Great Ajax Corp
NYSE:AJX
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Great Ajax Corp
Earnings Call Analysis
Summary
Q2-2024
Great Ajax reported a GAAP net loss of $12.7 million, reduced from the previous quarter, driven by asset sales and mark-to-market losses. The company is shifting its focus from reperforming residential assets to commercial real estate investments. They maintain a $0.06 per share dividend and hold $253.6 million in equity. The goal is to grow cash reserves and invest in high-yield assets, targeting mid-teens returns. Management aims to opportunistically raise equity at 6-7% and deploy it at 12-15% returns, believing this strategy will be accretive to shareholders over time.
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Good day, and welcome to the Great Ajax Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to [ Emma Boling ]. Please go ahead.
Thank you, and good morning, everyone. I would like to thank you for joining us today for Great Ajax's Second Quarter 2024 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm 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.
Thanks, Emma. Good morning, everyone, and for those of you that are joining us this morning, we appreciate you dialing in.
Today's call is really about the future. When we first embarked on this from the Rithm perspective, we looked at this vehicle and thought, let's look back to the playbook that we established back at Fortress in 2013, where we saw dislocations in the MSR market. And based on that, we created a vehicle that we seeded with $1 billion of capital. And then today, that vehicle is known as Rithm Capital, which has $7.2 billion of equity capital, a large balance sheet and is a world-class asset manager.
We are going to look to do the same playbook, with the difference this time looking at the commercial real estate market and the dislocations we see there and the huge needs for capital. So we're going to leverage the very same investment teams that came from Fortress with us here, and we're really excited about the challenge as we look ahead.
The needs for capital in the commercial real estate market, I don't think it's something that we need to go into a huge depth on, but there are huge needs. When you look at the landscape around commercial real estate REITs, this vehicle today is clean. It has no legacy commercial real estate assets. And as we look going forward, what we're going to do is migrate from what I would call, reperforming residential assets, sell down on those or sell those down, other than the stuff that we need to keep for risk retention, and reinvest into current cash flow and commercial real estate assets, which we've already begun to do so.
The deal closed, I believe, on June 11, when Rithm took over the management contract. And as we go forward, full staff here at Rithm focused on this business around the commercial real estate side.
As we think about the commercial real estate investing environment, we think it's some of the best investment opportunities that we've seen, even looking back to the great financial crisis, whether you look at office or you look at some of the other things, particularly where spreads are, for example, even on AAA CMBS, where, over the course of the past couple of weeks, we've made a few different investments there as we've sold down some of the legacy residential side.
The one thing I want to be clear about, it's going to take time to get back -- get this vehicle back to a place where it's cash flow positive. It's growing in a meaningful way, but we're very confident that with our existing team, we're going to be able to do that.
As we think about the dividend, and we think about earnings, obviously -- and Mary Doyle, who is the CFO of Great Ajax, is sitting with us. She'll talk a little bit about the financials this morning.
But as we look at where we are, look at the dividend policy. Yesterday we had a Board meeting, the Board voted to keep the dividend the same. We will be evaluating the dividend quarter-to-quarter as we think about the ability to grow earnings. The vehicle will need more equity over time and that equity will likely be -- hopefully raised in and around what we'll call opportunistic investments. So as you think about that, if the dividend yields where we could raise equity is in and around, call it, 6% to 7%. We're able to deploy capital at 12%, it is going to be hugely accretive for shareholders.
For the quarter, when you look at the overall numbers, there were losses due to asset sales as the balance sheet continues to get turned over as well as some mark-to-market issues. Mary is also going to talk about book value and how to think about that in the context of what was reported versus actual mark-to-market.
That's kind of my opening comments. We'll now flip to the supplement, which has been prepared and which is posted online. Again, Mary will take the financial side. I'll take the -- some comments. If you start on Page 3, like I pointed out in the opening remarks, Rithm Capital today has $7-plus billion of equity capital, give or take, a $40 billion balance sheet. We own Sculptor Asset Management, which is a large world-class asset management business. And really, the Great Ajax vehicle is going to be focused again on commercial real estate opportunities as well as some other opportunistic investments that we may see come across the platform, and we see plenty.
The team, the same team that got us here on the Rithm side, is going to be the very same team, plus some that's going to be focused on Great Ajax.
On the commercial real estate side, just a side note, when we look at the amount of real estate professionals we have here at Rithm, there was about 30 folks between Rithm and an opco that we own, 50% of it at GreenBarn. So we have a lot of real commercial real estate expertise around the house. This is not something we take lightly, and we're really excited again about the prospects as we look at that going forward.
On the Sculptor side, Sculptor has about 35 folks as well, 35 to 40 folks in the real estate business, and they are world-class commercial real estate investor.
I'll let Mary talk a little bit or as much as you want, actually, about the financial highlights on Page 4, and then we'll get back into a couple of other slides and then open up for Q&A.
Thank you, Michael.
We reported a GAAP net loss of $12.7 million. This is considerably lower than the first quarter of 2024, and is also driven by mark-to-market losses as well as some additional realized losses on the sale of mortgage loans. If you look at the balance sheet, you can see that we are continuing to contract on the asset side and build up cash reserves ready to deploy in the commercial real estate strategy that's being discussed.
Earnings available for distribution also came down versus the loss last quarter. And just to note that earnings available for distribution is what we previously referred to as operating income in last quarter's release. We have some transaction costs and as we continue to restructure the balance sheet, we do still have a negative net interest margin, and that's driving most of that loss.
We are declaring a common stock dividend of $0.06 per share. And of note, if you look at the balance sheet, you can see that we've continued to grow our cash, cash balance from the year-end, notwithstanding redeeming our convertible debt in April of 2024.
Book value at $5.56 per common share. As most of you know, most of our assets are carried at amortized costs. We did move a chunk of the loan portfolio to fair value, which is driving losses. But we are at an amortized cost value of $5.56. If we went to a full fair value valuation, we'd be at around $4.20, and that is marking mostly the asset side of the balance sheet.
Total stockholders' equity at quarter end was $253.6 million. We expect to grow that over time. We might take some incremental hits as we continue to sell loans. That's all part of the longer-term strategy to grow cash, ready to deploy into higher-yielding assets to improve our net interest margin.
Great. Thanks, Mary, for the update.
Folks, we'll now flip to Page 5. Just to talk a little bit about the transaction of Rithm and Ajax. Rithm just took over the management contracts from Great Ajax. Again, same team. Some of the actions that were taken in the second quarter, Mary alluded to, selling down loans. A lot of the stuff happened prior to us quite frankly, getting involved. We redeemed $100 million of the convertible senior notes. And again, I think the overall story for us as a team and as a business is looking ahead for the future and how we reposition the company.
Page 6 just talks about the commercial real estate opportunities. We look about -- we are a commercial real estate REIT without any legacy issues. I mean I think that is a huge deal as we think about the growth going forward and the absolute yield levels and absolute spread levels. We do believe we're going to be able to grow this, not just grow it, but actually generate real earnings and hopefully grow the dividend over time.
Environment, as we discussed, very, very attractive commercial real estate investing environment. And then overall, the breadth of what we do here at Rithm, I think is, we're happy to match up against anybody in the business.
Page 7 just gives you a little bit of an illustrative future-state portfolio, talks about commercial real estate securities, loans, mezz loans, other investments. We're going to target absolute yield levels from an IRR perspective of something between, give or take, a lower to mid-teens type number for this vehicle, and we're confident we're going to get there.
With that, I'll turn it back to the operator, and then we could open up for some Q&A.
[Operator Instructions] Our first question comes from Eric Hagen with BTIG.
Can we start by repeating the impact of marking the whole book to fair value? And just looking at the balance sheet, what is the balance of the legacy RPL portfolio right now? And what's in commercial real estate?
So on the book value question, Eric, full mark-to-market takes us in and around $4. I think Mary alluded to something around [ $4.23 ].
What I would tell you is that on all the assets that we have on balance sheet today, they're mark-to-market, I think we feel very good about the marks where things are. That doesn't mean you'll have a gain or a loss going forward, but I think we feel very good, particularly in light of what's happening in the credit markets.
As far as total going forward, there'll be some securities and some loans that are going to be sold. [ Charles ], what's the total going to be about? Between loans and securities to clean up the balance sheet, it's about $100 million and...
About $120 million.
About $120 million of assets that are left to be sold. And yes, so it's not much.
Okay. Got it. And then on the commercial real estate side, are we talking mostly securities initially? And what's the balance there right now? What kind of returns are you guys...
Yes. Currently, we've made -- I think we've made about 3 investments there, [ mostly ] AAA CMBS, highly liquid securities. We'll use those as a placeholder now with a levered return of something probably [ 12 plus ], something between 12% and 15%. And like I said, there is -- I think we bought 3 tranches of AAA CMBS.
Is it reasonable to expect that by the end of the year, that $120 million left to be sold from the RPL portfolio will be...
Yes.
Our next question comes from Stephen Laws with Raymond James.
Curious, Michael, as you look at the legacy assets, and you think about it maybe in percentage terms, how much capital of existing capital will be needed to support kind of the first loss pieces or risk retention that you'll need to keep? And what percentage of that capital will be freed up to go into new targeted investments?
So there -- so Stephen, just so we understand the question, your question is how much capital is allocated to the risk retention securities we're not able to sell, and then how much is going to get released against the $120 million that we intend to sell. Is that the question?
Yes.
Yes. The risk retention assets have approximately [ $15 million to $16 million ] worth of equity capital that sit against them. And the non-risk retention assets along with some of the RPL and NPL securities are probably in and around, let's just call it, $35 million to $40 million worth of equity gap.
Great. And then -- appreciate that. To follow up on Eric's question, as you think about whether it's 12 or 24 months out, do you expect this to be largely CRE whole loans? How big of a mix will securities be? And I guess, along those lines, from an investment sourcing standpoint, do you feel you have everyone you need between the GreenBarn and Sculptor teams? Or do you need to build out that origination effort?
Yes. I think, just so we're clear, at the Rithm level, Sculptor is a world-class, what I would call real estate investment business, and they'll continue to do that across our entire business. From a platform perspective here at Rithm and Sculptor, I believe that we see pretty much everything that comes out in the real estate space. So we don't need anything new.
On the -- as we go forward and think about this vehicle at the -- from a Rithm management perspective, if you look at Page 7, we gave a little bit of a potential future state portfolio, which has some CMBS, some senior loans, some potential mezz loans and then some opportunistic investments. Everything kind of geared around a mid-teens type return. And part of it is going to be what the market is going to give us, right? If you get a couple of Fed rate cuts and the curve steepens out here, I think credit spreads overall will continue to do better. And by default, the assets that we're going to have on balance sheet should do better, and that should help grow book value as well.
So I think it's a little bit of a TBD. But the one thing we're all clear about is that this is a -- almost like a blank canvas with some of [indiscernible] with $250 million of equity, and that the goal is going to be to grow this not only from an equity perspective, but really from an earnings standpoint. So we earn out of the [ hole ] that the current dividend is paying. But like I said before, we're going to evaluate the dividend quarter-to-quarter.
Right. Well, certainly a good time to be active lending in CRE right now, and good luck with the transition.
[Operator Instructions] Our next question comes from Jason Stewart with Janney Montgomery Scott.
On Slide 7, Michael, it sounds like this is sort of a progression of how the portfolio will grow. And when you get down to opportunistic, is that going to be focused on CRE mortgage? Or is that platform-based operating businesses? How do you see that evolving through the cycle?
I think it's -- we don't know -- I mean, we see a ton of stuff, honestly, that comes across, right? If you think about Rithm and the scope of our business, whether it be on the residential side, the commercial side, the consumer side and everything else that we look at, there are a ton of opportunities that not everything pans out, obviously, when you underwrite them, but there's a ton of opportunities that come across the platform.
You could envision at some point there could be some M&A activity, quite frankly. You could have a bank that might come in and say, "We want to sell x amount of loans and we believe in that portfolio of loans."
I think the main thing to think about here is we're not just going to be able to grow through earnings. We're going to need more equity capital over time. And to the extent that we hit that we need more equity capital, there's got to be something on the other side that makes it accretive for us to come to market to say, okay, we want to raise equity because we're deploying capital to 15% return.
So if you think about it, again, going back to my earlier example, if you have 6% to 7% cost of capital on the equity side and you're able to deploy it at 15%, it should be a home run for shareholders as we go forward. It's going to take time, though, so we're all clear.
Right. And along those lines, how willing are you to take the blank canvas in this clean balance sheet and acquire something that might be highly distressed, but has some issues to work through? How do you balance those 2?
I think in our history at Rithm slash New Residential, we've demonstrated a willingness to do so. A good example would be Ditech when we took that out of bankruptcy, and we had a lot of hair on it. And it's been a grand slam.
A lot of the acquisitions we've done over the years, if you look at -- we did the Caliber deal, that was a great one. You look at a number of -- we did HLS and HLSS and some subsequent investments with Ocwen, those were great ones. So yes, I mean, that's part of our DNA. You're not going to be able to go regular way to say, okay, you're going to compete against X, Y, Z and all of a sudden, everything is going to be 15% to 20% returns. We're going to have to do some stuff with hair on it for sure.
Yes, understood. And last one for me. Just more near term in terms of the senior loan focus, is there a geography or an asset class that we should expect you to focus on first?
No. I mean for now, we're taking excess cash and we're deploying a AAA CMBS that are highly liquid. Again, I think we'll look at anything. If you look at some of the investments we made in the real estate space, on the Rithm balance sheet, we made an investment that was in the press in CXP, which is Columbia Property Trust. It was a distressed portfolio of office. So I think we'll look at anything. If it underwrites and we feel like the risk-adjusted returns warrant that investment, we'll try to do that.
This concludes our question-and-answer session. I would like to turn the conference back over to Michael Nierenberg for any closing remarks.
Thanks for dialing in. Thanks for the questions, guys.
We're excited about this one. I mean I think it's -- again, it's a clean canvas in a lot of ways. I don't want to sound like an artist, but as we look forward, we think the opportunity set, put in front of us around this vehicle is going to be something that's going to be special. We want to make sure that we're focused on the commercial real estate space. We have a lot of expertise around the house. And we look forward to updating you throughout the quarter and on next quarter's call. So have a great rest of the summer, and thanks for dialing in.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.