Business Overview and History
Great Ajax Corp. (AJX), a residential mortgage REIT, is undergoing a significant strategic shift under new management, transitioning the company towards a focus on commercial real estate investments. After several years of challenges in its legacy residential loan portfolio, Great Ajax is now poised to capitalize on opportunities in the distressed commercial real estate market.
Great Ajax Corp., a Maryland corporation, was formed on January 30, 2014 and capitalized on March 28, 2014 by its then sole stockholder, Aspen Capital, an affiliate of Aspen Yo. The company operates as a mortgage REIT and initially targeted acquisitions of re-performing loans (RPLs) and non-performing loans (NPLs), which it acquired either directly or through joint ventures with institutional accredited investors. In 2014, the company elected to be taxed as a REIT for U.S. federal income tax purposes.
Great Ajax was externally managed, with Thetis Asset Management serving as the external manager since inception. Over the years, the company faced significant challenges in managing its portfolio of residential mortgage loans, including substantial losses from its holdings of NPLs and RPLs. The company also encountered difficulties in consummating sales of its NPLs and RPLs at attractive prices and on a prompt timeline.
In 2020, Great Ajax issued shares of preferred stock and warrants to institutional accredited investors in a series of private placements to raise capital. During 2022, the company took steps to optimize its balance sheet by repurchasing and retiring a portion of its outstanding preferred stock at a discount.
Despite these efforts, Great Ajax continued to struggle with increasing losses from its RPL and NPL portfolio, reporting a net loss of $47.1 million in 2023 and a net loss of $15.0 million in 2022. This performance was driven by factors such as rising interest rates, a slowing housing market, and difficulties in monetizing its distressed residential loan holdings. As of December 31, 2023, Great Ajax's mortgage loan portfolio stood at $864.6 million, down from $989.1 million at the end of 2022.
In February 2024, Great Ajax announced a strategic transaction with Rithm Capital Corp. (RITM), a global asset manager. As part of this deal, Rithm's subsidiary RCM GA LLC became Great Ajax's new external manager, replacing Thetis Asset Management. The company also issued $14 million in new common stock to Rithm and took on a $70 million term loan from a Rithm affiliate to help address its outstanding convertible notes.
The strategic shift under Rithm's management marks a critical turning point for Great Ajax. The company plans to transition away from its legacy residential loan portfolio and instead focus on commercial real estate investments, targeting opportunities in the distressed commercial real estate market. This pivot is aimed at improving the company's financial performance and generating more stable cash flows.
Financial Overview
Great Ajax's financial performance has been challenging in recent years, with the company reporting net losses in both 2023 and 2022. In 2023, the company posted a net loss of $47.1 million, or $2.01 per diluted share, compared to a net loss of $15.0 million, or $1.24 per diluted share, in 2022.
The company's net interest income has declined, from $38.9 million in 2022 to $13.0 million in 2023, as its mortgage loan portfolio has shrunk. Additionally, Great Ajax has incurred significant losses from its investments in affiliates, as well as mark-to-market losses on its mortgage loans held-for-sale.
As of December 31, 2023, Great Ajax had $52.8 million in cash and cash equivalents on its balance sheet, down from $84.4 million at the end of 2021. The company's book value per common share stood at $9.99 as of December 31, 2023, compared to $16.70 at the end of 2022.
In the most recent quarter (Q3 2024), Great Ajax reported a net loss of $8.03 million or $0.18 per diluted share, compared to a net loss of $6.09 million or $0.25 per share in the prior year quarter. The increase in net loss was primarily due to a $1.71 million mark-to-market loss on mortgage loans held-for-sale and a $3.28 million loss in other income, partially offset by a $0.65 million increase in net interest income and a $1.45 million decrease in expenses. The company's revenue for Q3 2024 was -$2.78 million, with operating cash flow of $23.75 million.
Liquidity
Great Ajax's liquidity position has been impacted by its ongoing financial challenges. The company's cash and cash equivalents have decreased significantly over the past two years, from $84.4 million at the end of 2021 to $52.8 million at the end of 2023. However, as of September 30, 2024, the company reported $84.02 million in cash, indicating an improvement in its cash position.
The company's ability to generate cash from its operations has been limited, as evidenced by the decline in net interest income and the difficulties in selling NPLs and RPLs at attractive prices. This has put pressure on Great Ajax's liquidity position and its ability to fund ongoing operations and meet its financial obligations.
The recent strategic transaction with Rithm Capital Corp. has provided some relief to Great Ajax's liquidity situation. The $14 million in new common stock issued to Rithm and the $70 million term loan from a Rithm affiliate have helped address the company's outstanding convertible notes and provided additional working capital.
Great Ajax has two repurchase facilities, with one facility currently outstanding. The total outstanding balance on the repurchase facilities was $231.46 million as of September 30, 2024. The company also has $110 million in 8.88% senior unsecured notes due 2027. The debt-to-equity ratio stands at 2.46, indicating a significant level of leverage.
Asset Composition
Great Ajax's core business activities and assets are centered around residential mortgage loans, with a strategic shift towards commercial real estate investments under the new management. As of September 30, 2024, the company's asset composition included:
1. Mortgage Loans: $403.1 million in mortgage loans held-for-investment and $31.3 million in mortgage loans held-for-sale. These primarily consist of re-performing loans (RPLs) and non-performing loans (NPLs) secured by one-to-four family residential properties.
2. Investments in Securities: $166.7 million in investments in securities available-for-sale at fair value and $47.1 million in investments in securities held-to-maturity. These include residential and commercial mortgage-backed securities (RMBS and CMBS) as well as subordinated interests from the company's prior securitization transactions.
3. Equity Securities: $21.9 million investment in Gaea Real Estate Corp., representing a 22.2% ownership stake.
4. Real Estate Owned (REO) Properties: $4.2 million in carrying value of properties acquired through foreclosure or settlement of non-performing loans.
The company has been actively managing and repositioning its mortgage loan portfolio. During the nine months ended September 30, 2024, Great Ajax acquired $14.4 million in new mortgage loans, received $55.8 million in loan payments, and sold $388.6 million in mortgage loans, reflecting its strategic transition under the new management.
Outlook and Risks
Under Rithm's management, Great Ajax is expected to pivot its business model towards commercial real estate investments, leveraging Rithm's expertise and platform. The company plans to deploy its remaining capital, estimated at $20-25 million as of the third quarter of 2024, into commercial mortgage-backed securities (CMBS) and other commercial real estate debt instruments.
Great Ajax's success in this transition will depend on its ability to identify and capitalize on attractive opportunities in the distressed commercial real estate market. The company will also need to manage the risks associated with commercial real estate investments, such as exposure to economic downturns, changes in interest rates, and potential defaults.
Additionally, Great Ajax faces the challenge of addressing its outstanding $100 million in debt that carries a 10.25% coupon. The company will need to find a solution to refinance or restructure this high-cost debt in order to improve its financial position.
Risks to Great Ajax's turnaround strategy include the potential for a deeper economic downturn, continued weakness in the commercial real estate market, and the company's ability to effectively execute its pivot to commercial real estate investments under the new management team.
In terms of guidance, Great Ajax expects to reach breakeven, before dividends, by the end of Q1 2025. The company intends to maintain its current $0.06 per share dividend, which represents a dividend yield of 7.2% as of the end of Q3 2024, although this is not guaranteed. The company is aiming to build a portfolio that can generate a low- to mid-teens return for shareholders.
Conclusion
Great Ajax's strategic shift under Rithm's leadership represents a critical juncture for the company. After struggling with its legacy residential loan portfolio, the REIT is now poised to capitalize on opportunities in the distressed commercial real estate market. The company's focus on transitioning from legacy "negative carry residential assets" to cash-flowing CMBS investments reflects its efforts to improve financial performance and reach breakeven by Q1 2025.
However, the success of this transition will depend on Great Ajax's ability to navigate the risks inherent in commercial real estate investing and address its high-cost debt. The company's ability to maintain its current dividend while building a portfolio capable of generating low- to mid-teens returns will be crucial for shareholder value.
Investors will be closely watching the company's progress as it works to transform its business model and return to profitability. The deployment of remaining capital into CMBS investments and the management of the existing debt structure will be key factors in determining Great Ajax's future success in the commercial real estate market.