage through that certain things. Low, you know, low yielding or low cap rate multifamily, probably not for us right now. The other thing I would point out is in our manufacturing capabilities at rhythm, you know, our genesis business, which will do, you know, three plus billion dollars in loans this year. They do a fair amount of multifamily lending and there's always the opportunity for what I would call some nice mess, you know, coupon type preferred, you know, preferred mes or preferred equity in the cat. So we're not going to rule out anything but it's got to be really solid cash flowing to actually get this company to start making money again.

Tom Catherwood

Got it. Appreciate, appreciate that answer Michael and then maybe kind of following up on that. And I know this is kind of a crystal ball type question. So I apologize. But in the past, you've mentioned rate cuts by the fed really helping to spur transaction activity. But is there a scenario where maybe the lower rates give borrowers and kind of the banks that you're referring to some cushion to ride out this distress? And we get less opportunity coming to the market or is there just so much out there that that's not likely to be a scenario?

Michael Nierenberg

Yeah, I think, first of all, you know, rates this morning, you've seen the bond market back up fairly significantly over the course of the past month or so. Right. You got tens, you know, north of 410, you got the front end trading at 4% right now. While saying that, you know, I think rates historically, you know, a 6.5 coupon mortgage is not historically high or a '10 year note at four or 4.25% is just not high.
So what you really have is that the problem is the equity in these properties and, and you've seen it for some of the very, very large sponsors, the equity has been wiped out in a lot of these deals and particularly in a lot of the office deals. So there will be the opportunity to recap a number of these things that, that we look at on a, on a daily basis. I think where we are from a rate perspective, whether the fed goes, you know, '25 at the next meeting or not. I do think 50 was a mistake. Obviously, as you look back, I do think where we sit now and whether the Fed cuts rates another '25 or another 100 basis points, there's still going to be that huge need for both equity and debt financing in the commercial real estate sector. And I think that will only spur it as it relates to the banks, banks, once the bank takes on an asset they want out. So you know, you look at the very large banks that are sitting on a number of these assets. If they can get out, they're going to get out. And when you look at the banking system today and you look at their quarterly earnings, they make so much money. So to be able to clean up balance sheet and not hold capital against distressed assets, I think you'll continue to see it come out where rates are 3.5% or whether they're, you know, 5%

Tom Catherwood

Understood. Appreciate that color. And then last one for me, you know, kind of twofold one, obviously, you put a lot of capital to work in the third quarter, buying the AAA tranches of CMBS. Have you put any more of kind of that cash balance to work so far in October? And then, you know, beyond the $ 31 million of resi mortgage loans that are remaining in the held for sale bucket. Are there any other even smaller investments in your balance sheet that you could look to monetize in the near term?

Michael Nierenberg

Yes. So what I would say today, as we, as we, as we speak today, the amount of equity available for deployment to buy securities or something like that is about between $ 20 million and $ 25 million.
When I look at the balance sheet, think about the equity there, you know, candidly, there's a lot of small, odd lot positions that were created on the, on the this Great Ajax balance sheet. It's not going to give you a huge amount of cash really when you look at some of this stuff and, and we think about the total amount of, of real equity, it's not that much that's remaining in the portfolio. And I mentioned earlier, we're going to be patient about cleaning up, you know, the rest of the stuff like this. I'm looking at our at our position sheets, you know, on things that we could actually sell the a position is $2.6 million notional amount of debt. It's just that they're just small pieces. So where we marked and when I look at book value today at 547 I think we feel pretty good about that. The loan book of 30 odd million, you know, there is a bunch of what I would call scattered things that sit in there, including some zero coupon loans that were made, that somebody bought that were made by habitat for humanity. So, it gives you a sense of, of this, some of the stuff that we're working on to get cleaned up and we'll look to refinance out a number of those things or do short sales. What have you but in general, I would say that balance sheet is in very good shape. There's $ 20 million to $'25 million of cash left to deploy. When you think about the broader capital structure, there's $100 million of debt that carries a '10 and a quarter coupon. We're addressing that we'll be, we'll be figuring out solutions around that as well.
But it's going to take a little time to get this company to where we want to. Again, unless there is that large transformational deal or group of loans that we think are going to make a lot of sense for the balance sheet. And that's what's going to take us forward. But I think the message, the clear message to the market and shareholders for now is the story remains the same. Continue to deploy a little bit of capital here, I think will be fully deployed by the end of Q4, you know, in, in, in commercial stuff. Look for those, look for that great opportunity, maintain our dividend policy right now. Obviously, it's a board decision and figure and deal with the, you know, the $ 100 million or so of debt. That's a '10 and a quarter coupon.
So, but again, it's think of it like almost like a, you know, I hate to use this word like a blank canvas. It's a $250 million vehicle that I think has tremendous upside for shareholders.

Tom Catherwood

Got it. Thank you for all the thoughts Michael. That's it for me.

Michael Nierenberg

Thank you.

Operator

The next question comes from Stephen laws with Raymond James. Please go ahead.

Stephen A Laws

Hi, good morning. Michael, a lot was covered in your comments with Tom, but just kind of make sure I tie this together. You mentioned $ 20 million to '$ 25 million remaining of investable capital and I think in your prepared remarks, you commented kind of maybe break even this quarter and supporting the dividend in Q1. So, so is that really just Q1 being the full quarter impact of getting these remaining proceeds deployed into most likely triple ACMBS?

Michael Nierenberg

Yeah, I think it's a couple of things. One is, it's addressing our debt, right, which is $ 100 million and a quarter coupon debt to deploying, you know, the rest of our so-called capital three, cleaning up whatever we can on balance sheet. But I'm not, you know, we're not really that concerned where we are today balance sheet wise with the, with the legacy assets. I think it's, it's, you know, Steven to your question, I don't see break even. I don't believe this quarter. I think it's going to be more of a first quarter thing pre dividend. And if we could figure out ways to cover that and you know, do some, what I would say capital reengineering, I think that's how we, that's how we're going to get there sooner rather than later. But in general, I think I would, I would look to Q1.

Stephen A Laws

Great. And then, you know, I thought the slide on page 8, the bank lending was, was pretty interesting. I mean, multi hasn't really changed much, right? But construction and non multi CRE you know, banks have become much less active or interested in that right now. Is that really where we should expect you to lean in or is this really a situation where you're looking for that kind of big bite? That that's significantly accretive and it's just the timing of when that, that large opportunity presents itself is uncertain.

Michael Nierenberg

I think it's both, you know, I don't, I don't know that we need to lean into any one asset class. Going back to Tom's question, you know, we have a large construction multifamily lender in Genesis.
There could be things that we do together between Genesis and and grade age Act as we go forward. You know, the, the asset class itself, if you think about it on the multifamily side, is an extremely good re asset for us. So we'll continue to monitor that and then you look at the opportunities that get created as a result of us owning a great X. We see plenty of opportunities. So I, I think it's you know, we're not, we're not what I would say. We're not married to any one type of lending vertical. However, you know, we don't want to put all our eggs in one basket. So I think it's going to be a little bit more diverse. And the bank and Stephen, to your point, the banks, you know, banks don't want to really do construction loans. And they don't want to do other types of loans. So it, it is a great opportunity for our genesis business. But, you know, there is a possibility going forward at some point that Great Ax does something with them.

Stephen A Laws

Great. And then, and then lastly, and it may be too early to know just on the financing side. I noticed in the in the deck, you guys made some progress on, on both improving and reducing the cost of the financing facilities. But as you look forward, you know, do you think this vehicle will largely be financed using bank lines? Is that, you know, when you look to the markets for some type of clo or, you know, if it's construction, we, we try to find a way to maybe find another note financing or some other financing alternative away from bank lines and you know, CLOs.

Michael Nierenberg

Yeah, I think the bank lines will be specific to the securities portfolio, but at some point, we'll want to hit, you know, the debt, the debt markets or, or you know, the equity markets for some type of different security is what I would say.

Stephen A Laws

Great, appreciate the comments this morning, Michael.

Michael Nierenberg

Thank you. Thanks Steven.

Operator

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

Michael Nierenberg

I appreciate the questions, everyone and stay tuned. This is all about the future. You know, we're, we're looking to take this vehicle and create great earnings for our equity holders and shareholders that, that join us along this what I would call Endeavor going forward. So, have a great week. Thanks for dialing in. Take care.

Operator

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