Great Ajax: Lots to prove, but senior ratings look good (NYSE: AJX)




Incorporated in 2014, Great Ajax Corp. (NYSE: AJX) (the “Company”) is a externally managed Mortgage REITs with a market cap of less than $225 million.

I am NEUTRAL on the Company for various reasons, including a declining net asset values, poor quarterly GAAP results for the last quarter (June 30, 2022), declining equity, potential misalignment of incentives associated with external management, the current market environment (i.e. say rising rates and rising credit risk) and the company’s relatively short and unimpressive track record as a public company. Notably, according to data from Seeking Alpha, the company is trading below its 2015 IPO price and below initial market capitalization. See also “IPO Preview: Greater Ajax.”

However, higher in the equity stack, the company’s publicly traded senior notes due April 30, 2024 (AJXA) (the “Notes”) offer reasonable value and I have purchased shares at between $24.44 and $25.07.

Company activity

By the Society website, the Company’s business activities are primarily focused on (1) acquiring, investing in and managing a portfolio of mortgage loans secured by single-family residences and single-family properties; (2) invest in loans secured by multi-family residential and commercial mixed-use commercial/residential properties; (3) the holding of property acquired in foreclosure (or deeds in lieu thereof) of the Company’s non-performing mortgage loans, and (4) to a much lesser extent, the acquisition of real estate in the market.

The Company’s loan portfolio is primarily for single-family homes, although its portfolio includes loans to small commercial properties. When a loan is foreclosed, management determines whether to sell the foreclosed property (and offer the buyer mortgage financing) or hold the foreclosed property as a rental property. The Company’s management believes that its personalized approach to each acquired (foreclosure) property will generate alpha for its long-term investors.

The Company also actively participates in the purchase of discount reproductive mortgages (“RPLs”), adding yield to its portfolio, but assuming the risk that these loans will once again be non-performing. Intuitively, this seems like a difficult and risky business because debtors who miss payments are more likely to miss payments again in the future. However, defaults are perhaps less of a problem when there is sufficient loan-to-value (“LTV”), coupled with the company buying the loan at a discount. In this regard, the recent rise in house prices should support (at least temporarily) the LTV of the Company’s mortgage portfolios; thereby reducing the likelihood of the Company incurring a loss in a foreclosure scenario. On the other hand, the recent spike in mortgage rates is negative, as this could put downward pressure on house prices, as well as the value of the mortgages the Company holds on its balance sheet.

The Company also has a relatively small portfolio of low balance commercial loans. These loans reflect the Company’s investment in certain multifamily and mixed commercial/residential properties.

Finances and income

The Company’s balance sheet included in its most recent quarterly filing (10-Q) with the SEC shows a decline in total assets during the six-month period ended June 30, 2022, of approximately $175 million; a decrease in total liabilities of approximately $110 million; and a decrease in equity of approximately $65 million.

The Company’s press release for the three months ended June 30, 2022 (the “Press Release”) noted that the reduction in assets and liabilities resulted in part from the Company’s redemption of preferred shares and warrants :

During the quarter ended June 30, 2022, we repurchased and withdrew $25.0 million of face value of our preferred shares and associated warrants for our common shares in a series of repurchase transactions . The redemption of the preferred stock resulted in the recognition of $2.5 million of deferred GAAP issuance costs and the redemption of the warrants accelerated the future GAAP accretion expense on the company’s liabilities. option to put $3.5 million warrants for a total of $6.0 million in non-recurring charges. Redeeming the preferred stock will save us about $1.7 million per year in preferred dividends, while redeeming the warrants will reduce future put option accretion charges by $2.8 million per year for a total annual savings of $4.5 million. We financed these buyouts with cash on hand.”

[Emphasis mine]

According to the press release, the company’s GAAP book value decreased from $15.95 per common share as of March 31, 2022 to $14.98 per common share as of June 30, 2022. At the time of this writing, the shares of the company are trading at less than $10 per share, a large discount to its last reported book value per share, but perhaps justified given the external management, declining equity and rising interest rates, as well as the company’s recent quarterly GAAP loss for the three months ended June 30, 2022 (per Press Release):

For the three months ended June 30, 2022, we recorded a consolidated GAAP net loss attributable to common shareholders of ($9.2) million or ($0.40) per common share.

In terms of cash flow, per the 10-Q linked above, net cash flow from operating activities was approximately $4.1 million as of June 20, 2022 compared to negative $23 million as of June 30, 2021; net cash from investing activities was approximately $130 million as of June 30, 2022 compared to approximately $11 million as of June 30, 2021; and net cash provided by financing activities was approximately negative $165 million as of June 30, 2022 versus approximately negative $7 million as of June 30, 2021. Overall cash decreased by approximately $30 million over the one-year period. Considering operating cash flow was slightly positive, the overall drop in cash isn’t that bad when you also consider 1) the $73 million debt repayment, 2) the purchase/repurchase approximately $39 million of preferred stock, warrants and common stock, and 3) the payment of $16 million in common and preferred stock dividends. Company actions subsequent to the June 30, 2022 quarter include the following:

[R]each acquired a nominal amount of $5.0 million of its outstanding preferred shares and associated warrants for its common shares. Redeeming the Preferred Shares will save the Company approximately $0.3 million per year in preferred dividends, while redeeming the Warrants will reduce future expense of increasing put options by approximately 0.6 million dollars per year for a total expected annual savings of $0.9 million. »

[Source: 10-Q for Q2 2022]

As of June 30, 2022, the Company held 22,726,572 common shares, compared to 23,146,775 common shares as of December 31, 2021. The Board of Directors of the Company increased the quarterly common stock dividend by one penny (3.8% ) at $0.27 per share.

Overall, the quarter ended June 30, 2022 included positive operating cash flow, a reduction in the number of common shares, a reduction in the number of preferred shares, a reduction in the number of warrants outstanding , a small redemption of notes and an increase in the dividend.

It should be monitored whether management’s capital allocation decisions result in increased operating cash flow in the future. With the company’s net asset value declining (and historically declining) as noted above, I’m not willing to give management the benefit of the doubt at this time, particularly with rising rates and the recessionary environment in which we currently find ourselves.

In short, I currently have no interest in the common shares of the Company.


PS Notes listed on the stock exchange:

As mentioned above, I bought tickets from the company (AJXA) (CUSIP No.38983D409). The notes mature on April 30, 2024 (approximately 20 months away) and yield over 7%. The next interest payment date is October 15, 2022. The Notes rank senior to the Company’s preferred and common shares. I believe management would reduce ordinary and preferred dividends to avoid defaulting on senior notes. Additionally, under the management agreement with the external manager, the Company has the option to pay 50% of the manager’s fees in common stock, which would provide liquidity in a distress scenario (see filing 10-Q) . Of course, the Company is not a blue chip company and is engaged in risky leveraged activity. Do your own due diligence.


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