A Review of Newer Unique mREIT Great Ajax Corp
By: Tim McPartland,
There are more than enough typical mortgage REITs in existance today to fulfill the investing needs of most investors–but there is always someone looking to carve the available pie in a new and different way. Newer (came public 2/2015 at $14.25/share) mReit Great Ajax Corp (ticker:AJX) is not a typical mortgage REIT.
AJX holds mortgages–primarily on single family residential, but also a few on multi family properties and small commercial buildings. In total as of 3/31/2015 they held 1,828 morgages, which they have purchased in bulk. What makes AJX unique is that they purchase only ‘re-performing’ or ‘non-performing’ loans. A normal mREIT is looking to buy good, performing loans and in most cases they buy ‘agency’ paper (Fannie Mae, Freddie Mac etc), which carry a agency guarantee with them. AJX is different and they buy some fairly low grade loans at steep discounts to unpaid loan balance (UPB in their terms).
Before going further we need to define ‘re-performing’ mortgages (‘non-performing’ is pretty self explanatory). ‘Re-performing’ mortgages are those in which 5 of the last 7 payments have been received or the most recent payment has been made and accepted based upon a agreement, or the full dollar amount to cover at least 5 payments has been made in the last 7 months. So AJX buys pretty junky loans–not the worst loans possible, but pretty darned close to the worst.
Besides the fact that they buy re-performing and non performing loans the average loan is on a property in which the homeowner is near being ‘underwater’ (owes more than the property is worth). Total unpaid loan balance (referred to as ‘UPB’) on the loans AJX owns is $402 million and underlying collateral value is $432 million. The average coupon on these loans is 4.96%. Now this coupon would seem to be pretty thin on this type of loan–and no doubt it is thin, but realize that AJX paid just 70.3% of UPB for these loans (66% of underlying property values). Looking at the coupon based on a cost basis the return improves greatly.
Normally a mortgage REIT will leverage their portfolio on a 4 or 5 to 1 basis–NOT Great Ajax. For the quarter ended 3/31/2015 AJX had $292 million in loans on the books with debt of just $98 million. The debt on the books are loans securitized by some of the mortgage portfolio AJX holds. The loans are at very good rates as Great Ajax pledges unpaid loan balances much higher than loan amount. So to date the company has kept dept at low levels–although we think they will be forced to borrow against most of the portfolio in the near future, because like all REITs they have to either raise debt or equity to be able to grow.
Since the company is a fairly new issue they have not even released a full quarter worth of financials so far. The financials through the quarter ended 3/31/2015 showed net income (not FFO) at $3.6 million (.28 cents/share). On 5/4/2015 the company declared a 18 cents/share dividend which gives them a current yield of 5.15% (shares are around $14/share now).
Like essentially all REITs and MLPs that come public there are more than enough conflicts with Great Ajax and their external management and loan servicing company. Both are related entities to Great Ajax–we would like to think these relationships don’t happen, but they are a fact of life in IPO’s of REITs and as long as the fees are reasonable and customary we don’t have a problem with them (and we looked at the fees for AJX and they seem reasonable).
In Summary, Great Ajax Corp is a new, unique, mortgage REIT which we believe has some potential — mostly in a disasterous way. AJX has said they will work with borrowers to insure that they will be able to make their payments or they will negotiate terms which will be workable for the borrower. Given the uniqueness (and unknowns) of this type of mREIT one has to wonder what the upside is for investors? Certainly the 5.15% current yield is not adequate compensation for the high level of risk that potential is buried in this issue. And certainly investors can’t be looking for miracles whereby borrowers who have previously not paid their mortgages on a regular basis now pay them. AJX has said they will keep properties as rentals if they have to foreclose, but there will be no ‘scale’ (our assumption) and we know from the single family REITs that it takes large scale to make rentals attractive. Additionally, while the company would appear to have bought the loans ‘right’, there likely isn’t upside in a sale of a foreclosed property. So in all honesty we don’t know what the attraction Great Ajax would be to investors. Our thought is that investors should run, not walk, away from this REIT–while they will likely perform OK for a quarter or two we would be surprised if this was a long term successful company.
Our list of REITs by yield contains over 90 companies with yields superior to AJX and a investor would be much better off to select from this list than tho touch AJX.