Overview of Great Ajax Corp.

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. RPLs are residential mortgage loans where the borrower has made at least 5 of the last 7 payments. SBC loans are commercial loans with a principal balance of up to $5 million, secured by multi-family or mixed-use properties. Great Ajax also invests in non-performing loans (NPLs) and single-family and smaller commercial properties.

The company was formed in 2014 and elected to be taxed as a REIT starting in 2014. Great Ajax is externally managed by Thetis Asset Management LLC. The company’s mortgage loans and real estate properties are serviced by its affiliate, Gregory Funding LLC.

Financial Performance

For the three months ended September 30, 2019, Great Ajax reported net income attributable to common stockholders of $7.7 million, or $0.39 per basic share and $0.36 per diluted share. This was up from $6.6 million, or $0.35 per basic share and $0.34 per diluted share, in the same period in 2018.

The key drivers of the improved performance were:

• Increased income from investments in debt securities and beneficial interests
• Lower loan servicing fees due to a lower average balance of the mortgage loan portfolio
• Lower real estate operating expenses, including a decrease in impairments on REO properties

These positive factors were partially offset by an increase in incentive fees paid to the company’s manager.

For the nine months ended September 30, 2019, net income attributable to common stockholders was $28.0 million, up from $21.7 million in the same period in 2018. The increase was primarily due to a $7.1 million gain on the sale of mortgage loans in 2019, compared to no loan sales in 2018.

Loan Portfolio

As of September 30, 2019, Great Ajax’s mortgage loan portfolio had a carrying value of $1.2 billion, down from $1.3 billion at the end of 2018. The portfolio consisted of:

• $1.1 billion in RPLs
• $26.7 million in NPLs
• $38.0 million in SBC loans

During the first nine months of 2019, the company acquired 539 RPLs with an unpaid principal balance (UPB) of $115.6 million, compared to 422 RPLs with $104.5 million UPB in the same period of 2018. Great Ajax did not acquire any NPLs in 2019, compared to 11 NPLs with $1.7 million UPB in 2018.

The company also acquired 21 SBC loans with $18.4 million UPB in the first nine months of 2019, compared to 6 SBC loans with $4.8 million UPB in the same period of 2018.

In total, Great Ajax’s mortgage loan portfolio had a weighted average loan-to-value (LTV) ratio of 83.8% as of September 30, 2019, down from 85.9% at the end of 2018. The weighted average coupon was 4.56%, up slightly from 4.54% at the end of 2018.

Real Estate Investments

In addition to mortgage loans, Great Ajax also invests in real estate properties. As of September 30, 2019, the company held:

• $16.5 million in properties held-for-sale
• $38.3 million in rental properties

During the first nine months of 2019, Great Ajax acquired 5 multi-family rental properties for $16.0 million and 2 single-tenant commercial properties for $1.5 million.

Financing Activities

Great Ajax funds its investments primarily through secured borrowings, repurchase agreements, and proceeds from equity offerings. As of September 30, 2019, the company had:

• $438.4 million outstanding under repurchase agreements
• $123.9 million in convertible senior notes outstanding

The company also completed 6 secured borrowing transactions through securitization trusts, raising a total of $340.0 million in non-recourse, fixed-rate financing.

In the third quarter of 2019, Great Ajax sold 551,223 shares of common stock for net proceeds of $8.3 million under its at-the-market equity offering program.

Strengths and Weaknesses

Strengths:

• Diversified portfolio of RPLs, SBC loans, and real estate properties
• Ability to generate consistent cash flows from loan portfolio
• Access to multiple financing sources, including secured borrowings and equity offerings
• Experienced management team with expertise in mortgage loan and real estate investing

Weaknesses:

• Reliance on external manager and affiliated service provider
• Exposure to interest rate and real estate market risks
• Potential volatility in quarterly results due to timing of loan acquisitions and resolutions

Outlook and Future Prospects

Great Ajax believes the current market environment continues to present attractive investment opportunities, particularly in RPLs and SBC loans. The company expects demand for single-family and multi-family rental properties to remain elevated due to factors such as rising home prices, tighter mortgage underwriting standards, and demographic shifts.

However, the company also faces headwinds such as rising interest rates, which could negatively impact the value of its mortgage loan portfolio and increase its borrowing costs. Regulatory changes and competition from other investors could also affect Great Ajax’s ability to source attractive loan acquisitions.

Overall, Great Ajax appears well-positioned to continue growing its business and generating solid returns for shareholders, though the company will need to carefully manage risks and adapt to changing market conditions. Investors should monitor the company’s ability to continue acquiring loans and properties at favorable prices, control costs, and convert non-performing loans into performing assets or rental properties.