Great Ajax(US:AJX)2022-05-05 16:00PART I Financial Information This section presents the company's unaudited financial statements, management's discussion, market risk disclosures, and internal controls Item 1. Consolidated Interim Financial Statements This section presents Great Ajax Corp.'s unaudited Q1 2022 consolidated financial statements, encompassing balance sheets, income, comprehensive income, equity, cash flows, and detailed notes Consolidated Balance Sheets Great Ajax Corp.'s balance sheets as of March 31, 2022, show decreased total assets and liabilities due to reduced investments and borrowings, alongside a slight equity decline Consolidated Balance Sheet Highlights ($ in thousands) | Account | March 31, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,685,879 | $1,759,680 | | Mortgage loans held-for-investment, net | $1,063,476 | $1,080,434 | | Investments in securities at fair value | $327,793 | $355,178 | | Total Liabilities | $1,198,380 | $1,259,207 | | Secured borrowings, net | $536,988 | $575,563 | | Borrowings under repurchase transactions | $522,574 | $546,054 | | Total Equity | $487,499 | $500,473 | Consolidated Statements of Income For Q1 2022, the company reported a significant decrease in common stockholders' net income, driven by other losses and increased expenses Consolidated Income Statement Highlights ($ in thousands) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Net interest income | $14,606 | $13,731 | | Total revenue, net | $14,971 | $19,766 | | Total expense | $9,368 | $8,179 | | Consolidated net income | $5,631 | $10,642 | | 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 | $0.30 | Consolidated Statements of Comprehensive Income In Q1 2022, the company recorded a comprehensive loss, a stark contrast to prior-year income, primarily due to significant net unrealized losses on available-for-sale debt securities Comprehensive (Loss)/Income ($ in thousands) | Description | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Consolidated net income attributable to common stockholders | $3,586 | $7,004 | | Net unrealized (loss)/income on investments | ($9,778) | $1,306 | | Comprehensive (loss)/income | ($6,192) | $8,310 | Consolidated Statements of Cash Flows In Q1 2022, the company experienced a net cash outflow, primarily driven by financing and operating activities, partially offset by cash inflows from investing activities Cash Flow Summary ($ in thousands) | Cash Flow Activity | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :--- | :--- | :--- | | Net cash from operating activities | ($9,161) | ($9,374) | | Net cash from investing activities | $69,024 | $22,863 | | Net cash from financing activities | ($71,662) | $16,941 | | Net change in cash | ($11,799) | $30,430 | Notes to Consolidated Interim Financial Statements These notes detail the company's accounting policies and financial activities, including its REIT structure, loan portfolio, investments, debt, equity, and new accounting standards - The company is an externally managed mortgage REIT primarily targeting acquisitions of re-performing loans (RPLs) and, to a lesser extent, non-performing loans (NPLs) and small balance commercial (SBC) loans30 - The company adopted ASU 2020-06, which simplifies accounting for convertible instruments, resulting in a $0.7 million reduction in additional paid-in capital and a corresponding increase in the carrying value of its Convertible senior notes9057 - In Q1 2022, the company re-pooled its entire mortgage loan portfolio into six new pools based on payment patterns and borrower equity to better reflect recent market trends and loan performance100101 - A $4.0 million impairment was recorded on beneficial interests in two joint venture trusts (2018-D and -G) due to lower than expected cash proceeds at redemption, driven by market disruption132194 Cautionary Statement Regarding Forward-Looking Statements This section warns that forward-looking statements in the report are subject to risks and uncertainties, such as market volatility and interest rate changes, which may cause actual results to differ materially - Forward-looking statements are identified by terms like "anticipate," "believe," "expect," and are not guarantees of future performance243 - Key risks that could affect future performance include adverse real estate markets, changes in business strategy, impact of COVID-19, capital market volatility, interest rate changes, and failure to maintain REIT status244 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2022 financial condition and results, covering business overview, portfolio, market trends, and performance factors, noting a decrease in common stockholders' net income Overview and Portfolio Great Ajax Corp. is a REIT focused on acquiring residential mortgage loans and small balance commercial loans, with its total mortgage-related assets decreasing as of March 31, 2022 - The company's primary business is acquiring RPLs, but it also invests in NPLs, SBC loans, and real estate owned (REO) properties, and is externally managed by Thetis Asset Management LLC and serviced by the affiliated Gregory Funding LLC249 Portfolio Carrying Value ($ in millions) | Asset Type | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Residential RPLs | $931.4 | $971.1 | | Residential NPLs | $116.6 | $119.5 | | SBC loans | $15.5 | $19.3 | | Investments in securities at fair value | $327.8 | $355.2 | | Investment in beneficial interests | $139.2 | $139.6 | | Total mortgage related assets | $1,537.1 | $1,610.8 | Market Trends and Factors Affecting Results Management identifies rising home prices and interest rates as key Q1 2022 market trends, noting that loan acquisitions, financing, resolution strategies, and external factors significantly impact results - Market trends include rising home prices and interest rates, a fall-off in refinance activity, and continued market share gains by non-bank lenders257258 - Key operational drivers include acquisitions, financing availability (securitizations and repurchase agreements), loan resolution strategies (modification preferred), and expenses (management and servicing fees)266269271273 - External factors like home price appreciation (HPA), interest rate changes, and the COVID-19 pandemic significantly impact portfolio value, financing costs, and credit performance274275280 Results of Operations Analysis Q1 2022 saw a decrease in common stockholders' net income, primarily due to impairments and fair value adjustments, despite increased net interest income and a slight rise in book value per share Q1 2022 vs Q1 2021 Results ($ in thousands) | Metric | Q1 2022 | Q1 2021 | | :--- | :--- | :--- | | Net interest income | $14,606 | $13,731 | | Other (loss)/income | ($3,550) | $356 | | Total expense | $9,368 | $8,179 | | Consolidated net income attributable to common stockholders | $3,586 | $7,004 | - The decrease in earnings was primarily driven by a $4.0 million impairment on investments in beneficial interests and a $1.3 million increase in the fair value adjustment expense for the put option liability285288305 - Book value per common share increased to $15.95 at March 31, 2022, from $15.92 at December 31, 2021, mainly due to the anti-dilutive effect of convertible notes in the Q1 2022 calculation311312 - Loan acquisition activity was very low in Q1 2022, with only $0.9 million of NPLs purchased, compared to over $35 million in total loans purchased in Q1 2021313316 Liquidity and Capital Resources The company's liquidity relies on cash from operations, securities offerings, and secured borrowings, with significant contractual obligations from repurchase agreements and convertible notes - Primary sources of cash include proceeds from securities offerings, secured borrowings, repurchase agreements, and principal/interest payments from the portfolio331 Key Balances as of March 31, 2022 ($ in millions) | Item | Balance | | :--- | :--- | | Cash and cash equivalents | $70.7 | | Repurchase obligations | $522.6 | | Secured borrowings (gross) | $543.5 | | Convertible senior notes (principal) | $104.6 | | Put option liability (expected future value) | $50.7 | - The company has five outstanding secured borrowings structured as debt financings, not REMIC sales, which remain on the consolidated balance sheet342 - Subsequent to quarter-end, the company refinanced two joint ventures into a new $215.5 million UPB securitization (2022-A), declared a $0.26/share dividend, and continued to acquire small pools of RPLs and NPLs377380381 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's primary market risks, including real estate, interest rate, prepayment, credit, and inflation, which can significantly impact asset values, financing costs, and borrower performance - Real Estate Risk: Property values are volatile and affected by economic conditions, local markets, and other factors, where decreases in property values may cause losses383 - Interest Rate Risk: Rising interest rates increase the cost of funds on repurchase lines and for new secured borrowings, and may lower refinancing volume, affecting the fair value of the company's portfolio384 - Prepayment Risk: Changes in prepayment rates, influenced by interest rates and borrower behavior, affect yields, where an increase in prepayments on discounted loans can increase yield but also creates reinvestment risk386 - Credit Risk: The company is subject to the risk of borrower default due to factors like job loss, personal events, or, for commercial loans, poor property performance388389 - Inflation Risk: Recent and expected interest rate hikes by the Federal Reserve to combat inflation are expected to increase the company's cost of funds390 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of the end of the quarter, the company's disclosure controls and procedures were effective392 - No changes occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting393 PART II Other Information This section provides additional information, including legal proceedings, risk factors, unregistered securities sales, defaults, and exhibits Item 1. Legal Proceedings The company reports no material pending legal or regulatory proceedings involving itself or its subsidiaries as of the filing date - As of the filing date, the company is not involved in any material pending legal proceedings395 Item 1A. Risk Factors The company reports no material changes to the risk factors previously disclosed in its 2021 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's 2021 Annual Report on Form 10-K395 Item 2. Unregistered Sales of Securities During the quarter, the company issued unregistered common stock shares in private transactions to its Manager and independent directors as partial payment for fees - On March 7, 2022, 39,558 shares of common stock were issued to the Manager for the stock-based portion of the management fee396 - On March 7, 2022, a total of 3,470 shares (694 each) were issued to the five independent directors as partial payment of their quarterly fees396 Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None397 Item 5. Other Information The company reported no other information for this item - None397 Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - Exhibits filed with the report include Sarbanes-Oxley Act certifications (31.1, 31.2, 32.1, 32.2) and Inline XBRL documents (101 series)399