Great Ajax Corp. - Quarter Report: 2020 March (Form 10-Q)

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, 2020

☐ 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			47-1271842
State or other jurisdiction of incorporation or organization			(I.R.S. Employer Identification No.)

9400 SW Beaverton-Hillsdale Hwy, Suite 131

Beaverton, OR 97005

(Address of principal executive offices and 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 ☐ No☒

As of May 4, 2020, 22,921,935 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS


PART I Financial Information

Item 1. Consolidated Interim Financial Statements			1

Cautionary Statement Regarding Forward-Looking Statements			44

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			45

Item 3. Quantitative and Qualitative Disclosures About Market Risk			74

Item 4. Controls and Procedures			75

PART II Other Information

Item 1. Legal Proceedings			76

Item 1A. Risk Factors			76

Item 2. Unregistered Sales of Securities			104

Item 3. Defaults Upon Senior Securities			104

Item 4. Mine Safety Disclosure			104

Item 5. Other Information			104

Item 6. Exhibits			104

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, 2020		December 31, 2019
ASSETS	(Unaudited)
Cash and cash equivalents	$	31,179	$	64,343
Cash held in trust	19		20
Mortgage loans, net^(1,2)	1,098,629		1,151,469
Property held-for-sale, net⁽³⁾	10,905		13,537
Rental property, net	1,345		1,534
Investments at fair value⁽⁴⁾	247,372		231,685
Investments in beneficial interests⁽⁵⁾	64,703		57,954
Receivable from servicer	17,322		17,013
Investments in affiliates	28,028		29,649
Prepaid expenses and other assets	38,345		9,637
Total assets	$	1,537,847	$	1,576,841
LIABILITIES AND EQUITY
Liabilities:
Secured borrowings, net^(1,2,6)	$	630,938	$	652,747
Borrowings under repurchase transactions	431,091		414,114
Convertible senior notes, net⁽⁶⁾	111,420		118,784
Management fee payable	1,795		1,634
Accrued expenses and other liabilities	5,329		5,478
Total liabilities	1,180,573		1,192,757
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, 22,921,935 shares at March 31, 2020 and 22,142,143 shares at December 31, 2019 issued and outstanding	230		222
Additional paid-in capital	316,762		309,395
Treasury stock	(514)		(458)
Retained earnings	42,749		49,446
Accumulated other comprehensive gain/(loss)	(27,167)		1,277
Equity attributable to stockholders	332,060		359,882
Non-controlling interests⁽⁷⁾	25,214		24,202
Total equity	357,274		384,084
Total liabilities and equity	$	1,537,847	$	1,576,841

(1)Mortgage loans net include $888.2 million and $908.6 million of loans at March 31, 2020 and December 31, 2019, 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 $16.1 million and $2.0 million of allowance for loan credit losses at March 31, 2020 and December 31, 2019, respectively.

(2)As of March 31, 2020, balances for Mortgage loans, net includes $316.5 million and Secured borrowings, net of deferred costs includes $271.6 million from the 50% and 63% owned joint ventures, respectively. As of December 31, 2019, balances for Mortgage loans, net include $341.8 million and

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

Secured borrowings, net of deferred costs includes $284.8 million from a 50% and 63% owned joint ventures, all of which the Company consolidates under U.S. Generally Accepted Accounting Principles ("U.S. GAAP").

(3)Property held-for-sale, net, includes valuation allowances of $2.3 million and $1.8 million at March 31, 2020 and December 31, 2019, respectively.

(4)As of March 31, 2020 and December 31, 2019 Investments at fair value include amortized cost basis of $274.5 million and $230.4 million, respectively, and unrealized losses of $27.2 million and unrealized gains of $1.3 million, respectively.

(5)Investments in beneficial interests includes allowance for credit losses of $7.2 million at March 31, 2020. No allowance for credit losses were recorded as of December 31, 2019.

(6)Secured borrowings and Convertible senior notes are presented net of deferred issuance costs.

(7)As of March 31, 2020 and December 31, 2019 non-controlling interests includes $23.4 million and $22.4 million, respectively, from the 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.

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended
($ in thousands except per share data)	March 31, 2020		March 31, 2019
INCOME
Interest income	$	27,286	$	29,452
Interest expense	(13,070)		(15,685)
Net interest income	14,216		13,767
Provision for credit losses	(5,109)		(154)
Net interest income after provision for credit losses	9,107		13,613
Income/(Loss) from investments in affiliates	(1,112)		461
Loss on sale of mortgage loans	(705)		—
Other income	747		1,110
Total income	8,037		15,184
EXPENSE
Related party expense – loan servicing fees	2,014		2,506
Related party expense – management fee	1,799		1,688
Loan transaction expense	(103)		69
Professional fees	805		862
Real estate operating expenses	912		786
Other expense	1,025		1,081
Total expense	6,452		6,992
Loss on debt extinguishment	408		—
Income before provision for income taxes	1,177		8,192
Provision for income taxes (benefit)	(319)		71
Consolidated net income	1,496		8,121
Less: consolidated net income attributable to the non-controlling interest	1,096		791
Consolidated net income attributable to common stockholders	$	400	$	7,330
Basic earnings per common share	$	0.02	$	0.39
Diluted earnings per common share	$	0.02	$	0.36
Weighted average shares – basic	22,070,354		18,811,713
Weighted average shares – diluted	22,189,984		27,829,448

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

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended March 31,
($ in thousands)	2020		2019
Consolidated net income attributable to common stockholders	$	400	$	7,330
Other comprehensive (loss)/income:
Net unrealized (loss)/gain on investments in available-for-sale debt securities	(28,444)		397
Income tax expense related to items of other comprehensive income	—		—
Comprehensive (loss)/income	$	(28,044)	$	7,727

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

GREAT AJAX CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended
($ in thousands)	March 31, 2020		March 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Consolidated net income	$	1,496	$	8,121
Adjustments to reconcile net income to net cash from operating activities
Stock-based management fee and compensation expense	214		1,029
Non-cash interest income accretion	(9,450)		(10,891)
Discount accretion on investment in debt securities and beneficial interests	(2,794)		(1,155)
Loss on sale of mortgage loans	705		—
Loss on debt extinguishment	408		—
Gain on sale of property held-for-sale	(286)		(103)
Gain on sale of securities	—		(8)
Depreciation of property	8		106
Impairment of real estate owned	897		475
Provision for credit losses on mortgage loans	2,122		154
Provision for credit losses on beneficial interests	2,987		—
Amortization of debt discount and prepaid financing costs	1,316		1,281
Undistributed loss/(income) from investment in affiliates	1,112		(461)
Net change in operating assets and liabilities
Prepaid expenses and other assets	(28,878)		(798)
Receivable from servicer	(278)		(4,160)
Accrued expenses, management fee payable, and other liabilities	12		1,366
Net cash from operating activities	(30,409)		(5,044)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of mortgage loan pools and related balances	(185)		(7,205)
Acquisition of commercial loans	(1,206)		(17,793)
Principal paydowns on mortgage loans	34,597		28,765
Principal paydowns on debt securities held as investments	10,233		11,941
Proceeds from sale of mortgage loans	25,412		—
Purchase of securities	(61,306)		(64,014)
Proceeds from sale of securities	—		39,635
Purchase of rental property	—		(2,300)
Proceeds from sale of property held-for-sale	3,017		5,131
Renovations of rental property	—		77
Distribution from affiliates	453		170
Net cash from investing activities	11,015		(5,593)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from repurchase transactions	72,417		67,463
Repayments on repurchase transactions	(55,440)		(45,483)
Repayments on secured borrowings	(22,599)		(17,837)
Deferred financing costs	(34)		—
Repurchase of senior convertible notes	(8,176)		—
Sale of common stock pursuant to dividend reinvestment plan	—		72
Distribution to non-controlling interests	(84)		(162)

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


Issuance of stock from subsidiary	145		—
Dividends paid on common stock	—		(7,021)
Net cash from financing activities	(13,771)		(2,968)
NET CHANGE IN CASH, CASH EQUIVALENTS, AND CASH HELD IN TRUST	(33,165)		(13,605)
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, beginning of period	64,363		55,170
CASH, CASH EQUIVALENTS AND CASH HELD IN TRUST, end of period	$	31,198	$	41,565
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	11,249	$	15,469
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized gain on available for sale securities, net of non-controlling interest and tax	$	28,444	$	397
Issuance of common stock for dividends paid	$	7,097	$	—
Net transfer of loans to rental property or property held-for-sale	$	814	$	4,171
Issuance of common stock for management fee and compensation expense	$	214	$	1,029
Treasury stock received through distributions from investment in Manager	$	56	$	40
Non-cash adjustments to basis in mortgage loans	$	31	$	5

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, 2020 and March 31, 2019 ($ in thousands):


	March 31, 2020		March 31, 2019
Cash and cash equivalents	$	31,179	$	41,542
Cash held in trust	19		23
Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flows	$	31,198	$	41,565

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

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, 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 declared ($0.32 per share) and distributions	—	—		—		—		(7,021)		—		(7,021)		(162)		(7,183)
Other comprehensive income	—	—		—		—		—		397		397		—		397
Treasury stock	(2,952)	—		(40)		—		—		—		(40)		—		(40)
Balance at Balance at March 31, 2019	18,967,223	$	190	$	(310)	$	261,527	$	41,372	$	(178)	$	302,601	$	34,074	$	336,675

Balance at December 31, 2019	22,142,143	$	222	$	(458)	$	309,395	$	49,446	$	1,277	$	359,882	$	24,202	$	384,084
Net income	—	—		—		—		400		—		400		1,096		1,496
Issuance of shares of subsidiary	—	—		—		145		—		—		145		—		145
Stock-based compensation expense	2,600	—		—		214		—		—		214		—		214
Dividends declared ($0.32 per share) and distributions	781,222	8		—		7,089		(7,097)		—		—		(84)		(84)
Convertible senior notes repurchase	—	—		—		(81)		—		—		(81)		—		(81)
Other comprehensive income	—	—		—		—		—		(28,444)		(28,444)		—		(28,444)
Treasury stock	(4,030)	—		(56)		—		—		—		(56)		—		(56)
Balance at March 31, 2020	22,921,935	$	230	$	(514)	$	316,762	$	42,749	$	(27,167)	$	332,060	$	25,214	$	357,274

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

GREAT AJAX CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

March 31, 2020

(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”), which are residential mortgage loans on which at least five of the seven most recent payments have been made, or the most recent payment has been made and accepted pursuant to an agreement, or the full dollar amount, to cover at least five payments has been paid in the last seven months. The Company also acquires and originates small balance commercial loans (“SBC loans”). 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 invests in single-family and smaller commercial properties directly either through a foreclosure event of a loan in its 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. 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 LLC ("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 variable interest entities ("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 Corp. 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 Corp. as a TRS under the Code.

The Operating Partnership, through interests in certain entities, holds 99.8% of Great Ajax II REIT Inc. which holds an interest in Great Ajax II Depositor LLC which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings. The Company has securitized mortgage loans through a securitization trust and retained subordinated securities from the secured borrowings. This trust is considered to be a VIE and the Company has determined that it is the primary beneficiary of this VIE.

In 2018, the Company formed Gaea Real Estate Corp. ("Gaea"), a wholly-owned subsidiary of the Operating partnership to hold investments in multi-family, mixed use commercial real estate. The Company had elected to treat Gaea as a TRS under the Code. Also during 2018, the Company formed Gaea Real Estate Operating Partnership LP, a wholly-owned subsidiary of Gaea, to hold investments in commercial real estate assets. The Company also formed BLFD Holding LLC ("BFLD"), Gaea Commercial Properties LLC, Gaea Commercial Finance LLC and Gaea RE LLC as subsidiaries of Gaea Real Estate Operating Partnership. In 2019, the Company formed DG Brooklyn Holdings, LLC ("DG Brooklyn Holdings") also as a subsidiary of Gaea Real Estate Operating Partnership LP, to hold investments in multi-family properties.

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

On November 22, 2019, Gaea completed a private capital raise transaction in which it raised $66.3 million from the issuance of 4,419,641 shares of its common stock to third parties to allow Gaea to continue to advance its investment strategy. The purchase price per share was $15.00. Upon completion of the private placement, the Company retained ownership of approximately 23.2% of Gaea with third party investors owning the remaining approximately 76.8%. Prior to the date of the capital raise, the Company consolidated Gaea's results and balances. From the date of the capital raise forward, the Company accounts for its investment in Gaea under the equity method.

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, 2019, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on March 4, 2020.

Interim financial statements are unaudited and prepared in accordance with 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 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, 2020. 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 four 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. Great Ajax II REIT Inc. which holds an interest in Great Ajax II Depositor LLC which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings and is 99.8% owned by the Company. 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.

At inception, the Operating Partnership was a majority owned partnership that had a non-controlling ownership interest held by an unaffiliated third party included in non-controlling interests on the Company’s consolidated balance sheet. At December 31, 2018, 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 the unaffiliated holder. The OP units were exchangeable on a 1-for-1 basis with shares of the Company’s common stock. During the second quarter of 2019, all 624,106 OP units held by the unaffiliated holder were exchanged for shares of the Company’s common stock. As a result, at March 31, 2020, the Operating Partnership was 100% owned by the Company. 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.

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

Note 2 — Summary of Significant Accounting Policies

Mortgage loans

Loans acquired with deterioration in credit quality

As of their acquisition date the loans acquired by the Company have generally suffered some credit deterioration subsequent to origination. As a result, prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses, otherwise known as CECL, on January 1, 2020, the Company was required to account for the mortgage loans pursuant to ASC 310-30, Accounting for Loans with Deterioration in Credit Quality. Under both standards, the Company’s recognition of interest income for loans with deteriorated credit quality ("PCD loans") is based upon its having a reasonable expectation of the amount and timing of the cash flows expected to be collected. When the timing and amount of cash flows expected to be collected are reasonably estimable, the Company uses expected cash flows to apply the effective interest method of income recognition.

Under both CECL and ASC 310-30, acquired loans may be aggregated and accounted for as a pool of loans if the loans have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. However, CECL allows more flexibility to the Company to adjust its loan pools as the underlying risk factors change over time. Under ASC 310-30, RPLs were determined by the Company to have common risk characteristics and were accounted for as a single loan pool for loans acquired within each three-month calendar quarter. Similarly, NPLs were determined to have common risk characteristics and were accounted for as a single non-performing pool for loans acquired within each three-month calendar quarter. The result was generally two additional pools (RPLs and NPLs) each quarter. Under CECL, the Company has re-aggregated its loan pools around similar risk factors, while eliminating the previous distinction for the quarter in which loans were acquired. This resulted in a reduction of the number of loan pools to four, each of which is oriented around similar risk factors. Excluded from the aggregate pools are loans that pay in full subsequent to the acquisition closing date but prior to pooling. Any gain or loss on these loans is recognized as Interest income in the period the loan pays in full.

The Company’s accounting for PCD loans gives rise to an accretable yield and an allowance for credit losses. Under CECL, upon the acquisition of PCD loans the Company records the acquisition as three separate elements for 1) the amount of purchase discount which the Company expects to recover through eventual repayment by the borrower, 2) an allowance for future expected credit loss and 3) the UPB of the loan. The purchase price discount which the Company expects at the time of acquisition to collect over the life of the loans is the accretable yield. Cash flows expected at acquisition include all cash flows directly related to the acquired loan, including those expected from the underlying collateral. The Company recognizes the accretable yield as Interest income on a prospective level yield basis over the life of the pool. The Company’s expectation of the amount of undiscounted cash flows 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, any prior allowance is reversed to the extent of the increase and the expected yield to maturity is adjusted on a prospective basis. The allowance for credit losses is increased when the Company estimates it will not collect all amounts previously estimated to be collectible, and reduced when the underlying asset has been liquidated and all expected underlying cash flows have been realized. Management assesses the credit quality of the portfolio and the adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, 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. 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.

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

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

While the Company generally acquires loans that have experienced deterioration in credit quality, it also acquires loans that have not experienced a deterioration in credit quality and originates SBC loans.

Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. 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.

If necessary, an allowance for loan losses is established through a provision for loan losses charged to expenses. The allowance is the difference between the present value of the expected future cash flows from the loan and the contractual balance due.

Investments at Fair Value

The Company’s Investments at Fair Value as of March 31, 2020 and December 31, 2019 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 notes 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. The Company marks its investments to fair value using prices received from its financing counterparties and believes any unrealized losses on its debt securities to be temporary. Any other-than-temporary losses, which represent the excess of the amortized cost basis over the present value of expected future cash flows, are recognized in the period identified in the Company’s consolidated statements of income. Risks inherent in the Company's debt securities portfolio, affecting both the valuation of its securities as well as the portfolio's interest income and recovery of principal include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters and damage to or delay in realizing the value of the underlying collateral. The Company monitors the credit quality of the mortgage loans underlying its debt securities 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.

Investments in Beneficial Interests

The Company’s Investments in beneficial interests as of March 31, 2020 and December 31, 2019 consist of investments in the trust certificates issued by joint ventures which 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 adopted CECL with respect to its Investment in beneficial interests on January 1, 2020. The methodology is similar to that described in "Mortgage Loans" except that the Company only recognizes its ratable share of gain, loss, income or expense.

Real Estate

The Company acquires real estate properties directly through purchases, 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

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

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 27.5 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 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.

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

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 fungible 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 repurchased, 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 1.7279 shares of common stock per $25.00 principal amount of the notes, which represents a conversion price of approximately $14.47 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 at issuance of $3.2 million, representing the fair value of the embedded conversion feature, was recorded to stockholder equity, which was reduced during the quarter ended March 31, 2020 by $0.1 million from the repurchase of notes by the Company. No sinking fund has been established for redemption of the principal.

During the first quarter of 2020, the Company completed a series of convertible note repurchases for an aggregate principal amount of $8.0 million and total purchase of $8.2 million. The carrying amount of the equity component reversed from Additional paid-in Capital due to the March 2020 transaction was $0.1 million.

Management Fee and Expense Reimbursement

The Company is a party to the Third Amended and Restated Management Agreement with the Manager (the "Management Agreement") by and between the Company and the Manager, dated as of May 1, 2020, 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 Management Agreement, 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 incentive management fee based on its cash distributions to its stockholders, and has the option to pay up to 100% of the base and incentive fees in cash rather than in half cash and half shares of its common stock. Management fees are expensed in the quarter incurred and the portion payable in common stock (if any) is included in stockholders’ equity at quarter end. See Note 10 — Related party transactions.

Servicing Fees

The Company is also a party to a Servicing Agreement (the "Servicing Agreement"), expiring July 8, 2029, with the Servicer. Under the Servicing Agreement by and between the Company and the Servicer, the Servicer receives an annual servicing fee ranging from 0.65% annually of the unpaid principal balance (“UPB”) to 1.25% annually of UPB for loans that are on-performing at acquisition. For certain of the Company's joint ventures, the servicing fee rate for RPLs is reduced to an annual servicing fee rate of 0.42% annually on a loan-by-loan basis for any loan that makes seven consecutive payments. Servicing fees are paid monthly. The total fees incurred by the Company for these services depend upon the UPB and type of mortgage loans that the Servicer services pursuant to the terms of the Servicing Agreement. The fees do not change if a RPL becomes non-performing or vice versa. Servicing fees for the Company’s real property assets 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 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

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

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

At least a portion of the management fee is payable in cash, and a portion of the management fee may be payable (at the Company's discretion) 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 (if any) are determined based on the higher of the most recently reported book value or the average of the closing prices of the Company's common stock on the New York Stock Exchange ("NYSE") on the five business days after the date on which the most recent regular quarterly dividend to holders of the common stock is paid. Any 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 may also periodically issue 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, which was 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.

On June 7, 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 is based on the grant date fair value of the stock. 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.

The accompanying notes are an integral part of the consolidated interim 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 which 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 and applicable portion of management fee 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

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

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 financial counterparties which 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 which 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 from 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 our proprietary asset valuation model unless a property is listed for sale or is under contract, in which case the list price or contract price is used, respectively, which price is then reduced by expected 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, 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 two TRS entities, GA-TRS and GAJX Real Estate Corp., which are subject to U.S. federal, state and local income taxes on their taxable income. Income from these two entities and any other TRS that the Company forms in the future 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

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

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.

Recently Adopted 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. In May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The amendments to Topic 326 and other Topics in this Update include items related to the amendments in Update 2016-13 discussed at the June 2018 and November 2018 Credit Losses Transition Resource Group meetings. The amendments clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13. This guidance is effective for interim and annual reporting periods that are applicable to the original ASU’s affected by the codification improvements. Also in May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief to allow financial statement preparers who had elected the fair value option for newly acquired financial assets to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13 for assets previously measured at amortized cost basis. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses to clarify or address stakeholders’ specific issues about certain aspects of the amendments in Update 2016-13. In February 2020, the FASB issued ASU 2020-02, Financial Instruments - Credit Losses (Topic 326) and Leases (Topic 842) to amend SEC paragraphs pursuant to SEC Staff Accounting Bulletin No. 119 and to update the SEC section on the effective date related to ASU 2016-02. The guidance in ASU 2016-13, ASU 2019-04, ASU 2019-05, ASU 2019-11and ASU 2020-02 became effective for the Company for all periods beginning after December 15, 2019. The Company adopted ASU 2016-13 and all related amendments on January 1, 2020.

For the Company’s mortgage loan portfolio, the initial adoption resulted in a reclassification between loan discount and allowance for purchased credit impaired loans of $10.2 million. This adjustment had no effect on the Company’s balance sheet presentation, or on consolidated equity. The Company does not consider this transition adjustment to be material to its financial position or previously reported statements. During subsequent periods this allowance for credit losses will be adjusted either upward or downward for expected changes in future credit losses based on expected cash flows. These changes to the reserve will be recognized in the Company's current period income. Historically, only reductions in expected cash flows were recognized in the current period earnings, while increases in expected cash flows were recognized prospectively over the remaining expected lives of the loan pools. The Company’s investments in beneficial interests are also deemed to be credit impaired under ASC 2016-13 and follow guidance comparable to that for impaired loans. Similarly, upon adoption, a reclassification from discount to allowance for credit impaired loss of $4.2 million was recorded, with no net impact on the Company’s balance sheet or on consolidated equity. As with the adjustment noted above for the Company's loan portfolio, this adjustment had no effect on the Company’s balance sheet presentation, or on consolidated equity. The Company does not consider this transition adjustment to be material to its financial position or previously reported statements. In subsequent periods, changes to the reserve for beneficial interests will be recognized in the Company’s current period income. Under ASU 2016-13, credit losses for available-for-sale debt securities are measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be recorded through an allowance for credit losses, which will cause subsequent reversals in credit loss estimates to be recognized in current income. In addition, the allowance for available-for-sale debt securities is limited to the extent that the fair value is less than the amortized cost.

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

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 adopted ASU 2018-13 in the first quarter of 2020 with no effect on its consolidated assets or liabilities, consolidated net income or equity or cash flows on the date of adoption.

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 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 adopted ASU 2018-15 in the first quarter of 2020 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 December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing certain exceptions and adding certain clarifications to rules and definitions used in the calculation of the income tax provision. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020, 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.

In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321, Investments) – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The amendments in this update clarify the interactions between Topic 321, Topic 323, and Topic 815, which clarifies aspects of accounting for investments in equity-method investees acquired through step acquisitions to require remeasurement of an investment immediately before adopting the equity method of accounting if the investor identifies observable price changes in orderly transactions for an identical or similar investment of the same issuer, and also requires such remeasurement upon discontinuance of the equity method. The amendments also clarify whether upon settlement of a forward contract or option the underlying security would be accounted for under the Equity Method (Topic 323) or the fair value option (Topic 825). This guidance is effective for interim and annual reporting periods beginning after December 15, 2020, 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 Company's RPL loan pools, NPL loan pools and SBC loans as of March 31, 2020 and December 31, 2019 ($ in thousands):


Loan portfolio basis by asset type	March 31, 2020		December 31, 2019
Residential RPL loan pools	$	1,066,555	$	1,085,514
SBC loan pools	5		11,652
Other mortgage loans non-pooled⁽¹⁾	4,212		23,434
Residential NPL loan pools	27,857		30,869
Total	$	1,098,629	$	1,151,469

(1)Other mortgage loans non-pooled are accounted for as non-PCD loans under CECL.

Included on the Company’s consolidated balance sheets as of March 31, 2020 and December 31, 2019 are approximately $1.1 billion and $1.2 billion, respectively, of RPLs, NPLs, and SBCs. RPLs, NPLs and SBCs are categorized at acquisition. The carrying value of all loans reflects the original investment amount, plus accretion of interest income and discount, less principal and interest cash flows received. The carrying values at March 31, 2020 and December 31, 2019 for the Company's loans in the table above are presented net of a cumulative allowance for loan losses of $16.1 million and

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

$2.0 million, respectively, reflected in the appropriate lines in the table by loan type. For the three months ended March 31, 2020 and 2019, the Company recognized $2.1 million and $0.2 million, respectively, of provision for loan loss. For the three month periods ended March 31, 2020 and 2019, the Company accreted $19.6 million and $26.4 million net of credit impairments, respectively, into interest income with respect to its RPL, NPL and SBC loan pools.

Loss estimates are determined based on the net present value of the difference between the contractual cash flows and the expected cash flows over the expected life of the assets. Contractual cash flows are calculated based on the stated terms of the loans, and incorporate any prepayment assumptions utilized in the expected cash flows. Expected cash flows are based on our proprietary model, which includes factors such as resolution method, resolution timeline, foreclosure costs, rehabilitation costs and eviction costs. Additional variables include the specific location of the underlying property, loan-to-value ratio, property age and condition, change and rate of change of borrower credit rating, servicing notes, interest rate, monthly payment amount and neighborhood rents.

The Company's mortgage loans are secured by real estate. Risks inherent in the Company's mortgage loan portfolio, affecting both the valuation of its mortgage loans as well as the portfolio's interest income include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters, or the pandemic caused by the novel coronavirus ("COVID-19") outbreak, and damage to or delay in realizing the value of the underlying collateral. 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.

The Company’s loan acquisitions during the three months ended March 31, 2020 consisted of 26 purchased RPLs with UPB of $2.0 million, one NPL with UPB of $0.2 million and no originated SBC loans. Comparatively, during the three months ended March 31, 2019, the Company acquired 38 purchased RPLs with UPB of $8.5 million, no NPLs and 19 originated SBC loans with UPB of $17.8 million. The Company also sold 26 commercial loans to Gaea, an affiliated entity, during the quarter with a carrying value of $26.1 million and UPB of $26.2 million and collateral values of $44.2 million for $25.4 million, recognizing a loss on the sale of $0.7 million. (See Note 10 — Related Party Transactions.) No loans were sold during the quarter ended March 31, 2019.

The Company adopted CECL using the prospective transition approach for PCD assets on January 1, 2020, at the time, $10.2 million of loan discount was reclassified to the allowance for credit losses with no net impact on the amortized cost basis of the portfolio. The Company views its mortgage loan portfolio based on loan performance and uses four pools to aggregate its portfolio of PCD loans, and one pool for its originated loans. Among the PCD loans, separate pools exist for loans that have made seven of the most recent seven payments ("7f7 and better"), loans that have been securitized in rated secured borrowings during 2019 ("Great Ajax II REIT"), loans with collateral in California which are not included in Great Ajax II REIT ("California") and loans which have made between four and six of the most recent payments or worse ("4f4-6f6 and below"). Originated loans are aggregated in the "Originated" pool. The following table presents information regarding the year of origination of the Company's mortgage loan portfolio by basis ($ in thousands):


	March 31, 2020
	2020		2019		2018		2017		2016		2009-2015		2006-2008		2005 and prior		Total
7f7 and better	$	—	$	—	$	244	$	124	$	2,085	$	33,490	$	262,595	$	114,237	$	412,775
Great Ajax II REIT	—		—		—		226		1,107		34,114		212,468		67,583		315,498
California	—		—		—		351		216		8,291		155,506		36,116		200,480
4f4-6f6 and below	—		—		—		361		698		24,410		99,980		39,006		164,455
Originated	—		788		1,245		2,508		104		711		55		10		5,421
Total	$	—	$	788	$	1,489	$	3,570	$	4,210	$	101,016	$	730,604	$	256,952	$	1,098,629

The following table presents a reconciliation between the purchase price and par value for the Company's loan acquisitions and originations for the quarter ended March 31, 2020 ($ in thousands):

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


	Three months ended March 31, 2020
	PCD Loans		Non PCD Loans
Par	$	227	$	1,952
Discount	(37)		(747)
Allowance	(4)		—
Purchase Price	$	186	$	1,205

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. Under CECL, the Company adjusts its allowance for loan losses when there are changes in its expectation of future cash flows. An increase to the allowance for losses will occur when there is a reduction in the Company's expected future cash flows. Reduction to the allowance, or recovery, may occur if there is an increase in expected future cash flows that were previously subject to a provision for losses. 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, 2020, the Company recorded a provision for credit losses of $2.1 million on its mortgage loan portfolio primarily as a result of reduced cash flow expectations due to the COVID-19 outbreak. This reserve reflects the macroeconomic impact of the COVID-19 outbreak on mortgage loans and residential real estate markets generally and is not specific to any loan losses or impairments in the mortgage loan portfolio. During the quarter ended March 31, 2019, the Company recorded an impairment of $0.2 million on its mortgage loan portfolio. An analysis of the balance in the allowance for loan losses account follows ($ in thousands):


	Three months ended March 31,
	2020		2019
Allowance for loan credit losses, beginning of period	$	(1,960)	$	(1,164)
Beginning period adjustment for CECL	(10,156)		—
Provision for credit losses on mortgage loans	(2,122)		(154)
Change to allowance for loan credit losses	(1,898)		—
Allowance for loan credit losses, end of period	$	(16,136)	$	(1,318)

The following table sets forth the carrying value of the Company’s mortgage loans by delinquency status as of March 31, 2020 and December 31, 2019 ($ in thousands):


	March 31, 2020
	Current		30		60		90		Foreclosure		Total
7f7 and better	$	231,761	$	66,809	$	51,058	$	61,750	$	1,398	$	412,776
Great Ajax II REIT	247,368		35,519		17,831		14,448		331		315,497
California	113,120		30,438		14,315		40,643		1,964		200,480
4f4- 6f6 and below	9,412		12,492		15,057		90,019		37,476		164,456
Originated	3,635		—		1,177		608		—		5,420
Total	$	605,296	$	145,258	$	99,438	$	207,468	$	41,169	$	1,098,629


	December 31, 2019
	Current		30		60		90		Foreclosure		Total
7f7 and better	$	252,815	$	72,394	$	41,673	$	50,602	$	1,894	$	419,378
Great Ajax II REIT	129,812		31,426		16,467		36,785		1,986		216,476
California	265,679		37,553		14,034		4,597		—		321,863
4f4- 6f6 and below	6,412		4,835		20,782		103,872		34,417		170,318
Originated	21,425		—		850		1,159		—		23,434
Total	$	676,143	$	146,208	$	93,806	$	197,015	$	38,297	$	1,151,469

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

Note 4 — Real Estate Assets, Net

The Company acquires real estate assets 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, 2020, the Company owned nine rental properties with an aggregate carrying value of $1.3 million held for investment as rentals, at which time five 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 six were transferred from Property held-for-sale, where all six were acquired through foreclosures. The remaining rental property was directly purchased. As of December 31, 2019, the Company owned 10 rental properties with a carrying value of $1.5 million held for use as rentals, at which time six were rented. Two properties were acquired as an RPL but transitioned to foreclosure prior to boarding by the Servicer, one was acquired through foreclosures, and six were transferred from Property held-for-sale, where all six were acquired through foreclosures. The remaining rental property was 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, 2020 and December 31, 2019, the Company’s net investments in REO held-for-sale were $10.9 million and $13.5 million, respectively, which include balances of $0.7 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, 2020 and 2019, 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, 2020 and 2019 ($ in thousands):


	Three months ended March 31,
	2020				2019
Property Held-for-sale	Count	Amount		Count	Amount
Balance at beginning of period	58	$	13,537	102	$	19,402
Transfers from mortgage loans	5	814		26	4,171
Adjustments to record at lower of cost or fair value	—	(897)		—	(475)
Disposals	(19)	(2,730)		(33)	(5,028)
Transfer from Rental property	1	181		3	880
Transfers to Rental property	—	—		(1)	(293)
Other	—	—		—	(77)
Balance at end of period	45	$	10,905	97	$	18,580

Dispositions

During the three months ended March 31, 2020 and 2019, the Company sold 19 and 33 REO properties, respectively, realizing a net gain of approximately $0.4 million and $0.1 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, 2020 and 2019 of $0.9 million and $0.5 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 VIEs, 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 marks its debt securities to fair value using prices provided by financing counterparties, and believes any unrealized losses to be temporary.

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

Risks inherent in the Company's debt securities portfolio, affecting both the valuation of its securities as well as the portfolio's interest income include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters, or the COVID-19 outbreak, and damage to or delay in realizing the value of the underlying collateral. The Company monitors the credit quality of the mortgage loans underlying its debt securities 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. The following table presents information regarding the Company's investments in debt securities and investments in beneficial interests ($ in thousands):


	As of March 31, 2020
	Basis⁽¹⁾		Gross unrealized gains		Gross unrealized losses		Carrying value (fair value)
Debt securities	$	274,539	$	—	$	(27,167)	$	247,372
Beneficial interests in securitization trusts	64,703		—		—		64,703
Total investments	$	339,242	$	—	$	(27,167)	$	312,075

(1)Basis amount is net of any amortized discount, allowance for credit losses, principal paydowns and interest receivable on securities of $0.3 million.


	As of December 31, 2019
	Basis⁽¹⁾		Gross unrealized gains		Gross unrealized losses		Carrying value (fair value)
Debt securities	$	230,408	$	1,643	$	(366)	$	231,685
Beneficial interests in securitization trusts	57,954		—		—		57,954
Total investments	$	288,362	$	1,643	$	(366)	$	289,639

(1)Basis amount is net of any amortized discount, principal paydown and interest receivable on securities of $0.3 million.

As of March 31, 2020, the Company recorded no gross unrealized gains and a gross unrealized loss of $27.2 million in fair valuation adjustments in accumulated other comprehensive income and carried the Notes on the consolidated balance sheet at a fair value of $247.4 million, which includes $0.3 million in interest receivable. As of March 31, 2020, the Company had a gross unrealized loss of $5.2 million for securities due in April 2058, February 2057 and September 2059 which have been in an unrealized loss position for 12 months or longer. As of December 31, 2019, the Company recorded a gross unrealized gain of $1.6 million and a gross unrealized loss of $0.4 million in fair valuation adjustments in accumulated other comprehensive income and carried the Notes on the Company's consolidated balance sheet at fair value of $231.7 million, which includes $0.3 million in interest receivable. As of December 31, 2019, the Company had a gross unrealized loss of $0.4 million for securities due in April 2058, February 2057 and September 2059 which had been in an unrealized loss position for 12 months or longer.

During the first quarter of 2020, the Company acquired $61.3 million in notes and beneficial interests issued by joint ventures between the Company and third party institutional accredited 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. Of the $61.3 million acquired in the first quarter of 2020, the Company acquired $49.6 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. 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 thousand, net of transaction fees.

The remaining $7.1 million consisted of beneficial interests issued by its sponsored joint ventures during the first quarter of 2020. As of March 31, 2020, the investments in beneficial interests were carried on the Company's consolidated balance sheet at $64.7 million. For the year ended December 31, 2019, the investments in beneficial interests were carried on the Company's consolidated balance sheet at $58.0 million. As of March 31, 2020 and December 31, 2019, the Company had no securities that were past due.

The following table presents a reconciliation between the purchase price and par value for the Company's beneficial interests acquisitions for the quarter ended March 31, 2020 ($ in thousands):

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


	Three months ended March 31, 2020
	Beneficial Interest
Par	$	11,970
Discount	(4,888)
Purchase Price	$	7,082

The Company adopted CECL using the prospective transition approach for PCD assets for its beneficial interests on January 1, 2020, at the time $4.2 million was reclassified from discount to allowance for credit losses for its Investments in beneficial interests. Under CECL, the company adjusts its allowance for loan losses when there are changes in its expectation of future cash flows. An increase to the allowance for losses will occur when there is a reduction in the Company’s expected future cash flows. A reduction to the allowance, or recovery, may occur if there is an increase in expected future cash flows that were previously subject to a provision for losses. 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, 2020, the Company recorded a provision for credit losses of $3.0 million on its mortgage loan portfolio, primarily as a result of reduced cash flow expectations due to the pandemic caused by COVID-19. This reserve reflects the macroeconomic impact of the COVID-19 outbreak on mortgage loan and residential real estate markets generally and is not specific to any specific asset in the beneficial interest portfolio. During the quarter ended March 31, 2019, the Company recorded no impairment on its beneficial interests. An analysis of the balance in the allowance for beneficial interest losses account follows ($ in thousands):


	Three months ended March 31,
	2020		2019
Allowance for beneficial interests credit losses, beginning balance	$	—	$	—
Beginning period adjustment for CECL	(4,221)		—
Provision for credit losses on beneficial interests	(2,987)		—
Allowance for beneficial interests credit losses, end balance	$	(7,208)	$	—

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

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, 2020 and December 31, 2019 ($ in thousands):


			Level 1		Level 2		Level 3
March 31, 2020	Carrying value		Quoted prices in active markets		Observable inputs other than Level 1 prices		Unobservable inputs
Financial assets
Recurring financial assets
Investments in debt securities at fair value	$	247,372	$	—	$	247,372	$	—
Investments in beneficial interests	$	64,703	$	—	$	64,703	$	—
Non-recurring financial assets
Mortgage loans, net	$	1,098,629	$	—	$	—	$	1,098,638
Investment in Manager	$	734	$	—	$	—	$	4,419
Investment in AS Ajax E LLC	$	894	$	—	$	968	$	—
Investment in GAFS, including warrants	$	2,747	$	—	$	—	$	3,320
Investment in Gaea	$	19,998	$	—	$	—	$	19,998
Investment in legacy entities	$	651	$	—	$	—	$	651
Financial liabilities
Recurring financial liabilities
Borrowings under repurchase transactions	$	431,091	$	—	$	431,091	$	—
Non-recurring financial liabilities
Secured borrowings, net	$	630,938	$	—	$	—	$	568,525
Convertible senior notes, net	$	111,420	$	87,073	$	—	$	—


			Level 1		Level 2		Level 3
December 31, 2019	Carrying value		Quoted prices in active markets		Observable inputs other than Level 1 prices		Unobservable inputs
Financial assets
Recurring financial assets
Investments in debt securities at fair value	$	231,685	$	—	$	231,685	$	—
Investments in beneficial interests	$	57,954	$	—	$	57,954	$	—
Non-recurring financial assets
Mortgage loans, net	$	1,151,469	$	—	$	—	$	1,260,385
Investment in Manager	$	1,755	$	—	$	—	$	7,721
Investment in AS Ajax E LLC	$	931	$	—	$	1,012	$	—
Investment in GAFS, including warrants	$	3,023	$	—	$	—	$	3,320
Investment in Gaea	$	19,995	$	—	$	—	$	19,995
Investment in legacy entities	$	760	$	—	$	—	$	760
Financial liabilities
Recurring financial liabilities
Borrowings under repurchase transactions	$	414,114	$	—	$	414,114	$	—
Non-recurring financial liabilities
Secured borrowings, net	$	652,747	$	—	$	—	$	657,918
Convertible senior notes, net	$	118,784	$	132,173	$	—	$	—

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

The fair value of mortgage loans and beneficial interests 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 using estimates provided by its financing counterparties. 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 financing counterparties (See Note 5 — Investments).

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

The Company’s investment in AS Ajax E LLC is valued using estimates provided by financing counterparties.

The fair value of the Company's investment in GAFS is presented by applying an earnings multiple to expected earnings.

The Company's investment in Gaea and the legacy entities are presented as the carrying value due to the recent nature of the acquisition transactions.

The fair value of secured borrowings is estimated using estimates provided by the Company's financing counterparties which are compared for reasonableness to the Manager’s proprietary pricing model which estimates expected cash flows of the underlying mortgage loans collateralizing the debt, and which drive the cash flows used to make interest payments.

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 plus improvements (cost) or net realizable value. Net realizable value is determined based on appraisals, broker price opinions, or other market indicators of fair value less expected liquidation costs. The lower of cost or net realizable 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, 2020 and December 31, 2019 ($ in thousands):


					Level 1		Level 2		Level 3
March 31, 2020	Carrying value		Three months ended 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	$	10,905	$	897	$	—	$	—	$	10,905


					Level 1		Level 2		Level 3
December 31, 2019	Carrying value		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	$	13,537	$	2,104	$	—	$	—	$	13,537

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

Note 7 — Affiliates

Unconsolidated Affiliates

On November 22, 2019, Gaea completed a private capital raise transaction in which it raised $66.3 million from the issuance of 4,419,641 shares of its common stock to third parties to allow it to continue to advance its investment strategy. Upon completion of the capital raise, the Company retained ownership of approximately 23.2% of Gaea with third party investors owning the remaining approximately 76.8%. The Company recognized no gain or loss on the transaction as Gaea's fair value at the date of the deconsolidation did not represent a material change from the fair values of its recently acquired assets and liabilities due to the limited lapse of time since their acquisitions. The Company accounts for its investment in Gaea using the equity method.

During the year ended December 31, 2019, the Company acquired a cumulative 40.4% average ownership interest in three legacy entity LLCs managed by the Servicer for $1.0 million which hold investments in RPLs and NPLs. The Company accounts for its investment using the equity method.

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.

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. As of March 31, 2020 and December 31, 2019, the Company’s interest in AS Ajax E LLC was approximately 16.5%. The Company accounts for its investment using the equity method.

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.

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/(loss), assets and liabilities of unconsolidated affiliates at 100%


	Three months ended March 31,
Net income/(loss) at 100%	2020		2019
Legacy Entities	$	198	$	—
AS Ajax E LLC	$	62	$	76
Gaea Real Estate Corp.	$	15	$	—
Great Ajax FS LLC⁽¹⁾	$	(3,450)	$	1,600
Thetis Asset Management LLC	$	(4,877)	$	1,408

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


	March 31, 2020						December 31, 2019
Assets and Liabilities at 100%	Assets		Liabilities		Assets		Liabilities
Gaea Real Estate Corp.	$	83,173	$	772	$	83,068	$	768
Great Ajax FS LLC	$	56,538	$	35,656	$	61,432	$	37,142
Thetis Asset Management LLC	$	7,229	$	2,379	$	12,277	$	2,265
AS Ajax E LLC	$	5,522	$	2	$	5,747	$	2
Legacy entities	$	1,350	$	3,125	$	1,592	$	3,095

Net income/(loss), assets and liabilities of unconsolidated affiliates at the Company's share


	Three months ended March 31,
Net income/(loss) at the Company's share	2020		2019
Legacy Entities	$	79	$	—
AS Ajax E LLC	$	10	$	13
Gaea Real Estate Corp.	$	4	$	—
Great Ajax FS LLC⁽¹⁾	$	(276)	$	128
Thetis Asset Management LLC	$	(966)	$	279


	March 31, 2020						December 31, 2019
Assets and Liabilities at the Company's share	Assets		Liabilities		Assets		Liabilities
Gaea Real Estate Corp.	$	19,277	$	179	$	19,252	$	178
Great Ajax FS LLC	$	4,523	$	2,852	$	4,915	$	2,971
Thetis Asset Management LLC	$	1,431	$	471	$	2,431	$	448
AS Ajax E LLC	$	911	$	—	$	948	$	—
Legacy Entities	$	540	$	1,259	$	637	$	1,247

(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 three months ended March 31, 2019

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 VIEs, and the Company has determined that it is the primary beneficiary of the VIEs. See Note 9 — Debt.

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, 2020, 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, 2020, 2017-D was 50.0% owned by a third-party institutional accredited investor. As of March 31, 2020, 2018-C was 63.0% owned by the Company, with the remainder held by third-party institutional accredited investors. Great Ajax II REIT which holds an interest in Great Ajax II Depositor LLC which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings is 99.8% owned by the Company as of March 31, 2020.

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.

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

At March 31, 2020, the Company had commitments to purchase, subject to due diligence, 906 RPLs and NPLs with aggregated UPB of $162.0 million secured by single-family residences. The Company will only acquire loans that meet the acquisition criteria for its own portfolios, or those of its third party institutional accredited co-investors. See Note 15 — Subsequent Events, for remaining open acquisitions as of the filing date.

The full extent of the impact of COVID-19 on the global economy generally, and the Company's business in particular, is uncertain. As of March 31, 2020, no contingencies have been recorded on the Company's consolidated balance sheet as a result of COVID-19, however as the global pandemic continues and the economic implications worsen, it may have long-term adverse impacts on the Company's financial condition, results of operations, and cash flows.

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, 2020, 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 three repurchase facilities substantially similar to the mortgage loan repurchase facilities, but where the pledged assets are the class B bonds and certificates from the Company's secured borrowing transactions. These facilities have no effective ceilings. Each repurchase transaction represents its own borrowing. As such, the ceilings associated with these transactions are the amounts currently borrowed at any one time. 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. Each 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 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):

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


				March 31, 2020
Maturity Date	Origination date	Maximum Borrowing Capacity		Amount Outstanding		Amount of Collateral		Percentage of Collateral Coverage		Interest Rate
April 2, 2020	January 3, 2020	$	1,758	$	1,758	$	2,388	136	%	2.96	%
April 2, 2020	January 3, 2020	1,684		1,684		2,287		136	%	2.96	%
April 13, 2020	March 12, 2020	37,201		37,201		49,877		134	%	2.46	%
April 13, 2020	March 12, 2020	3,236		3,236		4,655		144	%	2.56	%
April 22, 2020	March 24, 2020	35,381		35,381		51,679		146	%	5.00	%
April 27, 2020	January 28, 2020	5,749		5,749		7,464		130	%	3.00	%
April 27, 2020	March 27, 2020	4,811		4,811		10,024		208	%	3.71	%
April 27, 2020	March 27, 2020	4,108		4,108		7,101		173	%	3.71	%
April 27, 2020	January 28, 2020	2,522		2,522		3,381		134	%	2.80	%
April 27, 2020	March 27, 2020	2,153		2,153		10,938		508	%	3.86	%
June 3, 2020	March 3, 2020	20,987		20,987		27,814		133	%	3.11	%
June 3, 2020	March 3, 2020	11,181		11,181		14,682		131	%	3.11	%
June 3, 2020	March 3, 2020	10,019		10,019		13,192		132	%	3.11	%
June 3, 2020	December 6, 2019	6,097		6,097		7,565		124	%	3.64	%
June 3, 2020	March 3, 2020	5,161		5,161		6,616		128	%	3.11	%
June 3, 2020	December 6, 2019	4,704		4,704		5,755		122	%	3.64	%
June 3, 2020	March 3, 2020	3,827		3,827		4,907		128	%	3.11	%
June 3, 2020	December 6, 2019	3,053		3,053		3,959		130	%	3.64	%
June 3, 2020	December 6, 2019	2,332		2,332		3,360		144	%	3.79	%
June 3, 2020	March 3, 2020	1,848		1,848		2,640		143	%	3.21	%
June 3, 2020	December 6, 2019	1,132		1,132		1,607		142	%	3.79	%
June 19, 2020	March 20, 2020	14,599		14,599		19,893		136	%	6.22	%
June 19, 2020	December 19, 2019	13,447		13,447		17,077		127	%	3.55	%
June 19, 2020	March 20, 2020	9,571		9,571		13,043		136	%	6.22	%
June 19, 2020	March 20, 2020	4,691		4,691		6,089		130	%	6.22	%
June 19, 2020	March 20, 2020	2,665		2,665		4,050		152	%	6.72	%
June 19, 2020	December 19, 2019	1,155		1,155		1,687		146	%	3.70	%
June 26, 2020	March 26, 2020	20,906		20,906		31,930		153	%	9.23	%
June 30, 2020	January 3, 2020	8,328		8,328		3,656		44	%	3.56	%
June 30, 2020	January 3, 2020	6,099		6,099		9,038		148	%	3.56	%
June 30, 2020	December 30, 2019	5,286		5,286		6,850		130	%	3.57	%
June 30, 2020	January 3, 2020	5,116		5,116		6,721		131	%	3.56	%
June 30, 2020	December 30, 2019	3,324		3,324		4,667		140	%	3.72	%
July 10, 2020	January 13, 2020	9,020		9,020		13,016		144	%	3.67	%
July 31, 2020	February 3, 2020	7,763		7,763		9,702		125	%	3.56	%
July 31, 2020	February 3, 2020	7,151		7,151		9,537		133	%	3.56	%
July 10, 2020	July 15, 2016	250,000		30,141		44,217		147	%	3.38	%
September 24, 2020	September 25, 2019	400,000		112,885		164,103		145	%	3.11	%
Totals		$	938,065	$	431,091	$	607,167	141	%	3.86	%

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


				December 31, 2019
Maturity Date	Origination date	Maximum Borrowing Capacity		Amount Outstanding		Amount of Collateral		Percentage of Collateral Coverage		Interest Rate
January 3, 2020	November 26, 2019	$	8,411	$	8,411	$	11,098	132	%	3.45	%
January 3, 2020	November 26, 2019	6,093		6,093		9,038		148	%	3.45	%
January 3, 2020	November 26, 2019	5,175		5,175		6,855		132	%	3.45	%
January 3, 2020	December 2, 2019	11,966		11,966		15,742		132	%	3.45	%
January 3, 2020	December 2, 2019	10,648		10,648		14,058		132	%	3.45	%
January 3, 2020	December 2, 2019	5,485		5,485		7,050		129	%	3.45	%
January 3, 2020	December 2, 2019	4,096		4,096		5,261		128	%	3.45	%
January 3, 2020	December 2, 2019	1,644		1,644		2,388		145	%	3.55	%
January 3, 2020	December 2, 2019	1,576		1,576		2,287		145	%	3.55	%
January 10, 2020	December 11, 2019	21,088		21,088		28,284		134	%	3.47	%
January 10, 2020	December 11, 2019	1,808		1,808		2,640		146	%	3.57	%
January 13, 2020	July 11, 2019	8,956		8,956		13,016		145	%	4.16	%
January 21, 2020	December 20, 2019	15,718		15,718		20,623		131	%	3.41	%
January 21, 2020	December 20, 2019	10,305		10,305		13,521		131	%	3.41	%
January 21, 2020	December 20, 2019	5,840		5,840		7,324		125	%	3.41	%
January 21, 2020	December 20, 2019	2,784		2,784		4,050		145	%	3.51	%
January 28, 2020	October 30, 2019	5,318		5,318		7,464		140	%	3.19	%
January 28, 2020	October 30, 2019	2,520		2,520		3,381		134	%	2.99	%
February 3, 2020	August 1, 2019	7,568		7,568		9,702		128	%	4.19	%
February 3, 2020	August 1, 2019	6,664		6,664		9,537		143	%	4.19	%
February 24, 2020	November 26, 2019	41,412		41,412		54,828		132	%	2.92	%
March 25, 2020	September 25, 2019	7,075		7,075		10,024		142	%	3.96	%
March 25, 2020	September 25, 2019	5,851		5,851		7,423		127	%	3.81	%
March 26, 2020	September 26, 2019	27,075		27,075		34,591		128	%	3.81	%
March 27, 2020	September 27, 2019	2,915		2,915		3,709		127	%	3.79	%
June 3, 2020	December 6, 2019	6,097		6,097		7,891		129	%	3.64	%
June 3, 2020	December 6, 2019	4,704		4,704		6,106		130	%	3.64	%
June 3, 2020	December 6, 2019	3,053		3,053		4,035		132	%	3.64	%
June 3, 2020	December 6, 2019	2,332		2,332		3,360		144	%	3.79	%
June 3, 2020	December 6, 2019	1,132		1,132		1,607		142	%	3.79	%
June 19, 2020	December 19, 2019	13,447		13,447		18,076		134	%	3.55	%
June 19, 2020	December 19, 2019	1,155		1,155		1,687		146	%	3.70	%
June 30, 2020	December 30, 2019	5,286		5,286		7,044		133	%	3.57	%
June 30, 2020	December 30, 2019	3,324		3,324		4,667		140	%	3.72	%
July 10, 2020	July 15, 2016	250,000		28,931		57,397		198	%	4.28	%
September 24, 2020	September 25, 2019	400,000		116,662		164,403		141	%	4.24	%
Totals		$	918,521	$	414,114	$	580,167	140	%	3.77	%

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. During the last two weeks in March 2020, the Company received margin calls from its financing counterparties in the amount of $28.2 million due to the turmoil in the financial markets resulting from the COVID-19 outbreak. As of March 31, 2020, the Company had $32.4 million of cash collateral on deposit with financing counterparties. This cash is included in Prepaid expenses and other assets on its consolidated balance sheet at

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

March 31, 2020 and is not netted against its Borrowings under repurchase agreements. 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, 2020 and December 31, 2019 in the table below ($ in thousands):


	Gross amounts not offset in balance sheet
	March 31, 2020		December 31, 2019
Gross amount of recognized liabilities	$	431,091	$	414,114
Gross amount of loans and securities pledged as collateral	607,167		580,167
Other prepaid collateral	32,360		4,117
Net collateral amount	$	143,716	$	161,936

Secured Borrowings

From inception (January 30, 2014) to March 31, 2020, the Company has completed 15 secured borrowings for its own balance sheet, not including its 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, 2020. 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.

The Company’s secured borrowings are generally structured with Class A notes, subordinate notes, and trust certificates, which have rights to the residual interests in the mortgages once the notes are repaid. With the exception of 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 applicable trust certificates from the other six secured borrowings outstanding at March 31, 2020.

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, 2019-D and 2019-F secured borrowings carry 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 with the exception of 2019-D and 2019-F, which are subordinate, sequential pay, fixed rate notes for Class B-1 and variable rate notes for Class B-2 and Class B-3. The interest rate is effectively the rate equal to the spread between the gross average rate of interest the trust collects on its mortgage loan portfolio minus the rate derived from the sum of the servicing fee and other expenses of the trust. The Class M notes issued under 2017-B, 2019-D and 2019-F are also mezzanine, sequential pay, fixed rate notes.

For all of the Company's secured borrowings, except 2017-B, 2019-D and 2019-F, which contains no interest rate step-up, if the Class A notes have not been redeemed by the payment date or otherwise paid in full 36 months after issue, or in the case of 2017-C, 48 months after issue, an interest rate step-up of 300 basis points is triggered. Twelve months after the 300 basis 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

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

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, 2020 at their respective cutoff dates:

Issuing Trust/Issue Date

Interest Rate Step-up Date

Security

Original Principal

Interest Rate

Ajax Mortgage Loan Trust 2017-B/ December 2017

None

Class A notes due 2056

$115.8 million

3.16

None

Class M-1 notes due 2056⁽³⁾

$9.7 million

3.50

None

Class M-2 notes due 2056⁽³⁾

$9.5 million

3.50

None

Class B-1 notes due 2056⁽¹⁾

$9.0 million

3.75

None

Class B-2 notes due 2056⁽¹⁾

$7.5 million

3.75

Trust certificates⁽²⁾

$14.3 million

—

Deferred issuance costs

$(1.8) million

—

Ajax Mortgage Loan Trust 2017-C/ November 2017

November 25, 2021

Class A notes due 2060

$130.2 million

3.75

May 25, 2022

Class B-1 notes due 2060⁽¹⁾

$13.0 million

5.25

Trust certificates⁽²⁾

$42.8 million

—

Deferred issuance costs

$(1.7) million

—

Ajax Mortgage Loan Trust 2017-D/ December 2017

April 25, 2021

Class A notes due 2057⁽⁴⁾

$177.8 million

3.75

None

Class B certificates⁽⁴⁾

$44.5 million

—

Deferred issuance costs

$(1.1) million

—

Ajax Mortgage Loan Trust 2018-C/ September 2018

October 25, 2021

Class A notes due 2065⁽⁵⁾

$170.5 million

4.36

April 25, 2022

Class B notes due 2065⁽⁵⁾

$15.9 million

5.25

Trust certificates⁽⁵⁾

$40.9 million

—

Deferred issuance costs

$(2.0) million

—

Ajax Mortgage Loan Trust 2019-D/ July 2019

None

Class A-1 notes due 2065

$140.4 million

2.96

None

Class A-2 notes due 2065

$6.1 million

3.50

None

Class A-3 notes due 2065

$10.1 million

3.50

None

Class M-1 notes due 2065⁽³⁾

$9.3 million

3.50

None

Class B-1 notes due 2065⁽⁶⁾

$7.5 million

3.50

None

Class B-2 notes due 2065⁽⁶⁾

$7.1 million

variable⁽⁷⁾

None

Class B-3 notes due 2065⁽⁶⁾

$12.8 million

variable⁽⁷⁾

Deferred issuance costs

$(2.7) million

—

Ajax Mortgage Loan Trust 2019-F/ November 2019

None

Class A-1 notes due 2059

$110.1 million

2.86

None

Class A-2 notes due 2059

$12.5 million

3.50

None

Class A-3 notes due 2059

$5.1 million

3.50

None

Class M-1 notes due 2059⁽¹⁾

$6.1 million

3.50

None

Class B-1 notes due 2059⁽⁶⁾

$11.5 million

3.50

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

None

Class B-2 notes due 2059⁽⁶⁾

$10.4 million

variable⁽⁷⁾

None

Class B-3 notes due 2059⁽⁶⁾

$15.1 million

variable⁽⁷⁾

Deferred issuance costs

$(1.8) million

—

(1)The Class B notes are subordinate, sequential pay, fixed rate notes with Class B-2 notes subordinate to the Class B-1 notes. The Company has retained the Class B notes.

(2)The trust certificates issued by the trusts and the beneficial ownership of the trusts are retained by Great Ajax Funding LLC as the depositor. As the holder of the trust certificates, the Company is entitled to receive any remaining amounts in the trusts after the Class A notes, Class M notes, where present, and Class B notes have been paid in full.

(3)The Class M notes are subordinate, sequential pay, fixed rate notes with Class M-2 notes subordinate to the Class M-1 notes. The Company has retained the Class M notes.

(4)Ajax Mortgage Loan Trust ("AJAXM") 2017-D is a joint venture in which a third party owns 50% of the Class A notes and 50% of the Class B certificates. The Company is required to consolidate 2017-D under GAAP and is reflecting 100% of the mortgage loans, in Mortgage loans, net. 50% of the Class A notes, which are held by the third party, are included in Secured borrowings, net. The 50% portion of the Class A notes retained by the Company have been encumbered under a repurchase agreement. 50% of the Class B certificates are recognized as Non-controlling interest.

(5)AJAXM 2018-C is a joint venture in which a third party owns 95% of the Class A notes and 37% of the Class B notes and certificates. The Company is required to consolidate 2018-C under GAAP and is reflecting 100% of the mortgage loans, in Mortgage loans, net. 95% of the Class A notes and 37% of the Class B notes, which are held by the third party, are included in Secured borrowings, net. The 5% portion of the Class A notes retained by the Company have been encumbered under the repurchase agreement. 37% of the Class C certificates are recognized as Non-controlling interest.

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

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

Servicing for the mortgage loans in the Company’s secured borrowings is provided by the Servicer at servicing fee rates of between 0.65% of outstanding UPB and 1.25% of outstanding UPB at acquisition, and is paid monthly. For certain of the Company's joint ventures, the servicing fee rate for RPLs is reduced to an annual servicing fee rate of 0.42% annually on a loan-by-loan basis for any loan that makes seven consecutive payments. The determination of RPL or NPL status, which determines the servicing fee rates, is based on the status of the loan at acquisition and does not change regardless of the loan’s subsequent performance. The following table sets forth the status of the notes held by others at March 31, 2020 and December 31, 2019, and the securitization cutoff date ($ in thousands):


	Balances at March 31, 2020												Balances at December 31, 2019							Original balances at securitization cutoff date
Class of Notes	Carrying value of mortgages		Bond principal balance			Percentage of collateral coverage		Carrying value of mortgages		Bond principal balance			Percentage of collateral coverage		Mortgage UPB			Bond principal balance
2017-B	$	120,075	$	80,325		149	%	$	121,909	$	84,624		144	%	$	165,850		$	115,846
2017-C	136,177		91,159			149	%	137,369		94,126			146	%	185,942			130,159
2017-D	140,364		57,434		(1)	244	%	148,119		60,934		(1)	243	%	203,870		(2)	88,903
2018-C	176,116		140,815		(3)	125	%	179,303		146,925		(3)	122	%	222,181		(4)	167,910
2019-D	161,705		142,980			113	%	165,963		146,383			113	%	193,301			156,670
2019-F	153,793		124,403			124	%	155,899		126,723			123	%	170,876			127,673
	$	888,230	$	637,116	(5)	139	%	$	908,562	$	659,715	(5)	138	%	$	1,142,020		$	787,161

(1)The gross amount of senior bonds at March 31, 2020 and December 31, 2019 were $114.9 million and $121.9 million however, only $57.4 million and $60.9 million are reflected in Secured borrowings as the remainder is owned by the Company, respectively.

(2)Includes $26.7 million of cash collateral intended for use in the acquisition of additional mortgage loans.

(3)2018-C contains notes held by the third party institutional investors for senior bonds and class B bonds. The gross amount of the senior and class B bonds at March 31, 2020 were $142.0 million and $15.9 million, however, only $134.9 million and $5.9 million are reflected in Secured borrowings as the remainder is owned by the Company, respectively. The gross amount of the senior and class B bonds at December 31, 2019 were $148.5 million and $15.9 million, however, only $141.0 million and $5.9 million are reflected in Secured borrowings as the remainder is owned by the Company, respectively.

(4)Includes $45.5 million of cash collateral intended for use in the acquisition of additional mortgage loans.

(5)This represents the gross amount of Secured borrowings and excludes the impact of deferred issuance costs of $6.2 million and $7.0 million as of March 31, 2020 and December 31, 2019.

The Company’s obligations under its secured borrowings are not fixed, and the payments on these borrowings are predicated upon cash flows received on the underlying mortgage loans.

Convertible Senior Notes

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

On April 25, 2017, the Company completed the issuance and sale of $87.5 million aggregate principal amount of its 7.25% convertible senior notes due 2024 in an underwritten public offering. The net proceeds to the Company from the sale of the notes, after deducting the underwriter's discounts, commissions and offering expenses, were approximately $84.9 million. The carrying amount of the equity component of the transaction was $2.5 million representing the fair value to the notes' owners of the right to convert the notes into shares of the Company's common stock. The notes were issued at a 17.5% conversion premium and bear interest at a rate of 7.25% per year, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on July 15, 2017.

On August 18, 2017, the Company completed the public offer and sale of an additional $20.5 million in aggregate principal amount of its 7.25% Convertible senior notes due 2024, which combined with the $87.5 million aggregate principal amount from its April offering, form a single series of fungible notes. The net proceeds to the Company from the August 18, 2017 sale of the notes, after deducting the underwriter's discounts, commissions and offering expenses, were approximately $20.5 million. The carrying amount of the equity component of the August transaction was $0.2 million representing the fair value to the notes' owners of the right to convert the notes into shares of the Company's common stock.

The notes in the August transaction were issued at a 6.0% conversion premium and bear interest at a rate of 7.25% per year, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on July 15, 2017. The notes will mature on April 30, 2024, unless earlier repurchased, redeemed or converted.

On November 19, 2018, the Company completed the public offer and sale of an additional $15.9 million in aggregate principal amount of its 7.25% convertible senior notes due 2024, which combined with the $108.0 million aggregate principal amount from its August and April offerings in 2017, form a single series of fungible notes. The net proceeds to the Company from the November 19, 2018 sale of the notes, after deducting the underwriter's discounts, commissions and offering expenses, were approximately $15.2 million. The carrying amount of the equity component of the November transaction was $0.5 million representing the fair value to the notes' owners of the right to convert the notes into shares of the Company's common stock.

The notes in the November transaction were issued at an 11.43% conversion premium and bear interest at a rate of 7.25% per year, payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, beginning on January 15, 2019. The notes will mature on April 30, 2024, unless earlier repurchased, redeemed or converted.

During the first quarter of 2020, the Company completed a series of convertible note repurchases for an aggregate principal amount of $8.0 million for a total purchase price $8.2 million. The carrying amount of the equity component of $0.1 million reversed from Additional paid-in Capital due to the March 2020 transaction.

Holders may convert their notes at their option prior to April 30, 2023 only under certain circumstances. In addition, the notes will be convertible irrespective of those circumstances from, and including, April 30, 2023 to, and including, the business day immediately preceding the maturity date. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company's election.

The conversion rate as of March 31, 2020 equals 1.7279 shares of the Company's common stock per $25.00 principal amount of notes which is equivalent to a conversion price of approximately $14.47 per share of common stock. The conversion rate, and thus the conversion price, may be subject to adjustment under certain circumstances. As of March 31, 2020, the amount by which the if-converted value falls short of the principal value for the entire series is $64.9 million.

The Company may not redeem the notes prior to April 30, 2022, and may redeem for cash all or any portion of the notes, at its option, on or after April 30, 2022 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No "sinking fund" will be provided for the notes.

At March 31, 2020, outstanding aggregate principal amount of the notes was $115.9 million, and discount and deferred expenses were $4.4 million. Interest expense of $2.4 million was recognized during the quarter ended March 31, 2020 which includes $0.3 million of amortization of discount and deferred expenses, respectively. The discount will be amortized through April 30, 2023, the date at which the notes can be converted by their holders. The effective interest rate of the notes for the quarter ended March 31, 2020 was 8.72%.

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

Note 10 — Related Party Transactions

The Company’s consolidated statements of income included the following significant related party transactions ($ in thousands):


			Three months ended March 31,
Transaction	Consolidated Statement of Income location	Counterparty	2020		2019
Interest income	Interest income	Various non-consolidated joint ventures	$	2,019	$	2,416
Loan servicing fees	Related party expense – loan servicing fees	Gregory	$	2,014	$	2,506
Management fee	Related party expense – management fee	Thetis	$	1,799	$	1,688
Income/(loss) from equity investment	Income from investments in affiliates	Great Ajax FS	$	(276)	$	128
Loss on sale of mortgage loans	Loss on sale of mortgage loans	Gaea	$	(705)	$	—
Income/(loss) from equity investment	Income from investments in affiliates	Thetis	$	(966)	$	279

The Company’s consolidated balance sheets included the following significant related party balances ($ in thousands):

As of March 31, 2020

Transaction

Consolidated Balance Sheet location

Counterparty

Amount

Receivables from Servicer

Receivable from Servicer

Gregory

17,322

Management fee payable

Thetis

1,795

Expense reimbursement receivable

Prepaid expenses and other assets

Gregory

865

Advances to Servicer

Prepaid expenses and other assets

Gregory

757

Expense reimbursement receivable

Prepaid expenses and other assets

Various non-consolidated joint ventures

377

Expense reimbursement receivable

Prepaid expenses and other assets

Gaea

Expense reimbursement receivable

Prepaid expenses and other assets

Thetis

Expense reimbursements

Accrued expenses and other liabilities

Various non-consolidated joint ventures

As of December 31, 2019

Transaction

Consolidated Balance Sheet location

Counterparty

Amount

Receivables from Servicer

Receivable from Servicer

Gregory

17,013

Management fee payable

Thetis

1,634

Expense reimbursements receivable

Prepaid expenses and other assets

Gregory

687

Advances to Servicer

Prepaid expenses and other assets

Gregory

585

Expense reimbursements receivable

Prepaid expenses and other assets

Various non-consolidated joint ventures

241

Expense reimbursements receivable

Prepaid expenses and other assets

Thetis

Expense reimbursements

Accrued expenses and other liabilities

Gaea

Expense reimbursements

Accrued expenses and other liabilities

Various non-consolidated joint ventures

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

During the quarter ended March 31, 2020 we sold 26 SBC mortgage loans with a carrying value of $26.1 million and UPB of $26.2 million for a loss of $0.7 million.

During 2020 and 2019, the Company retained $61.3 million and $187.8 million, respectively, in notes and beneficial interests issued by joint ventures between the Company and third party institutional accredited investors. Each joint venture issued senior notes and beneficial interests, which are trust certificates representing the residual balance of the trust after the outstanding debt obligations have been settled. In certain transactions, the joint venture also issued subordinate notes. In the first quarter of 2020, the Company retained $49.6 million in senior notes and $4.6 million in subordinate notes. In the first quarter of 2019, the Company retained $50.0 million in senior notes and $4.6 million in subordinate notes. The notes are accounted for as debt securities carried at fair value. As of March 31, 2020 and December 31, 2019, the Notes were carried on the Company’s consolidated balance sheet at a fair value of $247.4 million and $231.7 million, respectively.

During the second quarter of 2019, the Company sold $176.9 million to a related party joint venture, Ajax Mortgage Loan Trust 2019-C ("2019-C") a joint venture with third party institutional investors and retained 34% or $8.0 million of the trust certificates and $12.1 million in debt securities. The Company recorded a $7.0 million gain on the sale. The retained securities are included in the notes and beneficial interests of $187.8 million discussed in the previous paragraph.

In June 2019, the Company entered into an arrangement with the Servicer as the borrower and the Company as the lender to advance funds secured by real property to facilitate the purchase of real estate from certain of the company's joint ventures. Such funds are repaid no later than the liquidation of the real estate. The maximum amount available to the Servicer is $12.0 million. At March 31, 2020, and December 31, 2019, the Company had advanced $0.8 million and $0.6 million, respectively, to the Servicer. Interest on the arrangement accrues at 7.2% annually.

The Company also acquired $7.1 million and $9.5 million in beneficial interests issued by joint ventures in the first quarters of 2020 and 2019, respectively. As of March 31, 2020, and December 31, 2019 the Investments in beneficial interests were carried on the Company's consolidated balance sheet at $64.7 million and $58.0 million, respectively.

Management Agreement

The Company is a party to the Amended and Restated Management Agreement with the Manager, which expires 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, directly or through affiliates, provides the Company with a management team and necessary administrative and support personnel. 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 Management Agreement, the Company pays both a base management fee and an incentive fee to the Manager. The base management fee equals 1.5% of the Company's stockholders’ equity, including equity equivalents such as the Company's issuance of convertible senior notes, per annum and calculated and payable quarterly in arrears. The Company has the option to pay its management fee with between 50% to 100% cash at its discretion, and pay the remainder in shares of its common stock.

In the event the Company elects to pay its manager in shares of its common stock, the calculation for to determine the number of shares of the Company's common stock to be issued to the Manager is outlined below. The initial $1.0 million of the quarterly base management fee will be payable at least 75% in cash and up to 25% in shares of the Company’s common stock (allocated at the Company's discretion). Any amount of the base management fee in excess of $1.0 million may be payable in shares of the Company’s common stock (at the Company's discretion) until payment is at least 50% in cash and up to 50% in shares (the “50/50 split”). Any remaining amount of the quarterly base management fee after the 50/50 split threshold is reached may be payable in equal amounts of cash and shares (at the Company's discretion). The base management fee currently exceeds the 50/50 split threshold, and the Company is currently paying the management fee 50% in cash and 50% in shares. 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.

The Manager is also entitled to an incentive fee, payable quarterly and calculated in arrears, which, through the end of 2018, was calculated as 20% of the amount by which total dividends on common stock and distributions on OP units exceeded 8% of book value on a per share basis. Effective as of March 5, 2019, the incentive fee was restructured into both a quarterly

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

and annual component. A quarterly incentive fee is payable to the Manager if the sum of the Company’s dividends on its common stock, its distributions on its externally-held operating partnership units and its increase in book value, all relative to the applicable quarter and calculated per-share on an annualized basis, exceed 8%. The Manager will also be entitled to an annual incentive fee if the sum of the Company’s quarterly cash dividends on its common stock, special cash dividends on its common stock and distributions on its externally-held operating partnership units within the applicable calendar year exceed 8% of the Company’s book value per share as of the end of the calendar year. However, no incentive fee will be payable to the Manager with respect to any calendar quarter unless the Company’s cumulative core earnings, defined as U.S. GAAP net income or loss less non-cash equity compensation, unrealized gains or losses from mark-to-market adjustments, one-time adjustments to earnings resulting from changes to U.S. GAAP, and certain other non-cash items, is greater than zero for the most recently completed eight calendar quarters. In the event that the payment of the quarterly base management fee has not reached the 50/50 split, up to 100% of the incentive fee will be payable in shares of the Company’s common stock, at the Company's discretion, until the 50/50 split occurs. In the event that the total payment of the quarterly base management fee and the incentive fee has reached the 50/50 split, up to 20% of the remaining incentive fee is payable in shares of the Company’s common stock at the Company's discretion and the remaining incentive fee is payable in cash. In the first quarter of 2020 and 2019 the Company recorded an expense of $0 and $0.2 million, respectively, for an incentive fee payable to the Manager.

The Company also reimburses the Manager for all third-party, out-of-pocket costs incurred by the Manager for managing its business, including third-party due diligence and valuation consultants, legal expenses, auditors and other financial services. The reimbursement obligation is not subject to any dollar limitation. Expenses are reimbursed in cash on a monthly basis.

The Company will be required to pay the Manager a termination fee in the event that the Management Agreement is terminated as a result of (i) a termination by the Company without cause, (ii) its decision not to renew the Management Agreement upon the determination of at least two thirds of the Company’s independent directors for reasons including the failure to agree on revised compensation, (iii) a termination by the Manager as a result of the Company becoming regulated as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”) (other than as a result of the acts or omissions of the Manager in violation of investment guidelines approved by the Company’s Board of Directors), or (iv) a termination by the Manager if the Company defaults in the performance of any material term of the Management Agreement (subject to a notice and cure period). The termination fee will be equal to twice the combined base fee and incentive fees payable to the Manager during the 12-month period ended as of the end of the most recently completed fiscal quarter prior to the date of termination.

Servicing Agreement

The Company is also a party to the Servicing Agreement, expiring July 8, 2029, with the Servicer. The Company’s overall servicing costs under the Servicing Agreement will vary based on the types of assets serviced.

Servicing fees range from 0.65% to 1.25% annually UPB at acquisition (or the fair market value or purchase price of REO), and are paid monthly. For certain of the Company's securitization trusts, the servicing fee rate for RPLs is reduced to an annual servicing fee rate of 0.42% annually on a loan-by-loan basis for any loan that makes seven consecutive payments. The servicing fee is based upon the status of the loan at acquisition. 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 that convert to real property assets does not change. For the joint ventures, a conversion from a loan to a real property asset does not cause a change in servicing fee rate.

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.

If the Servicing Agreement has been terminated other than for cause and/or the Servicer terminates the servicing agreement, the Company will be required to pay a termination fee equal to the aggregate servicing fees payable under the servicing agreement for the immediate preceding 12-month period.

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

Trademark Licenses

Aspen has granted the Company a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use the name “Great Ajax” and the related logo. The Company also has a similar license to use the name “Thetis.” The agreement has no specified term. If the Management Agreement expires or is terminated, the trademark license agreement will terminate within 30 days. In the event that this agreement is terminated, all rights and licenses granted thereunder, including, but not limited to, the right to use “Great Ajax” in its name will terminate. Aspen also granted to the Manager a substantially identical non-exclusive, non-transferable, non-sublicensable, royalty-free license use of the name “Thetis.”

Note 11 — Stock-based Payments and Director Fees

Pursuant to the terms of the Management Agreement, the Company may pay a portion of the base fee to the Manager in shares of its common stock with the number of shares determined based on the average of the closing prices of its common stock on the NYSE on the five business days preceding the date on which the most recent regular quarterly dividend to holders of its common stock is paid. The Company recognized a base management fee to the Manager for the quarter ended March 31, 2020 of $1.8 million, of which none was payable in shares of its common stock as the Board of Directors approved the management fee to be paid in all cash.

In addition, through the first quarter of 2019, each of the Company’s independent directors received an annual retainer of $75,000, payable quarterly, half of which was paid in shares of the Company’s common stock on the same basis as the stock portion of the management fee payable to the Manager and half 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, which became effective as of April 1, 2019.

The following table sets forth the Company’s stock-based management fees and independent director fees ($ in thousands except share amounts):

Stock-based Management Fees and Director Fees


	For the three months ended March 31,
	2020				2019
	Number of shares	Amount of expense recognized⁽¹⁾		Number of shares	Amount of expense recognized⁽¹⁾
Management fees	—	$	—	62,301	$	728
Independent director fees	3,468	40		2,764	38
Totals	3,468	$	40	65,065	$	766

(1)All management fees and independent director fees are fully expensed in the period in which the relevant service is received by the Company.

Restricted Stock

Each independent director is issued a restricted stock award of 2,000 shares of the Company’s common stock subject to a one-year vesting period upon initial appointment to the Company’s Board of Directors. On August 17, 2016, the Company granted 153,000 shares of restricted stock to employees of its Manager and Servicer, which was reduced in 2017 by forfeitures of 4,000 shares and in 2018 by forfeitures of 2,666 shares. On July 24, 2017, the Company granted 39,000 shares of restricted stock to employees of its Manager and Servicer, which was reduced in 2019 by forfeitures of 333 shares. On July 31, 2018, the Company granted 36,500 shares of restricted stock to employees of its Manager and Servicer, which was reduced in 2019 by forfeitures of 2,500 shares. On August 1, 2019, the Company granted 79,000 shares of restricted stock to employees of its Manager and Servicer. The shares 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. Grants of restricted stock use grant date fair value of the stock as the basis for measuring the cost of the grant.

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

The following table sets forth the activity in the Company’s restricted stock plans ($ in thousands, except per share amounts):


	Total Grants				Current period activity					Non-vested shares at March 31, 2020			Fully-vested shares at March 31, 2020
Three months ended March 31, 2020	Total shares granted	Total expected cost of grant		Shares granted during the year	Grant expense recognized for the three months ended March 31, 2020		Shares	Per share grant date fair value		Shares	Per share grant date fair value
Employee and Service Provider Grant 2017^(1,4)	38,667	$	539	—	$	44	12,667	$	13.95	26,000	$	13.95
Employee and Service Provider Grant 2018^(2,5)	34,000	462		—	38		22,667	13.58		11,333	13.58
Employee and Service Provider Grant 2019⁽³⁾	79,000	1,101		—	92		79,000	13.94		—	—
Totals	151,667	$	2,102	—	$	174	114,334	$	13.87	37,333	$	13.84

(1)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2020 is 0.3 years.

(2)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2020 is 1.4 years.

(3)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2020 is 2.3 years.

(4)Total is shown net of 2019 forfeitures of 333 shares.

(5)Total is shown net of 2019 forfeitures of 2,500 shares.


	Total Grants				Current period activity					Non-vested shares at March 31, 2019			Fully-vested shares at March 31, 2019
Three months ended March 31, 2019	Total shares granted	Total expected cost of grant		Shares granted during the year	Grant expense recognized for the three months ended March 31, 2019		Shares	Per share grant date fair value		Shares	Per share grant date fair value
Directors’ Grants 2018⁽¹⁾	12,000	$	162	—	$	14	—	$	13.48	12,000	$	13.48
Employee and Service Provider Grant 2016^(2,5)	146,334	1,976		—	163		47,889	13.50		98,445	13.50
Employee and Service Provider Grant 2017⁽³⁾	39,000	544		—	45		26,000	13.95		13,000	13.95
Employee and Service Provider Grant 2018⁽⁴⁾	36,500	496		—	41		36,500	13.58		—	—
Totals	233,834	$	3,178	—	$	263	110,389	$	13.63	123,445	$	13.55

(1)Half of the 12,000 shares granted vested immediately on the grant date while the remaining shares vest ratably over a one-year period. Grant is fully vested at March 31, 2019.

(2)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2019 is 0.4 years.

(3)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2019 is 1.3 years.

(4)Vesting is ratable over three-year period from grant date. Weighted average remaining life of grant at March 31, 2019 is 2.4 years.

(5)Total is shown net of 2017 forfeitures of 4000 shares and 2018 forfeitures of 2666 shares.

Note 12 — Income Taxes

As a REIT, the Company must meet certain organizational and operational requirements including the requirement to distribute at least 90% of its annual REIT taxable income to its stockholders. And as a REIT, the Company generally will not be subject to U.S. federal income tax to the extent the Company distributes its REIT taxable income to its stockholders and provided the Company satisfies the REIT requirements including certain asset, income, distribution and stock ownership tests.

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

If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification.

For the three months ended March 31, 2020, the Company’s consolidated taxable income was $1.2 million; and provisions for income taxes were $0.3 million. For the three months ended March 31, 2019, the Company’s consolidated taxable income was $2.0 million; and provisions for income taxes of $0.1 million. The Company recognized no deferred income tax assets or liabilities on its consolidated balance sheets at March 31, 2020 or 2019. The Company also recorded no interest or penalties for either the three months ended March 31, 2020 or 2019.

Note 13 — Earnings per Share

The following table sets forth the components of basic and diluted EPS ($ in thousands, except per share):


	Three months ended March 31, 2020								Three months ended March 31, 2019
	Income (Numerator)		Shares (Denominator)	Per Share Amount		Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic EPS
Consolidated net income attributable to common stockholders	$	400	22,070,354			$	7,330	18,811,713
Allocation of earnings to participating restricted shares	(2)		—			(84)		—
Consolidated net income attributable to unrestricted common stockholders	$	398	22,070,354	$	0.02	$	7,246	18,811,713	$	0.39
Effect of dilutive securities
Operating Partnership units	—		—			239		624,106
Restricted stock grants and Manager and director fee shares	2		119,630			84		217,316
Interest expense (add back) and assumed conversion of shares from convertible senior notes⁽¹⁾	—		—			2,549		8,176,313
Diluted EPS
Consolidated net income attributable to common stockholders and dilutive securities	$	400	22,189,984	$	0.02	$	10,118	27,829,448	$	0.36

(1)The effect of the interest expense and assumed conversion of shares from convertible senior notes on the Company's Diluted EPS calculation for the first quarter of 2020 would have been anti-dilutive, accordingly the effect of these securities have been removed from the Diluted EPS calculation for the quarter ended March 31, 2020.

Note 14 — Equity

Common stock

As of March 31, 2020 and December 31, 2019 the Company had 22,921,935 and 22,142,143 shares, respectively, of $0.01 par value common stock outstanding with 125,000,000 shares authorized at each period end.

Preferred stock

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

The Company had 0 shares of preferred stock outstanding at March 31, 2020 and December 31, 2019. There were 25,000,000 shares authorized as of March 31, 2020 and December 31, 2019. See Note 15 — Subsequent events for description of the Company's issuance of preferred stock in April 2020.

Treasury stock

As of March 31, 2020 the Company held 37,278 shares of treasury stock received through distributions of the Company's shares previously held by its Manager. The Company held 33,248 shares of treasury stock at December 31, 2019.

Dividend Reinvestment Plan

The Company sponsors a dividend reinvestment plan through which stockholders may purchase additional shares of the Company’s common stock by reinvesting some or all of the cash dividends received on shares of the Company’s common stock. During the three months ended March 31, 2020 no shares were issued under the plan. Comparatively, during the three months ended March 31, 2019 5,321 shares were issued under the plan for total proceeds of approximately $0.1 million.

Stock Dividend

On March 24, 2020 the Company announced that it would pay its declared dividend of $0.32 per share in shares of the Company's common stock (value based upon the $9.14 per share closing price on the record date of March 17, 2020). The dividend was paid on March 27, 2020 through the issuance of 781,222 shares of common stock.

At-the-Market Offering

The Company has entered into an equity distribution agreement under which the Company may sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time in any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. During the three months ended March 31, 2020 and 2019, no shares were sold under the at-the-market program.

Accumulated Other Comprehensive Loss

The Company recognizes unrealized gains or losses on its investment in debt securities as components of Other comprehensive income/(loss). Accumulated other comprehensive gain/(loss) at March 31, 2020 and December 31, 2019 was as follows ($ in thousands):


Investments in securities:	March 31, 2020		December 31, 2019
Unrealized gains	$	—	$	1,643
Unrealized losses	(27,167)		(366)
Accumulated other comprehensive gain/(loss)	$	(27,167)	$	1,277

Non-controlling Interest

During the Company’s second quarter of 2019, all the outstanding 624,106 OP units held by the unaffiliated holder were exchanged for shares of the Company’s common stock, resulting in a reclassification within the Company's consolidated Statement of Changes in Equity of $10.8 million from non-controlling interest to the Additional Paid-in Capital and Common Stock accounts. At March 31, 2020, the Company’s Operating Partnership was 100% owned by the Company. The Company consolidates the assets, liabilities, revenues and expenses of the Operating Partnership.

At March 31, 2020, the Company had non-controlling interests attributable to ownership interests by four legal entities.

During the year ended December 31, 2017, the Company established AS Ajax E II LLC, to purchase and hold an investment in a Delaware trust which holds single family residential real estate loans, SBC loans and other real estate assets. AS Ajax E II LLC is 46.9% held by third parties. As of March 31, 2020 the Company had retained 53.1% of AS Ajax E II LLC and consolidates the assets, liabilities, revenues and expenses of the entity.

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

During the year ended December 31, 2017, the Company established 2017-D, a securitization trust, which is 50% held by an accredited institutional investor. As of March 31, 2020 the Company had retained 50% of 2017-D and consolidates the assets, liabilities, revenues and expenses of the trust.

During the year ended December 31, 2018, the Company established 2018-C, a securitization trust, which is 37.0% held by an accredited institutional investor. As of March 31, 2020 the Company had retained 63.0% of 2018-C and consolidates the assets, liabilities, revenues and expenses of the trust.

During the year ended December 31, 2019 formed Great Ajax II REIT which holds an interest in Great Ajax II Depositor LLC which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts the Company may form for additional secured borrowings and is 0.2% held by third parties. As of March 31, 2020, the Company had retained 99.8% of Great Ajax II REIT and consolidates the assets, liabilities, revenues and expenses of the entity.

During the year ended December 31, 2018, the Company established BFLD, to purchase and hold REO property. BFLD was 10.0% held by a third party and 90.0% retained by the Company through its Gaea subsidiary. During the year ended December 31, 2019, the Company established DG Brooklyn Holdings, to purchase and hold REO property. DG Brooklyn Holdings was 5.0% held by a third party and 95.0% owned by the Company through Gaea. On November 22, 2019, the Company undertook a private capital raise transaction for Gaea which resulted in the Company's deconsolidation of Gaea. As a result, the Company did not consolidate either BFLD or DG Brooklyn Holdings at March 31, 2020 or December 31, 2019. The Company has retained a 23.2% interest in Gaea which is accounted for under the equity method.

The following table sets forth the effects of changes in the Company's ownership interest due to transfers to or from non-controlling interest ($ in thousands):


	March 31, 2020		December 31, 2019
Decrease from redemption of OP units by third party investor	$	—	$	(10,816)
Decrease due to deconsolidation of Gaea	—		(22)
Change in non-controlling interest	$	—	$	(10,838)

Note 15 — Subsequent Events

Loan Acquisitions

The Company has acquired 677 residential RPLs with aggregate UPB of $123.2 million in one transaction from a single seller. The purchase price equals 92.5% of UPB and 60.0% of the estimated market value of the underlying collateral of $189.9 million. These loans were acquired into the joint venture formed in March 2020 with proceeds from the established prefunding account.

Preferred Stock

On April 6, 2020, the Company closed a private placement of $80.0 million of preferred stock and warrants to institutional accredited investors pursuant to a securities purchase agreement dated April 3, 2020. The Company issued 820,000 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,380,000 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock, each at a purchase price per share of $25.00 and two series of five-year warrants to purchase an aggregate of 4,000,000 shares of the Company's common stock at an exercise price of $10.00 per share. Each series of warrants includes a put option that allows the holder to sell the warrants to the Company at a specified put price on or after July 6, 2023. In addition, the Company granted the purchasers an option to purchase up to an additional 800,000 shares of Series A Preferred Stock and Series B Preferred Stock and warrants to purchase an aggregate of 1,000,000 shares of the Company's common stock on the same terms. The Company expects to use the net proceeds from the private placement to acquire mortgage loans and mortgage-related assets consistent with its investment strategy.

Management Agreement Amendment

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

On April 28, 2020 , the Company's Board of Directors approved the Third Amended and Restated Management Agreement with the Manager, which provides the Company with the option to pay its management fee between 50% to 100% cash at the Company's discretion, and pay the remainder in shares of its common stock.

Dividend Declaration

On May 3, 2020, the Company’s Board of Directors declared a cash dividend of $0.17 per share, to be paid on May 29, 2020 to stockholders of record as of May 15, 2020. On March 27, 2020, the Company paid the dividend of $0.32 per share we previously announced in February 2020 in shares of our common stock (valued based upon the closing price on the record date) in lieu of cash.

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this quarterly report constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negatives of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results to vary from our forward-looking statements:

• the impact of adverse real estate, mortgage or housing markets and changes in the general economy;

•changes in our business strategy;

•the impact of the global pandemic caused by the novel coronavirus ("COVID-19") outbreak;

•general volatility of the capital markets;

•the impact of adverse legislative or regulatory tax changes;

•our ability to obtain financing arrangements on favorable terms or at all;

•our ability to implement our business strategy;

•difficulties in identifying re-performing loans (“RPLs”), small balance commercial mortgage loans (“SBC loans”) and properties to acquire; and the impact of changes to the supply of, value of and the returns on RPLs and SBC loans;

•our ability to compete with our competitors;

•our ability to control our costs;

•the impact of changes in interest rates and the market value of the collateral underlying our RPL and non-performing loan (“NPL”) portfolios or of our other real estate assets;

•our ability to convert NPLs into performing loans or to modify or otherwise resolve such loans;

•our ability to convert NPLs to properties that can generate attractive returns either through sale or rental;

•our ability to retain our engagement of our Manager;

•the failure of the Servicer to perform its obligations under the Servicing Agreement;

•our failure to qualify or maintain qualification as a real estate investment trust (“REIT”); and

•our failure to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

Overview

Great Ajax Corp. is a Maryland corporation that is organized and operated in a manner intended to allow us to qualify as a REIT. We primarily target acquisitions of RPLs, which are residential mortgage loans on which at least five of the seven most recent payments have been made, or the most recent payment has been made and accepted pursuant to an agreement, or the full dollar amount, to cover at least five payments has been paid in the last seven months. We also acquire and originate SBC loans. The SBC loans that we target through acquisitions generally have a principal balance of up to $5.0 million and are secured by multi-family residential and commercial mixed use retail/residential properties on which at least five of the seven most recent payments have been made, or the most recent payment has been made and accepted pursuant to an agreement, or the full dollar amount, to cover at least five payments has been paid in the last seven months. We also originate SBC loans that we believe will provide an appropriate risk-adjusted total return. Additionally, we invest in single-family and smaller commercial properties directly either through a foreclosure event of a loan in its mortgage portfolio or through a direct acquisition. We may also target investments in NPLs either directly or with joint venture partners. NPLs are loans on which the most recent three payments have not been made. We may acquire NPLs either directly or with joint venture partners. We own a 19.8% equity interest in the Manager and an 8.0% equity interest in the parent company of our Servicer. GA-TRS is a wholly-owned subsidiary of the Operating Partnership that owns the equity interest in the Manager and the Servicer. We have elected to treat GA-TRS as a taxable REIT subsidiary under the Code. Our mortgage loans and real properties are serviced by the Servicer, also an affiliated company.

In 2014, we formed Great Ajax Funding LLC, a wholly-owned subsidiary of the Operating Partnership, to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts we may form for additional secured borrowings. AJX Mortgage Trust I and AJX Mortgage Trust II are wholly-owned subsidiaries of the Operating Partnership formed to hold mortgage loans used as collateral for financings under our repurchase agreements. On February 1, 2015, we formed GAJX Real Estate Corp., as a wholly-owned subsidiary of the Operating Partnership, to own, maintain, improve and sell certain REO purchased by us. We have elected to treat GAJX Real Estate Corp. as a TRS under the Code.

Our Operating Partnership, through interests in certain entities, holds 100% of Great Ajax II REIT Inc. which holds an interest in Great Ajax II Depositor LLC which was formed to act as the depositor of mortgage loans into securitization trusts and to hold the subordinated securities issued by such trusts and any additional trusts we may form for additional secured borrowings. We have securitized mortgage loans through a securitization trust and retained subordinated securities from the secured borrowings. This trust is considered to be a VIE, and the we have determined that we are the primary beneficiary of this VIE.

In 2018, we formed Gaea Real Estate Corp. ("Gaea"), a wholly-owned subsidiary of the Operating Partnership. We have elected to treat Gaea as a TRS under the Code. Also during 2018, we formed Gaea Real Estate Operating Partnership LP, a wholly-owned subsidiary of Gaea, to hold investments in commercial real estate assets. We also formed BFLD Holdings LLC ("BFLD"), Gaea Commercial Properties LLC, Gaea Commercial Finance LLC and Gaea RE LLC as subsidiaries of Gaea Real Estate Operating Partnership. In 2019, we formed DG Brooklyn Holdings ("DG Brooklyn Holdings"), also a subsidiary of Gaea Real Estate Operating Partnership LP, to hold investments in multi-family properties. On November 22, 2019, Gaea completed a private capital raise in which it raised $66.3 million from the issuance of 4,419,641 shares of its common stock to third parties to allow Gaea to continue to advance its investment strategy. We retained a 23.2% ownership interest in Gaea following the transaction.

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

Our Portfolio

The following table outlines the carrying value of our portfolio of mortgage loan assets and single-family and smaller commercial properties as of March 31, 2020 and December 31, 2019 ($ in millions):


	March 31, 2020		December 31, 2019
Residential RPL loan pools	$	1,066.6	$	1,085.5
SBC loan pools	—		11.7
Other mortgage loans non-pooled⁽¹⁾	4.2		23.4
Residential NPL loan pools	27.9		30.9
Property held-for-sale, net	10.9		13.5
Rental property, net	1.3		1.5
Investment in debt securities	247.4		231.7
Investment in beneficial interests	64.7		58.0
Total Real Estate Assets	$	1,423.0	$	1,456.2

(1)Other mortgage loans non-pooled are accounted for as non-PCD loans under CECL.

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

Market Trends and Outlook

COVID-19

The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in household, business, and economic market conditions, including in the United States, where we conduct all of our business. COVID-19 has not yet been contained and could affect significantly more households and businesses in the coming months. While the duration and severity of the pandemic has yet to be identified, many governmental and nongovernmental authorities have directed their actions toward curtailing household and business activity in order to contain COVID-19 while simultaneously deploying fiscal- and monetary-policy measures in order to partially mitigate the adverse effects. Whether these programs and policies will be successful in mitigating the adverse of COVID-19 is unclear. Many of the

government measures have impacted the mortgage market.

COVID-19 began to meaningfully impact our operations in late March 2020 and this disruption is reflected in our results of operations for the quarter ended March 31, 2020 as follows:

•We recorded total provisions expense of $5.1 million on our Mortgage loan portfolio and Investments in beneficial interests as a result of expectations of extended portfolio durations and longer foreclosure and eviction timelines,

•We recorded a $28.4 million unrealized loss on our Investments in debt securities to Other comprehensive income as counterparty marks at March 31, 2020 reflecting the extreme disruption in the residential mortgage securities market.

•We recorded impairments on our REO portfolio as extended eviction timelines will reduce our estimated net liquidation proceeds due to higher holding period costs and higher rehabilitation costs.

•We settled margin calls in the amount of $28.2 million with our repurchase financing counterparties due to the extreme disruption in the residential mortgage securities market.

The spread of COVID-19 has continued into April and May 2020. As a result, our forecast of macroeconomic conditions and expected lifetime credit losses on our mortgage loan and beneficial interest portfolios is subject to meaningful uncertainty. While our borrowers continue to make scheduled payments and we continue to receive payments in full, we have acted swiftly to support our borrowers with a mortgage forbearance program. While we generally do not hold loans guaranteed by GSEs or the US Government, we, through our Servicer, are nonetheless offering a forbearance program under similar terms. Borrowers that are able to provide documentation of a negative impact of COVID-19 are entitled to three months of forbearance. The three monthly payments may then be repaid over 12 months. HAMP loans, FHA loans and borrowers in certain states do not have to provide evidence that they are impacted by COVID-19. Our Servicer has extensive experience dealing with delinquent borrowers and we believe it is well positioned to react on our behalf to any increase in mortgage delinquencies. The following list shows the COVID-19 forbearance activity in our portfolio as of April 30, 2020⁽¹⁾:

•Number of COVID-19 forbearance relief inquires: 920

•Number of COVID-19 forbearance relief granted: 115

•Number of COVID-19 related forbearance under review: 146

(1)Statistics are for loans carried on our balance sheet including loans held in Ajax 2017-D and Ajax 2018-C where third parties own 50% and 37%, respectively. Statistics do not include non-consolidated joint ventures where we own bonds and beneficial interests issued by the joint ventures.

In response to the disruption in the financial markets caused by COVID-19, we raised preferred equity in the first week of April 2020. We expect this additional capital to allow us to maintain liquidity in the short term and take advantage of favorable investment opportunities. Not withstanding this additional capital and liquidity, we expect continued volatility in the residential mortgage securities market in the short term and increased acquisition opportunities later in the year. Extended forbearance, foreclosure timelines and eviction timelines could result in lower yields and losses on our mortgage loan and beneficial interest portfolios and losses on our REO held-for-sale. Ongoing disruption in the credit markets could result in additional margin calls from our financing counterparties and additional mark downs on our Investments in debt securities.

We believe that certain cyclical trends continue to drive a significant realignment within the mortgage sector notwithstanding the impact of COVID-19. Through the end of the first quarter, the recent trends noted below have continued, including:

•historically low interest rates and elevated operating costs resulting from new regulatory requirements continue to drive sales of residential mortgage assets by banks and other mortgage lenders;

•declining home ownership due to rising prices, low inventory, tighter lending standards and increased down payment requirements that have increased the demand for single-family and multi-family residential rental properties;

•the Dodd-Frank risk retention rules for asset backed securities have reduced the universe of participants in the securitization markets;

•the lack of a robust market for non-conforming mortgage loans will reduce the pool of buyers due to tighter credit standards as a result of COVID-19; and

•the current market landscape and decrease in the price of residential mortgage loans as a result of the COVID-19 outbreak we believe will generate new opportunities in residential mortgage-related whole loan strategies.

The origination of subprime and alternative residential mortgage loans remain substantially below 2008 levels and the qualified mortgage and ability-to-repay rule requirements have put pressure on new originations. Additionally, many banks and other mortgage lenders have increased their credit standards and down payment requirements for originating new loans. Recent market disruption from COVID-19 has sharply reduced financing alternatives for borrowers not eligible for financing programs underwritten by the GSEs or the Federal government.

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

We believe that investments in residential RPLs with positive equity provide an optimal investment value. As a result, we are currently focusing on acquiring pools of RPLs, though we may acquire NPLs, either directly or with joint venture partners, if attractive opportunities exist. Through our Servicer, we work with our borrowers to improve their payment records. Once there is a period of continued performance, we expect that borrowers will typically refinance these loans at or near the estimated value of the underlying property.

We also believe there are significant attractive investment opportunities in the SBC loan and property markets and originate as well as purchase these loans. The primary lenders for smaller multi-family and mixed retail/residential properties are community banks and not regional and national banks and large institutional lenders. We believe the primary lenders and loan purchasers are less interested in these assets because they typically require significant commercial and residential mortgage credit and underwriting expertise, special servicing capability and active property management. It is also more difficult to create the large pools of these loans that banks, other lenders and portfolio acquirers typically desire. We continually monitor opportunities to increase our holdings of these SBC loans and properties.

Factors That May Affect Our Operating Results

Acquisitions. Our operating results depend heavily on sourcing residential RPLs and SBC loans and, when attractive opportunities are identified, NPLs. We believe that there is generally a large supply of RPLs available to us for acquisition and we believe the available supply provides for a steady acquisition pipeline of assets since large institutions are active sellers in the market. We expect that our residential mortgage loan portfolio may grow at an uneven pace, as opportunities to acquire distressed residential mortgage loans may be irregularly timed and may involve large portfolios of loans, and the timing and extent of our success in acquiring such loans cannot be predicted. We also believe there may be increased opportunities to acquire NPLs due to COVID-19. In addition, for any given portfolio of loans that we agree to acquire, we typically acquire fewer loans than originally expected, as certain loans may be resolved prior to the closing date or may fail to meet our diligence standards. The number of loans not acquired typically constitutes a small portion of a particular portfolio. In any case where we do not acquire the full portfolio, we make appropriate adjustments to the applicable purchase price.

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

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

Resolution Methodologies. We, through the Servicer, or our affiliates, employ various loan resolution methodologies with respect to our residential mortgage loans, including loan modification, collateral resolution and collateral disposition. The manner in which an NPL is resolved will affect the amount and timing of revenue we will receive. Our preferred resolution methodology is to modify NPLs. Once successfully modified and there is a period of continued performance, we expect that borrowers will typically refinance these loans at or near the estimated value of the underlying property. We believe modification followed by refinancing generates near-term cash flows, provides the highest possible economic outcome for us and is a socially responsible business strategy because it keeps more families in their homes. In certain circumstances, we may also consider selling these modified loans. Through historical experience, we expect that many of our NPLs will enter into foreclosure or similar proceedings, ultimately becoming REO that we can sell or convert into single-family rental properties that we believe will generate long-term returns for our stockholders. Our REO properties may be converted into single-family rental properties or they may be sold through REO liquidation and short sale processes. We expect the timelines for each of the different processes to vary significantly. The exact nature of resolution will depend on a number of factors that are beyond our control, including borrower willingness, property value, availability of refinancing, interest rates, conditions in the financial markets, regulatory environment and other factors. To avoid the 100% prohibited transaction tax on the sale of dealer property

by a REIT, we may dispose of assets that may be treated as held “primarily for sale to customers in the ordinary course of a trade or business” by contributing or selling the asset to a TRS prior to marketing the asset for sale.

The state of the real estate market and home prices will determine proceeds from any sale of real estate. We will opportunistically and on an asset-by-asset basis determine whether to rent any REO we acquire, whether upon foreclosure or otherwise, we may determine to sell such assets if they do not meet our investment criteria. In addition, while we seek to track real estate price trends and estimate the effects of those trends on the valuations of our portfolios of residential mortgage loans, future real estate values are subject to influences beyond our control. Declining real estate prices, including as a result of COVID-19, are expected to negatively affect our results. We also expect that extended eviction timelines resulting from COVID-19 will negatively impact sales of our REO held-for-sale.

Conversion to Rental Property. From time to time we will retain an REO property as a rental property and may acquire rental properties through direct purchases at attractive prices. The key variables that will affect our residential rental revenues over the long-term will be the extent to which we acquire properties, which, in turn, will depend on the amount of our capital invested, average occupancy and rental rates in our owned rental properties. We expect the timeline to convert multi-family and single-family loans, into rental properties will vary significantly by loan, which could result in variations in our revenue and our operating performance from period to period. There are a variety of factors that may inhibit our ability, through the Servicer, to foreclose upon a residential mortgage loan and get access to the real property within the time frames we model as part of our valuation process. These factors include, without limitation: state foreclosure timelines and the associated deferrals (including from litigation); unauthorized occupants of the property; U.S. federal, state or local legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures that may delay the foreclosure process; U.S. federal government programs that require specific procedures to be followed to explore the non-foreclosure outcome of a residential mortgage loan prior to the commencement of a foreclosure proceeding; and declines in real estate values and high levels of unemployment and underemployment that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems. We do not expect to retain a material number of single family residential properties for use as rentals. We do, however, intend to focus on retaining multi-unit residences derived from foreclosures or acquired through outright purchases as rentals.

Expenses. Our expenses primarily consist of the fees and expenses payable by us under the Management Agreement and the Servicing Agreement. Additionally, our Manager incurs direct, out-of-pocket costs related to managing our business, which are contractually reimbursable by us. Loan transaction expense is the cost of performing due diligence on pools of mortgage loans under consideration for purchase. Professional fees are primarily for legal, accounting and tax services. Real estate operating expense consists of the ownership and operating costs of our REO properties, both held-for-sale and as rentals, and includes any charges for impairments to the carrying value of these assets, which may be significant. Those expenses may increase due to extended eviction timelines caused by COVID-19. Interest expense, which is subtracted from our Interest income to arrive at Net interest income, consists of the costs to borrow money.

Changes in Home Prices. As discussed above, generally, rising home prices are expected to positively affect our results, particularly as this should result in greater levels of re-performance of mortgage loans, faster refinancing of those mortgage loans, more re-capture of principal on greater than 100% LTV (loan-to-value) mortgage loans and increased recovery of the principal of the mortgage loans upon sale of any REO. Conversely, declining real estate prices are expected to negatively affect our results, particularly if the home prices should decline below our purchase price for the loans and especially if borrowers determine that it is better to strategically default as their equity in their homes decline. While home prices have risen to, or in some cases beyond, pre-Great Recession levels in many parts of the United States, there are still significant regions where values have not materially increased. We typically concentrate our investments in specific urban geographic locations in which we expect stable or better property markets. However, when we analyze loan and property acquisitions we do not take home price appreciation HPA into account except for rural properties for which we model negative HPA related to our expectation of worse than expected property condition. It is too early to determine the impact of the COVID-19 outbreak on HPA and the resulting impact on our markets.

We typically concentrate our investments in specific urban geographic locations in which we expect stable or better property markets, although we do not use any appreciation expectation in the acquisition price evaluation. To date, there has been no measurable data on the impact of COVID-19 on HPA and it is unclear what the short and long term impact will be. A significant decline in HPA will have an adverse impact on our operating results.

Changes in Market Interest Rates. With respect to our business operations, increases in existing interest rates, in general, may over time cause: (1) the value of our mortgage loan and MBS (retained from our secured borrowings) portfolio to decline; (2) coupons on our adjustable rate mortgages (“ARM”) and hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to higher interest rates; (3) prepayments on our mortgage loans and MBS portfolio to slow, thereby slowing

the amortization of our purchase premiums and the accretion of our purchase discounts; (4) the interest expense associated with our borrowings to increase; and (5) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (a) prepayments on our mortgage loan and MBS portfolio to increase, thereby accelerating the accretion of our purchase discounts; (b) the value of our mortgage loan and MBS portfolio to increase; (c) coupons on our ARM and hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to lower interest rates; (d) the interest expense associated with our borrowings to decrease; and (e) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease. We currently expect the pace of loan prepayments to slow due to the COVID-19 outbreak.

Market Conditions. Due to the dramatic repricing of real estate assets that occurred during the 2008 financial crisis and the continuing uncertainty regarding the direction and continuing strength of the real estate markets including as a result of the COVID-19 outbreak, we believe a void in the debt and equity capital available for investing in real estate exists as many financial institutions, insurance companies, finance companies and fund managers have determined to reduce or discontinue investment in debt or equity related to real estate. We believe the dislocations in the residential real estate market have resulted or will result in an “over-correction” in the repricing of real estate assets, creating a potential opportunity for us to capitalize on these market dislocations and capital void to the extent we are able to obtain financing for additional purchases.

We believe that in spite of the continuing uncertain market environment for mortgage-related assets, including as a result of the COVID-19 outbreak, current market conditions offer potentially attractive investment opportunities for us, even in the face of a riskier and more volatile market environment. We expect that market conditions will continue to impact our operating results and will cause us to adjust our investment and financing strategies over time as new opportunities emerge and risk profiles of our business change.

COVID-19. The current outbreak of COVID-19 has also impacted, and is likely to continue to impact, directly or indirectly, many of the other factors discussed above, as well as other aspects of our business. New developments continue to emerge and it is not possible for us to predict with certainty which factors will impact our business. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In particular, it is difficult to fully assess the impact of COVID-19 at this time due to, among other things, uncertainty regarding the severity and duration of the outbreak domestically and internationally and the effectiveness of federal, state and local government efforts to contain the spread of COVID-19, the effects of those efforts on our business, the indirect impact on the U.S. economy and economic activity and the impact on the mortgage markets and capital markets.

Critical Accounting Policies and Estimates

Mortgage Loans

Loans acquired with deterioration in credit quality — As of their acquisition date the loans we acquire have generally suffered some credit deterioration subsequent to origination. As a result, prior to the adoption of ASU 2016-13, Financial Instruments - Credit Losses, otherwise known as CECL, on January 1, 2020, we were required to account for the mortgage loans pursuant to ASC 310-30, Accounting for Loans with Deterioration in Credit Quality. Under both standards, our recognition of interest income for loans with deteriorated credit quality ("PCD loans") is based upon its having a reasonable expectation of the amount and timing of the cash flows expected to be collected. When the timing and amount of cash flows expected to be collected are reasonably estimable, we use expected cash flows to apply the effective interest method of income recognition.

Under both CECL and ASC 310-30, acquired loans may be aggregated and accounted for as a pool of loans if the loans have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. However, CECL allows more flexibility to adjust the loan pools as the underlying risk factors change over time. Under ASC 310-30, we determined RPLs to have common risk characteristics and accounted for them as a single loan pool for loans acquired within each three-month calendar quarter. Similarly, we determined NPLs to have common risk characteristics and accounted for them as a single non-performing pool for loans acquired within each three-month calendar quarter. The result was generally two additional pools (RPLs and NPLs) each quarter. Under CECL, we re-aggregated our loan pools around similar risk factors, while eliminating the previous distinction for the quarter in which loans were acquired. This resulted in reducing the number of loan pools to four, each of which is oriented around similar risk factors. Excluded from the aggregate pools are loans that pay in full subsequent to the acquisition closing date but prior to pooling. Any gain or loss on these loans is recognized as Interest income in the period the loan pays in full.

Our accounting for PCD loans gives rise to an accretable yield and an allowance for credit losses. Under CECL, upon the acquisition of PCD loans we record the acquisition as three separate elements for 1) the amount of purchase discount which we expect to recover through eventual repayment by the borrower, 2) an allowance for future expected credit loss and 3) the UPB of the loan. The purchase price discount which we expect at the time of acquisition to collect over the life of the loans is the accretable yield. Cash flows expected at acquisition include all cash flows directly related to the acquired loan, including those expected from the underlying collateral. We recognize the accretable yield as Interest income on a prospective level yield basis over the life of the pool. The expectation of the amount of undiscounted cash flows to be collected is evaluated at the end of each calendar quarter. If we expect to collect greater cash flows over the life of the pool, any prior allowance is reversed to the extent of the increase and the expected yield to maturity is adjusted on a prospective basis. The allowance for credit losses is increased when we estimate we will not collect all amounts previously estimated to be collectible, and reduced when the underlying asset has been liquidated and all expected underlying cash flows have been realized. Management assesses the credit quality of the portfolio and the adequacy of loan loss reserves on a quarterly basis, or more frequently as necessary. Significant judgment is required in this analysis. Depending on the expected recovery of its investment, we consider the estimated net recoverable value of the loan pools as well as other factors, such as the fair value of the underlying collateral. Because these determinations are based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized may differ materially from the carrying value as of the reporting date.

Our mortgage loans are secured by real estate. We monitor the credit quality of the mortgage loans in our portfolio on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, we assess the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluates whether and when it becomes probable that all amounts contractually due will not be collected.

Borrower payments on the mortgage loans are classified as principal, interest, payments of fees, or escrow deposits. Amounts applied as interest on the borrower account are similarly classified as interest for accounting purposes and are classified as operating cash flows in our consolidated Statement of Cash Flows. Amounts applied as principal on the borrower account including amounts contractually due from borrowers that exceed our basis in loans purchased at a discount, are similarly classified as principal for accounting purposes and are classified as investing cash flows in the consolidated Statement of Cash Flows as required 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 our cash flow.

Loans acquired or originated that have not experienced a deterioration in credit quality — while we generally acquire loans that have experienced deterioration in credit quality, we also acquire loans that have not experienced a deterioration in credit quality and originate SBC loans.

Accrual of interest on individual loans is discontinued when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of interest is doubtful. Our policy is to stop accruing interest when a loan’s delinquency exceeds 90 days. All interest accrued but not collected for loans that are placed on non-accrual status or subsequently charged-off are reversed against Interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic principal and interest payments returns and future payments are reasonably assured, in which case the loan is returned to accrual status.

An individual loan is considered to be impaired when, based on current events and conditions, it is probable we will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price, or the fair value of the collateral if the loan is collateral dependent. For individual loans, a troubled debt restructuring is a formal restructuring of a loan where, for economic or legal reasons related to the borrower’s financial difficulties, a concession that would not otherwise be considered is granted to the borrower. The concession may be granted in various forms, including providing a below-market interest rate, a reduction in the loan balance or accrued interest, an extension of the maturity date, or a combination of these. An individual loan that has had a troubled debt restructuring is considered to be impaired and is subject to the relevant accounting for impaired loans.

If necessary, an allowance for loan losses is established through a provision for loan losses charged to expenses. The allowance is the difference between the expected future cash flows from the loan and the contractual balance due.

Real Estate

REO Property — we acquire real estate properties directly from sellers and when we foreclose on a borrower and take title to the underlying property (REO). REO is recorded at cost if purchased, or at the present value of future cash flows if obtained through foreclosure. REO we expect to actively market for sale is classified as held-for-sale. REO held-for-sale is carried at the lower of its acquisition basis, or its net realizable value (estimated fair market value less expected selling costs). We estimate fair market value using a combination of BPOs, comparable sales, appraisals, and competitive market analyses provided by local realtors subject to our judgment. Net unrealized losses due to changes in market value are recognized through a valuation allowance by charges to income. No depreciation or amortization expense is recognized on properties held-for-sale, while holding costs are expensed as incurred. Foreclosed property that is sold to a third party at the foreclosure sale (“Third Party Sales”) is not considered REO and proceeds on these third party sales are treated as payment in satisfaction of the underlying loan. See Mortgage Loans, above.

Rental property is real estate property not held-for-sale. Rental property is intended to be held as long-term investments but may eventually be held-for-sale. Property is held for investment as rental property if the modeled present value of the future expected cash flows from use as a rental exceed the present value of expected cash flows from a sale. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets of 27.5 years. We perform an impairment analysis for all rental property not held-for-sale using estimated cash flows if events or changes in circumstances indicate that the carrying value may be impaired, such as prolonged vacancy, identification of materially adverse legal or environmental factors, changes in expected ownership period or a decline in market value to an amount less than cost. This analysis is performed at the property level. The cash flows are estimated based on a number of assumptions that are subject to economic and market uncertainties including, among others, demand for rental properties, competition for customers, changes in market rental rates, costs to operate each property and expected ownership periods.

If the carrying amount of a held for investment asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. We generally estimate the fair value of assets held for use by using BPOs, comparable sales or realtor competitive market analysis. In some instances, appraisal information may be available and is used in addition to other measures of fair value.

From time to time, we perform property renovations to maximize the value of REO held-for-sale and held for investment. Such expenditures are generally advanced by our Servicer and recovered by our Servicer when the property is liquidated (for REO property held-for-sale) or upon completion of the renovations (for REO property held for investment). For residential and commercial properties that are not held-for-sale, the carrying value, including any renovations that improve or extend the life of the asset, are accounted for at cost. The cost basis is depreciated using the straight-line method over an estimated useful life of 27.5 years. Interest and other carrying costs incurred during the renovation period are capitalized until the property is ready for its intended use. Expenditures for ordinary maintenance and repairs are charged to expense as incurred. We generally intend to limit rental activity to multifamily or multi-unit single family properties.

Investments at fair value

Our Investments at Fair Value as of March 31, 2020 and December 31, 2019 consist of investments in senior and subordinate notes issued by joint ventures which we form with third party institutional accredited investors. We recognize income on the debt securities using the effective interest method. Additionally, the notes are classified as available for sale and are carried at fair value with changes in fair value reflected in our consolidated statements of comprehensive income. We mark our investments to fair value using prices received from our financing counterparties and believe any unrealized losses on our debt securities to be temporary. Any other-than-temporary losses, which represent the excess of the amortized cost basis over the present value of expected future cash flows, are recognized in the period identified in our consolidated statements of income. Risks inherent in our debt securities portfolio, affecting both the valuation of the securities as well as the portfolio's interest income include the risk of default, delays and inconsistency in the frequency and amount of payments, risks affecting borrowers such as man-made or natural disasters, or the COVID-19 outbreak, and damage to or delay in realizing the value of the underlying collateral. We monitor the credit quality of the mortgage loans in underlying its debt securities on an ongoing basis, principally by considering loan payment activity or delinquency status. In addition, we assess the expected cash flows from the mortgage loans, the fair value of the underlying collateral and other factors, and evaluate whether and when it becomes probable that all amounts contractually due will not be collected.

Investments in Beneficial Interests

Our Investments in beneficial interests as of March 31, 2020 and December 31, 2019 consist of investments in the trust certificates issued by joint ventures which we form with third party institutional accredited investors. The trust certificates represent the residual interest of any special purpose entity formed to facilitate the investment. We account for our Investments in beneficial interests under CECL, as discussed under Mortgage Loans.

Debt

Secured Borrowings — We issue, through securitization trusts, callable debt secured by our mortgage loans in the ordinary course of business. The secured borrowings are structured as debt financings, and the loans remain on our balance sheet as we are the primary beneficiary of many of these securitization trusts, which are variable interest entities (“VIEs”). These secured borrowing VIEs are structured as pass-through entities that receive principal and interest on the underlying mortgages and distribute those payments to the holders of the notes. Our exposure to the obligations of the VIEs is generally limited to the amount of our investments in the VIE entities; the creditors do not have recourse to the primary beneficiary. Coupon interest on the debt is recognized using the accrual method of accounting. Deferred issuance costs, including original issue discount and debt issuance costs, are amortized on an effective yield basis based on the underlying cash flow of the mortgage loans. We assume the debt will be called at the specified call date for purposes of amortizing discount and issuance costs because we believe we will have the intent and ability to call the debt on the call date. Changes in the actual or projected underlying cash flows are reflected in the timing and amount of deferred issuance cost amortization.

Repurchase Facilities — We enter into repurchase financing facilities under which we nominally sell assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets at a price equal to the sold amount plus an interest factor. Despite being legally structured as sales and subsequent repurchases, repurchase transactions are generally accounted for as debt secured by the underlying assets. At the maturity of a repurchase financing, unless the repurchase financing is renewed, we are required to repay the borrowing including any accrued interest and concurrently receive back our pledged collateral from the lender. The repurchase financings are treated as collateralized financing transactions; pledged assets are recorded as assets in our consolidated balance sheets, and debt is recognized at the contractual amount. Interest is recorded at the contractual amount on an accrual basis. Costs associated with the set-up of a repurchasing contract are recorded as deferred expense at inception and amortized over the contractual life of the agreement. Any draw fees associated with individual transactions and any facility fees assessed on the amounts outstanding are recorded as deferred expense when incurred and amortized over the contractual life of the related borrowing.

Fair Value

Fair Value of Financial Instruments — Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

•Level 1 — Quoted prices in active markets for identical assets or liabilities.

•Level 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 fair value of mortgage loans is estimated using the Manager’s proprietary pricing model which estimates expected cash flows with the discount rate used in the present value calculation representing the estimated effective yield of the loan. For valuation purposes, we disclose the fair value of REO at the lower of its acquisition basis, or its net realizable value (estimated fair market value less expected selling costs). We estimate fair market value using BPOs, comparable sales and competitive

market analyses provided by local realtors. We use net realizable value as a proxy for fair value as it represent the liquidation proceeds to us and is most comparable to the fair value disclosure for loans.

We calculate the fair value for the senior debt consolidated on our balance sheet from securitization trusts by using our Manager’s proprietary pricing model to estimate the cash flows expected to be generated from the underlying collateral with the discount rate used in the present value calculation representing an estimate of the average rate for debt instruments with similar durations and risk factors.

Our convertible senior notes are traded on the NYSE; the debt’s fair value is determined from the NYSE closing price on the balance sheet date.

Recent Accounting Pronouncements

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

Results of Operations

For the three months ended March 31, 2020, we had net income attributable to common stockholders of $0.4 million, or $0.02 per share, for basic and diluted common shares. For the three months ended March 31, 2019, we had net income attributable to common stockholders of $7.3 million, or $0.39 per share, for basic and $0.36 for diluted common shares. Key items for the three months ended March 31, 2020 include:

•Formed a joint venture that acquired $184.8 million in unpaid principal balance ("UPB") of mortgage loans with collateral values of $292.9 million and an aggregate purchase price of $170.4 million. As of March 31, 2020, the joint venture was prefunded with $132.6 million of cash for additional loan purchases of which 677 RPLs with UPB of $123.2 million closed in April for a purchase price of $114.0 million. We retained $61.3 million of varying classes of related securities issued by the joint venture to end the quarter with $312.1 million of investments in debt securities and beneficial interests

•Purchased $0.2 million of NPLs with UPB of $0.2 million and underlying collateral values of $0.3 million, and 26 RPLs for $1.2 million, with UPB of $2.0 million and collateral values of $3.1 million to end the quarter with $1.1 billion in net mortgage loans

•Interest income of $27.3 million; net interest income after provision for credit losses of $9.1 million

•Overall cost of funds decreased approximately 21 basis points

•Net income attributable to common stockholders of $0.4 million

•Basic earnings per share ("EPS") of $0.02

•Taxable income of $0.05 per share

•Book value per share of $14.37 at March 31, 2020

•Collected total cash of $62.4 million, from loan payments, sales of real estate owned ("REO") and investments in debt securities and beneficial interests

•Held $31.2 million of cash and cash equivalents at March 31, 2020; average daily cash balance for the quarter was $58.6 million

•At March 31, 2020, approximately 74% of our portfolio based on UPB had made at least the last 12 out of 12 payments

Table 1: Results of Operations


	Three months ended March 31,
($ in thousands)	2020		2019
INCOME
Interest income	$	27,286	$	29,452
Interest expense	(13,070)		(15,685)
Net interest income	14,216		13,767
Provision for credit losses	(5,109)		(154)
Net interest income after provision for credit losses	9,107		13,613
Income/(Loss) from investments in affiliates	(1,112)		461
Loss on sale of mortgage loans	(705)		—
Other income	747		1,110
Total income	8,037		15,184
EXPENSE
Related party expense – loan servicing fees	2,014		2,506
Related party expense – management fee	1,799		1,688
Loan transaction expense	(103)		69
Professional fees	805		862
Real estate operating expenses	912		786
Other expense	1,025		1,081
Total expense	6,452		6,992
Loss on debt extinguishment	408		—
Income before provision for income taxes	1,177		8,192
Provision for income taxes (benefit)	(319)		71
Consolidated net income	1,496		8,121
Less: consolidated net income attributable to the non-controlling interest	1,096		791
Consolidated net income attributable to common stockholders	$	400	$	7,330

Our consolidated net income attributable to common stockholders decreased $6.9 million for the quarter ended March 31, 2020 compared to the quarter ended March 31, 2019 primarily as a result of a $5.1 million provision for losses on our loan and investments in beneficial interest portfolios driven primarily by the expectation of deferrals of borrower payments, extended duration on loans and extensions of foreclosure timelines as a result of the relief provisions for the global pandemic caused by COVID-19. This reserve reflects the macroeconomic impact of the COVID-19 outbreak on mortgage loan and residential real estate markets generally and is not specific to any loan losses or impairments in our portfolio. We recorded a provision for losses in the amount of $0.2 million for the quarter ended March 31, 2019. Our book value declined to $14.37 per share from $15.80 at December 31, 2019 primarily from the effects of a $28.4 million non-cash mark-to-market adjustment to the fair value of our debt securities as generally determined by marks provided by our financing counterparties.

On January 1, 2020 we adopted Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”). Under CECL, we are required to record the net present value of the expected life of loan losses on our Mortgage loans and our Investments in beneficial interests. Our transition adjustment on January 1, 2020 resulted in a reclassification from discount to the allowance for losses in the amount of $14.4 million with no impact on Shareholder equity. On March 31, 2020, we recorded a charge to accrete $0.4 million of credit loss expense resulting from the January 1 transition adjustment and a $4.7 million increase in the allowance for losses driven by expectations derived from the COVID-19 outbreak, as described above. This resulted in a total provision for loss expense of $5.1 million for the first quarter of 2020.

We recorded a loss from our investments in affiliates of $1.1 million for the quarter ended March 31, 2020 compared to a gain of $0.5 million for the quarter ended March 31, 2019. The loss is primarily due to the flow through impact of mark-to-market losses on shares of our stock held by our Manager and our Servicer. We account for our investments in our Manager

and our Servicer using the equity method of accounting and all elements of income, expense, gain and loss are picked up in proportion to our investment. Additionally, during the quarter ended March 31, 2020 we sold 26 SBC mortgage loans with a carrying value of $26.1 million and UPB of $26.2 million for a loss of $0.7 million. We sold no loans in the quarter ended March 31, 2019.

We recorded $0.9 million in impairments on our REO held-for-sale portfolio in real estate operating expense for the quarter ended March 31, 2020 compared to $0.5 million for the quarter ended March 31, 2019. We continue to liquidate our REO properties held-for-sale at a faster rate than we acquire properties, with 19 properties sold in the first quarter while five were added to REO held-for-sale through foreclosures. The impairment was driven primarily by an extension of expected liquidation timelines based on state and local eviction moratoriums, and additional related expenses, and an overall slow-down in real estate sales due to the impact of the COVID-19 outbreak. We expect the rate of new foreclosures to slow due to the current moratorium in many states.

Interest Income

Our primary source of income is accretion earned on our mortgage loan portfolio offset by the interest expense incurred to fund and hold portfolio acquisitions. Net interest income after provision for loan losses decreased to $9.1 million for the three months ended March 31, 2020 from $13.6 million for the three months ended March 31, 2019 primarily as a result of $5.1 million in provisions for credit losses from across various aspects of our portfolio. The increase in the provision for credit losses is the result of losses driven by expectations derived from the COVID-19 outbreak, including the potential effect of Government mandated forbearance arrangements. As a result, for the three months ended March 31, 2020 we recorded provisions for credit losses of $2.1 million on our mortgage loan portfolio and $3.0 million on our investments in debt securities. Comparatively during the three months ended March 31, 2019 we recorded provisions for credit losses of $0.2 million on our mortgage loan portfolio and no provisions for credit losses on our investments in debt securities.

Our gross interest income decreased by $2.2 million to $27.3 million in the quarter ended March 31, 2020 from $29.5 million in the quarter ended March 31, 2019 due primarily to a decrease in the average balance of our mortgage loan portfolio driven partly by sales of mortgage loans, including the sale of loans to our 2019-C securitization on May 1, 2019, as well as from payoff of mortgage loans by borrowers. The volume of payoffs on the portfolio remained robust during the first quarter of 2020, with $47.0 million collected on our loan portfolio for the first quarter as compared to $44.7 million for the first quarter of 2019, as borrowers refinance or sell the underlying property.

Our interest expense decreased $2.6 million to $13.1 million in the quarter ended March 31, 2020 from $15.7 million in the quarter ended March 31, 2019 primarily due to a full quarter's impact of our rated secured borrowing that closed in November 2019.

The weighted average balance of our mortgage loan portfolio was $1.1 billion for the three months ended March 31, 2020 compared to $1.3 billion for the three months ended March 31, 2019. Additionally, we collected $62.4 million, excluding the loan sales proceeds, in cash payments and proceeds on our mortgage loans, our REO held-for-sale and our investments in securities for the three months ended March 31, 2020 compared to collections of $63.2 million for the three months ended March 31, 2019.

The interest income detail for the three months ended March 31, 2020 and 2019 are included in the table below ($ in thousands):

Table 2: Interest income detail


	Three months ended March 31,
	2020		2019
Accretable yield recognized on RPLs, NPLs and SBC loans, pooled	$	21,737	$	26,553
Interest income on securities	5,006		2,416
Interest income earned on other loans	384		158
Bank interest income	121		320
Other interest income	38		5
Interest income	$	27,286	$	29,452
Provision for credit losses	(5,109)		(154)
Interest income after provision for credit losses	$	22,177	$	29,298

The average balance of our mortgage loan portfolio, investment in securities and debt outstanding for the three months ended March 31, 2020 and 2019 are included in the table below ($ in thousands):

Table 3: Average Balances


	Three months ended March 31,
	2020		2019
Average mortgage loan portfolio	$	1,135,336	$	1,306,500
Average carrying value of debt securities and beneficial interests	$	298,304	$	135,449
Total average asset level debt	$	1,067,983	$	1,127,673

Other Income

Other income decreased for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 due to decreased rental income from the impact on our rental portfolio as a result our Gaea capital raise in November 2019 and lower income from the federal government's Home Affordable Modification Program ("HAMP") as more loans reach the five-year threshold for where any additional fees will have been earned. This was offset by increased net gain on sale of property held-for-sale. A breakdown of Other income is provided in the table below ($ in thousands):

Table 4: Other Income


	Three months ended March 31,
	2020		2019
Net gain on sale of Property held-for-sale	$	413	$	103
Late fee income	185		230
HAMP fees	138		384
Rental Income	11		385
Other income	—		8
Total Other Income	$	747	$	1,110

Expenses

Total expenses for the three months ended March 31, 2020 decreased from the three months ended March 31, 2019 due to a decrease in loan servicing fees as a result of a lower average balance of our mortgage loan portfolio and because our interest income from debt securities and beneficial interests is recorded net of servicing fees. This was offset by REO impairments, an element of our real estate operating expenses, which increased from $0.5 million for the three months ended March 31, 2019 to $0.9 million for the three months ended March 31, 2020. A breakdown of expenses is provided in the table below ($ in thousands):

Table 5: Expenses


	Three months ended March 31,
	2020		2019
Related party expense – loan servicing fees	$	2,014	$	2,506
Related party expense - management fee	1,799		1,688
Other expense	1,025		1,081
Real estate operating expenses	912		786
Professional fees	805		862
Loan transaction expense	(103)		69
Total expenses	$	6,452	$	6,992

Other expense decreased for the three months ended March 31, 2020 over the comparable period in 2019 primarily due to a decrease in employee and service provider share grants and taxes and regulatory expense offset by lower travel expense. Travel expense is primarily incurred during due diligence prior to and subsequent to portfolio acquisition. A breakdown of other expense is provided in the table below ($ in thousands):

Table 6: Other Expense


	Three months ended March 31,
	2020		2019
Insurance	$	184	$	159
Employee and service provider share grants	174		250
Borrowing related expenses	170		197
Travel, meals, entertainment	138		101
Directors' fees and grants	109		97
Other expense	97		67
Software licenses and amortization	70		47
Taxes and regulatory expense	46		112
Internal audit services	37		51
Total Other expense	$	1,025	$	1,081

Equity and Net Book Value per Share

Our net book value per share was $14.37 and $15.80 at March 31, 2020 and December 31, 2019, respectively. Our decrease in book value was driven primarily by the reduction in equity that resulted from the fair value adjustments of $28.4 million taken on our portfolio of debt securities recorded to Other comprehensive income. While GAAP does not specifically define the parameters for calculating book value, we believe our calculation is representative of our book value on a per share basis, and our Manager believes book value per share is a valuable metric for evaluating our business. The net book value per share is calculated by dividing equity, after adjusting for the anticipated conversion of the senior convertible notes into shares of common stock, the subtraction of non-controlling interests classified in equity, and shares for Manager and director fees that were approved but still unissued as of the date indicated, unvested employee and service provider stock grants and the common shares from assumed conversion of our Senior convertible notes. A breakdown of our book value per share is set forth in the table below ($ in thousands except per share amounts):

Table 7: Book Value per Share


	March 31, 2020		December 31, 2019
Outstanding shares	22,921,935		22,142,143
Adjustments for:
Unvested grants of restricted stock, and Manager and director shares earned but not issued as of the date indicated	3,468		2,600
Conversion of convertible senior notes into shares of common stock	8,007,089		8,270,208
Total adjusted shares outstanding	30,932,492		30,414,951

Equity at period end	$	357,274	$	384,084
Net increase in equity from expected conversion of convertible senior notes	112,750		120,669
Adjustment for equity due to non-controlling interests	(25,414)		(24,257)
Adjusted equity	$	444,610	$	480,496
Book value per share	$	14.37	$	15.80

Mortgage Loan Portfolio

For the three months ended March 31, 2020, we acquired 26 RPLs with an aggregated acquisition price of $1.2 million, representing 61.7% of UPB. Comparatively, for the three months ended March 31, 2019, we acquired 38 RPLs with an aggregate acquisition price of $7.2 million, representing 84.8% of UPB. We acquired one NPL loan for an acquisition price of

$0.2 million, representing 81.5% of UPB for the three month periods ended March 31, 2020. Comparatively, during the three months ended March 31, 2019 we acquired no NPLs.

For the three months ended March 31, 2020, we acquired no SBC loans. Comparatively, for the three months ended March 31, 2019 we acquired 19 SBC loans, with UPB of $17.8 million that represented 62.0% of the underlying collateral value of $28.7 million. We ended the period with $1.1 billion of mortgage loans with an aggregate UPB of $1.2 billion as of March 31, 2020 and $1.3 billion of mortgage loans with an aggregate UPB of $1.5 billion as of March 31, 2019.

The following table shows loan portfolio acquisitions that includes paid in full loans after acquisition but before boarding by the Servicer, for the three months ended March 31, 2020, and 2019 ($ in thousands):

Table 8: Loan Portfolio Acquisitions


	Three months ended March 31,
	2020			2019
RPLs
Count	26			38
UPB	$	1,952		$	8,495
Purchase price	$	1,205		$	7,205
Purchase price % of UPB	61.7		%	84.8		%
NPLs
Count	1			—
UPB	$	227		$	—
Purchase price	$	185		$	—
Purchase price % of UPB	81.5		%	—		%

Table 9: Commercial loans non-pooled


	Three months ended March 31,
	2020			2019
SBC loans non-pooled
Count	—			19
UPB	$	—		$	17,776
Undrawn UPB at acquisition	$	—		$	469
Issue price % of collateral value	—		%	62.0		%

During the three months ended March 31, 2020, 151 mortgage loans, representing 4.5% of our ending UPB, were liquidated. Comparatively, during the three months ended March 31, 2019, 151 mortgage loans, representing 1.7% of our ending UPB, were liquidated. Our loan portfolio activity for the three months ended March 31, 2020 and 2019 are presented below ($ in thousands):

Table 10: Loan Portfolio Activity


	Three months ended March 31,
	2020		2019
Beginning carrying value	$	1,151,469	$	1,310,873
RPL, NPL and SBC pool portfolio acquisitions, net cost basis	185		7,205
Other non-pooled portfolio acquisitions, net cost basis	1,206		17,793
Accretion recognized	21,745		26,586
Payments received, net	(46,960)		(44,460)
Reclassifications to REO	(814)		(4,171)
Sale of mortgage loans	(26,111)		—
Provision for credit losses on mortgage loans	(2,122)		(154)
Other	31		5
Ending carrying value	$	1,098,629	$	1,313,677

Table 11: Portfolio Composition

As of March 31, 2020 and December 31, 2019, our portfolios consisted of the following ($ in thousands):


March 31, 2020^(1,2)					December 31, 2019^(1,2)
No. of Loans	6,060			No. of Loans	6,184
Total UPB	$	1,207,885		Total UPB	$	1,268,126
Interest-Bearing Balance	$	1,131,370		Interest-Bearing Balance	$	1,190,917
Deferred Balance⁽³⁾	$	76,515		Deferred Balance⁽³⁾	$	77,209
Market Value of Collateral⁽⁴⁾	$	1,917,331		Market Value of Collateral⁽⁴⁾	$	1,783,856
Price/Total UPB⁽⁵⁾	82.4		%	Price/Total UPB⁽⁵⁾	82.9		%
Price/Market Value of Collateral	54.8		%	Price/Market Value of Collateral	61.9		%
Weighted Average Coupon	4.52		%	Weighted Average Coupon	4.55		%
Weighted Average LTV⁽⁶⁾	74.5		%	Weighted Average LTV⁽⁶⁾	83.5		%
Weighted Average Remaining Term (months)	304			Weighted Average Remaining Term (months)	311
No. of first liens	6,001			No. of first liens	6,124
No. of second liens	59			No. of second liens	60
No. of Rental Properties	9			No. of Rental Properties	10
Capital Invested in Rental Properties	$	1,394		Capital Invested in Rental Properties	$	1,591
RPLs loans	97.1		%	RPLs loans	95.3		%
NPLs loans	2.5		%	NPLs loans	2.7		%
Small-balance commercial loans	0.4		%	Small-balance commercial loans	2.0		%
No. of Other REO	45			No. of Other REO	58
Market Value of Other REO⁽⁷⁾	$	11,329		Market Value of Other REO⁽⁷⁾	$	13,987
Carrying value of debt securities and beneficial interests in trusts	$	346,450		Carrying value of debt securities and beneficial interests in trusts	$	288,362
Loans with 12 for 12 payments as an approximate percentage of UPB⁽⁸⁾	74.0		%	Loans with 12 for 12 payments as an approximate percentage of UPB⁽⁸⁾	76.0		%
Loans with 24 for 24 payments as an approximate percentage of UPB ⁽⁹⁾	67.0		%	Loans with 24 for 24 payments as an approximate percentage of UPB ⁽⁹⁾	64.0		%

(1)Includes the impact of 1,003 mortgage loans with a purchase price of $177.3 million, UPB of $194.3 million and collateral value of $295.3 million acquired in the fourth quarter of 2017 through a 50% owned joint venture which we consolidate.

(2)Includes the impact of 256 mortgage loans with a purchase price of $47.4 million, UPB of $52.8 million and collateral value of $68.1 million acquired in the third quarter of 2018 through a 63.0% owned joint venture which we consolidate.

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

(4)As of date of acquisition.

(5)At March 31, 2020 and December 31, 2019, our loan portfolio consists of fixed rate (52.1% of UPB), ARM (9.4% of UPB) and Hybrid ARM (38.5% of UPB); and fixed rate (52.8% of UPB), ARM (9.5% of UPB) and Hybrid ARM (37.7% of UPB), respectively.

(6)UPB as of March 31, 2020 and December 31, 2019, divided by market value of collateral and weighted by the UPB of the loan.

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

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

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

Table 12: Portfolio Characteristics

The following tables present certain characteristics of our mortgage loans by year of origination as of March 31, 2020 and December 31, 2019, respectively ($ in thousands):

Portfolio at March 31, 2020


	Years of Origination
	After 2008			2006 – 2008			2005 and prior
Number of loans	612			3,516			1,932
Unpaid principal balance	$	123,662		$	806,805		$	277,418
Mortgage loan portfolio by year of origination	10.2		%	66.8		%	23.0		%
Loan Attributes:
Weighted average loan age (months)	107.3			157.6			196.5
Weighted Average loan-to-value	72.4		%	78.8		%	64.8		%
Delinquency Performance:
Current	51.4		%	55.1		%	54.0		%
30 days delinquent	13.1		%	12.6		%	13.9		%
60 days delinquent	9.1		%	8.4		%	10.1		%
90+ days delinquent	22.7		%	19.1		%	18.3		%
Foreclosure	3.7		%	4.8		%	3.7		%

Portfolio at December 31, 2019


	Years of Origination
	After 2008			2006 – 2008			2005 and prior
Number of loans	625			3,576			1,983
Unpaid principal balance	$	153,923		$	826,684		$	287,519
Mortgage loan portfolio by year of origination	12.1		%	65.2		%	22.7		%
Loan Attributes:
Weighted average loan age (months)	88.0			154.5			193.3
Weighted Average loan-to-value	72.7		%	81.2		%	66.5		%
Delinquency Performance:
Current	61.9		%	56.9		%	58.8		%
30 days delinquent	9.5		%	13.0		%	12.6		%
60 days delinquent	6.5		%	8.4		%	8.2		%
90+ days delinquent	20.5		%	17.3		%	17.3		%
Foreclosure	1.6		%	4.4		%	3.1		%

Table 13: Loans by State

The following table identifies our mortgage loans by state, number of loans, loan value, collateral value and percentages thereof at March 31, 2020 and December 31, 2019 ($ in thousands):


March 31, 2020																		December 31, 2019
State	Count	UPB		% UPB		Collateral Value⁽¹⁾		% of Collateral Value		State	Count	UPB		% UPB		Collateral Value⁽¹⁾		% of Collateral Value
CA⁽²⁾	962	$	330,994	27.4	%	$	575,714	30.0	%	CA	1,010	$	370,838	29.2	%	$	564,169	31.6	%
FL	676	117,008		9.7	%	183,163		9.6	%	FL	689	119,728		9.4	%	156,967		8.8	%
NY⁽²⁾	327	103,473		8.6	%	175,429		9.1	%	NY	331	105,853		8.3	%	161,646		9.1	%
NJ ⁽²⁾	295	66,828		5.5	%	88,579		4.6	%	NJ	290	66,762		5.3	%	80,472		4.5	%
MD	253	61,581		5.1	%	78,503		4.1	%	MD	257	63,349		5.0	%	74,027		4.2	%
GA	355	47,694		4.0	%	71,522		3.7	%	GA	363	48,969		3.9	%	62,960		3.5	%
VA	201	43,217		3.6	%	60,873		3.2	%	VA	206	44,193		3.5	%	57,678		3.2	%
IL	223	41,929		3.5	%	53,587		2.8	%	IL	228	42,962		3.4	%	49,586		2.8	%
TX	392	38,310		3.2	%	75,244		3.9	%	TX	399	39,689		3.1	%	69,874		3.9	%
MA	177	36,146		3.0	%	59,155		3.1	%	MA	181	37,596		3.0	%	53,785		3.0	%
NC	244	31,259		2.6	%	46,895		2.5	%	NC	240	31,402		2.5	%	42,977		2.4	%
WA	109	27,364		2.3	%	48,364		2.5	%	WA	114	28,489		2.2	%	43,372		2.4	%
AZ	152	25,884		2.2	%	40,914		2.1	%	AZ	154	26,321		2.1	%	34,277		1.9	%
NV	106	20,989		1.8	%	33,355		1.7	%	NV	107	21,384		1.7	%	27,540		1.5	%
PA	175	20,287		1.7	%	28,736		1.5	%	PA	180	20,978		1.7	%	26,936		1.5	%
SC	127	14,855		1.2	%	22,757		1.2	%	SC	129	15,282		1.2	%	21,263		1.2	%
MI	95	13,283		1.1	%	22,704		1.2	%	MI	98	14,339		1.1	%	21,876		1.2	%
OH	109	13,271		1.1	%	17,030		0.9	%	OH	110	13,515		1.1	%	15,451		0.9	%
OR	64	12,678		1.1	%	21,749		1.1	%	OR	66	12,991		1.0	%	19,519		1.1	%
CT	72	12,521		1.0	%	16,224		0.8	%	CT	72	12,594		1.0	%	15,832		0.9	%
TN	112	11,960		1.0	%	21,090		1.1	%	TN	115	12,566		1.0	%	19,203		1.1	%
CO	59	11,633		1.0	%	23,735		1.2	%	CO	63	12,368		1.0	%	22,471		1.3	%
MO	80	9,951		0.8	%	13,275		0.7	%	MN	54	10,200		0.8	%	12,753		0.7	%
MN	53	9,839		0.8	%	13,651		0.7	%	MO	80	10,003		0.8	%	12,427		0.7	%
IN	98	9,407		0.8	%	13,789		0.7	%	IN	100	9,521		0.8	%	12,545		0.7	%
UT	51	8,705		0.7	%	17,196		0.9	%	UT	52	8,923		0.7	%	13,957		0.8	%
LA	72	7,531		0.6	%	11,259		0.6	%	LA	74	7,585		0.6	%	11,389		0.6	%
HI	17	7,207		0.6	%	10,444		0.6	%	HI	17	7,229		0.6	%	10,093		0.6	%
DE	33	6,540		0.5	%	7,702		0.4	%	DE	33	6,566		0.5	%	7,626		0.4	%
WI	37	4,738		0.4	%	6,126		0.3	%	WI	37	4,772		0.4	%	5,827		0.3	%
DC	16	4,525		0.4	%	7,180		0.4	%	DC	16	4,542		0.4	%	6,368		0.4	%
NM	30	4,498		0.4	%	5,985		0.3	%	NM	30	4,525		0.4	%	5,407		0.3	%
KY	34	3,951		0.3	%	5,551		0.3	%	KY	34	3,969		0.3	%	5,213		0.3	%
AL	42	3,435		0.3	%	4,303		0.2	%	AL	43	3,569		0.3	%	4,480		0.3	%
RI	15	3,220		0.3	%	4,700		0.3	%	RI	15	3,232		0.3	%	4,188		0.2	%
NH	17	3,003		0.3	%	4,608		0.3	%	NH	17	3,016		0.2	%	4,290		0.3	%
OK	29	2,610		0.2	%	4,048		0.2	%	OK	30	2,631		0.2	%	3,948		0.2	%
MS	28	2,525		0.2	%	3,435		0.2	%	MS	25	2,389		0.2	%	3,062		0.2	%
ID	14	1,717		0.1	%	3,311		0.2	%	ID	14	1,723		0.1	%	2,755		0.2	%
IA	16	1,588		0.1	%	2,028		0.1	%	IA	16	1,599		0.1	%	2,011		0.1	%
WV	17	1,585		0.1	%	2,014		0.1	%	WV	17	1,595		0.1	%	2,208		0.1	%
ME	11	1,553		0.1	%	1,903		0.1	%	ME	11	1,564		0.1	%	1,829		0.1	%
KS	18	1,375		0.1	%	2,736		0.2	%	KS	18	1,391		0.1	%	2,435		0.1	%
AR	18	1,313		0.1	%	1,814		0.1	%	AR	18	1,318		0.1	%	1,777		0.1	%
MT	5	692		0.1	%	1,076		0.1	%	NE	6	702		0.1	%	836		0.1	%
PR	6	541		—	%	629		—	%	MT	5	697		0.1	%	1,005		0.1	%
NE	4	532		—	%	581		—	%	PR	6	546		—	%	838		0.1	%
WY	4	517		—	%	589		—	%	WY	4	519		—	%	593		—	%
SD	3	508		—	%	701		0.1	%	SD	3	509		—	%	678		—	%
VT	2	462		—	%	505		—	%	VT	2	467		—	%	470		—	%
ND	3	401		—	%	481		—	%	ND	3	403		—	%	595		—	%
AK	2	252		—	%	389		—	%	AK	2	253		—	%	372		—	%
	6,060	$	1,207,885	100.0	%	$	1,917,331	100.0	%		6,184	$	1,268,126	100.0	%	$	1,783,856	100.0	%

(1) As of date of acquisition.

(2) State significantly impacted by the COVID-19 pandemic.

Liquidity and Capital Resources

Source and Uses of Cash

Our primary sources of cash have consisted of proceeds from our securities offerings, our secured borrowings, repurchase agreements, principal and interest payments on our loan portfolio, principal paydowns on securities, and sales of properties held-for-sale. Depending on market conditions, we expect that our primary financing sources will continue to include secured borrowings, repurchase agreements, and securities offerings in addition to transaction or asset specific funding arrangements and credit facilities (including term loans and revolving facilities). We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs. From time to time, we may invest with third parties and acquire interests in loans and other real estate assets through investments in joint ventures using special purpose entities that can result in investments at fair value and investments in beneficial interests, which are reflected on our consolidated balance sheet.

As of March 31, 2020 and December 31, 2019, substantially all of our invested capital was in RPLs, NPLs, SBC loans, property held-for-sale, debt securities, beneficial interests and rental properties. We also held approximately $31.2 million of cash and cash equivalents, a decrease of $33.2 million from our balance of $64.3 million at December 31, 2019. Our average daily cash balance during the quarter was $58.6 million, a decrease of $7.5 million from our average daily cash balance of $66.1 million during the three months ended December 31, 2019.

Our collections of principal and interest payments on mortgage loans and securities, payoffs of mortgage loans and proceeds on the sale of our property held-for-sale and sale of debt securities held as investments were $62.4 million and $63.2 million for the three months ended March 31, 2020 and 2019, respectively. We currently expect the pace of loan prepayments to slow due to COVID-19.

Our operating cash outflows, including the effect of restricted cash, for the three months ended March 31, 2020 and 2019 were $30.4 million and $5.0 million, respectively. Our primary operating cash inflow is cash interest payments on our mortgage loan pools of $12.3 million and $15.7 million for the three months ended March 31, 2020 and 2019, respectively. Non-cash interest income accretion was $9.5 million and $10.9 million for the three months ended March 31, 2020 and 2019, respectively. We also recognized a loss of $0.7 million from the sale of 26 mortgage loans during the quarter to Gaea, an affiliated entity. No loans were sold during the three months ended March 31, 2019. We expect, however, that the impact of the COVID-19 outbreak will put pressure on our cash flow from operations as we enter into loan modifications on certain of our loans permitting interest payments to be deferred. Though the ownership of mortgage loans and other real estate assets is our business, GAAP requires that operating cash flows do not include the portion of principal payments that are allocable to the discount we recognize on our mortgage loans including proceeds from loans that pay in full or are liquidated in a short sale or third party sale at foreclosure or the proceeds on the sales of our property held-for-sale. These activities are all considered to be Investing activities under GAAP, and the cash flows from these activities are included in the investing section of our consolidated statements of cash flows.

For the three months ended March 31, 2020 our investing cash inflow of $11.0 million was primarily driven by the sale of mortgage loans to Gaea in the amount of $25.4 million and principal payments on and payoffs of our mortgage loan portfolio of $34.6 million, principal payments on and payoffs of our debt securities and beneficial interests of $10.2 million, offset by purchases of debt securities and beneficial interests of $61.3 million and acquisitions of mortgage loans of $1.4 million. For the three months ended March 31, 2019 our investing cash outflow of $5.6 million was primarily driven by the acquisitions of our mortgage loans of $25.0 million and purchases of debt securities, beneficial interests and equity securities of $64.0 million offset by principal payments on and payoffs of our mortgage loan portfolio of $28.8 million, principal payments on and payoffs of our debt securities and beneficial interests of $11.9 million, sale of our debt securities of $39.6 million and sale of our property held-for-sale.

Our financing cash flows are driven primarily by funding used to acquire mortgage loan pools. We fund our mortgage loan pool acquisitions primarily through secured borrowings, repurchase agreements and the proceeds from our convertible debt and equity offerings. For the three months ended March 31, 2020, we had net financing cash outflows of $13.8 million from our pay down of existing debt obligations, primarily driven by repayments of $55.4 million on repurchase transactions, $22.6 million on secured debt and the repurchase of our senior convertible notes for a net cash impact of $8.2 million, partially offset by additional borrowing through repurchase transactions of $72.4 million. For the three months ended March 31, 2019, we had net cash outflows from financing activities of $3.0 million primarily driven by our pay down of existing debt obligations of $45.5 million on repurchase transactions and $17.8 million on secured debt offset by proceeds from our

repurchase transactions of $67.5 million. For the three months ended March 31, 2020 and 2019 we paid $0.1 million and $7.2 million, respectively, in combined dividends and distributions.

Financing Activities — Equity offerings

During the three months ended March 31, 2020, we did not sell any shares of common stock under our at-the-market program which we established in October 2016, to sell, through our agents, shares of common stock with an aggregate offering price of up to $50.0 million. In accordance with the terms of the agreements, we may offer and sell shares of our common stock at any time and from time to time through the sales agents. Sales of the shares, if any, will be made by means of ordinary brokers’ transactions on the New York Stock Exchange or otherwise at market prices prevailing at the time of the sale.

Financing Activities — Secured Borrowings and Convertible Senior Notes

From inception (January 30, 2014) to March 31, 2020, we have completed 15 secured borrowings, not including borrowings we completed for our non-consolidated joint ventures (See Table 17: Investments in joint ventures), through securtiziation trusts pursuant to Rule 144A under the Securities Act, six of which were outstanding at March 31, 2020. The secured borrowings are structured as debt financings and not REMIC sales, and the loans included in the secured borrowings remain on our consolidated balance sheet as we are the primary beneficiary of the secured borrowing trusts, which are VIEs. The secured borrowing VIEs are structured as pass through entities that receive principal and interest on the underlying mortgages and distribute those payments to the holders of the notes. Our exposure to the obligations of the VIEs is generally limited to our investments in the entities. The notes that are issued by the secured borrowing trusts are secured solely by the mortgages held by the applicable trusts and not by any of our other assets. The mortgage loans of the applicable trusts are the only source of repayment and interest on the notes issued by such trusts. We do not guarantee any of the obligations of the trusts under the terms of the agreement governing the notes or otherwise.

Our secured borrowings are generally structured with Class A notes, subordinate notes, and trust certificates, which have rights to the residual interests in the mortgages once the notes are repaid. With the exception of our Ajax Mortgage Loan Trusts 2017-D ("2017-D") secured borrowings, from which we sold a 50% interest in the Class A notes and a 50% interest in the residual equity to third parties and 2018-C secured borrowings, from which we sold a 95% interest in the Class A notes and 37% in the Class B and trust certificates, we have retained the subordinate notes and the applicable trust certificates from the other six secured borrowings outstanding at March 31, 2020.

For all of our secured borrowings the Class A notes are senior, sequential pay, fixed rate notes, and with the exception of 2017-D and 2018-C as noted above, the Class B notes are subordinate, sequential pay, fixed rate notes with the exception of 2019-D which are subordinate, sequential pay, fixed rate notes for Class B-1 and variable rate notes for Class B-2 and Class B-3. The interest rate is effectively the rate equal to the spread between the gross average rate of interest the trust collects on its mortgage loan portfolio minus the rate derived from the sum of the servicing fee and other expenses of the trust. The Class M notes issued under 2017-B, 2019-D and 2019-F are also mezzanine, sequential pay, fixed rate notes.

For all of our secured borrowings, except 2017-B, 2019-D and 2019-F, which contains no interest rate step-up, if the Class A notes have not been redeemed by the payment date or otherwise paid in full 36 months after issue, or in the case of 2017-C, 48 months after issue, an interest rate step-up of 300 basis points is triggered. Twelve months after the 300 basis point step up is triggered, an additional 100 basis point step up will be triggered, and an amount equal to the aggregate interest payment amount that accrued and would otherwise be paid to the subordinate notes will be paid as principal to the Class A notes on that date and each subsequent payment date until the Class A notes are paid in full. After the Class A notes are paid in full, the subordinate notes will resume receiving their respective interest payment amounts and any interest that accrued but was not paid while the Class A notes were outstanding. As the holder of the trust certificates, we are entitled to receive any remaining amounts in the trusts after the Class A notes and subordinate notes have been paid in full.

The following table sets forth the original terms of all outstanding notes from our secured borrowings outstanding at March 31, 2020 at their respective cutoff dates:

Table 14: Secured Borrowings

Issuing Trust/Issue Date

Interest Rate Step-up Date

Security

Original Principal

Interest Rate

Ajax Mortgage Loan Trust 2017-B/ December 2017

None

Class A notes due 2056

$115.8 million

3.16

None

Class M-1 notes due 2056⁽³⁾

$9.7 million

3.50

None

Class M-2 notes due 2056⁽³⁾

$9.5 million

3.50

None

Class B-1 notes due 2056⁽¹⁾

$9.0 million

3.75

None

Class B-2 notes due 2056⁽¹⁾

$7.5 million

3.75

Trust certificates⁽²⁾

$14.3 million

—

Deferred issuance costs

$(1.8) million

—

Ajax Mortgage Loan Trust 2017-C/ November 2017

November 25, 2021

Class A notes due 2060

$130.2 million

3.75

May 25, 2022

Class B-1 notes due 2060⁽¹⁾

$13.0 million

5.25

Trust certificates⁽²⁾

$42.8 million

—

Deferred issuance costs

$(1.7) million

—

Ajax Mortgage Loan Trust 2017-D/ December 2017

April 25, 2021

Class A notes due 2057⁽⁴⁾

$177.8 million

3.75

None

Class B certificates⁽⁴⁾

$44.5 million

—

Deferred issuance costs

$(1.1) million

—

Ajax Mortgage Loan Trust 2018-C/ September 2018

October 25, 2021

Class A notes due 2065⁽⁵⁾

$170.5 million

4.36

April 25, 2022

Class B notes due 2065⁽⁵⁾

$15.9 million

5.25

Trust certificates⁽⁵⁾

$40.9 million

—

Deferred issuance costs

$(2.0) million

—

Ajax Mortgage Loan Trust 2019-D/ July 2019

None

Class A-1 notes due 2065

$140.4 million

2.96

None

Class A-2 notes due 2065

$6.1 million

3.50

None

Class A-3 notes due 2065

$10.1 million

3.50

None

Class M-1 notes due 2065⁽³⁾

$9.3 million

3.50

None

Class B-1 notes due 2065⁽⁶⁾

$7.5 million

3.50

None

Class B-2 notes due 2065⁽⁶⁾

$7.1 million

variable⁽⁷⁾

None

Class B-3 notes due 2065⁽⁶⁾

$12.8 million

variable⁽⁷⁾

Deferred issuance costs

$(2.7) million

—

Ajax Mortgage Loan Trust 2019-F/ November 2019

None

Class A-1 notes due 2059

$110.1 million

2.86

None

Class A-2 notes due 2059

$12.5 million

3.50

None

Class A-3 notes due 2059

$5.1 million

3.50

None

Class M-1 notes due 2059⁽¹⁾

$6.1 million

3.50

None

Class B-1 notes due 2059⁽⁶⁾

$11.5 million

3.50

None

Class B-2 notes due 2059⁽⁶⁾

$10.4 million

variable⁽⁷⁾

None

Class B-3 notes due 2059⁽⁶⁾

$15.1 million

variable⁽⁷⁾

Deferred issuance costs

$(1.8) million

—

(1)The Class B notes are subordinate, sequential pay, fixed rate notes with Class B-2 notes subordinate to the Class B-1 notes. We have retained the Class B notes.

(2)The trust certificates issued by the trusts and the beneficial ownership of the trusts are retained by Great Ajax Funding LLC as the depositor. As the holder of the trust certificates, we are entitled to receive any remaining amounts in the trusts after the Class A notes, Class M notes, where present, and Class B notes have been paid in full.

(3)The Class M notes are subordinate, sequential pay, fixed rate notes with Class M-2 notes subordinate to the Class M-1 notes. We retained the Class M notes.

(4)AJAXM 2017-D is a joint venture in which a third party owns 50% of the Class A notes and 50% of the Class B certificates. We are required to consolidate 2017-D and are reflecting 100% of the mortgage loans, in Mortgage loans, net. 50% of the Class A notes, which are held by the third party, are included in Secured borrowings, net. The 50% portion of the Class A notes retained by us have been encumbered under a repurchase agreement. 50% of the Class B certificates are recognized as Non-controlling interest.

(5)AJAXM 2018-C is a joint venture in which a third party owns 95% of the Class A notes and 37% of the Class B notes and certificates. We are required to consolidate 2018-C and are reflecting 100% of the mortgage loans, in Mortgage loans, net. 95% of the Class A notes and 37% of the Class B notes, which are held by the third party, are included in Secured borrowings, net. The 5% portion of the Class A notes retained by us have been encumbered under the repurchase agreement. 37% percent of the Class C certificates are recognized as Non-controlling interest.

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

Repurchase Transactions

We have two repurchase facilities whereby we, through two wholly-owned Delaware trusts (the “Trusts”), acquire pools of mortgage loans which are then sold by the Trusts, as “Seller” to two separate counterparties, the “buyer” or “buyers.” One facility has a ceiling of $250.0 million and the other $400.0 million at any one time. Upon the time of the initial sale to the buyer, each Trust, with a simultaneous agreement, also agrees to repurchase the pools of mortgage loans from the buyer. Mortgage loans sold under these facilities carry interest calculated based on a spread to one-month LIBOR, which are fixed for the term of the borrowing. The purchase price that the Trust realizes upon the initial sale of the mortgage loans to the buyer can vary between 70% and 85% of the asset’s acquisition price, depending upon the facility being utilized and/or the quality of the underlying collateral. The obligations of the Trust to repurchase these mortgage loans at a future date are guaranteed by the Operating Partnership. The difference between the market value of the asset and the amount of the repurchase agreement is generally the amount of equity we have in the position and is intended to provide the buyer with some protection against fluctuations in the value of the collateral, and/or a failure by us to repurchase the asset and repay the borrowing at maturity. We also have three repurchase facilities substantially similar to the mortgage loan repurchase facilities where the pledged assets are the class B bonds and certificates from our securitization transactions. These facilities have no effective ceilings. Each repurchase transaction represents its own borrowing. As such, the ceilings associated with these transactions are the amounts currently borrowed at any one time. We have effective control over the assets subject to all of these transactions; therefore, our repurchase transactions are accounted for as financing arrangements.

During the last two weeks of March 2020, we received margin calls from financing counterparties in the amount of $28.2 million due to the turmoil in the financial markets resulting from the COVID-19 outbreak. As of March 31, 2020, we had $32.4 million of cash collateral on deposit with financing counterparties. This cash is included in Prepaid expenses and other assets on our consolidated balance sheet at March 31, 2020 and is not netted against our Borrowings under repurchase agreements

A summary of our outstanding repurchase transactions at March 31, 2020 and December 31, 2019 is as follows ($ in thousands):

Table 15: Repurchase Transactions by Maturity Date


										March 31, 2020
Maturity Date	Origination date	Maximum Borrowing Capacity		Amount Outstanding		Amount of Collateral		Percentage of Collateral Coverage			Interest Rate
April 2, 2020	January 3, 2020	$	1,758	$	1,758	$	2,388	136	%		2.96	%
April 2, 2020	January 3, 2020	1,684		1,684		2,287		136	%		2.96	%
April 13, 2020	March 12, 2020	37,201		37,201		49,877		134	%		2.46	%
April 13, 2020	March 12, 2020	3,236		3,236		4,655		144	%		2.56	%
April 22, 2020	March 24, 2020	35,381		35,381		51,679		146	%		5.00	%
April 27, 2020	January 28, 2020	5,749		5,749		7,464		130	%		3.00	%
April 27, 2020	March 27, 2020	4,811		4,811		10,024		208	%		3.71	%
April 27, 2020	March 27, 2020	4,108		4,108		7,101		173	%		3.71	%
April 27, 2020	January 28, 2020	2,522		2,522		3,381		134	%		2.80	%
April 27, 2020	March 27, 2020	2,153		2,153		10,938		508	%		3.86	%
June 3, 2020	March 3, 2020	20,987		20,987		27,814		133	%		3.11	%
June 3, 2020	March 3, 2020	11,181		11,181		14,682		131	%		3.11	%
June 3, 2020	March 3, 2020	10,019		10,019		13,192		132	%		3.11	%
June 3, 2020	December 6, 2019	6,097		6,097		7,565		124	%		3.64	%
June 3, 2020	March 3, 2020	5,161		5,161		6,616		128	%		3.11	%
June 3, 2020	December 6, 2019	4,704		4,704		5,755		122	%		3.64	%
June 3, 2020	March 3, 2020	3,827		3,827		4,907		128	%		3.11	%
June 3, 2020	December 6, 2019	3,053		3,053		3,959		130	%		3.64	%
June 3, 2020	December 6, 2019	2,332		2,332		3,360		144	%		3.79	%
June 3, 2020	March 3, 2020	1,848		1,848		2,640		143	%		3.21	%
June 3, 2020	December 6, 2019	1,132		1,132		1,607		142	%		3.79	%
June 19, 2020	March 20, 2020	14,599		14,599		19,893		136	%		6.22	%
June 19, 2020	December 19, 2019	13,447		13,447		17,077		127	%		3.55	%
June 19, 2020	March 20, 2020	9,571		9,571		13,043		136	%		6.22	%
June 19, 2020	March 20, 2020	4,691		4,691		6,089		130	%		6.22	%
June 19, 2020	March 20, 2020	2,665		2,665		4,050		152	%		6.72	%
June 19, 2020	December 19, 2019	1,155		1,155		1,687		146	%		3.70	%
June 26, 2020	March 26, 2020	20,906		20,906		31,930		153	%		9.23	%
June 30, 2020	January 3, 2020	8,328		8,328		3,656		44	%		3.56	%
June 30, 2020	January 3, 2020	6,099		6,099		9,038		148	%		3.56	%
June 30, 2020	December 30, 2019	5,286		5,286		6,850		130	%		3.57	%
June 30, 2020	January 3, 2020	5,116		5,116		6,721		131	%		3.56	%
June 30, 2020	December 30, 2019	3,324		3,324		4,667		140	%		3.72	%
July 10, 2020	January 13, 2020	9,020		9,020		13,016		144	%		3.67	%
July 31, 2020	February 3, 2020	7,763		7,763		9,702		125	%		3.56	%
July 31, 2020	February 3, 2020	7,151		7,151		9,537		133	%		3.56	%
July 10, 2020	July 15, 2016	250,000		30,141		44,217		147	%		3.38	%
September 24, 2020	September 25, 2019	400,000		112,885		164,103		145	%		3.11	%
Totals		$	938,065	$	431,091	$	607,167	141	%		3.86	%


				December 31, 2019
Maturity Date	Origination date	Maximum Borrowing Capacity		Amount Outstanding		Amount of Collateral		Percentage of Collateral Coverage		Interest Rate
January 3, 2020	November 26, 2019	$	8,411	$	8,411	$	11,098	132	%	3.45	%
January 3, 2020	November 26, 2019	6,093		6,093		9,038		148	%	3.45	%
January 3, 2020	November 26, 2019	5,175		5,175		6,855		132	%	3.45	%
January 3, 2020	December 2, 2019	11,966		11,966		15,742		132	%	3.45	%
January 3, 2020	December 2, 2019	10,648		10,648		14,058		132	%	3.45	%
January 3, 2020	December 2, 2019	5,485		5,485		7,050		129	%	3.45	%
January 3, 2020	December 2, 2019	4,096		4,096		5,261		128	%	3.45	%
January 3, 2020	December 2, 2019	1,644		1,644		2,388		145	%	3.55	%
January 3, 2020	December 2, 2019	1,576		1,576		2,287		145	%	3.55	%
January 10, 2020	December 11, 2019	21,088		21,088		28,284		134	%	3.47	%
January 10, 2020	December 11, 2019	1,808		1,808		2,640		146	%	3.57	%
January 13, 2020	July 11, 2019	8,956		8,956		13,016		145	%	4.16	%
January 21, 2020	December 20, 2019	15,718		15,718		20,623		131	%	3.41	%
January 21, 2020	December 20, 2019	10,305		10,305		13,521		131	%	3.41	%
January 21, 2020	December 20, 2019	5,840		5,840		7,324		125	%	3.41	%
January 21, 2020	December 20, 2019	2,784		2,784		4,050		145	%	3.51	%
January 28, 2020	October 30, 2019	5,318		5,318		7,464		140	%	3.19	%
January 28, 2020	October 30, 2019	2,520		2,520		3,381		134	%	2.99	%
February 3, 2020	August 1, 2019	7,568		7,568		9,702		128	%	4.19	%
February 3, 2020	August 1, 2019	6,664		6,664		9,537		143	%	4.19	%
February 24, 2020	November 26, 2019	41,412		41,412		54,828		132	%	2.92	%
March 25, 2020	September 25, 2019	7,075		7,075		10,024		142	%	3.96	%
March 25, 2020	September 25, 2019	5,851		5,851		7,423		127	%	3.81	%
March 26, 2020	September 26, 2019	27,075		27,075		34,591		128	%	3.81	%
March 27, 2020	September 27, 2019	2,915		2,915		3,709		127	%	3.79	%
June 3, 2020	December 6, 2019	6,097		6,097		7,891		129	%	3.64	%
June 3, 2020	December 6, 2019	4,704		4,704		6,106		130	%	3.64	%
June 3, 2020	December 6, 2019	3,053		3,053		4,035		132	%	3.64	%
June 3, 2020	December 6, 2019	2,332		2,332		3,360		144	%	3.79	%
June 3, 2020	December 6, 2019	1,132		1,132		1,607		142	%	3.79	%
June 19, 2020	December 19, 2019	13,447		13,447		18,076		134	%	3.55	%
June 19, 2020	December 19, 2019	1,155		1,155		1,687		146	%	3.70	%
June 30, 2020	December 30, 2019	5,286		5,286		7,044		133	%	3.57	%
June 30, 2020	December 30, 2019	3,324		3,324		4,667		140	%	3.72	%
July 10, 2020	July 15, 2016	250,000		28,931		57,397		198	%	4.28	%
September 24, 2020	September 25, 2019	400,000		116,662		164,403		141	%	4.24	%
Totals		$	918,521	$	414,114	$	580,167	140	%	3.77	%

As of March 31, 2020, we had $431.1 million outstanding under our repurchase transactions compared to $414.1 million as of December 31, 2019. The maximum month-end balance outstanding during the three months ended March 31, 2020 was $467.3 million, compared to a maximum month-end balance for the three months ended December 31, 2019, of $438.4 million. The following table presents certain details of our repurchase transactions for the three months ended March 31, 2020 and December 31, 2019 ($ in thousands):

Table 16: Repurchase Balances


	Three months ended
	March 31, 2020		December 31, 2019
Balance at the end of period	$	431,091	$	414,114
Maximum month-end balance outstanding during the quarter	$	467,344	$	438,388
Average balance	$	417,379	$	422,837

The decrease in our average balance from $422.8 million for the three months ended December 31, 2019 to our average balance of $417.4 million for the three months ended March 31, 2020 was due to a net decrease in repurchase financing during the three months ended March 31, 2020, as a result of decreased investments in mortgage loans and debt securities.

As of March 31, 2020 and December 31, 2019, we did not have any credit facilities or other outstanding debt obligations other than the repurchase facilities, secured borrowings and our Senior convertible notes.

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

Dividends

We may declare dividends based on, among other things, our earnings, our financial condition, our working capital needs, new opportunities, and distribution requirements imposed on REITs. The declaration of dividends to our stockholders and the amount of such dividends are at the discretion of our Board of Directors. On March 25, 2020 we announced that we would pay our previously declared cash dividend of $0.32 per share in shares of our common stock. The value was based on the $9.14 per share closing price on the record date. As a result, on March 27, 2020, we issued 781,222 shares of our common stock in fulfillment of the dividend.

On May 3, 2020, our Board of Directors declared a cash dividend of $0.17 per share, paid on May 29, 2020 to stockholders of record as of May 15, 2020. Our Management Agreement with our Manager requires the payment of an incentive management fee above the amount of the base management fee if either, (1) for any quarterly incentive fee, the sum of cash dividends on our common stock, plus distributions on our externally-held operating partnership units, plus any quarterly increase in book value, all calculated on an annualized basis, exceed 8% of our book, or (2) for any annual incentive fee, the value of quarterly cash dividends on our common stock, plus cash special dividends on our commons stock, plus distributions on our externally-held operating partnership units all paid out within the applicable calendar year, paid out of our taxable income, exceeds of 8% (on an annualized basis) of our stock’s book value. During the three months ended of March 31, 2020 and 2019, we recorded $0 and $0.2 million, respectively, in expense for incentive fees payable to our Manager. Our dividend payments are driven by the amount of our taxable income, subject to IRS rules for maintaining our status as a REIT.

Our most recently declared quarterly dividend represents a payment of approximately 4.73% on an annualized basis of our book value of $14.37 per share at March 31, 2020. However, if our taxable income increases to the levels we experienced during 2019, we could continue to exceed the threshold for paying an incentive fee to our Manager, and thereby trigger such payments. See Note 10 — Related party transactions.

Capital resources

Subsequent to the end of the March 31, 2020 quarter, we closed on a private placement of $80.0 million of our preferred stock and warrants to institutional accredited investors pursuant to a securities purchase agreement dated April 3, 2020. We issued 820,000 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,380,000 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock, each at a purchase price per share of $25.00 and two series of five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock at an exercise price of $10.00 per share. Each series of warrants includes a put option that allows the holder to sell the warrants to us at a specified put price on or after July 6, 2023. In addition, we granted the purchasers an option to purchase up to an additional 800,000 shares of Series A Preferred Stock and Series B Preferred Stock and warrants to purchase an aggregate of 1,000,000 shares of our common stock on the same terms. We expect to use the net proceeds from the private placement to acquire mortgage loans and mortgage-related assets.

We believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. As the local and global economies have weakened as a result of COVID-19, ensuring adequate liquidity is critical. We believe we have access to adequate resources to meet the needs of our existing operations, mandatory capital expenditures, dividend payments, and working capital, to the extent not funded by cash provided by operating activities. However, we expect the COVID-19 pandemic to adversely impact our future operating cash flows due to the inability of some of our borrowers to make scheduled payments on time or at all, and the potential for HPA decline.

Off-Balance Sheet Arrangements

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

Table 17: Investments in joint ventures

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

A summary of our investments in joint ventures is presented below⁽¹⁾ ($ in thousands):


						Great Ajax Corp. Ownership
Issuing Trust/Issue Date	Security	Total Original Outstanding Principal		Coupon		Ownership Percent		Original Stated or Notional Principal Balance Retained		Current Owned Stated or Notional Principal Balance Retained
Ajax Mortgage Loan Trust 2018-A/ April 2018	Class A notes due 2058	$	91,036	3.85	%	9.36	%	$	8,521	$	6,721
	Trust certificates	$	22,759	—		9.36	%	$	2,130	$	2,144

Ajax Mortgage Loan Trust 2018-B/ June 2018	Class A notes due 2057	$	66,374	3.75	%	20.00	%	$	13,275	$	6,089
	Trust certificates	$	28,447	—		20.00	%	$	5,689	$	4,109

Ajax Mortgage Loan Trust 2018-D/ September 2018	Class A notes due 2058	$	80,664	3.75	%	20.00	%	$	16,133	$	14,594
	Trust certificates	$	20,166	—		20.00	%	$	4,033	$	3,915

Ajax Mortgage Loan Trust 2018-E/ December 2018	Class A notes due 2058	$	86,089	4.38	%	5.01	%	$	4,313	$	3,963
	Class B notes due 2058	$	8,035	5.25	%	20.00	%	$	1,607	$	1,605
	Trust certificates	$	20,662	—		20.00	%	$	4,132	$	4,130

Ajax Mortgage Loan Trust 2018-F/ December 2018	Class A notes due 2058	$	180,002	4.38	%	5.01	%	$	9,018	$	7,565
	Class B notes due 2058	$	16,800	5.25	%	20.00	%	$	2,520	$	3,360
	Trust certificates	$	43,201	—		20.00	%	$	6,480	$	8,252


Ajax Mortgage Loan Trust 2018-G/ December 2018	Class A notes due 2057	$	173,562	4.38	%	25.00	%	$	43,390	$	32,936
	Class B notes due 2057	$	16,199	5.25	%	25.00	%	$	4,050	$	4,050
	Trust certificates	$	41,655	—		25.00	%	$	10,414	$	10,585

Ajax Mortgage Loan Trust 2019-A/ March 2019	Class A notes due 2057	$	127,801	3.75	%	20.00	%	$	25,560	$	19,588
	Class B notes due 2057	$	11,928	5.25	%	20.00	%	$	2,386	$	2,388
	Trust certificates	$	30,672	—		20.00	%	$	6,134	$	6,137

Ajax Mortgage Loan Trust 2019-B/ March 2019	Class A notes due 2059	$	163,325	3.75	%	15.00	%	$	24,499	$	19,807
	Class B notes due 2059	$	15,244	5.25	%	15.00	%	$	2,287	$	2,287
	Trust certificates	$	39,198	—		15.00	%	$	5,880	$	5,976

Ajax Mortgage Loan Trust 2019-C/ May 2019	Class A notes due 2058	$	150,037	3.95	%	5.00	%	$	7,502	$	6,836
	Class B notes due 2058	$	14,003	5.25	%	34.00	%	$	4,761	$	4,761
	Trust certificates	$	36,009	—		34.00	%	$	12,243	$	12,417

Ajax Mortgage Loan Trust 2019-E/September 2019	Class A notes due 2059	$	181,101	3.00	%	20.00	%	$	36,220	$	31,930
	Class B notes due 2059	$	16,903	4.88	%	20.00	%	$	3,381	$	3,381
	Trust certificates	$	43,464	—		20.00	%	$	8,693	$	8,558

Ajax Mortgage Loan Trust 2019-G/ December 2019	Class A notes due 2059	$	141,420	3.00	%	20.00	%	$	28,284	$	27,814
	Class B notes due 2059	$	13,199	4.25	%	20.00	%	$	2,640	$	2,640
	Trust certificates	$	33,941	—	%	20.00	%	$	6,788	$	6,858

Ajax Mortgage Loan Trust 2019-H/ December 2019	Class A notes due 2059	$	90,381	3.00	%	20.00	%	$	18,076	$	17,077
	Class B notes due 2059	$	8,435	4.25	%	20.00	%	$	1,687	$	1,687
	Trust certificates	$	21,692	—	%	20.00	%	$	4,338	$	4,393

Ajax Mortgage Loan Trust 2020-A/ March 2020	Class A notes due 2059	$	249,384	2.38	%	20.00	%	$	49,877	$	49,877
	Class B notes due 2059	$	23,276	3.50	%	20.00	%	$	4,655	$	4,655
	Trust certificates	$	59,852	—	%	20.00	%	$	11,970	$	11,970

(1)Table does not include our 2017-D and 2018-C securitizations with total original outstanding principal of $222.3 million and $227.3 million, respectively, as these trusts are included in our consolidated financial statements.

Table 18: Contractual Obligations

A summary of our contractual obligations as of March 31, 2020 and December 31, 2019 is as follows ($ in thousands):


March 31, 2020	Payments Due by Period
($ in thousands)	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years
Convertible senior notes	$	115,850	$	—	$	—	$	115,850	$	—
Borrowings under repurchase agreements	431,091		431,091		—		—		—
Interest on convertible senior notes	36,046		8,399		16,798		10,849		—
Interest on repurchase agreements	4,086		4,086		—		—		—
Total	$	587,073	$	443,576	$	16,798	$	126,699	$	—


December 31, 2019	Payments Due by Period
($ in thousands)	Total		Less than 1 Year		1 – 3 Years		3 – 5 Years		More than 5 Years
Convertible senior notes	$	123,850	$	—	$	—	$	123,850	$	—
Borrowings under repurchase agreements	414,114		414,114		—		—		—
Interest on convertible senior notes	40,780		8,979		17,958		13,843		—
Interest on repurchase agreements	5,699		5,699		—		—		—
Total	$	584,443	$	428,792	$	17,958	$	137,693	$	—

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

Inflation

Virtually all of our assets and liabilities are interest-rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and consolidated balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Subsequent Events

Since quarter end, we have acquired 677 residential RPLs with aggregate UPB of $123.2 million in one transaction from a single seller. The purchase price equaled 92.5% of UPB and 60.0% of the estimated market value of the underlying collateral of $189.9 million. The loans were acquired into the joint venture formed in March 2020 with proceeds from the established prefunding account.

On April 6, 2020 we closed a private placement of $80.0 million of preferred stock and warrants to institutional accredited investors pursuant to a securities purchase agreement dated April 3, 2020. We issued 820,000 shares of 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 2,380,000 shares of 5.00% Series B Fixed-to-Floating Rate Preferred Stock, each at a purchase price per share of $25.00 and two series of five-year warrants to purchase an aggregate of 4,000,000 shares of our common stock at an exercise price of $10.00 per share. Each series of warrants includes a put option that allows the holder to sell the warrants to us at a specified put price on or after July 6, 2023. In addition, we granted the purchasers an option to purchase up to an additional 800,000 shares of Series A Preferred Stock and Series B Preferred Stock and warrants to purchase an aggregate of 1,000,000 shares of our common stock on the same terms. We expect to use the net proceeds from the private placement to acquire mortgage loans and mortgage-related assets consistent with our investment strategy.

On April 28, 2020, our Board of Directors approved the Third Amended and Restated Management Agreement with our Manager, which provides us with the option to pay our management fee with between 50% to 100% cash at our discretion, and pay the remainder in shares of our common stock.

On May 3, 2020, our Board of Directors declared a cash dividend of $0.17 per share to be paid on May 29, 2020 to our common stockholders of record as of May 15, 2020. On March 27, 2020, we paid the dividend of $0.32 per share we previously announced in February 2020 in shares of our common stock (valued based upon the closing price on the record date) in lieu of cash.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary components of our market risk are related to real estate risk, interest rate risk, prepayment risk and credit risk. We seek to actively manage these and other risks and to acquire and hold assets at prices that we believe justify bearing those risks, and to maintain capital levels consistent with those risks. The COVID-19 pandemic presents risks and uncertainties

that we describe under “Risk Factors,” and many of these are outside of our control.

Real Estate Risk

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

Interest Rate Risk

We expect to continue to securitize our whole loan portfolios, primarily as a financing tool, when economically efficient to create long-term, fixed rate, non-recourse financing with moderate leverage, while retaining one or more tranches of the subordinate MBS so created. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Changes in interest rates may affect the fair value of the mortgage loans and real estate underlying our portfolios as well as our financing interest rate expense. Additionally, rises in interest rates may result in a lower refinance volume of our portfolio.

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

Prepayment Risk

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

slow due to COVID-19.

Credit Risk

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

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Neither we nor any of our affiliates are the subject of any material legal or regulatory proceedings. We and our affiliates may be involved, from time to time, in legal proceedings that arise in the ordinary course of business.

Item 1A. Risk Factors

You should carefully consider the risks described below together with the other information included in this quarterly report. Our business, financial condition or results of operations could be adversely affected by any of these risks. If any of these risks occur, the value of our common stock could decline.

Risks Related to Our Business

The recent outbreak of COVID-19 has adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and results of operations.

We believe the worldwide COVID-19 pandemic has negatively affected our business and is likely to continue to do so. The outbreak has caused significant volatility and disruption in the financial markets both globally and in the United States. If COVID-19, or another highly infectious or contagious disease, continues to spread or the response to contain it is unsuccessful, we could experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects will depend on future developments which are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the outbreak, the measures that have been or may be taken by various governmental authorities in response to the outbreak (such as quarantines, travel restrictions and mandated forbearance measures on mortgage collections) and the possible further impacts on the global economy. The continued spread of COVID–19 could also negatively impact the availability of key personnel necessary to conduct our business. Additionally, governments have adopted, and we expect will continue to adopt, policies, laws and plans intended to address the COVID-19 pandemic and adverse developments in the credit, financial and mortgage markets. These programs will be effective, sufficient or otherwise may have a positive material and adverse impact on our business.

A significant portion of our mortgage loans may become NPLs, which could increase our risk of loss.

We may acquire mortgage loans where the borrower has failed to make timely payments of principal and/or interest currently or in the past. As part of the mortgage loan portfolios we purchase, we also may acquire performing loans that subsequently become non-performing. Under current market conditions, many of these loans will have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate. Although we expect to purchase loans at significant discounts to UPB and underlying property value, if actual results are different from our assumptions in determining the prices for such loans, particularly if the market value of the underlying property decreases significantly, we may incur significant losses. There are no limits on the percentage of NPLs we may hold. Any loss we incur may be significant and could materially and adversely affect us.

We primarily own higher risk loans, which are more expensive to service than conventional mortgage loans.

A significant percentage of the mortgage loans we own are higher risk loans, meaning that the loans are made to less creditworthy borrowers or for properties the value of which has decreased, including as a result of the COVID-19 pandemic. These loans are more expensive to service because they require more frequent interaction with customers and greater monitoring and oversight. Additionally, in connection with mortgage market reforms and recent and possible future regulatory developments, servicers of higher risk loans may be subject to increased scrutiny by state and U.S. federal regulators or may experience higher compliance costs, which could result in a further increase in servicing costs. Through the Servicing Agreement, the Servicer passes along to us many of the additional third-party expenses incurred by it in servicing these higher risk loans. The greater cost of servicing higher risk loans, which may be further increased through regulatory changes, could adversely affect our business, financial condition and results of operations.

A change in delinquencies for the loans we own could adversely affect our business, financial condition and results of operations.

Delinquency rates have a significant impact on our revenues and expenses of our mortgage loans as follows:

•Revenue. Increased delinquencies generate higher ancillary fees to the loan servicer, which fees are recoverable, if at all, in the event that the related loan is liquidated prior to payment of the interest on the loan or MBS that we own.

•Expenses. An increase in delinquencies will result in a higher cost to service due to the increased time and effort required to collect payments from delinquent borrowers. The cost of servicing an increasingly delinquent mortgage loan portfolio may rise without a corresponding increase in revenue because of increased third-party cost reimbursements such as property taxes and insurance.

An increase in delinquency rates could therefore adversely affect our business, financial condition and results of operations.

Moreover, a significant percentage of the mortgage loans we own are higher risk loans, which tend to have higher delinquency and default rates than GSE and government agency-insured mortgage loans. These higher risk loans, combined with decreases in property values, have caused increases in loan-to-value ratios, resulting in borrowers having little or negative equity in their property, which may provide an incentive to borrowers to strategically default on their loans. Recent laws delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limit the ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors.

The lack of liquidity of our assets may adversely affect our business, including our ability to sell our assets.

We acquire assets, securities or other instruments that are not liquid or publicly traded, and market conditions could significantly and negatively affect the liquidity of other assets.

In addition, mortgage-related assets generally experience periods of illiquidity, including periods of delinquencies and defaults with respect to residential and commercial mortgage loans. Further, validating third-party pricing for illiquid assets may be more subjective than for liquid assets. Any illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets. We may also face other restrictions on our ability to liquidate any assets for which we have or could be attributed with material non-public information. If we are unable to sell our assets at favorable prices or at all, it could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition.

The principal and interest payments on our retained MBS are not guaranteed by any entity and, therefore, are subject to increased risks, including credit risk as a result of the COVID-19 pandemic.

We create and retain MBS that are backed by residential mortgage loans that do not conform to the Fannie Mae or Freddie Mac underwriting guidelines. Consequently, the principal and interest on those MBS are not guaranteed by GSEs such as Fannie Mae and Freddie Mac, or securitized through Ginnie Mae. We do not currently expect to acquire third-party non-Agency MBS. Our MBS are and will be subject to many of the risks of the respective underlying mortgage loans. In particular, the market for MBS has been, and is expected to continue to be, significantly and adversely impacted by the COVID-19 pandemic. A residential mortgage loan is typically secured by a single-family residential property and is subject to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured by a residential property depends upon the income or assets of the borrower. A number of factors, including the impact of the COVID-19 pandemic, a prolonged economic downturn, unemployment, acts of God, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their mortgage loans. In periods following home price declines, “strategic defaults” (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent.

In the event of defaults under mortgage loans backing any of our retained MBS, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan. Additionally, in the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. If borrowers default on the mortgage loans backing our MBS and we are unable to recover any resulting loss through the

foreclosure process, our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially adversely affected.

Residential mortgage loan modification, refinance, or forbearance programs, future legislative action, and other actions and changes in the general economy may materially and adversely affect the supply of, value of, and returns on RPLs and NPLs.

Our business model depends on the acquisition of a steady supply of RPLs, our ability to support continued performance by borrowers under RPLs, the success of our loan modification and other resolution efforts and to a certain extent, the conversion of a portion of those loans to REO that we can then sell or rent. The number of RPLs available for purchase may be reduced by uncertainty in the lending industry and the governmental sector and/or as a result of general economic conditions. Lenders have delayed foreclosure proceedings, offered payment forbearance, renegotiated interest rates, or refinanced loans for borrowers who face foreclosure.

In addition, as a reaction to the COVID-19 outbreak, the U.S. federal government has instituted and may continue to institute programs aimed at assisting at-risk homeowners, or reducing the number of properties going into foreclosure or going into non-performing status. Government sponsored or mandated loss mitigation programs may involve, among other things, the modification of residential mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans or to extend the payment terms of the loans. For example, section 4022 of the Coronavirus Aid, Relief, and Economic Security Act (or the “CARES Act”), requires that for a limited period of time, and upon a request by a borrower with a federally backed mortgage loan who is experiencing a COVID–19-related financial hardship, the servicer of the borrower’s loan must grant the borrower a forbearance for up to 180 days (or longer if the borrower requests an extension). Certain states have imposed or encouraged similar forbearance programs, or may do so in the future. These programs, any other programs that may replace them, future legislative or regulatory actions, including possible amendments to the bankruptcy laws that result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing residential mortgage loans, may materially and adversely affect the value of, and the returns on, our portfolio of RPLs and NPLs.

Other governmental actions may affect our business by hindering the pace of foreclosures. Certain jurisdictions suffer from a backlog of foreclosures, due to a combination of volume constraints and legal actions, including those brought by the U.S. Department of Justice (“DOJ”), the U.S. Department of Housing and Urban Development (“HUD”), State Attorneys General, the Office of the Comptroller of the Currency, and the Federal Reserve Board against mortgage servicers alleging wrongful foreclosure practices. Legal claims brought or threatened by the DOJ, HUD, CFPB and State Attorneys General against residential mortgage servicers have produced large settlements. A portion of the funds from these settlements were directed to homeowners seeking to avoid foreclosure through mortgage modifications, and servicers are required to adopt specified measures to reduce mortgage obligations in certain situations. We expect that the settlements will help many homeowners avoid foreclosures that would otherwise have occurred. It is also possible that other residential mortgage servicers will agree to similar settlements. In addition, the U.S. Congress and numerous state legislatures have considered, proposed or adopted legislation to constrain foreclosures, or may do so in the future. These developments will reduce the number of homes in the process of foreclosure and decrease the supply of properties and assets that meet our investment criteria.

The Dodd-Frank Act also created the CFPB, which supervises consumer financial services companies (including bank and non-bank mortgage lenders and mortgage servicers) and enforces U.S. federal consumer protection laws as they apply to banks, credit unions and other financial services companies, including mortgage servicers, and which has issued many regulations regarding mortgage origination and servicing. These regulations provide for special remedies in favor of consumer mortgage borrowers, particularly upon default and foreclosure. It remains uncertain whether any of these measures significantly affect foreclosure volumes. If foreclosure volumes were to decline significantly, we may experience difficulty in finding target assets at attractive prices, which will materially and adversely affect us. Also, the number of families seeking rental housing might be reduced by such legislation, reducing rental housing demand for properties that we may seek to rent in our markets.

The supply of RPLs and SBCs may decline over time as a result of higher credit standards for new loans and the prices for RPLs and SBCs may increase, which could materially and adversely affect us.

As a result of the continuing effects of the economic crisis in 2008, there has been an increased supply of RPLs available for sale. However, in response to the economic crisis, the origination of jumbo, subprime, Alt-A and second-lien residential mortgage loans has dramatically declined as lenders have increased their standards of creditworthiness in originating new loans and fewer homeowners may go into NPL status on their residential mortgage loans. Lenders may continue to rely on heightened credit standards, in light of the economic effects of the COVID-19 crisis or other crises. In addition, the prices at which both residential and SBC RPL loans can be acquired may increase due to the entry of new participants into the distressed loan marketplace or a smaller supply of RPL loans in the marketplace. For these reasons, along with the continuing slow rate of

general improvement in the economy, the supply of RPL loans that we may acquire may decline over time, which could materially and adversely affect us.

The SBC loans we expect to acquire will be subject to the ability of the commercial property owner to generate net income from operating the property as well as the increased risks of delinquency and foreclosure.

The ability of a commercial mortgage borrower to repay a SBC loan secured by an income-producing property, such as a multi-family residential and commercial mixed use retail/residential property, typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the SBC loan may be impaired. Net operating income of an income producing property can be affected by, among other things, tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense, limit rents that may be charged, or that restrict eviction and replacement of nonpaying tenants, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances. In particular, the number of commercial property delinquencies and foreclosures has, and is expected to continue to, significantly increased as a result of the COVID-19 pandemic. In the event of the bankruptcy of a commercial mortgage loan borrower, the SBC loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the SBC loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a SBC loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed SBC loan.

Our SBC loans in respect of smaller multi-family residential properties or smaller mixed use retail/residential properties may be subject to defaults, foreclosure timeline extension, fraud, commercial price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal.

Our SBC loans secured by multi-family or commercial property may be subject to risks of delinquency and foreclosure, and risk of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically depends primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things:

•tenant mix;

•success of tenant businesses;

•property management decisions;

•property location and condition;

•competition from comparable types of properties;

•changes in laws that increase operating expenses or limit rents that may be charged;

•any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;

•changes in national, regional or local economic conditions and/or specific industry segments;

•declines in regional or local real estate values;

•declines in regional or local rental or occupancy rates;

•increases in interest rates;

•real estate tax rates and other operating expenses;

•changes in governmental rules, regulations and fiscal policies, including environmental legislation; and

•acts of God, terrorist attacks, social unrest and civil disturbances.

Difficult conditions in the mortgage, residential real estate and smaller commercial real estate markets as well as general market concerns may adversely affect the value of the assets in which we invest and these conditions may persist for the foreseeable future.

Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the smaller commercial real estate market, the financial markets and the economy in general. Concerns about the residential mortgage market, as well as the COVID-19 pandemic, inflation, energy costs, geopolitical issues, concerns over the

creditworthiness of governments worldwide and the stability of the global banking system, continuing relatively high unemployment and under-employment and the availability and cost of credit have contributed to increased volatility and diminished expectations for the economy and markets going forward. In particular, the residential mortgage market in the United States has experienced a variety of difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. The smaller commercial real estate mortgage market also may face increased defaults, losses, or liquidity concerns due to economic conditions or government imposed forbearance programs.

Certain commercial banks, investment banks and insurance companies continue to announce losses from exposure to the residential mortgage market. These factors have affected investor perception of the risk associated with mortgage-backed securities, other real estate-related securities and various other asset classes in which we may invest. As a result, values of certain of our assets and the asset classes in which we intend to invest have experienced volatility. Further deterioration of the mortgage market and investor perception of the risks associated with MBS we may retain as part of our securitizations, as well as other assets that we acquire could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We may be materially and adversely affected by risks affecting borrowers or the single-family rental properties in which our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.

Our assets are not subject to any geographic, diversification or concentration limitations. Accordingly, our investment portfolio may be concentrated by geography, single-family rental property characteristics and/or borrower demographics, increasing the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or undergoing adverse developments. In addition, adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments. A material decline in the demand for single-family housing or rentals in these or other areas where we own assets may materially and adversely affect us. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments. Historically, our mortgage and real estate assets have been concentrated in Florida and the western and southwestern United States.

Changes in the underwriting standards by Freddie Mac, Fannie Mae or FHA could make it more difficult to refinance our purchased mortgage loans.

Stricter underwriting standards by Freddie Mac, Fannie Mae or the FHA could affect our ability to refinance mortgage loans and the terms on which mortgage loans may be refinanced, which may adversely affect our business and results of operations. For example, in 2010, Freddie Mac and Fannie Mae announced tighter underwriting guidelines, particularly for adjustable rate mortgages, (“ARMS”), and hybrid interest-only ARMs (“Hybrid ARMs”). Specifically, Freddie Mac announced that it would no longer purchase interest-only mortgages and Fannie Mae changed its eligibility criteria for purchasing and securitizing ARMs to protect consumers from potentially dramatic payment increases. If Freddie Mac, Fannie Mae, or the FHA were to adopt other restrictive underwriting standards, that could affect our ability to refinance loans and the terms of those loans.

The whole residential mortgage loans and other residential mortgage assets in which we invest are subject to risk of default, among other risks.

The mortgage loans and other mortgage-related assets that we acquire from time to time may be subject to defaults (including re-default for RPLs), foreclosure moratoria or timeline extensions, fraud, residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, or government mandated payment forbearances, among other factors, which could result in losses to us. Residential mortgage loans are secured by single-family residential property and, are subject to risks of delinquency and foreclosure and risks of loss. The payment of the principal and interest on the mortgage loans we acquire would not typically be guaranteed by any sponsored enterprise (“GSE”), such as Fannie Mae and Freddie Mac, or securitized through Ginnie Mae or any other governmental agency. Additionally, by directly acquiring whole mortgage loans, we do not receive the structural credit enhancements that can benefit senior tranches of MBS. A whole mortgage loan is directly exposed to losses resulting from nonpayment or other default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority and enforceability of the lien will significantly affect the value of such mortgage. The ability of a borrower to repay a loan secured by a residential property typically depends upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of nature, terrorism, social unrest and civil disturbances, may impair a borrower’s ability to repay a mortgage loan. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on a foreclosed mortgage loan. In the event of a foreclosure, we may assume direct

ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and any costs or delays involved in the foreclosure or liquidation process may increase losses.

Whole mortgage loans are also subject to “special hazard” risk such as property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor in possession to the extent the lien is unenforceable under state law. In addition, claims may be assessed against us on account of our position as a mortgage holder or property owner, including assignee liability, responsibility for tax payments, environmental hazards and other liabilities. In some cases, these liabilities may be “recourse liabilities” or may otherwise lead to losses in excess of the purchase price of the related mortgage or property. Although we acquire mortgage loans at significant discounts from their UPB and underlying property value, in the event of any default under a mortgage loan held directly by us, we bear a risk of loss of the principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and results of operations. The MBS we retain from our own securitizations evidence interests in, or are secured by, pools of residential mortgage loans. Accordingly, the MBS that we hold is subject to all of the risks of the respective underlying mortgage loans.

For certain residential mortgage loans, the Dodd-Frank Act established, through amendment to TILA, life-of-loan liability on any holder of a residential mortgage loan that takes action on the loan following default (including foreclosure). This liability is premised upon violation of the ATR Rule, as well as violation of the loan originator compensation rule. Borrower remedies, available by way of recoupment or set-off, include statutory damages and attorneys’ fees.

If we fail to develop, enhance and implement strategies to adapt to changing conditions in the commercial real estate industry and capital markets, our financial condition and results of operations may be materially and adversely affected by our acquisition of SBC loans.

The manner in which we compete and the types of SBC loans we are able to acquire will be affected by changing conditions resulting from sudden changes in the commercial real estate industry, regulatory environment, the role of credit rating agencies or their rating criteria or process, or the U.S. and global economies generally. If we do not effectively respond to these changes, or if our strategies to respond to these changes are not successful, our financial condition and results of operations may be adversely affected. In addition, we can provide no assurances that we will be successful in executing our business strategy in successfully acquiring SBC loans.

If we acquire and subsequently re-sell any whole mortgage loans, we may be required to repurchase such loans or indemnify investors if we breach representations and warranties.

If we acquire and subsequently re-sell any whole mortgage loans, we would generally be required to make customary representations and warranties about such loans to the loan purchaser. Our residential mortgage loan sale agreements and terms of any securitizations into which we sell loans will generally require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. Repurchased loans are typically worth only a fraction of the original price. Significant repurchase activity could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Further, depending on the level of repurchase and resale activities, we may determine to conduct any such activities through a taxable REIT subsidiary.

We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase mortgage loans if they breach representations and warranties, which could cause us to suffer losses.

When selling mortgage loans, sellers typically make customary representations and warranties about such loans. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparty will remain solvent or otherwise be able to honor its obligations under its mortgage loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of loans could harm our business, financial condition, liquidity, results of operations and our ability to make distributions to our stockholders.

Certain investments in portfolios of whole mortgage loans and other mortgage assets may require us to purchase less desirable mortgage assets as part of an otherwise desirable pool of mortgage assets, which could subject us to additional risks relating to the less desirable mortgage assets.

If we acquire portfolios of whole mortgage loans and other mortgage assets, the portfolio may contain some assets that we would not otherwise seek to acquire on their own. These other assets may subject us to additional risks. Acquisition of less desirable mortgage assets may impair our performance and reduce the return on our investments.

To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses.

Before making an investment, we conduct (either directly or using third parties) certain due diligence. There can be no assurance that we will conduct any specific level of due diligence, or that, among other things, our due diligence processes will uncover all relevant facts or that any purchase will be successful, which could result in losses on these assets, which, in turn, could adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

The failure of a seller of mortgage loans to provide all the necessary documentation to us could adversely affect our ability to leverage our assets or otherwise service the mortgage loans that we will own.

Pursuant to customary provisions in the purchase agreements governing our loan acquisitions, we also generally have the right to cause the sellers to repurchase certain loans if they do not provide proper documentation to evidence ownership or first lien status with respect to such loans within a specified time period. Any delay or inability to obtain such documentation could adversely affect our ability to leverage such loans, and could adversely affect the Servicer’s ability to service those mortgage loans and any such repurchases by the sellers would decrease the size of our portfolio.

Market conditions as a result of the COVID-19 pandemic and other factors may affect our ability to securitize assets, which could increase our financing costs and adversely affect our results of operations and ability to make distributions.

Our ability to obtain permanent non-recourse financing through securitizations is affected by a number of factors, including:

•conditions in the securities markets, generally;

•conditions in the asset-backed securities markets, specifically;

•yields on our portfolio of mortgage loans;

•the credit quality of our portfolio of mortgage loans; and

•our ability to obtain any necessary credit enhancement.

As a result of the COVID-19 pandemic, the asset-backed securitization markets have experienced unprecedented disruptions, and securitization volumes have decreased sharply. These recent conditions in the securitization markets include reduced liquidity, increased risk premiums for issuers, reduced investor demand, financial distress among financial guaranty insurance providers, a general tightening of credit and substantial regulatory uncertainty. If these conditions do not improve, they could increase our cost of funding, and could reduce or even eliminate our access to the securitization market. As a result, these conditions could preclude us from securitizing assets acquired for such purpose.

Our ability to sell mortgage loans into securitizations could also be delayed, limited, or precluded by legislative and regulatory reforms applicable to asset-backed securities and the institutions that sponsor, service, rate, or otherwise participate in, or contribute to, the successful execution of a securitization transaction. Other factors could also limit, delay, or preclude our ability to sell assets into securitizations. Provisions of the Dodd-Frank Act have required significant revisions to the legal and regulatory framework that apply to the asset-backed securities markets and securitizations. For example, Section 15G of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as modified by the Dodd-Frank Act, generally requires the issuer of asset-backed securities to retain not less than five percent of the credit risk of the assets collateralizing the asset-backed securities. While Section 15G includes an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages” (as defined in the accompanying regulations), RPLs of the type that we intend to purchase and securitize generally will not qualify for this exemption. We therefore are required to retain five percent or more of the credit risk associated with the assets we securitize.

In addition to these laws and rules, other U.S. federal or state laws and regulations that could affect our ability to sell assets into securitization programs may be proposed, enacted, or implemented. These laws and regulations could effectively

preclude us from financing our assets through securitizations or could delay our execution of these types of transactions. Other matters, such as (i) accounting standards applicable to securitization transactions and (ii) capital and leverage requirements applicable to banks and other regulated financial institutions that traditionally purchase and hold asset-backed securities, could also result in less investor demand for securities issued through securitization transactions.

Prepayment rates can change, adversely affecting the performance of our assets and our ability to reinvest the proceeds thereof.

The frequency at which prepayments (including voluntary prepayments by borrowers, loan buyouts and liquidations due to defaults and foreclosures) occur on mortgage loans, including those underlying MBS, is affected by a variety of factors, including the impact of the COVID-19 pandemic, prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. We expect prepayments rates to decrease as a result of the COVID-19 pandemic. Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on the mortgage loans and any related MBS. These faster or slower than expected payments may adversely affect our profitability, although the effects vary because upon prepayment we can receive 100% of the remaining UPB that we had purchased at a significant discount.

We may purchase loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the loan. In accordance with U.S. GAAP, we amortize this premium over the expected term of the security or loan based on our prepayment assumptions or its contractual terms, depending on the type of loan or security purchased. If a loan is prepaid in whole or in part at a faster than its expected rate or contractual term (as applicable), we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which will adversely affect our profitability.

We also may purchase securities or loans that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the loan. We accrete this discount over the expected term of the loan based on our prepayment assumptions or its contractual terms, depending on the type of loan or security purchased. If a loan is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of investment portfolio and result in a lower than expected yield on loans purchased at a discount to par.

Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property. The GSE guidelines for repurchasing delinquent loans from MBS trusts and changes in such guidelines also affect prepayment rates. Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, cost of capital, general economic conditions and the relative interest rates on fixed and adjustable rate loans, which could lead to an acceleration of the payment of the related principal.

The adverse effects of prepayments may affect us in various ways. Particular investments may underperform relative to any hedges that we may have constructed for these assets, resulting in a loss to us. Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run. Therefore, if actual prepayment rates differ from anticipated prepayment rates, our business, financial condition and results of operations and ability to make distributions to our stockholders could be materially adversely affected.

Slower prepayments may result in lower yields, current period income and cash collections as payments of interest and principal may be collected over a longer time period. While total cash collection may be higher than anticipated over the life of the loan, current period operating results could be adversely impacted.

The real estate assets and real estate-related assets we invest in are subject to the risks associated with real property.

We own real estate directly as well as assets that are secured by real estate. Real estate assets are subject to various risks, including:

•declines in the value of real estate, including as a result of the COVID-19 pandemic;

•acts of nature, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

•acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

•adverse changes in national and local economic and market conditions;

•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

•costs of remediation and liabilities associated with environmental conditions such as indoor mold; and

•the potential for uninsured or under-insured property losses.

We expect the value of U.S. real estate to significantly decline in urban areas as a result of the COVID-19 pandemic. The occurrence of any of the foregoing or similar events may reduce our return from an affected property or asset and, consequently, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We are subject to risks of loss from weather conditions, man-made or natural disasters and climate change.

Weather conditions and man-made or natural disasters such as hurricanes, tornadoes, earthquakes, floods, droughts, fires and other environmental conditions can damage properties that we own or that collateralize our loans. If properties collateralizing our mortgage loans incur damages that reduce the value of the collateral to an amount below the UPB of our loan, borrowers may cease making payments to us on those loans, and any foreclosure efforts may recover substantially less value than the amount we are due or no value at all. Because we seek to build concentrations of mortgage loans and real properties in certain markets, we may be particularly vulnerable to the impact of a localized weather condition, man-made or natural disaster or effects of climate change. Any of these events could adversely impact the demand for, and value of, our assets and could also directly impact the value of our assets through damage, destruction or loss, and could thereafter materially impact the availability or cost of insurance to protect against these events. Although we believe the properties collateralizing our mortgage loans and our remaining owned real estate are adequately covered by insurance, we cannot predict if we or our borrowers will be able to obtain appropriate coverage at a reasonable cost in the future, or if we will be able to continue to pass along all of the costs of insurance to our tenants. Any weather conditions, man-made or natural disasters or effects of climate change, whether or not insured, could have a material adverse effect on our financial performance, the market price of our common shares and our ability to pay dividends. In addition, there is a risk that one or more of our property insurers may not be able to fulfill their obligations with respect to claims payments due to deterioration in their financial condition driven by such events.

Investments in second-lien mortgage loans could subject us to increased risk of losses.

We invest in second-lien mortgage loans or create securitizations with MBS backed by such loans. If a borrower defaults on a second lien mortgage loan or on its senior debt (i.e., a first-lien loan in the case of a residential mortgage loan), or in the event of a borrower bankruptcy, such loan will be satisfied only after all senior debt is paid in full. As a result, if we invest in second-lien mortgage loans and the borrower defaults, we may lose all or a significant part of our investment.

The allocation of capital among our mortgage loans may vary, which may adversely affect our financial performance.

In executing our business plan, we regularly consider the allocation of capital between residential mortgage loans, SBC loans and REO. The allocation of capital may vary due to market conditions, the expected relative return on equity of each, the judgment of our Manager, the demand in the marketplace for certain mortgage loans and REO and the availability of specific investment opportunities. We also consider the availability and cost of our likely sources of capital. If we fail to appropriately allocate capital and resources across mortgage loans or fail to optimize our acquisition and capital raising opportunities, our financial performance may be adversely affected.

Our use of models in connection with the valuation of our assets and determination of the timing and amount of cash flows expected to be collected subjects us to potential risks in the event that such models are incorrect, misleading or based on incomplete information.

As part of the risk management process, we use our Manager’s detailed proprietary models to evaluate, depending on the asset class, house price appreciation and depreciation by county, region, prepayment speeds and foreclosure frequency, cost and timing. Models and data are used to value assets or potential assets, assess the timing and amount of cash flows expected to be collected, and may also be used in connection with any hedging of our acquisitions. Many of the models are based on historical trends. These trends may not be indicative of future results. Furthermore, the assumptions underlying the models may prove to be inaccurate, causing the models to also be incorrect. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models

and data, especially valuation or cash flow models, we may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low, overestimate the timing or amount of cash flows expected to be collected, underestimate the timing or amount of cash flows expected to be collected, or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.

Valuations of some of our assets will be inherently uncertain, may be based on estimates, may fluctuate over short periods of time and may differ from the values that would have been used if a ready market for these assets existed.

While in some cases our determination of the fair value of our assets will be based on valuations provided by third-party dealers and pricing services, we will value most of our assets using unobservable inputs based upon our judgment, and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or unreliable. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. The valuation process has been particularly difficult recently because market events have made valuations of certain assets unpredictable, and the disparity of valuations provided by third-party dealers has widened.

Our business, financial condition and results of operations and our ability to make distributions to our stockholders could be materially adversely affected if our fair value measurements of these assets were materially higher than the values that would exist if a ready market existed for these assets.

An increase in interest rates may cause a decrease in the amount of certain of our target assets that are available for acquisition, which could adversely affect our ability to acquire target assets that satisfy our investment objectives and to generate income and pay dividends.

Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the amount of target assets available to us for acquisition, which could adversely affect our ability to acquire assets that satisfy our investment objectives. Rising interest rates may also cause our target assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected.

An increase in interest rates may cause a decrease in the ability of our borrowers to refinance their existing mortgages, and may cause additional economic distress for borrowers with mortgages subject to changes in interest rates, causing our cash collections to decrease, and our anticipated resolution timelines to increase.

Rising interest rates may reduce the desirability of refinancing existing mortgages by increasing a borrower’s monthly payments. Rising interest rates may also cause economic distress to borrowers with mortgage terms that subject them to market-based increases in interest rates. Consequently borrowers who might otherwise have refinanced their mortgages may not be able to do so on favorable terms. And borrowers with interest-rate sensitive mortgages may experience payment increases that preclude their ability to makes such payments in a timely manner, if at all. As a result, the duration of our resolution timelines may be extended, with an associated negative impact in our cash collections and /or our earnings.

The Servicer’s operations are heavily regulated at the U.S. federal, state and local levels and its failure to comply with applicable regulations could materially adversely affect our expenses and results of operations, and there is no assurance that we could replace the Servicer with servicers that satisfy our requirements or with whom we could enter into agreements on satisfactory terms.

In January 2018, we acquired a 4.9% equity interest in the parent company of our Servicer which increased to 8.0% in May 2018, and we also own warrants to purchase additional equity interests. The Servicer must comply with a wide array of U.S. federal, state and local laws and regulations that regulate, among other things, the manner in which it services our mortgage loans and manages our real property in accordance with the Servicing Agreement, including CFPB mortgage servicing regulations promulgated pursuant to the Dodd-Frank Act, and temporary payment forbearance requirements and foreclosure moratorium under the CARES Act. These laws and regulations cover a wide range of topics such as licensing; allowable fees and loan terms; permissible servicing and debt collection practices; limitations on forced-placed insurance; special consumer protections in connection with default and foreclosure; and protection of confidential, nonpublic consumer

information (privacy). The volume of new or modified laws and regulations has increased in recent years, and states and individual cities and counties continue to enact laws that either restrict or impose additional obligations in connection with certain loan origination, acquisition and servicing activities in those cities and counties. The laws and regulations are complex and vary greatly among the states and localities, and in some cases, these laws are in direct conflict with each other or with U.S. federal law. In addition, these laws and regulations often contain vague standards or requirements, which make compliance efforts challenging. Material changes in these rules and regulations could increase our expenses under the Servicing Agreement. From time to time, the Servicer may be party to certain regulatory inquiries and proceedings, which, even if unrelated to the residential mortgage servicing operation, may result in adverse findings, fines, penalties or other assessments and may affect adversely its reputation. The Servicer’s failure to comply with applicable laws and regulations could adversely affect our expenses and results of operations. If we were to determine to change servicers, there is no assurance that we could find servicers that satisfy our requirements or with whom we could enter into agreements on satisfactory terms. The Servicer’s failure to comply with these laws and regulations could also indirectly result in damage to our reputation in the industry and adversely affect our ability to effect our business plan.

The failure of the Servicer to service our assets effectively would materially and adversely affect us.

We rely on the Servicer to service and manage our assets, including managing collections on our whole mortgage loans and the mortgage loans underlying our retained MBS. If the Servicer is not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If the Servicer takes longer than we expect to liquidate non-performing assets, our losses may be higher than originally anticipated. We also rely on the Servicer to provide all of our property management, lease management and renovation management services associated with the real properties we acquire upon conversion of residential mortgage loans that we own or that we acquire directly. The failure of the Servicer to effectively service our mortgage loan assets, including the mortgage loans underlying any MBS we may own, REO and other real estate-related assets could negatively impact the value of our investments and our performance.

We rely on the Servicer for our loss mitigation efforts relating to mortgage loan assets, which loss mitigation efforts may be unsuccessful or not cost-effective.

We depend on a variety of services provided by the Servicer, including, among other things, to collect principal and interest payments on our whole mortgage loans as well as the mortgage loans underlying our retained MBS and to perform loss mitigation services. In addition, legislation and regulation that have been enacted or that may be enacted in order to reduce or prevent foreclosures through, among other things, loan modifications, may reduce the value of mortgage loans. Mortgage servicers may be required or incentivized by the U.S. federal Government or other jurisdictions to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the owners of the mortgage loans. In addition to legislation and regulation that establish requirements or create financial incentives for mortgage loan servicers to modify loans and take other actions that are intended to prevent foreclosures, federal legislation has also been adopted that creates a safe harbor from liability to creditors for servicers that undertake loan modifications and other actions that are intended to prevent foreclosures. Finally, recent laws and regulations, including CFPB regulations, delay the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limit the ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans underlying the MBS. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs. As a result of these legislative and regulatory actions, the Servicer may not perform in our best interests or up to our expectations, which could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders. Furthermore, the lack of government assistance and relief made available to mortgage servicers as a result of the COVID-19 pandemic may materially and adversely impact the Servicer.

Certain mortgage loans our Servicer services are higher risk loans, which are more expensive to service than conventional mortgage loans.

Certain mortgage loans our Servicer services are higher risk loans, meaning that the loans are made to less credit worthy borrowers or for properties the value of which has decreased. These loans are more expensive to service because they require more frequent interaction with customers and greater monitoring and oversight. Additionally, in connection with mortgage market reforms and recent and possible future regulatory developments, servicers of higher risk loans are subject to increased scrutiny by state and federal regulators and experience higher compliance costs, which could result in a further increase in servicing costs. Our Servicer may not be able to pass along any of the additional expenses it incurs in servicing higher risk loans to its servicing clients. The greater cost of servicing higher risk loans, which may be further increased through

regulatory changes, consent decrees or enforcement, could adversely affect ours and our Servicer’s business, financial condition and results of operations.

We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process as a result of the COVID-19 pandemic.

As a reaction to the COVID-19 pandemic, the U.S. federal government has instituted and may continue to institute programs aimed at assisting at-risk homeowners, or reducing the number of properties going into foreclosure or going into non-performing status. As a result, there is significant uncertainty regarding the timing and ability of servicers to remove delinquent borrowers from their homes, so that they can liquidate the underlying properties and ultimately pass the liquidation proceeds through to owners of the mortgage loans or related MBS. In addition, given the magnitude of the housing crisis, and in response to the well-publicized failures of many servicers to follow proper foreclosure procedures (such as “robo-signing”), mortgage servicers are being held to much higher foreclosure-related documentation standards than they previously were. However, because many mortgages have been transferred and assigned multiple times (and by means of varying assignment procedures) throughout the origination, warehouse and securitization processes, mortgage servicers may have difficulty furnishing the requisite documentation to initiate or complete foreclosures. This leads to stalled or suspended foreclosure proceedings, and ultimately additional foreclosure-related costs. Foreclosure-related delays also tend to increase ultimate loan loss severities as a result of property deterioration, amplified legal and other costs, and other factors. Many factors delaying foreclosure, such as borrower lawsuits, judicial backlog and scrutiny, and government mandated foreclosure moratoria as a result of the COVID-19 pandemic, are outside of servicers’ control and have delayed, and will likely continue to delay, foreclosure processing in both judicial states (where foreclosures require court involvement) and non-judicial states. The Servicer’s failure or inability to remove delinquent borrowers from their homes in a timely manner could increase our costs, adversely affect the value of the property and mortgage loans and have a material adverse effect on our results of operations and business.

Changes in applicable laws or noncompliance with applicable law could materially and adversely affect us.

As an owner of real estate, we are required to comply with numerous U.S. federal, state and local laws and regulations, some of which may conflict with one another or be subject to limited judicial or regulatory interpretations. These laws and regulations may include zoning laws, building codes, landlord-tenant laws and other laws generally applicable to business operations. Noncompliance with laws or regulations could expose us to liability.

Lower revenue growth or significant unanticipated expenditures may result from our need to comply with changes in (i) laws imposing remediation requirements and potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions, (ii) rent control or rent stabilization laws or other residential landlord-tenant laws or (iii) other governmental rules and regulations or enforcement policies affecting the rehabilitation, use and operation of any single-family rental properties we may own, including changes to building codes and fire and life-safety codes.

Our decision whether to rent or sell any REO we acquire upon conversion of NPLs or acquire directly will depend on conditions in the relevant geographic markets, and if our assumptions about rental rates and occupancy levels in our markets are not accurate, our operating results and cash available for distribution could be adversely affected.

We either sell or rent the real property, either single-family residences or smaller commercial properties, that we acquire upon conversion of non-performing mortgage loans or directly. The success of our business model substantially depends on conditions in the applicable sales or rental markets in the relevant geographic markets, including, among other things, occupancy and rent levels. If those assumptions prove to be inaccurate, our operating results and cash available for distribution could be lower than expected, potentially materially.

Rental rates and occupancy levels for single-family residential properties have benefited in recent periods from macroeconomic trends affecting the U.S. economy and residential real estate and mortgage markets in particular, including:

•increases in housing costs which make the traditional concept of home ownership, especially for younger workers, more difficult;

•a tightening of credit that has made it more difficult to finance a home purchase, combined with efforts by consumers generally to reduce their exposure to credit;

•economic and employment conditions that have increased foreclosure rates;

•a concentration of high-paying employment opportunities in certain large metropolitan areas currently experiencing significant HPA is pricing homes beyond the reach of many buyers, and also forcing reductions in HPA in outlying areas.

The single-family rental market is currently significantly larger than in historical periods. We do not expect the favorable trends in the single-family rental market to continue indefinitely. The strengthening of the U.S. economy and job growth, the current availability of low residential mortgage rates and government-sponsored programs promoting home ownership, may contribute to a stabilization or reversal of the current trend that favors renting rather than homeownership. In addition, we expect that as investors increasingly seek to capitalize on opportunities to purchase undervalued housing properties and convert them to productive uses, the supply of single-family rental properties will decrease and the competition for tenants will intensify. To the extent that a significant portion of our business becomes single-family rentals, a softening of the rental property market in our markets could adversely affect our operating results and cash available for distribution, potentially materially.

We may incur significant costs in restoring our properties, and we may underestimate the costs or amount of time necessary to complete restorations.

Before determining whether to rent or sell any of our properties, the Servicer will perform a detailed assessment, including on-site reviews of such properties, to identify the scope of restoration to be completed. Beyond customary repairs, we may undertake improvements designed to optimize overall property appeal and increase the value and rentability of the property when such improvements can be done cost effectively. To the extent properties are occupied, restorations may be postponed until the premises are vacated. We expect that nearly all of our properties will require some level of restoration immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire properties that we plan to restore extensively. In addition, in order to reposition properties in the rental market, we will be required to make ongoing capital improvements and may need to perform significant restorations and repairs from time to time. Consequently, we are exposed to the risks inherent in property restoration, including potential cost overruns, increases in labor and material costs, delays by contractors in completing work, delays in the timing of receiving necessary work permits and certificates of occupancy and poor workmanship. If our assumptions regarding the cost or timing of restorations across our properties prove to be materially inaccurate, we could be materially and adversely affected.

Contingent or unknown liabilities could materially and adversely affect us.

Our acquisition activities are subject to many risks. We may acquire properties that are subject to unknown or contingent liabilities, including liabilities for or with respect to liens attached to properties, unpaid real estate taxes, utilities or other charges for which a prior owner remains liable, clean-up or remediation of environmental conditions or code violations, claims of vendors or other persons dealing with the acquired properties and tax liabilities, among other things. In each case, our acquisition may be without any, or with only limited, recourse with respect to unknown or contingent liabilities or conditions. As a result, if any such liability were to arise relating to our properties, or if any adverse condition exists with respect to our properties that is in excess of our insurance coverage, we might have to pay substantial sums to settle or cure it, which could materially and adversely affect us. The properties we acquire may also be subject to covenants, conditions or restrictions that restrict the use or ownership of such properties, including zoning laws and regulations and prohibitions on leasing or on tenant evictions, or requirements to obtain the approval of home owner associations prior to leasing. We may not discover such restrictions during the acquisition process and such restrictions may adversely affect our ability to operate such properties as we intend.

Poor tenant selection and defaults by our tenants may materially and adversely affect us.

Our success with any REO that we may seek to rent will depend, in large part, upon our Servicer’s ability to attract and retain qualified tenants for our properties, whether residential or commercial. This will depend, in turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We will inevitably make mistakes in our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease or other regulations could materially and adversely affect us and the quality and value of our properties. For example, tenants may default on payment of rent, make unreasonable and repeated demands for service or improvements, make unsupported or unjustified complaints to regulatory or political authorities, make use of our properties for illegal purposes, damage or make unauthorized structural changes to our properties that may not be fully covered by security deposits, refuse to leave the property when the lease is terminated, engage in domestic violence or similar disturbances, disturb nearby residents with noise, trash, odors or eyesores, fail to comply with applicable regulations, sub-let to less desirable individuals in violation of our leases or permit unauthorized persons to occupy the property.

In addition, defaulting tenants will often be effectively judgment-proof. The process of evicting a defaulting tenant from a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs or impair the rental revenue or value of the property. In addition, we will incur turnover costs associated with re-leasing the

properties, such as marketing expense and brokerage commissions, and will not collect revenue while the property is vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be no assurance that we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial objectives for the properties in which they live, but may subject us to liability, and may damage our reputation with our other tenants and in the communities where we do business.

A significant uninsured property or liability loss could have a material adverse effect on us.

We carry commercial general liability insurance and property insurance with respect to our rental properties on terms we consider commercially reasonable. There are, however, certain types of losses (such as losses arising from acts of war) that are not insured, in full or in part, because they are either uninsurable or the cost of insurance makes it economically impractical. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a single-family rental property or group of rental properties as well as the anticipated future revenues from such single-family rental property or group of properties. If an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with or court ordered damages to that third party. A significant uninsured property or liability loss could materially and adversely affect us.

We may be required to make determinations of a borrower’s creditworthiness based on incomplete information or information that we cannot verify, which may cause us to purchase or originate loans that we otherwise would not have purchased or originated and, as a result, may negatively impact our business or reputation.

The commercial real estate lending business depends on the creditworthiness of borrowers, which we must judge. In making such judgment, we may depend on information obtained from non-public sources and the borrowers in making acquisition decisions and such information may be difficult to obtain or may be inaccurate. As a result, we may be required to make decisions based on incomplete information or information that is impossible or impracticable to verify. A determination as to the creditworthiness of a prospective borrower is based on a wide range of information including, without limitation, information relating to the form of entity of the prospective borrower, which may indicate whether the borrower can limit the impact that its other activities have on its ability to pay obligations related to the SBC loan.

We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent which may result in riskier investments. In addition, our charter provides that our Board of Directors may authorize us to revoke or otherwise terminate our REIT election without the approval of our stockholders.

Our Board of Directors has the authority to change our investment strategy or asset allocation at any time without notice to or consent from our stockholders. To the extent that our investment strategy changes in the future, we may make investments that are different from, and possibly riskier than, the investments described in this Annual Report. A change in our investment or leverage strategy may increase our exposure to interest rate and real estate market fluctuations or require us to sell a portion of our existing investments, which could result in gains or losses and therefore increase our earnings volatility. Decisions to employ additional leverage in executing our investment strategies could increase the risk inherent in our asset acquisition strategy. Furthermore, a change in our asset allocation could result in our allocating assets in a different manner than as described in this Annual Report.

In addition, our charter provides that our Board of Directors may authorize us to revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interests to qualify as a REIT. These changes could adversely affect our financial condition, results of operations, the market value of our common stock, and our ability to make distributions to our stockholders.

Our inability to compete effectively in a highly competitive market could adversely affect our ability to implement our business strategy, which could materially and adversely affect us.

Our profitability depends, in large part, on our ability to acquire targeted assets at favorable prices. We face significant competition when acquiring RPLs and SBC loans and our other targeted assets. Our competitors include other mortgage REITs, financial companies, public and private funds, hedge funds, commercial and investment banks and residential and commercial finance companies. Many of our competitors are substantially larger and have considerably greater access to capital and other resources than we do. Furthermore, new companies with significant amounts of capital have recently been formed or have raised additional capital, and may continue to be formed and raise additional capital in the future, and these companies may have objectives that overlap with ours, which may create competition for assets we wish to acquire. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets to acquire

and establish more relationships than us. We also may have different operating constraints from those of our competitors including, among others, tax-driven constraints such as those arising from our intention to qualify and maintain our qualification as a REIT and restraints imposed on us by our attempt to comply with certain exclusions from the definition of an “investment company” or other exemptions under the Investment Company Act. Furthermore, competition for assets in our targeted asset classes may lead to the price of such assets increasing, may reduce the number of attractive RPL and SBC loan investment opportunities available to us or increase the bargaining power of asset owners seeking to sell, which would increase the prices for these assets. If such events occur, our ability to implement our business strategy could be adversely affected, which could materially and adversely affect us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

Our ability to make distributions to our stockholders depends on our operating results, our financial condition and other factors, and we may not be able to make regular cash distributions at a fixed rate or at all under certain circumstances.

We make distributions to our stockholders in amounts such that we distribute substantially all of our taxable income in each year (subject to certain adjustments). This distribution policy enables us to avoid being subject to U.S. federal income tax on our taxable income that we distribute to our stockholders. However, our ability to make distributions depends on our results of operations, which may experience uneven cash flow because we hold RPLs and NPLs, our earnings, applicable law, our financial condition and such other factors as our Board of Directors may deem relevant from time to time. We will declare and make distributions to our stockholders only to the extent approved by our Board of Directors.

We are highly dependent on communications and information systems operated by third parties, and systems failures could significantly disrupt our business and negatively impact our operating results.

Our business is highly dependent on communications and information systems that allow us to monitor, value, buy, sell, finance and hedge our investments. These systems are operated by third parties, including our affiliates, and, as a result, we have limited ability to ensure continued operation. In the event of systems failure or interruption, we will have limited ability to affect the timing and success of systems restoration. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities which could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

In the ordinary course of our business, we, through the Servicer, may acquire and store sensitive data on our network, such as our proprietary business information and personally identifiable information of borrowers obligated on loans and our prospective and current mortgages and tenants. The secure processing and maintenance of this information is critical to our business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disruption to our operations and the services we provide to customers or damage our reputation, which could materially and adversely affect us.

Uncertainty about the future of the London Interbank Offered Rate (LIBOR) may adversely affect our business and financial results.

LIBOR and other indices which are deemed "benchmarks" are the subject of recent national, international, and other regulatory guidance and proposals for reform. Some of these reforms are already effective, whereas others are still to be implemented. These reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted. We expect that, over time, the Secured Overnight Financing Rate ("SOFR") published by Federal Reserve Bank of New York will replace U.S. Dollar LIBOR as the principal reference rate for U.S. Dollar-denominated floating rate instruments. However, the manner and timing of this shift is currently unknown. SOFR is an overnight rate instead of a term rate, making SOFR an inexact replacement for LIBOR. Market participants are still considering how various types of financial instruments and securitization vehicles should be modified following a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate. No assurance can be provided that these uncertainties or their resolution will not adversely affect the use, level, and volatility of SOFR, LIBOR or other interest rates or the value of SOFR-based or LIBOR-based securities, including our mortgage loans. These uncertainties or their resolution also could negatively

impact our loan and other asset values, interest income, funding costs, asset-liability management strategies, and other aspects of our business and financial results.

Risks Related to Leverage and Hedging

We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders and increase losses when economic conditions are unfavorable.

We use leverage to finance our investment operations and to enhance our financial returns and potentially to pay dividends. Sources of leverage may include bank credit facilities, warehouse lines of credit, structured financing arrangements (including securitizations) and repurchase agreements, among others. We may also seek to raise additional capital through public or private offerings of debt or equity securities, depending upon market conditions. We may use repurchase agreements to acquire certain assets, including our internally developed MBS, until we can securitize the assets. Because repurchase agreements are short-term borrowing, typically with 30- to 90-day terms although some may have terms up to 364 days, they are more subject to volatility in interest rates and lenders willingness to extend such borrowings. We currently do not expect a majority of our borrowings to be repurchase agreements or other short-term borrowings. Through the use of leverage, we may acquire positions with market exposure significantly greater than the amount of capital committed to the transaction. We intend to use leverage for the primary purpose of financing acquisitions for our portfolio and not for the purpose of speculating on changes in interest rates. We do not have a targeted debt-to-equity ratio generally or for specific asset classes. We may, however, be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements that we may enter into in the future, and we may be subject to margin calls as a result of our financing activity. Our ability to achieve our investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms and, as necessary, to renew or replace borrowings as they mature.

Leverage magnifies both the gains and the losses of our positions. Leverage increases our returns as long as we earn a greater return on investments purchased with borrowed funds than our cost of borrowing such funds. However, if we use leverage to acquire an asset and the value of the asset decreases, the leverage increases our losses. Even if the asset increases in value, if the asset fails to earn a return that equals or exceeds our cost of borrowing, the leverage decreases our returns.

We may be required to post large amounts of cash as collateral or margin to secure our repurchase commitments. In the event of a sudden, precipitous drop in value of our financed assets, we might not be able to liquidate assets quickly enough to repay our borrowings, further magnifying losses. Even a small decrease in the value of a leveraged asset may require us to post additional margin or cash collateral. This may decrease the cash available to us for distributions to stockholders, which could adversely affect the price of our common stock. In addition, our debt service payments reduce cash flow available for distribution to stockholders. We may not be able to meet our debt service obligations. To the extent that we cannot meet our debt service obligations, we risk the loss of some or all of our assets to sale to satisfy our debt obligations.

To the extent we are compelled to liquidate qualifying real estate assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be negatively affected, which could jeopardize our ability to qualify and maintain our qualification as a REIT. Failing to qualify as a REIT would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and decrease profitability and cash available for distributions to stockholders.

We may not be able to achieve our optimal leverage or target leverage ratios.

We use leverage as a strategy to increase the return to our investors. However, we may not be able to achieve our desired leverage for any of the following reasons:

•we determine that the leverage would expose us to excessive risk;

•our lenders do not make funding available to us at acceptable rates or on acceptable terms; and

•our lenders require that we provide additional collateral to cover our borrowings which may be the case in volatile markets.

In addition, if we exceed our target leverage ratios, the potential adverse impact on our financial condition and results of operation described above may be amplified.

Non-recourse long-term financing structures such as securitizations expose us to risks that could result in losses to us.

We have used and intend to continue to use securitization and other non-recourse long-term financing for our investments if, and to the extent, available. In such structures, lenders typically have only a claim against the assets included in the securitizations rather than a general claim against the owner-entity. Prior to each such financing, we may seek to finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated. As a result, we would be subject to the risk that we would not be able to acquire, during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization.

We also bear the risk that we may not be able to obtain new short-term facilities or may not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets or securities for a securitization. In addition, conditions in the capital markets may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets or securities. While we retain and expect to retain the unrated equity component of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default. Additionally, the securitization of our portfolio could magnify our exposure to losses because any equity interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses. An inability to securitize our portfolio may adversely affect our performance and our ability to grow our business.

Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.

Additionally, our secured debt is structured with multiple interest rate step-ups generally beginning after an initial three-year borrowing term. While we fully intend to refinance these borrowings at lower interest rates before the step-up date is reached, we cannot guarantee that we will be able to refinance these borrowings on favorable terms, or at all, potentially exposing us to higher amounts of interest expense.

Our failure to comply with covenants contained in any debt agreement, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our operating results and our financial condition.

We may enter into debt facilities that will require us to comply with various operational, reporting and other covenants that limit us from engaging in certain types of transactions. If there were an event of default under our debt facilities that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be immediately due and payable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated, upon an event of default, or that we would be able to refinance or restructure the payments on those debt instruments.

Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Subject to qualifying and maintaining our qualification as a REIT and exemption from registration under the Investment Company Act, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our hedging activity would vary in scope based on the level and volatility of interest rates, the types of liabilities and assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

•interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

•available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

•the duration of the hedge may not match the duration of the related assets or liabilities being hedged;

•to the extent hedging transactions do not satisfy certain provisions of the Code or are not made through a TRS, the amount of income that a REIT may earn from hedging transactions to offset interest rate losses is limited by the Code provisions governing REITs;

•the value of derivatives used for hedging is adjusted from time to time in accordance with accounting rules to reflect changes in fair value; and downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity;

•the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

•the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

Our hedging transactions, which would be intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Risks Related to Regulatory and Legislative Actions

We operate in a highly regulated industry and continually changing U.S. federal, state and local laws and regulation could materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our stockholders.

The residential mortgage industry is highly regulated. We and our Manager are required to comply with a wide array of U.S. federal, state and local laws and regulations that regulate, among other things, the manner in which each of us conducts our businesses. These regulations directly impact our business and require constant compliance, monitoring and internal and external audits. A material failure to comply with any of these laws or regulations could subject us and our Manager to lawsuits or governmental actions and damage our reputation, which could materially adversely affect our business, financial condition and results of operations.

On March 27, 2020, the CARES Act was adopted, which, among other things, provides emergency assistance to qualifying businesses and individuals as a result of the COVID-19 pandemic. There can be no assurance that these interventions or future acts by the government will be successful or that the programs established by the CARES Act or future legislation will have and maintain sufficient liquidity to achieve its purpose. While we may indirectly receive financial, tax or other relief and other benefits under and as a result of the CARES Act, it is not possible to estimate at this time the availability, extent or impact of any such relief.

U.S. federal, state and local governments frequently propose or enact new laws, regulations and rules related to mortgage loans, including servicing and collection of mortgage loans. Laws, regulations, rules and judicial and administrative decisions relating to mortgage loans include those pertaining to Real Estate Settlement Procedures Act ("RESPA"), equal credit opportunity, fair lending, fair credit reporting, truth in lending, fair debt collection practices, service members protections, compliance with net worth and financial statement delivery requirements, compliance with U.S. federal and state disclosure and licensing requirements, the establishment of maximum interest rates, finance charges and other charges, qualified mortgages, secured transactions, payment processing, escrow, loss mitigation, collection, foreclosure, repossession and claims-handling procedures, and other trade practices and privacy regulations providing for the use and safeguarding of non-public personal financial information of borrowers. Our service providers, including the Servicer and outside foreclosure counsel retained to process foreclosures, must also comply with many of these legal requirements.

In particular, the Dodd-Frank Act resulted in a comprehensive overhaul of the financial services industry in the United States and includes, among other things (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among U.S. federal agencies, (ii) the creation of the CFPB, authorized to promulgate and enforce consumer protection regulations relating to financial products and services, including mortgage lending and servicing, and to exercise supervisory authority over participants in mortgage lending and mortgage servicing, (iii) the establishment of strengthened capital and prudential standards for banks and bank holding companies, (iv) enhanced regulation of financial markets, including the derivatives and securitization markets, and (v) amendments to the TILA, and the RESPA, aimed at improving consumer protections with respect to mortgage originations and mortgage servicing, including disclosures, originator compensation, minimum repayment standards, prepayment considerations, appraisals and loss mitigation and other servicing requirements. Unpredictable events, such as the recent COVID-19 pandemic, may create economic shocks, to which federal, state, and local governments respond with new borrower and tenant rights and protections.

In addition, although we do not intend to acquire MBS in which the underlying mortgage loans are guaranteed or insured by any GSE or U.S. Governmental agency, actions taken by or proposed to be taken by, among others, FHFA, the U.S. Treasury, the Federal Reserve Board or other U.S. governmental agencies that are intended to regulate the origination, underwriting guidelines, servicing guidelines, servicing compensation and other aspects of mortgage loans guaranteed by the GSEs or U.S. governmental agencies (known as “Agency RMBS”) can have indirect and sometimes direct effects on our business and business model, results of operations and liquidity. For example, loan originators and servicers, investors and other participants in the mortgage securities markets may use regulatory guidelines intended for Agency RMBS as guidelines or operating procedures in respect of non-Agency RMBS. In addition, changes in underwriting guidelines for Agency RMBS generally affect the supply of similar or complementary non-Agency RMBS.

Our Manager’s or our Servicer's failure to comply with these laws, regulations and rules may result in reduced payments by borrowers, modification of the original terms of mortgage loans, permanent forgiveness of debt, restrictions on tenant evictions, delays in the foreclosure process, increased servicing advances, litigation, enforcement actions, and repurchase and indemnification obligations.

We expect that legislative and regulatory changes will continue in the foreseeable future, which may increase our operating expenses, either to comply with applicable law, to deal with regulatory examinations or investigations, or to satisfy our lenders and investors that we are in compliance with those laws, regulations and rules that are applicable to our business. Any of these new, or changes in, laws, regulations or rules could adversely affect our business, financial condition and results of operations.

Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans. In the event that any such licensing requirement is applicable and we are not able to obtain such licenses in a timely manner or at all, our ability to implement our business strategy could be adversely affected, which could materially and adversely affect us.

Certain jurisdictions require a license to purchase, hold, enforce or sell residential mortgage loans. We currently do not hold any such licenses, and there is no assurance that we will be able to obtain them or, if obtained, that we will be able to maintain them. In connection with these licenses we would be required to comply with various information reporting and other regulatory requirements to maintain those licenses, and there is no assurance that we will be able to satisfy those requirements on an ongoing basis. Our failure to obtain or maintain such licenses or our inability to enter into another regulatory-compliant structure, such as establishing a trust with a federally chartered bank as trustee to purchase and hold the residential mortgage loans, could restrict our ability to invest in loans in these jurisdictions if such licensing requirements are applicable. In lieu of obtaining such licenses, we may contribute our acquired RPLs to one or more wholly-owned trusts whose trustee is a national bank, which may be exempt from state licensing requirements, or the seller of such loans may continue to hold the loans on our behalf until we obtain the applicable state license. If required, we will form one or more subsidiaries that will apply for necessary state licenses. If these subsidiaries obtain the required licenses, any trust holding loans in the applicable jurisdictions may transfer such loans to such subsidiaries, resulting in these loans being held by a state-licensed entity. There can be no assurance that we will be able to obtain the requisite licenses in a timely manner or at all or in all necessary jurisdictions, or that the use of the trusts will reduce the requirement for licensing, any of which could limit our ability to invest in residential mortgage loans. Our failure to obtain and maintain required licenses may expose us to penalties or other claims and may affect our ability to acquire an adequate and desirable supply of mortgage loans to conduct our securitization program and, as a result, could harm our business.

We could be subject to liability for potential violations of predatory lending laws, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Residential mortgage loan originators and servicers are required to comply with various U.S. federal, state and local laws and regulations, including anti-predatory lending laws and laws and regulations imposing certain restrictions on requirements on “high cost” loans. Failure of our Manager or service providers to comply with these laws could subject us, as an assignee or purchaser of the related residential mortgage loans, to monetary penalties and could result in impairment in the ability to foreclose such loans or the borrowers rescinding the affected residential mortgage loans. Lawsuits have been brought in various states making claims against assignees or purchasers of high cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If the loans are found to have been originated in violation of predatory or abusive lending laws, we could incur losses, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.

The present U.S. federal income tax treatment of REITs and their shareholders may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in our shares. The U.S. federal income tax rules, including those dealing with REITs, are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations.

The U.S. federal tax legislation, commonly known as the Tax Cuts and Jobs Act (“TCJA”), makes substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, a temporary reduction in the highest marginal income tax rate applicable to individuals subject to a “sunset” provision, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest), certain additional limitations on the deduction of net operating losses and preferential effective rates of taxation on

most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other, changes made in the TCJA is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets or shares of our common stock or market conditions generally. Furthermore, many of the provisions of the TCJA will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. There may also be technical corrections legislation proposed with respect to the TCJA, the effect and timing of which cannot be predicted and which may be adverse to us or our stockholders.

Among other amendments, the TCJA effected the following changes (generally effective for taxable years beginning after December 31, 2017, unless otherwise indicated):

•For taxable years that begin after December 31, 2017, and before January 1, 2026: (i) the U.S. federal income tax brackets generally applicable to ordinary income of individuals, trusts and estates have been modified, and (ii) stockholders that are individuals, trusts or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT (i.e., not including dividends that are eligible for the reduced rates applicable to “qualified dividend income” or treated as capital gain dividends), subject to certain limitations.

•The U.S. federal income tax rate applicable to corporations has been reduced to 21% (from the previous maximum rate of 35%), and the alternative minimum tax has been repealed for corporations. In addition, the maximum withholding rate on distributions by us to non-U.S. stockholders that are attributable to gain from the disposition of a U.S. real property interest is reduced from 35% to 21%.

•There are new limitations on the deductibility of interest expense and net operating losses, which may affect the deductibility of interest paid or accrued by, or net operating losses generated by, us or our TRSs or other subsidiaries. Certain of the limitations applicable to net operating losses apply to losses arising in taxable years ending after December 31, 2017.

•A U.S. tax-exempt stockholder that is subject to tax on its unrelated business taxable income (“UBTI”) will be required to segregate its taxable income and loss for each unrelated trade or business activity for purposes of determining its UBTI.

•New rules have been enacted that in some circumstances may accelerate the recognition of certain income items.

Risks Related to Our Management and Our Relationship with Our Manager, the Servicer and Aspen

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

Conflicts between us and our Manager. Our Manager manages our business, investment activities and affairs pursuant to the Management Agreement. This agreement was not negotiated at arm’s length and, accordingly, could contain terms, including the basis of calculation of the amount of the fees payable to our Manager, that are less favorable to us than similar agreements negotiated with unaffiliated third parties. Furthermore, the calculation of our Manager’s incentive fee is based on, among other measures, the dividends declared by our Board of Directors. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of dividends at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

As an externally managed REIT, we are entirely managed by our Manager, which negotiates all our agreements and deals with all our contractual counterparties on our behalf. For example, our Manager acts for us in connection with the Servicing Agreement, including monitoring the performance of our Servicer under the agreement and exercising any available rights or remedies on our behalf. Our Manager and our Servicer are affiliates. Each of our officers is an officer of our Manager or the Servicer.

Conflicts between us and the Servicer. The Servicing Agreement was also not negotiated at arms’ length and could contain terms that are less favorable to us than similar agreements negotiated with unaffiliated third parties. In addition, the

Servicer is generally not prohibited from providing similar services to other owners of mortgage loans and real estate assets, including other affiliates of Aspen.

Particular risks associated with our license for the name “Great Ajax.” If the Management Agreement expires or is terminated for any reason, the trademark license agreement pursuant to which we license the mark “Great Ajax” from Aspen will also terminate within 30 days. Upon any such termination, we would be required to cease doing business using the name “Great Ajax” and would have to change our corporate name, both of which could have a material adverse effect upon our business. All goodwill associated with our use of the mark “Great Ajax” is not our asset and such goodwill cannot be transferred by us to a third party. In addition, we need to obtain the consent of Aspen before we are permitted to register the licensed mark in any jurisdiction in the world. Failure to obtain such consent could have a material adverse effect on us, including our ability to expand our business into new jurisdictions.

Our Management team may engage in other activities and may have interests that conflict with ours. Our Manager and members of its management team may engage in any other business or render similar or different services to others including, without limitation, the direct or indirect sponsorship or management of other investment-based accounts or commingled pools of capital, so long as its services to us are not impaired thereby; provided that it may not engage in any such business or provide such services to any other entity that invests in the asset classes in which we intend to invest so long as we have on hand an average of $25 million in capital available for investment over the previous two fiscal quarters or our independent directors determine that we have the ability to raise capital at or above our most recent book value. If this occurs, our Manager or members of its management team may devote a disproportionate amount of time and other resources to acquire or manage properties owned by others. In addition, Aspen has agreed, for itself and its subsidiaries, including our Servicer, to similar restrictions on their ability to compete with us. We will seek to manage any potential conflicts through provisions of our agreements with them and through oversight by independent members of our Board of Directors or general dispute resolution methods. However, there can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with our Manager, our Servicer and Aspen or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with unaffiliated third parties.

We own a 19.8% equity interest in our Manager and an 8.0% equity interest in the parent company of our Servicer through GA-TRS, with warrants to purchase an additional equity interest in GAFS. As of March 2, 2020, two of our larger stockholders, Flexpoint Great Ajax Holdings LLC (“Flexpoint REIT Investor”) an affiliate of an investment fund managed by Flexpoint Ford LLC, and investors consisting of an investment fund for which Wellington Management Company LLP is the investment advisor and one or more other investment advisory clients of Wellington Management Company LLP (collectively, the “Wellington Investors”) own 4.3% and 14.8%, respectively, of our outstanding common stock. In addition, Flexpoint REIT Investor and one of the Wellington Investors each own 26.73% of our Manager, and 9.03% of Great Ajax FS LLC (“GAFS”), the parent of the Servicer, with warrants to purchase an additional equity interest in GAFS. Mr. Mendelsohn controls 50% of the manager of Aspen, which owns a 26.73% investment in our Manager and a 73.77% interest in GAFS, and has certain economic and/or management rights with respect to approximately 9.22% of the interests in Aspen. Furthermore, each of our executive officers is an executive officer of our Manager or the Servicer or both and has interests in our relationship with them that may be different from the interests of our stockholders. In particular, these individuals, other than the chief financial officer, have a direct interest in the financial success of our Manager or the Servicer, which may encourage these individuals to support strategies in furtherance of their financial success that adversely affect us. Such ownership creates conflicts of interest when such directors or members of our management team are faced with decisions that involve us and our Manager, our Servicer, Aspen or any of their respective subsidiaries. See “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Item 13. Certain Relationships and Related Transactions and Director Independence — Agreements with Anchor Investors.”

Our Board of Directors has approved a very broad investment policy and guidelines for our Manager and will not review or approve each investment decision. We may change our investment policy and guidelines without stockholder consent, which may materially and adversely affect the market price of our common stock and our ability to make distributions to our stockholders.

Our Manager is authorized to follow a very broad investment policy and guidelines and, therefore, has great latitude in determining the types of assets that are proper investments for us, as well as the individual investment decisions. In the future, our Manager may make investments with lower rates of return than those anticipated under current market conditions and/or may make investments with greater risks to achieve those anticipated returns. Our Board of Directors will periodically review our investment policy and guidelines and our investment portfolio but will not review or approve each proposed investment by our Manager unless it falls outside the scope of our previously approved investment policy and guidelines or constitutes a related party transaction.

In addition, in conducting periodic reviews, our Board of Directors relies primarily on information provided to it by our Manager. Furthermore, our Manager may use complex strategies. Transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our Board of Directors. In addition, we may change our investment policy and guidelines and targeted asset classes at any time without the consent of our stockholders, and this could result in our making investments that are different in type from, and possibly riskier than, our current investments or the investments currently contemplated. Changes in our investment policy and guidelines and targeted asset classes may increase our exposure to interest rate risk, counterparty risk, default risk and real estate market fluctuations, which could materially and adversely affect us.

We depend on our Manager. We may not be able to retain our engagement of our Manager under certain circumstances, which could materially and adversely affect us. Termination of our Manager by us without cause is difficult and costly and our agreements with our Servicer may simultaneously terminate or be terminated, as applicable.

Our success depends upon our relationships with and the performance of our Manager and its key personnel. Key personnel may leave its employment or may become distracted by financial or operational issues in connection with their business and activities unrelated to us and over which we have no control or may fail to perform for any reason. Our Manager may engage in any other business or render similar or different services to others, including, without limitation, the direct or indirect sponsorship or management of other investment-based accounts or commingled pools of capital, so long as its services to us are not impaired thereby; provided that our Manager may not engage in any such business or provide such services to any other entity that invests in the asset classes in which we intend to invest so long as we have on hand an average of $25 million in capital available for investment over the previous two fiscal quarters or our independent directors determine that we have the ability to raise capital at or above our most recent book value. Aspen Capital has agreed for itself and its subsidiaries to similar restrictions. In the event our Manager provides its services to a competitor, it may be difficult for us to secure a suitable replacement to our Manager on favorable terms, or at all or maintain our engagement of our Manager. In the event that the Management Agreement is terminated for any reason or our Manager is unable to retain its key personnel, it may also be difficult for us to secure a suitable replacement to our Manager on favorable terms, or at all. If we terminate the Management Agreement without cause thereafter or our Manager terminates the Management Agreement due to our default in the performance of any material term of the Management Agreement, we will be required to pay a significant termination fee. In addition, the Management Agreement will automatically terminate at the same time as the Servicing Agreement if the Servicing Agreement is terminated for any reason. If the Management Agreement expires or is earlier terminated, we and our Servicer have certain rights to terminate the Servicing Agreement and the trademark license agreement will automatically terminate. The occurrence of any of the above-described events could materially and adversely affect us.

The incentive fee payable to our Manager under the Management Agreement will be payable quarterly based on the dividends declared by our Board of Directors and may cause our Manager to select investments in more risky assets to increase its incentive compensation.

Our Manager will be entitled to receive incentive compensation based upon, among other measures, the dividends declared by our Board of Directors in its discretion. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of dividends at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

The Servicing Agreement was not negotiated at arm’s length.

Under the Servicing Agreement, the Servicer provides us with critically important services, including, among many others, the servicing of our whole mortgage loans, including the mortgage loans underlying our MBS, loan modification services, assisted deed-in-lieu of foreclosure services, assisted deed-for-lease services and other loss mitigation services with respect to our mortgage loans and property management, leasing management and renovation management services with respect to our real property assets and assistance in finding third party financing for such properties. The Servicing Agreement has an initial term of 15 years, expiring July 8, 2029. We may not terminate the Servicing Agreement except for cause or if we terminate the Management Agreement for cause, the Servicer may terminate the Servicing Agreement without cause by providing written notice to us no later than 180 days prior to December 31 of any year, and the Servicing Agreement will terminate effective on the December 31 next following the delivery of such notice. The Servicing Agreement also provides that the Servicer may terminate the agreement within 180 days after receiving notice that the Management Agreement has terminated, without any termination payment by us if the Management Agreement has been terminated for cause. If the Management Agreement has been terminated other than for cause and the Servicer terminates the Servicing Agreement, we will be required to pay a significant 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. Upon any termination of the Servicing Agreement, it may be difficult for us to secure suitable replacements or we may secure alternative servicers with less effective servicing platforms or at greater expense. In addition, the Servicer has no liability to us for its negligence in performing services for us under the Servicing Agreement, unless that negligence rises to the level of gross negligence or willful misconduct. The material terms of the Servicing Agreement are further described in “Item 1. Business — The Servicer.” The Servicing Agreement was not negotiated at arm's length; accordingly, it may contain terms that are less favorable to us than agreements negotiated with one or more unaffiliated third parties might contain.

Failure of our Servicer to effectively perform its obligations under the Servicing Agreement could materially and adversely affect us.

We are contractually obligated to service the residential mortgage loans that we acquire and we must operate or provide for the operation of the real estate assets we will own. We do not have any employees, a servicing platform, licenses or technical resources necessary to service our acquired loans. Consequently, we have engaged our Servicer to service our mortgage loans and other real estate assets. If for any reason our Servicer is unable to service these loans or real estate assets at the level and/or the cost that we anticipate, or if we fail to pay our Servicer or otherwise default under the Servicing Agreement, and our Servicer ceases to act as our servicer, alternate service providers may not be readily available on favorable terms, or at all, which could adversely affect our Manager’s performance under the Management Agreement and our business and results of operations. Our Servicer’s failure to perform the services under the Servicing Agreement would have a material adverse effect on us. Currently, we are our Servicer's largest customer.

Pursuant to the terms of the Servicing Agreement, our Servicer is required to pay taxes, insurance and other charges when the borrower does not have sufficient funds in to pay the amounts themselves or when the loan has converted to REO. Our Servicer generally recovers these amounts from the liquidation proceeds from the underlying loans or REO. In the event our Servicer is unable to fund these borrower or REO charges, we might have to advance the funds to protect our interest in the loan or REO. This advancing in advance of receiving liquidation proceeds could place a strain on our operating capital, our Servicer’s operating capital, and our ability to invest in additional assets.

Our Manager has a contractually defined duty to us rather than a fiduciary duty.

Under the Management Agreement, our Manager has a contractual, as opposed to a fiduciary, relationship with us that limits its obligations to us to those specifically set forth in the Management Agreement. The ability of our Manager and its officers and employees to engage in other business activities may reduce the time it spends managing us. In addition, unlike the relationship we have with our directors, there is no statutory standard of conduct under the Maryland General Corporation Law (the “MGCL”) for officers of a Maryland corporation. Officers of a Maryland corporation, including our officers who are employees of our Manager, are subject to general agency principles including the exercise of reasonable care and skill in the performance of their responsibilities as well as the duties of loyalty, good faith and candid disclosure.

Risks Related to Our Organizational Structure

Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations.

We intend to continue to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act. We are organized as a holding company and we conduct our business primarily through wholly-owned subsidiaries of our Operating Partnership. Neither we nor our Operating Partnership nor Great Ajax Funding is an investment company under Section 3(a)(1)(C). The securities issued by our subsidiaries that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with other investment securities we may own, cannot exceed 40% of the value of all our assets (excluding U.S. government securities and cash) on an unconsolidated basis. This requirement limits the types of businesses in which we may engage and the assets we may hold. Our 19.8% equity interest in our Manager and our 8.0% equity interest in the parent company of our Servicer are held by GA-TRS, which is a special purpose subsidiary of our Operating Partnership, and GA-TRS may rely on Section 3(c)(1) or Section 3(c)(7) for its Investment Company Act exclusion and, therefore, our interest in such subsidiary would constitute an “investment security” for purposes of determining whether we pass the 40% test (see “Item 1. Business — Operating and Regulatory Structure — Investment Company Act Exclusion” for additional information regarding the 40% test).

Certain of our subsidiaries may rely on the exclusion provided by Section 3(c)(5)(C) under the Investment Company Act. Section 3(c)(5)(C) of the Investment Company Act is designed for entities “primarily engaged in the business of

purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of the entity’s assets on an unconsolidated basis consist of qualifying real estate assets and at least 80% of the entity’s assets consist of qualifying real estate assets or real estate-related assets. These requirements limit the assets those subsidiaries can own and the timing of sales and purchases of those assets.

To classify the assets held by our subsidiaries as qualifying real estate assets or real estate-related assets, we will rely on no-action letters and other guidance published by the SEC staff regarding those kinds of assets, as well as upon our analyses (in consultation with outside counsel) of guidance published with respect to other types of assets. There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the SEC or its staff regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations. In fact, in August 2011, the SEC published a concept release in which it asked for comments on this exclusion from regulation. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon our exemption from the need to register under the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could further inhibit our ability to pursue the strategies that we have chosen. Furthermore, although we intend to monitor the assets of our subsidiaries regularly, there can be no assurance that our subsidiaries will be able to maintain their exclusion from registration. Any of the foregoing could require us to adjust our strategy, which could limit our ability to make certain investments or require us to sell assets in a manner, at a price or at a time that we otherwise would not have chosen. This could negatively affect the value of our common stock, the sustainability of our business model and our ability to make distributions.

Registration under the Investment Company Act would require us to comply with a variety of substantive requirements that impose, among other things:

•limitations on capital structure;

•restrictions on specified investments;

•restrictions on leverage or senior securities;

•restrictions on unsecured borrowings;

•prohibitions on transactions with affiliates; and

•compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly increase our operating expenses.

If we were required to register as an investment company but failed to do so, we could be prohibited from engaging in our business, and criminal and civil actions could be brought against us.

Registration with the SEC as an investment company would be costly, would subject us to a host of complex regulations and would divert attention from the conduct of our business, which could materially and adversely affect us. In addition, if we purchase or sell any real estate assets to avoid becoming an investment company under the Investment Company Act, our net asset value, the amount of funds available for investment and our ability to pay distributions to our stockholders could be materially adversely affected.

The ownership limit in our charter may discourage a takeover or business combination that may have benefited our stockholders.

To assist us in qualifying as a REIT, among other purposes, our charter generally limits the beneficial or constructive ownership of our (a) common stock by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock and (b) capital stock by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our capital stock. We have waived these ownership limits, to a certain extent, for Flexpoint REIT Investor, the Wellington Investors and certain other investors. This and other restrictions on ownership and transfer of our shares of stock contained in our charter may discourage a change of control of us and may deter individuals or entities from making tender offers for our common stock on terms that might be financially attractive to you or which may cause a change in our management. In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease your ability to sell our common stock.

Our stockholders’ ability to control our operations is limited.

Our Board of Directors approves our major strategies, including our strategies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our Board of Directors may amend or revise these and other strategies without a vote of our stockholders. Further, Flexpoint REIT Investor and the Wellington Investors own significant

portions of our common stock, will continue to have significant influence over us, and may have conflicts of interest with us or you now or in the future.

Certain provisions of Maryland law could inhibit a change in our control.

Certain provisions of the MGCL may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including:

•“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and

•“control share” provisions that provide that a holder of our “control shares” (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

We elected to opt out of these provisions of the MGCL, in the case of the business combination provisions, by resolution of our Board of Directors exempting any business combination between us and any other person (provided that such business combination is first approved by our Board of Directors, including a majority of our directors who are not affiliates or associates of such person), and in the case of the control share provisions, pursuant to a provision in our bylaws. We may not opt back in to either of these provisions without the approval of the holders of a majority of our shares of common stock.

Our authorized but unissued common and preferred stock may prevent a change in control of the company.

Our charter authorizes us to issue additional authorized but unissued common stock and preferred stock without stockholder approval. In addition, our Board of Directors may, without stockholder approval, (i) amend our charter to increase or decrease the aggregate number of our shares of stock or the number of shares of any class or series of stock that we have authority to issue and (ii) classify or reclassify any unissued common stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, among other things, our board may establish a class or series of common stock or preferred stock that could delay or prevent a transaction or a change in control of the company that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interest.

Our charter limits the liability of our present and former directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from:

•actual receipt of an improper benefit or profit in money, property or services; or

•active and deliberate dishonesty by the director or officer that was established by a final judgment and is material to the cause of action.

In addition, our charter authorizes us to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law and our bylaws require us to indemnify our present and former directors and officers, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us as a director or officer in these and other capacities. In addition, we may be obligated to pay or reimburse the expenses incurred by our present and former directors and officers without requiring a preliminary determination of their ultimate entitlement to indemnification. As a result, we and our stockholders may have more limited rights against our present and former directors and officers than

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might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies, which could limit your recourse in the event of actions not in your best interests.

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.

Our charter provides that, except pursuant to a Special Election Meeting (as defined in the charter), subject to the rights of holders of one or more classes or series of preferred stock to elect or remove one or more directors, a director may be removed only for “cause” (as defined in our charter), and even then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors. At a Special Election Meeting, our Manager, the Servicer, Aspen Yo and our directors and officers shall not vote the shares of common stock they beneficially own in the election or removal of directors. At a Special Election Meeting, a majority of the votes entitled to be cast is required to remove a director. Vacancies may be filled only by a majority of the remaining directors in office, even if less than a quorum, for the full term of the directorship in which the vacancy occurred (other than vacancies among any directors elected by the holder or holders of any class or series of preferred stock, if such right exists). These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in our control that is in the best interests of our stockholders.

Our charter generally does not permit ownership in excess of 9.8% of our common stock or of our stock of all classes and series based on value or number of shares, and attempts to acquire our stock in excess of the stock ownership limit will be ineffective unless an exemption is granted by our Board of Directors. These provisions may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares of common stock.

We elected to be taxed as a REIT for U.S. federal income tax purposes beginning with our taxable year ended December 31, 2014. In order for us to continue to qualify as a REIT, no more than 50% of the value of our outstanding shares of capital stock (after taking into account options to acquire shares of stock) may be owned, directly or constructively, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. In order to help us qualify as a REIT, among other purposes, our charter generally limits the beneficial or constructive ownership of our (a) common stock by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our common stock or (b) capital stock by any person to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the aggregate of the outstanding shares of our capital stock. Our Board of Directors, in its sole and absolute discretion, may grant an exemption to certain of these prohibitions, subject to certain conditions and receipt by our Board of Directors of certain representations, covenants and undertakings. Our Board of Directors waived such limit in connection with the ownership by Flexpoint REIT Investor, the Wellington Investors and certain other investors. Our Board of Directors may also from time to time increase this ownership limit for one or more persons and may decrease such limit for all other persons. Any decrease in the ownership limit generally applicable to all stockholders will not be effective for any person whose percentage ownership of our stock is in excess of such decreased ownership limit until such time as such person’s percentage ownership of our stock equals or falls below such decreased ownership limit, but any further acquisition of our stock in excess of such decreased ownership limit will be in violation of the decreased ownership limit. Our Board of Directors may not increase the decreased ownership limit (whether for one person or all stockholders) if such increase would allow five or fewer individuals (including certain entities) to beneficially own more than 49.9% in value of our outstanding capital stock.

Our charter’s constructive ownership rules are complex and may cause the outstanding shares of our stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding shares of any class or series of our stock by an individual or entity could cause that individual or entity to own constructively in excess of 9.8% of the outstanding shares of our common stock or of our stock of all classes and series and thus violate the ownership limits or other restrictions on ownership and transfer of our stock. Any attempt by a stockholder to own or transfer our stock in excess of the ownership limit without the consent of our Board of Directors or in a manner that would cause us to be “closely held” under Section 856(h) of the Code (without regard to whether the stock is held during the last half of a taxable year) or would otherwise cause us to fail to qualify as a REIT will result in the stock being automatically transferred to a trustee for a charitable trust or, if the transfer to the charitable trust is not automatically effective to prevent a violation of the stock ownership limit or the restrictions on ownership and transfer of our stock, any such transfer of our shares will be void ab initio. Further, any transfer of our stock that would result in our shares being beneficially owned by fewer than 100 persons will be void ab initio.

These ownership limitations could have the effect of discouraging a takeover or other transaction in which holders of our shares of common stock might receive a premium for their shares of common stock over the then-prevailing market price or which holders might believe to be otherwise in their best interests.

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Conflicts of interest could arise in the future as a result of our structure.

Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to our company under applicable Maryland law in connection with their oversight of the management of our company. At the same time, we, through our wholly-owned subsidiary, will have fiduciary duties, as a general partner, to our Operating Partnership and to any partners thereof under Delaware law in connection with the management of our Operating Partnership. Our duties as a general partner to our Operating Partnership and any of its affiliates may come into conflict with the duties of our directors and officers. In the event of a conflict between the interests of our stockholders and the interests of the affiliates of our Operating Partnership, we will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or the affiliates; provided, that for so long as we own a controlling interest in our Operating Partnership, any such conflict that we, in our sole and absolute discretion, determine cannot be resolved in a manner not adverse to either our stockholders or the affiliates of our Operating Partnership will be resolved in favor of our stockholders.

Risks Related to Our Common Stock

The market price of our common stock may fluctuate, and you could lose all or part of your investment.

The stock market in general has been, and the market price of our common stock in particular will likely be, subject to fluctuation, whether due to, or irrespective of, our operating results and financial condition. Our financial performance, government regulatory action, tax laws, interest rates and market conditions in general could have a significant impact on the future market price of our common stock. Some of the other factors that could negatively affect our share price or result in fluctuations in our share price include:

•economic and public health impact as a result of the COVID-19 pandemic;

•weakening of the mortgage loan market;

•actual or anticipated variations in our quarterly operating results;

•increases in market interest rates that lead purchasers of our common stock to demand a higher yield;

•changes in our cumulative core earnings or earnings estimates;

•changes in market valuations of similar companies;

•actions or announcements by our competitors;

•actual or perceived conflicts of interest, or the discontinuance of our strategic relationships, with our Manager, the Servicer or Aspen;

•adverse market reaction to any increased indebtedness we incur in the future;

•additions or departures of key personnel;

•actions by stockholders;

•speculation in the press or investment community;

•our ability to maintain the listing of our common stock on a national securities exchange;

•failure to qualify or maintain our qualification as a REIT; and

•failure to maintain our exemption from registration under the Investment Company Act.

The preparation of our consolidated financial statements involves the use of estimates, judgments and assumptions, and our consolidated financial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.

Consolidated financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the consolidated financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, determining the fair value of our assets and the timing and amount of cash flows from our assets. These estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face the risk that charges to income will be required. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our future plan of operations.

If we fail to establish and maintain an effective system of internal controls, we may not be able to determine accurately our financial results or to prevent fraud.

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Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of internal control that need further improvement, and we cannot be certain that we will be successful in maintaining adequate control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure that our internal controls remain effective. If we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of our common stock. Additionally, the existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner, or at all.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

To continue to qualify and maintain our qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we make regular quarterly distributions to holders of our common stock out of legally available funds. Our current policy is to pay quarterly distributions that, on an annual basis, will equal all or substantially all of our net taxable income. We have not, however, established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this Annual Report. All distributions are made at the discretion of our Board of Directors and depend on our earnings, our financial condition, any debt covenants, qualification and maintenance of our REIT qualification, restrictions on making distributions under Maryland law and other factors as our Board of Directors may deem relevant from time to time. We may not be able to make distributions in the future and our Board of Directors may change our distribution policy in the future. We believe that a change in any one of the following factors, among others, could adversely affect our results of operations and impair our ability to pay distributions to our stockholders:

•the profitability of the assets we hold, purchase or originate;

•our ability to make profitable acquisitions and originations;

•margin calls or other expenses that reduce our cash flow;

•defaults in our asset portfolio or decreases in the value of our portfolio; and

•the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

We cannot assure you that we will achieve results that will allow us to make a specified level of cash distributions or increases in cash distributions in the future. In addition, some of our distributions may include a return of capital.

We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our investment activities.

We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent that distributions exceed earnings or cash flow from our investment activities. Because our assets will consist primarily of RPLs that may not receive payments on a regular basis, we may experience uneven cash flow, making it more difficult to maintain the necessary cash to pay distributions. Such distributions would reduce the amount of cash we have available for investing and other purposes and could be dilutive to our financial results. In addition, funding our distributions from our net proceeds may constitute a return of capital to our investors, which would have the effect of reducing each stockholder’s basis in its common stock.

Future sales of our common stock or other securities convertible into our common stock could cause the market value of our common stock to decline and could result in dilution of your shares.

Sales of substantial amounts of shares of our common stock could cause the market price of our common stock to decrease significantly. We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares of our common stock for future sales, on the value of our common stock. Sales of substantial amounts of shares of our common stock, or the perception that such sales could occur, may adversely affect prevailing market values for our common stock.

During the third and fourth quarters of 2019, we sold 2,278,518 shares of our common stock under our at-the-market program for net proceeds of approximately $34.3 million, net of underwriting fees. We did not sell any shares of our common stock under our at-the-market program in 2018. The conversion rate for our convertible senior notes due 2024, which are convertible into shares of our common stock, was 1.6694 at December 31, 2019. Holders may convert their notes at their option prior to April 30, 2023 only under limited circumstances. See "Item 2. Management's Discussion and Analysis - Debt"

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Item 2. Unregistered Sales of Securities

Unregistered Sales of Equity Securities

On March 5, 2020 we issued each of our four independent directors 650 shares of common stock in partial payment of their quarterly director fees for the first quarter of 2020. These shares were issued in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are filed or furnished as part of this Quarterly Report on Form 10-Q.

104

EXHIBIT INDEX


Exhibit Number						Exhibit Description
10.1*						Third Amended and Restated Management Agreement, dated April 28, 2020, by and among Great Ajax Corporation, Great Ajax Operating Partnership, LP and Thetis Asset Management LLC.
31.1*						Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*						Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*						Section 1350 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*						Section 1350 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**						XBRL Instance Document
101.SCH**						XBRL Taxonomy Extension Schema Document
101.CAL**						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**						XBRL Taxonomy Definition Linkbase Document
101.LAB**						XBRL Taxonomy Definition Linkbase Document
101.PRE**						XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished herewith.

105

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		GREAT AJAX CORP.

Date: May 6, 2020	By:	/s/ Lawrence Mendelsohn
		Lawrence Mendelsohn
		Chairman and Chief Executive Officer (Principal Executive Officer)

Date: May 6, 2020	By:	/s/ Mary Doyle
		Mary Doyle
		Chief Financial Officer (Principal Financial and Accounting Officer)

106