xijian
Introduction
Incorporated in 2014, Great Ajax Corp. (NYSE:AJX) (the “Company”) is an externally managed mortgage REIT with a market capitalization of less than $225 million.
I am NEUTRAL on the Company for a variety of reasons, including a declining net asset value, tepid quarterly GAAP earnings for the most recent quarter (June 30, 2022), declining stockholder equity, the potential misalignment of incentives associated with external management, the current market environment (i.e., rising rates and rising credit risks) and the Company’s relatively short and unimpressive track record as a public company. Notably, per Seeking Alpha data, the Company trades below its 2015 IPO price and below the initial public market capitalization. See also “IPO Preview: Great Ajax.”
Higher up in the capital stack, however, the Company’s publicly traded senior notes maturing on April 30, 2024, (AJXA) (the “Notes”) offer reasonable value and I have purchased shares at prices between $24.44 and $25.07.
The Business of the Company
Per the Company’s website, the Company’s business operations are focused primarily on (1) acquiring, investing and managing a portfolio of mortgage loans secured by single-family residences and single-family properties; (2) investing in loans secured by multi-family residential and commercial mixed use retail/residential properties; (3) holding properties acquired upon foreclosure (or deeds in lieu thereof) of the Company non-performing mortgage loans, and (4) to a much lesser extent, acquisition of real property in the market.
The Company’s loan portfolio relates primarily to single-family homes, although its portfolio does include loans to small commercial properties. When a loan is foreclosed upon, management determines whether to sell the foreclosed property (and whether to offer the purchaser mortgage financing), or to hold the foreclosed property as a rental property. The Company’s management believes that its custom approach to each (foreclosure) acquired property will generate alpha for its investors over the long term.
The Company also actively partakes in the purchase of re-performing mortgage loans (“RPLs”) at a discount, adding yield to its portfolio, but taking on the risk of those loan non-performing again. Intuitively, this seems like a difficult and risky business as debtors that miss payments are more likely to miss payments again in the future. Perhaps, however, non-payments are less of an issue when there is sufficient loan to value (“LTV”), coupled with the Company purchasing the loan at a discount. In this regard, the recent rise in home prices should support (at least temporarily) the LTV of the Company’s mortgage portfolios; thus, reducing the probability of the Company taking a loss in a foreclosure scenario. On the other hand, the recent spike in mortgage rates is a negative, as that could put downward pressure on home prices, as well as the value of the mortgages the Company holds on its balance sheet.
The Company also has a relatively small portfolio of small balance commercial loans. Such loans reflect the Company’s investment in certain multi-family and mixed retail/residential properties.
Financials and Earnings
The balance sheet of the Company included in its latest quarterly filing (10-Q) with the SEC shows a decline in Total Assets over the six month period ended June 30, 2022, of approximately $175 million; a decline in Total Liabilities of approximately $110 million; and a decline in Shareholder Equity of approximately $65 million.
The Company’s press release for the quarter ended June 30, 2022 (the “Press Release”), highlighted that the reduction in assets and liabilities stems in part from the Company’s repurchase of preferred stock and warrants:
During the quarter ended June 30, 2022, we repurchased and retired $25.0 million face amount of our preferred stock and associated warrants for our common stock in a series of repurchase transactions. The repurchase of the preferred stock caused the recognition of $2.5 million of GAAP deferred issuance costs and the repurchase of the warrants accelerated future GAAP accretion expense on the warrant’s put option liability of $3.5 million for a total of $6.0 million in one-time charges. The repurchase of the preferred stock will save us approximately $1.7 million annually in preferred dividends while the repurchase of the warrants will reduce future put option accretion expense by $2.8 million annually for a total annual savings of $4.5 million. We funded these repurchases with cash on hand.”
[Emphasis mine]
Per the Press Release, the GAAP book value of the Company declined from $15.95 per common share at March 31, 2022 to $14.98 per common share at June 30, 2022. As of this writing, the Company’s stock trades at less than $10 per share, a wide discount to its last reported book value per share, but perhaps justified given the external management, declining shareholder equity and increased interest rates, as well as the Company’s recently quarterly GAAP loss for the quarter ended June 30, 2022, (per the Press Release):
For the quarter ended June 30, 2022, we had a GAAP consolidated net loss attributable to common stockholders of $(9.2) million or $(0.40) per common share.
In terms of cash flows, per the 10-Q linked above, net cash flows from operating activities were approximately $4.1 million at June 20, 2022 compared to negative $23 million at June 30, 2021; net cash from investing activities was approximately $130 million at June 30, 2022 versus approximately 11 million at June 30, 2021; and net cash from financing activities was approximately negative $165 million at June 30, 2022 versus approximately negative $7 million at June 30, 2021. Overall cash declined by approximately $30 million over the one-year period. Considering operating cash flow was slightly positive, the overall decline in cash in not that bad when you also consider 1) the pay down of $73 million in debt, 2) the purchase/buy back of approximately $39 million of preferred stock, warrants and common stock, and 3) the payment of $16 million in common and preferred stock dividends. Actions of the Company subsequent to the June 30, 2022 quarter include the following:
[R]epurchased $5.0 million face amount of its outstanding preferred stock and associated warrants for its common stock. The repurchase of the preferred stock will save the Company approximately $0.3 million annually in preferred dividends while the repurchase of the warrants will reduce future put option accretion expense by approximately $0.6 million annually for a total expected annual savings of $0.9 million”
[Source: 10-Q for Q2 2022]
As of June 30, 2022 the Company had 22,726,572 shares of common stock compared to 23,146,775 shares of common stock at December 31, 2021. The Board of the Company increased the quarterly common stock dividend by a penny (3.8%) to $0.27 per share.
Overall, the quarter ended June 30, 2022, included positive operating cash flow, a reduced common share count, a reduced preferred share count, reduced amount of warrants outstanding, a slight pay down of the Notes, and a dividend increase.
It is worth watching whether management’s capital allocation decisions result in increased operating cash flow going forward. With the Company’s net asset value declining (and historically doing so), as noted above, I am not willing to give management the benefit of the doubt at this time, particularly with the rising rate, recessionary environment we currently find ourselves.
In short, I have no current interest in the Company’s common shares.
Cheers!
P.S. The Publicly Traded Notes:
As noted above, I purchased some Notes of the Company (AJXA) (CUSIP No.38983D409). The Notes mature April 30, 2024 (roughly 20 months from now) and yield more than 7%. The next interest payment date is October 15, 2022. The Notes are senior to the Company’s preferred and common shares. I believe management would cut the common and preferred dividends to avoid defaulting on the senior Notes. In addition, under the management agreement with the external manager, the Company has the ability to pay 50% of the manager’s fee in common stock, which would provide liquidity in a distress scenario (see 10-Q filing). Of course, the Company is not an investment grade company and is engaged in a risky leveraged business. Do your own due diligence.
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