Great Ajax Corp. Reports Strong Financial Performance in 2018

Great Ajax Corp., a real estate investment trust (REIT) that primarily targets the acquisition of re-performing loans (RPLs) and smaller balance commercial (SBC) loans, had another successful year in 2018. The company reported net income attributable to common stockholders of $28.3 million, or $1.50 per share, up from $28.9 million, or $1.58 per share, in 2017.

Mortgage Loan Portfolio Grows A key driver of Great Ajax’s performance was continued growth in its mortgage loan portfolio. During 2018, the company purchased $159.6 million of RPLs and $5.4 million of non-performing loans (NPLs), with an aggregate unpaid principal balance (UPB) of $181.5 million. The company also originated $6.4 million of new SBC loans.

As of December 31, 2018, Great Ajax’s total mortgage loan portfolio stood at $1.31 billion, up from $1.25 billion at the end of 2017. The portfolio consisted primarily of RPLs (96.4%), with the remainder in NPLs (2.8%) and originated SBC loans (0.8%). The weighted average loan-to-value ratio was 85.9%, down from 88.0% the prior year, indicating rising home prices and improved borrower equity.

Strong Net Interest Income Great Ajax’s primary source of income is the interest earned on its mortgage loan portfolio, offset by the interest expense incurred to fund those investments. Net interest income increased to $54.8 million in 2018, up from $52.3 million in 2017 and $45.1 million in 2016.

The growth in net interest income was driven by an increase in the average balance of the mortgage loan portfolio to $1.25 billion in 2018, up from $994.1 million in 2017. The company also collected $219.8 million in cash payments and proceeds on its mortgage loans and real estate owned (REO) properties in 2018, up from $173.0 million the prior year.

Despite the recent rise in interest rates, Great Ajax continued to see a high volume of loan payoffs as borrowers refinanced or sold their properties. The company’s average portfolio yield declined slightly to 8.6% in 2018, compared to 9.2% in 2017, as the portfolio shifted more towards higher-performing RPLs.

Diversified Funding Sources Great Ajax funds its mortgage loan acquisitions through a variety of sources, including secured borrowings, repurchase agreements, and the issuance of convertible senior notes. During 2018, the company issued an additional $15.9 million of 7.25% convertible senior notes due 2024, adding to the $108.0 million issued in 2017.

The company also utilizes secured borrowings through the issuance of mortgage-backed securities. As of December 31, 2018, Great Ajax had six such securitization trusts outstanding, with a total of $234.5 million in notes issued. The company retains the subordinate notes and trust certificates from these transactions, providing additional upside potential.

In addition, Great Ajax has two repurchase facilities totaling $650 million in maximum borrowing capacity, of which $534.1 million was outstanding at the end of 2018, up from $276.4 million a year earlier. These repurchase agreements provide flexible, short-term financing for the company’s mortgage loan acquisitions.

Prudent Risk Management While growing its portfolio, Great Ajax has maintained a disciplined approach to risk management. The company recorded a $1.2 million provision for loan losses in 2018 due to impairments on a small number of NPL pools acquired in 2014 and 2015. However, the company continues to experience improved performance across the majority of its loan pools.

Great Ajax also focuses on acquiring properties in specific urban geographic locations where it expects stable or better real estate market conditions. The company does not rely on home price appreciation in its underwriting, instead concentrating on the intrinsic value of the underlying collateral.

Outlook Remains Positive Looking ahead, management believes the current market environment continues to offer attractive investment opportunities for Great Ajax. The company expects ongoing dislocation in the residential mortgage market, driven by factors such as increased regulatory requirements, declining home ownership, and rising interest rates.

These trends are creating a supply of distressed mortgage assets that Great Ajax can acquire at attractive yields. The company also sees continued demand for single-family and smaller multi-family rental properties, which aligns with its focus on SBC loans and REO properties.

While rising interest rates may put some pressure on refinancing activity and home price appreciation, Great Ajax’s disciplined underwriting and diversified funding sources position the company well to navigate these market conditions. The company’s strong balance sheet and liquidity provide the flexibility to capitalize on new opportunities as they arise.

Conclusion Great Ajax delivered another year of solid financial performance in 2018, driven by continued growth in its mortgage loan portfolio and strong net interest income. The company’s diversified funding sources, prudent risk management, and positive market outlook suggest it is well-positioned for continued success in the years ahead.