Great Ajax Corp. (AJX) Q1 2023 Earnings Call Transcript

Great Ajax Corp. (NYSE:AJX) Q1 2023 Earnings Conference Call May 4, 2023 5:00 PM ET

Company Participants

Larry Mendelsohn – Chief Executive Officer

Mary Doyle – Chief Financial Officer

Conference Call Participants

Matt Howlett – B. Riley

Eric Hagen – BTIG

Operator

Good day, everyone, and welcome to the Great Ajax Corp. Q1 2023 Financial Results Conference Call.

At this time, I would like to hand things over to Mr. Larry Mendelsohn, CEO. Please go ahead, sir.

Larry Mendelsohn

Thank you. Thank you, everyone, for joining us for our first quarter 2023 investor call. Before we get started, I’d like to point out Page 2 the Safe Harbor disclosure, and for forward-looking statements. I apologize for my voice. The allergy season in Portland is wane right now.

Before we get started, I wanted to give you a little introduction. Q1 of 2023 was as expected and predominantly as we discussed on the March 2 call, a couple of things to note before we get into the details though. In the first quarter, loan performance continued to increase and loan cash flow velocity from reinstatements on delinquent loans and from sales of homes by borrowers, particularly in March. This continued into the second quarter of 2023 as well.

Prepayments from borrowers, refinancing their mortgages, however, continued their slower pace as you would expect. The regular payment performance of our mortgage loans and mortgage loans and our JV structures in excess of our modeled expectations at the time of acquisition, for loans purchased at a discount to UPB has increased previous GAAP income by accelerating the purchase discount accretion, because of the required application of CECL. This then reduces forward GAAP interest income and return on equity thereafter.

However, the increase in cash flow velocity in the first quarter, particularly in March has increased even the post-CECL GAAP yields a bit. We’ve seen this in the second quarter as well so far.

At March 31, we did approximately $49 million of cash as well as significant amount of undercover securities and loans, which I’ll point out later in the table.

On Page 3, business overview, our manager’s data science guides our analysis of loan characteristics and the geographic market metrics for performance and resolution probabilities and the ability to source these mortgage loans through long-standing relationships has enabled us to acquire loans that we believe have material probability of prepayment and/or long-term continuing re-performance.

We’ve acquired loans in 378 different transactions since 2014, only three transactions however in first quarter of 2023. We own 19.8% of the equity of our manager at a zero basis, and we do not mark-to-market our ownership interest on our balance sheet.

As a result, our book value does not reflect the market value of our almost 20% interest. Internalizing the management of Great Ajax would result in recording a material GAAP capital gain from our 19.8% interest in our manager.

Additionally, our affiliated servicer Gregory Funding provide a strategic advantage in non-performing and non-regular paying loan resolution processes and time lines and data feedback loop for our managers’ analytics. In today’s volatile environment having our portfolio teams and the analytics group at the manager, working closely with the servicer is essential.

We’ve certainly seen the benefit of this with significant increases in loan performance, our consistent prepayment from property sales by borrowers, especially for delinquent loans. And with our AAA-rated structures that get up to 40% of loans to be greater than 60 days or more delinquent at the time of securitization.

Like our 20% interest in our manager, we now have a 21.6% economic interest in our servicer at a very low basis as well. In January, we increased our direct ownership in the parent of our servicer from 8% to 9.6%, and we also own warrants for an additional 12%. We don’t mark-to-market our equity interest and the service or on our balance sheet either. Our servicer is currently evaluating a private equity amount as part of rolling out some new data and technology-driven programs through strategic joint ventures and MSR joint ventures as well.

We still have low leverage. At March 31, our year-end corporate leverage was 3.3 times, our quarter one average asset base leverage was 2.6 times. We own a 22% equity interest in Gaea Real Estate Corp. Gaea is currently a private equity REIT that primarily invest in repositioning multi-family properties in specific markets and a triple net lease freestanding veterinary clinic properties in conjunction with several large national veterinary practice aggregators.

We carry our Gaea interest on balance sheet at the lower of cost to market. Gaea completed an additional round of equity about in the first quarter of 2022 at a premium to our carrying value, but our balance sheet income statement do not reflect any markup. We currently expect Gaea to raise additional private equity and ultimately become a public company, the current environment of bank runs and commercial real estate loan opportunities create significant optionality for Gaea.

On Page 4, just some highlights for the quarter. Net interest income from loans and securities, including $0.6 million of interest income from the application of CECL was approximately $4.1 million in the first quarter. Our gross interest income excluding $0.6 million from the application of CECL was $18.5 million.

There are three reasons why GAAP gross interest income is lower. First, we had approximately $50 million lower average interest-earning assets on balance sheet in the first quarter versus the fourth quarter of 2022. Second, we’re continuing to have significantly more delinquent loans than expected to become performing.

As delinquent loans become performing, they provide more cash flow but over a longer period. Since we buy loans to a discount, this increase in performance can extend expected duration, which lowers yield. However, in the recession and in declining house price environment, low LTV loans provide material hedge as increased delinquency shortest duration and significantly increases corresponding yields.

The third reason for lower interest income is the design of CECL. CECL was primarily designed for banks with loans with a par basis so that accelerating reserve recapture came after a write-down.

We establish an allowance under CECL when we acquire new pools of loans. If the NPV of the loan pools contractual cash flows is greater than the NPV of our expected cash flows and that allowance is allocated to part of our purchase discount.

If the expected cash flows on those loans increases in subsequent periods, we are required to reverse the related allowance into interest income. This immediate recognition of the increase in the change in cash flows reduces future yields and discount accretion. We also accelerate discount accretion when loans pay in full.

Despite the application of CECL, yield on interest earning assets increased little due to increased prepayment and reinstatement, particularly in the month of March. 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 interest income from loans.

For those – for these joint venture interests, servicing fees for securities are paid out of securities waterfall. So our interest income from joint venture 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 the servicing fees 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 March 31, 81.3% of our loan portfolio by UPB made at least 12 of the last 12 payments or 74% at June 30, 2022 and 79.6% at December 31, 2022. This compares to 13% at the time we purchase the loans.

Our NPL purchases over the last 15 months increased materially relative to RPL purchases. Previous increases in housing prices helps maintain these payment – prepayment patterns and lead to decreases in the present value of expected reserves and the related income recognition of $0.6 million of unallocated loan purchase discount reserves under CECL in the first quarter and the additional reserve recaptures we had in each of the previous eight quarters.

While loans become regularly paying produce higher total cash flows over the life of loans on average, they can extend duration and because we purchase loans and discounts, this can reduce percentage yield on the loan portfolio and interest income.

Loans that do not migrate to regular monthly pay status typically have materially shorter durations and therefore result in higher yields. We’re seeing that prepayments from property sales from both regularly paying and non-regularly paying loans is continuing and even increasing.

Our weighted average cost of funds in first quarter was higher than fourth quarter by approximately 40 basis points. Most of this comes from the remaining floating rate repurchase agreements on loans getting ready for securitization and some joint venture securities repurchase agreements and related increases in SOFR.

We expect a significant percentage of floating rate funding will be reduced through rated securitizations in Q2. The other reason weighted average cost of funds are up is because as we’ve delevered, the unsecured debt that we issued in late August becomes a higher percentage of our total debt outstanding, which increases the weighted average cost of funds.

Net income attributable to common stockholders was negative $7.9 million or $0.34 per share. There are several items of note that has impact on earnings in the first quarter. To make a little easier to follow, we have a table that ties GAAP to operating income on Page 16 in this presentation as well as in our 10-K.

Operating earnings was negative $2.1 million or $0.09 per share. Taxable income net of preferred dividends was $0.05 a share. Taxable income decreased in the first quarter for two primary reasons. First, significant increase in monthly performance in delinquent loans, which extends taxable income yield duration even more than GAAP yield duration as taxable income for performing loans is based on contractual duration of the loan. So if a loan has 30 years remaining to maturity, taxable income comes in equal installments over 30 years unless the loan prepays.

Second, we saw prepayments increase on performing loans, which typically have a higher tax basis relative to prepayment on non-performing loans. Taxable income is not affected by the CECL-related reserve recapture. So when we actually receive cash payments from borrowers and capture purchase discount because of larger than contractual payments, it creates taxable income. This is the first quarter where we’ve seen significant increase in property sales for performing loans versus delinquent loans.

We recorded a loss on investments in affiliates of $100,000 as a result of the flow-through of the mark-to-market decline in price of our common shares owned by our manager in the first quarter. Our manager receives a significant portion of its management fee in shares and changes in market value of those shares flows through to us based on our 20% ownership interest percentage.

Other income declined as we recorded $3 million loss from the sale of Class A senior debt securities in one of our joint venture transactions in February as we discussed in our subsequent event section in our March 2 earnings call. $2.2 million of this was already reflected in book value at December 31 in our joint venture structures we and our partners buy loans into multi-tranche securitization structures and we each retained a pro-rata vertical slice of each tranche of securities, including the equity tranche.

The Class A senior is usually the lowest coupon in its priced at market coupon in yield at that time. This Class A senior bond thereby had a low coupon and had negative carry from repurchase agreement funding and made sense to sell the Class A senior security and redeploy the capital for higher returns.

Book value per share was $12.58 at March 31. Book value decreased primarily by our GAAP loss and dividends paid with an offset from positive mark-to-market adjustment of our joint venture debt securities. There is a table on Page 17 in this presentation that details the change in book value. We do not mark-to-market our ownership interest in our manager and servicer and have close to a zero basis on the balance sheet, their market values are significantly above zero but book value would not reflect that.

In February, we refinanced our unrated 2019-E, -G and -H joint ventures into Ajax Mortgage Loan Trust 2023-A. 2023-A is a rated joint venture structure. We retained 5% of the AAA securities as required by vertical risk retention rules and 20% of the AA through B rated securities and equity of the structure.

At March 31, we had approximately $49 million of cash and for Q1 of 2023, we had an average daily cash and cash equivalent balance of approximately $50 million. We had approximately $44 million of cash collections in the first quarter. At March 31, we also have significant amount of unencumbered securities from our securitizations and joint ventures and unencumbered mortgage loans and we’ll discuss this more in detail on Page 12.

Approximately 81.3% of our portfolio by UPB made at least 12 of their last 12 payments compared to a small fraction of this at the time of loan acquisition. This increased from 79.6% December 31 and June 30 of 74.2%. This is despite buying significantly more NPLs and RPLs for the last 15 months.

This increases life of loan cash flow, but the duration extension reduces yield and interest income in the current quarter. As more purchased delinquent loans reperform rather than prepay or default, this lowers current cash flow income as well.

Purchased – if we go to Page 5, purchased RPLs represent approximately 89% of our portfolio at March 31. They represented 96% a year earlier. We primarily purchase RPLs that have made less than seven consecutive payments and NPLs at a certain loan level and underlying property specifications that our analytics suggest lead to positive payment migration, early property sales and related prepayment on average. We typically buy well-seasoned lower LTV loans.

Since November 2022, we have seen residential loan prices increase materially, especially for regular paying loans, but also for non-performing residential loans. For residential loans, we continue to see stronger performance than expected in our portfolio. However, given the increase in interest rates, credit tightening and the potential for material economic slowing, we would expect an increase in delinquency in default at some point and therefore an increase in availability of sub-performing and non-performing loans.

As a result, we have been hesitant to be aggressive in residential loan acquisitions as we expect a better opportunity set will develop. One thing we have seen is that significant home price appreciation and the resulting material increase in absolute dollars of equity made borrowers more engaged and financially attached to their properties, and therefore, more determined to maintain regular payments. Historically, we have frequently seen mortgage borrowers pay credit cards and auto loans and HELOCs before paying first mortgages in times of financial stress.

However, as a result of significant increases in absolute dollars of equity for older loans, we are now seeing increased delinquency for their credit cards and auto loans and the opposite for their first mortgages. Commercial real estate loans have not fared as well, and we are beginning to see opportunities. We believe there will be significant opportunities of sub-performing and non-performing commercial real estate loans in many markets as we get later into this calendar year and thereafter.

As we mentioned on the third quarter and fourth quarter 2022 earnings calls, we see one of the material market risk as the Fed breaking the system. We have seen a preview of this in the last few months, it is having a less talked about effect on mid-size and sub mid-size bank liquidity and loan portfolio performance. They frequently have higher percentages of their loan portfolios with commercial real estate exposure. We are beginning to see CRE loans for sale from these institutions and expect that opportunity set will grow.

We also expect that resulting bank consolidation will stimulate this as well. We have joint venture partners that would like us to find $1 billion-plus of commercial opportunities as they develop. From the same banks, we are seeing agency and non-agency MSRs being put up for sale in sub-$1 billion UPB increments as well as large MSR offerings from larger banks and originators.

As these banks look for predictable liquidity, they are marketing MSRs as MSR sales take two to four months to settle. One thing to note, however, is many of these small offerings now are not actually trading as the MSR bids are below current market value at these banks. We think there is also going to be significant MSR opportunity set and having Gregory as a servicer and owning 21.6% economic interest in it will be beneficial. We are discussions with several institutional MSR investors on joint venture structures.

On Page 6, we own lower LTV loans, but we did not buy many loans in the first quarter. Our overall RPL purchase price is approximately 42% of current property value and 90% of UPB. We have always been focused on loans with lower LTVs with certain threshold levels of absolute dollars of equity and in target geographic locations. This has become even more important in the recessionary environment.

On Page 7, since the third quarter and fourth quarter of 2021, we’ve significantly increased our NPL purchases versus RPLs. NPLs on average can have shorter duration than RPLs. For NPLs on our balance sheet are overall purchase prices, 89% of UPB, 84% of the owing balance, including arrearage and 47% of 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 significant reinstatement and reperformance on our NPLs.

As I mentioned earlier, for both RPLs and NPLs, purchasing aged low LTV loans at 50% discounts to property values and that has significant absolute dollars of equity provides a natural credit hedge to housing price declines and recession as resulting increases in delinquencies, shortened duration and increases corresponding yields quite materially.

On Page 8, at March 31, approximately 78% of our loans were in our target markets. California continues to represent the largest segment of our loan portfolio at approximately 22%, however, California has been nearly 40% of all prepayments in 2021, 2022, and first quarter of 2023. Our California mortgage loans are primarily in Los Angeles, Orange and San Diego counties.

Florida represents approximately 17% of our portfolio. Miami-Dade, Broward and Palm Beach counties are approximately 75% of that. We continue to see demand for homes in our price range targets in our markets, both from potential homeowners and single family rental buyers.

On Page 9, at March 31, approximately 81.3% of our loan portfolio made at least 12 of the last 12 payments as compared to under 74.2% a year ago. Approximately 72% of our loan portfolio made at least 24 of the last 24 compared to 69% three months ago. Over 83% have now made at least seven consecutive payments. This compares to a small fraction at the time of purchase.

The significant increase in multi-performance is more notable, given that since Q3 of 2021 we purchased primarily NPLs rather than RPLs. Much of this is likely due to Gregory Funding working with delinquent borrowers on a personal basis and to absolute dollars of home appreciation. As our target markets are significantly determined by data analytics that predict forward home price appreciation for each market in dollars. Historically, we have seen that when our purchase loans reached seven consecutive payments, excuse me, they typically get to 12 consecutive payments more than 92% of the time. Seven consecutive payments have been the statistical turning point.

Subsequent events on Page 10, we have $18 million UPB of RPLs and NPLs under contract at a price of approximately 83% of UPB and 54% of underlying property value. We expect these to close in the next week. We declare a cash dividend of $0.20 per share to be paid on May 31 to holders of record on May 15. We expect that taxable income will likely exceed GAAP income as result of CECL as cash yields on loans exceeds CECL impact to GAAP yields on loans.

To the extent the Fed continues significantly raising rates, the impact on remaining commodity rate financing will have some offsetting effect on taxable income. However, credit tightening and resulting recession will likely increase taxable income by shortening low duration and securitizations we have in the pipeline will replace more expensive floating rate funding and thereby likely increased taxable income also. We also see investment opportunities set brewing as a result of recession risk and banking sector risk issues as well.

On Page 11, some financial metrics average loan yields and average yields on beneficial equity interest in our joint ventures increased a little primarily due to significant loan cash flow in March and also so far in April. For debt security to 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 and have increased in 2020, 2021 and 2022 relative to loans. Since we purchased loans in discount, the increased reperformance of delinquent loans materially in excess of expectations can extend duration and reduce yield. The significant absolute dollars of equity for our loans, both from the types of loans we buy and the home price appreciation in our target markets on average, both accelerated prepayment from home sales on delinquent loans and led to material reperformance in excess of expectations, which reduces ongoing yield for loans purchased at a discount.

The sale of underlying properties by borrowers with delinquent loans with certain minimum absolute dollar amounts of equity and underlying geography and borrow demographics has been steady, but it was marginally lower in January and February and it has increased again in March and April.

Leverage continues to be low, especially for companies in our sector. We ended the first quarter with asset level debt at 2.6 times, which is lower than it was at year end 2022. Our total average debt cost was higher in Q1, primarily the result of rising SOFR base rates for repurchase agreement funding and the issuance of our unsecured notes in August, since they were a higher percentage of total outstanding debt as after debt pays down from loan prepayment.

Fixed rate securitized debt at March 31 is more than 60% of our total debt. We expect fixed rate debt to continue increasing as a percentage of our total debt as we have three securitizations in the pipeline. So far in 2023, we have seen a significant recovery and securitized senior bond credit spreads relative to the fourth quarter as well as in rate levels – rates levels for those bonds.

On Page 12, our total repurchase agreement related debt at March 31 was approximately $418 million, down from $446 million at December 31, $209 million was non-mark-to-market, non-recourse mortgage loan financing and $198 million was financing primarily on Class A1 senior bonds in our joint ventures with remaining expected lives of less than two years. We also have significant unencumbered assets. We expect the amount of our floating rate debt to continue declining relative to fixed rate debt significantly now that securitization markets are more functional.

And with that, I’d be happy to answer any questions anybody might have.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] And we do have a question, it comes from Matt Howlett, B. Riley.

Matt Howlett

Hi, Larry. Thanks for taking my question.

Larry Mendelsohn

Absolutely.

Matt Howlett

On the – I’m intrigued by the comments on your expectation in the residential and of course the commercial loan market. Just walk me through me, loan price – residential home loan prices still well bid, but do you think there’s going to be when these banks start selling, I know they’ve already started. What do you think the catalyst is to see sort of more supply come out? I mean, when do you think it’ll come out and where do you think prices can go? I mean, can you – do you think you could get unlevered yields and the teams from these home loansarecommercial? I mean, some people are out there saying 15%, 20%. I mean we talk – what type of products are we talking about, if you believe that’s the case.

Larry Mendelsohn

Sure. It depends on the specific type of commercial. I don’t think you’re going to see unlevered teams in residential. You will, however, I think, see more supply as delinquency increases as it leaks from credit cards into single family. And as you see bank consolidation, because one of the things we’ve seen both in residential, commercial over the years is when bigger bank provides smaller bank, it wants to classified assets off the balance sheet, a smaller bank before closing. And that way it can flush through the loss in the purchase price in a one-time charge. In commercial, depending on what it is and what kind of liquidity risk profile it has. So for example, on $500 million office buildings there’s – people are going to need to make a lot more than they will off of buying portfolio of business purpose [indiscernible] loans for example.

So – but I think you’re going to see a significant opportunity, definitely double-digit unlevered in some strip mall loans in some mixed use loans, you’ll see them in some urban office, not loans that you’ll see in double-digit teams unlevered, no question about that. When will you start to see that? We’re starting to see it leak as banks are looking for liquidity. Although, the one thing we’re seeing is that the banks are selling the things they can sell the quickest and the closest to their current mark versus other things.

But we think that probably in – by the Q3, Q4 and 2024, it’s really going to be picking up and probably 2024 and more so than 2023. The – it depends on the number of waves is how describe it in this – what’s going on in banking land. One of the things we’ve seen, like, in 1994, in 1998, 2004 and 2008 is everything was multiple waves that went over periods of time. And the question is, how many and how long and what’s the severity in between them all? So it’s a pretty interesting time and we certainly have had a bunch of our big institutional partners and also bond investors reach out to us and we’ve set up kind of here’s what we want to buy together type structures.

Matt Howlett

And I’m assuming on the residential side you’d look to this [indiscernible] market, you have it open. It’s open to you, I’m assuming these are private deals that you’re doing. Just give us an update on the state of the securitization market and is it still – what’s your outlook for it? Do you think it’s going to be – typically come in more?

Larry Mendelsohn

So the AAAs have tightened and obviously the treasury curve has come in significantly what I’ll call kind of three year, four year type expected lives. And most of our AAAs that we issue are expected lives between, call it, high twos and four years. And that those have come – those in rates have come in dramatically and AAA spreads in tighten. So what the transaction we did in February, we did it plus 150 to the expected life of I think 3.4 years. That market has been pretty strong for our RPL deals. We have, what I’ll call, a regular group of buyers for two of the three deals. 80% of the seniors are pre-subscribed, so it’s really the other two of the three deals, the other 20% and the third deal which is actually the first of all we’re going out with will just bring out to fully to market.

Matt Howlett

Got you. Thanks for the color, it makes a lot of sense. And I guess, the last one, Larry, I have for you. So we – I get this phenomenon, the pre-payments I think you said are starting to pick up in March and I get this phenomenon. What’s going on? What’s weighing the yields or on the performing loans are weighing on your taxable – your GAAP and even more so your taxable income. And of course, you have the repo, which is just about probably done here. The Fed is probably done here. If not, they’re probably going to be cutting in the next move, if not sooner rather than later. My question two is, how should we look at taxable income and the dividend. How we think about that trajectory rest of the year.

Larry Mendelsohn

Sure. So taxable income, when you think about prepayment, prepayment non-performing loans, okay, since we have a higher tax basis on performing loans, actually generates less taxable income than prepayment on non-performing loans. So right, which is – so it’s really tax – if you pay more for non-performing loans than performing loans – if you pay more for performing loans than non-performing loans, you have a higher tax basis prepayment, you capture less discounts sooner. And the taxable income from prepayment is all about the tax, the discount to tax basis.

So the – one of the things that’s weird is for taxable income, when loans pay like clockwork, you take it over the contractual life of a loan, unlike GAAP, which is over the expected life of a loan, right? And prepayments just accelerated. So that – until a loan prepays, a 360 month loan, you’re taking one, three, six of the tax basically or actually you’re taking based on the principle that’s received, which is very little in the early years.

Mary Doyle

It’s either going to be level yield with a fixed pre-payment assumption regardless, and it’s dictated by the deal document for a securitization transaction. And then we have other pools of loans where every time you get a payment, you basically take a percentage of discount and it’s recovered, literally if it’s a 780 month mortgage…

Larry Mendelsohn

So it’s not based unexpected life like GAAP. So when loans pay like clockwork, taxable income is less and when loans don’t pay, and you often get big lumps from, for example, liquidations or property sales that accelerates taxable income.

Mary Doyle

And unlike GAAP with – for taxable income, you’re required to fix your yield and prepayment assumption at closing, it may not change over the life of the pool of the loans.

Larry Mendelsohn

Right, unless the loan goes away.

Mary Doyle

Unless the loan goes away.

Larry Mendelsohn

Right. So it’s unlike GAAP, where as borrowers change behavior expected life changes in tax, expected life doesn’t change.

Matt Howlett

I got you. At some point, they all have to converge, right? I mean, at some point..

Larry Mendelsohn

When both loans are gone, they’re the same. A borrower pays off, tax and GAAP are the same for that loan.

Matt Howlett

Right. Well, it’s going to get more velocity, right, it sounds like tax income is going to absolutely, but tax income should be moving up and we get more velocity. That’s sort of what…

Larry Mendelsohn

So we bought – starting in late 2021, we started buying specifically low LTV, high absolute dollars of equity, non-performing loans, because we thought that recession was going to come and that would cause more delinquency and shorter duration and you’d pick up discount faster. Okay. What we didn’t anticipate is that so much HPA would change borrower behavior and cause them to pay their mortgage before their credit cards, their auto loans and their HELOCs. Because if you look, historically, it’s usually the other way around. You pay your revolvers first. So you’ve always maintained access to credit and you pay your car loans. So you have your ride to work. And what we’ve seen in our borrowers is credit card delinquency is increased, HELOC delinquency is increased, auto loan delinquency is increased and mortgage delinquency is decreased, so…

Matt Howlett

Yes. We’ve seen that before…

Larry Mendelsohn

Yes. So our NPLs as a result have become extremely performing, which decreases taxable and decreases GAAP.

Matt Howlett

Right. And it should be the other way around.

Larry Mendelsohn

Sure.

Matt Howlett

Thanks for the explanation. I sort of look forward to return to growth here with the environment. Thanks a lot. Thanks for…

Larry Mendelsohn

Yes. We’re getting a lot of – we think that commercial is going to be a significant opportunity. Its brewing right now. It’s not completely here yet, but it’s coming. You’re starting to see it and it’s going to increase in velocity. I think that’s pretty clear. Certainly, a lot of the big investors like Starwood has made the same statement and some others they obviously look at much bigger type properties than we do.

We like diversification in specific locations and things like that. But there’s going to be a significant opportunity set in commercial we think as well as in MSRs and we’re working with a bunch of MSR funds about joint venturing on MSRs and have Gregory be the sub-servicer in MSR land.

Matt Howlett

And on those, you wouldn’t have to really put any capital up, right? A lot of that’s just the third-party, right? You guys get thing – how to think about that?

Larry Mendelsohn

Right. And those the third-party would be 95%.

Matt Howlett

Wow. That could be incredible in terms of the accretion to Ajax.

Larry Mendelsohn

Yes. Yes. And to the kind of forward market value of Gregory as well.

Matt Howlett

Right. What shows 20%-plus.

Larry Mendelsohn

Exactly. Right.

Matt Howlett

Thanks a lot, Larry. I really appreciate it.

Larry Mendelsohn

Sure. Absolutely, absolutely.

Operator

[Operator Instructions] We’ll hear from Eric Hagen, BTIG.

Eric Hagen

Hey, how you’re doing?

Larry Mendelsohn

Eric, how you’re doing?

Eric Hagen

Yes. I’m good. Thank you. Got a couple here. Just how are you thinking about the severity of losses in this environment versus say a year ago or even when rates and mortgage spreads were tighter just in general and how does that drive how aggressive you get, especially in the JV structures where it sounds like you’ll be maybe the most active.

Hopefully you can also talk about some of the sources of leverage in the JV structures. And then the second kind of question here, the warrants that you hold in the servicer, what are the conditions by which you think you’d exercise those warrants?

Larry Mendelsohn

Sure. Okay. So let me answer the last one first because that’s the simplest. The warrants are based on valuations, so you would exercise them in a monetization event or in case of a special dividend.

Eric Hagen

Okay. Okay. That’s helpful.

Larry Mendelsohn

Yes. For kind of loss severities in residential land, for our portfolio, we tend to buy it plus 50% plus discounts to market that to property market value. And we tend to like having at least $130,000 of equity on average and minimum kind of target equity dollars, amounts of equity. So that if you have a 20% across the Board decline in home prices, and if you add 100% defaults of our portfolio, it would actually increase unlevered yields by 350 basis points to 400 basis points in our portfolio, because of duration changes, because for most of our portfolio, a default is a prepayment part, actually part plus arrearage.

The bigger risk I think in residential is much newer. We’ve seen a number of pools of loans of what I call newer origination where they’re kind of 80 LTVs. But when we look at the properties, we really think they’re kind of 90, 92 LTVs. And we think that there’s more delinquents, there’s more loss severity risk in those than there is in kind of the things we own.

We’ve been somewhat hesitant to be out buying kind of brand new kind of push the envelope 80 LTV, alternate document stuff and things like that. Just because we think there is going to be some increase in loss severity for newer versus older loans that have had the benefit of HPA. The – on the commercial side, we think there’s going to be significant loss severity in the commercial side and that loans are going to have to trade at material discounts.

We’re obviously very focused on buying things to property value, and we have a kind of fundamental rule is that you have to buy the loan at a discount to what you’d be willing to buy the property at on a commercial portfolio. Because one thing that you don’t have in commercial to the extent that you have in residential is in the foreclosure in residential, there’s a lot of single family rental buyers that buy in at foreclosure sales, especially moms and pops that buy at foreclosure sales.

You don’t have moms and pops doing that in commercial land, and you don’t have moms and pops in $20 million office land. So that’s going to have to be more institutional and it’s less predictable and less liquid. And so it creates a little bit more severity. So from a opportunity set, we like it because the more thinking it requires you to do the more opportunity there is. And the less liquidity there is, the more opportunity there is in the going inside. In residential land, we’re – we kind of want to wait for it to melt a little bit before we get too involved.

Eric Hagen

Always appreciate your perspectives guys. Thank you very much.

Larry Mendelsohn

Absolutely. Sure thing.

Operator

And everyone at this time, there are no further questions. I’ll hand things back to our speakers for any additional or closing remarks.

Larry Mendelsohn

Thank you, everybody for joining us for our first quarter presentation. I apologize for it being the same time as Apple’s call. But feel free to reach out if you have questions and look forward to talking to you over the next few weeks. Best regards.

Operator

Once again, everyone, that does conclude today’s conference. Thank you all for your participation. You may now disconnect.