Overview of Great Ajax Corp.

Great Ajax Corp. is a real estate investment trust (REIT) that primarily targets acquisitions of re-performing loans (RPLs), including residential mortgage loans and small balance commercial (SBC) loans. RPLs are mortgage loans where the borrower has made at least five of the seven most recent payments. The company also opportunistically originates SBC loans with a principal balance of up to $5 million that are secured by multi-family residential and commercial mixed-use properties.

Great Ajax may also invest in non-performing loans (NPLs), which are loans where the borrower has missed the most recent three payments. 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 the company’s mortgage loans and real properties are serviced by the Servicer.

Financial Performance

For the three months ended September 30, 2018, Great Ajax had net income attributable to common stockholders of $6.6 million, or $0.35 per share for basic and $0.34 per diluted share. This compares to net income of $7.5 million, or $0.41 per basic share and $0.38 per diluted share, for the same period in 2017.

The key drivers of the company’s financial performance include:

Interest Income and Net Interest Income

• Interest income from the mortgage loan and investment portfolio was $27.4 million for the third quarter of 2018, up from $24.5 million in the prior year period.
• Net interest income increased to $14.1 million in Q3 2018 from $13.8 million in Q3 2017, primarily due to growth in the mortgage loan portfolio.
• The company recorded a $0.4 million provision for loan losses in Q3 2018 based on a reduction in forecasted cash flows for two loan pools.

Loan Acquisitions and Originations

• Great Ajax acquired 271 RPLs for $64.4 million and 11 NPLs for $1.4 million in Q3 2018, compared to 109 RPLs for $26.6 million in Q3 2017.
• The company originated 6 SBC loans with $4.8 million in unpaid principal balance (UPB) in Q3 2018, compared to 2 SBC loans with $3.0 million UPB in Q3 2017.

Expenses

• Total expenses decreased slightly to $6.3 million in Q3 2018 from $6.5 million in Q3 2017, primarily due to lower loan transaction expenses.
• Loan servicing fees and management fees increased year-over-year due to growth in the company’s asset and equity bases.

As of September 30, 2018, Great Ajax had a mortgage loan portfolio with $1.27 billion in carrying value and $1.45 billion in UPB, as well as $28.5 million in real estate owned (REO) properties. The company also held $50.7 million in investments in debt securities.

Strengths and Weaknesses

Strengths

• Steady pipeline of RPL acquisition opportunities as large institutions continue to sell distressed mortgage loans
• Expertise in identifying, acquiring, and managing RPLs and SBC loans
• Vertically integrated model with affiliated Servicer provides operational efficiencies
• Diversified geographic footprint, with loans across 50 states and Puerto Rico

Weaknesses

• Reliance on debt financing to fund asset acquisitions, which exposes the company to interest rate risk
• Potential volatility in operating results due to the timing and size of loan portfolio acquisitions
• Concentration in residential mortgage loans, which could be impacted by declines in home prices

Outlook and Risks

Great Ajax believes the current market environment continues to offer attractive investment opportunities, as depressed asset prices have led to higher available yields. The company expects demand for single-family and multi-family rental properties to remain elevated due to factors such as rising home prices, low inventory, and increased credit standards for new mortgage originations.

However, the company faces several risks that could impact its future performance, including:

• Ability to continue sourcing attractive RPL and SBC loan acquisition opportunities
• Access to adequate financing, including equity and debt, to fund asset purchases
• Timing and success of loan resolution strategies, such as loan modifications and REO conversions
• Changes in interest rates and their effect on the value of the mortgage loan portfolio and borrowing costs
• Declines in home prices that could reduce recovery values on defaulted loans

To mitigate these risks, Great Ajax focuses on disciplined underwriting, active portfolio management, and maintaining a diversified funding structure. The company’s vertically integrated model and specialized expertise in mortgage loan investing also provide competitive advantages.

Overall, Great Ajax appears well-positioned to capitalize on current market conditions, but will need to navigate various economic and industry-specific challenges to continue delivering strong results for shareholders.