Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Great Ajax Corp second quarter 2023 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Lawrence Mendelsohn, Chief Executive Officer, you may begin your conference.
Thank you very much, operator. Thank you everybody for joining the Great Ajax Corp second quarter conference call. Along with me on this call are Russell Schaub, our President, Mary Doyle, our CFO. Before we get started, I want to point you to page two of the presentation with the Safe Harbor disclosure. In the second quarter of 2023, loan performance continued to increase, as did loan cash flow velocity for reinstatements on delinquent loans and from sales of homes, particularly in the months of April and May. This has continued into the third quarter of 2023 as well. Prepayments from borrowers refinancing their mortgages continued their slower pace, as you would expect, given current mortgage rates.
The regular payment performance of our mortgage loans and mortgage loans in our joint venture structures in excess of our modeled expectations at the time of acquisition for loans and purchases at a discount, effectively, which our credit reserve recaptures, has increased previous GAAP income by accelerating purchase discount because of required application of CECL. This reduces forward GAAP interest income and return on equity thereafter. The increase in cash flow velocity in Q2, particularly in April and May, has increased even the all-in post-CECL GAAP yields a bit for the second quarter. At June 30, we had approximately $40 million in cash, as well as a significant amount of unencumbered securities and loans. We currently have approximately $55 million of cash.
In page three of the business overview, our manager's data science guides the analysis of loan characteristics and geographic market metrics for performance and resolution pathway probabilities. Its ability to source these mortgage loans through long-standing relationships has enabled us to acquire loans that we believe have a material probability of prepayment and/or long-term continuing reperformance. We've acquired loans in 381 different transactions since 2014, including three transactions in the second quarter of 2023. Our affiliated servicer, Gregory Funding, provides a strategic advantage in non-performing and non-regular paying loan resolution processes and timelines, and a data feedback loop for our manager's analytics.
We've certainly seen significant increases in loan performance, consistent prepayment from property sales, especially for delinquent loans, with our AAA-rated structures that permit up to approximately 40% of loans to be greater than 60 days or more delinquent at the time of securitization. We have a 21.6% economic interest in our servicer between shares and warrants. Our servicer is currently evaluating a private equity round as part of rolling out some new data and technology-driven programs through strategic joint ventures and MSR joint ventures. Our economic interest in the servicer was an important part of our Ellington Financial merger agreement, as described in their press release of July third. We still have low leverage. At June thirty, our corporate leverage ratio was 3.4 times. Our Q2 ending asset-based leverage was 2.7 times.
We also own a 22% interest in Gaea Real Estate Corp. Gaea is currently a private equity REIT that primarily invests in repositioning multifamily properties in specific markets and of triple net lease freestanding veterinary clinic properties in conjunction with large national owners of veterinary practices. We carry our Gaea interest on balance sheet to lower our cost to market. We currently expect Gaea to raise additional equity and ultimately become a public company. The current environment of bank credit tightening and CRE loan disruption creates opportunities and more optionality for Gaea. Now for a discussion of the second quarter. Net interest income from loans and securities, excluding $2.86 million of interest income from the application of CECL, was approximately $3.3 million in Q2, including recoveries from the application of CECL. It was approximately $6.2 million.
Our gross interest income, excluding the $2.86 million from the application of CECL, was $18.3 million. There are three reasons why GAAP interest income is a little lower. First, we had approximately $23 million lower average interest-earning loans and securities on the balance sheet in the second quarter versus the first quarter. Secondly, we are continuing to have significantly more delinquent loans than expected become performing. As delinquent loans become performing, they provide more cash flow but over a longer period. Since we buy loans at a discount, this increase in performance can extend expected duration, which lowers yield. However, in the case of a recession and a declining housing price environment, these loans provide a material yield and cash flow hedge as increased delinquency shortens duration and the corresponding yields would increase materially.
The third reason for lower interest income is the design of CECL. CECL was primarily designed for banks of loans with a par basis so that accelerating reserve recapture would come after a previous write-down. We establish an allowance under CECL when we acquire new pools of loans if the NPV of the loan equals 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 these 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 expected cash flows can reduce future yields and discount accretion.
A GAAP item to keep in mind is that interest income for our portion of joint ventures shows up in income from securities, not interest income from loans. For these joint venture interest, servicing fees for securities are paid out of the securities waterfall. 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 purchased loans outside of joint ventures by the amount of the 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 March 31, or I'm sorry, at June 30, 82.1% of our loan portfolio by UPB made at least 12 of the last 12 payments, for 74% a year ago, and 81% three months ago. This compares to 13% at the time we purchased the loans. Our NPL purchases over the last 18 months increased materially relative to RPL purchases. Increases in housing prices in 2021 and 2022 helps maintain these payment-prepayment patterns and leads to decreases in the present value of expected reserves and the related income recognition of $2.86 million of unallocated loan purchase discount reserves under CECL in the second quarter, and the additional reserve recaptures we've had in each of the previous nine quarters.
While loans that become regular paying 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 quarterly interest income. Loans that do not migrate to regular monthly pay status typically have materially shorter durations and therefore result in higher yields. We are seeing that prepayments from property sales for both regular paying and non-regularly paying loans is continuing, though. Our weighted average cost of funds in the second quarter was higher than the first quarter by approximately 20 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 the related increase in SOFR. Net income attributable to common stockholders was negative $12 million or $0.51 per share. There are several items of note that had an impact on earnings in this quarter. To make it a little easier to follow, we 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 -$2.5 million or $0.11 per share. Taxable income, net of preferred dividends, was -$0.02 per share. Taxable income decreased in Q2 for two primary reasons.
First, the significant increase in monthly performance in delinquent loans to become performing loans extends taxable income yield duration even more than extends GAAP yield duration, as taxable income for performing loans is based on contractual duration, not expected duration. Taxable income for performing loans is typically 30 over 30 years rather than the expected life. Second, in Q2, 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.
We recorded a loss on investments in affiliates, partly as a result of the flow-through of the mark-to-market decline in the price of our common shares owned by our manager in the second quarter. Our manager receives a significant portion of their management fee in shares, and changes in market value of those shares flow through to us based on their 20% ownership interest. There are a few one-time and unusual items in the Q2 numbers. In July, we called eight joint venture securitizations and re-securitized the underlying loans into our 2023-B and 2023-C securitizations. The 2023-B was an unrated joint venture securitization, 2023-C was a AAA DBRS rated joint venture securitization. This resulted in a June 30 GAAP, but not cash charge, that we then collect back over the remaining life of the underlying loans.
Since the 8 called securitizations were joint ventures in which we owned a 20% interest, they were not consolidated on balance sheet as loans, but held legally and under GAAP as securities and beneficial interests. In the July 2023 re-securitizations to the new AAA-rated structure and unrated structure, we continued to own the same percentage, but the securities mark-to-market is lower. Because of this, in Q2, we took an impairment equal to the difference between the securities' carrying values and market values in June 2023 of $8.8 million or $0.37 per share. This treatment is the same as our 2022 JV re-securitizations and our Q1 2023 JV re-securitization.
The loans from the eight JV securitizations that were called are transferred from their eight joint venture trusts to our two new joint venture trusts, with the same partners owning the same percentages in each. We and our partner effectively sold the loans in the form of an exchange of securities from ourselves to ourselves, which triggers a non-cash loss under GAAP. It would go through book value, whether or not to sell 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 non-cash sale loss amount is fully recaptured over the expected life of the 2 re-securitizations.
This also doesn't reduce taxable income as we and our partner effectively sold the assets from ourselves to ourselves, and is therefore a refinancing rather than a sale for tax, so there is no tax impact. It's only a sale for GAAP because we own the JV loan assets in the form of securities. Book value was $11.86 at 30 June . Book value decreased primarily by our GAAP loss and dividends paid, with an offset from some positive mark-to-market adjustment in our investment in JV debt securities. There is a table on page 17 that details the change in book value. At 30 June , we had approximately $40.3 million of cash, and for Q2, we had an average daily cash and cash equivalent balance of approximately $43.6 million. We had approximately $49.5 million of cash collections in the second quarter.
At 30 June , we also have a significant amount of unencumbered assets, unencumbered securities from our securitizations and joint ventures, and unencumbered mortgage loans, which we'll discuss in more detail on page 12. Approximately 82.1% 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 81% three months ago and 74% 12 months ago, despite buying significantly more NPLs than RPLs since the middle of 2021. Reperformance increases life of loan cash flows, 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 materially lowers taxable income as well.
As you've probably all read or seen, on 30 June , we entered into a merger agreement with Ellington Financial Inc, in which Great Ajax shareholders would receive 0.5308 shares of Ellington Financial stock per share of Great Ajax stock, subject to any adjustments as described in the merger agreement, as well as a potential cash distribution depending upon certain potential repurchases of our securities prior to the closing. The S-4 for this was filed on 2 August 2023. If we move to page five, purchased RPLs represent approximately 89% of our loan portfolio at 30 June . 15 months ago, they represented 96%. 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, property sales, and related repayment on average.
We typically buy well-seasoned, lower LTV 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'd expect an increase in delinquency and default at some point, although we have not seen an increase in delinquency thus far in our portfolio. As a result, we have been hesitant to be too aggressive in residential loan acquisitions as we expect a better opportunity set will develop. One thing we have seen is that significant HPA 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 typically seen mortgage borrowers pay credit cards and auto loans and home equity lines of credit before they pay their first mortgages in times of financial stress. However, as a result of significant increases in absolute dollars of equity for seasoned loans, we are now seeing increased delinquency for their credit cards and auto loans, but not for their first mortgages. Commercial real estate loans have not fared as well, and we are beginning to see opportunities there. We believe there will be significant opportunities in sub-performing and non-performing commercial real estate loans in many markets as we get later into this calendar year and thereafter. We have seen a preview of this in the last few months, and it's 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 CRE exposure. We are beginning to see CRE loans for sale from these institutions and expect that opportunity set will grow. We also expect that bank consolidation will stimulate this as well. We have joint venture partners that would like us to find significant dollars of commercial opportunities. From these same banks, we are seeing agency and non-agency MSRs being put up for sale in sub-$1 billion of 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-four months to settle.
One thing to note, however, is many of these smaller offerings are now actually now not actually trading, as the MSR bids are below the current mark value at many of these banks. We think there is also going to be significant MSR opportunity set, and having Gregory as a servicer and owning a 21.6% economic interest in it will be beneficial. We have put in place joint venture structures with several institutional MSR investors. We own lower LTV loans. In the second quarter, we purchased $16.3 million of RPLs at 48% of property value and 80.7% of UPB. Our overall RPL purchase price is approximately 42% of the current property value and about 91% 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 is even more important for RPLs and NPLs to the extent that there is a potential recessionary environment. Since Q3, Q4 of 2021, we significantly increased our NPL purchases versus RPLs. NPLs on average can have shorter duration. For NPLs on our balance sheet, our overall purchase price is 89% of UPB, 84% of total 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 NPLs.
As I mentioned earlier, for both RPLs and NPLs, purchasing seasoned low LTV loans at 50% discounts to property values and that have significant absolute dollars of equity, provides a natural credit hedge to housing price declines in recession, as resulting increases in delinquency, shortens duration, increases corresponding yields materially. At 30 June , 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 so far in 2023. Our California mortgage loans are primarily in Los Angeles, Orange, and San Diego counties. Florida represents approximately 17% of our portfolio, and Miami-Dade, Broward, and Palm Beach counties are approximately 75% of that.
We continue to see demand for homes in our price ranges in our target markets, both from potential homeowners and rental buyers. As mentioned before, at 30 June , approximately 82.1% of our loan portfolio made at least 12 of the last 12 payments versus 74% a year ago. Approximately 75% of our loan portfolio made at least 24 of the last 24 payments, compared to approximately 69% at the end of 2022 and 72% three months ago. Over 83% have now made at least seven consecutive payments. The significant increase in monthly performance is more notable, given that since the third quarter of 2021, we've primarily only purchased low LPD 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 price appreciation, as our target markets are determined by data analytics that predict forward HPA for each market in dollars. Historically, we have seen that when our purchased loans reach seven consecutive payments, they typically get to 12 consecutive payments more than 92% of the time. Seven consecutive payments has been the statistical turning point. We have a small number of NPL and RPL acquisitions under contract. As I mentioned earlier on the call, we are waiting for the opportunity set to expand. We are starting to see an investment opportunity set brewing as a result of some recession risk and banking sector risk issues, particularly in CRE loans.
We declared a cash dividend of $0.20 per share to be paid on 31 August to holders of record 15 August . As I described earlier on the call, we re-securitized eight joint venture securitization structures into two new joint venture securitization structures, Ajax Mortgage Loan Trust 2023-B and 2023-C. While these closed in July 2023 and appear on balance sheet in Q3 2023, the economics of these transactions for GAAP show up in the income statement for Q2 2023. Average loan yields and average yields on beneficial equity interests in our joint ventures increased a little, primarily due to significant loan cash flow in April and May. For debt securities and beneficial interests, remember that yield is net of servicing fees and yield on loans is gross of servicing fees.
Debt securities and beneficial interests is how our interest in our joint ventures are presented under GAAP and have increased on balance sheet relative to loans since 2020. Since we purchased loans at a 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 HPA in our target markets on average, both accelerated repayment from home sales on delinquent loans and led to material reperformance in excess of expectations. The sale of underlying properties by borrowers with delinquent loans with certain minimum absolute dollar amounts of equity and underlying geography and borrower demographics has been steady but increased in April and May.
Leverage continues to be low, especially for companies in our sector. We ended Q2 with asset level debt of 2.7 times. Our total average debt cost was a little higher in the second quarter, primarily resulting from the rise of SOFR base rates for repurchase agreement and the issuance of our unsecured notes in August of 2022, since they were a higher % of total outstanding debt as asset-based debt, asset-based debt pays down from loan prepayment. Fixed-rate securitized debt and fixed-rate corporate debt at 30 June are approximately 65% of our total debt. Our total repurchase agreement-related debt at 30 June was approximately $413 million. $209 million was non-mark-to-market, non-recourse mortgage loan financing, and $193 million was financing primarily on Class A1 senior bonds in our joint ventures with remaining expected lives of sub-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. With that, if anybody has any questions regarding the second quarter or other, please let us know, and I'm happy to answer.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A. Again, if you have any questions, it's star one on your telephone keypad. We have no questions today. I will now turn the call back over to Mr. Lawrence Mendelsohn for some final closing remarks.
Thank you, everybody, for joining our second quarter 2023, conference call and the investor presentation. Feel free to reach out to the extent you have any questions. We're always happy to discuss our business and plans and hope everyone has a good evening.
This concludes today's conference call. Thank you for your participation. You may now disconnect.