Overview of Great Ajax Corp.

Great Ajax Corp. is a real estate investment trust (REIT) that primarily targets acquisitions of re-performing loans (RPLs) and small balance commercial (SBC) loans. RPLs are residential mortgage loans where at least 5 of the 7 most recent payments have been made. SBC loans generally have a principal balance of up to $5 million and are secured by multi-family residential and commercial mixed-use properties.

Great Ajax also invests in non-performing loans (NPLs) either directly or through joint ventures, and acquires single-family and smaller commercial properties through foreclosure or direct purchase. The company owns a 19.8% equity interest in its Manager, Thetis Asset Management LLC, and an 8% equity interest in the parent company of its Servicer, Gregory Funding LLC. All of Great Ajax’s mortgage loans and real properties are serviced by Gregory Funding.

Financial Performance

For the three months ended June 30, 2019, Great Ajax reported net income attributable to common stockholders of $13.0 million, or $0.67 per basic share and $0.56 per diluted share. This represents a significant increase from the $7.5 million, or $0.40 per basic share and $0.37 per diluted share, reported in the same period of 2018.

The key drivers of the improved financial performance were:

• Acquisition of $90.7 million in RPLs with an aggregate unpaid principal balance (UPB) of $106.6 million
• Sale of $176.9 million in loans with $200.1 million UPB to a joint venture for a $7.0 million gain
• Retention of $20.1 million in varying classes of securities issued by the joint venture
• Acquisition of 1 multi-family property for $2.3 million
• Net interest income after provision for loan losses of $12.6 million
• Collection of $59.9 million in cash, excluding loan sale proceeds

As of June 30, 2019, Great Ajax held $1.2 billion in net mortgage loans and $198.0 million in investments in debt securities and beneficial interests. The company’s book value per share was $15.85.

Revenue and Profit Trends

Great Ajax’s primary source of income is the accretion earned on its mortgage loan portfolio, offset by the interest expense incurred to fund and hold these portfolio acquisitions. Net interest income after provision for loan losses decreased slightly to $12.6 million for the three months ended June 30, 2019 from $13.9 million in the prior year period.

This decrease was primarily due to the reduction in the average balance of the loan portfolio following the sale of loans to the 2019-C securitization in May 2019. While Great Ajax acquired $90.7 million in RPLs during the quarter, these loans were only on the balance sheet for a weighted average of 20 days and provided minimal offset to the 60 days of lost income from the loan sale.

The company recorded a provision for loan losses of $0.1 million in Q2 2019 due to impairments of certain small loan pools, though it continues to experience increased performance across the majority of its loan pools. Great Ajax also collected $59.9 million in cash payments and proceeds, excluding the loan sale, compared to $56.5 million in the prior year period.

In addition to net interest income, Great Ajax recognized a $7.0 million gain on the sale of mortgage loans to the 2019-C securitization. Other income increased due to higher rental income from recent property acquisitions, offset by lower late fees and HAMP fees.

Total expenses increased to $6.9 million in Q2 2019 from $6.6 million in the prior year period, primarily due to higher loan servicing fees and management fees associated with the growth in assets and equity. Other expenses also increased due to employee stock grants, lien release costs, and higher taxes and regulatory fees.

Strengths and Weaknesses

A key strength of Great Ajax’s business model is its focus on acquiring RPLs, which provide stable cash flows and opportunities for borrowers to refinance at higher property values. The company’s ability to work with borrowers to improve payment records and then facilitate refinancing generates near-term cash flows and the highest possible economic outcome.

Great Ajax also sees attractive investment opportunities in the SBC loan and property markets, particularly in urban areas with favorable demographic and economic trends. The company’s specialized expertise in underwriting and servicing these assets gives it an advantage over larger lenders.

However, a potential weakness is the company’s reliance on accessing the capital markets through secured borrowings, repurchase agreements, and equity offerings to fund its asset acquisitions. While Great Ajax has been successful in obtaining financing to date, disruptions in the capital markets could limit its ability to grow the business.

Additionally, the company’s performance is sensitive to changes in home prices and interest rates. Declining home values could negatively impact loan performance and recovery values, while rising rates could reduce refinancing activity and slow the conversion of NPLs to performing status.

Outlook and Future Prospects

Great Ajax believes the current market landscape continues to present attractive investment opportunities, driven by factors such as historically low interest rates, declining home ownership, and the lack of a robust non-conforming mortgage market. The company expects demand for single-family and smaller multi-family rental properties to remain elevated.

To capitalize on these trends, Great Ajax plans to maintain its focus on acquiring RPLs, which it views as providing optimal investment value. The company will also continue to target SBC loans and properties, particularly in urban markets with favorable demographic and economic characteristics.

While the timing and pace of asset acquisitions can be uneven, Great Ajax believes it has access to a large supply of RPLs and SBC loans to support a steady pipeline of investments. The company’s ability to obtain adequate financing, both debt and equity, will be a key factor in its ability to grow the business.

Overall, Great Ajax appears well-positioned to continue generating attractive risk-adjusted returns for shareholders through its specialized expertise in identifying, acquiring, and managing residential and commercial mortgage assets. However, the company’s performance will remain subject to broader trends in the housing and credit markets.