Rithm Property Trust Inc.: Form 10-Q for the period ended Jun 30, 2024

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 Former Manager” refers to Thetis Asset Management LLC, a Delaware limited liability company; "our New Manager" refers to RCM GA LLC; “Aspen Capital” refers to the Aspen Capital group of companies; “the Servicer” or "Newrez" and “Gregory” or "our Former Manager" refer to Gregory Funding LLC, an Oregon limited liability company and our affiliate.

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. Historically, we have 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 acquired 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 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. We own a 19.8% equity interest in our Former Manager 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 Newrez, a Rithm affiliate.

On June 11, 2024, we completed our previously announced strategic transaction with Rithm. The Strategic Transaction was approved on May 20, 2024, by our stockholders of (i) the sale of $14.0 million of our common stock at a price of $4.87 per share (which represents the trailing five-day average closing price of our common stock on the NYSE as of the date of the Securities Purchase Agreement, entered into on February 26, 2024 by us, the Operating Partnership (as defined herein), Thetis Asset Management LLC and Rithm and (ii) a new Management Agreement with RCM GA, under which, RCM GA would become our new external manager. Additionally, on February 26, 2024, we entered into a $70.0 million Credit Agreement with NIC RMBS. For a full description of the Credit Agreement’s terms, conditions and covenants, see the section titled “The Transaction — Credit Agreement” in the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 10, 2024. The term loan was accompanied by our agreement to issue a certain number of warrants to Rithm or one of its affiliates to purchase our common stock, which warrants are detachable. See Note 8 — Commitments and Contingencies. Concurrently with entry into the Credit Agreement with NIC RMBS, we terminated our existing management contract with the Former Manager primarily in exchange for approximately 3,174,645 shares of our common stock. We currently own 19.8% of the Former Manager. The Former Manager is expected to liquidate in the fourth quarter of 2024 and distribute its assets to its members, including us.

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, 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 as a TRS under the code.

Our Operating Partnership, through interests in certain entities as of June 30, 2024, 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 June 30, 2024, 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. Also, during the year ended December 31, 2023, GA-TRS received an additional 20,991 shares of Gaea common stock due to the termination of Gaea's management agreement, which increased our ownership. At June 30, 2024, we owned approximately 22.2% of total shares outstanding. 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.

Strategic Transaction

On February 26, 2024, we entered into a $70.0 million term loan with NIC RMBS, an affiliate of Rithm. The term loan is accompanied by the issuance of a certain number of warrants to Rithm Capital Corp. (together with its subsidiaries, "Rithm") or one of its affiliates to purchase our common stock, which warrants are detachable. In connection therewith, we delivered a termination notice to our Former Manager on February 26, 2024. On June 11, 2024 we terminated the Former Management Agreement, entered into a termination and release agreement with the Former Manager and issued 3,174,645 shares of common stock to the Former Manager in connection with the termination.

On May 20, 2024, pursuant to the receipt of the approval of a majority of our stockholders and the satisfaction of certain other closing conditions, Rithm purchased $14.0 million of our common stock at a price of $4.87 per share (which represents the trailing five-day average closing price of the common stock on the NYSE as of the date of the Securities Purchase Agreement). In connection with the foregoing transaction and upon the termination of our management contract with our Former Manager, we entered into the Management Agreement with RCM GA, a Rithm affiliate, on June 11, 2024.

We believe the consummation of this strategic transaction will have a number of strategic benefits as our stockholders will have an opportunity to benefit from a shift in our strategic direction. We will seek to capitalize on commercial real estate investment opportunities and will be managed by RCM GA, which has an experienced team with a well-recognized track record of success in real estate investments.

We expect to pursue a flexible real estate investment strategy. Our target assets are currently expected to be in the commercial real estate sector, including commercial real estate, as well as preferred equity or debt instruments secured by mortgages on these types of properties, small balance commercial loans, mezzanine loans secured by pledges of equity interests in entities that own these types of properties or other forms of subordinated debt in connection with these types of properties, as well as commercial mortgage servicing rights and operating businesses in the sector. The post-closing Company does not currently anticipate investing in residential mortgage loans, RPLs or NPLs. Given the change in focus of our business, we intend to, over time, reposition much of our existing portfolio. We believe commercial real estate offers an attractive investment opportunity given market dynamics that are creating significant refinancing challenges and funding gaps.

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 June 30, 2024 and December 31, 2023 ($ 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

We have incurred substantial operating losses as a result. We expect to continue to incur operating losses for the foreseeable future as we continue to reposition our portfolio into commercial real estate assets. In particular, higher interest rates have had, and are expected to continue to have, significant negative effects on our loan assets. 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.

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

• higher interest rates have continued to reduce our net interest income;
• higher 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.

Rising mortgage rates have reduced the supply of residential mortgage loans and stronger payment performance has reduced the supply of NPLs. Additionally, rising interest rates have extended the duration of existing mortgages resulting in higher prices and lower yields.

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 market developments relating to 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 loans to dispose of their inventory.

Factors That May Affect Our Operating Results

Acquisitions. In light of current market conditions and certain financial challenges, including the significant losses we have incurred to date and limited sources of financing, we do not expect to be in a position to make new acquisitions of residential mortgage assets in the near future.

Financing. 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 has limited our access to financing.

Distributions. 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.

Expenses. Our expenses primarily consist of the fees and expenses payable by us under the Management Agreement and the Servicing Agreements. Additionally, our Former Manager incurred and our New 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. 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. Interest expense, which is subtracted from our Interest income to arrive at Net interest income, consists of the costs to borrow money.

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 further 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. Mortgage markets are undergoing a great deal of disruption and uncertainty with regard to both interest rates and origination volume. We expect that market conditions will continue to significantly and adversely impact our operating results and will cause us to adjust our investment and financing strategies over time.

Management Transition. In connection with the Rithm Transaction, we entered into the Management Agreement with RCM GA, an affiliate of Rithm, on June 11, 2024. Additionally, we transferred our loan servicing to Newrez. During the transition period, we have entered into a transition services arrangements in order to ensure continuity. In addition, as a result of the Rithm Transaction, among other reasons, we have experienced some loss of personnel. We may incur expenses and transaction costs associated with the management transition to Rithm and the transfer of our servicing contracts to Newrez. If we cannot retain certain key personnel during the transition period, the New Manager does not make available additional employees to assist, it may give rise to potential risks for us, including the risk of a significant deficiency or material weakness in internal control over financial reporting.

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, 2023, 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 June 30, 2024 include:

• GAAP Net Loss attributable to common stockholders of $(12.7) million, or $(0.32) per diluted common share
• Earnings Available for Distribution of $(9.6) million or $(0.24) per diluted common share
• Book value per diluted common share of $5.56 at June 30, 2024
• Common dividend of $2.2 million, or $0.06 per common share

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 June 30, 2024 of $(12.7) million or $(0.32) per diluted common share after preferred dividends, and Earnings Available for Distribution of $(9.6) million or $(0.24) per diluted common share. Earnings Available for Distribution 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 Earnings Available for Distribution a useful measure for comparing the results of our ongoing operations over multiple quarters. Comparatively, our GAAP Net Loss attributable to common stockholders for the three months ended June 30, 2023 was $(12.0) million or $(0.51) per common share, and Earnings Available for Distribution was $(2.5) million, or $(0.11) per common share.

At June 30, 2024, our book value decreased to $5.56 per common share from $9.99 at December 31, 2023, driven by the year to date GAAP Net Loss attributable to common stockholders of $87.1 million, dividends on our common stock of $5.6 million and dilution caused by the issuance of shares to the Former Manager in connection with the termination of the Former Management Agreement, the exchange of preferred shares for common stock, and issued to Rithm in connection with the new Management Agreement.

Table 1: Results of Operations

($ in thousands)

55

($ 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 $11.9 million for the three months ended June 30, 2024 from $18.3 million for the three months ended June 30, 2023 primarily due to lower average balances of our mortgage loan, debt security and beneficial interest portfolios. This was partially offset by a $0.3 million increase in our bank interest income. For the six months ended June 30, 2024, our gross interest income decreased to $27.7 million from $36.8 million for the six months ended June 30, 2023 primarily due to lower average balances of our mortgage loan and debt security portfolios, which was partially offset by a $0.6 million increase in our bank interest income.

Interest expense for the three months ended June 30, 2024 decreased to $11.6 million from $15.0 million for the three months ended June 30, 2023 due to decreases in the average balances of our repurchase lines of credit. For the six months ended June 30, 2024, our interest expense decreased to $25.7 million from $30.0 million for the six months ended June 30, 2023 due to decreases in the average balances on our borrowings on repurchase lines of credit.

Net interest income after recording the impact of the net change in expected credit losses decreased to $0.3 million for the three months ended June 30, 2024 from $6.2 million for the three months ended June 30, 2023 primarily as a result of lower interest income and a net zero impact of the net increase expected credit losses for our mortgage loan and beneficial interest portfolio for the three months ended June 30, 2024 compared to a $2.9 million decrease for the three months ended June 30, 2023. Net interest income after recording the impact of the net changes in expected credit losses decreased to $2.3 million for the six months ended June 30, 2024 from $10.3 million for the six months ended June 30, 2023 primarily as a result of higher interest expense and a net $4.2 million impact of the net decrease in the net change in expected credit losses for the six months ended June 30, 2024 compared to a $3.5 million decrease for the six months ended June 30, 2023.

The interest income detail for the three and six months ended June 30, 2024 and 2023 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 June 30, 2024 versus the comparative period in 2023 primarily due to loan sales. Additionally, the average carrying balances of our debt securities, beneficial interests and debt outstanding decreased for the three months ended June 30, 2024 versus the comparative period in 2023 due to paydowns, sales and redemptions and no 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 a (loss)/income from our investments in our Former Manager and Former Servicer of $0.8 million and $2.3 million for the three and six months ended June 30, 2024, respectively. Comparatively, for the three and six months ended June 30, 2023, we recorded losses from our investments in our Former Manager and Former Servicer of $49 thousand and $0.1 million, respectively. We account for our investments in our Former Manager and Former Servicer using the equity method of accounting. We recorded a loss of $0.1 million and $2.7 million in our other equity method investments for the three and six months ended June 30, 2024, respectively. Comparatively, for both the three and six months ended June 30, 2023, we recorded losses from our other equity method investments of $0.1 million. We recorded a loss from our investment in Gaea of $0.1 million for the three and six months ended June 30, 2024. Comparatively, for the three and six months ended June 30, 2023, we recorded a loss from our investment in Gaea of $0.3 million and $0.5 million, respectively.

During the three months ended March 31, 2024, we reduced the basis of GAFS to zero and recorded a write off of $2.6 million. We disposed of our investment during the three months ended June 30, 2024.

During the year ended December 31, 2023, GA-TRS received an additional 20,991 shares of Gaea common stock due to the termination of Gaea's management agreement, which increased our ownership. At June 30, 2024, we owned approximately 22.2% of Gaea.

The Company received a liquidating distribution in AS Ajax E LLC in the second quarter of 2024 that reduced its investment to zero.

Loss on Joint Venture Refinancing on Beneficial Interests

During the three and six months ended June 30, 2023, we recorded a $8.8 million and $9.8 million loss on joint venture refinancing on beneficial interests due to other than temporary impairment, respectively. The $8.8 million that was recorded during the three months ended June 30, 2023, was due to various joint ventures redeemed or partially paid down and the underlying loans being re-securitized to form Ajax Mortgage Loan Trusts 2023-B and 2023-C, which closed during the third quarter of 2023. The remaining $1.0 million of the $9.8 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 partial redemption of our beneficial interests in Ajax Mortgage Loan Trust 2019-H ("2019-H"), which became a realized loss when the transaction closed in February 2023. The 2019-H trust, along with Ajax Mortgage Loan Trusts 2019-E and 2019-G, were re-securitized and the underlying mortgage loans were used to form 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, no losses were recorded on joint venture refinancing on beneficial interests during the three and six months ended June 30, 2024.

Other Loss/Income

Other loss/income decreased for the three months ended June 30, 2024 by $2.3 million from the three months ended June 30, 2023 primarily due to a loss on sale of mortgage loans during the three months ended June 30, 2023. Comparatively, other loss/income increased for the six months ended June 30, 2024 by $0.2 million from the six months ended June 30, 2023 primarily due to a gain on property held-for-sale during the six months ended June 30, 2024. A breakdown of Other loss/income is provided in the table below ($ in thousands):

Table 4: Other (Loss)/Income

Expenses

Total expenses decreased for the three months ended June 30, 2024 from 2023, as a result of the fair value adjustment on the Rithm warrants and the common stock payable. Comparatively, for the six months ended June 30, 2024 and 2023, total expenses increased primarily due to the Strategic Transaction and the termination fee paid to our Former Manager. A breakdown of expenses is provided in the table below ($ in thousands):

Table 5: Expenses

58

Other Expense

Other expense increased for the three and six months ended June 30, 2024 over the comparable periods in 2023 primarily due to the amortization on deferred issuance costs for our Credit Agreement and an increase in employee and service provider share grants due to all restricted shares vesting on the transaction date. A breakdown of Other expense is provided in the table below ($ in thousands):

Table 6: Other Expense

Gain on Debt Extinguishment

During the three and six months ended June 30, 2024, there was no gain on debt extinguishment. Comparatively, during the three and six months ended June 30, 2023, we recorded zero and a $47 thousand gain related to the repurchase of $1.0 million aggregate principal of our 2024 Notes.

Equity and Net Book Value per Share

Our net book value per common share was $5.56 and $9.99 at June 30, 2024 and December 31, 2023, respectively. The decrease in book value was primarily due to the year to date net loss attributable to common stockholders of $87.1 million and the dividends on our common stock of $5.6 million and the dilution caused by the issuance of common stock as part of the strategic transaction. We believe our calculation is representative of our book value on a per share basis, and our New Manager believes book value per share is a valuable metric for evaluating our business. The net book value per share is calculated by taking equity at the balance sheet date (i) less preferred stock and non-controlling interest, (ii) adjusted for any addition for potential conversion of our 2024 Notes, divided by outstanding shares at the balance sheet date adjusted to include (i) unvested restricted stock earned but unissued and (ii) any share equivalents for our 2024 Notes or our warrant liability as determined by the dilution requirements for our EPS calculation. A breakdown of our book value per share is set forth in the table below ($ 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 June 30, 2024 or December 31, 2023 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 June 30, 2024 or December 31, 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 June 30, 2024 or December 31, 2023 as it has an anti-dilutive effect on our earnings per share calculation.

Mortgage Loan Portfolio

For the three and six months ended June 30, 2024, we purchased no RPLs. Comparatively, for the three and six months ended June 30, 2023, we purchased $13.5 million and $14.1 million of RPLs with UPB of $16.3 million and $17.1 million, respectively, at 48.0% and 48.4% of property value, respectively, and 82.7% and 82.2% of UPB, respectively. We ended the period with $522.8 million of mortgage loans with an aggregate UPB of $562.1 million as of June 30, 2024 and $1.0 billion for both our net mortgage loans and aggregate UPB as of June 30, 2023.

Our loan portfolio activity for the three and six months ended June 30, 2024 and 2023 is presented below ($ in thousands):

Table 8: Loan Portfolio Activity

60

61

Table 9: Portfolio Composition

As of June 30, 2024 and December 31, 2023, our portfolios consisted of the following ($ in thousands):

(1) Includes 2,199 loans that were classified from Mortgage loans held-for investment, net to Mortgage loans held-for-sale, net with a total UPB of $436.8 million and a carrying value of $428.0 million.

(2) Includes 262 loans that were classified from Mortgage loans held-for investment, net to Mortgage loans held-for-sale, net with a total UPB of $64.2 million and a carrying value of $64.3 million.

(3) At June 30, 2024 and December 31, 2023, our loan portfolio consists of fixed rate (56.0% of UPB), ARM (7.0% of UPB) and Hybrid ARM (37.0% of UPB); and fixed rate (60.0% of UPB), ARM (6.4% of UPB) and Hybrid ARM (33.6% of UPB), respectively.

(4) 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.

(5) As of the reporting date.

(6) UPB as of June 30, 2024 and December 31, 2023, divided by market value of collateral and weighted by the UPB of the loan.

(7) 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.

(8) 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.

(9) 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 10: Portfolio Characteristics

The following tables present certain characteristics about our mortgage loans by year of origination as of June 30, 2024 and December 31, 2023, respectively ($ in thousands):

Portfolio at June 30, 2024

Portfolio at December 31, 2023

(1) Includes 262 loans that were classified from Mortgage loans held-for investment, net to Mortgage loans held-for-sale, net with a total UPB of $64.2 million and a carrying value of $64.3 million.

Table 11: 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 June 30, 2024 and December 31, 2023 ($ in thousands):

(1) As of the reporting date.

Debt Securities and Trust Certificate Acquisitions

For the six months ended June 30, 2023, we received securities in exchange for our investments in Ajax Mortgage Loan Trust 2019-E, 2019-G and 2019-H for $8.8 million of class A securities with a UPB of $9.6 million and 90.7% of UPB, $1.6 million of class M securities with UPB of $2.1 million and 74.1% of UPB, $2.8 million of class B securities with UPB of $4.1 million and 68.7% of UPB and trust certificates of $3.0 million.

Liquidity and Capital Resources

Source and Uses of Cash

During the six months ended June 30, 2024, our primary sources of cash have consisted of proceeds from loan sales. Historically, our primary sources of cash have also included 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 also may have difficulty accessing the capital markets on favorable terms or at all. Additionally, market events, including inflation and the related Federal Reserve bank actions, may still 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 AFS, investments held-to-maturity and investments in beneficial interests, which are included on our consolidated balance sheet.

As of June 30, 2024 and December 31, 2023, substantially all of our invested capital was in RPLs, NPLs, SBC loans, debt securities, and beneficial interests. We also held approximately $72.0 million of cash and cash equivalents, an increase of $19.3 million from our balance of $52.8 million at December 31, 2023. Our average daily cash balance during the quarter was $57.8 million, an increase of $2.6 million from our average daily cash balance of $55.2 million during the three months ended December 31, 2023.

Six Month Operating, Investing and Financing Cash Flows

Our operating cash inflow for the six months ended June 30, 2024 were $8.0 million. Our operating cash outflows for the six months ended June 30, 2023 were $23.6 million. Our primary operating cash inflow is cash interest payments on our mortgage loan pools of $7.8 million and $23.0 million for the six months ended June 30, 2024 and 2023, respectively. Non-cash interest income accretion on our mortgage loans was $2.4 million and $3.3 million for the six months ended June 30, 2024 and 2023, respectively. Non-cash interest income on beneficial interests was $1.5 million and $4.1 million during the six months ended June 30, 2024 and 2023, respectively. Interest income on debt securities was $2.7 million and $4.9 million during the six months ended June 30, 2024 and 2023, respectively.

For the six months ended June 30, 2024, our investing cash inflows of $383.1 million were driven by the net proceeds from the sales of our mortgage loans of $311.3 million, principal and interest collections on our securities of $39.7 million, principal payments and payoffs of our mortgage loan portfolio of $27.9 million. For the six months ended June 30, 2023, our investing cash inflows of $88.3 million were driven by payoffs of our mortgage loan portfolio of $48.5 million, principal and interest collections on our securities of $39.1 million and proceeds from refinancing and sale of our debt securities of $29.4 million, partially offset by the purchase of securities of $16.3 million and acquisitions of mortgage loans of $14.1 million and the contribution of an additional $0.7 million equity interest in our GAFS affiliate.

Our financing cash flows are driven primarily by funding used to acquire mortgage loan pools and debt securities as well as debt service on our 2024 Notes and 2027 Notes. 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 six months ended June 30, 2024, we had net financing cash outflows of $371.9 million primarily driven by the redemption of our 2024 Notes of $103.5 million, repayments of $220.7 million on repurchase transactions, pay downs of secured borrowings of $136.2 million, partially offset by additional borrowing through repurchase transactions of $91.5 million. For the six months ended June 30, 2023, we had net financing cash outflows of $72.2 million primarily driven by repayments of $56.8 million on repurchase transactions and pay downs of existing debt obligations of $29.6 million on secured borrowings, partially offset by additional borrowing through repurchase transactions of $24.1 million. For the six months ended June 30, 2024 and 2023, we paid $6.8 million and $11.7 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 June 30, 2024 and 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 Former Manager, 361,912 shares received through our Former Servicer and 525,039 shares acquired through open market purchases.

On June 11, 2024 we entered into a termination and release agreement with the Former Manager and issued 3,174,645 shares of common stock to our Former Manager in connection with the termination for an exercise price of $5.36 per share. In connection with the execution of our new Management Agreement, we issued 2,874,744 shares of common stock to Rithm at a purchase price of $4.87 per share, for aggregate proceeds of approximately $14.0 million.

During the six months ended June 30, 2024, we exchanged the remaining 424,949 shares of our outstanding 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 1,135,590 shares of our outstanding 5.00% Series B Fixed-to-Floating Rate Preferred Stock and the associated warrants for newly issued shares of our common stock. A total of the 12,046,218 common shares were issued pursuant to the exchange with 9,464,524 shares of common stock exchanged during the quarter ended March 31, 2024 and 2,581,694 shares of common stock exchanged subsequent to the approval of the Company's shareholders on May 20, 2024. No preferred stock or warrants were exchanged during the three and six months ended June 30, 2023.

During the three and six months ended June 30, 2024, we did not sell any shares of common stock under our At the Market program. Comparatively, during the three and six months ended June 30, 2023, we sold 94,012 and 439,590 shares, respectively, of common stock for proceeds, net of issuance costs of $0.5 million and $3.0 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. 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

We generally finance our business through secured borrowings. 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 no non-rated secured borrowing outstanding at June 30, 2024.

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 June 30, 2024.

The following table sets forth the original terms of all outstanding notes from our secured borrowings outstanding at June 30, 2024 at their respective cutoff dates:

Table 12: Secured Borrowings

Rated

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(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 June 30, 2024 and December 31, 2023, the UPB of the debt was zero and $103.5 million, respectively. The 2024 Notes had an interest rate of 7.25% per annum and were payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The 2024 Notes matured on April 30, 2024. We redeemed the notes in full on April 30, 2024 for an aggregate amount of $103.5 million and 15 days of accrued interest.

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.

On June 30, 2024, we received notification that the 2027 Notes were downgraded from BBB- to BB+. Under the terms of the indenture governing the 2027 Notes, the downgrade results in a 100 basis point increase in the interest rate from 8.875% to 9.875% beginning on September 1, 2024.

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 13: 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 June 30, 2024, 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 June 30, 2024 and December 31, 2023 is as follows ($ in thousands):

Table 14: Repurchase Transactions by Maturity Date

(1) Maximum borrowing capacity subject to pledging sufficient collateral is the equivalent of the amount outstanding as of June 30, 2024.

(2) Maximum borrowing capacity subject to pledging sufficient collateral as of June 30, 2024 was $400.0 million.

(3) Maximum borrowing capacity subject to pledging sufficient collateral as of June 30, 2024 was $150.0 million.

(1) Maximum borrowing capacity subject to pledging sufficient collateral is the equivalent of the amount outstanding as of December 31, 2023.

(2) Maximum borrowing capacity subject to pledging sufficient collateral as of December 31, 2023 was $400.0 million.

(3) Maximum borrowing capacity subject to pledging sufficient collateral as of December 31, 2023 was $150.0 million.

(4) Includes $42.8 million of bonds that are consolidated on our balance sheet for GAAP as of December 31, 2023.

As of June 30, 2024, we had $246.5 million outstanding under our repurchase transactions compared to $375.7 million as of December 31, 2023. The maximum month-end balance outstanding during the three months ended June 30, 2024 was $408.9 million, compared to a maximum month-end balance for the three months ended December 31, 2023, of $392.0 million. The following table presents certain details of our repurchase transactions for the three months ended June 30, 2024 and December 31, 2023 ($ in thousands):

Table 15: Repurchase Balances

The decrease in our average balance from $378.4 million for the three months ended December 31, 2023 to our average balance of $304.1 million for the three months ended June 30, 2024 is a result of paydowns and asset sales.

As of June 30, 2024 and December 31, 2023, we did not have any credit facilities or other outstanding debt obligations other than the repurchase facilities, secured borrowings, warrant liability, 2024 Notes (as of December 31, 2023) 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. We do, however, have debt covenants related to our various borrowing arrangements that have minimum liquidity and tangible net worth requirements as well as maximum leverage ratio requirements. Generally, we are required to maintain minimum levels of liquidity (in Cash and cash equivalents) and tangible net worth of $30.0 million and $240.0 million, respectively. Similarly, our leverage ratio cannot exceed 3.5 times equity, excluding our secured borrowings.

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 July 23, 2024, our Board of Directors declared a dividend of $0.06 per share, to be paid on August 30, 2024 to stockholders of record as of August 15, 2024.

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 16: 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):

72

(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):

73

(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, and accrued interest on these obligations.

We use repurchase agreements to finance certain acquisitions of mortgage loans and certain debt securities we retain from our securitizations. At June 30, 2024 and December 31, 2023, our repurchase obligations totaled $246.5 million and $375.7 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 zero and $103.5 million at June 30, 2024 and December 31, 2023, respectively. On April 30, 2024, we repaid our 2024 Notes at maturity.

Our 2027 Notes had an outstanding principal balance of $110.0 million at both June 30, 2024 and December 31, 2023. The 2027 Notes will mature on September 1, 2027.

Our accrued interest expense associated with our repurchase obligations at June 30, 2024 and December 31, 2023, was $0.4 million and $2.3 million, respectively. Our interest expense expected to be paid on our 2024 Notes at June 30, 2024 and December 31, 2023, was zero and $4.1 million, respectively. Our interest expense expected to be paid on our 2027 Notes at June 30, 2024 and December 31, 2023, was $34.2 million and $39.1 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 was 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.

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

On July 23, 2024, our board declared a cash dividend of $0.06 per common share to be paid on August 30, 2024, to stockholders of record as of August 15, 2024.

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 have historically purchased 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 Principal 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 Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Based on the controls evaluation, our Chief Executive Officer and Principal 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 Principal 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.

Risks Related to the Rithm Transaction

We depend on a manager to run our business. If Rithm is unable to conduct our investment activities properly, there could be a material adverse effect on our business.

All of our investment activities are conducted by the New Manager. The New Manager has great latitude in determining the types of assets that are appropriate investments for us, as well as the individual investment decisions. Thus, our success will depend on our relationship with, and the performance of the New Manager. Should the New Manager fail to allocate sufficient resources or select appropriate investments, we may be unable to achieve our objectives. Further, if the New Manager or Rithm are unable to retain its key personnel, it may be difficult for the New Manager to manage our business. Changing our manager from the Former Manager to the New Manager could have a material adverse effect on our business, financial condition and results of operations.

Commercial real estate-related investments that are secured by commercial real property are subject to delinquency, foreclosure and loss, which could result in losses.

Following the consummation of the Rithm Transaction, under Rithm’s management, we have started to shift its strategic direction to include investing in mortgages, subordinated debt, preferred and other investments in commercial real estate. Commercial real estate debt instruments (e.g., mortgages and mezzanine loans) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are arguably greater than similar risks associated with a pool of loans secured by single-family residential properties. The ability of a borrower to repay a loan secured by an income-producing property is typically primarily dependent upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired.

Net operating income of an income producing property can be affected by, among other things: customer mix, success of customer businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expenses or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, current and potential future capital markets uncertainty, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, natural disasters, terrorism, social unrest and civil disturbances.

In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court) and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial adverse effect on our anticipated return on the foreclosed mortgage loan. In addition, if we foreclose on a particular property, we could become, as owner of the property, subject to liabilities associated with such property, including liabilities related to taxes and environmental matters. Moreover, in the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any realized deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow and limit amounts available for distribution to our stockholders.

In addition, we may be exposed to the risk of judicial proceedings with borrowers and other entities we invest in, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor. In the event that any of the properties or entities underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments could be reduced, which would adversely affect our results of operations and financial condition.

We invest in commercial mortgage loans which are non-recourse in nature and include limited options for financial recovery in the event of default; an event of default may adversely affect our results of operations and financial condition.

Following the consummation of the Rithm Transaction, under Rithm’s management, we invest in commercial mortgage loans, including mezzanine loans and B-notes, which are secured by commercial or other properties and are subject to risks of delinquency and foreclosure and risks of loss. Commercial real estate loans are not fully amortizing, meaning that they may have a significant principal balance or balloon payment due on maturity. Full satisfaction of the balloon payment by a commercial borrower is heavily dependent on the availability of subsequent financing or a functioning sales market, as well as other factors such as the value of the property, the level of prevailing mortgage rates, the borrower’s equity in the property and the financial condition and operating history of the property and the borrower. In certain situations, and during periods of credit distress, the unavailability of real estate financing may lead to default by a commercial borrower. In addition, in the absence of any such takeout financing, the ability of a borrower to repay a loan secured by an income-producing property will depend upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Furthermore, we may not have the same access to information in connection with investments in commercial mortgage loans, either when investigating a potential investment or after making an investment, as compared to publicly traded securities.

Commercial mortgage loans are usually non-recourse in nature. Therefore, if a commercial borrower defaults on the commercial mortgage loan, then the options for financial recovery are limited in nature. To the extent the underlying default rates with respect to the pool or tranche of commercial real estate loans in which we directly or indirectly invest increase, the performance of our investments related thereto may be adversely affected. Default rates and losses on commercial mortgage loans will be affected by a number of factors, including global, regional and local economic conditions in the area where the mortgage properties are located, the borrower’s equity in the mortgage property and the financial circumstances of the borrower. A continued decline in specific commercial real estate markets and property valuations may result in higher delinquencies and defaults and potentially foreclosures. In the event of default, the lender will have no right to assets beyond collateral attached to the commercial mortgage loan. The overall level of commercial mortgage loan defaults remains significant and market values of the underlying commercial real estate remain distressed in many cases. It has also become increasingly difficult for lenders to dispose of foreclosed commercial real estate without incurring substantial investment losses, ultimately leading to a decline in the value of such investments.

Investments in commercial real estate companies are subject to the specific risks relating to the particular company and to the general risks of investing in real estate-related loans and securities, which may result in significant losses.

Following the consummation of the Rithm Transaction, we may invest a portion of its assets in preferred and/or debt securities of commercial real estate operating or finance companies. These investments involve special risks relating to the particular company, including its financial condition, liquidity, results of operations, business and prospects. In particular, such debt securities are often non-collateralized and may also be subordinated to its other obligations. These investments also subject us to the risks inherent with real estate-related investments, including:

• risks of delinquency and foreclosure, and risks of loss in the event thereof;
• the dependence upon the successful operation of, and net income from, real property;
• risks generally incident to interests in real property; and
• risks specific to the type and use of a particular property.

These risks may adversely affect the value of our investments in commercial real estate operating and finance companies and the ability of the issuers thereof to make principal and interest payments in a timely manner, or at all, and could result in significant losses.

There are certain risks associated with the servicers of commercial real estate loans.

The exercise of remedies and successful realization of liquidation proceeds relating to commercial real estate loans may be highly dependent on the performance of the servicer or special servicer. The servicer may not be appropriately staffed or compensated to immediately address issues or concerns with the underlying loans. Such servicers may exit the business and need to be replaced, which could have a negative impact on the portfolio due to lack of focus during a transition. Special servicers frequently are affiliated with investors who have purchased the most subordinate bond classes, and certain servicing actions, such as a loan extension instead of forcing a borrower pay off, may benefit the subordinate bond classes more so than the senior bonds. There may be a limited number of special servicers available, particularly those which do not have conflicts of interest. In addition, to the extent any such servicers fail to effectively perform their obligations pursuant to the applicable servicing agreements, such failure may adversely affect our investments.

There are certain risks associated with an investment in CMBS.

CMBS investments may be subject to interest shortfalls due to interest collected from the underlying loans not being sufficient to pay accrued interest to all of the MBS interest holders. Interest shortfalls to the CMBS trust will occur when the servicer does not advance full interest payments on defaulted loans. The servicer in a CMBS trust is required to advance monthly principal and interest payments due on a delinquent loan. Once a loan is delinquent for a period of time (generally 60 days), the servicer is required to obtain a new appraisal to determine the value of the property securing the loan. The servicer is only required to advance interest based on the lesser of the loan amount or 90%, generally, of the appraised value. Interest shortfalls occur when 90%, generally, of the appraised value is less than the loan amount and the servicer does not advance interest on the full loan amount. The resulting interest shortfalls impact interest payments on the most junior class in the trust first. As interest shortfalls increase, more senior classes may be impacted. Over time, senior classes may be reimbursed for accumulated shortfalls if the delinquent loans are resolved, but there is no guarantee that shortfalls will be collected. Interest shortfalls to the CMBS trust may also occur as a result of accumulated advances and expenses on defaulted loans. When a defaulted loan or foreclosed property is liquidated, the servicer will be reimbursed for accumulated advances and expenses prior to payments to CMBS bond holders. If proceeds are insufficient to reimburse the servicer or if a defaulted loan is modified and not foreclosed, the servicer is able to make a claim on interest payments that is senior to the bond holders to cover accumulated advances and expenses. If the claim is greater than interest collected on the loans, interest shortfalls could impact one or more bond classes in a CMBS trust until the servicer’s claim is satisfied.

Additionally, the real estate loans backing the CMBS and other investments may be subject to various laws enacted in the jurisdiction or state of the borrower for the protection of creditors. If an unpaid creditor files a lawsuit seeking payment, the court may invalidate all or part of the borrower’s debt as a fraudulent conveyance, subordinate such indebtedness to existing or future creditors of the borrower or recover amounts previously paid by the borrower in satisfaction of such indebtedness, based on certain tests for borrower insolvency and other facts and circumstances, which may vary by jurisdiction. There can be no assurance as to what standard a court would apply in order to determine whether the borrower was “insolvent” after giving effect to the incurrence of the indebtedness constituting the mortgage backing the CMBS and other investments, or that regardless of the method of valuation, a court would not determine that the borrower was “insolvent” after giving effect to such incurrence. In addition, in the event of the insolvency of a borrower, payments made on such mortgage loans could be subject to avoidance as a “preference” if made within a certain period of time (which may be as long as one year and one day) before insolvency.

Rithm’s failure to appropriately manage or address conflicts of interest could damage its and our reputation and adversely affect our business, financial condition and results of operations.

Rithm confronts actual or potential conflicts of interest relating to its investment activities and the investment activities of investment funds or accounts managed by Rithm and its affiliates ("Affiliated Funds"), including the Company. Rithm operates as a real estate investment trust with a broad investment mandate covering real estate related securities and other investments. Accordingly, Rithm and certain of its Affiliated Funds, including the Company, have overlapping investment objectives. Actual or potential conflicts may arise with respect to Rithm’s decisions regarding how to allocate investment opportunities among Rithm, its Affiliated Funds, including the Company, and other operating companies. For example, Rithm may allocate an investment opportunity that is appropriate for Rithm, Affiliate Funds, in a manner that excludes one or more Affiliated Funds, including the Company, or results in a disproportionate allocation based on factors or criteria that Rithm determines, such as sourcing of the transaction, the specific nature of the investment or size and type of the investment, among other factors. Additionally, a decision by Rithm to acquire material non-public information about a company while pursuing an investment opportunity for itself, an operating company, or a particular Affiliated Fund gives rise to a potential conflict of interest when it results in Rithm having to restrict the ability of other Affiliated Funds, including the Company, or various operating companies and affiliates to buy or sell securities in the public markets. There may be perceived conflicts of interest regarding investment decisions.

In addition, the challenge of allocating investment opportunities to certain Affiliated Funds, including the Company, may be exacerbated as Rithm expands its business to include more lines of business. Allocating investment opportunities appropriately frequently involves significant and subjective judgments. In addition, the perception of non-compliance with such requirements or policies could harm Rithm’s and our reputation with fund investors and our respective stockholders.

To the extent that the Company co-invests in the same investment opportunity with Rithm, Affiliated Funds or operating companies, Rithm confronts actual or potential conflicts of interest in relation to investment decisions in respect of such co-investment opportunity. A co-investment will be made on the basis of multiple factors, including, without limitation, an assessment of the appropriate amount of risk for the Company and other participating affiliated co-investors to bear. Risk assessment is an inherently subjective determination and Rithm and RCM GA will not follow a pre-established formula to determine appropriate risk for each affiliated investor, including the Company, in a co-investment. Additional conflicts of interest may exist in relation to when to exit or liquidate a particular co-investment (which may be inherently illiquid), and RCM GA may not cause the Company to exit or liquidate the co-investment at the time which best aligns with the Company’s risk or liquidity profile. In addition, in a particular co-investment opportunity, there may be additional fees and expenses charged by parties originating or servicing the investment opportunity, including operating companies.

Rithm’s affiliates or portfolio companies may be service providers or counterparties to its funds or portfolio companies or the Company and receive fees or other compensation for services that are not shared with the Company. In such instances, Rithm may be incentivized to cause its funds or portfolio companies to purchase such services from its affiliates or portfolio companies rather than an unaffiliated service provider despite the fact that a third-party service provider could potentially provide higher quality services or offer them at a lower cost.

It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. While Rithm believes we have appropriate policies and procedures in place to manage conflicts of interest, this process is complex and difficult and our reputation could be damaged if Rithm fails, or appears to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materially adversely affect Great Ajax’s business, financial condition or results of operations in a number of ways, including an inability to raise additional funds and a reluctance of counterparties to do business with Great Ajax.

We have conflicts of interest with the New Manager and the Servicer, and certain members of our Board of Directors, as well as our management team, have, or could have in the future have, conflicts of interest due to their respective relationships with these entities, and such conflicts could be resolved in a manner adverse to us.

The New Manager currently manages our business, investment activities and affairs pursuant to the Management Agreement. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead the New Manager to place undue emphasis on Earnings Available for Distribution (as defined in the Management Agreement) at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio. As an externally managed REIT, we are entirely managed by the New Manager, which negotiates all our agreements and deals with all our contractual counterparties on our behalf. For example, the New Manager acts for us in connection with the Servicing Agreements, including monitoring the performance of the Servicer under the Servicing Agreements and exercising any available rights or remedies on our behalf. The New Manager and the Servicer are affiliates.

The Servicing Agreements were also not negotiated at arm’s length and could contain terms that are less favorable to us than similar agreements negotiated with unaffiliated third parties. In addition, the Servicer is generally not prohibited from providing similar services to other owners of mortgage loans and real estate assets, including other affiliates of Rithm.

RCM GA has registered under the Investment Advisers Act and is subject to regulation under that Act.

Upon its registration as an investment adviser under the Investment Advisers Act, RCM GA became subject to various requirements under the Investment Advisers Act such as fiduciary duties to clients, anti-fraud provisions, substantive prohibitions and requirements, contractual and record-keeping requirements and administrative oversight by the SEC (primarily by inspection). In addition, upon registration as an investment adviser under the Investment Advisers Act, it must continually address potential conflicts between its interests and those of its clients. Although Rithm has established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. If RCM GA or its applicable affiliates are deemed to be out of compliance with any such rules and regulations, they may be subject to civil liability, criminal liability and/or regulatory sanctions.

Risks Related to Our Business

We expect to continue to incur increasing and significant consolidated net losses from our mortgage asset holdings.

For the quarter ended June 30, 2024, we incurred a net loss attributable to common stockholders of $12.7 million compared to a net loss attributable to common stockholders of $12.0 million for the quarter ended June 30, 2023. We expect to continue to incur significant operating losses for the foreseeable future given the current market conditions for our mortgage asset holdings. In particular, higher interest rates have had, and are expected to continue to have, significant negative effects on our loan assets. 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. 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.

Risks Related to Our Common Stock

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

The market price of our shares has been extremely volatile. From January 1, 2024 through July 30, 2024, the trading price of our common stock has been as low as $3.15 per share and as high as $5.89 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. The trading price of our shares may remain volatile and it may be difficult to sell shares at a stable price as a result.