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Section 1: 10-Q (10-Q)

Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

(Mark One)
☒    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
​    For the transition period from                  to                 

001-36844
(Commission file number)
 
GREAT AJAX CORP.
(Exact name of registrant as specified in its charter)
 
Maryland
State or other jurisdiction
of incorporation or organization
47-1271842
(I.R.S. Employer
Identification No.)
9400 SW Beaverton-Hillsdale Hwy,
Suite 131
Beaverton, OR 97005
(Address of principal executive offices)
97005
(Zip Code)
503-505-5670
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Common stock, par value $0.01 per share
 
AJX
 
New York Stock Exchange
7.25% Convertible Senior Notes due 2024
 
AJXA
 
New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes☒ No☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  Yes☒ No☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging Growth Company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No☒
As of May 7, 2019, 18,964,556 shares of the registrant’s common stock, par value $0.01 per share, were outstanding, which includes 624,106 operating partnership units that are exchangeable on a one-for-one basis into shares of the registrant’s common stock.
 



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I. FINANCIAL INFORMATION

Item 1.    Consolidated Interim Financial Statements
GREAT AJAX CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands except per share data)
March 31, 2019

December 31, 2018
ASSETS
(Unaudited)


Cash and cash equivalents
$
41,542


$
55,146

Cash held in trust
23


24

Mortgage loans, net(1,4)
1,313,677


1,310,873

Property held-for-sale, net(2)
18,580


19,402

Rental property, net
19,242


17,635

Investments at fair value
152,083


146,811

Investments in beneficial interests
30,809

 
22,086

Receivable from servicer
18,746


14,587

Investments in affiliates
8,904


8,653

Prepaid expenses and other assets
12,576


7,654

Total assets
$
1,616,182


$
1,602,871

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Secured borrowings, net(1,3,4)
$
593,121


$
610,199

Borrowings under repurchase transactions
560,404


534,089

Convertible senior notes, net(3)
117,838


117,525

Management fee payable
951


881

Accrued expenses and other liabilities
7,193


5,898

Total liabilities
1,279,507


1,268,592

Commitments and contingencies – see Note 8

 

Equity:
 
 
 
Preferred stock $0.01 par value; 25,000,000 shares authorized, none issued or outstanding



Common stock $0.01 par value; 125,000,000 shares authorized, 18,967,223 shares at March 31, 2019 and 18,909,874 shares at December 31, 2018 issued and outstanding
190


189

Additional paid-in capital
261,527


260,427

Treasury stock
(310
)
 
(270
)
Retained earnings
41,372


41,063

Accumulated other comprehensive loss
(178
)

(575
)
Equity attributable to stockholders
302,601


300,834

Non-controlling interests(5)
34,074


33,445

Total equity
336,675


334,279

Total liabilities and equity
$
1,616,182


$
1,602,871

 
​(1)
Mortgage loans net include $883.1 million and $897.8 million of loans at March 31, 2019 and December 31, 2018, respectively, transferred to securitization trusts that are variable interest entities (“VIEs”); these loans can only be used to settle obligations of the VIEs. Secured borrowings consist of notes issued by VIEs that can only be settled with the assets and cash flows of the VIEs. The creditors do not have recourse to the primary beneficiary (Great Ajax Corp.). See Note 9 — Debt. Mortgage loans, net include $1.3 million and $1.2 million of allowance for loan losses at March 31, 2019 and December 31, 2018, respectively.
(2)
Property held-for-sale, net, includes valuation allowances of $1.9 million and $1.8 million at March 31, 2019 and December 31, 2018, respectively.

1



(3)
Secured borrowings and Convertible senior notes are presented net of deferred issuance costs.
​(4)
As of March 31, 2019, balances for Mortgage loans, net includes $370.5 million and Secured borrowings, net of deferred costs includes $227.3 million from the 50% and 63% owned joint ventures, respectively. As of December 31, 2018, balances for Mortgage loans, net include $377.0 million and Secured borrowings, net of deferred costs includes $231.9 million from a 50% and 63% owned joint ventures, all of which the Company consolidates under U.S. GAAP.
(5)
Non-controlling interests includes $20.9 million at March 31, 2019, from 50% and 63% owned joint ventures. Non-controlling interests includes $20.4 million at December 31, 2018, from a 50% and 63% owned joint ventures, which the Company consolidates under U.S. GAAP.

The accompanying notes are an integral part of the consolidated interim financial statements.
2


GREAT AJAX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
Three months ended
($ in thousands except per share data)
March 31, 2019
 
March 31, 2018
INCOME
 
 
 
Interest income
$
29,452

 
$
25,591

Interest expense
(15,685
)
 
(12,494
)
Net interest income
13,767

 
13,097

Provision for loan losses
(154
)
 

Net interest income after provision for loan losses
13,613

 
13,097

Income from investments in affiliates
461

 
192

Other income
1,110

 
1,454

Total income
15,184

 
14,743

EXPENSE
 
 
 
Related party expense – loan servicing fees
2,506

 
2,469

Related party expense – management fee
1,688

 
1,532

Loan transaction expense
69

 
355

Professional fees
862

 
609

Real estate operating expenses
786

 
449

Other expense
1,081

 
991

Total expense
6,992

 
6,405

Income before provision for income taxes
8,192

 
8,338

Provision for income taxes
71

 
16

Consolidated net income
8,121

 
8,322

Less: consolidated net income attributable to the non-controlling interest
791

 
657

Consolidated net income attributable to common stockholders
$
7,330

 
$
7,665

Basic earnings per common share
$
0.39

 
$
0.41

Diluted earnings per common share
$
0.36

 
$
0.38

Weighted average shares – basic
18,811,713

 
18,508,089

Weighted average shares – diluted
27,829,448

 
26,395,158



The accompanying notes are an integral part of the consolidated interim financial statements.
3


GREAT AJAX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended March 31,
($ in thousands)
2019
 
2018
Consolidated net income attributable to common stockholders
$
7,330


$
7,665

Other comprehensive income/(loss):
 
 
 
Net unrealized gain/(loss) on investments, net of non-controlling interest
397

 
(110
)
Income tax expense related to items of other comprehensive income

 

Comprehensive income
$
7,727

 
$
7,555





The accompanying notes are an integral part of the consolidated interim financial statements.
4


GREAT AJAX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
Three months ended
March 31, 2019
 
March 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Consolidated net income
$
8,121

 
$
8,322

Adjustments to reconcile net income to net cash from operating activities
 
 
 
Stock-based management fee and compensation expense
1,029

 
985

Non-cash interest income accretion
(10,891
)
 
(9,917
)
Discount accretion on investment in debt securities
(1,155
)
 
(43
)
Gain on sale of property held-for-sale
(103
)
 
(582
)
Gain on sale of securities
(8
)
 

Depreciation of property
106

 
22

Impairment of real estate owned
475

 
408

Provision for loan losses
154

 

Amortization of debt discount and prepaid financing costs
1,281

 
1,348

Undistributed income from investment in affiliates
(461
)
 
(192
)
Net change in operating assets and liabilities
 
 
 
Prepaid expenses and other assets
(798
)
 
1,504

Receivable from servicer
(4,160
)
 
(1,751
)
Accrued expenses, management fee payable, and other liabilities
1,366

 
(819
)
Net cash from operating activities
(5,044
)
 
(715
)
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchase of mortgage loan pools and related balances
(7,205
)
 
(17,566
)
Acquisition of commercial loans
(17,793
)
 

Principal paydowns on mortgage loans
28,765

 
30,100

Principal paydowns on debt securities held as investments
11,941

 

Draws on SBC loans

 
(117
)
Loans purchase deposit

 
(50
)
Purchase of securities
(64,014
)
 

Proceeds from sale of securities
39,635

 

Purchase of rental property
(2,300
)
 
(3,463
)
Proceeds from sale of property held-for-sale
5,131

 
4,807

Renovations of rental property
77

 

Investment in Great Ajax FS LLC, including warrants

 
(1,072
)
Distribution from affiliates
170

 
185

Net cash from investing activities
(5,593
)
 
12,824

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from repurchase transactions
67,463

 
13,315

Repayments on repurchase transactions
(45,483
)
 
(18,566
)
Repayments on secured borrowings
(17,837
)
 
(32,431
)
Deferred financing costs

 
(83
)
Sale of common stock pursuant to dividend reinvestment plan
72

 
52

Distribution to non-controlling interest
(162
)
 
(2,067
)
Dividends paid on common stock
(7,021
)
 
(5,606
)
Net cash from financing activities
(2,968
)
 
(45,386
)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN TRUST
(13,605
)
 
(33,277
)
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, beginning of period
55,170

 
80,762

CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, end of period
$
41,565

 
$
47,485

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 
 
 
Cash paid for interest
$
15,469

 
$
13,643

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Net transfer of loans to rental property or property held-for-sale
$
4,171

 
$
3,958

Issuance of common stock for management fee and compensation expense
$
1,029

 
$
985

Issuance of shares for investment in Great Ajax FS LLC
$

 
$
629


The accompanying notes are an integral part of the consolidated interim financial statements.
5


Non-cash adjustments to basis in mortgage loans
$
5

 
$
188

Unrealized gain/(loss) on available for sale securities, net of non-controlling interest and tax
$
397

 
$
(110
)
Treasury stock received through distributions from investment in Manager
$
40

 
$

    
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated Balance Sheet to the amount shown in the consolidated Statements of Cash Flows as of March 31, 2019 and March 31, 2018 ($ in thousands):
 
March 31, 2019
 
March 31, 2018
Cash and cash equivalents
$
41,542

 
$
47,459

Cash held in trust
23

 
26

Total cash and cash equivalents and restricted cash shown on the consolidated Statements of Cash Flows
$
41,565

 
$
47,485



The accompanying notes are an integral part of the consolidated interim financial statements.
6


GREAT AJAX CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
($ in thousands)
Common
Stock shares
 
Common stock amount
 
Treasury stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated other comprehensive loss
 
Total
Stockholders’
Equity
 
Non-controlling
Interest
 
Total
Equity
Balance at December 31, 2017
18,588,228

 
$
186

 
$

 
$
254,847

 
$
35,556

 
$
(233
)
 
$
290,356

 
$
27,082

 
$
317,438

Net income

 

 

 

 
7,665

 

 
7,665

 
657

 
8,322

Issuance of shares for Great Ajax FS LLC
45,938

 
1

 

 
628

 

 

 
629

 

 
629

Issuance of shares under dividend reinvestment plan
3,838

 

 

 
52

 

 

 
52

 

 
52

Stock-based management fee expense
48,654

 

 

 
763

 

 

 
763

 

 
763

Stock-based compensation expense
(238
)
 

 

 
222

 

 

 
222

 

 
222

Dividends and distributions

 

 

 

 
(5,606
)
 

 
(5,606
)
 
(2,067
)
 
(7,673
)
Other comprehensive loss

 

 

 

 

 
(110
)
 
(110
)
 

 
(110
)
Balance at March 31, 2018
18,686,420

 
$
187

 
$

 
$
256,512

 
$
37,615

 
$
(343
)
 
$
293,971

 
$
25,672

 
$
319,643

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
18,909,874

 
$
189

 
$
(270
)
 
$
260,427

 
$
41,063

 
$
(575
)
 
$
300,834

 
$
33,445

 
$
334,279

Net income

 

 

 

 
7,330

 

 
7,330

 
791

 
8,121

Issuance of shares under dividend reinvestment plan
5,321

 

 

 
72

 

 

 
72

 

 
72

Stock-based management fee expense
52,556

 
1

 

 
727

 

 

 
728

 

 
728

Stock-based compensation expense
2,424

 

 

 
301

 

 

 
301

 

 
301

Dividends and distributions

 

 

 

 
(7,021
)
 

 
(7,021
)
 
(162
)
 
(7,183
)
Other comprehensive income

 

 

 

 

 
397

 
397

 

 
397

Treasury stock
(2,952
)
 

 
(40
)
 

 

 

 
(40
)
 

 
(40
)
Balance at March 31, 2019
18,967,223

 
$
190

 
$
(310
)
 
$
261,527

 
$
41,372

 
$
(178
)
 
$
302,601

 
$
34,074

 
$
336,675



The accompanying notes are an integral part of the consolidated interim financial statements.
7


GREAT AJAX CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERM FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)
Note 1 — Organization and Basis of Presentation

Great Ajax Corp., a Maryland corporation (the “Company”), is an externally managed real estate company formed on January 30, 2014, and capitalized on March 28, 2014, by its then sole stockholder, Aspen Yo (“Aspen”), a company affiliated with Aspen Capital, the trade name for the Aspen group of companies. The Company was formed to facilitate capital raising activities and to operate as a mortgage real estate investment trust (“REIT”). The Company primarily targets acquisitions of re-performing loans (“RPLs”) including residential mortgage loans and small balance commercial mortgage loans (“SBC loans”). RPLs are 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. The SBC loans that the Company intends to opportunistically target, through acquisitions, or originations, generally have a principal balance of up to $5.0 million and are secured by multi-family residential and commercial mixed use retail/residential properties on which at least five of the seven most recent payments have been made, or the most recent payment has been made and accepted pursuant to an agreement, or the full dollar amount, to cover at least five payments has been paid in the last seven months. Additionally, the Company may invest in single-family and smaller commercial properties directly either through a foreclosure event of a loan in our mortgage portfolio or, less frequently, through a direct acquisition. Historically, the Company has also targeted investments in non-performing loans (“NPL”). NPLs are loans on which the most recent three payments have not been made. The Company may acquire NPLs from time to time, either directly or with joint venture partners, and will continue to manage the NPLs on its balance sheet. The Company’s manager is Thetis Asset Management LLC (the “Manager” or “Thetis”), an affiliated company. The Company owns 19.8% of the Manager and 8.0% of Great Ajax FS LLC ("GAFS" or "The Parent of the Servicer") which owns substantially all of the interest in Gregory Funding LLC ("Gregory" or the "Servicer"), the Company's loan and real property servicer that is also an affiliated company. The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

The Company conducts substantially all of its business through its operating partnership, Great Ajax Operating Partnership L.P., a Delaware limited partnership (the “Operating Partnership”), and its subsidiaries. The Company, through a wholly-owned subsidiary, is the sole general partner of the Operating Partnership. GA-TRS is a wholly-owned subsidiary of the Operating Partnership that owns the equity interest in the Manager and the Parent of the Servicer. The Company elected to treat GA-TRS as a taxable REIT subsidiary (“TRS”) under the Code. Great Ajax Funding LLC is a wholly-owned subsidiary of the Operating Partnership 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 the Company may form for additional secured borrowings. The Company generally securitizes its mortgage loans through securitization trusts and retains subordinated securities from the secured borrowings. These trusts are considered to be VIEs, and the Company has determined that it is the primary beneficiary of many of these VIEs. AJX Mortgage Trust I and AJX Mortgage Trust II are wholly-owned subsidiaries of the Operating Partnership formed to hold mortgage loans used as collateral for financings under the Company’s repurchase agreements. In addition, the Company, through its Operating Partnership, holds real estate owned properties (“REO”) acquired upon the foreclosure or other settlement of its owned NPLs, as well as through outright purchases. GAJX Real Estate LLC is a wholly-owned subsidiary of the Operating Partnership formed to own, maintain, improve and sell REO properties purchased by the Company. The Company has elected to treat GAJX Real Estate LLC as a TRS under the Code.

In 2018, the Company formed Gaea Real Estate Corp., a wholly-owned subsidiary of the Operating Partnership. The Company has elected to treat Gaea Real Estate Corp. as a TRS under the Code. Also during 2018, the Company formed Gaea Real Estate Operating Partnership, a wholly-owned subsidiary of Gaea RE Corp, to hold investments in commercial real estate assets. The Company also formed BFLD Holdings LLC ("BFLD"), Gaea Commercial Properties LLC, Gaea Commercial Finance LLC and Gaea RE LLC. All entities are wholly-owned subsidiaries with the exception of BFLD, of which 10.0% is owned by a third-party investor.

Basis of Presentation and Use of Estimates

The consolidated interim financial statements should be read in conjunction with the Company's consolidated Financial Statements and the notes thereto for the period ended December 31, 2018, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 6, 2019.

Interim financial statements are unaudited and prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management, all adjustments, consisting solely of normal recurring accruals

8


considered necessary for the fair presentation of consolidated financial statements for the interim period presented, have been included. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2019. The consolidated interim financial statements have been prepared in accordance with U.S. GAAP, as contained within the Accounting Standards Codification (“ASC”) of the Financial Accounting Standards Board (“FASB”) and the rules and regulations of the SEC, as applied to interim financial statements.

The Company consolidates the results and balances of five subsidiaries with non-controlling ownership interests held by third parties. AS Ajax E II LLC ("AS Ajax E II") holds a 5.0% interest in a Delaware trust that was formed to own residential mortgage loans and residential real estate assets; AS Ajax E II is 53.1% owned by the Company. Ajax Mortgage Loan Trusts 2017-D ("2017-D") and Ajax Mortgage Loan Trusts 2018-C (“2018-C”) are securitization trusts that hold mortgage loans, REO property and secured debt; 2017-D is 50.0% owned by the Company, and 2018-C is 63.0% owned by the Company. BFLD is 90.0% owned by the Company, which holds a single commercial property. The Company recognizes non-controlling interests in its consolidated financial statements for the amounts of the investments and income due to the third-party investors for its consolidated subsidiaries. The Operating Partnership is a majority owned partnership that has a non-controlling ownership interest that is included in non-controlling interests on the consolidated Balance Sheet. As of March 31, 2019, the Company owned 96.8% of the outstanding operating partnership units ("OP Units") and the remaining 3.2% of the OP Units were owned by an unaffiliated holder. All controlled subsidiaries are included in the Company's consolidated financial statements and all intercompany accounts and transactions have been eliminated in consolidation.

The Company’s 19.8% investment in the Manager and 8.0% investment in GAFS are accounted for using the equity method because the Company can exercise influence on the operations of these entities through common officers and directors. There is no traded or quoted price for the interests in the Manager or GAFS since each is privately held.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company considers significant estimates to include expected cash flows from its holdings of mortgage loans and beneficial interests in trusts, and their resolution methods and timelines, including foreclosure costs, eviction costs and property rehabilitation costs. Other significant estimates are fair value measurements, and the net realizable value of REO properties held-for-sale.

Note 2 — Summary of Significant Accounting Policies

Mortgage loans

Purchased mortgage loans are initially recorded at the purchase price, net of any acquisition fees or costs at the time of acquisition and are considered asset acquisitions. As part of the determination of the bid price for mortgage loans, the Company uses a proprietary discounted cash flow valuation model to project expected cash flows, and considers alternate loan resolution probabilities, including liquidation or conversion to REO. Observable inputs to the model include interest rates, loan amounts, status of payments and property types. Unobservable inputs to the model include discount rates, forecast of future home prices, alternate loan resolution probabilities, resolution timelines, the value of underlying properties and other economic and demographic data.

Loans acquired with deterioration in credit quality

The loans acquired by the Company have generally suffered some credit deterioration subsequent to origination. As a result, the Company is required to account for the mortgage loans pursuant to ASC 310-30, Accounting for Loans with Deterioration in Credit Quality. The Company’s recognition of interest income for loans within the scope of ASC 310-30 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, the Company uses expected cash flows to apply the effective interest method of income recognition.

Under 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. RPLs have been determined to have common risk characteristics and are accounted for as a single loan pool for loans acquired within each three-month calendar quarter. Similarly, NPLs have been determined to have common risk characteristics and are accounted for as a single non-performing pool for loans acquired within each three-month calendar quarter. 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.

9



The Company’s accounting for loans under ASC 310-30 gives rise to an accretable yield and a non-accretable amount. The excess of all undiscounted cash flows expected to be collected at acquisition over the initial investment in 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. The Company recognizes the accretable yield as Interest income on a prospective level yield basis over the life of the pool. The excess of a loan’s contractually required payments over the amount of cash flows expected at the acquisition is the non-accretable amount. The Company’s expectation of the amount of undiscounted cash flows expected to be collected is evaluated at the end of each calendar quarter. If the Company expects to collect greater cash flows over the life of the pool, the accretable yield amount increases and the expected yield to maturity is adjusted on a prospective basis. A provision for loan losses is established when the Company estimates it will not collect all amounts previously estimated to be collectible. 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, the Company considers the estimated net recoverable value of the loan pools as well as other factors, such as the fair value of the underlying collateral. When a loan pool is determined to be impaired, the amount of loss accrual is calculated by comparing the recorded investment to the value determined by discounting the expected future cash flows at the loan pool’s effective interest rate or 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.

The Company’s mortgage loans are secured by real estate. The Company monitors the credit quality of the mortgage loans in its portfolio on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, the Company assesses 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 Company’s 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 the Company’s consolidated Statement of Cash Flows. Amounts applied as principal on the borrower account including amounts contractually due from borrowers that exceed the Company’s 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 under U.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 the Company’s cash flow.

Loans acquired or originated that have not experienced a deterioration in credit quality

The Company also acquires and originates small balance commercial loans that have not experienced a deterioration in credit quality. The Company recognizes any related loan discount and deferred expenses pursuant to ASC 310-20 by amortizing these amounts over the life of the loan.

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. The Company’s 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 the Company 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. Loans are tested quarterly for impairment and impairment reserves are recorded to the extent the net realizable value of the underlying collateral falls below net book value.


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If necessary, an allowance for loan losses is established through a provision for loan losses charged to expenses. The allowance is an amount that the Manager believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectability of loans.

Investments at Fair Value

The Company’s Investments at Fair Value as of March 31, 2019 and December 31, 2018 consist of investments in Senior and Subordinate Notes issued by joint ventures which the Company forms with third party institutional accredited investors. The Company recognizes income on the debt securities using the effective interest method. Additionally, the debt securities are classified as available for sale and are carried at fair value with changes in fair value reflected in the Company's consolidated Statements of Comprehensive Income.

Investments in Beneficial Interests

The Company’s Investments in Beneficial Interests as of March 31, 2019 and December 31, 2018 consist of investments in the trust certificates issued by joint ventures that the Company forms with third party institutional accredited investors. The trust certificates represent the residual interest of any special purpose entity formed to facilitate the investment. The Company recognizes income using the effective interest method and assess each Beneficial Interest for impairment on a quarterly basis.

Real Estate

The Company acquires REO properties directly through purchases, or through conversion of mortgage loans such as when it forecloses on the borrower and takes title to the underlying property or the borrower surrenders the deed in lieu of foreclosure. Property is recorded at cost if purchased, or at the present value of future cash flows if obtained through foreclosure by the Company. Property that the Company expects to actively market for sale is classified as held-for-sale. Property held-for-sale is carried at the lower of its acquisition basis or net realizable value (fair market value less expected selling costs, and any additional costs necessary to prepare the property for sale). Fair market value is determined based on broker price opinions (“BPOs”), appraisals, or other market indicators of fair value including list price or contract price, if listed or under contract for sale at the balance sheet date. Net unrealized losses due to changes in market value are recognized through a valuation allowance by charges to income through real estate operating expenses. No depreciation or amortization expense is recognized on properties held-for-sale. Holding costs are generally incurred by the Servicer and are subtracted from the Servicer’s remittance of sale proceeds upon ultimate disposition of properties held-for-sale.

Rental property is property not held-for-sale. Rental properties are intended to be held as long-term investments but may eventually be reclassified as held-for-sale. Property that arose through conversions of mortgage loans in the Company's portfolio such as when a mortgage loan is foreclosed upon and the Company takes title to the property or the borrower surrenders the deed in lieu of foreclosure is generally held for investment as rental property if the cash flows from use as a rental exceed the present value of expected cash flows from a sale. The Company also acquires rental properties through direct purchases of properties for its rental portfolio. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets of three to 39 years. The Company performs an impairment analysis for rental property 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.

Renovations are performed by the Servicer, and those costs are then reimbursed to the Servicer. Any renovations on properties which the Company elects to hold as rental properties are capitalized as part of the property’s basis and depreciated over the remaining estimated useful life of the property. The Company may perform property renovations to maximize the value of a property for either its rental strategy or for resale.

Secured Borrowings

The Company, through securitization trusts which are VIEs, issues callable debt secured by its mortgage loans in the ordinary course of business. The secured borrowings facilitated by the trusts are structured as debt financings, and the mortgage loans used as collateral remain on the Company’s consolidated Balance Sheet as the Company is the primary beneficiary of the securitization trusts. These secured borrowing VIEs are structured as pass through entities that receive principal and interest on

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the underlying mortgages and distribute those payments to the holders of the notes. The Company’s exposure to the obligations of the VIEs is generally limited to its investments in the entities; the creditors do not have recourse to the primary beneficiary. Coupon interest expense on the debt is recognized using the accrual method of accounting. Deferred issuance costs, including original issue discount and debt issuance costs, are carried on the Company’s consolidated Balance Sheets as a deduction from Secured borrowings, and are amortized to interest expense on an effective yield basis based on the underlying cash flow of the mortgage loans serving as collateral. The Company assumes the debt will be called at the specified call date for purposes of amortizing discount and issuance costs because the Company believes it 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

The Company enters into repurchase financing facilities under which it nominally sells assets to a counterparty and simultaneously enters 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, the Company is required to repay the borrowing including any accrued interest and concurrently receives back its pledged collateral from the lender. The repurchase financings are treated as collateralized financing transactions; pledged assets are recorded as assets in the Company’s consolidated Balance Sheets, and the 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 issuance cost 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 costs when incurred and amortized over the contractual life of the related borrowing.

Convertible Senior Notes

On April 25, 2017, the Company completed the public offer and sale of $87.5 million in aggregate principal amount of its convertible senior notes (the “notes”) due 2024, with follow-on offerings of an additional $20.5 million and $15.9 million, respectively, in aggregate principal amount completed on August 18, 2017 and November 19, 2018, respectively, which, combined with the notes from the April offering form a single series of securities. The notes bear interest at a rate of 7.25% per annum, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year. The notes will mature on April 30, 2024, unless earlier converted or redeemed. During certain periods and subject to certain conditions the notes will be convertible by their holders into shares of the Company’s common stock at a conversion rate of 1.6554 shares of common stock per $25.00 principal amount of the notes, which represents a conversion price of approximately $15.10 per share of common stock. The conversion rate, and thus the conversion price, may be subject to adjustment under certain circumstances.

Coupon interest on the notes is recognized using the accrual method of accounting. Discount and deferred issuance costs are carried on the Company’s consolidated Balance Sheets as a deduction from the notes, and are amortized to interest expense on an effective yield basis through April 30, 2023, the date at which the notes can be converted. The Company assumes the debt will be converted at the specified conversion date for purposes of amortizing issuance costs because the Company believes such conversion will be in the economic interest of the holders. A cumulative discount of $3.2 million, representing the fair value of the embedded conversion feature, was recorded to stockholders' equity. No sinking fund has been established for redemption of the principal.

Management Fee and Expense Reimbursement

The Company is a party to the Management Agreement with the Manager, which has a 15-year term expiring on March 5, 2034. Under the Management Agreement, the Manager implements the Company’s business strategy and manages the Company’s business and investment activities and day-to-day operations, subject to oversight by the Company’s Board of Directors. Among other services, the Manager provides the Company with a management team and necessary administrative and support personnel. Additionally, the Company pays directly for the internal audit function that reports directly to the Audit Committee and the Board of Directors. The Company does not currently have any employees that it pays directly and does not expect to have any employees that it pays directly in the foreseeable future. Each of the Company’s executive officers is an employee or officer, or both, of the Manager or the Servicer.

Under the Second Amended and Restated Management Agreement by and between the Company and the Manager dated as of March 5, 2019, the Company pays a quarterly base management fee based on its stockholders’ equity, including equity equivalents such as the Company's issuance of convertible senior notes, and may be required to pay a quarterly and annual incentive management fee based on its cash distributions to its stockholders and increases in the Company’s book value.

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Manager fees are expensed in the quarter incurred and the portion payable in common stock is included in stockholders’ equity at quarter end. See Note 10 — Related party transactions.

Servicing Fees

The Company is also a party to Servicing Agreements (the "Servicing Agreements") with the Servicer. Under the Servicing Agreements by and between the Company and its joint ventures and the Servicer, the Servicer receives an annual servicing fee ranging from 0.42% annually of the Unpaid Principal Balance (“UPB”) to 1.25% annually of UPB. The servicing fee is based upon the status of the loan at acquisition. For certain of the Company’s secured borrowings, the servicing fee rate for is reduced, on a loan-by-loan basis, when the loan meets certain performance criteria which varies joint venture by joint venture. Servicing fees are paid monthly. A change in status from RPL to NPL does not cause a change in the servicing fee rate.

Servicing fees for the Company’s real property assets that were previously RPLs that are not held in joint ventures are the greater of (i) the servicing fee applicable to the underlying mortgage loan prior to foreclosure, or (ii) 1.00% annually of the fair market value of the REO as reasonably determined by the Manager or 1.00% annually of the purchase price of any REO otherwise purchased by the Company. The servicing fee for NPLs not held in joint ventures that convert to real property assets does not change.

The Servicer is reimbursed for all customary, reasonable and necessary out-of-pocket costs and expenses incurred in the performance of its obligations, including the actual cost of any repairs and renovations undertaken on the Company’s behalf. The total fees incurred by the Company for these services will be dependent upon the UPB and type of mortgage loans that the Servicer services, property values, previous UPB of the relevant loan, and the number of REO properties. The Servicing Agreement will automatically renew for successive one-year terms, subject to prior written notice of non-renewal. In certain cases, the Company may be obligated to pay a termination fee. The Management Agreement will automatically terminate at the same time as the Servicing Agreement if the Servicing Agreement is terminated for any reason. See Note 10 - Related party transactions.

Stock-based Payments

A portion of the management fee is payable in cash, and a portion of the management fee is in shares of the Company’s common stock, which are issued to the Manager in a private placement and are restricted securities under the Securities Act of 1933, as amended (the “Securities Act”). The number of shares issued to the Manager are determined based on the average of the closing prices of the Company's common stock on the New York Stock Exchange ("NYSE") on the five business days preceding the most recent regular quarterly dividend to holders of the common stock is paid. Management fees paid in common stock are recognized as an expense in the quarter incurred and recorded in stockholders' equity at quarter end. The shares vest immediately upon issuance. The Manager has agreed to hold any shares of common stock received by it as payment of the base management fee for at least three years from the date such shares of common stock are received.

Under the Company’s 2014 Director Equity Plan (the “Director Plan”), the Company may make stock-based awards to its directors. The Director Plan is designed to promote the Company’s interests by attracting and retaining qualified and experienced individuals for service as non-employee directors. The Director Plan is administered by the Company’s Board of Directors. The total number of shares of common stock or other stock-based award, including grants of long-term incentive plan units (“LTIP Units”) from the Operating Partnership, available for issuance under the Director Plan is 78,000 shares. The Company issued to each of its independent directors restricted stock awards of 2,000 shares of its common stock upon joining the Board of Directors, which are subject to a one-year vesting period. The Company also periodically issues additional restricted stock awards to its independent directors under the Director Plan. In addition, through March 31, 2019, each of the Company’s independent directors received an annual fee of $75,000, payable quarterly, 50% in shares of the Company’s common stock and 50% in cash. The annual fee was increased to $100,000, 40% of which is payable in shares of the Company's common stock and 60% in cash, to be effective as of April 1, 2019. Stock-based expense for the directors’ annual fee is expensed as earned, in equal quarterly amounts during the year, and recorded in stockholders' equity at quarter end.

In June 2016, the Company’s stockholders approved the 2016 Equity Incentive Plan (the “2016 Plan”) to attract and retain non-employee directors, executive officers, key employees and service providers, including officers and employees of the Company’s affiliates. The 2016 Plan authorized the issuance of up to 5% of the Company’s outstanding shares from time to time on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible senior notes, including OP Units and any LTIP Units, into shares of common stock). Grants of restricted stock under the 2016 Plan use grant date fair value of the stock as the basis for measuring the cost of the grant. The cost of grants of restricted stock to employees of the Company’s affiliates had previously been determined using the stock price as of the date at

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which the counterparty's performance is complete. However, pursuant to the issuance and early adoption of ASU 2018-07 in June 2018, the Company used the grant date fair value of the stock as the basis for measuring the cost of the grant. Forfeitures of granted shares are accounted for in the period in which they occur. The share grants vest over three years, with one third of the shares vesting on each of the first, second and third anniversaries of the grant date. The shares may not be sold until the third anniversary of the grant date.

Directors’ Fees

The expense related to directors’ fees is accrued, and the portion payable in common stock is reflected in consolidated Stockholders’ equity in the period in which it is incurred.

Variable Interest Entities

In the normal course of business, the Company enters into various types of transactions with special purpose entities, which have primarily consisted of trusts established for the Company’s secured borrowings (See “Secured Borrowings” above and Note 9 to the consolidated Financial Statements). Additionally, from time to time, the Company may enter into joint ventures with unrelated entities, which also generally involves the formation of a special purpose entity. The Company evaluates each transaction and its resulting beneficial interest to determine if the entity formed pursuant to the transaction should be classified as a VIE. If an entity created in a transaction meets the definition of a VIE and the Company determines that it or a consolidated subsidiary is the primary beneficiary, the Company will include the entity in its consolidated financial statements.

Cash and Cash Equivalents

Highly liquid investments with an original maturity of three months or less when purchased are considered cash equivalents. The Company generally maintains cash and cash equivalents at insured banking institutions with minimum assets of $1 billion. Certain account balances exceed Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage.

Cash Held in Trust

Cash held in trust consists of restricted cash balances either legally due to lenders or held in trust for the benefit of the Company's secured borrowers, and is segregated from the Company’s other cash deposits. Cash held in trust is not available to the Company for any purposes other than the settlement of existing obligations.

Earnings per Share

The Company grants restricted shares that entitle the recipients to receive dividend equivalents during the vesting period on a basis equivalent to the dividends paid to holders of common shares. Unvested share-based compensation awards containing non-forfeitable rights to receive dividends or dividend equivalents (collectively, “dividends”) are classified as “participating securities” and are included in the basic earnings per share calculation using the two-class method.

Under the two-class method, all earnings (distributed and undistributed) are allocated to common shares and participating securities, based on their respective rights to receive dividends. Basic earnings per share is determined by dividing net income available to common shareholders, reduced by income attributable to the participating securities, by the weighted-average common shares outstanding during the period.

Diluted earnings per share is determined by dividing net income attributable to diluted shareholders, which adds back to net income the interest expense, net of applicable income taxes, on the Company’s convertible senior notes, by the weighted-average common shares outstanding, assuming all dilutive securities, including stock grants, shares that would be issued in the event that OP Units are redeemed for shares of common stock of the Company, shares issued in respect of the stock-based portion of the base fee payable to the Manager and independent directors, and shares that would be issued in the event of conversion of the Company’s outstanding convertible senior notes were issued. In the event the Company were to record a net loss, potentially dilutive securities would be excluded from the diluted loss per share calculation, as their effect on loss per share would be anti-dilutive.

Fair Value of Financial Instruments


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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. The Company reviews its discount rates periodically to ensure the assumptions used to calculate fair value are in line with market conditions.

The Company’s Investments at fair value are carried at fair value with changes in fair value of equity securities reflected in the Company’s consolidated Statements of Income. Fair values of the Company's investments in debt securities are derived from estimates provided by banking institutions that are compared against available reference data from recent transactions and the Company's proprietary valuation model.

The fair value of the Company's Beneficial interests are derived from estimates provided by banking institutions that are compared for reasonableness against analyses from the Company's proprietary valuation model.

The Company calculates the fair value for the secured borrowings on its consolidated balance sheets issued by consolidated securitization trusts by using the Company’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.

The Company’s borrowings under its repurchase agreements are short-term in nature, and the Manager believes it can renew the current borrowing arrangements on similar terms in the future. Accordingly, the carrying value of these borrowings approximates fair value.

The Company’s convertible senior notes are traded on the NYSE under the ticker symbol "AJXA"; the debt’s fair value is determined from the closing price on the balance sheet date.

Property held-for-sale is carried at the lower of its acquisition basis or net realizable value. Net realizable value is determined based on broker price opinions, appraisals, or other market indicators of fair value, which are then reduced by anticipated selling costs. Net unrealized losses due to changes in market value are recognized through a valuation allowance by charges to income.

Income Taxes

The Company elected REIT status upon the filing of its 2014 income tax return, and has conducted its operations in order to satisfy and maintain eligibility for REIT status. Accordingly, the Company does not believe it will be subject to U.S. federal income tax from the year ended December 31, 2014 forward on the portion of the Company’s REIT taxable income that is distributed to the Company’s stockholders as long as certain asset, income and stock ownership tests are met. If the Company fails to qualify as a REIT in any taxable year, it generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost. In addition,

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notwithstanding the Company’s qualification as a REIT, it may also have to pay certain state and local income taxes, because not all states and localities treat REITs in the same manner that they are treated for U.S. federal income tax purposes.

The Company’s consolidated Financial Statements include the operations of three TRS entities, GA-TRS, GAJX Real Estate LLC and Gaea Real Estate Corp., which are subject to U.S. federal, state and local income taxes on their taxable income. Income from these three entities and any other TRS that the Company forms will be subject to U.S. federal and state income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences or benefits attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which management expects those temporary differences to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. Subject to the Company’s judgment, it reduces a deferred tax asset by a valuation allowance if it is “more-likely-than-not” that some or all of the deferred tax asset will not be realized. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in evaluating tax positions, and the Company recognizes tax benefits only if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority.

The Company evaluates tax positions taken in its consolidated financial statements under the interpretation for accounting for uncertainty in income taxes. As a result of this evaluation, the Company may recognize a tax benefit from an uncertain tax position only if it is “more-likely-than-not” that the tax position will be sustained on examination by taxing authorities.

The Company’s tax returns remain subject to examination and consequently, the taxability of the distributions and other tax positions taken by the Company may be subject to change. Distributions to stockholders generally will be primarily taxable as long-term capital gain, although a portion of such distributions may be designated as ordinary income or qualified dividend income, or may constitute a return of capital. The Company furnishes annually to each stockholder a statement setting forth distributions paid during the preceding year and their U.S. federal income tax treatment.

Segment Information

The Company’s primary business is acquiring, investing in and managing a portfolio of mortgage loans. The Company operates in a single segment focused on re-performing mortgages, and to a lesser extent non-performing mortgages and real property.

Reclassifications

Certain immaterial amounts in the Company’s 2018 consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income or equity.

Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee.  Lessor accounting was not significantly changed by this ASU.  This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018 by applying a modified retrospective approach. Early adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) - Targeted Improvements, which provides an optional transition method of applying the new leases standard at the adoption date by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also provides lessors with a practical expedient to not separate non-lease revenue components from the associated lease component if certain conditions are met.  Additionally, only incremental direct leasing costs may be capitalized under the new guidance. Any indirect incremental leasing costs must be expensed as incurred. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842) - Narrow Scope Improvements for Lessors which addresses lessor accounting for certain lessor costs associated with leased assets. ASU 2018-20 requires lessors to report amounts such as sales taxes reimbursed by a lessee and other similar reimbursed costs as lease revenue. In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) - Codification Improvements, which (1) addresses the fair value of leased assets by reinstating the exception in Topic 842 for lessors that are not manufacturers or dealers, allowing those lessors to use their cost of the asset, reflecting any volume or trade discounts that may apply, as the fair value of the underlying asset; (2) addresses the presentation on the statement of cash flows of sales type and direct financing leases by allowing depository and lending institutions to present principal payments received under leases in the investing section of the statement of cash flows, as opposed to the operating section, as otherwise required by Topic 842; and (3) the amendments in this update clarify the Board's original intent with regard to transition disclosures related to accounting changes

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and error corrections, and explicitly provide an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements which would have required disclosure of various items for the current annual period and any prior annual periods retroactively adjusted.

The Company has not identified any contracts under which it is a lessee. For leases where it is the lessor, the Company has elected not to separate non-lease components from lease components outlined in ASU 2018-11. The Company adopted ASU 2016-02, and amendments in ASU 2018-11 and ASU 2018-20 in its first quarter of 2019 with no effect on its consolidated assets or liabilities, consolidated net income or equity or cash flows on the date of adoption.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2016-15 in 2018 with no effect on its consolidated assets or liabilities, consolidated net income or equity or cash flows.
In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718) - Improvements to Nonemployee Share-based Payment Accounting. ASU 2018-07 simplifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees. This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted, but no earlier than an entity's adoption of Topic 606. The Company elected to early-adopt ASU 2018-07 in 2018. The cumulative effect on prior periods arising from the adoption was $0.1 million and is reflected as an adjustment to the Company's consolidated Balance Sheet at March 31, 2018.

In August 2018, the SEC issued a final rule to amend certain disclosure requirements that were redundant, duplicative, overlapping or superseded by other SEC disclosure requirements, U.S. GAAP or IFRS. Among other changes, the amendments generally eliminated or otherwise reduced certain disclosure requirements of various SEC rules and regulations. However, in some cases, the amendments require additional information to be disclosed, including changes in stockholders’ equity in interim periods. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting the requirement to include changes in stockholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule - e.g. for a calendar year-end company, the first quarter of fiscal year 2019. The Company adopted the SEC’s final rule in the first quarter of 2019 with no effect on its consolidated assets or liabilities, consolidated net income or equity or cash flows on the date of adoption.

Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. The main objective of this guidance is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity. To achieve this, the amendments in this guidance replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Specifically, the amendments in this guidance require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted, beginning with fiscal years after December 15, 2018. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.
 
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the concepts statement, including the consideration of costs and benefits. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted, including early adoption of any removed or modified disclosures addressed in this update and delay of additional disclosures until their effective date. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting

17


arrangements that include an internal-use software license. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted, including adoption in any interim period. The Company is currently evaluating the impact on its consolidated financial statements and related disclosures.

Note 3 — Mortgage Loans
The following table presents information regarding the carrying value for the mortgage loan categories of RPL loan pools, NPL loan pools and SBC loans as of March 31, 2019 and December 31, 2018 ($ in thousands):
Loan portfolio basis by asset type
 
March 31, 2019
 
December 31, 2018
Residential RPL loan pools
 
$
1,228,968

 
$
1,242,207

SBC loan pools
 
21,127

 
21,203

SBC loans non-pooled1
 
28,605

 
11,140

Residential NPL loan pools
 
34,977

 
36,323

Total
 
$
1,313,677

 
$
1,310,873

 
(1)
SBC loans not pooled are accounted for under ASC 310-20 versus ASC 310-30 for our loan pools.

Included on the Company’s consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 are approximately $1.3 billion and $1.3 billion, respectively, of RPLs, NPLs, and SBCs. RPLs and NPLs are categorized at acquisition. The carrying value of all loans reflects the original investment amount, plus accrual of interest income and discount, less principal and interest cash flows received. The carrying values at March 31, 2019 for the Company's loans in the table above are reduced by an allowance for loan losses of $1.3 million, reflected in the totals for each line in the table above. The Company had $1.2 million allowance for loan losses at December 31, 2018. For the three months ended March 31, 2019 the Company recognized $0.2 million provision for loan loss. For the three months ended March 31, 2018, the Company recognized no provision for loan loss. For the three month periods ended March 31, 2019 and 2018, the Company accreted $26.4 million and $25.2 million, respectively, into interest income with respect to its RPL, NPL and SBC loan pools.
The Company’s RPL loan acquisitions during the three month periods ended March 31, 2019 consisted of 38 purchased RPLs with UPB of $8.5 million. Comparatively during the three months ended March 31, 2018, the Company acquired 87 RPLs with UPB of $19.7 million. No NPLs were directly purchased during the three months ended March 31, 2019 and 2018.
The Company acquired 19 SBC loans, with no deterioration in credit quality that are not accounted for by pooling, with $17.8 million of UPB for the three months ended March 31, 2019 and no SBC loans, similarly not pooled for accounting, were acquired during the three months ended 2018.
The following table presents information regarding the accretable yield and non-accretable amount for purchased loan pools acquired during the following periods ($ in thousands):
 
Three months ended March 31, 2019
 
Three months ended March 31, 2018
 
Re-performing
loans

Non-performing
loans

Re-performing
loans

Non-performing
loans
Contractually required principal and interest
$
14,966

 
$

 
$
31,623

 
$

Non-accretable amount
(5,500
)
 

 
(9,574
)
 

Expected cash flows to be collected
9,466

 

 
22,049

 

Accretable yield
(2,261
)
 

 
(4,483
)
 

Fair value at acquisition
$
7,205

 
$

 
$
17,566

 
$

    
The Company determines the accretable yield on new acquisitions by comparing the expected cash flows from the Company’s proprietary cash flow model to the remaining contractual cash flows at acquisition. The difference between the expected cash flows and the portfolio acquisition price is accretable yield. The difference between the remaining contractual cash flows and the expected cash flows is the non-accretable amount. Accretable yield and accretion amounts do not include any of the interest income on unpooled SBC loans at March 31, 2019 and 2018 ($ in thousands):

18



Three months ended March 31, 2019

Three months ended March 31, 2018

Re-performing
loans

Non-performing
loans

Re-performing
loans

Non-performing
loans
Balance at beginning of period
$
311,806


$
6,459


$
344,141


$
7,370

Accretable yield additions
2,261




4,483



Accretion
(26,072
)

(330
)

(24,502
)

(715
)
Reclassification from (to) non-accretable amount, net
8,333


(1,281
)

(6,603
)

(370
)
Balance at end of period
$
296,328


$
4,848


$
317,519


$
6,285

During the three months ended March 31, 2019, the Company reclassified a net $7.1 million from non-accretable amount to accretable yield, consisting of a $8.3 million transfer from non-accretable amount to accretable yield for RPLs, and a $1.3 million transfer from accretable yield to non-accretable amount for NPLs. Comparatively, during the three months ended March 31, 2018, the Company reclassified a net $7.0 million from accretable yield to non-accretable amount, consisting of a $6.6 million transfer from accretable yield to non-accretable amount for its RPLs and $0.4 million from accretable yield to non-accretable amount on NPLs. The Company recalculates the amount of accretable yield and non-accretable amount on a quarterly basis. Reclassifications between the two categories are primarily based upon changes in expected cash flows and actual prepayments, including payoffs in full or in part. Additionally, the accretable yield and non-accretable amounts are revised when loans are reclassified to REO because the future expected cash flows are removed from the pool. The reclassification in the first quarter of 2019 and 2018 is based on an updated assessment of projected loan cash flows as compared to the projection at December 31, 2018 and December 31, 2017, respectively. This is offset by the removal of the accretable yield for loans that are removed from the pool at foreclosure and for loan payoffs, both in full or in part, prior to modeled expectations.
The Company performs an analysis of its expectation of the amount of undiscounted cash flows expected to be collected from its mortgage loan pools at the end of each calendar quarter. If the Company expects to collect greater cash flows over the life of the pool, the accretable yield amount increases and the expected yield to maturity is adjusted on a prospective basis. An allowance for loan losses is established when it is probable the Company will not collect all amounts previously estimated to be collectible. Management assesses the credit quality of the portfolio and the adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. During the quarter ended March 31, 2019, the Company recorded an impairment of $0.2 million of the value of five of its NPL pools acquired in 2014, 2015 and 2016. No impairment was recorded for the quarter ended March 31, 2018. An analysis of the balance in the allowance for loan losses account follows ($ in thousands):
 
Three months ended March 31,
 
2019
 
2018
Allowance for loan losses, beginning of period
$
(1,164
)
 
$

Provision for loan losses
(154
)
 

Allowance for loan losses, end of period
$
(1,318
)
 
$

The following table sets forth the carrying value of the Company’s mortgage loans, and related unpaid principal balance by delinquency status as of March 31, 2019 and December 31, 2018 ($ in thousands):
 
March 31, 2019
 
December 31, 2018
 
Number of
loans
 
Carrying
value
 
Unpaid
principal
balance
 
Number of
loans
 
Carrying
value
 
Unpaid
principal
balance
Current
4,031

 
$
781,289

 
$
864,758

 
3,929

 
$
757,276

 
$
848,551

30
960

 
166,180

 
183,499

 
1,006

 
167,286

 
185,742

60
667

 
113,418

 
125,095

 
711

 
123,078

 
136,586

90
1,104

 
195,211

 
220,436

 
1,188

 
200,419

 
231,063

Foreclosure
256

 
57,579

 
76,595

 
277

 
62,814

 
79,777

Mortgage loans
7,018

 
$
1,313,677

 
$
1,470,383

 
7,111

 
$
1,310,873

 
$
1,481,719



19


Note 4 — Real Estate Assets, Net

The Company acquires REO either through direct purchases of properties for its rental portfolio or through conversions of mortgage loans in its portfolio such as when a mortgage loan is foreclosed upon and the Company takes title to the property on the foreclosure date or the borrower surrenders the deed in lieu of foreclosure.

Rental Property

As of March 31, 2019, the Company owned 20 REO properties with an aggregate carrying value of $19.2 million held for investment as rentals, at which time 16 properties were rented. One property was acquired as an RPL but transitioned to foreclosure prior to boarding by the Servicer, one was acquired through foreclosure and nine were transferred from Property held-for-sale, where all nine were acquired through foreclosures. The remaining rental properties were directly purchased. As of December 31, 2018, the Company owned 21 REO properties with a carrying value of $17.6 million held for use as rentals, at which time 16 were rented. One property was acquired as an RPL but transitioned to foreclosure prior to boarding by the Servicer, one was acquired through foreclosures, and 12 were transferred from Property held-for-sale, where all 12 were acquired through foreclosures. The remaining rental properties were directly purchased.

Property Held-for-Sale

The Company classifies REO as held-for-sale if the REO is expected to be actively marketed for sale. As of March 31, 2019 and December 31, 2018, the Company’s net investments in REO held-for-sale were $18.6 million and $19.4 million, respectively, which include balances of $0.9 million and $2.2 million, respectively, for properties undergoing renovation or which are otherwise in the process of being brought to market. For the three months ended March 31, 2019 and 2018, all of the additions to REO held-for-sale were acquired through foreclosure or deed in lieu of foreclosure, and reclassified out of the mortgage loan portfolio.

The following table presents the activity in the Company’s carrying value of property held-for-sale for the three months ended March 31, 2019 and 2018 ($ in thousands):
 
 
Three months ended March 31,
 
 
2019
 
2018
Property Held-for-sale
 
Count
 
Amount
 
Count
 
Amount
Balance at beginning of period
 
102

 
$
19,402

 
136

 
$
24,947

Transfers from mortgage loans
 
26

 
4,171

 
27

 
3,958

Adjustments to record at lower of cost or fair value 
 

 
(475
)
 

 
(408
)
Disposals
 
(33
)
 
(5,028
)
 
(27
)
 
(4,226
)
Transfer from Rental property
 
3

 
880

 
4

 
440

Transfers to Rental property
 
(1
)
 
(293
)
 
(4
)
 
(942
)
Other
 

 
(77
)
 

 

Balance at end of period
 
97

 
$
18,580

 
136

 
$
23,769


Dispositions

During the three months ended March 31, 2019 and 2018, the Company sold 33 and 27 REO properties, respectively, realizing net gains of approximately $0.1 million and $0.6 million, respectively. These amounts are included in Other income on the Company's consolidated Statements of Income. The Company recorded lower of cost or net realizable value adjustments in Real estate operating expense for the three months ended March 31, 2019 and 2018 of $0.5 million and $0.4 million, respectively.

Note 5 — Investments

The Company holds investments in various debt securities and beneficial interests which are the net residual interest of the Company’s investments in securitization trusts. The Company's debt securities and beneficial interests are issued by securitization trusts, which are VIE's, that the Company has sponsored but which the Company does not consolidate since it has determined it is not the primary beneficiary. (See Note 10 - Related party transactions). The Company models the expected cash flows from the underlying loan pools held by the trusts using it's Manager's proprietary pricing model, and believes any

20


unrealized losses to be temporary. The following table presents information regarding the Company's investments in debt securities and investments in beneficial interests ($ in thousands):
 
 
As of March 31, 2019
 
 
Basis1
 
Gross unrealized gains
 
Gross unrealized losses
 
Carrying value (fair value)
Debt securities
 
$
152,261

 
$
410

 
$
(588
)
 
$
152,083

Beneficial interests in securitization trusts
 
30,809

 

 

 
30,809

Total investments
 
$
183,070

 
$
410

 
$
(588
)
 
$
182,892

 
 
As of December 31, 2018
 
 
Basis1
 
Gross unrealized gains
 
Gross unrealized losses
 
Carrying value (fair value)
Debt securities
 
$
147,386

 
$
250

 
$
(825
)
 
$
146,811

Beneficial interests in securitization trusts
 
22,086

 

 

 
22,086

Total investments
 
$
169,472

 
$
250

 
$
(825
)
 
$
168,897

 
(1)
Basis amount is net of any realized amortized costs and principal paydowns.

In October 2016, the Company purchased subordinate debt securities for $6.3 million from Oileus Residential Loan Trust. These securities were sold during the fourth quarter of 2018 for a gain of $0.2 million.

During the first quarter of 2019, the Company acquired $64.0 million in notes and beneficial interests issued by joint ventures between the Company and third party institutional investors.  Each joint venture issued senior notes and beneficial interests, which are trust certificates representing the residual investment of the trust.  In certain transactions, the joint ventures also issued subordinate notes.  The Company acquired $50.0 million in senior notes and $4.6 million in subordinate notes, collectively “the Notes.” The Notes are accounted for as debt securities and carried at fair value.  The carrying value of the Notes is also impacted by any amortized discount and principal paydowns on the underlying mortgage loans held in the trust.  As of March 31, 2019, the Company recorded a gross unrealized gain of $0.4 million and a gross unrealized loss of $0.6 million in accumulated other comprehensive income and carried the Notes on the Company’s consolidated Balance Sheet at a fair value of $152.1 million. As of December 31, 2018, the Company recorded a gross unrealized gain of $0.3 million and a gross unrealized loss of $0.8 million in accumulated other comprehensive income and carried the Notes on the Company's consolidated Balance Sheet at fair value of $146.8 million. During the first quarter of 2019, the Company sold senior notes issued by certain joint ventures for total proceeds of $39.6 million and recognized a gain of $8,000, net of transaction fees.

The Company also acquired $9.5 million in beneficial interests issued by joint ventures during the first quarter of 2019. The Company accounts for its investments in the Beneficial Interests at amortized cost and assesses its investment in Beneficial Interests for impairment on a quarterly basis.  As of March 31, 2019, the Investments in Beneficial Interests were carried on the Company's consolidated Balance Sheet at $30.8 million. For the year ended December 31, 2018, the Investments in Beneficial Interests were carried on the Company's consolidated Balance Sheet at $22.1 million.


21


Note 6 — Fair Value

The following tables set forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of March 31, 2019 and December 31, 2018 ($ in thousands):

 
 

 
Level 1
 
Level 2
 
Level 3
March 31, 2019
 
Carrying value
 
Quoted prices in active markets
 
Observable inputs other than Level 1 prices
 
Unobservable inputs
Financial assets
 

 
 
 
 
 
 
Mortgage loans, net
 
$
1,313,677

 
$

 
$

 
$
1,447,047

Investments in debt securities at fair value
 
$
152,083

 
$

 
$
152,083

 
$

Investments in beneficial interests
 
$
30,809

 
$

 
$
30,809

 
$

Investment in Manager
 
$
1,254

 
$

 
$

 
$
5,710

Investment in AS Ajax E
 
$
1,004

 
$

 
$
1,246

 
$

Investment in GAFS, including warrants
 
$
2,972

 
$

 
$

 
$
3,320

Financial liabilities
 
 
 
 
 
 
 
 
Secured borrowings, net
 
$
593,121

 
$

 
$

 
$
591,237

Borrowings under repurchase transactions
 
$
560,404

 
$

 
$
560,404

 
$

Convertible senior notes, net
 
$
117,838

 
$
123,850

 
$

 
$


 

 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
Carrying value
 
Quoted prices in active markets
 
Observable inputs other than Level 1 prices
 
Unobservable inputs
Financial assets
 
 
 
 
 
 
 
 
Mortgage loans, net
 
$
1,310,873

 
$

 
$

 
$
1,448,895

Investments in debt securities at fair value
 
$
146,811

 
$

 
$
146,811

 
$

Investments in beneficial interests
 
$
22,086

 
$

 
$
22,086

 
$

Investment in Manager
 
$
1,016

 
$

 
$

 
$
5,231

Investment in AS Ajax E
 
$
1,037

 
$

 
$
1,239

 
$

Investment in GAFS, including warrants
 
$
2,844

 
$

 
$

 
$
3,320

Financial liabilities
 
 
 
 
 
 
 
 
Secured borrowings, net
 
$
610,199

 
$

 
$

 
$
610,217

Borrowings under repurchase transactions
 
$
534,089

 
$

 
$
534,089

 
$

Convertible senior notes, net
 
$
117,525

 
$
118,103

 
$

 
$


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. The value of transfers of mortgage loans to REO is based upon the present value of future expected cash flows of the loans being transferred.

The Company values its Investments in debt securities and beneficial interests using estimates provided by banking institutions for its debt securities and beneficial interests. The Company also relies on its Manager's proprietary pricing model to estimate the underlying cash flows expected to be collected on these investments as a comparison to the estimates received from banking institutions (See Note 5 - Investments).

The Company's investment in the Manager is valued by applying an earnings multiple to expected earnings.

The Company’s investment in AS Ajax E is valued using estimates provided by banking institutions.
    

22


The fair value of the Company's investment in GAFS is presented by applying an earnings multiple to expected earnings.
    
The fair value of secured borrowings is estimated using the Manager’s proprietary pricing model which estimates expected cash flows of the underlying mortgage loans which collateralize the debt, and which drive the cash flows used to make interest payments. The discount rate used in the present value calculation of the mortgage loans used as collateral, therefore, represents the estimated effective yield on the secured debt. The discount rate is then applied to the face value of the secured debt to derive the debt's fair value.

The Company’s borrowings under repurchase agreements are short-term in nature, and the Company’s management believes it can renew the current borrowing arrangements on similar terms in the future. Accordingly, the carrying value of these borrowings approximates fair value.

The Company’s 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.

The carrying values of its Cash and cash equivalents, Cash held in trust, Receivable from servicer, Prepaid expenses and other assets, Management fee payable and Accrued expenses and other liabilities are equal to or approximate fair value.

Non-financial assets

Property held-for-sale is carried at the lower of its acquisition basis or net realizable value. Fair market value is determined based on appraisals, broker price opinions, or other market indicators of fair value. Since net unrealized losses due to changes in market value are recognized through a valuation allowance by charges to income, aggregate fair value for the Company’s REO Property is stated as its carrying value. The following tables set forth the fair value of non-financial assets by level within the fair value hierarchy as of March 31, 2019 and December 31, 2018 ($ in thousands): 

 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
March 31, 2019
 
Carrying value
 
Current quarter fair value adjustment recognized in the consolidated Statements of Income
 
Quoted prices in active markets
 
Observable inputs other than Level 1 prices
 
Unobservable inputs
Non-financial assets
 
 
 
 
 
 

 
 

 
 

Property held-for-sale
 
$
18,580

 
$
475

 
$

 
$

 
$
18,580

 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
December 31, 2018
 
Carrying value
 
Fiscal year 2018 fair value adjustment recognized in the consolidated Statements of Income
 
Quoted prices in active markets
 
Observable inputs other than Level 1 prices
 
Unobservable inputs
Non-financial assets
 
 
 
 
 
 
 
 
 
 
Property held-for-sale
 
$
19,402

 
$
2,700

 
$

 
$

 
$
19,402


Note 7 — Affiliates

Unconsolidated Affiliates

During 2018, the Company acquired an 8.0% ownership interest in GAFS. The acquisition was completed in two transactions. January 26, 2018 was the initial closing date wherein the Company acquired a 4.9% interest in GAFS and three warrants, each exercisable for a 2.45% interest in GAFS upon payment of additional consideration, in exchange for consideration of $1.1 million of cash and 45,938 shares of the Company’s common stock with a value of approximately $0.6 million. On May 29, 2018 the additional closing was completed wherein the Company acquired an additional 3.1% interest in GAFS and three warrants, each exercisable for a 1.55% interest in GAFS, in exchange for consideration of $0.7 million of cash and 29,063 shares of the Company's common stock with a value of approximately $0.4 million. The Company accounts for its investment in GAFS using the equity method.

23



Upon the closing of the Company’s original private placement in July 2014, the Company received a 19.8% equity interest in the Manager, a privately held company for which there is no public market for its securities. The Company accounts for its investment in the Manager using the equity method.

On March 14, 2016, the Company formed AS Ajax E LLC to hold an equity interest in a Delaware trust formed to own residential mortgage loans and residential real estate assets. AS Ajax E LLC owns a 5% equity interest in Ajax E Master Trust which holds a portfolio of RPLs. At the time of the original investment, the Company held a 24.2% interest in AS Ajax E LLC. In October 2016, additional capital contributions were made by third parties, and the Company’s ownership interest in AS Ajax E was reduced to a lower percentage of the total. At both March 31, 2019 and December 31, 2018, the Company’s interest in AS Ajax E LLC was approximately 16.5%. The Company accounts for its investment using the equity method.

The table below shows the net income, assets and liabilities for the Company’s unconsolidated affiliates at 100%, and at the Company’s share ($ in thousands):

Net income, assets and liabilities of unconsolidated affiliates at 100%

 
 
Three months ended March 31,
Net income at 100%
 
2019

2018
Great Ajax FS LLC
 
$
1,600

 
$
115

Thetis Asset Management LLC
 
$
1,408

 
$
652

AS Ajax E LLC
 
$
76

 
$
69


 
 
March 31, 2019

December 31, 2018
Assets and Liabilities at 100%
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Great Ajax FS LLC
 
$
40,670

 
$
16,942

 
$
74,164

 
$
52,184

Thetis Asset Management LLC
 
$
9,705

 
$
2,209

 
$
8,604

 
$
2,136

AS Ajax E LLC
 
$
6,213

 
$
2

 
$
6,424

 
$
13


Net income, assets and liabilities of unconsolidated affiliates at the Company's share

 
 
Three months ended March 31,
Net income at the Company's share
 
2019
 
2018
Thetis Asset Management LLC
 
$
279

 
$
129

Great Ajax FS LLC(1)
 
$
128

 
$
9

AS Ajax E LLC
 
$
13

 
$
11


 
 
March 31, 2019
 
December 31, 2018
Assets and Liabilities at the Company's share
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Great Ajax FS LLC
 
$
3,254

 
$
1,355

 
$
5,933

 
$
4,175

Thetis Asset Management LLC
 
$
1,922

 
$
437

 
$
1,704

 
$
423

AS Ajax E LLC
 
$
1,025

 
$

 
$
1,060

 
$
2

 
(1)
Net income at the Company's share is not directly proportionate to Net income at 100% due to the timing of the Company's acquisition during the quarter ended March 31, 2018.
 
Consolidated affiliates

The Company consolidates the results and balances of securitization trusts which are established to provide debt financing to the Company by securitizing pools of mortgage loans. These trusts are considered to be VIE’s, and the Company has determined that it is the primary beneficiary of the VIE’s. See Note 9 - Debt.

24



The Company also consolidates the activities and balances of its controlled affiliates, which include AS Ajax E II, which was established to hold an equity interest in a Delaware trust formed to own residential mortgage loans and residential real estate assets. As of March 31, 2019, AS Ajax E II LLC was 53.1% owned by the Company, with the remainder held by third parties. 2017-D and 2018-C are securitization trusts formed to hold mortgage loans, REO property and secured debt. As of March 31, 2019, 2017-D is 50% owned by a third-party institutional investor. As of March 31, 2019 2018-C was 63.0% owned by the Company, with the remainder held by third-party institutional investors. As of March 31, 2019 BFLD was 90.0% owned by the Company, with the remainder held by third-party institutional investors. The Company consolidates the results and balances of AS Ajax E II LLC, 2017-D, 2018-C and BFLD in its consolidated financial statements, and recognizes a non-controlling interest on its consolidated Balance Sheet for the amount of the investment due to the third party investors. Additionally, non-controlling interests in the earnings of AS Ajax E II LLC, 2017-D, 2018-C and BFLD are recognized in the Company’s consolidated Statement of Income, which consists of the proportionate amount of income attributable to the third party investors.

Note 8 — Commitments and Contingencies

The Company regularly enters into agreements to acquire additional mortgage loans and mortgage-related assets, subject to continuing diligence on such assets and other customary closing conditions. There can be no assurance that the Company will acquire any or all of the mortgage loans identified in any acquisition agreement as of the date of these consolidated financial statements, and it is possible that the terms of such acquisitions may change.

At March 31, 2019, the Company had commitments to purchase, subject to due diligence, 88 mortgage loans secured by single-family residences with aggregate UPB of $18.1 million. The Company will only acquire loans that meet the acquisition criteria for its own portfolios, or those of its third party institutional co-investors. See Note 15 - Subsequent Events, for remaining open acquisitions as of the filing date.

Litigation, Claims and Assessments

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2019, the Company was not a party to, and its properties were not subject to, any pending or threatened legal proceedings that individually or in the aggregate, are expected to have a material impact on its financial condition, results of operations or cash flows.

Note 9 — Debt

Repurchase Agreements

The Company has entered into two repurchase facilities whereby the Company, through two wholly-owned Delaware trusts (the “Trusts”) acquires 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, the 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 a Trust to repurchase these mortgage loans at a future date are guaranteed by the Operating Partnership. The difference between the market value of the asset and the amount of the repurchase agreement is generally the amount of equity 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 the Company to repurchase the asset and repay the borrowing at maturity. The Company has also entered into two repurchase facilities substantially similar to the mortgage loan repurchase facilities where the pledged assets are the class B bonds and certificates from the Company's secured borrowing transactions. The Company has effective control over the assets subject to all of these transactions; therefore, the Company’s repurchase transactions are accounted for as financing arrangements.

The Servicer services these mortgage loans pursuant to the terms of a Servicing Agreement by and among the Servicer and each Buyer which Servicing Agreement has the same fees and expenses terms as the Company’s Servicing Agreement described under Note 10 — Related party transactions. The Operating Partnership, as guarantor, will provide to the buyers a limited guaranty of certain losses incurred by the buyers in connection with certain events and/or the Seller’s obligations under the mortgage loan purchase agreement, following the breach of certain covenants by the Seller, the occurrence of certain bad acts by the Seller, the occurrence of certain insolvency events of the Seller or other events specified in the Guaranty. As security

25


for its obligations under the Guaranty, the guarantor will pledge the Trust Certificate representing the Guarantor’s 100% beneficial interest in the Seller.

The following table sets forth the details of the Company’s repurchase transactions and facilities ($ in thousands):
 
 
 

 
March 31, 2019
Maturity Date
 
Origination date
 
Maximum
Borrowing
Capacity
 
Amount
Outstanding
 
Amount of
Collateral
 
Percentage of Collateral Coverage
 
Interest Rate
April 25, 2019
 
October 26, 2018
 
$
10,549

 
$
10,549

 
$
15,145

 
144
%
 
4.85
%
April 25, 2019
 
October 26, 2018
 
5,865

 
5,865

 
7,630

 
130
%
 
4.65
%
April 29, 2019
 
March 28, 2019
 
8,725

 
8,725

 
11,781

 
135
%
 
4.35
%
April 29, 2019
 
March 28, 2019
 
26,367

 
26,367

 
35,232

 
134
%
 
4.25
%
May 8, 2019
 
November 8, 2018
 
18,226

 
18,226

 
26,599

 
146
%
 
4.74
%
May 8, 2019
 
November 8, 2018
 
10,933

 
10,933

 
16,502

 
151
%
 
4.84
%
June 6, 2019
 
December 6, 2018
 
3,786

 
3,786

 
4,967

 
131
%
 
4.80
%
June 6, 2019
 
February 8, 2019
 
9,937

 
9,937

 
13,181

 
133
%
 
4.65
%
June 7, 2019
 
December 7, 2018
 
50,294

 
50,294

 
67,837

 
135
%
 
4.47
%
June 21, 2019
 
December 21, 2018
 
32,393

 
32,393

 
41,660

 
129
%
 
4.65
%
June 21, 2019
 
December 21, 2018
 
2,771

 
2,771

 
4,050

 
146
%
 
4.80
%
June 28, 2019
 
December 28, 2018
 
8,860

 
8,860

 
10,842

 
122
%
 
4.64
%
July 11, 2019
 
January 11, 2019
 
8,956

 
8,956

 
13,016

 
145
%
 
4.75
%
July 12, 2019
 
July 15, 2016
 
250,000

 
192,065

 
252,645

 
132
%
 
4.98
%
August 1, 2019
 
February 1, 2019
 
14,068

 
14,068

 
19,239

 
137
%
 
4.81
%
September 24, 2019
 
September 25, 2018
 
400,000

 
126,147

 
132,538

 
105
%
 
4.99
%
September 25, 2019
 
March 25, 2019
 
9,154

 
9,154

 
12,243

 
134
%
 
4.43
%
September 25, 2019
 
March 25, 2019
 
11,869

 
11,869

 
16,549

 
139
%
 
4.58
%
September 30, 2019
 
March 28, 2019
 
1,638

 
1,638

 
2,388

 
146
%
 
4.58
%
September 30, 2019
 
March 29, 2019
 
6,233

 
6,233

 
8,330

 
134
%
 
4.40
%
September 30, 2019
 
March 29, 2019
 
1,568

 
1,568

 
2,287

 
146
%
 
4.55
%
Totals
 
 
$
892,192

 
$
560,404

 
$
714,661

 
128
%
 
4.81
%

26


 
 
 

 
December 31, 2018
Maturity Date
 
Origination date
 
Maximum
Borrowing
Capacity
 
Amount
Outstanding
 
Amount of
Collateral
 
Percentage of Collateral Coverage
 
Interest Rate
January 11, 2019
 
July 11, 2018
 
$
8,956

 
$
8,956

 
$
12,834

 
143
%
 
4.41
%
February 1, 2019
 
August 1, 2018
 
13,322

 
13,322

 
17,174

 
129
%
 
4.53
%
March 25, 2019
 
September 25, 2018
 
6,396

 
6,396

 
8,376

 
131
%
 
4.34
%
March 25, 2019
 
September 25, 2018
 
7,020

 
7,020

 
10,024

 
143
%
 
4.49
%
March 28, 2019
 
September 28, 2018
 
12,539

 
12,539

 
15,846

 
126
%
 
4.40
%
April 25, 2019
 
October 26, 2018
 
10,549

 
10,549

 
15,145

 
144
%
 
4.85
%
April 25, 2019
 
October 26, 2018
 
5,865

 
5,865

 
7,580

 
129
%
 
4.65
%
May 8, 2019
 
November 8, 2018
 
18,226

 
18,226

 
26,036

 
143
%
 
4.74
%
May 8, 2019
 
November 8, 2018
 
10,933

 
10,933

 
15,618

 
143
%
 
4.84
%
June 6, 2019
 
December 6, 2018
 
44,224

 
44,224

 
58,965

 
133
%
 
4.65
%
June 6, 2019
 
December 6, 2018
 
3,786

 
3,786

 
5,408

 
143
%
 
4.80
%
June 7, 2019
 
December 7, 2018
 
50,294

 
50,294

 
66,747

 
133
%
 
4.47
%
June 21, 2019
 
December 21, 2018
 
32,393

 
32,393

 
43,390

 
134
%
 
4.62
%
June 21, 2019
 
December 21, 2018
 
2,771

 
2,771

 
4,050

 
146
%
 
4.77
%
June 28, 2019
 
December 28, 2018
 
8,860

 
8,860

 
13,275

 
150
%
 
4.64
%
July 12, 2019
 
July 15, 2016
 
250,000

 
195,644

 
258,144

 
132
%
 
5.00
%
September 24, 2019
 
September 25, 2018
 
400,000

 
102,311

 
114,852

 
112
%
 
4.89
%
Totals
 
 
$
886,134

 
$
534,089

 
$
693,464

 
130
%
 
4.80
%

The guaranty establishes a master netting arrangement; however, the arrangement does not meet the criteria for offsetting within the Company’s consolidated Balance Sheets. A master netting arrangement derives from contractual agreements entered into by two parties to multiple contracts that provides for the net settlement of all contracts covered by the agreements in the event of default under any one contract. The amount outstanding on the Company’s repurchase facilities and the carrying value of the Company’s loans pledged as collateral are presented as gross amounts in the Company’s consolidated balance sheets at March 31, 2019 and December 31, 2018 in the table below ($ in thousands):

 
 
Gross amounts not offset in balance sheet
 
 
March 31, 2019
 
December 31, 2018
Gross amount of recognized liabilities
 
$
560,404

 
$
534,089

Gross amount pledged as collateral
 
714,661

 
693,464

Net amount
 
$
154,257

 
$
159,375


Secured Borrowings

From inception (January 30, 2014) to March 31, 2019, the Company has completed 13 secured borrowings for it's own Balance Sheet, not including it's off-balance sheet joint ventures in which it holds investments in various classes of securities, pursuant to Rule 144A under the Securities Act, six of which were outstanding at March 31, 2019. The secured borrowings are structured as debt financings and not sales through a real estate investment conduit (“REMIC”), and the loans included in the secured borrowings remain on the Company’s consolidated Balance Sheet as the Company is the primary beneficiary of the securitization trusts, which are VIEs. The securitization VIEs are structured as pass through entities that receive principal and interest on the underlying mortgages and distribute those payments to the holders of the notes. The Company’s exposure to the obligations of the VIEs is generally limited to its investments in the entities. The notes that are issued by the securitization trusts are secured solely by the mortgages held by the applicable trusts and not by any of the Company’s other assets. The mortgage loans of the applicable trusts are the only source of repayment and interest on the notes issued by such trusts. The Company does not guarantee any of the obligations of the trusts under the terms of the agreement governing the notes or otherwise.


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The Company’s secured borrowings are 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 the Company’s 2017-D securitization, from which the Company sold a 50% interest in the Class B certificates to third parties and 2018-C securitization, from which the Company sold a 95% interest in the Class A notes and 37% in the Class B notes and trust certificates, the Company has retained the subordinate notes and the trust certificates from the six secured borrowings outstanding at March 31, 2019.

2017-D secured borrowing contains Class A notes and Class B certificates representing the residual interests in the mortgages held within the securitization trusts subsequent to repayment of the Class A debt. The Company has retained 50% of both the Class A notes and Class B certificates from 2017-D.

2018-C secured borrowing contains Class A notes, Class B notes and trust certificates representing the residual interest in the mortgages held within the securitization trusts subsequent to repayment of the Class A debt. The Company has retained 5% of the Class A notes and 63% of the Class B notes and trust certificates.
 
The Company's 2017-B secured borrowing carries no provision for a step-up in interest rate on any of the Class A, Class B or Class M notes.

For all of the Company's 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. The Class M notes issued under 2017-B are also mezzanine, sequential pay, fixed rate notes.

For all of the Company's secured borrowings, except 2017-B, 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 points 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, the Company is entitled to receive any remaining amounts in the trusts after the Class A notes and subordinate notes have been paid in full.

The following table sets forth the original terms of all notes from our secured borrowings outstanding at March 31, 2019 at their respective cutoff dates:
Issuing Trust/Issue Date
 
Interest Rate Step-up Date
 
Security
 
Original Principal
 
Interest Rate
Ajax Mortgage Loan Trust 2016-C/ October 2016
 
October 25, 2019
 
Class A notes due 2057
 
$102.6 million
 
4.00
%
 
 
April 25, 2020
 
Class B-1 notes due 2057(1,4)
 
$7.9 million
 
5.25
%
 
 
None
 
Class B-2 notes due 2057(1,4)
 
$7.9 million
 
5.25
%
 
 
 
 
Trust certificates(2)
 
$39.4 million
 
%
 
 
 
 
Deferred issuance costs
 
$(1.6) million
 
%
 
 
 
 
&