Overview

Great Ajax Corp. is a real estate investment trust (REIT) that primarily acquires and manages re-performing loans (RPLs) and small balance commercial (SBC) loans. The company also invests in non-performing loans (NPLs) and single-family and smaller commercial properties. Great Ajax is organized and operated to qualify as a REIT, which means it must distribute at least 90% of its taxable income to shareholders each year.

The company’s portfolio consists of $1.1 billion in net mortgage loans, $264.7 million in investments in debt securities, and $94.9 million in investments in beneficial interests as of March 31, 2021. Great Ajax acquires these assets primarily through secured borrowings, repurchase agreements, and equity offerings. The company also generates revenue by converting NPLs into performing loans or rental properties.

Financial Performance

For the first quarter of 2021, Great Ajax reported net income attributable to common stockholders of $7.0 million, or $0.30 per share. This represents a significant increase from the first quarter of 2020, when the company reported net income of $0.4 million, or $0.02 per share.

The primary driver of the improved earnings was a $5.5 million acceleration of purchase discount on loans that paid off during the quarter, as actual cash flows exceeded modeled expectations. This more than offset a $1.9 million fair value adjustment on the company’s put option liability. Great Ajax also benefited from a decrease in interest expense due to lower average interest rates on its mortgage and bond repurchase agreements.

The company’s net interest income after the reversal of provision for losses increased to $19.2 million in Q1 2021 from $9.1 million in Q1 2020. This was partially offset by a decrease in gross interest income from $26.9 million to $24.0 million, as the average balance of the mortgage loan portfolio declined due to paydowns and payoffs exceeding new loan purchases.

Great Ajax’s book value per common share increased to $16.18 as of March 31, 2021, up from $15.59 at the end of 2020. This was driven by the strong earnings as well as a $1.3 million recovery in the fair value of the company’s debt securities portfolio.

Portfolio and Acquisitions

During the first quarter of 2021, Great Ajax purchased $31.6 million in RPLs, $0.4 million in NPLs, and $3.6 million in SBC loans. This compares to $1.2 million in RPLs, $0.2 million in NPLs, and no SBC loans purchased in the prior-year period.

The company’s mortgage loan portfolio ended the quarter at $1.1 billion, with an aggregate unpaid principal balance (UPB) of $1.2 billion. Approximately 73.1% of the portfolio by UPB had made at least 12 of the last 12 payments as of March 31, 2021.

Great Ajax also holds $264.7 million in investments in debt securities and $94.9 million in investments in beneficial interests. These assets generated $2.5 million and $3.5 million in interest income, respectively, during the first quarter.

Expenses and Liquidity

The company’s total expenses increased to $8.2 million in Q1 2021 from $6.5 million in the prior-year period, primarily due to a $1.9 million fair value adjustment on the put option liability and an increase in management fees driven by the company’s higher capital base.

Great Ajax ended the first quarter with $137.6 million in cash and cash equivalents, up from $107.1 million at the end of 2020. The company’s average daily cash balance during Q1 2021 was $115.2 million, down from $128.7 million in the prior quarter.

The company’s primary sources of cash include proceeds from securities offerings, secured borrowings, repurchase agreements, and principal and interest payments on its loan portfolio. Great Ajax uses this cash to fund new loan acquisitions, pay dividends, and cover operating expenses.

Financing Activities

To fund its asset acquisitions, Great Ajax utilizes a variety of financing sources, including secured borrowings, repurchase agreements, and equity offerings. As of March 31, 2021, the company had $740.0 million in secured borrowings outstanding and $305.1 million drawn on its repurchase facilities.

During the first quarter of 2021, the company completed two securitizations that materially reduced its cost of funds. The first transaction placed $175.1 million of AAA, A, and BBB-rated securities at a weighted average coupon of 1.31%, while the second placed $215.9 million of senior securities at a 2.24% coupon.

Great Ajax also repurchased $2.5 million in principal amount of its convertible senior notes during Q1 2021. The company had $108.0 million in convertible notes outstanding at the end of the quarter.

In 2020, the company raised $130 million through the private placement of preferred stock and warrants to institutional investors. The proceeds are being used to acquire additional mortgage loans and other assets.

Outlook and Risks

The COVID-19 pandemic has had a significant impact on the mortgage market, leading to increased volatility and disruption. Great Ajax has acted swiftly to support its borrowers through a mortgage forbearance program, and as of April 30, 2021, the company had granted forbearance relief to 297 borrowers.

While the majority of the company’s borrowers continue to make scheduled payments, the pandemic has introduced meaningful uncertainty into the forecast of macroeconomic conditions and expected lifetime credit losses on Great Ajax’s mortgage loan and beneficial interest portfolios.

The company believes certain cyclical trends in the mortgage sector, such as historically low interest rates, declining home ownership, and rising home prices, will continue to drive acquisition opportunities. However, the lack of a robust market for non-conforming mortgage loans and the potential for extended forbearance, foreclosure, and eviction timelines could result in lower yields and losses on Great Ajax’s assets.

Key risks facing the company include the ability to source attractive loan acquisitions, access adequate financing, effectively resolve non-performing loans, and manage the impact of changes in interest rates and home prices. The ongoing uncertainty surrounding the COVID-19 pandemic also poses a significant risk to the company’s operations and financial performance.

Conclusion

Great Ajax delivered strong financial results in the first quarter of 2021, driven by a recovery in purchase discount accretion and lower interest expense. The company continues to actively manage its portfolio of mortgage loans, debt securities, and real estate assets to generate attractive risk-adjusted returns for shareholders.

While the COVID-19 pandemic has introduced significant uncertainty, Great Ajax appears well-positioned to navigate the challenges, with a diversified portfolio, experienced management team, and access to a variety of financing sources. Investors should closely monitor the company’s ability to source new acquisitions, manage credit risk, and adapt to evolving market conditions in the months and years ahead.