Great Ajax(AJX) - 2020 Q1 - Quarterly Report

PART I Item 1. Consolidated Interim Financial Statements The consolidated interim financial statements present Great Ajax Corp.'s financial position as of March 31, 2020, showing a decrease in total assets to $1.54 billion and a significant decline in net income to $0.4 million due to a $5.1 million provision for credit losses from COVID-19 impacts and CECL adoption Consolidated Balance Sheets Consolidated Balance Sheet Summary (in thousands) | Account | March 31, 2020 (Unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $31,179 | $64,343 | | Mortgage loans, net | $1,098,629 | $1,151,469 | | Investments at fair value | $247,372 | $231,685 | | Total assets | $1,537,847 | $1,576,841 | | Liabilities | | | | Secured borrowings, net | $630,938 | $652,747 | | Borrowings under repurchase transactions | $431,091 | $414,114 | | Convertible senior notes, net | $111,420 | $118,784 | | Total liabilities | $1,180,573 | $1,192,757 | | Equity | | | | Equity attributable to stockholders | $332,060 | $359,882 | | Total equity | $357,274 | $384,084 | - Total assets decreased from $1.58 billion at the end of 2019 to $1.54 billion as of March 31, 2020, while total equity decreased from $384.1 million to $357.3 million over the same period[9] - The allowance for loan credit losses increased significantly to $16.1 million as of March 31, 2020, from $2.0 million at December 31, 2019, reflecting the adoption of CECL and the expected impact of COVID-19[9] Consolidated Statements of Income Consolidated Income Statement Summary (in thousands, except per share data) | Account | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net interest income | $14,216 | $13,767 | | Provision for credit losses | ($5,109) | ($154) | | Total income | $8,037 | $15,184 | | Total expense | $6,452 | $6,992 | | Consolidated net income | $1,496 | $8,121 | | Consolidated net income attributable to common stockholders | $400 | $7,330 | | Diluted earnings per common share | $0.02 | $0.36 | - Net income attributable to common stockholders plummeted to $0.4 million ($0.02 per diluted share) for Q1 2020, compared to $7.3 million ($0.36 per diluted share) for Q1 2019[14] - The significant decrease in net income was primarily driven by a $5.1 million provision for credit losses in Q1 2020, a substantial increase from the $154 thousand provision in the prior-year period[14] Consolidated Statements of Cash Flows Consolidated Cash Flow Summary (in thousands) | Activity | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | Net cash from operating activities | ($30,409) | ($5,044) | | Net cash from investing activities | $11,015 | ($5,593) | | Net cash from financing activities | ($13,771) ($2,968) | | Net change in cash | ($33,165) | ($13,605) | | Cash at beginning of period | $64,363 | $55,170 | | Cash at end of period | $31,198 | $41,565 | - Cash and cash equivalents decreased by $33.2 million during the quarter, ending at $31.2 million, driven by significant cash outflows from operating and financing activities, partially offset by investing activities[20][21] Notes to Consolidated Interim Financial Statements - The company adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in a non-cash reclassification of $10.2 million from loan discount to allowance for credit losses for mortgage loans and $4.2 million for beneficial interests, with no impact on consolidated equity[92][93] - During Q1 2020, the company recorded a provision for credit losses of $2.1 million on its mortgage loan portfolio and $3.0 million on its beneficial interests, primarily due to reduced cash flow expectations from the COVID-19 outbreak[105][119] - In late March 2020, the company received margin calls of $28.2 million from its financing counterparties due to market turmoil from the COVID-19 outbreak, holding $32.4 million of cash collateral on deposit as of March 31, 2020[148] - Subsequent to the quarter end, in April 2020, the company closed a private placement of $80.0 million of preferred stock and warrants to institutional investors to bolster its capital position[231] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic on Q1 2020 results, leading to a $5.1 million provision for credit losses, a $28.4 million unrealized loss on debt securities, and $28.2 million in margin calls, with net income falling to $0.4 million and the company raising $80 million in preferred equity post-quarter end Overview and Portfolio - Great Ajax Corp. is a REIT primarily focused on acquiring, investing in, and managing a portfolio of re-performing loans (RPLs) and small balance commercial (SBC) loans, also investing directly in single-family and smaller commercial properties[240] Portfolio Carrying Value (in millions) | Asset Type | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Residential RPL loan pools | $1,066.6 | $1,085.5 | | Investment in debt securities | $247.4 | $231.7 | | Investment in beneficial interests | $64.7 | $58.0 | | Property held-for-sale, net | $10.9 | $13.5 | | Total Real Estate Assets | $1,423.0 | $1,456.2 | Market Trends and Outlook (COVID-19) - The COVID-19 pandemic began to significantly impact operations in late March 2020, leading to several adverse financial effects in the first quarter[248] - Key impacts of COVID-19 in Q1 2020 include: - A $5.1 million provision expense on mortgage loans and beneficial interests due to expectations of extended portfolio durations and foreclosure timelines - A $28.4 million unrealized loss on investments in debt securities recorded to Other Comprehensive Income - Impairments on the REO portfolio due to extended eviction timelines and higher costs - Settled margin calls of $28.2 million with financing counterparties[248] - In response to the pandemic, the company, through its Servicer, implemented a mortgage forbearance program, with 920 inquiries, 115 granted, and 146 under review as of April 30, 2020[249] Results of Operations - Net income attributable to common stockholders decreased by $6.9 million to $0.4 million in Q1 2020 from $7.3 million in Q1 2019, primarily due to a $5.1 million provision for losses driven by the expected impact of COVID-19[296] - Book value per share declined to $14.37 from $15.80 at year-end 2019, mainly due to a $28.4 million non-cash mark-to-market adjustment on the fair value of its debt securities[296] - Interest income decreased by $2.2 million year-over-year due to a smaller average mortgage loan portfolio, while interest expense decreased by $2.6 million due to the impact of a rated secured borrowing that closed in late 2019[302][303] Liquidity and Capital Resources - Primary sources of cash include securities offerings, secured borrowings, repurchase agreements, and cash flows from the loan portfolio; as of March 31, 2020, the company held $31.2 million in cash and cash equivalents, a decrease of $33.2 million from year-end 2019[333][334] - In April 2020, subsequent to the quarter's end, the company raised $80.0 million through a private placement of preferred stock and warrants to enhance liquidity and fund asset acquisitions[357][367] Contractual Obligations as of March 31, 2020 (in thousands) | Obligation | Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | More than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Convertible senior notes | $115,850 | $— | $— | $115,850 | $— | | Borrowings under repurchase agreements | $431,091 | $431,091 | $— | $— | $— | | Interest on convertible senior notes | $36,046 | $8,399 | $16,798 | $10,849 | $— | | Interest on repurchase agreements | $4,086 | $4,086 | $— | $— | $— | | Total | $587,073 | $443,576 | $16,798 | $126,699 | $— | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company identifies its primary market risks as real estate, interest rate, prepayment, and credit risk, acknowledging that the COVID-19 pandemic presents significant uncertainties that could adversely affect these areas, with an expected slowdown in loan prepayments - The company's primary market risks include: - Real Estate Risk: Residential property values are volatile and can be adversely affected by economic conditions, including public health crises like COVID-19 - Interest Rate Risk: Changes in interest rates can affect the fair value of mortgage loans, financing expenses, and refinancing volumes - Prepayment Risk: The rate of principal repayment on mortgage loans is uncertain and affected by interest rates and economic factors; the company expects prepayment rates to slow due to COVID-19 - Credit Risk: The company is subject to the risk of borrower default, which can be influenced by job loss, personal events, and economic downturns[370][371][372][374][375] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2020, with no material changes in internal control over financial reporting during the first quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[378] - No changes in internal control over financial reporting occurred during the first quarter of 2020 that have materially affected, or are reasonably likely to materially affect, these controls[379] PART II Item 1. Legal Proceedings The company reports that neither it nor its affiliates are subject to any material legal or regulatory proceedings, though it may be involved in various claims and legal actions that arise in the ordinary course of business - As of the filing date, the company is not a party to any material legal proceedings[382] Item 1A. Risk Factors This section details significant risks, including the adverse effects of the COVID-19 pandemic, risks from higher-risk loans, illiquidity of assets, potential failures of the affiliated Servicer, regulatory changes (including the CARES Act), conflicts of interest with the external Manager, and risks associated with leverage and organizational structure - A primary risk factor is the COVID-19 pandemic, which has adversely affected and is expected to continue to adversely affect the company's business, financial condition, liquidity, and results of operations due to market volatility, government measures like forbearance, and potential impacts on personnel[384] - The company faces risks from its portfolio of higher-risk loans, which are more expensive to service and have higher delinquency rates; government-mandated forbearance programs and foreclosure moratoriums under the CARES Act may adversely affect the value and returns on these loans[386][396] - Significant conflicts of interest exist with the company's external Manager and affiliated Servicer; the Management and Servicing agreements were not negotiated at arm's length, and the incentive fee structure may encourage the Manager to select riskier investments to maximize dividends[493][503] - The company's use of leverage, particularly short-term repurchase agreements, exposes it to risks of margin calls and increased losses in unfavorable economic conditions; market disruptions from COVID-19 have already impacted the company's ability to securitize assets and increased financing costs[418][467] Item 2. Unregistered Sales of Securities On March 5, 2020, the company issued a total of 2,600 shares of common stock (650 shares to each of its four independent directors) as partial payment for their Q1 2020 director fees, issued in a private placement exempt from registration under Section 4(a)(2) of the Securities Act - On March 5, 2020, the company issued 650 shares of common stock to each of its four independent directors as partial payment of quarterly fees, relying on the Section 4(a)(2) exemption from registration[536] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[537] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including the Third Amended and Restated Management Agreement, certifications by the CEO and CFO as required by the Sarbanes-Oxley Act, and XBRL data files - Key exhibits filed include the Third Amended and Restated Management Agreement dated April 28, 2020, and Sarbanes-Oxley Act certifications by the CEO and CFO[542]