Overview of Great Ajax Corp.

Great Ajax Corp. is a real estate investment trust (REIT) that primarily targets 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 5 of the last 7 payments. The company may also invest in non-performing loans (NPLs) - loans where the borrower has missed the last 3 payments.

Great Ajax was formed in 2014 and elected to be taxed as a REIT starting that year. As a REIT, the company must distribute at least 90% of its taxable income to shareholders each year. Great Ajax owns a 19.8% equity interest in its Manager, Thetis Asset Management, and a 4.9% equity interest in the parent company of its Servicer, Gregory Funding.

Financial Performance

For the first quarter of 2018, Great Ajax reported net income attributable to common stockholders of $7.7 million, or $0.41 per basic share and $0.38 per diluted share. This compares to net income of $8.4 million, or $0.46 per basic and diluted share, in the first quarter of 2017.

The company’s net interest income, which is the difference between interest income from its mortgage loan portfolio and interest expense on its borrowings, was $13.1 million in Q1 2018, relatively flat compared to $13.2 million in Q1 2017. Interest income increased due to growth in the loan portfolio, but was offset by higher interest expense, primarily from the issuance of convertible senior notes.

Great Ajax collected $50.4 million in cash from its mortgage loan and real estate owned (REO) portfolios through payments, payoffs, and sales of REO properties in Q1 2018, up from $36.2 million in the prior year period. The company ended the quarter with $47.5 million in cash and cash equivalents.

Portfolio Composition

As of March 31, 2018, Great Ajax’s portfolio consisted of the following:

The portfolio was 95.9% RPLs, 3.2% NPLs, and 0.9% originated SBC loans. The weighted average loan-to-value ratio was 87.5% and the weighted average remaining term was 321 months.

Great Ajax continues to focus on acquiring RPLs, which it believes provide the optimal investment value. The company may also acquire NPLs, either directly or through joint ventures, if attractive opportunities arise. Additionally, the company is targeting investments in SBC loans and properties, particularly in urban areas with favorable demographic and economic trends.

Market Trends and Outlook

Great Ajax believes several key trends are driving opportunities in the residential mortgage and small commercial real estate sectors:

• Low interest rates and elevated operating costs are leading banks and lenders to sell residential mortgage assets.
• Declining home ownership due to rising prices and tighter credit standards is increasing demand for single-family and multi-family rental properties.
• Rising home prices are reducing strategic defaults and increasing homeowner equity.
• Regulatory changes like the Dodd-Frank risk retention rules have reduced participation in the securitization markets.
• The lack of a robust non-conforming mortgage market since the financial crisis.
• Increases in interest rates will likely lead to lower refinancing volume and slower home price appreciation.

The company sees significant opportunities to acquire RPLs from banks and other sellers, as well as attractive investment prospects in the SBC loan and property markets, particularly in urban areas. Great Ajax believes demand for single-family and smaller multi-family rental properties will remain elevated due to demographic and economic trends.

Factors Affecting Operating Results

Great Ajax’s operating results depend heavily on its ability to source and acquire RPLs and SBC loans, as well as, when attractive, NPLs. The company’s growth is tied to the availability of adequate financing, including debt and equity, to fund asset acquisitions.

The manner in which NPLs are resolved - through loan modification, foreclosure, or property sales - will impact the timing and amount of revenue the company receives. Great Ajax’s preferred approach is to modify NPLs, which it believes generates the highest economic outcome while keeping more families in their homes.

Home price trends also significantly affect Great Ajax’s results. Generally, rising home prices have a positive impact, leading to greater re-performance of loans, faster refinancing, and higher recoveries on REO properties. Declining home prices have the opposite effect.

Changes in market interest rates can impact the value of the company’s mortgage loan and securities portfolio, the coupons on adjustable-rate loans, prepayment speeds, and its borrowing costs. Great Ajax seeks to mitigate interest rate risk through its financing strategies.

Liquidity and Capital Resources

Great Ajax’s primary sources of cash include proceeds from securities offerings, secured borrowings, repurchase agreements, and principal and interest payments on its loan portfolio. As of March 31, 2018, the company held $47.5 million in cash and cash equivalents.

The company funds its mortgage loan acquisitions primarily through secured borrowings and repurchase agreements. From inception through March 2018, Great Ajax has completed 12 secured borrowing transactions, 7 of which were outstanding at the end of Q1 2018. These borrowings are structured as debt financings, with the underlying mortgage loans remaining on the company’s balance sheet.

Great Ajax also has two repurchase facilities with maximum borrowing capacities of $250 million and $200 million. As of March 31, 2018, the company had $273.2 million outstanding under these repurchase agreements.

In 2017, the company issued $108 million of 7.25% convertible senior notes due 2024, which provide an additional source of long-term financing. The company did not sell any shares under its at-the-market equity offering program during the first quarter of 2018.

Overall, Great Ajax believes its capital resources are sufficient to meet its anticipated liquidity needs. The company is not required to maintain any specific debt-to-equity ratio and believes the appropriate leverage depends on the risk and credit quality of its assets, as well as financing availability.

Outlook and Risks

Great Ajax believes current market conditions continue to present attractive investment opportunities, despite the uncertain environment, as depressed asset prices have led to higher available yields. The company expects to adjust its investment and financing strategies as new opportunities emerge and the risk profile of its business changes.

Key risks and uncertainties facing the company include:

• Its ability to identify and acquire suitable RPLs, SBC loans, and NPLs
• Access to adequate financing on favorable terms
• Successful resolution of NPLs through loan modifications, foreclosures, or property sales
• Changes in home prices and interest rates
• Maintaining its REIT status and exemption from the Investment Company Act
• Performance of its Manager and Servicer

Overall, Great Ajax appears well-positioned to capitalize on current market conditions in the residential mortgage and small commercial real estate sectors. The company’s focus on RPLs, selective NPL acquisitions, and SBC loans, combined with its financing strategies and risk management approach, should allow it to generate attractive risk-adjusted returns for shareholders over the long-term, barring any significant macroeconomic or market disruptions.