Great Ajax Corp. [AJX] Filings

10-Q 1 ajx-20230331.htm 10-Q ajx-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-36844

(Commission file number)

GREAT AJAX CORP.

(Exact name of registrant as specified in its charter)


Maryland			46-5211870
State or other jurisdiction of incorporation or organization			(I.R.S. Employer Identification No.)

13190 SW 68th Parkway, Suite 110

Tigard, OR 97223

(Address of principal executive offices and Zip Code)

503-505-5670

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbols

Name of each exchange on which registered

Common stock, par value $0.01 per share

AJX

New York Stock Exchange

7.25% Convertible Senior Notes due 2024

AJXA

New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer (Do not check if a smaller reporting company)	☐	Smaller reporting company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 3, 2023, 23,505,487 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS


PART I Financial Information

Item 1. Consolidated Interim Financial Statements			1

Cautionary Statement Regarding Forward-Looking Statements			48

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			49

Item 3. Quantitative and Qualitative Disclosures About Market Risk			76

Item 4. Controls and Procedures			77

PART II Other Information

Item 1. Legal Proceedings			78

Item 1A. Risk Factors			78

Item 2. Unregistered Sales of Securities			78

Item 3. Defaults Upon Senior Securities			78

Item 4. Mine Safety Disclosure			78

Item 5. Other Information			78

Item 6. Exhibits			78

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Interim Financial Statements

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


($ in thousands except per share data)	March 31, 2023		December 31, 2022
ASSETS	(Unaudited)
Cash and cash equivalents	$	49,397	$	47,845
Mortgage loans held-for-investment, net (1,2)	970,665		989,084
Real estate owned properties, net(3)	5,092		6,333
Investments in securities available-for-sale(4)	146,480		257,062
Investments in securities held-to-maturity(5)	73,907		—
Investments in beneficial interests(6)	135,614		134,552
Receivable from servicer	9,622		7,450
Investments in affiliates	30,560		30,185
Prepaid expenses and other assets	18,304		11,915
Total assets	$	1,439,641	$	1,484,426
LIABILITIES AND EQUITY
Liabilities:
Secured borrowings, net(1,2,7)	$	454,664	$	467,205
Borrowings under repurchase transactions	418,653		445,855
Convertible senior notes, net(7)	103,450		104,256
Notes payable, net(7)	106,258		106,046
Management fee payable	1,826		1,720
Put option liability	13,775		12,153
Accrued expenses and other liabilities	8,460		9,726
Total liabilities	1,107,086		1,146,961
Commitments and contingencies – see Note 8
Equity:
Preferred stock $0.01 par value, 25,000,000 shares authorized
Series A 7.25% Fixed-to-Floating Rate Cumulative Redeemable, $25.00 liquidation preference per share, 424,949 shares issued and outstanding at both March 31, 2023 and December 31, 2022	9,411		9,411
Series B 5.00% Fixed-to-Floating Rate Cumulative Redeemable, $25.00 liquidation preference per share, 1,135,590 shares issued and outstanding at both March 31, 2023 and December 31, 2022	25,143		25,143
Common stock $0.01 par value; 125,000,000 shares authorized, 23,509,446 shares issued and outstanding at March 31, 2023 and 23,130,956 shares issued and outstanding at December 31, 2022	245		241
Additional paid-in capital	325,462		322,439
Treasury stock	(9,532)		(9,532)
Retained earnings	(544)		13,275
Accumulated other comprehensive loss	(19,763)		(25,649)
Equity attributable to stockholders	330,422		335,328
Non-controlling interests(8)	2,133		2,137
Total equity	332,555		337,465
Total liabilities and equity	$	1,439,641	$	1,484,426

The accompanying notes are an integral part of the consolidated financial statements.

(1)Mortgage loans held-for-investment, net include $664.2 million and $675.8 million of loans at March 31, 2023 and December 31, 2022, respectively, transferred to securitization trusts that are variable interest entities (“VIEs”); these loans can only be used to settle obligations of the VIEs. Secured borrowings consist of notes issued by VIEs that can only be settled with the assets and cash flows of the VIEs. The creditors do not have recourse to the primary beneficiary (Great Ajax Corp.). See Note 9 — Debt. Mortgage loans held-for-investment, net include $4.3 million and $6.1 million of allowance for expected credit losses at March 31, 2023 and December 31, 2022, respectively.

(2)As of both March 31, 2023 and December 31, 2022, balances for Mortgage loans held-for-investment, net include $0.9 million from a 50.0% owned joint venture, which the Company consolidates under U.S. Generally Accepted Accounting Principles ("U.S. GAAP" or "GAAP").

(3)Real estate owned properties, net, are presented net of valuation allowances of $0.8 million and $0.7 million at March 31, 2023 and December 31, 2022, respectively.

(4)Investments in securities available-for-sale (“AFS”) are presented at fair value. As of March 31, 2023, Investments in securities AFS include an amortized cost basis of $157.3 million and a net unrealized loss of $10.9 million. As of December 31, 2022, Investments in securities AFS include an amortized cost basis of $282.7 million and net unrealized loss of $25.6 million.

(5)On January 1, 2023, the Company transferred certain of its investments in securities to held-to-maturity ("HTM") due to European risk retention regulations. Investments in securities HTM includes an allowance for expected credit losses of zero and remaining discount of $8.9 million related to the unamortized unrealized loss in AOCI from transfer at March 31, 2023.

(6)Investments in beneficial interests includes allowance for expected credit losses of zero at both March 31, 2023 and December 31, 2022.

(7)Secured borrowings, net are presented net of deferred issuance costs of $4.3 million at March 31, 2023 and $4.7 million at December 31, 2022. Convertible senior notes, net are presented net of deferred issuance costs of $0.1 million and $0.3 million at March 31, 2023 and December 31, 2022, respectively. Notes payable, net are presented net of deferred issuance costs and discount of $3.7 million at March 31, 2023 and $4.0 million at December 31, 2022.

(8)As of March 31, 2023, non-controlling interests includes $1.0 million from a 50.0% owned joint venture, $1.0 million from a 53.1% owned subsidiary and $0.1 million from a 99.9% owned subsidiary. As of December 31, 2022, non-controlling interests includes $1.0 million from a 50.0% owned joint venture, $1.1 million from a 53.1% owned subsidiary and $0.1 million from a 99.9% owned subsidiary which the Company consolidates.

The accompanying notes are an integral part of the consolidated interim financial statements.

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended
($ in thousands except per share data)	March 31, 2023		March 31, 2022
INCOME
Interest income	$	18,456	$	23,212
Interest expense	(14,925)		(8,606)
Net interest income	3,531		14,606
Net decrease in the net present value of expected credit losses	621		3,978
Net interest income after the impact of changes in the net present value of expected credit losses	4,152		18,584
Loss from investments in affiliates	(98)		(63)
Loss on joint venture refinancing on beneficial interests	(995)		(3,973)
Other (loss)/income	(2,519)		423
Total revenue, net	540		14,971
EXPENSE
Related party expense – loan servicing fees	1,860		2,091
Related party expense – management fee	1,828		2,293
Professional fees	934		345
Fair value adjustment on put option liability	1,622		3,200
Other expense	1,614		1,437
Total expense	7,858		9,366
Gain on debt extinguishment	(47)		—
(Loss)/income before provision for income taxes	(7,271)		5,605
Provision for income taxes (benefit)	93		(26)
Consolidated net (loss)/income	(7,364)		5,631
Less: consolidated net income attributable to the non-controlling interest	30		96
Consolidated net (loss)/income attributable to the Company	(7,394)		5,535
Less: dividends on preferred stock	547		1,949
Consolidated net (loss)/income attributable to common stockholders	$	(7,941)	$	3,586
Basic (loss)/earnings per common share	$	(0.34)	$	0.15
Diluted (loss)/earnings per common share	$	(0.34)	$	0.15
Weighted average shares – basic	22,920,943		22,922,316
Weighted average shares – diluted	22,920,943		22,922,316

The accompanying notes are an integral part of the consolidated interim financial statements.

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)


	Three months ended
($ in thousands)	March 31, 2023		March 31, 2022
Consolidated net (loss)/income attributable to common stockholders	$	(7,941)	$	3,586
Other comprehensive loss:
Unrealized gain/(loss) on available-for-sale securities	3,853		(9,778)
Amortization of unrealized loss on debt securities available-for-sale transferred to held-to-maturity	2,033		—
Income tax expense related to items of other comprehensive income	—		—
Comprehensive loss	$	(2,055)	$	(6,192)

The accompanying notes are an integral part of the consolidated interim financial statements.

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended
($ in thousands)	March 31, 2023		March 31, 2022
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net (loss)/income	$	(7,364)	$	5,631
Adjustments to reconcile net income to net cash from operating activities
Stock-based management fee and compensation expense	600		761
Discount accretion on mortgage loans	(1,713)		(4,251)
Interest and discount accretion on investment in debt securities	(2,464)		(2,763)
Discount accretion on investment in beneficial interests	(2,057)		(4,153)
Gain on debt extinguishment	(47)		—
(Gain)/loss on sale of real estate owned properties	(91)		16
Loss on sale of securities	2,974		—
Impairment of real estate owned	111		169
Credit loss expense on mortgage loans and beneficial interests	44		161
Net decrease in the net present value of expected credit losses	(621)		(3,978)
Loss on loans and joint venture refinancing on beneficial interests	995		3,973
Amortization of debt discount and prepaid financing costs	845		1,041
Undistributed loss from investment in affiliates	98		63
Fair value adjustment on put option liability	1,622		3,200
Net change in operating assets and liabilities
Prepaid expenses and other assets	(6,405)		(9,822)
Receivable from Servicer	(2,172)		1,764
Accrued expenses, management fee payable, and other liabilities	(1,160)		(2,878)
Net cash from operating activities	(16,805)		(11,066)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of mortgage loans and related balances	(604)		(903)
Principal paydowns on mortgage loans	21,482		54,350
Proceeds from refinancing and sale of securities available-for-sale	29,413		—
Purchase of securities available-for-sale and beneficial interests	(16,335)		—
Principal and interest collection on debt securities available-for-sale and beneficial interests	17,721		21,194
Principal and interest collection on debt securities held-to-maturity	11,251		—
Proceeds from sale of property held-for-sale	1,052		121
Investment in equity method investments	(726)		(6,090)
Distribution from affiliates	252		352
Net cash from investing activities	63,506		69,024
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from repurchase transactions	13,376		6,006
Repayments on repurchase transactions	(40,578)		(29,486)
Repayments on secured borrowings	(12,963)		(39,422)
Repurchase of the Company's senior convertible notes	(952)		—
Sale of common stock, net of offering costs	2,427		—
Sale of common stock pursuant to dividend reinvestment plan	—		115

The accompanying notes are an integral part of the consolidated interim financial statements.


Distribution to non-controlling interests	(34)		(909)
Dividends paid on common stock and preferred stock	(6,425)		(7,966)
Net cash from financing activities	(45,149)		(71,662)
NET CHANGE IN CASH AND CASH EQUIVALENTS	1,552		(13,704)
CASH AND CASH EQUIVALENTS, beginning of period	47,845		84,426
CASH AND CASH EQUIVALENTS, end of period	$	49,397	$	70,722
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	14,894	$	7,819
Cash paid for income taxes	$	215	$	62
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Transfer of debt securities from investments in securities available-for-sale to investments in securities held-to-maturity	$	83,022	$	—
Unrealized gain/(loss) on available-for-sale securities	$	3,853	$	(9,778)
Amortization of unrealized loss on debt securities transferred to held-to-maturity	$	2,033	$	—
Issuance of common stock for management fee and compensation expense	$	600	$	761
Net transfer of loans (from)/to property held-for-sale	$	(169)	$	828
Non-cash adjustments to basis in mortgage loans	$	—	$	18
Treasury stock received through distributions from investment in Manager	$	—	$	(117)
Net transfer of loans to mortgage held-for-investment, net from mortgage loans held-for-sale, net	$	—	$	(29,572)

The accompanying notes are an integral part of the consolidated interim financial statements.

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)


($ in thousands)	Preferred stock - series A shares	Preferred stock - series A amount		Preferred stock - series B shares	Preferred stock - series B amount		Common stock shares	Common stock amount		Treasury stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income/(loss)		Total stockholders' equity		Non-controlling interest		Total equity
Balance at three months ended March 31, 2022
Balance at December 31, 2021	2,307,400	$	51,100	2,892,600	$	64,044	23,146,775	$	233	$	(1,691)	$	316,162	$	66,427	$	1,020	$	497,295	$	3,178	$	500,473
Net income	—	—		—	—		—	—		—		—		5,535		—		5,535		96		5,631
Issuance of shares under dividend reinvestment plan	—	—		—	—		9,739	—		—		115		—		—		115		—		115
Distribution to non-controlling interest	—	—		—	—		—	—		—		—		—		—		—		(819)		(819)
Stock-based management fee expense	—	—		—	—		39,558	1		—		436		—		—		437		—		437
Stock-based compensation expense	—	—		—	—		8,900	—		—		324		—		—		324		—		324
Dividends declared ($0.26 per share) and distributions	—	—		—	—		—	—		—		—		(7,966)		—		(7,966)		(90)		(8,056)
Other comprehensive loss	—	—		—	—		—	—		—		—		—		(9,778)		(9,778)		—		(9,778)
Reclass of conversion premium - convertible notes	—	—		—	—		—	—		—		(711)		—		—		(711)		—		(711)
Treasury stock	—	—		—	—		(10,406)	—		(117)		—		—		—		(117)		—		(117)
Balance at March 31, 2022	2,307,400	$	51,100	2,892,600	$	64,044	23,194,566	$	234	$	(1,808)	$	316,326	$	63,996	$	(8,758)	$	485,134	$	2,365	$	487,499

The accompanying notes are an integral part of the consolidated interim financial statements.


($ in thousands)	Preferred stock - series A shares	Preferred stock - series A amount		Preferred stock - series B shares	Preferred stock - series B amount		Common stock shares	Common stock amount		Treasury stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income/(loss)		Total stockholders' equity		Non-controlling interest		Total equity
Balance at three months ended March 31, 2023
Balance at December 31, 2022	424,949	$	9,411	1,135,590	$	25,143	23,130,956	$	241	$	(9,532)	$	322,439	$	13,275	$	(25,649)	$	335,328	$	2,137	$	337,465
Net loss	—	—		—	—		—	—		—		—		(7,394)		—		(7,394)		30		(7,364)
Sale of shares	—	—		—	—		345,578	4		—		2,423		—		—		2,427		—		2,427
Stock-based compensation expense	—	—		—	—		32,912	—		—		600		—		—		600		—		600
Dividends declared ($0.25 per share) and distributions	—	—		—	—		—	—		—		—		(6,425)		—		(6,425)		(34)		(6,459)
Amortization of unrealized loss on debt securities available-for-sale transferred to held-to-maturity	—	—		—	—		—	—		—		—		—		2,033		2,033		—		2,033
Other comprehensive income	—	—		—	—		—	—		—		—		—		3,853		3,853		—		3,853
Balance at March 31, 2023	424,949	$	9,411	1,135,590	$	25,143	23,509,446	$	245	$	(9,532)	$	325,462	$	(544)	$	(19,763)	$	330,422	$	2,133	$	332,555

The accompanying notes are an integral part of the consolidated interim financial statements.

GREAT AJAX CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

March 31, 2023

(Unaudited)

Note 1 — Organization and Basis of Presentation

Great Ajax Corp., a Maryland corporation (the “Company”), is an externally managed real estate company formed on January 30, 2014, and capitalized on March 28, 2014, by its then sole stockholder, Aspen Yo (“Aspen”), a company affiliated with Aspen Capital, the trade name for the Aspen group of companies. The Company facilitates capital raising activities and operates as a mortgage real estate investment trust (“REIT”). The Company primarily targets acquisitions of (i) re-performing loans (“RPLs”), which are residential 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 and (ii) non-performing loans ("NPLs"), which are residential mortgage loans on which the most recent three payments have not been made. The Company may acquire RPLs and NPLs either directly or in joint ventures with institutional accredited investors. The joint ventures are structured as securitization trusts, of which the Company acquires debt securities and beneficial interests. The Company may also acquire or originate small balance commercial loans (“SBC loans”). The SBC loans that the Company opportunistically targets generally have a principal balance of up to $5.0 million and are secured by multi-family residential and commercial mixed use retail/residential properties 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. Additionally, the Company invests in single-family and smaller commercial properties directly either through a foreclosure event of a loan in its mortgage portfolio or, less frequently, through a direct acquisition. The Company’s manager is Thetis Asset Management LLC (the “Manager” or “Thetis”), an affiliated company. The Company owns 19.8% of the Manager and 9.6% of Great Ajax FS LLC ("GAFS" or "The Parent of the Servicer") which owns substantially all of the interest in Gregory Funding LLC ("Gregory" or the "Servicer"), the Company's loan and real property servicer that is also an affiliated company. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

The Company conducts substantially all of its business through its operating partnership, Great Ajax Operating Partnership L.P., a Delaware limited partnership (the “Operating Partnership”), and its subsidiaries. The Company, through a wholly owned subsidiary, Great Ajax Operating LLC, is the sole general partner of the Operating Partnership. GA-TRS LLC ("GA-TRS") is a wholly owned subsidiary of the Operating Partnership that owns the equity interest in the Manager and the Parent of the Servicer. The Company elected to treat GA-TRS as a taxable REIT subsidiary (“TRS”) under the Code. Great Ajax Funding LLC is a wholly owned subsidiary of the Operating Partnership formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings. The Company generally securitizes its mortgage loans through securitization trusts and retains subordinated securities from the secured borrowings. These trusts are considered to be variable interest entities ("VIEs"), and the Company has determined that it is the primary beneficiary of many of these VIEs. AJX Mortgage Trust I and AJX Mortgage Trust II are wholly owned subsidiaries of the Operating Partnership formed to hold mortgage loans used as collateral for financings under the Company’s repurchase agreements. In addition, the Company, through its Operating Partnership, holds real estate owned (“REO”) properties acquired upon the foreclosure or other settlement of its owned NPLs, as well as through outright purchases. GAJX Real Estate Corp. is a wholly owned subsidiary of the Operating Partnership formed to own, maintain, improve and sell REO properties purchased by the Company. The Company has elected to treat GAJX Real Estate Corp. as a TRS under the Code.

The Operating Partnership, through interests in certain entities, as of March 31, 2023, held 99.9% of Great Ajax II REIT Inc., which owns Great Ajax II Depositor LLC, which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts. Similarly, as of March 31, 2023, the Operating Partnership wholly owned Great Ajax III Depositor LLC, which was formed to act as the depositor into Ajax Mortgage Loan Trust 2021-E ("2021-E"), which is a real estate mortgage investment conduit ("REMIC"). The Company has securitized mortgage loans through these securitization trusts and retained subordinated securities from the secured borrowings. These trusts are considered to be VIEs, and the Company has determined that it is the primary beneficiary of the VIEs.

In 2018, the Company formed Gaea Real Estate Corp. ("Gaea"), as a wholly-owned subsidiary of the Operating Partnership that invests in multifamily properties with a focus on property appreciation and triple net lease veterinary clinics. The Company elected to treat Gaea as a TRS under the Code in 2018 and elected to treat Gaea as a REIT under the Code in 2019 and thereafter. Also during 2018, the Company formed Gaea Real Estate Operating Partnership LP, a wholly-owned subsidiary of Gaea, to hold investments in commercial real estate assets, and Gaea Real Estate Operating LLC, to act as its general partner. The Company also formed Gaea Veterinary Holdings LLC, BFLD Holdings LLC, Gaea Commercial Properties LLC, Gaea Commercial Finance LLC and Gaea RE Holdings LLC as subsidiaries of Gaea Real Estate Operating Partnership.

The accompanying notes are an integral part of the consolidated interim financial statements.

In 2019, the Company formed DG Brooklyn Holdings LLC, also a subsidiary of Gaea Real Estate Operating Partnership LP, to hold investments in multi-family properties.

On November 22, 2019, Gaea completed a private capital raise transaction through which it raised $66.3 million from the issuance of its common stock to third parties to allow Gaea to continue to advance its investment strategy. Additionally, in January 2022, Gaea completed a second private capital raise in which it raised approximately $30.0 million from the issuance of its common stock and warrants. At March 31, 2023, the Company owned approximately 22.0% of Gaea. The Company accounts for its investment in Gaea under the equity method.

Basis of Presentation and Use of Estimates

The consolidated interim financial statements should be read in conjunction with the Company's consolidated financial statements and the notes thereto for the year ended December 31, 2022, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 3, 2023.

Interim financial statements are unaudited and prepared in accordance with U.S. GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of consolidated financial statements for the interim period presented, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2023. The consolidated interim financial statements have been prepared in accordance with U.S. GAAP, as contained within the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) and the rules and regulations of the SEC, as applied to interim financial statements.

The Company consolidates the results and balances of three subsidiaries with non-controlling ownership interests held by third parties. AS Ajax E II LLC ("AS Ajax E II") holds a 5.0% interest in a Delaware trust that owns residential mortgage loans and residential real estate assets; AS Ajax E II is 53.1% owned by the Company at both March 31, 2023 and December 31, 2022. Ajax Mortgage Loan Trust 2017-D ("2017-D") is a securitization trust that holds mortgage loans, REO property and secured borrowings; 2017-D is 50.0% owned by the Company. Great Ajax II REIT Inc. wholly owns Great Ajax II Depositor LLC which acts as the depositor of mortgage loans into securitization trusts and holds the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings is 99.9% owned by the Company as of March 31, 2023 and December 31, 2022. The Company recognizes non-controlling interests in its consolidated financial statements for the amounts of the investments and income due to the third party investors for its consolidated subsidiaries.

As of March 31, 2023 and December 31, 2022, the Operating Partnership wholly owned Great Ajax III Depositor LLC, which was formed to act as the depositor into Ajax Mortgage Loan Trust 2021-E ("2021-E"), which is a REMIC.

During January 2023, the Company contributed an additional $0.7 million equity interest in GAFS. As of March 31, 2023 and December 31, 2022, the Company's ownership of GAFS was 9.6% and 8.0%, respectively.

The Company’s 19.8% ownership of the Manager and 9.6% ownership of GAFS are accounted for using the equity method because the Company can exercise influence on the operations of these entities through common officers and directors. There is no traded or quoted price for the interests in either the Manager or GAFS.

Note 2 — Summary of Significant Accounting Policies

Mortgage Loans

Purchased Credit Deteriorated Loans ("PCD loans")

As of their acquisition date, the loans acquired by the Company have generally suffered some credit deterioration subsequent to origination. As a result, the Company’s recognition of interest income for PCD loans is based upon it having a reasonable expectation of the amount and timing of the cash flows expected to be collected. When the timing and amount of cash flows expected to be collected are reasonably estimable, the Company uses expected cash flows to apply the effective interest method of income recognition. The Company adopted ASU 2016-13, Financial Instruments - Credit Losses, otherwise known as CECL using the prospective transition approach for PCD assets on January 1, 2020. At the time, $10.2 million of loan discount was reclassified to the allowance for expected credit losses with no net impact on the amortized cost basis of the portfolio.

The accompanying notes are an integral part of the consolidated interim financial statements.

Acquired loans may be aggregated and accounted for as a pool of loans if the loans have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The Company may adjust its loan pools as the underlying risk factors change over time. The Company has aggregated its mortgage loan portfolio into loan pools based on similar risk factors. Excluded from the aggregate pools are loans that pay in full subsequent to the acquisition closing date but prior to pooling. Any gain or loss on these loans is recognized as interest income in the period the loan pays in full.

The Company’s accounting for PCD loans gives rise to an accretable yield and an allowance for expected credit losses. Upon the acquisition of PCD loans the Company records the acquisition as three separate elements for (i) the amount of purchase discount which the Company expects to recover through eventual repayment by the borrower, (ii) an allowance for future expected credit loss and (iii) the unpaid principal balance (“UPB”) of the loan. The purchase price discount which the Company expects at the time of acquisition to collect over the life of the loans is the accretable yield. Expected cash flows from acquired loans include all cash flows directly related to the loan, including those expected from the underlying collateral. The Company recognizes the accretable yield as interest income on a prospective level yield basis over the life of the pool. The Company’s expectation of the amount of undiscounted cash flows to be collected is evaluated at the end of each calendar quarter. The net present value of changes in expected cash flows as compared to contractual amounts due, whether caused by timing or loan performance, is reported in the period in which it arises and is reflected as an increase or decrease in the provision for expected credit losses to the extent a provision for expected credit losses is recorded against the pool of mortgage loans. If no provision for expected credit losses is recorded against the pool of assets, the increase in expected future cash flows is recognized prospectively as an increase in yield.

The Company’s mortgage loans are secured by real estate. The Company monitors the credit quality of the mortgage loans in its portfolio on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, the Company assesses the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluates whether and when it becomes probable that all amounts contractually due will not be collected.

Borrower payments on the Company’s mortgage loans are classified as principal, interest, payments of fees, or escrow deposits. Amounts applied as interest on the borrower account are similarly classified as interest for accounting purposes and are classified as operating cash flows in the Company’s consolidated statement of cash flows. Amounts applied as principal on the borrower account including amounts contractually due from borrowers that exceed the Company’s basis in loans purchased at a discount, are similarly classified as principal for accounting purposes and are classified as investing cash flows in the consolidated statement of cash flows as required under U.S. GAAP. Amounts received as payments of fees are recorded in Other income and classified as operating cash flows in the consolidated statement of cash flows. Escrow deposits are recorded on the Servicer’s balance sheet and do not impact the Company’s cash flow.

Non-PCD Loans

While the Company generally acquires loans that have experienced deterioration in credit quality, it may acquire loans that have not experienced a deterioration in credit quality or originate SBC loans.

The Company accounts for its non-PCD loans by estimating any allowance for expected credit losses for its non-PCD loans based on the risk characteristics of the individual loans. If necessary, an allowance for expected credit losses is established through a provision for loan losses. The allowance is the difference between the net present value of the expected future cash flows from the loan and the contractual balance due. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price, or the fair value of the collateral if the loan is collateral dependent. For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans.

Investments in Securities

The Company’s Investments in Securities Available-for-Sale ("AFS") and Investments in Securities Held-to-Maturity ("HTM") consist of investments in senior and subordinate notes issued by joint ventures which the Company forms with third party institutional accredited investors. Investments in debt securities for which the Company does not have the positive intent and ability to hold to maturity are classified as AFS. Investments in debt securities for which the Company has the positive intent, ability, or are required to hold to maturity are classified as HTM.

The accompanying notes are an integral part of the consolidated interim financial statements.

The Company recognizes income on the AFS debt securities using the effective interest method. Historically, the notes have been classified as AFS and are carried at fair value with changes in fair value reflected in the Company's consolidated statements of comprehensive income. The Company marks its investments to fair value using prices received from its financing counterparties and believes any unrealized losses on its debt securities are expected to be temporary. Any other-than-temporary losses, which represent the excess of the amortized cost basis over the present value of expected future cash flows, are recognized in the period identified in the Company’s consolidated statements of operations.

On January 1, 2023, the Company transferred $83.0 million of investment securities from AFS to HTM due to sale restrictions pursuant to Article 6(1) of Regulation (EU) 2017/2402 of the European Parliament and of the Council (as amended, the “EU Securitization Regulation” and, together with applicable regulatory and implementing technical standards in relation thereto, the “EU Securitization Rules”). Pursuant to the terms of these debt securities, the Company must hold at least 5.01% of the nominal value of each class of securities offered or sold to investors (the EU Retained Interest) subject to the EU Securitization Rules. Under the EU Securitization Rules, the Company is prohibited from selling, transferring or otherwise surrendering all or part of the EU Retained Interest until all such classes are paid in full or redeemed.

Transfers of securities from AFS to HTM are non-cash transactions and are recorded at fair value. Unrealized gains or losses recorded to accumulated other comprehensive income for the transferred securities continue to be reported in accumulated other comprehensive income and are amortized into interest income on a level-yield basis over the remaining life of the securities. This amortization will offset the effect on interest income of the amortization of the discount resulting from the transfer recorded at fair value.

The Company accounts for its investments in securities HTM under CECL and carries them at amortized cost. Interest income is recognized using the effective interest method and is based upon the Company having a reasonable expectation of the amount and timing of the cash flows expected to be collected. The Company’s expectation of the amount of undiscounted cash flows to be collected, and the corresponding need for an allowance for credit loss, is evaluated at the end of each calendar quarter and takes into consideration past events, current conditions, and supportable forecasts about the future. The net present value of changes in expected cash flows as compared to contractual amounts due, whether caused by timing or investment performance, is reported in the period in which it arises and is reflected as an increase or decrease in the allowance for credit loss to the extent an allowance for credit loss is recorded against the investments. If no allowance for credit loss is recorded against the investment, the increase in expected future cash flows is recognized prospectively as an increase in yield.

Risks inherent in the Company's debt securities portfolio, affecting both the valuation of its securities as well as the portfolio's interest income and recovery of principal include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters and damage to or delay in realizing the value of the underlying collateral. The Company monitors the credit quality of the mortgage loans underlying its debt securities on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, the Company assesses the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors and evaluates whether and when it becomes probable that all amounts contractually due will not be collected.

Investments in Beneficial Interests

The Company’s Investments in Beneficial Interests consist of the residual investment in the securitization trusts which the Company forms with third party institutional accredited investors. The Company accounts for its Investments in Beneficial Interests under CECL, which it adopted using the prospective transition approach. At adoption, $1.7 million of discount was reclassified to the allowance for expected credit losses with no net impact on the amortized cost basis of the beneficial interests. Each beneficial interest is accounted for individually, and the Company recognizes its ratable share of gain, loss, income or expense based on its percentage ownership interest.

The Company's Investments in Beneficial Interests are carried at amortized cost. Upon acquisition, the investments are recorded as three separate elements: (i) the amount of purchase discount which the Company expects to recover through eventual repayment of the investment, (ii) an allowance for future expected credit loss and (iii) the par value of the investment. The purchase discount which the Company expects to recover through eventual repayment of the investment gives rise to an accretable yield. The Company recognizes this accretable yield as interest income on a prospective level yield basis over the life of the investment. The Company’s recognition of interest income is based upon it having a reasonable expectation of the amount and timing of the cash flows expected to be collected. When the timing and amount of cash flows expected to be collected are reasonably estimable, the Company uses these expected cash flows to apply the effective interest method of income recognition.

The accompanying notes are an integral part of the consolidated interim financial statements.

The Company’s expectation of the amount of undiscounted cash flows to be collected is evaluated at the end of each calendar quarter. The net present value of changes in expected cash flows as compared to contractual amounts due, whether caused by timing or investment performance, is reported in the period in which it arises and is reflected as an increase or decrease in the allowance for expected credit losses to the extent a provision for expected credit losses is recorded against the investment. If no provision for expected credit losses is recorded against the investment, the increase in expected future cash flows is recognized prospectively as an increase in yield.

Risks inherent in the Company's beneficial interest portfolio include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters and damage to or delay in realizing the value of the underlying collateral. The Company monitors the credit quality of the mortgage loans underlying its beneficial interests on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, the Company assesses the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluates whether and when it becomes probable that all amounts contractually due will not be collected.

Real Estate

The Company generally acquires real estate properties through one of three instances, either directly through purchases, when it forecloses on a borrower and takes title to the underlying property, or when the borrower surrenders the deed in lieu of foreclosure. Property is recorded at cost if purchased, or at the present value of future cash flows if obtained through foreclosure by the Company. Property that the Company expects to actively market for sale is classified as held-for-sale. Property held-for-sale is carried at the lower of its acquisition basis or net realizable value (fair market value less expected selling costs, and any additional costs necessary to prepare the property for sale). Fair market value is determined based on broker price opinions (“BPOs”), appraisals, or other market indicators of fair value including list price or contract price, if listed or under contract for sale at the balance sheet date. Net unrealized losses due to changes in market value are recognized through a valuation allowance by charges to income through real estate operating expenses. No depreciation or amortization expense is recognized on properties held-for-sale. Holding costs are generally incurred by the Servicer and are subtracted from the Servicer’s remittance of sale proceeds upon ultimate disposition of properties held-for-sale.

Preferred Stock

During the year ended December 31, 2020, the Company issued an aggregate of $125.0 million, net of offering costs, of preferred stock in two series and warrants to institutional accredited investors in a series of private placements. The Company issued 2,307,400 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,892,600 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock. The shares have a liquidation preference of $25.00 per share.

During the year ended December 31, 2022, the Company completed a series of preferred share repurchases. The Company repurchased and retired 1,882,451 shares of its 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 1,757,010 shares of its 5.00% Series B Fixed-to-Floating Rate Preferred Stock.

Put Option Liability

As part of the Company’s capital raise transactions during the three months ended June 30, 2020, the Company issued two series of five-year warrants to purchase an aggregate of 6,500,000 shares of the Company's common stock at an exercise price of $10.00 per share.

The warrants include a put option that allows the holder to sell the warrants to the Company at a specified put price on or after July 6, 2023. U.S. GAAP requires the Company to account for the outstanding warrants as if the put option will be exercised by the holders. The warrants were recorded as a liability in the Company's consolidated balance sheets with an original basis of $9.5 million. During the year ended December 31, 2022, the Company repurchased and retired a portion of its warrants. As of March 31, 2023, the basis of the warrants was $2.9 million. The Company is accreting the amount of the liability under the effective interest method to its expected future put value and marks the obligation to market through earnings at each balance sheet date. The Company determines the fair value using a discounted cash flow method. The future put obligation was $15.7 million as of March 31, 2023 from an original value of $15.7 million due to the Company's repurchases and retirement of warrants.

Secured Borrowings

The Company, through securitization trusts which are VIEs, issues callable debt secured by its mortgage loans in the ordinary course of business. The secured borrowings facilitated by the trusts are structured as debt financings, and the mortgage

The accompanying notes are an integral part of the consolidated interim financial statements.

loans used as collateral remain on the Company’s consolidated balance sheet as the Company is the primary beneficiary of the securitization trusts. These secured borrowing VIEs are structured as pass through entities that receive principal and interest on the underlying mortgages and distribute those payments to the holders of the notes. The Company’s exposure to the obligations of the VIEs is generally limited to its investments in the entities; the creditors do not have recourse to the primary beneficiary. Coupon interest expense on the debt is recognized using the accrual method of accounting. Deferred issuance costs, including original issue discount and debt issuance costs, are carried on the Company’s consolidated balance sheets as a deduction from Secured borrowings, and are amortized to interest expense on an effective yield basis based on the underlying cash flow of the mortgage loans serving as collateral. The Company's unrated securitizations have a call provision and the Company assumes the debt will be called at the specified call date for purposes of amortizing discount and issuance costs because the Company believes it will have the intent and ability to call the debt on the call date. Changes in the actual or projected underlying cash flows are reflected in the timing and amount of deferred issuance cost amortization. See Note 8 — Commitments and Contingencies.

Repurchase Facilities

The Company enters into repurchase financing facilities under which it nominally sells assets to a counterparty and simultaneously enters into an agreement to repurchase the sold assets at a price equal to the sold amount plus an interest factor. Despite being legally structured as sales and subsequent repurchases, repurchase transactions are generally accounted for as debt secured by the underlying assets. At the maturity of a repurchase financing, unless the repurchase financing is renewed, the Company is required to repay the borrowing including any accrued interest and concurrently receives back its pledged collateral from the lender. The repurchase financings are treated as collateralized financing transactions; pledged assets are recorded as assets in the Company’s consolidated balance sheets, and the debt is recognized at the contractual amount. Interest is recorded at the contractual amount on an accrual basis. Costs associated with the set-up of a repurchasing contract are recorded as deferred issuance cost at inception and amortized over the contractual life of the agreement. Any draw fees associated with individual transactions and any facility fees assessed on the amounts outstanding are recorded as expense when incurred.

Convertible Senior Notes

During 2017 and 2018, the Company completed the public offer and sale of its convertible senior notes due 2024 (the "2024 Notes"). At March 31, 2023 and December 31, 2022, the UPB of the debt was $103.5 million and $104.5 million, respectively. The 2024 Notes bear interest at a rate of 7.25% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The 2024 Notes will mature on April 30, 2024, unless earlier repurchased, converted or redeemed. During certain periods and subject to certain conditions, the 2024 Notes will be convertible by their holders into shares of the Company’s common stock at a current conversion rate of 1.7405 shares of common stock per $25.00 principal amount of the notes, which represents a conversion price of approximately $14.36 per share of common stock. The conversion rate, and thus the conversion price, are subject to adjustment under certain circumstances.

Coupon interest on the 2024 Notes is recognized using the accrual method of accounting. Discount and deferred issuance costs are carried on the Company’s consolidated balance sheets as a reduction of the carrying value of the 2024 Notes, and are amortized to interest expense on an effective yield basis through April 30, 2023, the date at which the 2024 Notes can be converted. The Company assumes the debt will be converted at the specified conversion date for purposes of amortizing issuance costs because the Company believes such conversion will be in the economic interest of the holders. No sinking fund has been established for redemption of the principal.

On January 1, 2022, the Company adopted ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40) by recording a reduction in its additional paid-in capital account of $0.7 million and a corresponding increase in the carrying value of its Convertible senior notes of $0.7 million, representing the carrying value of the conversion feature associated with the notes.

Notes Payable

During August 2022, the Operating Partnership issued $110.0 million aggregate principal amount of 8.875% senior unsecured notes due September 2027 (the "2027 Notes"). The 2027 Notes have a five year term and were issued at 99.009% of par value and are fully and unconditionally guaranteed by the Company and two of its subsidiaries: Great Ajax Operating LLC (the "GP Guarantor") and Great Ajax II Operating Partnership L.P. (the "Subsidiary Guarantor," and together with the Company and the GP Guarantor, the "Guarantors"). The 2027 Notes are included in the Company's liabilities in its consolidated balance sheet at March 31, 2023 and December 31, 2022. Interest on the 2027 Notes is payable semi-annually on March 1 and September 1, with the first payment due and payable on March 1, 2023. The 2027 Notes will mature on September 1, 2027. Net proceeds from the sale of the 2027 Notes totaled approximately $

Great Ajax Corp. [AJX] Filings

Great Ajax Corp. [AJXA] Filings