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 September 30, 2021

OR

☐    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 November 3, 2021, 23,143,037 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	51
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3. Quantitative and Qualitative Disclosures About Market Risk	83
Item 4. Controls and Procedures	84
PART II Other Information
Item 1. Legal Proceedings	85
Item 1A. Risk Factors	85
Item 2. Unregistered Sales of Securities	85
Item 3. Defaults Upon Senior Securities	85
Item 4. Mine Safety Disclosure	85
Item 5. Other Information	85
Item 6. Exhibits	85

i

PART I. FINANCIAL INFORMATION

Item 1.    Consolidated Interim Financial Statements

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

($ in thousands except per share data)	September 30, 2021		December 31, 2020
ASSETS	(Unaudited)
Cash and cash equivalents	$	92,843	$	107,147
Cash held in trust	2,534		188
Mortgage loans held-for-investment, net(1,2)	976,351		1,119,372
Mortgage loans held-for-sale, net	30,963		—
Real estate owned properties, net(3)	6,097		8,526
Investments in securities at fair value(4)	340,082		273,834
Investments in beneficial interests(5)	139,494		91,418
Receivable from servicer	18,128		15,755
Investments in affiliates	27,464		28,616
Prepaid expenses and other assets	14,132		8,876
Total assets	$	1,648,088	$	1,653,732
LIABILITIES AND EQUITY
Liabilities:
Secured borrowings, net(1,2,6)	$	612,592	$	585,403
Borrowings under repurchase transactions	399,340		421,132
Convertible senior notes, net(6)	103,754		110,057
Management fee payable	2,289		2,247
Put option liability	20,843		14,205
Accrued expenses and other liabilities	6,165		6,197
Total liabilities	1,144,983		1,139,241
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, 2,307,400 shares issued and outstanding at September 30, 2021 and 2,307,400 shares issued or outstanding at December 31, 2020	51,100		51,100
Series B 5.00% Fixed-to-Floating Rate Cumulative Redeemable, $25.00 liquidation preference per share, 2,892,600 shares issued and outstanding at September 30, 2021 and 2,892,600 shares issued and outstanding at December 31, 2020	64,044		64,044
Common stock $0.01 par value; 125,000,000 shares authorized, 23,140,131 shares issued and outstanding at September 30, 2021 and 22,978,339 shares issued and outstanding at December 31, 2020	232		231
Additional paid-in capital	315,611		317,424
Treasury stock	(1,539)		(1,159)
Retained earnings	66,958		53,346
Accumulated other comprehensive income	3,418		375
Equity attributable to stockholders	499,824		485,361
Non-controlling interests(7)	3,281		29,130
Total equity	503,105		514,491
Total liabilities and equity	$	1,648,088	$	1,653,732

(1)Mortgage loans held-for-investment, net include $790.9 million and $842.2 million of loans at September 30, 2021 and December 31, 2020, respectively, transferred to securitization trusts that are variable interest entities (“VIEs”); these loans can only be used to settle obligations of the VIEs. Secured

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

1

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 $13.9 million and $13.7 million of allowance for expected credit losses at September 30, 2021 and December 31, 2020, respectively.     

(2)As of September 30, 2021, balances for Mortgage loans held-for-investment, net include $1.5 million from a 50.0% owned joint venture. As of December 31, 2020, balances for Mortgage loans held-for-investment, net include $307.1 million and Secured borrowings, net of deferred costs includes $250.6 million from 50.0% and 63.0% owned joint ventures, all of which the Company consolidates under U.S. Generally Accepted Accounting Principles ("U.S. GAAP"). The creditors do not have recourse to the primary beneficiary (Great Ajax Corp.). See Note 9 — Debt.    

(3)Real estate owned properties, net, are presented net of valuation allowances of $0.4 million and $1.4 million at September 30, 2021 and December 31, 2020, respectively.

(4)As of September 30, 2021 and December 31, 2020, Investments in securities at fair value include amortized cost basis of $336.7 million and $273.4 million, respectively, and net unrealized gains of $3.4 million and $0.4 million, respectively.

(5)Investments in beneficial interests includes allowance for expected credit losses of $0.6 million and $4.5 million at September 30, 2021 and December 31, 2020, respectively.

(6)Secured borrowings, net are presented net of deferred issuance costs of $8.3 million at September 30, 2021 and $5.4 million at December 31, 2020. Convertible senior notes, net are presented net of deferred issuance costs of $2.1 million at September 30, 2021 and $3.3 million at December 31, 2020.

(7)As of September 30, 2021 non-controlling interests includes $1.8 million from a 50.0% owned joint venture, $1.3 million from a 53.1% owned subsidiary and $0.1 million from a 99.9% owned subsidiary. As of December 31, 2020 non-controlling interests includes $27.4 million from the 50.0% and 63.0% owned joint ventures, $1.5 million from a 53.1% owned subsidiary and $0.2 million from a 99.9% owned subsidiary which the Company consolidates under U.S. GAAP.

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

2

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended				Nine months ended
($ in thousands except per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
INCOME
Interest income	$	23,054	$	23,517	$	70,137	$	73,576
Interest expense	(8,609)		(11,727)		(27,743)		(37,855)
Net interest income	14,445		11,790		42,394		35,721
Net decrease in the net present value of expected credit losses(1)	3,678		4,440		13,927		4,591
Net interest income after the impact of changes in the net present value of expected credit losses	18,123		16,230		56,321		40,312
Income/(loss) from investments in affiliates	90		(25)		610		(465)
Other income	778		537		1,620		1,259
Total revenue, net	18,991		16,742		58,551		41,106
EXPENSE
Related party expense – loan servicing fees	1,743		1,848		5,275		5,798
Related party expense – management fee	2,292		2,264		6,835		6,206
Professional fees	526		576		1,929		2,113
Real estate operating expenses	(76)		173		197		1,273
Fair value adjustment on put option liability	2,493		1,766		6,638		3,016
Other expense	1,227		986		3,906		3,048
Total expense	8,205		7,613		24,780		21,454
Loss on debt extinguishment	—		253		1,072		661
Income before provision for income taxes	10,786		8,876		32,699		18,991
Provision for income taxes (benefit)	102		(16)		203		(215)
Consolidated net income	10,684		8,892		32,496		19,206
Less: consolidated net (loss)/income attributable to the non-controlling interest	(578)		1,662		(47)		3,493
Consolidated net income attributable to Company	11,262		7,230		32,543		15,713
Less: dividends on preferred stock	1,949		1,950		5,848		3,791
Consolidated net income attributable to common stockholders	$	9,313	$	5,280	$	26,695	$	11,922
Basic earnings per common share	$	0.40	$	0.23	$	1.16	$	0.53
Diluted earnings per common share	$	0.38	$	0.23	$	1.10	$	0.53
Weighted average shares – basic	22,862,429		22,844,192		22,835,237		22,575,480
Weighted average shares – diluted	30,407,649		22,989,616		30,286,613		22,575,480

(1)Net decrease in the net present value of expected credit losses represents the net decrease to the allowance resulting from changes in actual and expected cash flows during both the three and nine months ended September 30, 2021 and September 30, 2020, respectively. It represents the net increase of the present value of the expected cash flows in excess of contractual cash flows offset by any incremental provision expense on the Mortgage loan pools and Beneficial interests. The decrease is calculated at the pool level for Mortgage loans and at the security level for Beneficial interests. To the extent a pool or Beneficial interest has an associated allowance, the decrease in expected credit losses is recorded in the period in which the change occurs, otherwise it is recognized prospectively as an increase in yield.

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

3

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

	Three months ended September 30,				Nine months ended September 30,
($ in thousands)	2021		2020		2021		2020
Consolidated net income attributable to common stockholders	$	9,313	$	5,280	$	26,695	$	11,922
Other comprehensive income:
Net unrealized income/(loss) on investments in available-for-sale debt securities	1,767		4,337		3,043		(876)
Income tax expense related to items of other comprehensive income	—		—		—		—
Comprehensive income	$	11,080	$	9,617	$	29,738	$	11,046

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

4

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
($ in thousands)	September 30, 2021		September 30, 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	32,496	$	19,206
Adjustments to reconcile net income to net cash from operating activities
Stock-based compensation expense	979		650
Non-cash interest income accretion on mortgage loans	(15,495)		(22,765)
Interest and discount accretion on investment in debt securities	(8,159)		(5,074)
Discount accretion on investment in beneficial interests	(12,339)		(7,982)
Loss on sale of mortgage loans	—		705
Gain on refinancing of securitization trust 2017-D	(122)		—
Loss on debt extinguishment	1,072		661
Gain on sale of property held-for-sale	(572)		(957)
Gain on sale of securities	(201)		(145)
Depreciation of property	7		23
Impairment of real estate owned	170		1,155
Decrease in net present value of expected credit losses on loans	(9,148)		(2,902)
Credit loss expense on mortgage loans	757		794
Decrease in net present value of expected credit losses on beneficial interests	(4,779)		(1,688)
Credit loss expense on beneficial interests	440		570
Amortization of debt discount and prepaid financing costs	4,777		3,924
Undistributed (income)/loss from investment in affiliates	(610)		465
Fair value adjustment on put option liability	6,638		3,016
Other non-cash charges	(3)		—
Net change in operating assets and liabilities
Prepaid expenses and other assets	(8,759)		2,355
Receivable from Servicer	(2,373)		618
Accrued expenses, management fee payable, and other liabilities	12		1,316
Net cash from operating activities	(15,212)		(6,055)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of mortgage loans and related balances	(128,422)		(44,846)
Principal paydowns on mortgage loans	145,442		91,161
Proceeds from sale of mortgage loans	—		25,412
Proceeds from refinancing of securitization trust	125,975		—
Draws on small balance commercial loans	(10,366)		—
Purchase of securities	(286,461)		(144,682)
Principal and interest collection on debt securities	111,238		37,921
Proceeds from payoff and sale of securities	90,229		38,944
Proceeds from sale of property held-for-sale	5,835		9,101
Renovations and recovery costs of rental property and property held-for-sale	—		54
Distribution from affiliates	1,381		1,082
Net cash from investing activities	54,851		14,147
CASH FLOWS FROM FINANCING ACTIVITIES

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

5

Proceeds from repurchase transactions	376,301		270,019
Repayments on repurchase transactions	(398,093)		(268,714)
Proceeds from origination of secured borrowings	391,028		114,534
Repayments on secured borrowings	(354,990)		(153,932)
Payment of prepaid financing costs	(7,339)		(1,861)
Purchase of bonds of non-controlling interest in subsidiaries	(5,887)		—
Repurchase of the Company's senior convertible notes	(7,463)		(10,481)
Proceeds from issuance of preferred stock and warrants, net of offering costs	—		124,976
Sale of common stock, net of offering costs	99		—
Sale of common stock pursuant to dividend reinvestment plan	166		86
Redemption of non-controlling interests in subsidiaries	(26,163)		—
Distribution to non-controlling interests	(325)		(227)
Issuance of non-controlling interests in subsidiaries	—		145
Dividends on common stock and preferred stock	(18,931)		(11,621)
Net cash from financing activities	(51,597)		62,924
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN TRUST	(11,958)		71,016
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, beginning of period	107,335		64,363
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, end of period	$	95,377	$	135,379
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	22,151	$	32,511
Cash paid for income taxes	$	57	$	60
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net transfer of loans from mortgage held-for-investment, net to mortgage loans held-for-sale, net	$	159,733	$	—
Non-cash adjustments to basis in mortgage loans	$	3,193	$	43
Unrealized gain/(loss) on available for sale securities, net of non-controlling interest and tax	$	3,043	$	(876)
Net transfer of loans to rental property or property held-for-sale	$	3,013	$	1,515
Issuance of common stock for compensation expense	$	979	$	650
Treasury stock received through distributions from investment in Manager	$	380	$	164
Issuance of common stock for dividends	$	—	$	7,097

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet to the amount shown in the consolidated statements of cash flows as of September 30, 2021 and September 30, 2020 ($ in thousands):

	September 30, 2021		September 30, 2020
Cash and cash equivalents	$	92,843	$	135,190
Cash held in trust	2,534		189
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows	$	95,377	$	135,379

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

6

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 nine months ended September 30, 2020
Balance at December 31, 2019	—	$	—	—	$	—	22,142,143	$	222	$	(458)	$	309,395	$	49,446	$	1,277	$	359,882	$	24,202	$	384,084
Net income	—	—		—	—		—	—		—		—		400		—		400		1,096		1,496
Issuance of shares of subsidiary	—	—		—	—		—	—		—		145		—		—		145		—		145
Stock-based compensation expense	—	—		—	—		2,600	—		—		214		—		—		214