Great Ajax: A Lot to Prove, but Senior Note Looks OK (NYSE:AJX)

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Founded in 2014 Great Ajax Corp. (New York Stock Exchange: AJX) (“we”) external management Mortgage REITs with market capitalization less than $225 million.

I am company neutral for a variety of reasons including declining net worth asset values, lukewarm quarterly GAAP earnings for the most recent quarter (June 30, 2022), lower shareholders’ equity, potential misalignment of incentives related to external management, current market conditions (i.e. higher interest rates and increased risk), and our track record as a public company is relatively short and unimpressive. Notably, Seeking Alpha data shows the company underperformed its 2015 IPO price, below its initial public market cap.See also “IPO Preview: Great Ajax.”

However, higher up the capital stack, the company’s Listed Senior Notes (AJXA) (the “Notes”) maturing on April 30, 2024 offer reasonable value, and I’m looking at prices between $24.44 and $25.07. I bought shares.

company business

According to our website, our business mainly focuses on: (2) Investments in loans backed by multi-family and commercial mixed-use retail/residential real estate. (3) holding assets acquired in our distressed mortgage foreclosures (or deeds in lieu thereof); and (4) to a much lesser extent, acquiring real estate on the market.

The Company’s loan portfolio is primarily related to single-family homes, although its portfolio includes loans to smaller commercial properties. When a loan is foreclosed, management decides whether to sell the foreclosed property (and provide the buyer with a mortgage) or to keep the foreclosed property as a rental property. Our management believes that our unique approach to each acquired property (foreclosure) will create alpha for our investors over the long term.

The Company also actively participates in purchasing Reperform Home Loans (“RPLs”) at discounted prices, adding yield to its portfolio, but at the risk that these loans will default again. Intuitively, this sounds like a difficult and risky business, as debtors who default on their payments are more likely to default on their payments in the future. However, if the loan has sufficient value (“LTV”) and the company purchases the loan at a discount, nonpayment is probably less of an issue. In this regard, the recent rise in home prices should (at least temporarily) support the LTV of our mortgage portfolio. Thus reducing the chances of the company suffering losses in foreclosure scenarios. On the other hand, the recent spike in mortgage rates is a negative factor and could put downward pressure not only on home prices, but also on the value of the mortgages we hold on our balance sheet.

We also have a relatively small portfolio of retail commercial loans. Such loans reflect our investments in certain multifamily and mixed retail/residential properties.

finances and earnings

The company’s balance sheet included in its most recent quarterly filing (10-Q) with the SEC shows that total assets decreased by approximately $175 million during the six months ended June 30, 2022. increase. Reduced total debt by approximately $110 million. A reduction in shareholders’ equity of approximately $65 million.

The Company’s press release for the quarter ended June 30, 2022 (the “Press Release”) highlighted that the decrease in assets and liabilities was partially attributable to the repurchase of the Company’s preferred stock and warrants. .

During the quarter ended June 30, 2022, the Company repurchased and retired $25 million par value of preferred stock and related common stock warrants in a series of repurchase transactions. The preferred stock repurchase resulted in the recognition of a GAAP deferred issuance cost of $2.5 million, and the warrant repurchase accelerated his $3.5 million future GAAP increase in the put option liability on the warrant, for a total of $6.0 million. A temporary expense has occurred. The preferred stock repurchase will save approximately $1.7 million annually in preferred dividends, and the warrant repurchase will reduce future put option accretion costs by $2.8 million annually. Total annual savings of $4.5 millionThese buybacks were financed with cash on hand. ”

[Emphasis mine]

The company’s GAAP book value decreased from $15.95 per common share on March 31, 2022 to $14.98 per common share on June 30, 2022, according to a press release. Significant discount to previously reported book value per share, given external management, reduced shareholders’ equity, higher interest rates and recent quarterly GAAP losses for the quarter ended June 30, 2022 , probably justified. release):

GAAP consolidated net loss attributable to common shareholders for the quarter ended June 30, 2022 was $(9.2 million) or $(0.40) per common share.

In terms of cash flow, according to the 10-Q linked above, net cash flow from operations on June 20, 2022 was approximately $4.1 million. negative $23 million as of June 30, 2021. Net cash from investing activities was approximately $130 million as of June 30, 2022, compared with approximately $11 million as of June 30, 2021.Net cash from financing activities is approximately negative Approximately $165 million as of June 30, 2022 negative $7 million as of June 30, 2021. Overall cash he reduced by about $30 million in one year. Given that operating cash flow was marginally positive, 1) debt repayments of $73 million, and 2) purchases/repurchases of preferred stock, warrants and common stock of approximately $39 million were also taken into account. reduction is not so bad. 3) He paid $16 million in dividends on common and preferred stock. Our actions after the June 30, 2022 quarter include:

[R]Repurchased $5 million par value of outstanding preferred stock and related common stock warrants. The preferred stock buyback will save the company approximately $300,000 annually in preferred dividends, and the warrant buyback will reduce future put option accretion costs by approximately $600,000 annually, for a total annual savings of $900,000. Expected. ”

[Source: 10-Q for Q2 2022]

As of June 30, 2022, we had 22,726,572 shares of common stock and as of December 31, 2021, we had 23,146,775 shares. The Company’s Board of Directors has increased its quarterly common stock dividend by one penny (3.8%) to bring him to $0.27 per share.

Overall, the quarter ended June 30, 2022 saw positive operating cash flow, a decrease in common stock, a decrease in preferred stock, a decrease in warrants outstanding, a small repayment of bonds and an increase in dividends. was included.

It will be interesting to see if management’s capital allocation decisions lead to increased operating cash flow going forward. As noted above, with the company’s net asset value declining (and historically it has), we are not going to give management the benefit of the doubt at this point, especially in the current environment of rising interest rates and recession. There is none.

In short, I currently have no interest in our common stock.


PS Listed Bonds:

As mentioned above, I purchased a company notebook (AJXA) (CUSIP No.38983D409). The maturity date is April 30, 2024 (about 20 months from now) and the yield is over 7%. The next coupon payment date is October 15, 2022. The Notes supersede our preferred and common stock. I believe management will reduce the common and preferred dividends to avoid a default on the preferred notes. In addition, under our management agreement with an external manager, we are able to pay him 50% of the manager’s compensation in common stock, which provides liquidity in difficult scenarios (see 10-Q filing ). Of course, we are not an investment grade company and are in a risky leveraged business. Please do your own due diligence.

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