Overview

Great Ajax Corp. is a Maryland corporation that is organized and operated in a manner intended to allow it to qualify as a REIT. The company primarily targets re-performing loans (RPLs), including residential mortgage loans and smaller balance commercial (SBC) loans. RPLs are mortgage loans on which at least five of the seven most recent payments have been made, or the most recent payment has been made and accepted pursuant to an agreement, or the full dollar amount to cover at least five payments has been paid in the last seven months. The company may also invest in non-performing loans (NPLs) and single-family and smaller commercial properties.

Our Portfolio

As of June 30, 2017, Great Ajax’s portfolio consisted of:

The company’s loan classification is based on status at acquisition. REO consists primarily of loans that transition from loan pools to REO, as well as some purchased REO properties.

Market trends and outlook

Great Ajax believes several key trends are driving opportunities in the residential mortgage-related whole loan market:

• Low interest rates and elevated operating costs are driving sales of residential mortgage assets by banks and other lenders.
• Declining home ownership due to rising prices, low inventory, and increased down payment requirements is increasing demand for single-family and multi-family rental properties.
• Rising home prices are increasing homeowner equity and reducing strategic defaults.
• Low interest rates and rising prices have resulted in many homeowners being “in the money” to refinance.
• Dodd-Frank risk retention rules have reduced the universe of participants in the securitization markets.
• The lack of a robust market for non-conforming mortgage loans in the aftermath of the financial crisis.

The company believes these trends have created significant opportunities in residential RPLs with positive equity, as well as attractive investment opportunities in the SBC loan and property markets.

Factors that may affect our operating results

Key factors that may impact Great Ajax’s operating results include:

• Acquisitions - The company’s results depend heavily on sourcing RPLs and SBC loans. The timing and extent of successful acquisitions is uncertain.
• Financing - The company’s ability to grow depends on the availability of adequate financing, including debt and equity.
• Resolution Methodologies - The company employs various loan resolution strategies, including modification, collateral resolution, and collateral disposition, which can impact revenue.
• Changes in Home Prices - Generally, rising home prices are expected to positively affect results, while declining prices could negatively impact results.
• Changes in Market Interest Rates - Increases in rates may cause the value of the company’s portfolio to decline and interest expense to rise, while decreases could have the opposite effect.
• Market Conditions - Continued uncertainty in real estate markets could impact asset valuations and investment opportunities.

Critical accounting policies and estimates

Great Ajax has identified three critical accounting policies related to: 1) accounting for interest income on the mortgage loan portfolio, 2) accounting for interest expense on secured borrowings, and 3) accounting for interest expense on repurchase agreement borrowings.

Results of operations

For the three months ended June 30, 2017, Great Ajax had consolidated net income attributable to common stockholders of $6.9 million, or $0.38 per share. Key highlights include:

• Purchased $210.2 million of RPLs with an aggregate UPB of $249.0 million.
• Issued $87.5 million of Convertible senior notes and increased secured borrowings by $98.1 million.
• Portfolio interest income of $21.7 million and net interest income of $12.4 million.
• Collected $44.5 million on the mortgage loan and REO portfolios.

The increase in net interest income was driven by growth in the average mortgage loan portfolio balance, partially offset by lower yields on the portfolio.

Liquidity and capital resources

Great Ajax’s primary sources of cash include proceeds from securities offerings, securitizations, repurchase agreements, and principal and interest payments on the loan portfolio. The company uses cash to purchase mortgage-related assets, repay borrowings, and fund operations and distributions.

As of June 30, 2017, the company had $42.0 million in cash and cash equivalents. The company has funded acquisitions primarily through secured borrowings, repurchase agreements, and equity offerings. Great Ajax has completed nine securitizations to date, retaining the subordinate tranches and trust certificates.

The company also has two repurchase facilities with a total capacity of $450 million, under which it had $245.5 million outstanding as of June 30, 2017. Additionally, Great Ajax issued $87.5 million of Convertible senior notes in April 2017.

The company believes its capital resources will be sufficient to meet anticipated short-term and long-term liquidity needs.