Overview of Great Ajax Corp.

Great Ajax Corp. is a real estate investment trust (REIT) that primarily targets the purchase of residential reperforming loans (RPLs) and small-balance commercial (SBC) loans. RPLs are mortgage loans where the borrower has made at least 5 of the last 7 payments, while NPLs are loans where the borrower has missed the last 3 payments. The company also opportunistically invests in non-performing loans (NPLs) and converts some foreclosed properties into rental properties.

Great Ajax was formed in 2014 and elected to be taxed as a REIT starting in 2014. As a REIT, the company must distribute at least 90% of its taxable income to shareholders each year. The company owns a 19.8% equity stake in its external manager and a 4.9% stake in the parent company of its loan servicer, which are both affiliated entities.

Market Trends and Outlook

The company believes several key trends are driving opportunities in the residential mortgage market:

• Low interest rates and increased regulatory costs are leading banks to sell more mortgage assets.
• Declining home ownership and rising home prices are increasing demand for rental properties.
• The Dodd-Frank risk retention rules have reduced participation in mortgage securitization markets.
• Tighter mortgage underwriting standards have limited credit availability for non-conforming borrowers.

As a result, Great Ajax sees significant opportunities to acquire RPLs and SBC loans at attractive yields. The company is currently focused on acquiring RPLs, as it believes these provide the best investment value, though it may also acquire NPLs opportunistically. Great Ajax also sees attractive investment opportunities in the SBC loan market, particularly in urban areas with positive demographic and economic trends.

Financial Performance

For the year ended December 31, 2017, Great Ajax reported net income attributable to common shareholders of $28.9 million, or $1.58 per basic share. This compares to $27.8 million, or $1.65 per share, in 2016 and $24.8 million, or $1.68 per share, in 2015.

Key highlights for 2017 include:

• Purchased $459.2 million of RPLs with an aggregate unpaid principal balance (UPB) of $526.5 million.
• Originated $8.8 million of SBC loans.
• Raised $471.7 million in new secured debt financing.
• Issued $108.0 million of convertible senior notes.
• Collected $173.0 million from the mortgage loan and REO portfolios.
• Ended the year with $53.7 million in cash and cash equivalents.

Net Interest Income

Net interest income, the company’s primary source of revenue, increased to $52.3 million in 2017 from $45.1 million in 2016 and $36.2 million in 2015. This growth was driven by an increase in the average balance of the mortgage loan portfolio, which grew to $994.1 million in 2017 from $676.4 million in 2016.

The average yield on the mortgage loan portfolio declined slightly in 2017 and 2016 compared to 2015, as the portfolio has shifted more towards performing RPLs, which generally have a lower current yield but longer duration than NPLs. However, this was offset by a decrease in the company’s average cost of funds, which fell from 2015 to 2017 as Great Ajax took advantage of favorable market conditions to issue new secured debt.

Other Income and Expenses

Other income increased in 2017 compared to 2016 and 2015, driven by higher late fee collections, HAMP fees, and gains on REO sales. Total expenses also increased over this period, primarily due to higher loan servicing fees, management fees, and professional fees associated with the growth in the business.

The company reported a loss on debt extinguishment of $1.1 million in 2017 and $0.6 million in 2016 related to the refinancing of secured borrowings.

Mortgage Loan Portfolio

As of December 31, 2017, Great Ajax’s mortgage loan portfolio consisted of 6,901 loans with a total UPB of $1.47 billion. This included:

• 95.6% RPLs
• 3.5% NPLs
• 0.9% originated SBC loans

The portfolio had a weighted average loan-to-value (LTV) ratio of 88.0% and a weighted average coupon of 4.33%. During 2017, the company acquired $459.2 million of RPLs and originated $8.8 million of SBC loans.

The mortgage loan portfolio is diversified across 48 states, with the largest concentrations in California (28.0% of UPB), Florida (10.5%), and Texas (3.3%). The portfolio has seasoned over time, with 67.7% of loans originated between 2006-2008 and 21.9% originated between 2001-2005.

Financing Activities

Great Ajax funds its mortgage loan acquisitions primarily through secured borrowings, repurchase agreements, and equity offerings. Key financing activities in 2017 included:

• Issuing $108.0 million of 7.25% convertible senior notes due 2024.
• Completing 5 additional secured borrowing transactions, raising $431.1 million.
• Entering into $542.5 million of repurchase facilities, with $276.4 million outstanding at year-end.

The company’s secured borrowings are structured as debt financings, with the underlying mortgage loans remaining on the balance sheet. Great Ajax has retained the subordinate notes and trust certificates from these transactions, giving it the right to any residual cash flows after the senior notes are repaid.

Liquidity and Capital Resources

As of December 31, 2017, Great Ajax held $53.7 million in cash and cash equivalents, up from $35.7 million at the end of 2016. The company’s primary sources of liquidity are proceeds from securities offerings, secured borrowings, repurchase agreements, and principal/interest payments on its loan portfolio.

Operating cash flows were negative in 2017, 2016, and 2015 due to the non-cash nature of interest income accretion. Investing cash outflows were driven by mortgage loan acquisitions, while financing cash inflows came from new debt and equity issuances used to fund those acquisitions.

The company believes its current sources of liquidity are sufficient to meet its short-term and long-term funding needs. Great Ajax intends to continue funding its growth through a combination of secured debt, repurchase agreements, and equity offerings as attractive opportunities arise.

Outlook and Risks

Great Ajax believes the current market environment continues to present attractive investment opportunities, particularly in RPLs and SBC loans. The company expects to grow its portfolio of mortgage assets, funded by a mix of debt and equity capital.

However, the company’s operating results and financial condition are subject to various risks and uncertainties, including:

• Ability to source and acquire mortgage loans at attractive prices
• Availability of adequate financing, including debt and equity capital
• Loan resolution timelines and recovery rates on foreclosed properties
• Changes in interest rates and their impact on the value of the loan portfolio
• Broader macroeconomic conditions and their effect on real estate values

To mitigate these risks, Great Ajax employs various loan resolution strategies, maintains a diversified portfolio, and seeks to optimize its capital structure. Overall, the company believes its business model and market positioning position it well to capitalize on current opportunities in the residential mortgage market.