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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, 2022
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 classTrading SymbolsName of each exchange on which registered
Common stock, par value $0.01 per shareAJXNew York Stock Exchange
7.25% Convertible Senior Notes due 2024AJXANew 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 filerAccelerated 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 4, 2022, 23,183,898 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.



TABLE OF CONTENTS

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)March 31, 2022December 31, 2021
ASSETS(Unaudited)
Cash and cash equivalents$70,722 $84,426 
Cash held in trust5,005 3,100 
Mortgage loans held-for-sale, net 29,572 
Mortgage loans held-for-investment, net(1,2)
1,063,476 1,080,434 
Real estate owned properties, net(3)
6,586 6,063 
Investments in securities at fair value(4)
327,793 355,178 
Investments in beneficial interests(5)
139,249 139,588 
Receivable from servicer19,153 20,899 
Investments in affiliates32,578 27,020 
Prepaid expenses and other assets21,317 13,400 
Total assets$1,685,879 $1,759,680 
LIABILITIES AND EQUITY
Liabilities:
Secured borrowings, net(1,2,6)
$536,988 $575,563 
Borrowings under repurchase transactions522,574 546,054 
Convertible senior notes, net(6)
103,749 102,845 
Management fee payable2,424 2,279 
Put option liability26,867 23,667 
Accrued expenses and other liabilities5,778 8,799 
Total liabilities1,198,380 1,259,207 
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 March 31, 2022 and December 31, 2021
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 March 31, 2022 and December 31, 2021
64,044 64,044 
Common stock $0.01 par value; 125,000,000 shares authorized, 23,194,566 shares issued and outstanding at March 31, 2022 and 23,146,775 shares issued and outstanding at December 31, 2021
234 233 
Additional paid-in capital316,326 316,162 
Treasury stock(1,808)(1,691)
Retained earnings63,996 66,427 
Accumulated other comprehensive (loss)/income(8,758)1,020 
Equity attributable to stockholders485,134 497,295 
Non-controlling interests(7)
2,365 3,178 
Total equity487,499 500,473 
Total liabilities and equity$1,685,879 $1,759,680 
(1)Mortgage loans held-for-investment, net include $729.0 million and $756.8 million of loans at March 31, 2022 and December 31, 2021, 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 $7.7 million and $7.1 million of allowance for expected credit losses at March 31, 2022 and December 31, 2021, respectively.     
(2)As of March 31, 2022 and December 31, 2021, balances for Mortgage loans held-for-investment, net include $1.0 million and $1.4 million, respectively, from a 50.0% owned joint venture, which the Company consolidates under U.S. Generally Accepted Accounting Principles ("U.S. GAAP").
(3)Real estate owned properties, net, are presented net of valuation allowances of $0.6 million and $0.5 million at March 31, 2022 and December 31, 2021, respectively.
(4)As of March 31, 2022, Investments in securities at fair value include an amortized cost basis of $336.6 million and a net unrealized loss of $8.8 million. As of December 31, 2021, Investments in securities at fair value include an amortized costs basis of $354.2 million and net unrealized gains $1.0 million.
(5)Investments in beneficial interests includes allowance for expected credit losses of zero and $0.6 million at March 31, 2022 and December 31, 2021, respectively.
(6)Secured borrowings, net are presented net of deferred issuance costs of $6.5 million at March 31, 2022 and $7.3 million at December 31, 2021. Convertible senior notes, net are presented net of deferred issuance costs of $0.8 million and $1.7 million at March 31, 2022 and December 31, 2021, respectively.
(7)As of March 31, 2022 non-controlling interests includes $1.1 million from a 50.0% owned joint venture, $1.2 million from a 53.1% owned subsidiary and $0.1 million from a 99.9% owned subsidiary. As of December 31, 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 which the Company consolidates.

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
($ in thousands except per share data)March 31, 2022March 31, 2021
INCOME
Interest income$23,212 $24,035 
Interest expense(8,606)(10,304)
Net interest income14,606 13,731 
Net decrease in the net present value of expected credit losses(1)
3,978 5,516 
Net interest income after the impact of changes in the net present value of expected credit losses18,584 19,247 
(Loss)/income from investments in affiliates(63)163 
Other (loss)/income(3,550)356 
Total revenue, net14,971 19,766 
EXPENSE
Related party expense – loan servicing fees2,091 1,833 
Related party expense – management fee2,293 2,273 
Professional fees345 640 
Real estate operating expenses185 185 
Fair value adjustment on put option liability3,200 1,944 
Other expense1,254 1,304 
Total expense9,368 8,179 
Loss on debt extinguishment 911 
Income before provision for income taxes5,603 10,676 
Provision for income taxes (benefit)(28)34 
Consolidated net income5,631 10,642 
Less: consolidated net income/(loss) attributable to the non-controlling interest96 1,689 
Consolidated net income attributable to Company5,535 8,953 
Less: dividends on preferred stock1,949 1,949 
Consolidated net income attributable to common stockholders$3,586 $7,004 
Basic earnings per common share$0.15 $0.30 
Diluted earnings per common share$0.15 $0.30 
Weighted average shares – basic22,922,316 22,816,978 
Weighted average shares – diluted22,922,316 22,816,978 
(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 months ended March 31, 2022 and March 31, 2021. 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
($ in thousands) March 31, 2022March 31, 2021
Consolidated net income attributable to common stockholders$3,586 $7,004 
Other comprehensive (loss)/income:
Net unrealized (loss)/income on investments in available-for-sale debt securities(9,778)1,306 
Income tax expense related to items of other comprehensive income  
Comprehensive (loss)/income$(6,192)$8,310 




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)
Three months ended
($ in thousands) March 31, 2022March 31, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income$5,631 $10,642 
Adjustments to reconcile net income to net cash from operating activities
Stock-based management fee and compensation expense761 294 
Non-cash interest income accretion on mortgage loans(4,251)(5,878)
Interest and discount accretion on investment in debt securities(2,763)(2,476)
Discount accretion on investment in beneficial interests(4,153)(3,600)
Loss on debt extinguishment 911 
Loss/(gain) on sale of real estate owned properties16 (105)
Depreciation of property 3 
Impairment of real estate owned169 171 
Decrease in net present value of expected credit losses on loans(3,624)(5,500)
Credit loss expense on mortgage loans111 454 
Decrease in net present value of expected credit losses on beneficial interests(354)(15)
Impairment on beneficial interests3,973  
Credit loss expense on beneficial interests50 139 
Amortization of debt discount and prepaid financing costs1,041 1,613 
Undistributed loss/(income) from investment in affiliates63 (163)
Fair value adjustment on put option liability3,200 1,944 
Other non-cash charges 6 
Net change in operating assets and liabilities
Prepaid expenses and other assets(7,917)(4,468)
Receivable from Servicer1,764 (3,092)
Accrued expenses, management fee payable, and other liabilities(2,878)(254)
Net cash from operating activities(9,161)(9,374)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of mortgage loans and related balances(903)(35,637)
Principal paydowns on mortgage loans54,350 43,578 
Draws on small balance commercial loans (85)
Proceeds from paydowns on securities21,194 12,935 
Proceeds from sale of property held-for-sale121 1,587 
Investment in equity method investments(6,090) 
Distribution from affiliates352 485 
Net cash from investing activities69,024 22,863 
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from repurchase transactions6,006 89,652 
Repayments on repurchase transactions(29,486)(205,691)
Proceeds from origination of secured borrowings 391,028 
Repayments on secured borrowings(39,422)(225,232)
Payment of prepaid financing costs (7,301)
Purchase of bonds of non-controlling interest in subsidiaries (5,887)

The accompanying notes are an integral part of the consolidated interim financial statements.
5


Repurchase of the Company's senior convertible notes (2,430)
Sale of common stock pursuant to dividend reinvestment plan115 47 
Acquisition of non-controlling interest in subsidiary (11,362)
Distribution to non-controlling interests(909)(84)
Dividends paid on common stock and preferred stock(7,966)(5,799)
Net cash from financing activities(71,662)16,941 
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN TRUST(11,799)30,430 
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, beginning of period87,526 107,335 
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, end of period$75,727 $137,765 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest$7,819 $8,441 
Cash paid for income taxes$ $ 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Net transfer of loans to rental property or property held-for-sale$828 $228 
Issuance of common stock for management fee and compensation expense$761 $294 
Non-cash adjustments to basis in mortgage loans$18 $1,324 
Treasury stock received through distributions from investment in Manager$(117)$ 
Unrealized (loss)/gain on available for sale securities, net of non-controlling interest and tax$(9,778)$1,306 
Net transfer of loans (to)/from mortgage held-for-investment, net (from)/to mortgage loans held-for-sale, net$(29,572)$131,719 

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 March 31, 2022 and March 31, 2021 ($ in thousands):

March 31, 2022March 31, 2021
Cash and cash equivalents$70,722 $137,579 
Cash held in trust5,005 186 
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows$75,727 $137,765 


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 sharesPreferred stock - Series A amountPreferred stock - Series B sharesPreferred stock - Series B amountCommon stock sharesCommon stock amountTreasury stockAdditional Paid-in CapitalRetained EarningsAccumulated other comprehensive income/(loss)Total Stockholders' EquityNon-controlling InterestTotal Equity
Balance at three months ended March 31, 2021
Balance at December 31, 20202,307,400 $51,100 2,892,600 $64,044 22,978,339 $231 $(1,159)$317,424 $53,346 $375 $485,361 $29,130 $514,491 
Net income— — — — — — — — 8,953 — 8,953 1,689 10,642 
Issuance of shares under dividend reinvestment plan— — — — 4,228 — — 47 — — 47 — 47 
Acquisition of non-controlling interest in subsidiary— — — — — — — (3,056)— — (3,056)(8,306)(11,362)
Stock-based compensation expense— — — — 6,280 — — 294 — — 294 — 294 
Dividends declared ($0.17 per share) and distributions
— — — — — — — — (5,799)— (5,799)(84)(5,883)
Other comprehensive income— — — — — — — — — 1,306 1,306 — 1,306 
Balance at March 31, 20212,307,400 $51,100 2,892,600 $64,044 22,988,847 $231 $(1,159)$314,709 $56,500 $1,681 $487,106 $22,429 $509,535 
Balance at three months ended March 31, 2022
Balance at December 31, 20212,307,400 $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 

The accompanying notes are an integral part of the consolidated interim financial statements.
7


($ in thousands)Preferred stock - Series A sharesPreferred stock - Series A amountPreferred stock - Series B sharesPreferred stock - Series B amountCommon stock sharesCommon stock amountTreasury stockAdditional Paid-in CapitalRetained EarningsAccumulated other comprehensive income/(loss)Total Stockholders' EquityNon-controlling InterestTotal Equity
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, 20222,307,400 $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.
8


GREAT AJAX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
March 31, 2022
(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 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. 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 may also target investments in non-performing loans (“NPLs”). NPLs are loans on which the most recent three payments have not been made. The Company may acquire NPLs from time to time, either directly or with joint venture partners. 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 8.0% 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, 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, 2022, 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. The Company has securitized mortgage loans through a securitization trust and retained subordinated securities from the secured borrowings. This trust is considered to be a VIE, and the Company has determined that it is the primary beneficiary of this VIEs.

In 2018, the Company formed Gaea Real Estate Corp. ("Gaea"), as a wholly owned subsidiary of the Operating Partnership to hold investments in multi-family, mixed use and commercial real estate. 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.

On November 22, 2019, Gaea completed a private capital raise transaction through which it raised $66.3 million from the issuance common stock to third parties to allow Gaea to continue to advance its investment strategy. At March 31, 2022 the Company owned approximately 22.2% of Gaea. The Company accounts for its investment in Gaea under the equity method.

The accompanying notes are an integral part of the consolidated interim financial statements.
9


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 period ended December 31, 2021, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 4, 2022.

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, 2022. 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, 2022 and December 31, 2021. 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, 2022 and December 31, 2021. 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.

During the second quarter of 2021, the majority of loans held by 2017-D were sold into Ajax Mortgage Loan Trust 2021-C ("2021-C"), a related party joint venture with third party institutional investors. The Company held a 50.0% ownership of the remaining loans held by 2017-D at both March 31, 2022 and December 31, 2021.

During the first quarter of 2021, the Company acquired the outstanding non-controlling ownership interest in Ajax Mortgage Loan Trust 2018-C ("2018-C"), a subsidiary that had been 63.0% owned by the Company with its results included in the Company's consolidated financial statements. As a result, at March 31, 2022 and December 31, 2021 there were no non-controlling ownership interests in 2018-C held by third parties.

The Company’s 19.8% ownership of the Manager and 8.0% 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.

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



The accompanying notes are an integral part of the consolidated interim financial statements.
10


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, 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 also acquires loans that have not experienced a deterioration in credit quality and originates 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 at Fair Value

The Company’s Investments in Securities at Fair Value consist of investments in senior and subordinate notes issued by joint ventures which the Company forms with third party institutional accredited investors. The Company recognizes income on the debt securities using the effective interest method. Additionally, the notes are classified as available for sale 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 income. 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



The accompanying notes are an integral part of the consolidated interim financial statements.
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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 investments in the trust certificates issued by joint ventures which the Company forms with third party institutional accredited investors. The trust certificates represent the residual interest of any special purpose entity formed to facilitate certain investments. The accounting methodology used is similar to that described in "Mortgage Loans" except that the Company only recognizes its ratable share of gain, loss, income or expense based on its percentage ownership interest, and each beneficial interest is accounted for independently.

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 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.

Rental property is property not held-for-sale. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets of up to 27.5 years. The Company performs an impairment analysis for rental property using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired.

Preferred Stock

During the quarter ended June 30, 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.

Put Option Liability

As part of the Company’s capital raise transactions during the quarter 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. Each series of warrants includes 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. The Company is accreting the amount of the liability under the effective interest method to its expected future put value of $50.7 million 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.

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 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



The accompanying notes are an integral part of the consolidated interim financial statements.
12


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 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 (the "notes") due 2024, in three separate offerings which form a single series of fungible securities. At both March 31, 2022 and December 31, 2021, the UPB of the debt was $104.6 million. The 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 notes will mature on April 30, 2024, unless earlier repurchased, converted or redeemed. During certain periods and subject to certain conditions the 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 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 deduction from the notes, and are amortized to interest expense on an effective yield basis through April 30, 2023, the date at which the 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.

During the quarter ended March 31, 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. See — Recently Adopted Accounting Standards, below.

During the first quarter of 2021, the Company completed a repurchase of convertible notes for an aggregate principal amount of $2.5 million for a total purchase price of $2.4 million. There were no convertible note repurchases during the first quarter of 2022.

Management Fee and Expense Reimbursement

The Company is a party to the Third Amended and Restated Management Agreement with the Manager (the "Management Agreement") by and between the Company and the Manager, dated as of May 1, 2020, expiring on March 5, 2034. Under the Management Agreement, the Manager implements the Company’s business strategy and manages the Company’s business and investment activities and day-to-day operations subject to oversight by the Company’s Board of Directors. Among other services, the Manager provides the Company with a management team and necessary administrative and support personnel. Additionally, the Company pays directly for the internal audit function that reports directly to the Audit Committee and the Board of Directors. The Company does not currently have any employees that it pays directly and does not expect to have any employees that it pays directly in the foreseeable future. Each of the Company’s executive officers is an employee or officer, or both, of the Manager or the Servicer.



The accompanying notes are an integral part of the consolidated interim financial statements.
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Under the Management Agreement, the Company pays a quarterly base management fee based on its stockholders’ equity, including equity equivalents such as the Company's issuance of convertible senior notes, and may be required to pay a quarterly incentive management fee based on its cash distributions to its stockholders and the change in book value, and has the option to pay up to 100% of the base and incentive fees in cash or in shares of the Company's common stock. Management fees are expensed in the quarter incurred and the portion payable in common stock, if any, is accrued at quarter end. See Note 10 — Related party transactions.

Servicing Fees

The Company is also a party to a Servicing Agreement (the "Servicing Agreement"), expiring July 8, 2029, with the Servicer. Under the Servicing Agreement by and between the Company and the Servicer, the Servicer receives an annual servicing fee ranging from 0.65% annually of the UPB of loans that are re-performing at acquisition to 1.25% annually of UPB of loans that are non-performing at acquisition. Servicing fees are paid monthly. The total fees incurred by the Company for these services depend upon the UPB and type of mortgage loans that the Servicer services pursuant to the terms of the Servicing Agreement. The fees do not change if an RPL becomes non-performing or vice versa. Servicing fees for the Company’s real property assets are the greater of (i) the servicing fee applicable to the underlying mortgage loan prior to foreclosure, or (ii) 1.00% annually of the fair market value of the REO as reasonably determined by the Manager or 1.00% annually of the purchase price of any REO otherwise purchased by the Company. The Servicer is reimbursed for all customary, reasonable and necessary out-of-pocket costs and expenses incurred in the performance of its obligations, including the actual cost of any repairs and renovations undertaken on the Company’s behalf.

The total fees incurred by the Company for these services will be dependent upon the UPB and the type of mortgage loans that the Servicer services, for fees based on mortgage loans, and property values, previous UPB of the relevant loan, and the number of REO properties for fees based on REO properties. The Servicing Agreement will automatically renew for successive one-year terms, subject to prior written notice of non-renewal. In certain cases, the Company may be obligated to pay a termination fee. The Management Agreement will automatically terminate at the same time as the Servicing Agreement if the Servicing Agreement is terminated for any reason. See Note 10 — Related party transactions.

Stock-based Payments

At least a portion of the management fee is payable in cash, and a portion of the management fee may be payable (at the Company's discretion) in shares of the Company’s common stock, which are issued to the Manager in a private placement and are restricted securities under the Securities Act of 1933, as amended (the “Securities Act”). The number of shares issued to the Manager (if any) is determined based on the average of the closing prices of the Company's common stock on the New York Stock Exchange ("NYSE") on the five business days preceding the record date of the most recent regular quarterly dividend to holders of the common stock. Any management fees paid in common stock are recognized as an expense in the quarter incurred and accrued at quarter end. The shares vest immediately upon issuance. The Manager has agreed to hold any shares of common stock received by it as payment of the base management fee for at least three years from the date such shares of common stock are received.

Under the Company’s 2014 Director Equity Plan (the “Director Plan”), the Company may make stock-based awards to its directors. The Director Plan is designed to promote the Company’s interests by attracting and retaining qualified and experienced individuals for service as non-employee directors. The Director Plan is administered by the Company’s Board of Directors. The total number of shares of common stock or other stock-based awards, including grants of long-term incentive plan units (“LTIP Units”) from the Operating Partnership, available for issuance under the Director Plan is 60,000 shares. The Company issued to each of its independent directors restricted stock awards of 2,000 shares of its common stock upon joini