Rithm Property Trust Inc.: Form 10-Q for the period ended Sep 30, 2023

In this quarterly report on Form 10-Q (“report”), unless the context indicates otherwise, references to “Great Ajax,” “we,” “the company,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Great Ajax Corp.; “operating partnership” refers to Great Ajax Operating Partnership L.P., a Delaware limited partnership; “our Manager” refers to Thetis Asset Management LLC, a Delaware limited liability company; “Aspen Capital” refers to the Aspen Capital group of companies; “Aspen” and “Aspen Yo” refers to Aspen Yo LLC, an Oregon limited liability company that is part of Aspen Capital; and “the Servicer” and “Gregory” refer to Gregory Funding LLC, an Oregon limited liability company and our affiliate, and an indirect subsidiary of Aspen Yo.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited interim consolidated financial statements and related notes included in Item 1. Consolidated interim financial statements of this report and in Item 8. Financial statements and supplementary data in our most recent Annual Report on Form 10-K, as well as the section entitled “Risk Factors” in Part II, Item 1A. of this report, as well as other cautionary statements and risks described elsewhere in this report and our most recent Annual Report on Form 10-K.

Overview

Great Ajax Corp. is a Maryland corporation that is organized and operated in a manner intended to allow us to qualify as a REIT. We primarily target acquisitions of (i) 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 and (ii) NPLs, which are residential mortgage loans on which the most recent three payments have not been made. We may acquire RPLs and NPLs either directly or in joint ventures with institutional accredited investors. The joint ventures are structured as securitization trusts, of which we acquire debt securities and beneficial interests. We may also acquire or originate SBC loans. The SBC loans that we target through acquisitions 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, we invest in single-family and smaller commercial properties directly either through a foreclosure event of a loan in our mortgage portfolio, or, less frequently, through a direct acquisition. We own a 19.8% equity interest in our Manager and an 9.6% equity interest in the parent company of our Servicer through GA-TRS, a wholly owned subsidiary of the Operating Partnership. We have elected to treat GA-TRS as a taxable REIT subsidiary under the Code. Our mortgage loans and real properties are serviced by the Servicer, also an affiliated company.

In 2014, we formed Great Ajax Funding LLC, a wholly owned subsidiary of the Operating Partnership, 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 we may form for additional secured borrowings. 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 our repurchase agreements. On February 1, 2015, we formed GAJX Real Estate Corp., as a wholly owned subsidiary of the Operating Partnership, to own, maintain, improve and sell certain REOs purchased by us. We have elected to treat GAJX Real Estate Corp. as a TRS under the Code.

Our Operating Partnership, through interests in certain entities as of September 30, 2023, owns 99.9% of Great Ajax II REIT Inc. which owns Great Ajax II Depositor LLC which then acts as the depositor of mortgage loans into securitization trusts and holds subordinated securities issued by such trusts. Similarly, as of September 30, 2023, the Operating Partnership wholly owned Great Ajax III Depositor LLC, which was formed to act as the depositor into Ajax Mortgage Loan Trust 2021-E ("2021-E"), which is a real estate mortgage investment conduit ("REMIC"). We have securitized mortgage loans through these securitization trusts and retained subordinated securities from the secured borrowings. These trusts are considered to be variable interest entities ("VIEs"), and we have determined that we are the primary beneficiary of the VIEs.

In 2018, we formed Gaea Real Estate Corp. ("Gaea"), as a wholly-owned subsidiary of the Operating Partnership that invests in multifamily properties with a focus on property appreciation and triple net lease veterinary clinics. We elected to treat Gaea as a TRS under the Code for 2018 and elected to treat Gaea as a REIT under the Code in 2019 and thereafter. Also during 2018, we formed Gaea Real Estate Operating Partnership LP, a wholly-owned subsidiary of Gaea, to hold investments in commercial real estate assets, and Gaea Real Estate Operating LLC, to act as its general partner. We also formed Gaea Veterinary Holdings LLC, BFLD Holdings LLC, Gaea Commercial Properties LLC, Gaea Commercial Finance LLC and Gaea RE Holdings LLC as subsidiaries of Gaea Real Estate Operating Partnership. In 2019, we formed DG Brooklyn Holdings LLC, also a subsidiary of Gaea Real Estate Operating Partnership LP, to hold investments in multi-family properties.

On November 22, 2019, Gaea completed a private capital raise transaction through which it raised $66.3 million from the issuance of its common stock to third parties to allow Gaea to continue to advance its investment strategy. Additionally, in January 2022, Gaea completed a second private capital raise in which it raised approximately $30.0 million from the issuance of its common stock and warrants. At September 30, 2023, we owned approximately 22.0% of Gaea. We account for our investment in Gaea under the equity method.

We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code, and that our current intended manner of operation enables us to meet the requirements for taxation as a REIT for U.S. federal income tax purposes.

Termination of the Merger Agreement

As we previously announced on October 20, 2023, we and Ellington Financial Inc. (“Ellington Financial”) mutually terminated our merger agreement with Ellington Financial. The termination was approved by both companies’ boards of directors after careful consideration of the proposed merger and the progress made towards completing the transaction. In connection with the termination, Ellington Financial paid us $16.0 million, $5.0 million of which was paid in cash, and $11.0 million of which was paid in cash as consideration for approximately 1,666,666 shares of our common stock. The common stock was purchased at $6.60 per share. The purchase price was determined based on the merger exchange ratio. Ellington Financial holds approximately 6.1% of our stock. An affiliate of Ellington Financial’s external manager owned 273,983 shares of our common stock as of June 30, 2023. Ellington Financial remains one of our securitization joint venture partners.

As we discussed when we announced the now terminated transaction, our board regularly evaluates and considers our strategic direction, our objectives and our succession plans, as well as our ongoing business, all with a view to maximizing long-term value for our stockholders. This evaluation and consideration led to our entry into the merger agreement with Ellington Financial. Following termination of the agreement, the board engaged Piper Sandler & Co. as our financial adviser to assist us with a thorough evaluation of strategic alternatives, including, but not limited to, other strategic transactions, potential capital injections involving us and/or our affiliates, other monetization opportunities involving us and/or our affiliates, specific asset sales, or other opportunities. No assurance can be given that this process will culminate in a successful transaction, nor can we provide any guidance regarding the timing of this process or any possible transaction(s) that might result given that the board must undertake a thorough review of available alternatives. We do not intend to comment further on the review of strategic alternatives until we determine disclosure is necessary or advisable.

Our Portfolio

The following table outlines the carrying value of our portfolio of mortgage loan assets and single-family and smaller commercial properties as of September 30, 2023 and December 31, 2022 ($ in millions):

We closely monitor the status of our mortgage loans and, through our Servicer, work with our borrowers to improve their payment records.

Market Trends and Outlook

In February, March, May and July 2023, the U.S. Federal Reserve (the "Fed") raised its benchmark federal-funds rate by a quarter of a percentage point for each month respectively, for a year to date increase of 1.00 point. The Fed signaled that further rate increases are possible over the course of the year in response to the elevated level of inflation in the United States. Although inflation has eased somewhat over the past few months, it is still unclear how much the Fed will further increase interest rates to bring inflation down to its 2.00% target. According to Freddie Mac, the 30-year fixed rate mortgage rate increased to an average of 7.63% for the week of October 19, 2023, from 6.92% for the year earlier period.(1)

Ongoing disruption in the credit markets could result in margin calls from our financing counterparties and additional mark downs on our Investments in debt securities, beneficial interests and mortgage loans.

Through the end of the third quarter, the recent trends noted below have continued, including:

• rising interest rates have increased our borrowing costs;
• increasing mortgage interest rates and higher home prices, are slowing home purchases and refinancing activity resulting in lower prepayments of our loan and securities portfolios;
• rising home prices and higher mortgage rates have triggered significant NPL borrower re-performance extending duration;
• borrowers that purchased or refinanced in 2020 and 2021 have record low interest rates and will be unlikely to trade up in the current interest rate environment leading to lower inventory for first time buyers and a smaller population of move up buyers; and
• the Dodd-Frank risk retention rules for asset backed securities have reduced the universe of participants in the securitization markets.

The combination of these factors has also resulted in a significant number of families that cannot qualify to obtain new residential mortgage loans. We believe the U.S. federal regulations addressing “qualified mortgages” based on, among other factors such as employment status, debt-to-income level, impaired credit history or lack of savings, limit mortgage loan availability from traditional mortgage lenders. In addition, we believe that many homeowners displaced by foreclosure or who either cannot afford to own or cannot be approved for a mortgage will prefer to live in single-family rental properties with similar characteristics and amenities to owned homes as well as smaller multi-family residential properties. In certain demographic areas, new households are being formed at a rate that exceeds the new homes being added to the market, which we believe favors future demand for non-federally guaranteed mortgage financing for single-family and smaller multi-family rental properties. For all these reasons, we believe that demand for single-family and smaller multi-family rental properties will continue to be stable in the near term and for the foreseeable future.

We believe that investments in residential RPLs and NPLs with positive equity can provide a good investment value. As a result, we are currently focused on acquiring pools of RPLs and NPLs, at attractive prices. Rising mortgage rates, however, have reduced supply of residential mortgage loans and stronger payment performance has reduced the supply of NPLs.

We also believe there are significant attractive investment opportunities in the SBC loan and property markets and originate as well as purchase these loans, particularly in urban areas where there is a sustainable trend of young adults desiring to live near where they work. We focus on urban areas where we expect positive economic change based on certain demographic, economic and social statistical data. The primary lenders for smaller multi-family and mixed retail/residential properties are community banks and not regional and national banks and large institutional lenders. There has been significant disruption in the commercial real estate loan market as a result of the pandemic and rising interest rates. We believe the primary lenders and loan purchasers are less interested in these assets because they typically require significant commercial and residential mortgage credit and underwriting expertise, special servicing capability and active property management. It is also more difficult to create the large pools of these loans that primary banks, lenders and portfolio acquirers typically desire. We continually monitor opportunities to increase our holdings of these SBC loans and properties.

We also believe that banks that have deposit outflows due to rising interest rates and significant commercial real estate loan exposure will begin to sell certain SBC loans to dispose of their inventory.

(1) Freddie Mac Primary Mortgage Market Survey, U.S. weekly averages as of October 19, 2023 and as of October 13, 2022.

Factors That May Affect Our Operating Results

Acquisitions. Our operating results depend heavily on sourcing residential RPLs and SBC loans and, when attractive opportunities are identified, NPLs. We believe that there is generally a large supply of RPLs available to us for acquisition and we believe the available supply provides for a steady acquisition pipeline of assets since large institutions are active sellers in the market. However, we expect that our residential mortgage loan portfolio may grow at an uneven pace, as opportunities to acquire distressed residential mortgage loans may be irregularly timed and may involve large portfolios of loans, and the timing and extent of our success in acquiring such loans cannot be predicted. In addition, for any given portfolio of loans that we agree to acquire, we typically acquire fewer loans than originally expected, as certain loans may be resolved prior to the closing date or may fail to meet our diligence standards. The number of loans not acquired typically constitutes a small portion of a particular portfolio. In any case where we do not acquire the full portfolio, we make appropriate adjustments to the applicable purchase price. Also, acquisitions are lower primarily due to reduced supply.

Financing. Our ability to grow our business by acquiring residential RPLs and SBC loans depends on the availability of adequate financing, including additional equity financing, debt financing or both in order to meet our objectives. We intend to leverage our investments with debt, the level of which may vary based upon the particular characteristics of our portfolio and on market conditions. We have funded and intend to continue to fund our asset acquisitions with non-recourse secured borrowings in which the underlying collateral is not marked to market and employ repurchase agreements without the obligation to mark to market the underlying collateral to the extent available. We securitize our whole loan portfolios, primarily as a financing tool, when economically efficient to create long-term, fixed rate, non-recourse financing with moderate leverage, while retaining one or more tranches of the subordinate MBS so created. The secured borrowings are structured as debt financings and not REMIC sales. We completed the securitization transactions pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), in which we issued notes primarily secured by seasoned, performing and non-performing mortgage loans primarily secured by first liens on one-to-four family residential properties. Currently there is substantial uncertainty in the securitization markets which could limit our access to financing.

To qualify as a REIT under the Code, we generally will need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our stockholders. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.

Resolution Methodologies. We, through the Servicer, or our affiliates, employ various loan resolution methodologies with respect to our residential mortgage loans, including loan modification, collateral resolution and collateral disposition. The manner in which an NPL is resolved will affect the amount and timing of revenue we will receive. Our preferred resolution methodology is typically to cause the RPLs to continue to perform and NPLs to perform through loan modification. Following a period of continued performance, we expect that borrowers will typically refinance these loans at or near the estimated value of the underlying property. We believe modification followed by refinancing generates near-term cash flows, provides the highest possible economic outcome for us and is a socially responsible business strategy because it keeps more families in their homes. In certain circumstances, we may also consider selling these modified loans. Through historical experience, we expect that many of our NPLs will enter into foreclosure or similar proceedings, ultimately becoming REO that we can sell. We expect the timelines for these different processes to vary significantly. The exact nature of resolution will depend on a number of factors that are beyond our control, including borrower willingness, property value, availability of refinancing, interest rates, conditions in the financial markets, regulatory environment and other factors. To avoid the 100% prohibited transaction tax on the sale of dealer property by a REIT, we may dispose of assets that may be treated as held “primarily for sale to customers in the ordinary course of a trade or business” by contributing or selling the asset to a TRS prior to marketing the asset for sale. The state of the real estate market and home prices will determine proceeds from any sale of real estate.

Conversion to Rental Property. From time to time we may retain an REO property as a rental property. We do not expect to retain a material number of single family residential properties for use as rentals.

Expenses. Our expenses primarily consist of the fees and expenses payable by us under the Management Agreement and the Servicing Agreement. Additionally, our Manager incurs direct, out-of-pocket costs related to managing our business, which are contractually reimbursable by us. Loan transaction expense is the cost of performing due diligence on pools of mortgage loans under consideration for purchase. Professional fees are primarily for legal, accounting and tax services. Real estate operating expense consists of the ownership and operating costs of our REO properties, and includes any charges for impairments to the carrying value of these assets, which may be significant. Those expenses may increase due to extended eviction timelines caused by the pandemic. Interest expense, which is subtracted from our Interest income to arrive at Net interest income, consists of the costs to borrow money.

Changes in Home Prices. As discussed above, generally, rising home prices are expected to positively affect our results, particularly as this should result in greater levels of re-performance of mortgage loans, faster refinancing of those mortgage loans, more re-capture of principal on greater than 100% LTV (loan-to-value) mortgage loans and increased recovery of the principal of the mortgage loans upon sale of any REO. Conversely, declining real estate prices are expected to negatively affect our results, particularly if the home prices should decline below our purchase price for the loans and especially if borrowers determine that it is better to strategically default as their equity in their homes decline. We typically concentrate our investments in specific urban geographic locations in which we expect stable or better property markets. However, when we analyze loan and property acquisitions we do not take home price appreciation ("HPA") into account except for rural properties for which we model negative HPA related to our expectation of worse than expected property condition. While we initially expected the COVID-19 outbreak to have a material downward effect on home prices, we are generally seeing increases in HPA in our target markets. A significant decline in HPA could have an adverse impact on our operating results.

Changes in Market Interest Rates. With respect to our business operations, increases in existing interest rates, in general, may over time cause: (1) the value of our mortgage loan and MBS portfolio to decline; (2) coupons on our ARM and hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to higher interest rates; (3) impact adversely our ability to securitize, re-securitize or sell our assets on attractive terms; (4) reduce the ability or desire of borrowers to refinance their loans; (5) mortgage related assets may become more illiquid during periods of interest rate volatility; (6) difficulties refinancing our securitizations and increases in the costs of our repurchase facility financings; (7) increase our financing costs as we seek to renew or replace borrowing facilities; and (8) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (a) prepayments on our mortgage loan and MBS portfolio to increase, thereby accelerating the accretion of our purchase discounts; (b) the value of our mortgage loan and MBS portfolio to increase; (c) coupons on our ARM and hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to lower interest rates; (d) the interest expense associated with our borrowings to decrease; and (e) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

Market Conditions. As the Fed continues its current trend toward monetary tightening, mortgage markets are undergoing a great deal of uncertainty with regard to both interest rates and origination volume. We believe that in spite of the continuing uncertain market environment for mortgage-related assets current market conditions offer potentially attractive investment opportunities for us, even in the face of a riskier and more volatile market environment. We expect that market conditions will continue to impact our operating results and will cause us to adjust our investment and financing strategies over time as new opportunities emerge and risk profiles of our business change.

COVID-19 Pandemic. While lock downs and restrictions from the pandemic have ended, the effects of the pandemic on inflation and resulting increase in interest rates have contributed to a substantial dislocation in the credit markets. A return to any COVID-19 pandemic like restriction could also negatively impact our business if the reactions of federal, state and local governments caused additional disruption in the capital markets and in housing.

Critical Accounting Policies and Estimates

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, and other subjective assessments. In particular, we have identified six policies that, due to the judgment and estimates inherent in those policies, are critical to understanding our consolidated financial statements. These policies relate to (i) the allowance for credit losses, (ii) accounting for Interest income on our mortgage loan portfolio; (iii) accounting for Investments in securities available-for-sale ("AFS") and Investments in securities held-to-maturity ("HTM"); (iv) accounting for Investments in beneficial interests; (v) accounting for Interest expense on our secured borrowings, repurchase facilities, 2024 Notes and 2027 Notes; and (vi) fair values. We believe that the judgment and estimates used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments or estimates could result in material differences in our results of operations or financial condition. For further information, please refer to the Critical Accounting Policies and Estimates in our Form 10-K for our calendar year ended December 31, 2022, as there have been no changes to these policies.

Recent Accounting Pronouncements

Refer to the notes to our interim financial statements for a description of relevant recent accounting pronouncements.

Results of Operations

Quarter Overview

Key items for the three months ended September 30, 2023 include:

• Interest income of $17.9 million; net interest income of $3.0 million
• Net loss attributable to common stockholders of $(6.1) million
• Operating loss of $(2.3) million
• Earnings per share ("EPS") per basic common share was a loss of $(0.25)
• Operating loss per basic common share of $(0.09)
• Taxable loss of $(0.06) per share attributable to common stockholders after payment of dividends on our preferred stock
• Book value per common share of $11.07 at September 30, 2023
• Formed two joint ventures that acquired $325.3 million in unpaid principal balance ("UPB") of mortgage loans with collateral values of $718.7 million and retained $57.9 million of varying classes of related securities issued by the joint venture to end the quarter with $309.2 million of investments in debt securities and beneficial interests
• Collected total cash of $39.5 million from loan payments, sales of REO and collections from investments in debt securities and beneficial interests
• Held $63.9 million of cash and cash equivalents at September 30, 2023; average daily cash balance for the quarter was $53.2 million
• As of September 30, 2023, approximately 81.2% of our portfolio (based on UPB at the time of acquisition) made at least 12 out of the last 12 payments

We generated a consolidated net loss attributable to common stockholders under U.S. Generally Accepted Accounting Principles ("U.S. GAAP" or "GAAP") for the three months ended September 30, 2023 of $(6.1) million or $(0.25) per common share after preferred dividends, and Operating loss of $(2.3) million or $(0.09) per common share. Operating income is a non-GAAP financial measure which adjusts GAAP earnings by removing gains and losses as well as certain other non-core income and expenses and preferred dividends. We consider Operating income a useful measure for comparing the results of our ongoing operations over multiple quarters. Comparatively, our GAAP consolidated net loss attributable to common stockholders for the three months ended September 30, 2022 was $(16.2) million, or $(0.71) per common share, and Operating income was $4.0 million, or $0.17 per common share.

At September 30, 2023, our book value decreased to $11.07 per common share from $13.00 at December 31, 2022, driven by dividends on our common stock of $15.4 million and the year to date net loss attributable to common stockholders of $26.1 million, partially offset by the effect of mark to market net gain adjustments of $3.8 million on our investments in debt securities AFS and amortization of $4.2 million of unrealized losses on our investments in debt securities AFS transferred to HTM.

Table 1: Results of Operations

($ in thousands)

61

($ in thousands)

Interest Income

Our primary source of income is accretion earned on our mortgage loan portfolio offset by the interest expense incurred to fund and hold portfolio acquisitions. Our gross interest income excluding the impact of credit losses decreased to $17.9 million for the three months ended September 30, 2023 from $20.0 million for the three months ended September 30, 2022 primarily due to lower average balances of our mortgage loan and debt security portfolios. This was partially offset by a $0.5 million increase in our bank interest income. For the nine months ended September 30, 2023, our gross interest income decreased to $54.7 million from $64.1 million for the nine months ended September 30, 2022 primarily due to lower average balances of our mortgage loan and debt security portfolios, which was partially offset by a $1.4 million increase in our bank interest income.

Interest expense for the three months ended September 30, 2023 increased to $14.8 million from $11.4 million for the three months ended September 30, 2022 due to increases in the interest rate on our borrowings on repurchase lines of credit and the issuance of our unsecured debt during the third quarter of 2022. For the nine months ended September 30, 2023, our interest expense increased to $44.8 million from $29.2 million for the nine months ended September 30, 2022 due to increases in the interest rate on our borrowings on repurchase lines of credit and the issuance of our unsecured debt during the third quarter of 2022.

Net interest income after recording the impact of the net present value of increases/decreases in expected credit losses decreased to $2.7 million for the three months ended September 30, 2023 from $10.6 million for the three months ended September 30, 2022 primarily as a result of higher interest expense, lower interest income and the net impact of a net $0.3 million increase in the net present value of expected credit losses for our mortgage loan portfolio the three months ended September 30, 2023 compared to a $1.9 million decrease for the three months ended September 30, 2022. Net interest income after recording the impact of the net present value of decreases in expected credit losses decreased to $13.0 million for the nine months ended September 30, 2023 from $41.9 million for the nine months ended September 30, 2022 primarily as a result of higher interest expense and a net $3.2 million impact of the net decrease in the net present value of expected credit losses for the nine months ended September 30, 2023 compared to a $6.9 million decrease for the nine months ended September 30, 2022. Of the $3.2 million for the nine months ended September 30, 2023, the total $3.2 million relates to the net decrease in the net present value of expected credit losses on our mortgage loan portfolio. Comparatively, of the $6.9 million for the nine months ended September 30, 2022, $7.0 million related to a decrease in the net present value of expected credit losses on our mortgage loan portfolio and $0.1 million to an increase in the net present value of expected credit losses of our investments in beneficial interests.

During the three months ended September 30, 2023, we collected $39.5 million in cash payments and proceeds on our mortgage loans, securities and REO held-for-sale compared to $57.8 million for the three months ended September 30, 2022 as rising interest rates have reduced refinancing as a primary driver of prepayments.

The interest income detail for the three and nine months ended September 30, 2023 and 2022 are included in the table below ($ in thousands):

Table 2: Interest Income Detail

The average carrying balance of our mortgage loan portfolio decreased for the three months ended September 30, 2023 versus the comparative period in 2022 primarily due to continued prepayments of our mortgage loan portfolio and fewer acquisitions. The average carrying balances of our debt securities, beneficial interests and debt outstanding decreased for the three months ended September 30, 2023 versus the comparative period in 2022 as paydowns and sales outpaced acquisitions. The average carrying balances for our portfolio are included in the table below ($ in thousands):

Table 3: Average Balances

Loss from Equity Method Investments

We recorded income from our investments in our Manager and Servicer of $0.3 million and $0.2 million for the three and nine months ended September 30, 2023, respectively. Comparatively, for the three and nine months ended September 30, 2022, we recorded losses from our investments in our Manager and Servicer of $0.3 million and $0.7 million, respectively. We account for our investments in our Manager and our Servicer using the equity method of accounting. We recorded losses of $1.0 million and $1.2 million, respectively, in our other equity method investments for the three and nine months ended September 30, 2023. Comparatively, for both the three and nine months ended September 30, 2022, we recorded losses from our other equity method investments of $0.2 million.

During the three months ended March 31, 2023, we contributed an additional $0.7 million equity interest in Great Ajax FS LLC ("GAFS") to increase our total ownership of GAFS to $2.7 million, or 9.6%.

During the three months ended March 31, 2022, we invested an additional $6.1 million in Gaea to increase our total investment to $25.5 million, or 22.2% of total shares outstanding. In addition to common stock, we received 371,103 warrants to purchase additional shares at $16.41 per share for a two year period following the date that the common stock commences trading on a trading market.

Loss on Joint Venture Refinancing on Beneficial Interests

During the three and nine months ended September 30, 2023, we recorded a $1.2 million and $11.0 million loss on joint venture refinancing on beneficial interests, respectively. The $1.2 million that was recorded during the three months ended September 30, 2023, was primarily due to recording the final sales price of the loans sold to Ajax Mortgage Loan Trusts 2023-B and 2023-C ("2023-B and -C"). During the three months ended June 30, 2023, we recorded a $8.8 million loss on joint venture refinancing on beneficial interests due to other than temporary impairment due to various joint ventures redeemed or partially paid down and the underlying loans being re-securitized to form 2023-B and -C, which closed during the third quarter of 2023. The remaining $1.0 million of the $11.0 million loss on joint venture refinancing on beneficial interests due to other than temporary impairment occurred during the first quarter of 2023. The $1.0 million relates to the resecuritization of Ajax Mortgage Loan Trusts 2019-E, 2019-G and 2019-H ("2019-E, -G, -H") into Ajax Mortgage Loan Trust 2023-A ("2023-A"). Although we retained a proportionate investment in the securities issued by the new joint ventures, the beneficial interests are accounted for as distinct legal securities and the loss recorded represents the mark to market adjustment on the sale of the underlying loans by the old joint ventures to the new joint ventures.

Comparatively, during the three months ended September 30, 2022, we recorded no loss on joint venture refinancing on beneficial interests; however, during the nine months ended September 30, 2022, we recorded a $6.1 million loss on joint venture refinancing. Of the $6.1 million loss that was recorded during the nine months ended September 30, 2022, $2.1 million was due to the resecuritization of Ajax Mortgage Loan Trusts 2019-A and 2019-B ("2019-A and -B") and into Ajax Mortgage Loan Trust 2022-B ("2022-B"). The remaining $4.0 million of the $6.1 million loss on joint venture refinancing occurred during the first quarter of 2022 when we recorded an other than temporary impairment for Ajax Mortgage Loan Trusts 2018-D and 2018-G ("2018-D and -G"), which became a realized loss in the second quarter of 2022, when the loans were resecuritized into Ajax Mortgage Loan Trust 2022-A. Although we retained a proportionate investment in the securities issued by the new joint ventures, the beneficial interests are accounted for as distinct legal securities and the loss recorded represents the mark to market adjustment on the sale of the underlying loans by the old joint ventures to the new joint ventures.

Other Income/Loss

Other income/loss decreased for the three months ended September 30, 2023 by $0.2 million from the three months ended September 30, 2022 primarily due to a lower net gain on sale of property held-for-sale. Comparatively, during the nine months ended September 30, 2023, Other income/loss decreased by $1.2 million from the nine months ended September 30, 2022. The decrease in Other income/loss was driven by a $3.3 million loss on the disposition of debt securities, primarily from the sale of securities in 2021-NPL 1. Of the $3.3 million loss on sale, $2.2 million was already reflected in our book value calculation through Accumulated other comprehensive loss at December 31, 2022, and we recorded an additional $0.8 million loss on the sale date. A breakdown of Other income/loss is provided in the table below ($ in thousands):

Table 4: Other Income/(Loss)

(1) Includes a reclass of Late fee income, HAMP fees and Rental income to Other gain/(loss).

(2) Includes a reclass of Loss on refinancing of beneficial interests out of Other income/(loss).

Expenses

Total expenses decreased for the three and nine months ended September 30, 2023 over the comparable period in 2022 as a result of a decrease in our put option expense on our outstanding common stock warrants. These were partially offset by an increase in other expense (See "Table 6: Other Expense"). A breakdown of expenses is provided in the table below ($ in thousands):

Table 5: Expenses

(1) Previously presented to include Real estate operating expense as its own line item, which has now been reclassed to Other expense.

Other Expense

Other expense increased for the three and nine months ended September 30, 2023 over the comparable periods in 2022 primarily due to an increase in real estate operating expense as a result of higher impairment on our REO. A breakdown of Other expense is provided in the table below ($ in thousands):

Table 6: Other Expense

(1) Includes a reclass of Real estate operating expense.

(2) Includes a reclass of Loan transaction expense and Lien release non due diligence to Other expense.

Acceleration of Put Option Settlement

During the year ended December 31, 2022, we repurchased and retired 4,549,328 warrants for our common stock in a series of repurchase transactions. The warrants were repurchased for an aggregate of $35.0 million at a price equal to the expected future put value obligation of $20.00 per warrant. The repurchase of the warrants accelerated future accretion expense on the warrant's put option of $12.3 million. Of the $12.3 million recognized, $8.8 million and $12.3 million was recognized during the three and nine months ended September 30, 2022, respectively. The repurchase reduced future put option expense and the warrants were accrued to the initial put value obligation in July 2023. Prospectively, the put option will be accrued at a rate of 10.75% for the Series A Preferred Stock and 13.00% for the Series B Preferred Stock on the initial future put obligation with no compounding . There was no repurchase of warrants during the three and nine months ended September 30, 2023.

Gain on Debt Extinguishment

During the three and nine months ended September 30, 2023, we recorded a $16 thousand loss related a bond repo payoff and a $31 thousand gain related to the repurchase of $1.0 million aggregate principal of our 2024 Notes. Comparatively, no acceleration of deferred issuance costs from refinancing activities during both the three and nine months ended September 30, 2022.

Discount on Retirement of Preferred Stock

During the year ended December 31, 2022, we repurchased and retired 1,882,451 shares of our series A preferred stock and 1,757,010 shares of our series B preferred stock in a series of repurchase transactions. The series A and series B preferred stock were repurchased for an aggregate of $88.7 million at an average price of $24.37 per share, representing discounts of approximately 2.5% to the face value of $25.00 per share. The repurchase of the preferred stock caused the recognition of $8.2 million of preferred stock discount during the year ended December 31, 2022. Of the $8.2 million of preferred stock discount during the year ended December 31, 2022, $5.7 million and $8.2 million of preferred stock discount related to the three and nine months ended September 30, 2022, respectively. The repurchase has saved us approximately $5.6 million annually in preferred dividends. There was no repurchase of preferred stock during the three and nine months ended September 30, 2023.

Equity and Net Book Value per Share

Our net book value per common share was $11.07 and $13.00 at September 30, 2023 and December 31, 2022, respectively. The decrease in book value was primarily due to the dividends on our common stock of $15.4 million and the year to date net loss attributable to common stockholders of $26.1 million, partially offset by the recovery of mark to market losses of $3.8 million on our investments in debt securities AFS and the amortization of $4.2 million of unrealized losses on our investments in debt securities AFS transferred to HTM. We believe our calculation is representative of our book value on a per share basis, and our Manager believes book value per share is a valuable metric for evaluating our business. The net book value per share is calculated by taking equity at the balance sheet date (i) less preferred stock and non-controlling interest, (ii) adjusted for any addition for potential conversion of our 2024 Notes, divided by outstanding shares at the balance sheet date adjusted to include (i) unvested restricted stock earned but unissued and (ii) any share equivalents for our 2024 Notes or our put option liability as determined by the dilution requirements for our EPS calculation. A breakdown of our book value per share is set forth in the table below ($ in thousands except per share amounts):

Table 7: Book Value per Common Share

(1) The conversion of convertible senior notes is not included in the book value calculation as of September 30, 2023 or December 31, 2022 as it has an anti-dilutive effect on our earnings per share calculation.

(2) There were no unvested grants of restricted stock and shares earned but not issued as of September 30, 2023 as the independent director fees will be settled 100% in cash.

(3) The settlement of the put option in shares is not included in the book value calculation as of September 30, 2023 or December 31, 2022 as it has an anti-dilutive effect on our earnings per share calculation.

Mortgage Loan Portfolio

For the three and nine months ended September 30, 2023, we purchased $0.1 million and $14.2 million of RPLs with UPB of $0.2 million and $17.3 million, respectively, at 25.8% and 47.9% of property value, respectively, and 80.5% and 82.2% of UPB, respectively. Comparatively, for the three and nine months ended September 30, 2022, we purchased $8.2 million and $9.4 million of RPLs with UPB of $9.1 million and $10.3 million, respectively, at 42.3% and 44.2% of property value, respectively, and 90.4% and 90.6% of UPB, respectively. For both the three and nine months ended September 30, 2023, we purchased $0.2 million of NPLs with UPB of $0.2 million at 60.7% of property value, and 93.7% of UPB. Comparatively, for the three and nine months ended September 30, 2022, we purchased $0.3 million and $1.3 million of NPLs with UPB of $0.4 million and $1.5 million, respectively, at 52.4% and 54.0% of property value, respectively, and 69.2% and 87.5% of UPB, respectively. For both the three and nine months ended September 30, 2023 and 2022, we purchased no SBC loans. We ended the period with $939.1 million of mortgage loans with an aggregate UPB of $972.8 million as of September 30, 2023 and $1.0 billion for both our net mortgage loans and aggregate UPB as of September 30, 2022.

The following table shows loan portfolio acquisitions for the three and nine months ended September 30, 2023, and 2022 ($ in thousands):

Table 8: Loan Portfolio Acquisitions

67

During the three and nine months ended September 30, 2023, 108 and 307 mortgage loans, respectively, representing 1.9% and 5.6% of our ending UPB, respectively, were liquidated. Comparatively, during the three and nine months ended September 30, 2022, 146 and 567 mortgage loans, respectively, representing 2.3% and 10.8% of our ending UPB, respectively, were liquidated. Our loan portfolio activity for the three and nine months ended September 30, 2023 and 2022 is presented below ($ in thousands):

Table 9: Loan Portfolio Activity

68

Table 10: Portfolio Composition

As of September 30, 2023 and December 31, 2022, our portfolios consisted of the following ($ in thousands):

(1) At September 30, 2023 and December 31, 2022, our loan portfolio consists of fixed rate (60.2% of UPB), ARM (6.4% of UPB) and Hybrid ARM (33.4% of UPB); and fixed rate (61.2% of UPB), ARM (6.8% of UPB) and Hybrid ARM (32.0% of UPB), respectively.

(2) Amounts that have been deferred in connection with a loan modification on which interest does not accrue. These amounts generally become payable at the time of maturity.

(3) As of the reporting date.

(4) UPB as of September 30, 2023 and December 31, 2022, divided by market value of collateral and weighted by the UPB of the loan.

(5) Market value of REO is based on net realizable value. Fair market value is determined based on appraisals, broker price opinions ("BPOs"), or other market indicators of fair value including list price or contract price.

(6) Loans that have made at least 12 of the last 12 payments, or for which the full dollar amount to cover at least 12 payments has been made in the last 12 months.

(7) Loans that have made at least 24 of the last 24 payments, or for which the full dollar amount to cover at least 24 payments has been made in the last 24 months.

Table 11: Portfolio Characteristics

The following tables present certain characteristics about our mortgage loans by year of origination as of September 30, 2023 and December 31, 2022, respectively ($ in thousands):

Portfolio at September 30, 2023

Portfolio at December 31, 2022

70

Table 12: Loans by State

The following table identifies our mortgage loans for our top 10 states by number of loans, loan value, collateral value and percentages thereof at September 30, 2023 and December 31, 2022 ($ in thousands):

(1) As of the reporting date.

Table 13: Debt Securities and Trust Certificate Acquisitions

The following table shows our debt securities and trust certificate acquisitions for the three and nine months ended September 30, 2023 and 2022 ($ in thousands):

(1) The securities were received in exchange for our investments in Ajax Mortgage Loan Trusts 2018-A, 2018-B, 2018-E, 2018-F, 2019-E, 2019-G, 2019-H and 2020-A and include cash and non-cash components for the three and nine months ended September 30, 2023.

(2) The securities were received in exchange for our investments in 2018-D and -G and 2019-A and -B and include cash and non-cash components for the nine months ended September 30, 2022.

Liquidity and Capital Resources

Source and Uses of Cash

Our primary sources of cash have consisted of proceeds from our securities offerings, our secured borrowings, repurchase agreements, principal and interest payments on our loan portfolio, principal paydowns on securities, and sales of properties held-for-sale. Depending on market conditions, we expect that our primary financing sources will continue to include secured borrowings, repurchase agreements, and securities offerings in addition to transaction or asset specific funding arrangements and credit facilities (including term loans and revolving facilities). We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs. We believe we have access to adequate resources to meet the needs of our existing operations, mandatory capital expenditures, dividend payments, and working capital, to the extent not funded by cash provided by operating activities. However, we expect market events, including inflation and the related Federal Reserve bank actions, may adversely impact our future operating cash flows due to the inability of some of our borrowers to make scheduled payments on time or at all, and through increased interest rates on secured borrowings and repurchase lines of credit. From time to time, we may invest with third parties and acquire interests in loans and other real estate assets through investments in joint ventures using special purpose entities that can result in investments available-for-sale, investments held-to-maturity and investments in beneficial interests, which are included on our consolidated balance sheet.

As of September 30, 2023 and December 31, 2022, substantially all of our invested capital was in RPLs, NPLs, SBC loans, debt securities, and beneficial interests. We also held approximately $63.9 million of cash and cash equivalents, an increase of $16.1 million from our balance of $47.8 million at December 31, 2022. Our average daily cash balance during the quarter was $53.2 million, an increase of $6.0 million from our average daily cash balance of $47.2 million during the three months ended December 31, 2022.

Our collections of principal and interest payments on mortgages and securities, and payoffs and proceeds on the sale of our property held-for-sale were $39.5 million and $132.6 million, respectively, for the three and nine months ended September 30, 2023 and $57.8 million and $217.1 million, respectively, for the three and nine months ended September 30, 2022.

Nine Month Operating, Investing and Financing Cash Flows

Our operating cash outflows for the nine months ended September 30, 2023 were $33.7 million. Our operating cash inflows for the nine months ended September 30, 2022 were $4.0 million. Our primary operating cash inflow is cash interest payments on our mortgage loan pools of $33.9 million and $35.8 million for the nine months ended September 30, 2023 and 2022, respectively. Non-cash interest income accretion on our mortgage loans was $5.2 million and $11.0 million for the nine months ended September 30, 2023 and 2022, respectively. Interest income on beneficial interests was $6.0 million and $8.8 million during the nine months ended September 30, 2023 and 2022, respectively. Interest income on debt securities was $7.2 million and $8.0 million during the nine months ended September 30, 2023 and 2022, respectively.

Though the ownership of mortgage loans and other real estate assets is our business, U.S. GAAP requires that operating cash flows do not include the portion of principal payments that are allocable to the discount we recognize on our mortgage loans including proceeds from loans that pay in full or are liquidated in a short sale or third party sale at foreclosure or the proceeds on the sales of our property held-for-sale. These activities are all considered to be investing activities under U.S. GAAP, and the cash flows from these activities are included in the investing section of our consolidated statements of cash flows.

For the nine months ended September 30, 2023, our investing cash inflows of $148.3 million were driven by principal payments and payoffs of our mortgage loan portfolio of $71.2 million, principal and interest collections on our securities of $101.3 million and proceeds from refinancing and sale of our debt securities AFS of $61.7 million, partially offset by the purchase of securities of $74.3 million, acquisitions of our mortgage loans of $14.4 million and the contribution of an additional $0.7 million equity interest in our GAFS affiliate. For the nine months ended September 30, 2022, our investing cash inflows of $210.7 million were primarily driven by principal payments on and payoffs of our mortgage loan portfolio of $126.8 million, proceeds from refinancing and sale of our debt securities and beneficial interests of $123.9 million and principal and interest collections on our securities of $56.3 million, partially offset by the purchase of securities of $84.5 million, acquisitions of our mortgage loans of $10.7 million and the purchase of additional shares of common stock in our Gaea affiliate of $6.1 million.

Our financing cash flows are driven primarily by funding used to acquire mortgage loan pools and debt securities. We fund our mortgage loan pools primarily through secured borrowings and repurchase agreements and we fund our debt securities primarily through repurchase agreements. For the nine months ended September 30, 2023, we had net financing cash outflows of $98.5 million primarily driven by repayments of $118.0 million on repurchase transactions and pay downs of existing debt obligations of $43.8 million on secured borrowings, partially offset by additional borrowing through repurchase transactions of $64.1 million. For the nine months ended September 30, 2022, we had net cash outflows from financing activities of $226.2 million primarily driven by repayments of $221.0 million on repurchase transactions, the repurchase of our preferred stock and warrants of $125.0 million and pay downs of existing debt obligations of $95.9 million on secured borrowings, partially offset by additional borrowing through repurchase transactions of $138.2 million. For the nine months ended September 30, 2023 and 2022, we paid $17.1 million and $24.2 million, respectively, in combined dividends and distributions.

Financing Activities — Equity Offerings

On February 28, 2020, our Board of Directors approved a stock repurchase of up to $25.0 million of our common shares. The amount and timing of any repurchases depends on a number of factors, including but not limited to the price and availability of the common shares, trading volume and general circumstances and market conditions. As of September 30, 2023, we held 1,035,785 shares of treasury stock consisting of 148,834 shares received through distributions of our shares previously held by our Manager, 361,912 shares received through our Servicer and 525,039 shares acquired through open market purchases. As of September 30, 2022, we held 657,029 shares of treasury stock consisting of 131,990 shares received through distributions of our shares previously held by our Manager and 525,039 shares acquired through open market purchases.

During the year ended December 31, 2022, we repurchased and retired 1,882,451 shares of our series A preferred stock and 1,757,010 shares of our series B preferred stock in a series of repurchase transactions. The series A and series B preferred stock were repurchased for an aggregate of $88.7 million at an average price of $24.37 per share, representing discounts of approximately 2.5% to the face value of $25.00 per share. The repurchase of the preferred stock caused the recognition of $8.2 million of preferred stock discount during the year ended December 31, 2022. Of the $8.2 million recognized, $5.7 million and $8.2 million was recognized during both the three and nine months ended September 30, 2022, respectively. There was no repurchase of preferred stock in either the three or nine months ended September 30, 2023. The repurchase is expected to reduce preferred dividends by $5.6 million annually. Also, during the year ended December 31, 2022, we repurchased and retired 4,549,328 of our outstanding warrants for $35.0 million, resulting in the acceleration of $12.3 million of accretion expense, which will result in less accretion expense in future periods. Of the $12.3 million recognized, $8.8 million and $12.3 million was recognized during both the three and nine months ended September 30, 2022, respectively. There was no repurchase of warrants during the three or nine months ended September 30, 2023.

During the three and nine months ended September 30, 2023, we sold 2,182,152 and 2,621,742 shares, respectively, of common stock for proceeds, net of issuance costs of $14.3 million and $17.2 million, respectively, under our At the Market program, which we sell, through our agents, shares of common stock with an aggregate offering price of up to $100.0 million. Comparatively, during the three and nine months ended September 30, 2022, we did not sell any shares of common stock under our At the Market program. In accordance with the terms of the agreements, we may offer and sell shares of our common stock at any time and from time to time through the sales agents. Sales of the shares, if any, will be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of the sale.

Financing Activities — Secured Borrowings, 2024 Notes and 2027 Notes

Secured Borrowings

From our inception (January 30, 2014) to September 30, 2023, we have completed 18 secured borrowings, not including borrowings we completed for our non-consolidated joint ventures (See "Table 18: Investments in Joint Ventures"), through securitization trusts pursuant to Rule 144A under the Securities Act, five of which were outstanding at September 30, 2023. The secured borrowings are generally structured as debt financings. The loans included in the secured borrowings remain on our consolidated balance sheet as we are the primary beneficiary of the securitization trusts, which are VIEs. The securitization 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. Our exposure to the obligations of the VIEs is generally limited to our investments in the entities. The notes that are issued by the securitization trusts are secured solely by the mortgages held by the applicable trusts and not by any of our other assets. The mortgage loans of the applicable trusts are the only source of repayment and interest on the notes issued by such trusts. We do not guarantee any of the obligations of the trusts under the terms of the agreement governing the notes or otherwise.

Our non-rated secured borrowings are generally structured with Class A notes, subordinated notes, and trust certificates, which have rights to the residual interests in the mortgages once the notes are repaid. We have retained the subordinated notes and the applicable trust certificates from one non-rated secured borrowing outstanding at September 30, 2023.

Our rated secured borrowings are generally structured as “REIT TMP” transactions which allows us to issue multiple classes of securities without using a REMIC structure or being subject to an entity level tax. Our rated secured borrowings generally issue classes of debt from AAA through mezzanine. We generally retain the mezzanine and residual certificates in the transactions. We have retained the applicable mezzanine and residual certificates from the other four rated secured borrowings outstanding at September 30, 2023. Our rated secured borrowings are designated in the table below.

Our secured borrowings carry no provision for a step-up in interest rate on any of the Class B notes, except for 2021-B.

The following table sets forth the original terms of all outstanding notes from our secured borrowings outstanding at September 30, 2023 at their respective cutoff dates:

Table 14: Secured Borrowings

Rated

74

(1) The Class M notes are subordinated, sequential pay, fixed rate notes. We have retained the Class M notes, with the exception of Ajax Mortgage Loan Trust 2021-A.

(2) The Class B notes are subordinated, sequential pay, with B-2 and B-3 notes having variable interest rates and subordinate to the Class B-1 notes. The Class B-1 notes are fixed rate notes. We have retained the Class B notes.

(3) The interest rate is effectively the rate equal to the spread between the gross average rate of interest the trust collects on its mortgage loan portfolio minus the rate derived from the sum of the servicing fee and other expenses of the trust.

2024 Notes (Convertible Senior Notes)

During 2017 and 2018, we completed the public offer and sale of our 2024 Notes, in three separate offerings which form a single series of fungible securities. At September 30, 2023 and December 31, 2022, the UPB of the debt was $103.5 million and $104.5 million, respectively. The 2024 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 2024 Notes will mature on April 30, 2024, unless earlier repurchased, converted or redeemed. During certain periods and subject to certain conditions the 2024 Notes will be convertible by their holders into shares of our common stock at a current conversion rate of 1.7405 shares of common stock per $25.00 principal amount of the 2024 Notes, which represents a conversion price of approximately $14.36 per share of common stock. The conversion rate, and thus the conversion price, may be subject to adjustment under certain circumstances.

2027 Notes (Unsecured Notes)

During August 2022, our Operating Partnership issued $110.0 million aggregate principal amount of 8.875% 2027 Notes. The 2027 Notes were issued at 99.009% of par value and are fully and unconditionally guaranteed by the Guarantors.

Under the indenture governing the 2027 Notes, a subsidiary guarantor's guarantee will terminate upon: (i) the sale, exchange, disposition or other transfer (including by way of consolidation) of the subsidiary guarantor or the sale or disposition of all or substantially all the assets of the subsidiary guarantor otherwise permitted by the indenture, (ii) satisfaction of the requirements for legal or covenant defeasance or discharge of the 2027 Notes, or (iii) no default or event of default has occurred and is continuing under the indenture.

The following table presents summarized financial information for the Guarantors and our Operating Partnership, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor ($ in thousands):

Table 15: Summary of Issuer and Guarantor Financial Statements

Repurchase Transactions

We have two repurchase facilities whereby we, through two wholly owned Delaware trusts (the “Trusts”), acquire pools of mortgage loans, which are then sold by the Trusts, as “Seller” to two separate counterparties, the “buyer” or “buyers.” One facility has a ceiling of $150.0 million and the other $400.0 million at any one time. Upon the time of the initial sale to the buyer, each Trust, with a simultaneous agreement, also agrees to repurchase the pools of mortgage loans from the buyer. Mortgage loans sold under these facilities carry interest calculated based on a spread to one-month SOFR, which are fixed for the term of the borrowing. The purchase price that the Trust realizes upon the initial sale of the mortgage loans to the buyer can vary between 75% and 90% of the asset’s acquisition price, depending upon the facility being utilized and/or the quality of the underlying collateral. The obligations of the Trust to repurchase these mortgage loans at a future date are guaranteed by the Operating Partnership. The difference between the market value of the asset and the amount of the repurchase agreement is generally the amount of equity we have in the position and is intended to provide the buyer with some protection against fluctuations in the value of the collateral, and/or a failure by us to repurchase the asset and repay the borrowing at maturity. We also have four repurchase facilities, as of September 30, 2023, substantially similar to the mortgage loan repurchase facilities where the pledged assets are bonds retained from our securitization transactions. These facilities have no effective ceilings. Each repurchase transaction represents its own borrowing. As such, the ceilings associated with these transactions are the amounts currently borrowed at any one time. We have effective control over the assets subject to all of these transactions; therefore, our repurchase transactions are accounted for as financing arrangements.

A summary of our outstanding repurchase transactions at September 30, 2023 and December 31, 2022 is as follows ($ in thousands):

Table 16: Repurchase Transactions by Maturity Date

(1) Maximum borrowing capacity subject to pledging sufficient collateral is the equivalent of the amount outstanding as of September 30, 2023.

(2) Maximum borrowing capacity subject to pledging sufficient collateral as of September 30, 2023 was $400.0 million. Also, subsequent to September 30, 2023 the maturity date has been extended to November 3, 2023.

(3) Maximum borrowing capacity subject to pledging sufficient collateral as of September 30, 2023 was $150.0 million.

(4) Includes $42.8 million of bonds that are consolidated on our balance sheet for GAAP as of September 30, 2023.

(1) Maximum borrowing capacity subject to pledging sufficient collateral is the equivalent of the amount outstanding as of December 31, 2022.

(2) Maximum borrowing capacity subject to pledging sufficient collateral as of December 31, 2022 was $400.0 million.

(3) Maximum borrowing capacity subject to pledging sufficient collateral as of December 31, 2022 was $150.0 million.

(4) Includes $42.8 million of bonds that are consolidated on our balance sheet for GAAP as of December 31, 2022.

As of September 30, 2023, we had $392.0 million outstanding under our repurchase transactions compared to $445.9 million as of December 31, 2022. The maximum month-end balance outstanding during the three months ended September 30, 2023 was $422.1 million, compared to a maximum month-end balance for the three months ended December 31, 2022, of $474.6 million. The following table presents certain details of our repurchase transactions for the three months ended September 30, 2023 and December 31, 2022 ($ in thousands):

Table 17: Repurchase Balances

The decrease in our average balance from $452.9 million for the three months ended December 31, 2022 to our average balance of $397.3 million for the three months ended September 30, 2023 is a result of paydowns and asset sales.

As of September 30, 2023 and December 31, 2022, we did not have any credit facilities or other outstanding debt obligations other than the repurchase facilities, secured borrowings, put option liability, 2024 Notes and 2027 Notes.

We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets.

Dividends

We may declare dividends based on, among other things, our earnings, our financial condition, our working capital needs, new opportunities, and distribution requirements imposed on REITs. The declaration of dividends to our stockholders and the amount of such dividends are at the discretion of our Board of Directors.

On November 2, 2023, our Board of Directors declared a dividend of $0.11 per share, to be paid on November 30, 2023 to stockholders of record as of November 15, 2023. Our Management Agreement with our Manager requires the payment of an incentive management fee above the amount of the base management fee if either, (1) for any quarterly incentive fee, the sum of cash dividends on our common stock paid out of our taxable income plus any quarterly increase in book value, all calculated on an annualized basis, exceed 8% of our book value, or (2) for any annual incentive fee, the value of quarterly cash dividends on our common stock plus cash special dividends on our common stock paid out of our taxable income, plus the increase in our book value, taken together exceeds 8% (on an annualized basis) of our stock’s book value at the end of the year. During the three and nine months ended September 30, 2023, we recorded no incentive fee payable to the Manager. Comparatively, during the three and nine months ended September 30, 2022, we recorded incentive fees payable to the Manager of zero and $0.3 million, respectively. Our dividend payments are driven by the amount of our taxable income, subject to IRS rules for maintaining our status as a REIT.

Our most recently declared quarterly dividend represents a payment of approximately 3.97% on an annualized basis of our book value of $11.07 per share at September 30, 2023. If our taxable income increases, we could exceed the threshold for paying an incentive fee to our Manager, and thereby trigger such payments. See Note 10 — Related Party Transactions.

Off-Balance Sheet Arrangements

Other than our investments in debt securities and beneficial interests issued by joint ventures, which are summarized below by securitization trust, and our equity method investments discussed elsewhere in this report, we do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities. As such, we are not materially exposed to any market, credit, liquidity or financing risk that could arise if we had engaged in such relationships.

Table 18: Investments in Joint Ventures

We form joint ventures with third party institutional accredited investors to purchase mortgage loans and other mortgage related assets. The debt securities and beneficial interests we carry on our consolidated balance sheets are issued by securitization trusts formed by these joint ventures, which are VIEs, that we have sponsored but which we do not consolidate since we have determined we are not the primary beneficiary.

On January 1, 2023, we transferred $83.0 million of investment securities from AFS to HTM due to sale restrictions pursuant to Article 6(1) of Regulation (EU) 2017/2402 of the European Parliament and of the Council (as amended, the “EU Securitization Regulation” and, together with applicable regulatory and implementing technical standards in relation thereto, the “EU Securitization Rules”). Pursuant to the terms of these debt securities, we must hold at least 5.01% of the nominal value of each class of securities offered or sold to investors (the "EU Retained Interest") subject to the EU Securitization Rules. Under the EU Securitization Rules, we are prohibited from selling, transferring or otherwise surrendering all or part of the EU Retained Interest until all such classes are paid in full or redeemed. The EU risk retention component of our investments in securities is classified as HTM on our consolidated balance sheets.

A summary of our investments in debt securities AFS and HTM issued by joint ventures is presented below ($ in thousands):

80

81

(1) Ajax Mortgage Loan Trust 2021-E was formed on July 19, 2021 which was subsequent to completing Ajax Mortgage Loan Trust 2021-F and 2021-G. The trust made an election to be taxed as a REMIC however the residual class was placed with an unrelated third party.

(2) Weighted average of Class A notes.

(3) Weighted average ownership of Class A notes.

(4) Total principal includes 5.01% EU risk retention component classified as investments in securities HTM on our consolidated balance sheets.

A summary of our investments in beneficial interests issued by joint ventures is presented below ($ in thousands):

82

(1) Ajax Mortgage Loan Trust 2021-E was formed on July 19, 2021 which was subsequent to completing Ajax Mortgage Loan Trust 2021-F and 2021-G. The trust made an election to be taxed as a REMIC however the residual class was placed with an unrelated third party.

(2) The trust certificate has no stated principal balance and is tied to the unpaid balance of the underlying mortgage loans.

(3) Includes the addition of Class B notes classified as beneficial interests on our consolidated balance sheets. Total original outstanding principal and principal balance retained of the Class B notes is $25.9 million and $6.0 million, respectively.

(4) Includes the addition of Class B notes classified as Beneficial Interests on our consolidated balance sheets. Total original outstanding principal and principal balance retained of the Class B notes is $22.1 million and $3.8 million, respectively.

Contractual Obligations

Our contractual obligations include obligations under repurchase agreements, our 2024 Notes, our 2027 Notes, accrued interest on the repurchase agreements and notes, and the put obligation on our outstanding warrants.

We use repurchase agreements to finance certain acquisitions of mortgage loans and certain debt securities we retain from our securitizations. At September 30, 2023 and December 31, 2022, our repurchase obligations totaled $392.0 million and $445.9 million, respectively. Our repurchase financing is considered short term in nature as the underlying agreements generally renew within one year. (See “Repurchase Transactions” above.)

Our 2024 Notes had outstanding principal balances of $103.5 million and $104.5 million at September 30, 2023 and December 31, 2022, respectively. The 2024 Notes will mature on April 30, 2024 unless earlier repurchased, converted or redeemed. During certain periods and subject to certain conditions the 2024 Notes will be convertible by their holders into shares of our 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, may be subject to adjustment under certain circumstances.

Our 2027 Notes had an outstanding principal balance of $110.0 million at both September 30, 2023 and December 31, 2022. The 2027 Notes will mature on September 1, 2027.

Our accrued interest expense associated with our repurchase obligations at September 30, 2023 and December 31, 2022, was $2.9 million and $2.3 million, respectively. Our interest expense expected to be paid on our 2024 Notes at September 30, 2023 and December 31, 2022, was $5.9 million and $11.7 million, respectively. Our interest expense expected to be paid on our 2027 Notes at September 30, 2023 and December 31, 2022, was $39.1 million and $49.0 million, respectively. Interest expense accrued on our repurchase financings is paid upon the maturity of a financing. Unless the repurchase financing is renewed, we are required to repay the borrowing and any accrued interest and we concurrently receive back our pledged collateral from the lender. Interest expense on our 2024 Notes is paid quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. Interest expense on our 2027 Notes is payable semi-annually on March 1 and September 1, with the first payment due and payable on March 1, 2023.

We have two series of five-year warrants outstanding which allow the holders to purchase an aggregate of 1,950,672 shares of our 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 back to us at a specified put price on or after July 6, 2023. We believe the most economically beneficial result for the holders will be to exercise the put, which we expect to settle for $15.7 million.

Our secured borrowings are not included under our contractual obligations as such borrowings are non-recourse to us and principal and interest are only paid to the extent that cash flows from mortgage loans (in the securitization trust) collateralizing the debt are received. Accordingly, a projection of contractual maturities over the next five years is inapplicable.

Subsequent Events

This year, to date, we have distributed $0.65 per share in dividends. On November 2, 2023, our board declared a cash dividend of $0.11 per share to be paid on November 30, 2023 to stockholders of record as of November 15, 2023. We reduced the dividend per share amount in order to focus on book value and maximizing stockholder value overall.

The primary components of our market risk are related to real estate risk, interest rate risk, prepayment risk and credit risk. We seek to actively manage these and other risks and to acquire and hold assets at prices that we believe justify bearing those risks, and to maintain capital levels consistent with those risks. The pandemic presents risks and uncertainties that we describe under “Risk Factors” and many of these are outside of our control.

Real Estate Risk

Residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns, public health crises and other factors); local real estate conditions (such as an oversupply of housing); construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. Increases in interest rates will result in lower refinancing volume, and home price increases will slow. Decreases in property values may cause us to suffer losses.

Interest Rate Risk

We expect to continue to securitize our whole loan portfolios, primarily as a financing tool, when economically efficient to create long-term, fixed rate, non-recourse financing with moderate leverage, while retaining one or more tranches of the subordinate MBS so created. We expect to continue to utilize repurchase lines of credit as an interim financing tool until we have sufficient volume to execute a secured borrowing. Increases in interest rates will increase our cost of funds for new secured borrowings and our cost of funds on repurchase lines of credit on the repurchase reset date. Changes in interest rates may affect the fair value of the mortgage loans and real estate underlying our portfolios as well as our financing interest rate expense. Additionally, rises in interest rates may result in a lower refinance volume of our portfolio.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Rising interest rates could be accompanied by inflation and higher household incomes which generally correlate closely to higher rent levels and property values. It is possible that the value of our real estate assets and our net income could decline in a rising interest rate environment to the extent that our real estate assets are financed with floating rate debt and there is no accompanying increase in loan yield and rental yield or property values.

Prepayment Risk

Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in respect of the mortgage loans we own as well as the mortgage loans underlying our retained MBS, including both through voluntary prepayments and through liquidations due to defaults and foreclosures. This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal and other factors. Prepayment rates, besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation. Changes in prepayment rates will have varying effects on the different types of assets in our portfolio. We attempt to take these effects into account. We will generally purchase RPLs and NPLs at discounts from UPB and underlying property values. An increase in prepayments would accelerate the repayment of the discount and lead to increased yield on our assets while also causing re-investment risk that we can find additional assets with the same interest and return levels. A decrease in prepayments would likely have the opposite effects. We currently expect the pace of loan prepayments to slow due to rising interest rates.

Credit Risk

We are subject to credit risk in connection with our assets. While we will engage in diligence on assets we will acquire, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead us to misprice acquisitions. Property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns, public health crises and other factors), local real estate conditions (such as an oversupply of housing), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors and retroactive changes to building or similar codes.

There are many reasons borrowers will fail to pay including but not limited to, in the case of residential mortgage loans, reductions in personal income, job loss and personal events such as divorce or health problems, and in the case of commercial mortgage loans, reduction in market rents and occupancies and poor property management services by borrowers. We will rely on the Servicer to mitigate our risk. Such mitigation efforts may include loan modifications and prompt foreclosure and property liquidation following a default. If a sufficient number of re-performing borrowers default, our results of operations will suffer and we may not be able to pay our own financing costs.

Inflation

Virtually all of our assets and liabilities are interest-rate sensitive in nature. Recent and expected rate increases by the Federal Reserve Bank to mitigate inflation have increased and are expected to continue to increase our cost of funds. Increasing mortgage interest rates may also have a negative impact on housing prices. Additionally, inflation that outpaces wage increases could drive a decrease in disposable household income and increase the credit risk of certain borrowers.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are also designed to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that material information related to our company and our consolidated subsidiaries is made known to management, including the Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider the risks described below in addition to the risks previously disclosed in our annual report and other filings, the information included under the caption "Cautionary Statement Regarding Forward-Looking Statements" and the other information included in this quarterly report. Our business, financial condition or results of operations could be adversely affected by any of these risks. If any of these risks occur, the value of our common stock could decline.

Increasing interest rates have had, and are expected to continue to have, significant negative effects on our loan assets.

Increases in interest rates, the interrelationships between various rates and interest rate volatility have had, and are expected to continue to have, negative effects on our earnings because it has extended duration. This has resulted in, and is expected to continue to result in, significant decreases in the fair market value of performing loans. It also may impact adversely our ability to securitize, re-securitize or sell our assets on attractive terms. Higher interest rates may reduce the ability or desire of borrowers to refinance their loans. Mortgage related assets may become more illiquid during periods of interest rate volatility. As a result, we also may encounter difficulties refinancing our securitizations and it increases the costs of our repurchase facility financings. Higher interest rates also generally increase our financing costs as we seek to renew or replace borrowing facilities.

Our strategic alternatives process may not result in a successful strategic transaction or liquidity event.

On November 2, 2023, we announced that we are exploring strategic alternatives. There can be no assurance that this strategic alternatives process will result in the announcement or consummation of any strategic transaction, or that any resulting plans or transactions will yield additional value for our stockholders. Any potential transaction would depend on factors that may be beyond our control, including, among other things, market conditions, industry trends, the interest of third parties in a potential transaction and the availability of financing to potential buyers (if required) on reasonable terms. The process of exploring strategic alternatives could adversely impact our business, financial condition and results of operations. In addition, from time to time, in recent years, companies that have experienced stock price volatility and that have announced such processes have attracted increased interest from activists. Any such form of activist interest may prove to be disruptive to the process, distract management time and attention away from the process, and result in additional expense for the company, all of which may have an adverse effect on our financial results.

Our share price has been and may continue to be volatile.

The market price of our shares has been extremely volatile. From January 1, 2023 through October 27, 2023, the trading price of our common stock has been as low as $4.08 per share and as high as $9.24 per share. The market price variation of our shares may not necessarily bear any relationship to our book value, asset values, operating results, financial condition or any other established criteria of value, and may not be indicative of the market price for our shares in the future. In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources.