Great Ajax Corp. (AJX): Navigating the Commercial Real Estate Landscape with Rithm's Expertise

Published on September 24, 2024 | Ticker: AJX

Great Ajax Corp. (AJX) is embarking on a transformative journey, leveraging the expertise of Rithm Capital (Rithm) to capitalize on the burgeoning opportunities in the commercial real estate market. With a clean slate and a seasoned team, the company is poised to redefine its growth trajectory and deliver value to its shareholders.

The company's financial performance in recent quarters has been impacted by the challenging market conditions, particularly in the residential mortgage sector. For the full year 2023, Great Ajax reported a net loss of $47.1 million on revenue of $62.7 million, with an operating cash flow of -$46.5 million and free cash flow of -$46.5 million. However, the company's focus has now shifted to the commercial real estate space, where it sees significant potential.

In the second quarter of 2024, Great Ajax reported a GAAP net loss of $12.7 million, a considerable improvement from the previous quarter's results. This was driven by continued mark-to-market losses and realized losses on the sale of mortgage loans as the company restructures its balance sheet. Earnings available for distribution, previously referred to as operating income, also declined compared to the prior quarter, reflecting the ongoing transition.

The company's book value at the end of the second quarter stood at $5.56 per common share, with a full fair value of around $4.20 per share. This discrepancy highlights the amortized cost accounting treatment of most of the company's assets, which will be gradually adjusted as the portfolio is repositioned.

Business Overview

Great Ajax's transformation is being led by Rithm, a well-established and respected player in the real estate investment landscape. Rithm, with its $7.2 billion in equity capital and a $40 billion balance sheet, brings a wealth of expertise and a proven track record to the table.

The company's new strategic focus is on the commercial real estate sector, where it sees significant opportunities. Rithm's team, which includes seasoned professionals from its Fortress and Sculptor platforms, boasts deep expertise in commercial real estate investing. This team will be responsible for identifying and executing on the most promising opportunities in the current market environment.

One of the key advantages Great Ajax now possesses is a clean balance sheet, free from any legacy commercial real estate assets. This provides the company with a blank canvas to build a diversified portfolio of commercial real estate-related investments, including CMBS, senior loans, mezzanine loans, and other opportunistic plays.

Rithm's management team is targeting an internal rate of return (IRR) in the low to mid-teens for the company's future investments, a goal they are confident in achieving given the current market dynamics. The team believes the commercial real estate landscape presents significant dislocations and funding gaps, creating a favorable environment for their investment approach.

Liquidity and Capital Allocation

As part of the transition, Great Ajax has been actively selling down its legacy residential mortgage loan portfolio, with approximately $120 million in assets remaining to be sold. This process has freed up capital, which the company is now poised to deploy into the commercial real estate space.

The company's balance sheet reflects this shift, with a growing cash position of $100 million as of the end of the second quarter. This liquidity provides Great Ajax with the flexibility to capitalize on emerging opportunities in the commercial real estate market.

However, the company acknowledges that additional equity capital will be needed to support its growth ambitions. Rithm's management team is committed to raising capital in a disciplined manner, targeting opportunities where the deployment of capital can be accretive to shareholders, with a focus on maintaining an attractive dividend yield.

Dividend and Outlook

Great Ajax's Board of Directors has maintained the company's quarterly dividend at $0.06 per share, recognizing the need to balance near-term cash flow requirements with the long-term growth potential of the business. The management team has indicated that the dividend will be evaluated on a quarterly basis as the company works to grow its earnings and cash flow.

As Rithm takes the helm, the company's outlook is one of cautious optimism. The team is confident in its ability to identify and execute on compelling commercial real estate investment opportunities, leveraging its deep industry expertise and extensive network. However, they also acknowledge that the transition will take time, and the company may face some near-term challenges as it repositions its portfolio.

Risks and Considerations

While the shift to the commercial real estate sector presents significant opportunities, Great Ajax is not without its risks. The company's success will be heavily dependent on Rithm's ability to navigate the complex and volatile commercial real estate landscape, identify the right investment opportunities, and effectively manage the associated risks.

Additionally, the company's reliance on external capital raises to fund its growth plans introduces execution risk. The ability to raise capital at attractive terms and deploy it effectively will be crucial to the company's long-term success.

Furthermore, the commercial real estate market is subject to various macroeconomic factors, such as interest rate movements, economic conditions, and changes in consumer and business behavior. Any significant disruptions in these areas could impact Great Ajax's investment performance and financial results.

Conclusion

Great Ajax's partnership with Rithm represents a transformative moment for the company, as it pivots its focus to the commercial real estate sector. With a clean balance sheet, a seasoned management team, and a well-defined investment strategy, the company is poised to capitalize on the significant opportunities present in the current market environment.

While the transition will not be without its challenges, the company's commitment to disciplined capital allocation and a focus on delivering attractive risk-adjusted returns to shareholders provides a solid foundation for long-term success. As Great Ajax navigates this new chapter, investors will be closely watching the company's ability to execute on its strategic vision and deliver sustainable growth and value creation.

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