GREAT AJAX CORP.
In this quarterly report on Form 10-Q ("report"), unless the context indicates
otherwise, references to "Great Ajax ," "we," "the company," "our" and "us" refer
to the activities of and the assets and liabilities of the business and
operations of Great Ajax Corp. ; "operating partnership" refers to Great Ajax
Operating Partnership L.P. , a Delaware limited partnership; "our Manager" refers
to Thetis Asset Management LLC , a Delaware limited liability company; "Aspen
Capital " refers to the Aspen Capital group of companies; "Aspen" and "Aspen Yo"
refers to Aspen Yo LLC , an Oregon limited liability company that is part of
Aspen Capital ; and "the Servicer" and "Gregory" refer to Gregory Funding LLC , an
Oregon limited liability company and our affiliate, and an indirect subsidiary
of Aspen Yo.
Our Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited interim consolidated
financial statements and related notes included in Item 1. Consolidated interim
financial statements of this report and in Item 8. Financial statements and
supplementary data in our most recent Annual Report on Form 10-K, as well as the
section entitled "Risk Factors" in Part II, Item 1A. of this report, as well as
other cautionary statements and risks described elsewhere in this report and our
most recent Annual Report on Form 10-K.
Overview
Great Ajax Corp. is aMaryland corporation that is organized and operated in a manner intended to allow us to qualify as a REIT. We primarily target acquisitions of 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. We also acquire and 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 also originate SBC loans that we believe will provide an appropriate risk-adjusted total return. Additionally, we invest in single-family and smaller commercial properties directly either through a foreclosure event of a loan in its mortgage portfolio or through a direct acquisition. We may also target investments in NPLs either directly or with joint venture partners. NPLs are loans on which the most recent three payments have not been made. We may acquire NPLs either directly or with joint venture partners. We own a 19.8% equity interest in the Manager and an 8.0% equity interest in the parent company of our Servicer. GA-TRS is a wholly-owned subsidiary of theOperating Partnership that owns the equity interest in the Manager and the Servicer. We have elected to treat GA-TRS as a taxable REIT subsidiary under the Code. Our mortgage loans and real properties are serviced by the Servicer, also an affiliated company. In 2014, we formedGreat Ajax Funding LLC , a wholly-owned subsidiary of theOperating 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 theOperating Partnership formed to hold mortgage loans used as collateral for financings under our repurchase agreements. OnFebruary 1, 2015 , we formedGAJX Real Estate Corp. , as a wholly-owned subsidiary of theOperating Partnership , to own, maintain, improve and sell certain REO purchased by us. We have elected to treatGAJX Real Estate Corp. as a TRS under the Code. OurOperating Partnership , through interests in certain entities, holds 100% ofGreat Ajax II REIT Inc. which holds an interest inGreat Ajax II Depositor LLC which was formed 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. We have securitized mortgage loans through a securitization trust and retained subordinated securities from the secured borrowings. This trust is considered to be a VIE, and the we have determined that we are the primary beneficiary of this VIE. In 2018, we formedGaea Real Estate Corp. ("Gaea"), a wholly-owned subsidiary of theOperating Partnership . We have elected to treat Gaea as a TRS under the Code. Also during 2018, we formedGaea Real Estate Operating Partnership LP , a wholly-owned subsidiary of Gaea, to hold investments in commercial real estate assets. We also formedBFLD Holdings LLC ("BFLD"),Gaea Commercial Properties LLC ,Gaea Commercial Finance LLC andGaea RE LLC as subsidiaries ofGaea Real Estate Operating Partnership . In 2019, we formedDG Brooklyn Holdings ("DG Brooklyn Holdings "), also a subsidiary ofGaea Real Estate Operating Partnership LP , to hold investments in multi-family properties. OnNovember 22, 2019 , Gaea completed a private capital raise in which it raised$66.3 million from the issuance of 4,419,641 shares of its common stock to third parties to allow Gaea to continue to advance its investment strategy. We retained a 23.2% ownership interest in Gaea following the transaction. 45 -------------------------------------------------------------------------------- We elected to be taxed as a REIT forU.S. federal income tax purposes beginning with our taxable year endedDecember 31, 2014 . Our qualification as a REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code, and that our current intended manner of operation enables us to meet the requirements for taxation as a REIT forU.S. federal income tax purposes.
Our Portfolio
The following table outlines the carrying value of our portfolio of mortgage loan assets and single-family and smaller commercial properties as ofMarch 31, 2020 andDecember 31, 2019 ($ in millions): March 31, 2020 December 31, 2019 Residential RPL loan pools$ 1,066.6 $ 1,085.5 SBC loan pools - 11.7 Other mortgage loans non-pooled(1) 4.2 23.4 Residential NPL loan pools 27.9 30.9 Property held-for-sale, net 10.9 13.5 Rental property, net 1.3 1.5 Investment in debt securities 247.4 231.7 Investment in beneficial interests 64.7 58.0 Total Real Estate Assets$ 1,423.0 $ 1,456.2
(1)Other mortgage loans non-pooled are accounted for as non-PCD loans under CECL.
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
COVID-19
The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in household, business, and economic market conditions, including inthe United States , where we conduct all of our business. COVID-19 has not yet been contained and could affect significantly more households and businesses in the coming months. While the duration and severity of the pandemic has yet to be identified, many governmental and nongovernmental authorities have directed their actions toward curtailing household and business activity in order to contain COVID-19 while simultaneously deploying fiscal- and monetary-policy measures in order to partially mitigate the adverse effects. Whether these programs and policies will be successful in mitigating the adverse of COVID-19 is unclear. Many of the government measures have impacted the mortgage market.
COVID-19 began to meaningfully impact our operations in late
•We recorded total provisions expense of$5.1 million on our Mortgage loan portfolio and Investments in beneficial interests as a result of expectations of extended portfolio durations and longer foreclosure and eviction timelines, •We recorded a$28.4 million unrealized loss on our Investments in debt securities to Other comprehensive income as counterparty marks atMarch 31, 2020 reflecting the extreme disruption in the residential mortgage securities market. •We recorded impairments on our REO portfolio as extended eviction timelines will reduce our estimated net liquidation proceeds due to higher holding period costs and higher rehabilitation costs. •We settled margin calls in the amount of$28.2 million with our repurchase financing counterparties due to the extreme disruption in the residential mortgage securities market. 46 -------------------------------------------------------------------------------- The spread of COVID-19 has continued into April andMay 2020 . As a result, our forecast of macroeconomic conditions and expected lifetime credit losses on our mortgage loan and beneficial interest portfolios is subject to meaningful uncertainty. While our borrowers continue to make scheduled payments and we continue to receive payments in full, we have acted swiftly to support our borrowers with a mortgage forbearance program. While we generally do not hold loans guaranteed by GSEs or theUS Government , we, through our Servicer, are nonetheless offering a forbearance program under similar terms. Borrowers that are able to provide documentation of a negative impact of COVID-19 are entitled to three months of forbearance. The three monthly payments may then be repaid over 12 months. HAMP loans, FHA loans and borrowers in certain states do not have to provide evidence that they are impacted by COVID-19. Our Servicer has extensive experience dealing with delinquent borrowers and we believe it is well positioned to react on our behalf to any increase in mortgage delinquencies. The following list shows the COVID-19 forbearance activity in our portfolio as ofApril 30, 2020 (1):
•Number of COVID-19 forbearance relief inquires: 920 •Number of COVID-19 forbearance relief granted: 115 •Number of COVID-19 related forbearance under review: 146
(1)Statistics are for loans carried on our balance sheet including loans held in Ajax 2017-D and Ajax 2018-C where third parties own 50% and 37%, respectively. Statistics do not include non-consolidated joint ventures where we own bonds and beneficial interests issued by the joint ventures. In response to the disruption in the financial markets caused by COVID-19, we raised preferred equity in the first week ofApril 2020 . We expect this additional capital to allow us to maintain liquidity in the short term and take advantage of favorable investment opportunities. Not withstanding this additional capital and liquidity, we expect continued volatility in the residential mortgage securities market in the short term and increased acquisition opportunities later in the year. Extended forbearance, foreclosure timelines and eviction timelines could result in lower yields and losses on our mortgage loan and beneficial interest portfolios and losses on our REO held-for-sale. Ongoing disruption in the credit markets could result in additional margin calls from our financing counterparties and additional mark downs on our Investments in debt securities.
We believe that certain cyclical trends continue to drive a significant realignment within the mortgage sector notwithstanding the impact of COVID-19. Through the end of the first quarter, the recent trends noted below have continued, including:
•historically low interest rates and elevated operating costs resulting from new regulatory requirements continue to drive sales of residential mortgage assets by banks and other mortgage lenders; •declining home ownership due to rising prices, low inventory, tighter lending standards and increased down payment requirements that have increased the demand for single-family and multi-family residential rental properties; •the Dodd-Frank risk retention rules for asset backed securities have reduced the universe of participants in the securitization markets; •the lack of a robust market for non-conforming mortgage loans will reduce the pool of buyers due to tighter credit standards as a result of COVID-19; and •the current market landscape and decrease in the price of residential mortgage loans as a result of the COVID-19 outbreak we believe will generate new opportunities in residential mortgage-related whole loan strategies. The origination of subprime and alternative residential mortgage loans remain substantially below 2008 levels and the qualified mortgage and ability-to-repay rule requirements have put pressure on new originations. Additionally, many banks and other mortgage lenders have increased their credit standards and down payment requirements for originating new loans. Recent market disruption from COVID-19 has sharply reduced financing alternatives for borrowers not eligible for financing programs underwritten by the GSEs or the Federal government. 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 theU.S. federal regulations addressing "qualified mortgages" based, among other factors on 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 increase in the near term and remain at heightened levels for the foreseeable future. 47 -------------------------------------------------------------------------------- We believe that investments in residential RPLs with positive equity provide an optimal investment value. As a result, we are currently focusing on acquiring pools of RPLs, though we may acquire NPLs, either directly or with joint venture partners, if attractive opportunities exist. Through our Servicer, we work with our borrowers to improve their payment records. Once there is a period of continued performance, we expect that borrowers will typically refinance these loans at or near the estimated value of the underlying property. We also believe there are significant attractive investment opportunities in the SBC loan and property markets and originate as well as purchase these loans. The primary lenders for smaller multi-family and mixed retail/residential properties are community banks and not regional and national banks and large institutional lenders. 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 banks, other lenders and portfolio acquirers typically desire. We continually monitor opportunities to increase our holdings of these SBC loans and properties.
Factors That May Affect Our Operating Results
Acquisitions. Our operating results depend heavily on sourcing residential RPLs
and SBC loans and, when attractive opportunities are identified, NPLs. We
believe that there is generally a large supply of RPLs available to us for
acquisition and we believe the available supply provides for a steady
acquisition pipeline of assets since large institutions are active sellers in
the market. We expect that our residential mortgage loan portfolio may grow at
an uneven pace, as opportunities to acquire distressed residential mortgage
loans may be irregularly timed and may involve large portfolios of loans, and
the timing and extent of our success in acquiring such loans cannot be
predicted. We also believe there may be increased opportunities to acquire NPLs
due to COVID-19. In addition, for any given portfolio of loans that we agree to
acquire, we typically acquire fewer loans than originally expected, as certain
loans may be resolved prior to the closing date or may fail to meet our
diligence standards. The number of loans not acquired typically constitutes a
small portion of a particular portfolio. In any case where we do not acquire the
full portfolio, we make appropriate adjustments to the applicable purchase
price.
Financing. Our ability to grow our business by acquiring residential RPLs and
SBC loans depends on the availability of adequate financing, including
additional equity financing, debt financing or both in order to meet our
objectives. We intend to leverage our investments with debt, the level of which
may vary based upon the particular characteristics of our portfolio and on
market conditions. We have funded and intend to continue to fund our asset
acquisitions with non-recourse secured borrowings in which the underlying
collateral is not marked-to-market and employ repurchase agreements without the
obligation to mark-to-market the underlying collateral to the extent available.
We securitize our whole loan portfolios, primarily as a financing tool, when
economically efficient to create long-term, fixed rate, non-recourse financing
with moderate leverage, while retaining one or more tranches of the subordinate
MBS so created. The secured borrowings are structured as debt financings and not
real estate investment conduit ("REMIC") sales. We completed the securitization
transactions pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act"), in which we issued notes primarily secured by seasoned,
performing and non-performing mortgage loans primarily secured by first liens on
one-to-four family residential properties. Currently there is substantial
uncertainty in the securitization markets which could limit our access to
financing.
To qualify as a REIT under the Code, we generally will need to distribute at
least 90% of our taxable income each year (subject to certain adjustments) to
our stockholders. This distribution requirement limits our ability to retain
earnings and thereby replenish or increase capital to support our activities.
Resolution Methodologies. We, through the Servicer, or our affiliates, employ
various loan resolution methodologies with respect to our residential mortgage
loans, including loan modification, collateral resolution and collateral
disposition. The manner in which an NPL is resolved will affect the amount and
timing of revenue we will receive. Our preferred resolution methodology is to
modify NPLs. Once successfully modified and there is a period of continued
performance, we expect that borrowers will typically refinance these loans at or
near the estimated value of the underlying property. We believe modification
followed by refinancing generates near-term cash flows, provides the highest
possible economic outcome for us and is a socially responsible business strategy
because it keeps more families in their homes. In certain circumstances, we may
also consider selling these modified loans. Through historical experience, we
expect that many of our NPLs will enter into foreclosure or similar proceedings,
ultimately becoming REO that we can sell or convert into single-family rental
properties that we believe will generate long-term returns for our stockholders.
Our REO properties may be converted into single-family rental properties or they
may be sold through REO liquidation and short sale processes. We expect the
timelines for each of the different processes to vary significantly. The exact
nature of resolution will depend on a number of factors that are beyond our
control, including borrower willingness, property value, availability of
refinancing, interest rates, conditions in the financial markets, regulatory
environment and other factors. To avoid the 100% prohibited transaction tax on
the sale of dealer property
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by a REIT, we may dispose of assets that may be treated as held "primarily for
sale to customers in the ordinary course of a trade or business" by contributing
or selling the asset to a TRS prior to marketing the asset for sale.
The state of the real estate market and home prices will determine proceeds from
any sale of real estate. We will opportunistically and on an asset-by-asset
basis determine whether to rent any REO we acquire, whether upon foreclosure or
otherwise, we may determine to sell such assets if they do not meet our
investment criteria. In addition, while we seek to track real estate price
trends and estimate the effects of those trends on the valuations of our
portfolios of residential mortgage loans, future real estate values are subject
to influences beyond our control. Declining real estate prices, including as a
result of COVID-19, are expected to negatively affect our results. We also
expect that extended eviction timelines resulting from COVID-19 will negatively
impact sales of our REO held-for-sale.
Conversion to Rental Property. From time to time we will retain an REO property
as a rental property and may acquire rental properties through direct purchases
at attractive prices. The key variables that will affect our residential rental
revenues over the long-term will be the extent to which we acquire properties,
which, in turn, will depend on the amount of our capital invested, average
occupancy and rental rates in our owned rental properties. We expect the
timeline to convert multi-family and single-family loans, into rental properties
will vary significantly by loan, which could result in variations in our revenue
and our operating performance from period to period. There are a variety of
factors that may inhibit our ability, through the Servicer, to foreclose upon a
residential mortgage loan and get access to the real property within the time
frames we model as part of our valuation process. These factors include, without
limitation: state foreclosure timelines and the associated deferrals (including
from litigation); unauthorized occupants of the property; U.S. federal, state or
local legislative action or initiatives designed to provide homeowners with
assistance in avoiding residential mortgage loan foreclosures that may delay the
foreclosure process; U.S. federal government programs that require specific
procedures to be followed to explore the non-foreclosure outcome of a
residential mortgage loan prior to the commencement of a foreclosure proceeding;
and declines in real estate values and high levels of unemployment and
underemployment that increase the number of foreclosures and place additional
pressure on the already overburdened judicial and administrative systems. We do
not expect to retain a material number of single family residential properties
for use as rentals. We do, however, intend to focus on retaining multi-unit
residences derived from foreclosures or acquired through outright purchases as
rentals.
Expenses. Our expenses primarily consist of the fees and expenses payable by us
under the Management Agreement and the Servicing Agreement. Additionally, our
Manager incurs direct, out-of-pocket costs related to managing our business,
which are contractually reimbursable by us. Loan transaction expense is the cost
of performing due diligence on pools of mortgage loans under consideration for
purchase. Professional fees are primarily for legal, accounting and tax
services. Real estate operating expense consists of the ownership and operating
costs of our REO properties, both held-for-sale and as rentals, and includes any
charges for impairments to the carrying value of these assets, which may be
significant. Those expenses may increase due to extended eviction timelines
caused by COVID-19. Interest expense, which is subtracted from our Interest
income to arrive at Net interest income, consists of the costs to borrow money.
Changes in Home Prices. As discussed above, generally, rising home prices are
expected to positively affect our results, particularly as this should result in
greater levels of re-performance of mortgage loans, faster refinancing of those
mortgage loans, more re-capture of principal on greater than 100% LTV
(loan-to-value) mortgage loans and increased recovery of the principal of the
mortgage loans upon sale of any REO. Conversely, declining real estate prices
are expected to negatively affect our results, particularly if the home prices
should decline below our purchase price for the loans and especially if
borrowers determine that it is better to strategically default as their equity
in their homes decline. While home prices have risen to, or in some cases
beyond, pre-Great Recession levels in many parts of the United States , there are
still significant regions where values have not materially increased. We
typically concentrate our investments in specific urban geographic locations in
which we expect stable or better property markets. However, when we analyze loan
and property acquisitions we do not take home price appreciation HPA into
account except for rural properties for which we model negative HPA related to
our expectation of worse than expected property condition. It is too early to
determine the impact of the COVID-19 outbreak on HPA and the resulting impact on
our markets.
We typically concentrate our investments in specific urban geographic locations
in which we expect stable or better property markets, although we do not use any
appreciation expectation in the acquisition price evaluation. To date, there has
been no measurable data on the impact of COVID-19 on HPA and it is unclear what
the short and long term impact will be. A significant decline in HPA will have
an adverse impact on our operating results.
Changes in Market Interest Rates. With respect to our business operations,
increases in existing interest rates, in general, may over time cause: (1) the
value of our mortgage loan and MBS (retained from our secured borrowings)
portfolio to decline; (2) coupons on our adjustable rate mortgages ("ARM") and
hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to
higher interest rates; (3) prepayments on our mortgage loans and MBS portfolio
to slow, thereby slowing
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the amortization of our purchase premiums and the accretion of our purchase
discounts; (4) the interest expense associated with our borrowings to increase;
and (5) 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. We currently expect the
pace of loan prepayments to slow due to the COVID-19 outbreak.
Market Conditions. Due to the dramatic repricing of real estate assets that
occurred during the 2008 financial crisis and the continuing uncertainty
regarding the direction and continuing strength of the real estate markets
including as a result of the COVID-19 outbreak, we believe a void in the debt
and equity capital available for investing in real estate exists as many
financial institutions, insurance companies, finance companies and fund managers
have determined to reduce or discontinue investment in debt or equity related to
real estate. We believe the dislocations in the residential real estate market
have resulted or will result in an "over-correction" in the repricing of real
estate assets, creating a potential opportunity for us to capitalize on these
market dislocations and capital void to the extent we are able to obtain
financing for additional purchases.
We believe that in spite of the continuing uncertain market environment for
mortgage-related assets, including as a result of the COVID-19 outbreak, current
market conditions offer potentially attractive investment opportunities for us,
even in the face of a riskier and more volatile market environment. We expect
that market conditions will continue to impact our operating results and will
cause us to adjust our investment and financing strategies over time as new
opportunities emerge and risk profiles of our business change.
COVID-19. The current outbreak of COVID-19 has also impacted, and is likely to
continue to impact, directly or indirectly, many of the other factors discussed
above, as well as other aspects of our business. New developments continue to
emerge and it is not possible for us to predict with certainty which factors
will impact our business. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. In particular, it is difficult to fully assess
the impact of COVID-19 at this time due to, among other things, uncertainty
regarding the severity and duration of the outbreak domestically and
internationally and the effectiveness of federal, state and local government
efforts to contain the spread of COVID-19, the effects of those efforts on our
business, the indirect impact on the U.S. economy and economic activity and the
impact on the mortgage markets and capital markets.
Critical Accounting Policies and Estimates
Mortgage Loans
Loans acquired with deterioration in credit quality - As of their acquisition date the loans we acquire have generally suffered some credit deterioration subsequent to origination. As a result, prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses, otherwise known as CECL, onJanuary 1, 2020 , we were required to account for the mortgage loans pursuant to ASC 310-30, Accounting for Loans with Deterioration in Credit Quality. Under both standards, our recognition of interest income for loans with deteriorated credit quality ("PCD loans") is based upon its having a reasonable expectation of the amount and timing of the cash flows expected to be collected. When the timing and amount of cash flows expected to be collected are reasonably estimable, we use expected cash flows to apply the effective interest method of income recognition. Under both CECL and ASC 310-30, acquired loans may be aggregated and accounted for as a pool of loans if the loans have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. However, CECL allows more flexibility to adjust the loan pools as the underlying risk factors change over time. Under ASC 310-30, we determined RPLs to have common risk characteristics and accounted for them as a single loan pool for loans acquired within each three-month calendar quarter. Similarly, we determined NPLs to have common risk characteristics and accounted for them as a single non-performing pool for loans acquired within each three-month calendar quarter. The result was generally two additional pools (RPLs and NPLs) each quarter. Under CECL, we re-aggregated our loan pools around similar risk factors, while eliminating the previous distinction for the quarter in which loans were acquired. This resulted in reducing the number of loan pools to four, each of which is oriented around similar risk factors. Excluded from the aggregate pools are loans that pay in full subsequent to the acquisition closing date but prior to pooling. Any gain or loss on these loans is recognized as Interest income in the period the loan pays in full. 50 -------------------------------------------------------------------------------- Our accounting for PCD loans gives rise to an accretable yield and an allowance for credit losses. Under CECL, upon the acquisition of PCD loans we record the acquisition as three separate elements for 1) the amount of purchase discount which we expect to recover through eventual repayment by the borrower, 2) an allowance for future expected credit loss and 3) the UPB of the loan. The purchase price discount which we expect at the time of acquisition to collect over the life of the loans is the accretable yield. Cash flows expected at acquisition include all cash flows directly related to the acquired loan, including those expected from the underlying collateral. We recognize the accretable yield as Interest income on a prospective level yield basis over the life of the pool. The expectation of the amount of undiscounted cash flows to be collected is evaluated at the end of each calendar quarter. If we expect to collect greater cash flows over the life of the pool, any prior allowance is reversed to the extent of the increase and the expected yield to maturity is adjusted on a prospective basis. The allowance for credit losses is increased when we estimate we will not collect all amounts previously estimated to be collectible, and reduced when the underlying asset has been liquidated and all expected underlying cash flows have been realized. Management assesses the credit quality of the portfolio and the adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, we consider the estimated net recoverable value of the loan pools as well as other factors, such as the fair value of the underlying collateral. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date. Our mortgage loans are secured by real estate. We monitor the credit quality of the mortgage loans in our portfolio on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, we assess the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluates whether and when it becomes probable that all amounts contractually due will not be collected. Borrower payments on the mortgage loans are classified as principal, interest, payments of fees, or escrow deposits. Amounts applied as interest on the borrower account are similarly classified as interest for accounting purposes and are classified as operating cash flows in our consolidated Statement of Cash Flows. Amounts applied as principal on the borrower account including amounts contractually due from borrowers that exceed our basis in loans purchased at a discount, are similarly classified as principal for accounting purposes and are classified as investing cash flows in the consolidated Statement of Cash Flows as required underU.S. GAAP. Amounts received as payments of fees are recorded in Other income and classified as operating cash flows in the consolidated Statement of Cash Flows. Escrow deposits are recorded on the Servicer's balance sheet and do not impact our cash flow. Loans acquired or originated that have not experienced a deterioration in credit quality - while we generally acquire loans that have experienced deterioration in credit quality, we also acquire loans that have not experienced a deterioration in credit quality and originate SBC loans. Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that collection of interest is doubtful. Our policy is to stop accruing interest when a loan's delinquency exceeds 90 days. All interest accrued but not collected for loans that are placed on non-accrual status or subsequently charged-off are reversed against Interest income. Income is subsequently recognized on the cash basis until, in management's judgment, the borrower's ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status. An individual loan is considered to be impaired when, based on current events and conditions, it is probable we will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Impaired loans are carried at the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's market price, or the fair value of the collateral if the loan is collateral dependent. For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower's financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans. If necessary, an allowance for loan losses is established through a provision for loan losses charged to expenses. The allowance is the difference between the expected future cash flows from the loan and the contractual balance due.
Real Estate
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REO Property - we acquire real estate properties directly from sellers and when
we foreclose on a borrower and take title to the underlying property (REO). REO
is recorded at cost if purchased, or at the present value of future cash flows
if obtained through foreclosure. REO we expect to actively market for sale is
classified as held-for-sale. REO held-for-sale is carried at the lower of its
acquisition basis, or its net realizable value (estimated fair market value less
expected selling costs). We estimate fair market value using a combination of
BPOs, comparable sales, appraisals, and competitive market analyses provided by
local realtors subject to our judgment. Net unrealized losses due to changes in
market value are recognized through a valuation allowance by charges to income.
No depreciation or amortization expense is recognized on properties
held-for-sale, while holding costs are expensed as incurred. Foreclosed property
that is sold to a third party at the foreclosure sale ("Third Party Sales") is
not considered REO and proceeds on these third party sales are treated as
payment in satisfaction of the underlying loan. See Mortgage Loans, above.
Rental property is real estate property not held-for-sale. Rental property is
intended to be held as long-term investments but may eventually be
held-for-sale. Property is held for investment as rental property if the modeled
present value of the future expected cash flows from use as a rental exceed the
present value of expected cash flows from a sale. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets of
27.5 years. We perform an impairment analysis for all rental property not
held-for-sale using estimated cash flows if events or changes in circumstances
indicate that the carrying value may be impaired, such as prolonged vacancy,
identification of materially adverse legal or environmental factors, changes in
expected ownership period or a decline in market value to an amount less than
cost. This analysis is performed at the property level. The cash flows are
estimated based on a number of assumptions that are subject to economic and
market uncertainties including, among others, demand for rental properties,
competition for customers, changes in market rental rates, costs to operate each
property and expected ownership periods.
If the carrying amount of a held for investment asset exceeds the sum of its
undiscounted future operating and residual cash flows, an impairment loss is
recorded for the difference between estimated fair value of the asset and the
carrying amount. We generally estimate the fair value of assets held for use by
using BPOs, comparable sales or realtor competitive market analysis. In some
instances, appraisal information may be available and is used in addition to
other measures of fair value.
From time to time, we perform property renovations to maximize the value of REO
held-for-sale and held for investment. Such expenditures are generally advanced
by our Servicer and recovered by our Servicer when the property is liquidated
(for REO property held-for-sale) or upon completion of the renovations (for REO
property held for investment). For residential and commercial properties that
are not held-for-sale, the carrying value, including any renovations that
improve or extend the life of the asset, are accounted for at cost. The cost
basis is depreciated using the straight-line method over an estimated useful
life of 27.5 years. Interest and other carrying costs incurred during the
renovation period are capitalized until the property is ready for its intended
use. Expenditures for ordinary maintenance and repairs are charged to expense as
incurred. We generally intend to limit rental activity to multifamily or
multi-unit single family properties.
Investments at fair value
Our Investments at Fair Value as ofMarch 31, 2020 andDecember 31, 2019 consist of investments in senior and subordinate notes issued by joint ventures which we form with third party institutional accredited investors. We recognize income on the debt securities using the effective interest method. Additionally, the notes are classified as available for sale and are carried at fair value with changes in fair value reflected in our consolidated statements of comprehensive income. We mark our investments to fair value using prices received from our financing counterparties and believe any unrealized losses on our debt securities to be temporary. Any other-than-temporary losses, which represent the excess of the amortized cost basis over the present value of expected future cash flows, are recognized in the period identified in our consolidated statements of income. Risks inherent in our debt securities portfolio, affecting both the valuation of the securities as well as the portfolio's interest income include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters, or the COVID-19 outbreak, and damage to or delay in realizing the value of the underlying collateral. We monitor the credit quality of the mortgage loans in underlying its debt securities on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, we assess the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluate whether and when it becomes probable that all amounts contractually due will not be collected. 52 --------------------------------------------------------------------------------
Investments in Beneficial Interests
Our Investments in beneficial interests as ofMarch 31, 2020 andDecember 31, 2019 consist of investments in the trust certificates issued by joint ventures which we form with third party institutional accredited investors. The trust certificates represent the residual interest of any special purpose entity formed to facilitate the investment. We account for our Investments in beneficial interests under CECL, as discussed under Mortgage Loans.
Debt
Secured Borrowings - We issue, through securitization trusts, callable debt
secured by our mortgage loans in the ordinary course of business. The secured
borrowings are structured as debt financings, and the loans remain on our
balance sheet as we are the primary beneficiary of many of these securitization
trusts, which are variable interest entities ("VIEs"). These secured borrowing
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 the
amount of our investments in the VIE entities; the creditors do not have
recourse to the primary beneficiary. Coupon interest on the debt is recognized
using the accrual method of accounting. Deferred issuance costs, including
original issue discount and debt issuance costs, are amortized on an effective
yield basis based on the underlying cash flow of the mortgage loans. We assume
the debt will be called at the specified call date for purposes of amortizing
discount and issuance costs because we believe we will have the intent and
ability to call the debt on the call date. Changes in the actual or projected
underlying cash flows are reflected in the timing and amount of deferred
issuance cost amortization.
Repurchase Facilities - We enter into repurchase financing facilities under
which we nominally sell assets to a counterparty and simultaneously enter into
an agreement to repurchase the sold assets at a price equal to the sold amount
plus an interest factor. Despite being legally structured as sales and
subsequent repurchases, repurchase transactions are generally accounted for as
debt secured by the underlying assets. At the maturity of a repurchase
financing, unless the repurchase financing is renewed, we are required to repay
the borrowing including any accrued interest and concurrently receive back our
pledged collateral from the lender. The repurchase financings are treated as
collateralized financing transactions; pledged assets are recorded as assets in
our consolidated balance sheets, and debt is recognized at the contractual
amount. Interest is recorded at the contractual amount on an accrual basis.
Costs associated with the set-up of a repurchasing contract are recorded as
deferred expense at inception and amortized over the contractual life of the
agreement. Any draw fees associated with individual transactions and any
facility fees assessed on the amounts outstanding are recorded as deferred
expense when incurred and amortized over the contractual life of the related
borrowing.
Fair Value
Fair Value of Financial Instruments - Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. A fair value
hierarchy has been established that requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value. The standard describes three levels of inputs that may be used to
measure fair value:
•Level 1 - Quoted prices in active markets for identical assets or liabilities.
•Level 2 - Observable inputs other than Level 1 prices, such as quoted prices
for similar assets and liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
•Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
The degree of judgment utilized in measuring fair value generally correlates to
the level of pricing observability. Assets and liabilities with readily
available actively quoted prices or for which fair value can be measured from
actively quoted prices generally will have a higher degree of pricing
observability and a lesser degree of judgment utilized in measuring fair value.
Conversely, assets and liabilities rarely traded or not quoted will generally
have little or no pricing observability and a higher degree of judgment utilized
in measuring fair value. Pricing observability is impacted by a number of
factors, including the type of asset or liability, whether it is new to the
market and not yet established, and the characteristics specific to the
transaction.
The fair value of mortgage loans is estimated using the Manager's proprietary
pricing model which estimates expected cash flows with the discount rate used in
the present value calculation representing the estimated effective yield of the
loan. For valuation purposes, we disclose the fair value of REO at the lower of
its acquisition basis, or its net realizable value (estimated fair market value
less expected selling costs). We estimate fair market value using BPOs,
comparable sales and competitive
53
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market analyses provided by local realtors. We use net realizable value as a
proxy for fair value as it represent the liquidation proceeds to us and is most
comparable to the fair value disclosure for loans.
We calculate the fair value for the senior debt consolidated on our balance
sheet from securitization trusts by using our Manager's proprietary pricing
model to estimate the cash flows expected to be generated from the underlying
collateral with the discount rate used in the present value calculation
representing an estimate of the average rate for debt instruments with similar
durations and risk factors.
Our convertible senior notes are traded on the NYSE; the debt's fair value is determined from the NYSE closing price on the balance sheet date.
Recent Accounting Pronouncements
Refer to the notes to our interim financial statements for a description of relevant recent accounting pronouncements.
Results of Operations
For the three months endedMarch 31, 2020 , we had net income attributable to common stockholders of$0.4 million , or$0.02 per share, for basic and diluted common shares. For the three months endedMarch 31, 2019 , we had net income attributable to common stockholders of$7.3 million , or$0.39 per share, for basic and$0.36 for diluted common shares. Key items for the three months endedMarch 31, 2020 include: •Formed a joint venture that acquired$184.8 million in unpaid principal balance ("UPB") of mortgage loans with collateral values of$292.9 million and an aggregate purchase price of$170.4 million . As ofMarch 31, 2020 , the joint venture was prefunded with$132.6 million of cash for additional loan purchases of which 677 RPLs with UPB of$123.2 million closed in April for a purchase price of$114.0 million . We retained$61.3 million of varying classes of related securities issued by the joint venture to end the quarter with$312.1 million of investments in debt securities and beneficial interests •Purchased$0.2 million of NPLs with UPB of$0.2 million and underlying collateral values of$0.3 million , and 26 RPLs for$1.2 million , with UPB of$2.0 million and collateral values of$3.1 million to end the quarter with$1.1 billion in net mortgage loans •Interest income of$27.3 million ; net interest income after provision for credit losses of$9.1 million •Overall cost of funds decreased approximately 21 basis points •Net income attributable to common stockholders of$0.4 million •Basic earnings per share ("EPS") of$0.02 •Taxable income of$0.05 per share •Book value per share of$14.37 atMarch 31, 2020 •Collected total cash of$62.4 million , from loan payments, sales of real estate owned ("REO") and investments in debt securities and beneficial interests •Held$31.2 million of cash and cash equivalents atMarch 31, 2020 ; average daily cash balance for the quarter was$58.6 million •AtMarch 31, 2020 , approximately 74% of our portfolio based on UPB had made at least the last 12 out of 12 payments 54 --------------------------------------------------------------------------------
Table 1: Results of Operations
Three months ended March 31,
($ in thousands) 2020 2019
INCOME
Interest income $ 27,286 $ 29,452
Interest expense (13,070) (15,685)
Net interest income 14,216 13,767
Provision for credit losses (5,109) (154)
Net interest income after provision for credit losses 9,107 13,613
Income/(Loss) from investments in affiliates (1,112) 461
Loss on sale of mortgage loans (705) -
Other income 747 1,110
Total income 8,037 15,184
EXPENSE
Related party expense - loan servicing fees 2,014 2,506
Related party expense - management fee 1,799 1,688
Loan transaction expense (103) 69
Professional fees 805 862
Real estate operating expenses 912 786
Other expense 1,025 1,081
Total expense 6,452 6,992
Loss on debt extinguishment 408 -
Income before provision for income taxes 1,177 8,192
Provision for income taxes (benefit) (319) 71
Consolidated net income 1,496 8,121
Less: consolidated net income attributable to the
non-controlling interest 1,096 791
Consolidated net income attributable to common
stockholders $ 400 $ 7,330
Our consolidated net income attributable to common stockholders decreased $6.9
million for the quarter ended March 31, 2020 compared to the quarter ended
March 31, 2019 primarily as a result of a $5.1 million provision for losses on
our loan and investments in beneficial interest portfolios driven primarily by
the expectation of deferrals of borrower payments, extended duration on loans
and extensions of foreclosure timelines as a result of the relief provisions for
the global pandemic caused by COVID-19. This reserve reflects the macroeconomic
impact of the COVID-19 outbreak on mortgage loan and residential real estate
markets generally and is not specific to any loan losses or impairments in our
portfolio. We recorded a provision for losses in the amount of $0.2 million for
the quarter ended March 31, 2019 . Our book value declined to $14.37 per share
from $15.80 at December 31, 2019 primarily from the effects of a $28.4 million
non-cash mark-to-market adjustment to the fair value of our debt securities as
generally determined by marks provided by our financing counterparties.
On January 1, 2020 we adopted Accounting Standards Update (ASU) No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments ("CECL"). Under CECL, we are required to record the net
present value of the expected life of loan losses on our Mortgage loans and our
Investments in beneficial interests. Our transition adjustment on January 1,
2020 resulted in a reclassification from discount to the allowance for losses in
the amount of $14.4 million with no impact on Shareholder equity. On March 31,
2020 , we recorded a charge to accrete $0.4 million of credit loss expense
resulting from the January 1 transition adjustment and a $4.7 million increase
in the allowance for losses driven by expectations derived from the COVID-19
outbreak, as described above. This resulted in a total provision for loss
expense of $5.1 million for the first quarter of 2020.
We recorded a loss from our investments in affiliates of $1.1 million for the
quarter ended March 31, 2020 compared to a gain of $0.5 million for the quarter
ended March 31, 2019 . The loss is primarily due to the flow through impact of
mark-to-market losses on shares of our stock held by our Manager and our
Servicer. We account for our investments in our Manager
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and our Servicer using the equity method of accounting and all elements of
income, expense, gain and loss are picked up in proportion to our investment.
Additionally, during the quarter ended March 31, 2020 we sold 26 SBC mortgage
loans with a carrying value of $26.1 million and UPB of $26.2 million for a loss
of $0.7 million . We sold no loans in the quarter ended March 31, 2019 .
We recorded $0.9 million in impairments on our REO held-for-sale portfolio in
real estate operating expense for the quarter ended March 31, 2020 compared to
$0.5 million for the quarter ended March 31, 2019 . We continue to liquidate our
REO properties held-for-sale at a faster rate than we acquire properties, with
19 properties sold in the first quarter while five were added to REO
held-for-sale through foreclosures. The impairment was driven primarily by an
extension of expected liquidation timelines based on state and local eviction
moratoriums, and additional related expenses, and an overall slow-down in real
estate sales due to the impact of the COVID-19 outbreak. We expect the rate of
new foreclosures to slow due to the current moratorium in many states.
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. Net interest income after provision for loan losses decreased to$9.1 million for the three months endedMarch 31, 2020 from$13.6 million for the three months endedMarch 31, 2019 primarily as a result of$5.1 million in provisions for credit losses from across various aspects of our portfolio. The increase in the provision for credit losses is the result of losses driven by expectations derived from the COVID-19 outbreak, including the potential effect of Government mandated forbearance arrangements. As a result, for the three months endedMarch 31, 2020 we recorded provisions for credit losses of$2.1 million on our mortgage loan portfolio and$3.0 million on our investments in debt securities. Comparatively during the three months endedMarch 31, 2019 we recorded provisions for credit losses of$0.2 million on our mortgage loan portfolio and no provisions for credit losses on our investments in debt securities. Our gross interest income decreased by$2.2 million to$27.3 million in the quarter endedMarch 31, 2020 from$29.5 million in the quarter endedMarch 31, 2019 due primarily to a decrease in the average balance of our mortgage loan portfolio driven partly by sales of mortgage loans, including the sale of loans to our 2019-C securitization onMay 1, 2019 , as well as from payoff of mortgage loans by borrowers. The volume of payoffs on the portfolio remained robust during the first quarter of 2020, with$47.0 million collected on our loan portfolio for the first quarter as compared to$44.7 million for the first quarter of 2019, as borrowers refinance or sell the underlying property.
Our interest expense decreased
The weighted average balance of our mortgage loan portfolio was$1.1 billion for the three months endedMarch 31, 2020 compared to$1.3 billion for the three months endedMarch 31, 2019 . Additionally, we collected$62.4 million , excluding the loan sales proceeds, in cash payments and proceeds on our mortgage loans, our REO held-for-sale and our investments in securities for the three months endedMarch 31, 2020 compared to collections of$63.2 million for the three months endedMarch 31, 2019 .
The interest income detail for the three months ended
Table 2: Interest income detail
Three
months ended
2020 2019
Accretable yield recognized on RPLs, NPLs and SBC loans, pooled
$ 21,737 $ 26,553 Interest income on securities 5,006 2,416 Interest income earned on other loans 384 158 Bank interest income 121 320 Other interest income 38 5 Interest income$ 27,286 $ 29,452 Provision for credit losses (5,109) (154)
Interest income after provision for credit losses
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The average balance of our mortgage loan portfolio, investment in securities and
debt outstanding for the three months ended March 31, 2020 and 2019 are included
in the table below ($ in thousands):
Table 3: Average Balances
Three months ended March 31,
2020 2019
Average mortgage loan portfolio $ 1,135,336 $ 1,306,500 Average carrying value of debt securities and beneficial interests
$ 298,304 $ 135,449 Total average asset level debt$ 1,067,983 $ 1,127,673 Other Income Other income decreased for the three months endedMarch 31, 2020 as compared to the three months endedMarch 31, 2019 due to decreased rental income from the impact on our rental portfolio as a result our Gaea capital raise inNovember 2019 and lower income from the federal government's Home Affordable Modification Program ("HAMP") as more loans reach the five-year threshold for where any additional fees will have been earned. This was offset by increased net gain on sale of property held-for-sale. A breakdown of Other income is provided in the table below ($ in thousands): Table 4: Other Income Three months ended March 31, 2020 2019 Net gain on sale of Property held-for-sale$ 413 $ 103 Late fee income 185 230 HAMP fees 138 384 Rental Income 11 385 Other income - 8 Total Other Income$ 747 $ 1,110 Expenses Total expenses for the three months endedMarch 31, 2020 decreased from the three months endedMarch 31, 2019 due to a decrease in loan servicing fees as a result of a lower average balance of our mortgage loan portfolio and because our interest income from debt securities and beneficial interests is recorded net of servicing fees. This was offset by REO impairments, an element of our real estate operating expenses, which increased from$0.5 million for the three months endedMarch 31, 2019 to$0.9 million for the three months endedMarch 31, 2020 . A breakdown of expenses is provided in the table below ($ in thousands): Table 5: Expenses Three months ended March 31, 2020 2019 Related party expense - loan servicing fees$ 2,014 $ 2,506 Related party expense - management fee 1,799 1,688 Other expense 1,025 1,081 Real estate operating expenses 912 786 Professional fees 805 862 Loan transaction expense (103) 69 Total expenses$ 6,452 $ 6,992 57
-------------------------------------------------------------------------------- Other expense decreased for the three months endedMarch 31, 2020 over the comparable period in 2019 primarily due to a decrease in employee and service provider share grants and taxes and regulatory expense offset by lower travel expense. Travel expense is primarily incurred during due diligence prior to and subsequent to portfolio acquisition. A breakdown of other expense is provided in the table below ($ in thousands): Table 6: Other Expense Three months ended March 31, 2020 2019 Insurance $ 184$ 159 Employee and service provider share grants 174
250
Borrowing related expenses 170
197
Travel, meals, entertainment 138 101 Directors' fees and grants 109 97 Other expense 97 67 Software licenses and amortization 70
47
Taxes and regulatory expense 46 112 Internal audit services 37 51 Total Other expense$ 1,025 $ 1,081
Equity and Net Book Value per Share
Our net book value per share was$14.37 and$15.80 atMarch 31, 2020 andDecember 31, 2019 , respectively. Our decrease in book value was driven primarily by the reduction in equity that resulted from the fair value adjustments of$28.4 million taken on our portfolio of debt securities recorded to Other comprehensive income. While GAAP does not specifically define the parameters for calculating book value, we believe our calculation is representative of our book value on a per share basis, and our Manager believes book value per share is a valuable metric for evaluating our business. The net book value per share is calculated by dividing equity, after adjusting for the anticipated conversion of the senior convertible notes into shares of common stock, the subtraction of non-controlling interests classified in equity, and shares for Manager and director fees that were approved but still unissued as of the date indicated, unvested employee and service provider stock grants and the common shares from assumed conversion of our Senior convertible notes. A breakdown of our book value per share is set forth in the table below ($ in thousands except per share amounts): Table 7: Book Value per Share March 31, 2020 December 31, 2019 Outstanding shares 22,921,935 22,142,143
Adjustments for: Unvested grants of restricted stock, and Manager and director shares earned but not issued as of the date indicated
3,468 2,600
Conversion of convertible senior notes into shares of common stock
8,007,089 8,270,208
Total adjusted shares outstanding 30,932,492 30,414,951
Equity at period end $
357,274
112,750 120,669
Adjustment for equity due to non-controlling interests (25,414) (24,257)
Adjusted equity $ 444,610 $ 480,496
Book value per share $ 14.37 $ 15.80
Mortgage Loan Portfolio
For the three months ended March 31, 2020 , we acquired 26 RPLs with an
aggregated acquisition price of $1.2 million , representing 61.7% of UPB.
Comparatively, for the three months ended March 31, 2019 , we acquired 38 RPLs
with an aggregate acquisition price of $7.2 million , representing 84.8% of UPB.
We acquired one NPL loan for an acquisition price of
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For the three months ended
The following table shows loan portfolio acquisitions that includes paid in full
loans after acquisition but before boarding by the Servicer, for the three
months ended
Table 8: Loan Portfolio Acquisitions
Three months ended March 31,
2020 2019
RPLs
Count 26 38
UPB $ 1,952 $ 8,495
Purchase price $ 1,205 $ 7,205
Purchase price % of UPB 61.7 % 84.8 %
NPLs
Count 1 -
UPB $ 227 $ -
Purchase price $ 185 $ -
Purchase price % of UPB 81.5 % - %
Table 9: Commercial loans non-pooled
Three months ended March 31,
2020 2019
SBC loans non-pooled
Count - 19
UPB $ - $ 17,776
Undrawn UPB at acquisition $ - $ 469
Issue price % of collateral value - % 62.0 %
During the three months endedMarch 31, 2020 , 151 mortgage loans, representing 4.5% of our ending UPB, were liquidated. Comparatively, during the three months endedMarch 31, 2019 , 151 mortgage loans, representing 1.7% of our ending UPB, were liquidated. Our loan portfolio activity for the three months endedMarch 31, 2020 and 2019 are presented below ($ in thousands):
Table 10: Loan Portfolio Activity
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Three months ended March 31,
2020 2019
Beginning carrying value $ 1,151,469 $ 1,310,873 RPL, NPL and SBC pool portfolio acquisitions, net cost basis
185 7,205
Other non-pooled portfolio acquisitions, net cost basis 1,206 17,793
Accretion recognized 21,745 26,586
Payments received, net (46,960) (44,460)
Reclassifications to REO (814) (4,171)
Sale of mortgage loans (26,111) -
Provision for credit losses on mortgage loans (2,122) (154)
Other 31 5
Ending carrying value $ 1,098,629 $ 1,313,677
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Table 11: Portfolio Composition
As of
December 31,
March 31, 2020(1,2) 2019(1,2)
No. of Loans 6,060 No. of Loans 6,184
Total UPB $ 1,207,885 Total UPB $ 1,268,126
Interest-Bearing Balance $ 1,131,370 Interest-Bearing Balance $ 1,190,917
Deferred Balance(3) $ 76,515 Deferred Balance(3) $ 77,209
Market Value of Collateral(4) $ 1,917,331 Market Value of Collateral(4) $ 1,783,856
Price/Total UPB(5) 82.4 % Price/Total UPB(5) 82.9 %
Price/Market Value of Collateral 54.8 % Price/Market Value of Collateral 61.9 %
Weighted Average Coupon 4.52 % Weighted Average Coupon 4.55 %
Weighted Average LTV(6) 74.5 % Weighted Average LTV(6) 83.5 %
Weighted Average Remaining Term Weighted Average Remaining Term
(months) 304 (months) 311
No. of first liens 6,001 No. of first liens 6,124
No. of second liens 59 No. of second liens 60
No. of Rental Properties 9 No. of Rental Properties 10
Capital Invested in
97.1 % RPLs loans 95.3 %
NPLs loans 2.5 % NPLs loans 2.7 %
Small-balance commercial loans 0.4 % Small-balance commercial loans 2.0 %
No. of Other REO 45 No. of Other REO 58
Market Value of Other REO(7) $ 11,329 Market Value of Other REO(7) $ 13,987
Carrying value of debt securities and Carrying value of debt securities and
beneficial interests in trusts $ 346,450 beneficial interests in trusts $ 288,362
Loans with 12 for 12 payments as an Loans with 12 for 12 payments as an
approximate percentage of UPB (8) 74.0 % approximate percentage of UPB (8) 76.0 %
Loans with 24 for 24 payments as an Loans with 24 for 24 payments as an
approximate percentage of UPB (9) 67.0 % approximate percentage of UPB (9) 64.0 %
(1)Includes the impact of 1,003 mortgage loans with a purchase price of $177.3
million , UPB of $194.3 million and collateral value of $295.3 million acquired
in the fourth quarter of 2017 through a 50% owned joint venture which we
consolidate.
(2)Includes the impact of 256 mortgage loans with a purchase price of $47.4
million , UPB of $52.8 million and collateral value of $68.1 million acquired in
the third quarter of 2018 through a 63.0% owned joint venture which we
consolidate.
(3)Amounts that have been deferred in connection with a loan modification on
which interest does not accrue. These amounts generally become payable at the
time of maturity.
(4)As of date of acquisition.
(5)At March 31, 2020 and December 31, 2019 , our loan portfolio consists of fixed
rate (52.1% of UPB), ARM (9.4% of UPB) and Hybrid ARM (38.5% of UPB); and fixed
rate (52.8% of UPB), ARM (9.5% of UPB) and Hybrid ARM (37.7% of UPB),
respectively.
(6)UPB as of March 31, 2020 and December 31, 2019 , divided by market value of
collateral and weighted by the UPB of the loan.
(7)Market value of REO is based on net realizable value. Fair market value is
determined based on appraisals, BPOs, or other market indicators of fair value
including list price or contract price.
(8)Loans that have made at least 12 of the last 12 payments, or for which the
full dollar amount to cover at least 12 payments has been made in the last 12
months.
(9)Loans that have made at least 24 of the last 24 payments, or for which the
full dollar amount to cover at least 24 payments has been made in the last 24
months.
Table 12: Portfolio Characteristics
The following tables present certain characteristics of our mortgage loans by year of origination as ofMarch 31, 2020 andDecember 31, 2019 , respectively ($ in thousands): Portfolio atMarch 31, 2020 61
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Years of Origination
After 2008 2006 - 2008 2005 and prior
Number of loans 612 3,516 1,932
Unpaid principal balance $ 123,662 $ 806,805 $ 277,418
Mortgage loan portfolio by year of origination 10.2 % 66.8 % 23.0 %
Loan Attributes:
Weighted average loan age (months) 107.3 157.6 196.5
Weighted Average loan-to-value 72.4 % 78.8 % 64.8 %
Delinquency Performance:
Current 51.4 % 55.1 % 54.0 %
30 days delinquent 13.1 % 12.6 % 13.9 %
60 days delinquent 9.1 % 8.4 % 10.1 %
90+ days delinquent 22.7 % 19.1 % 18.3 %
Foreclosure 3.7 % 4.8 % 3.7 %
Portfolio at
Years of Origination
After 2008 2006 - 2008 2005 and prior
Number of loans 625 3,576 1,983
Unpaid principal balance $ 153,923 $ 826,684 $ 287,519
Mortgage loan portfolio by year of origination 12.1 % 65.2 % 22.7 %
Loan Attributes:
Weighted average loan age (months) 88.0 154.5 193.3
Weighted Average loan-to-value 72.7 % 81.2 % 66.5 %
Delinquency Performance:
Current 61.9 % 56.9 % 58.8 %
30 days delinquent 9.5 % 13.0 % 12.6 %
60 days delinquent 6.5 % 8.4 % 8.2 %
90+ days delinquent 20.5 % 17.3 % 17.3 %
Foreclosure 1.6 % 4.4 % 3.1 %
Table 13: Loans by State
The following table identifies our mortgage loans by state, number of loans,
loan value, collateral value and percentages thereof at
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March 31, 2020 December 31, 2019
% of % of
Collateral Collateral Collateral Collateral
State Count UPB % UPB Value(1) Value State Count UPB % UPB Value(1) Value
CA(2) 962 $ 330,994 27.4 % $ 575,714 30.0 % CA 1,010 $ 370,838 29.2 % $ 564,169 31.6 %
FL 676 117,008 9.7 % 183,163 9.6 % FL 689 119,728 9.4 % 156,967 8.8 %
NY(2) 327 103,473 8.6 % 175,429 9.1 % NY 331 105,853 8.3 % 161,646 9.1 %
NJ (2) 295 66,828 5.5 % 88,579 4.6 % NJ 290 66,762 5.3 % 80,472 4.5 %
MD 253 61,581 5.1 % 78,503 4.1 % MD 257 63,349 5.0 % 74,027 4.2 %
GA 355 47,694 4.0 % 71,522 3.7 % GA 363 48,969 3.9 % 62,960 3.5 %
VA 201 43,217 3.6 % 60,873 3.2 % VA 206 44,193 3.5 % 57,678 3.2 %
IL 223 41,929 3.5 % 53,587 2.8 % IL 228 42,962 3.4 % 49,586 2.8 %
TX 392 38,310 3.2 % 75,244 3.9 % TX 399 39,689 3.1 % 69,874 3.9 %
MA 177 36,146 3.0 % 59,155 3.1 % MA 181 37,596 3.0 % 53,785 3.0 %
NC 244 31,259 2.6 % 46,895 2.5 % NC 240 31,402 2.5 % 42,977 2.4 %
WA 109 27,364 2.3 % 48,364 2.5 % WA 114 28,489 2.2 % 43,372 2.4 %
AZ 152 25,884 2.2 % 40,914 2.1 % AZ 154 26,321 2.1 % 34,277 1.9 %
NV 106 20,989 1.8 % 33,355 1.7 % NV 107 21,384 1.7 % 27,540 1.5 %
PA 175 20,287 1.7 % 28,736 1.5 % PA 180 20,978 1.7 % 26,936 1.5 %
SC 127 14,855 1.2 % 22,757 1.2 % SC 129 15,282 1.2 % 21,263 1.2 %
MI 95 13,283 1.1 % 22,704 1.2 % MI 98 14,339 1.1 % 21,876 1.2 %
OH 109 13,271 1.1 % 17,030 0.9 % OH 110 13,515 1.1 % 15,451 0.9 %
OR 64 12,678 1.1 % 21,749 1.1 % OR 66 12,991 1.0 % 19,519 1.1 %
CT 72 12,521 1.0 % 16,224 0.8 % CT 72 12,594 1.0 % 15,832 0.9 %
TN 112 11,960 1.0 % 21,090 1.1 % TN 115 12,566 1.0 % 19,203 1.1 %
CO 59 11,633 1.0 % 23,735 1.2 % CO 63 12,368 1.0 % 22,471 1.3 %
MO 80 9,951 0.8 % 13,275 0.7 % MN 54 10,200 0.8 % 12,753 0.7 %
MN 53 9,839 0.8 % 13,651 0.7 % MO 80 10,003 0.8 % 12,427 0.7 %
IN 98 9,407 0.8 % 13,789 0.7 % IN 100 9,521 0.8 % 12,545 0.7 %
UT 51 8,705 0.7 % 17,196 0.9 % UT 52 8,923 0.7 % 13,957 0.8 %
LA 72 7,531 0.6 % 11,259 0.6 % LA 74 7,585 0.6 % 11,389 0.6 %
HI 17 7,207 0.6 % 10,444 0.6 % HI 17 7,229 0.6 % 10,093 0.6 %
DE 33 6,540 0.5 % 7,702 0.4 % DE 33 6,566 0.5 % 7,626 0.4 %
WI 37 4,738 0.4 % 6,126 0.3 % WI 37 4,772 0.4 % 5,827 0.3 %
DC 16 4,525 0.4 % 7,180 0.4 % DC 16 4,542 0.4 % 6,368 0.4 %
NM 30 4,498 0.4 % 5,985 0.3 % NM 30 4,525 0.4 % 5,407 0.3 %
KY 34 3,951 0.3 % 5,551 0.3 % KY 34 3,969 0.3 % 5,213 0.3 %
AL 42 3,435 0.3 % 4,303 0.2 % AL 43 3,569 0.3 % 4,480 0.3 %
RI 15 3,220 0.3 % 4,700 0.3 % RI 15 3,232 0.3 % 4,188 0.2 %
NH 17 3,003 0.3 % 4,608 0.3 % NH 17 3,016 0.2 % 4,290 0.3 %
OK 29 2,610 0.2 % 4,048 0.2 % OK 30 2,631 0.2 % 3,948 0.2 %
MS 28 2,525 0.2 % 3,435 0.2 % MS 25 2,389 0.2 % 3,062 0.2 %
ID 14 1,717 0.1 % 3,311 0.2 % ID 14 1,723 0.1 % 2,755 0.2 %
IA 16 1,588 0.1 % 2,028 0.1 % IA 16 1,599 0.1 % 2,011 0.1 %
WV 17 1,585 0.1 % 2,014 0.1 % WV 17 1,595 0.1 % 2,208 0.1 %
ME 11 1,553 0.1 % 1,903 0.1 % ME 11 1,564 0.1 % 1,829 0.1 %
KS 18 1,375 0.1 % 2,736 0.2 % KS 18 1,391 0.1 % 2,435 0.1 %
AR 18 1,313 0.1 % 1,814 0.1 % AR 18 1,318 0.1 % 1,777 0.1 %
MT 5 692 0.1 % 1,076 0.1 % NE 6 702 0.1 % 836 0.1 %
PR 6 541 - % 629 - % MT 5 697 0.1 % 1,005 0.1 %
NE 4 532 - % 581 - % PR 6 546 - % 838 0.1 %
WY 4 517 - % 589 - % WY 4 519 - % 593 - %
SD 3 508 - % 701 0.1 % SD 3 509 - % 678 - %
VT 2 462 - % 505 - % VT 2 467 - % 470 - %
ND 3 401 - % 481 - % ND 3 403 - % 595 - %
AK 2 252 - % 389 - % AK 2 253 - % 372 - %
6,060 $ 1,207,885 100.0 % $ 1,917,331 100.0 % 6,184 $ 1,268,126 100.0 % $ 1,783,856 100.0 %
63-------------------------------------------------------------------------------- (1) As of date of acquisition. (2) State significantly impacted by the COVID-19 pandemic.
Liquidity and Capital Resources
Source and Uses of Cash
Our primary sources of cash have consisted of proceeds from our securities offerings, our secured borrowings, repurchase agreements, principal and interest payments on our loan portfolio, principal paydowns on securities, and sales of properties held-for-sale. Depending on market conditions, we expect that our primary financing sources will continue to include secured borrowings, repurchase agreements, and securities offerings in addition to transaction or asset specific funding arrangements and credit facilities (including term loans and revolving facilities). We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs. 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 at fair value and investments in beneficial interests, which are reflected on our consolidated balance sheet. As ofMarch 31, 2020 andDecember 31, 2019 , substantially all of our invested capital was in RPLs, NPLs, SBC loans, property held-for-sale, debt securities, beneficial interests and rental properties. We also held approximately$31.2 million of cash and cash equivalents, a decrease of$33.2 million from our balance of$64.3 million atDecember 31, 2019 . Our average daily cash balance during the quarter was$58.6 million , a decrease of$7.5 million from our average daily cash balance of$66.1 million during the three months endedDecember 31, 2019 . Our collections of principal and interest payments on mortgage loans and securities, payoffs of mortgage loans and proceeds on the sale of our property held-for-sale and sale of debt securities held as investments were$62.4 million and$63.2 million for the three months endedMarch 31, 2020 and 2019, respectively. We currently expect the pace of loan prepayments to slow due to COVID-19. Our operating cash outflows, including the effect of restricted cash, for the three months endedMarch 31, 2020 and 2019 were$30.4 million and$5.0 million , respectively. Our primary operating cash inflow is cash interest payments on our mortgage loan pools of$12.3 million and$15.7 million for the three months endedMarch 31, 2020 and 2019, respectively. Non-cash interest income accretion was$9.5 million and$10.9 million for the three months endedMarch 31, 2020 and 2019, respectively. We also recognized a loss of$0.7 million from the sale of 26 mortgage loans during the quarter to Gaea, an affiliated entity. No loans were sold during the three months endedMarch 31, 2019 . We expect, however, that the impact of the COVID-19 outbreak will put pressure on our cash flow from operations as we enter into loan modifications on certain of our loans permitting interest payments to be deferred. Though the ownership of mortgage loans and other real estate assets is our business, GAAP requires that operating cash flows do not include the portion of principal payments that are allocable to the discount we recognize on our mortgage loans including proceeds from loans that pay in full or are liquidated in a short sale or third party sale at foreclosure or the proceeds on the sales of our property held-for-sale. These activities are all considered to be Investing activities under GAAP, and the cash flows from these activities are included in the investing section of our consolidated statements of cash flows. For the three months endedMarch 31, 2020 our investing cash inflow of$11.0 million was primarily driven by the sale of mortgage loans to Gaea in the amount of$25.4 million and principal payments on and payoffs of our mortgage loan portfolio of$34.6 million , principal payments on and payoffs of our debt securities and beneficial interests of$10.2 million , offset by purchases of debt securities and beneficial interests of$61.3 million and acquisitions of mortgage loans of$1.4 million . For the three months endedMarch 31, 2019 our investing cash outflow of$5.6 million was primarily driven by the acquisitions of our mortgage loans of$25.0 million and purchases of debt securities, beneficial interests and equity securities of$64.0 million offset by principal payments on and payoffs of our mortgage loan portfolio of$28.8 million , principal payments on and payoffs of our debt securities and beneficial interests of$11.9 million , sale of our debt securities of$39.6 million and sale of our property held-for-sale. Our financing cash flows are driven primarily by funding used to acquire mortgage loan pools. We fund our mortgage loan pool acquisitions primarily through secured borrowings, repurchase agreements and the proceeds from our convertible debt and equity offerings. For the three months endedMarch 31, 2020 , we had net financing cash outflows of$13.8 million from our pay down of existing debt obligations, primarily driven by repayments of$55.4 million on repurchase transactions,$22.6 million on secured debt and the repurchase of our senior convertible notes for a net cash impact of$8.2 million , partially offset by additional borrowing through repurchase transactions of$72.4 million . For the three months endedMarch 31, 2019 , we had net cash outflows from financing activities of$3.0 million primarily driven by our pay down of existing debt obligations of$45.5 million on repurchase transactions and$17.8 million on secured debt offset by proceeds from our 64 -------------------------------------------------------------------------------- repurchase transactions of$67.5 million . For the three months endedMarch 31, 2020 and 2019 we paid$0.1 million and$7.2 million , respectively, in combined dividends and distributions.
Financing Activities - Equity offerings
During the three months endedMarch 31, 2020 , we did not sell any shares of common stock under our at-the-market program which we established inOctober 2016 , to sell, through our agents, shares of common stock with an aggregate offering price of up to$50.0 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 theNew York Stock Exchange or otherwise at market prices prevailing at the time of the sale.
Financing Activities - Secured Borrowings and Convertible Senior Notes
From inception (January 30, 2014 ) toMarch 31, 2020 , we have completed 15 secured borrowings, not including borrowings we completed for our non-consolidated joint ventures (See Table 17: Investments in joint ventures), through securtiziation trusts pursuant to Rule 144A under the Securities Act, six of which were outstanding atMarch 31, 2020 . The secured borrowings are structured as debt financings and not REMIC sales, and the loans included in the secured borrowings remain on our consolidated balance sheet as we are the primary beneficiary of the secured borrowing trusts, which are VIEs. The secured borrowing 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 secured borrowing 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 secured borrowings are generally structured with Class A notes, subordinate notes, and trust certificates, which have rights to the residual interests in the mortgages once the notes are repaid. With the exception of our Ajax Mortgage Loan Trusts 2017-D ("2017-D") secured borrowings, from which we sold a 50% interest in the Class A notes and a 50% interest in the residual equity to third parties and 2018-C secured borrowings, from which we sold a 95% interest in the Class A notes and 37% in the Class B and trust certificates, we have retained the subordinate notes and the applicable trust certificates from the other six secured borrowings outstanding atMarch 31, 2020 . For all of our secured borrowings the Class A notes are senior, sequential pay, fixed rate notes, and with the exception of 2017-D and 2018-C as noted above, the Class B notes are subordinate, sequential pay, fixed rate notes with the exception of 2019-D which are subordinate, sequential pay, fixed rate notes for Class B-1 and variable rate notes for Class B-2 and Class B-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. The Class M notes issued under 2017-B, 2019-D and 2019-F are also mezzanine, sequential pay, fixed rate notes. For all of our secured borrowings, except 2017-B, 2019-D and 2019-F, which contains no interest rate step-up, if the Class A notes have not been redeemed by the payment date or otherwise paid in full 36 months after issue, or in the case of 2017-C, 48 months after issue, an interest rate step-up of 300 basis points is triggered. Twelve months after the 300 basis point step up is triggered, an additional 100 basis point step up will be triggered, and an amount equal to the aggregate interest payment amount that accrued and would otherwise be paid to the subordinate notes will be paid as principal to the Class A notes on that date and each subsequent payment date until the Class A notes are paid in full. After the Class A notes are paid in full, the subordinate notes will resume receiving their respective interest payment amounts and any interest that accrued but was not paid while the Class A notes were outstanding. As the holder of the trust certificates, we are entitled to receive any remaining amounts in the trusts after the Class A notes and subordinate notes have been paid in full. 65 -------------------------------------------------------------------------------- The following table sets forth the original terms of all outstanding notes from our secured borrowings outstanding atMarch 31, 2020 at their respective cutoff dates: Table 14: Secured Borrowings Interest Rate Issuing Trust/Issue Date Step-up Date Security Original Principal Interest RateAjax Mortgage Loan Trust 2017-B/ December 2017 None Class A notes due 2056$115.8 million 3.16 % None Class M-1 notes due 2056(3)$9.7 million 3.50 % None Class M-2 notes due 2056(3)$9.5 million 3.50 % None Class B-1 notes due 2056(1)$9.0 million 3.75 % None Class B-2 notes due 2056(1)$7.5 million 3.75 % Trust certificates(2)$14.3 million - % Deferred issuance costs$(1.8) million - %Ajax Mortgage Loan Trust 2017-C/ November 2017 November 25, 2021 Class A notes due 2060$130.2 million 3.75 % May 25, 2022 Class B-1 notes due 2060(1)$13.0 million 5.25 % Trust certificates(2)$42.8 million - % Deferred issuance costs$(1.7) million - %Ajax Mortgage Loan Trust 2017-D/ December 2017 April 25, 2021 Class A notes due 2057(4)$177.8 million 3.75 % None Class B certificates(4)$44.5 million - % Deferred issuance costs$(1.1) million - %Ajax Mortgage Loan Trust 2018-C/ September 2018 October 25, 2021 Class A notes due 2065(5)$170.5 million 4.36 % April 25, 2022 Class B notes due 2065(5)$15.9 million 5.25 % Trust certificates(5)$40.9 million - % Deferred issuance costs$(2.0) million - %Ajax Mortgage Loan Trust 2019-D/ July 2019 None Class A-1 notes due 2065$140.4 million 2.96 % None Class A-2 notes due 2065$6.1 million 3.50 % None Class A-3 notes due 2065$10.1 million 3.50 % None Class M-1 notes due 2065(3)$9.3 million 3.50 % None Class B-1 notes due 2065(6)$7.5 million 3.50 % None Class B-2 notes due 2065(6)$7.1 million variable(7) None Class B-3 notes due 2065(6)$12.8 million variable(7) Deferred issuance costs$(2.7) million - %Ajax Mortgage Loan Trust 2019-F/ November 2019 None Class A-1 notes due 2059$110.1 million 2.86 % None Class A-2 notes due 2059$12.5 million 3.50 % None Class A-3 notes due 2059$5.1 million 3.50 % None Class M-1 notes due 2059(1)$6.1 million 3.50 % None Class B-1 notes due 2059(6)$11.5 million 3.50 % None Class B-2 notes due 2059(6)$10.4 million variable(7) None Class B-3 notes due 2059(6)$15.1 million variable(7) Deferred issuance costs$(1.8) million - % 66
-------------------------------------------------------------------------------- (1)The Class B notes are subordinate, sequential pay, fixed rate notes with Class B-2 notes subordinate to the Class B-1 notes. We have retained the Class B notes. (2)The trust certificates issued by the trusts and the beneficial ownership of the trusts are retained byGreat Ajax Funding LLC as the depositor. As the holder of the trust certificates, we are entitled to receive any remaining amounts in the trusts after the Class A notes, Class M notes, where present, and Class B notes have been paid in full. (3)The Class M notes are subordinate, sequential pay, fixed rate notes with Class M-2 notes subordinate to the Class M-1 notes. We retained the Class M notes. (4)AJAXM 2017-D is a joint venture in which a third party owns 50% of the Class A notes and 50% of the Class B certificates. We are required to consolidate 2017-D and are reflecting 100% of the mortgage loans, in Mortgage loans, net. 50% of the Class A notes, which are held by the third party, are included in Secured borrowings, net. The 50% portion of the Class A notes retained by us have been encumbered under a repurchase agreement. 50% of the Class B certificates are recognized as Non-controlling interest. (5)AJAXM 2018-C is a joint venture in which a third party owns 95% of the Class A notes and 37% of the Class B notes and certificates. We are required to consolidate 2018-C and are reflecting 100% of the mortgage loans, in Mortgage loans, net. 95% of the Class A notes and 37% of the Class B notes, which are held by the third party, are included in Secured borrowings, net. The 5% portion of the Class A notes retained by us have been encumbered under the repurchase agreement. 37% percent of the Class C certificates are recognized as Non-controlling interest. (6)The Class B notes are subordinate, sequential pay, with B-2 and B-2 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. (7)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. Repurchase Transactions We have two repurchase facilities whereby we, through two wholly-ownedDelaware 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$250.0 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 LIBOR, 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 70% and 85% 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 theOperating 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 three repurchase facilities substantially similar to the mortgage loan repurchase facilities where the pledged assets are the class B bonds and certificates 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. During the last two weeks ofMarch 2020 , we received margin calls from financing counterparties in the amount of$28.2 million due to the turmoil in the financial markets resulting from the COVID-19 outbreak. As ofMarch 31, 2020 , we had$32.4 million of cash collateral on deposit with financing counterparties. This cash is included in Prepaid expenses and other assets on our consolidated balance sheet atMarch 31, 2020 and is not netted against our Borrowings under repurchase agreements
A summary of our outstanding repurchase transactions at
67
--------------------------------------------------------------------------------Table 15: Repurchase Transactions by Maturity Date
March 31, 2020
Maximum
Borrowing Amount Amount of Percentage of
Maturity Date Origination date Capacity Outstanding Collateral Collateral Coverage Interest Rate
April 2, 2020 January 3, 2020 $ 1,758 $ 1,758 $ 2,388 136 % 2.96 %
April 2, 2020 January 3, 2020 1,684 1,684 2,287 136 % 2.96 %
April 13, 2020 March 12, 2020 37,201 37,201 49,877 134 % 2.46 %
April 13, 2020 March 12, 2020 3,236 3,236 4,655 144 % 2.56 %
April 22, 2020 March 24, 2020 35,381 35,381 51,679 146 % 5.00 %
April 27, 2020 January 28, 2020 5,749 5,749 7,464 130 % 3.00 %
April 27, 2020 March 27, 2020 4,811 4,811 10,024 208 % 3.71 %
April 27, 2020 March 27, 2020 4,108 4,108 7,101 173 % 3.71 %
April 27, 2020 January 28, 2020 2,522 2,522 3,381 134 % 2.80 %
April 27, 2020 March 27, 2020 2,153 2,153 10,938 508 % 3.86 %
June 3, 2020 March 3, 2020 20,987 20,987 27,814 133 % 3.11 %
June 3, 2020 March 3, 2020 11,181 11,181 14,682 131 % 3.11 %
June 3, 2020 March 3, 2020 10,019 10,019 13,192 132 % 3.11 %
June 3, 2020 December 6, 2019 6,097 6,097 7,565 124 % 3.64 %
June 3, 2020 March 3, 2020 5,161 5,161 6,616 128 % 3.11 %
June 3, 2020 December 6, 2019 4,704 4,704 5,755 122 % 3.64 %
June 3, 2020 March 3, 2020 3,827 3,827 4,907 128 % 3.11 %
June 3, 2020 December 6, 2019 3,053 3,053 3,959 130 % 3.64 %
June 3, 2020 December 6, 2019 2,332 2,332 3,360 144 % 3.79 %
June 3, 2020 March 3, 2020 1,848 1,848 2,640 143 % 3.21 %
June 3, 2020 December 6, 2019 1,132 1,132 1,607 142 % 3.79 %
June 19, 2020 March 20, 2020 14,599 14,599 19,893 136 % 6.22 %
June 19, 2020 December 19, 2019 13,447 13,447 17,077 127 % 3.55 %
June 19, 2020 March 20, 2020 9,571 9,571 13,043 136 % 6.22 %
June 19, 2020 March 20, 2020 4,691 4,691 6,089 130 % 6.22 %
June 19, 2020 March 20, 2020 2,665 2,665 4,050 152 % 6.72 %
June 19, 2020 December 19, 2019 1,155 1,155 1,687 146 % 3.70 %
June 26, 2020 March 26, 2020 20,906 20,906 31,930 153 % 9.23 %
June 30, 2020 January 3, 2020 8,328 8,328 3,656 44 % 3.56 %
June 30, 2020 January 3, 2020 6,099 6,099 9,038 148 % 3.56 %
June 30, 2020 December 30, 2019 5,286 5,286 6,850 130 % 3.57 %
June 30, 2020 January 3, 2020 5,116 5,116 6,721 131 % 3.56 %
June 30, 2020 December 30, 2019 3,324 3,324 4,667 140 % 3.72 %
July 10, 2020 January 13, 2020 9,020 9,020 13,016 144 % 3.67 %
July 31, 2020 February 3, 2020 7,763 7,763 9,702 125 % 3.56 %
July 31, 2020 February 3, 2020 7,151 7,151 9,537 133 % 3.56 %
July 10, 2020 July 15, 2016 250,000 30,141 44,217 147 % 3.38 %
September 24, 2020 September 25, 2019 400,000 112,885 164,103 145 % 3.11 %
Totals $ 938,065 $ 431,091 $ 607,167 141 % 3.86 %
68--------------------------------------------------------------------------------
December 31, 2019
Maximum
Borrowing Amount Amount of Percentage of
Maturity Date Origination date Capacity Outstanding Collateral Collateral Coverage Interest Rate
January 3, 2020 November 26, 2019 $ 8,411 $ 8,411 $ 11,098 132 % 3.45 %
January 3, 2020 November 26, 2019 6,093 6,093 9,038 148 % 3.45 %
January 3, 2020 November 26, 2019 5,175 5,175 6,855 132 % 3.45 %
January 3, 2020 December 2, 2019 11,966 11,966 15,742 132 % 3.45 %
January 3, 2020 December 2, 2019 10,648 10,648 14,058 132 % 3.45 %
January 3, 2020 December 2, 2019 5,485 5,485 7,050 129 % 3.45 %
January 3, 2020 December 2, 2019 4,096 4,096 5,261 128 % 3.45 %
January 3, 2020 December 2, 2019 1,644 1,644 2,388 145 % 3.55 %
January 3, 2020 December 2, 2019 1,576 1,576 2,287 145 % 3.55 %
January 10, 2020 December 11, 2019 21,088 21,088 28,284 134 % 3.47 %
January 10, 2020 December 11, 2019 1,808 1,808 2,640 146 % 3.57 %
January 13, 2020 July 11, 2019 8,956 8,956 13,016 145 % 4.16 %
January 21, 2020 December 20, 2019 15,718 15,718 20,623 131 % 3.41 %
January 21, 2020 December 20, 2019 10,305 10,305 13,521 131 % 3.41 %
January 21, 2020 December 20, 2019 5,840 5,840 7,324 125 % 3.41 %
January 21, 2020 December 20, 2019 2,784 2,784 4,050 145 % 3.51 %
January 28, 2020 October 30, 2019 5,318 5,318 7,464 140 % 3.19 %
January 28, 2020 October 30, 2019 2,520 2,520 3,381 134 % 2.99 %
February 3, 2020 August 1, 2019 7,568 7,568 9,702 128 % 4.19 %
February 3, 2020 August 1, 2019 6,664 6,664 9,537 143 % 4.19 %
February 24, 2020 November 26, 2019 41,412 41,412 54,828 132 % 2.92 %
March 25, 2020 September 25, 2019 7,075 7,075 10,024 142 % 3.96 %
March 25, 2020 September 25, 2019 5,851 5,851 7,423 127 % 3.81 %
March 26, 2020 September 26, 2019 27,075 27,075 34,591 128 % 3.81 %
March 27, 2020 September 27, 2019 2,915 2,915 3,709 127 % 3.79 %
June 3, 2020 December 6, 2019 6,097 6,097 7,891 129 % 3.64 %
June 3, 2020 December 6, 2019 4,704 4,704 6,106 130 % 3.64 %
June 3, 2020 December 6, 2019 3,053 3,053 4,035 132 % 3.64 %
June 3, 2020 December 6, 2019 2,332 2,332 3,360 144 % 3.79 %
June 3, 2020 December 6, 2019 1,132 1,132 1,607 142 % 3.79 %
June 19, 2020 December 19, 2019 13,447 13,447 18,076 134 % 3.55 %
June 19, 2020 December 19, 2019 1,155 1,155 1,687 146 % 3.70 %
June 30, 2020 December 30, 2019 5,286 5,286 7,044 133 % 3.57 %
June 30, 2020 December 30, 2019 3,324 3,324 4,667 140 % 3.72 %
July 10, 2020 July 15, 2016 250,000 28,931 57,397 198 % 4.28 %
September 24, 2020 September 25, 2019 400,000 116,662 164,403 141 % 4.24 %
Totals $ 918,521 $ 414,114 $ 580,167 140 % 3.77 %
As of March 31, 2020 , we had $431.1 million outstanding under our repurchase
transactions compared to $414.1 million as of December 31, 2019 . The maximum
month-end balance outstanding during the three months ended March 31, 2020 was
$467.3 million , compared to a maximum month-end balance for the three months
ended December 31, 2019 , of $438.4 million . The following table presents certain
details of our repurchase transactions for the three months ended March 31, 2020
and December 31, 2019 ($ in thousands):
69
--------------------------------------------------------------------------------Table 16: Repurchase Balances
Three months ended
March 31, 2020 December 31, 2019
Balance at the end of period $ 431,091 $ 414,114
Maximum month-end balance outstanding during the quarter $ 467,344 $ 438,388
Average balance $ 417,379 $ 422,837
The decrease in our average balance from $422.8 million for the three months
ended December 31, 2019 to our average balance of $417.4 million for the three
months ended March 31, 2020 was due to a net decrease in repurchase financing
during the three months ended March 31, 2020 , as a result of decreased
investments in mortgage loans and debt securities.
As of
We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets.
Dividends We may declare dividends based on, among other things, our earnings, our financial condition, our working capital needs, new opportunities, and distribution requirements imposed on REITs. The declaration of dividends to our stockholders and the amount of such dividends are at the discretion of our Board of Directors. OnMarch 25, 2020 we announced that we would pay our previously declared cash dividend of$0.32 per share in shares of our common stock. The value was based on the$9.14 per share closing price on the record date. As a result, onMarch 27, 2020 , we issued 781,222 shares of our common stock in fulfillment of the dividend. OnMay 3, 2020 , our Board of Directors declared a cash dividend of$0.17 per share, paid onMay 29, 2020 to stockholders of record as ofMay 15, 2020 . Our Management Agreement with our Manager requires the payment of an incentive management fee above the amount of the base management fee if either, (1) for any quarterly incentive fee, the sum of cash dividends on our common stock, plus distributions on our externally-held operating partnership units, plus any quarterly increase in book value, all calculated on an annualized basis, exceed 8% of our book, or (2) for any annual incentive fee, the value of quarterly cash dividends on our common stock, plus cash special dividends on our commons stock, plus distributions on our externally-held operating partnership units all paid out within the applicable calendar year, paid out of our taxable income, exceeds of 8% (on an annualized basis) of our stock's book value. During the three months ended ofMarch 31, 2020 and 2019, we recorded$0 and$0.2 million , respectively, in expense for incentive fees payable to our Manager. Our dividend payments are driven by the amount of our taxable income, subject toIRS rules for maintaining our status as a REIT. Our most recently declared quarterly dividend represents a payment of approximately 4.73% on an annualized basis of our book value of$14.37 per share atMarch 31, 2020 . However, if our taxable income increases to the levels we experienced during 2019, we could continue to exceed the threshold for paying an incentive fee to our Manager, and thereby trigger such payments. See Note 10 - Related party transactions.
Capital resources
Subsequent to the end of theMarch 31, 2020 quarter, we closed on a private placement of$80.0 million of our preferred stock and warrants to institutional accredited investors pursuant to a securities purchase agreement datedApril 3, 2020 . We issued 820,000 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,380,000 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock, each at a purchase price per share of$25.00 and two series of five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock at an exercise price of$10.00 per share. Each series of warrants includes a put option that allows the holder to sell the warrants to us at a specified put price on or afterJuly 6, 2023 . In addition, we granted the purchasers an option to purchase up to an additional 800,000 shares of Series A Preferred Stock and Series B Preferred Stock and warrants to purchase an aggregate of 1,000,000 shares of our common stock on the same terms. We expect to use the net proceeds from the private placement to acquire mortgage loans and mortgage-related assets. 70 -------------------------------------------------------------------------------- We believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical. We believe we have access to adequate resources to meet the needs of our existing operations, mandatory capital expenditures, dividend payments, and working capital, to the extent not funded by cash provided by operating activities. However, we expect the COVID-19 pandemic to 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 the potential for HPA decline.
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 17: 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.
A summary of our investments in joint ventures is presented below(1) ($ in
thousands):
Great Ajax Corp. Ownership
Current
Owned
Stated or
Notional
Total Original Original Stated or Principal
Outstanding Notional Principal Balance
Issuing Trust/Issue Date Security Principal Coupon Ownership Percent Balance Retained Retained
Ajax Mortgage Loan Trust
2018-A/ April 2018 Class A notes due 2058 $ 91,036 3.85 % 9.36 % $ 8,521 $ 6,721
Trust certificates $ 22,759 - 9.36 % $ 2,130 $ 2,144
Ajax Mortgage Loan Trust
2018-B/ June 2018 Class A notes due 2057 $ 66,374 3.75 % 20.00 % $ 13,275 $ 6,089
Trust certificates $ 28,447 - 20.00 % $ 5,689 $ 4,109
Ajax Mortgage Loan Trust
2018-D/ September 2018 Class A notes due 2058 $ 80,664 3.75 % 20.00 % $ 16,133 $ 14,594
Trust certificates $ 20,166 - 20.00 % $ 4,033 $ 3,915
Ajax Mortgage Loan Trust
2018-E/ December 2018 Class A notes due 2058 $ 86,089 4.38 % 5.01 % $ 4,313 $ 3,963
Class B notes due 2058 $ 8,035 5.25 % 20.00 % $ 1,607 $ 1,605
Trust certificates $ 20,662 - 20.00 % $ 4,132 $ 4,130
Ajax Mortgage Loan Trust
2018-F/ December 2018 Class A notes due 2058 $ 180,002 4.38 % 5.01 % $ 9,018 $ 7,565
Class B notes due 2058 $ 16,800 5.25 % 20.00 % $ 2,520 $ 3,360
Trust certificates $ 43,201 - 20.00 % $ 6,480 $ 8,252
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Ajax Mortgage Loan Trust 2018-G/ December 2018 Class A notes due 2057$ 173,562 4.38 % 25.00 %$ 43,390 $ 32,936 Class B notes due 2057$ 16,199 5.25 % 25.00 %$ 4,050 $ 4,050 Trust certificates$ 41,655 - 25.00 %$ 10,414 $ 10,585 Ajax Mortgage Loan Trust 2019-A/ March 2019 Class A notes due 2057$ 127,801 3.75 % 20.00 %$ 25,560 $ 19,588 Class B notes due 2057$ 11,928 5.25 % 20.00 %$ 2,386 $ 2,388 Trust certificates$ 30,672 - 20.00 %$ 6,134 $ 6,137 Ajax Mortgage Loan Trust 2019-B/ March 2019 Class A notes due 2059$ 163,325 3.75 % 15.00 %$ 24,499 $ 19,807 Class B notes due 2059$ 15,244 5.25 % 15.00 %$ 2,287 $ 2,287 Trust certificates$ 39,198 - 15.00 %$ 5,880 $ 5,976 Ajax Mortgage Loan Trust 2019-C/ May 2019 Class A notes due 2058$ 150,037 3.95 % 5.00 %$ 7,502 $ 6,836 Class B notes due 2058$ 14,003 5.25 % 34.00 %$ 4,761 $ 4,761 Trust certificates$ 36,009 - 34.00 %$ 12,243 $ 12,417 Ajax Mortgage Loan Trust 2019-E/September 2019 Class A notes due 2059$ 181,101 3.00 % 20.00 %$ 36,220 $ 31,930 Class B notes due 2059$ 16,903 4.88 % 20.00 %$ 3,381 $ 3,381 Trust certificates$ 43,464 - 20.00 %$ 8,693 $ 8,558 Ajax Mortgage Loan Trust 2019-G/ December 2019 Class A notes due 2059$ 141,420 3.00 % 20.00 %$ 28,284 $ 27,814 Class B notes due 2059$ 13,199 4.25 % 20.00 %$ 2,640 $ 2,640 Trust certificates$ 33,941 - % 20.00 %$ 6,788 $ 6,858 Ajax Mortgage Loan Trust 2019-H/ December 2019 Class A notes due 2059$ 90,381 3.00 % 20.00 %$ 18,076 $ 17,077 Class B notes due 2059$ 8,435 4.25 % 20.00 %$ 1,687 $ 1,687 Trust certificates$ 21,692 - % 20.00 %$ 4,338 $ 4,393 Ajax Mortgage Loan Trust 2020-A/ March 2020 Class A notes due 2059$ 249,384 2.38 % 20.00 %$ 49,877 $ 49,877 Class B notes due 2059$ 23,276 3.50 % 20.00 %$ 4,655 $ 4,655 Trust certificates$ 59,852 - % 20.00 %$ 11,970 $ 11,970
(1)Table does not include our 2017-D and 2018-C securitizations with total
original outstanding principal of
72
--------------------------------------------------------------------------------Table 18: Contractual Obligations
A summary of our contractual obligations as of
March 31, 2020 Payments Due by Period
Less than More than
($ in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Convertible senior notes $ 115,850 $
- $ -
431,091 431,091 - - -
Interest on convertible senior notes 36,046 8,399 16,798 10,849 -
Interest on repurchase agreements 4,086 4,086 - - -
Total $ 587,073 $ 443,576 $ 16,798 $ 126,699 $ -
December 31, 2019 Payments Due by Period
Less than More than
($ in thousands) Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Convertible senior notes $ 123,850 $
- $ -
414,114 414,114 - - -
Interest on convertible senior notes 40,780 8,979 17,958 13,843 -
Interest on repurchase agreements 5,699 5,699 - - -
Total $ 584,443 $ 428,792 $ 17,958 $ 137,693 $ -
Our secured borrowings are not included in the table above 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.
Inflation
Virtually all of our assets and liabilities are interest-rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and consolidated balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
Subsequent Events
Since quarter end, we have acquired 677 residential RPLs with aggregate UPB of$123.2 million in one transaction from a single seller. The purchase price equaled 92.5% of UPB and 60.0% of the estimated market value of the underlying collateral of$189.9 million . The loans were acquired into the joint venture formed inMarch 2020 with proceeds from the established prefunding account. OnApril 6, 2020 we closed a private placement of$80.0 million of preferred stock and warrants to institutional accredited investors pursuant to a securities purchase agreement datedApril 3, 2020 . We issued 820,000 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,380,000 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock, each at a purchase price per share of$25.00 and two series of five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock at an exercise price of$10.00 per share. Each series of warrants includes a put option that allows the holder to sell the warrants to us at a specified put price on or afterJuly 6, 2023 . In addition, we granted the purchasers an option to purchase up to an additional 800,000 shares of Series A Preferred Stock and Series B Preferred Stock and warrants to purchase an aggregate of 1,000,000 shares of our common stock on the same terms. We expect to use the net proceeds from the private placement to acquire mortgage loans and mortgage-related assets consistent with our investment strategy.
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