Rithm Property Trust Inc. (RPT) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Annual Report, unless the context indicates otherwise, references to “Rithm Property Trust,” “we,” “the Company,” “our” and “us” refer to the activities of and the assets and liabilities of the business and operations of Rithm Property Trust Inc. and its subsidiaries (formerly Great Ajax Corp.); references to “Rithm” refer to Rithm Capital Corp. and its subsidiaries; references to “Operating Partnership” refers to Great Ajax Operating Partnership L.P., a Delaware limited partnership; references to our “Former Manager” refer to Thetis Asset Management LLC, a Delaware limited liability company; references to “RCM GA” or our “New Manager” refer to RCM GA LLC; references to our “Servicer” or “Newrez” refer to Newrez LLC, a Delaware limited liability company and an affiliate of RCM GA; references to “Rithm” refer to Rithm Capital Corp., a Delaware corporation and the parent entity of RCM GA; and references to “Gregory” or our “Former Servicer” refer to Gregory Funding LLC, an Oregon limited liability company.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and related notes included in Item 8. Financial statements and supplementary data, as well as other cautionary statements and risks described elsewhere in this Annual Report.

Overview

Rithm Property Trust Inc. (formerly Great Ajax Corp.) is a Maryland corporation that is organized and operated in a manner intended to allow us to qualify as a REIT. Historically, we acquired RPLs and NPLs either directly or in security form through joint ventures with institutional accredited investors. As discussed below, under RCM GA’s management, we have started to shift our strategic direction towards investments in the commercial real estate sector, and we have begun to invest in CMBS. Our mortgage loans and real properties are serviced by Newrez, a Rithm affiliate.

On June 11, 2024, we completed our previously announced Strategic Transaction with Rithm. The Strategic Transaction included (i) the entry into the Securities Purchase Agreement, which provided for, among other things, upon the approval of the Company’s stockholders on May 20, 2024, the sale of $14.0 million of the Company’s Common Stock to Rithm at a price of $4.87 per share (which represents the trailing five-day average closing price of the Company’s Common Stock on NYSE) as of the date of the Securities Purchase Agreement, and (ii) upon the approval of our stockholders on May 20, 2024, the entry into the Management Agreement with RCM GA, under which RCM GA became our new external manager. In connection with the Strategic Transaction, we terminated our existing management contract with the Former Manager in exchange for approximately 3.2 million shares of our Common Stock and $0.06 million in cash. For a full description of the components of the Strategic Transaction, see our Definitive Proxy Statement filed with the SEC on April 10, 2024. In addition, in connection with the Strategic Transaction, we changed our principal place of business and corporate headquarters to 799 Broadway, 8th Floor, New York, NY 10003. On December 2, 2024, we rebranded and changed our name to Rithm Property Trust Inc. from Great Ajax Corp.

The Company conducts substantially all of its business through our Operating Partnership and its subsidiaries. The Company, through a wholly-owned subsidiary, Great Ajax Operating LLC, is the sole general partner of the Operating Partnership. GA-TRS is a wholly-owned subsidiary of the Operating Partnership that owns an equity interest in the Former Manager and previously owned an equity interest in the Former Servicer. GAJX is a wholly-owned subsidiary of the Operating Partnership formed to own, maintain, improve and sell REO properties acquired by the Company. The Company elected to treat GA-TRS and GAJX as TRSs under the Internal Revenue 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. 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 REO properties acquired upon the foreclosure or other settlement of its owned NPLs.

Our Operating Partnership, through interests in certain entities as of December 31, 2024, owns 99.9% of Great Ajax II REIT Inc., which owns Great Ajax II Depositor LLC, which then acts as the depositor of mortgage loans into securitization trusts and holds subordinated securities issued by such trusts. Similarly, as of December 31, 2024, the Operating Partnership wholly-owned Great Ajax III Depositor LLC, which was formed to act as the depositor for a single joint venture with our partners. We have securitized mortgage loans through these securitization trusts and retained subordinated securities from the secured borrowings. These trusts are considered to be variable interest entities (“VIEs”), and we have determined that we are the primary beneficiary of the VIEs.

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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 Internal Revenue 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. Internal Revenue 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.

Under RCM GA’s management, we shifted our strategic direction towards investments in the commercial real estate sector, and we have begun to invest in CMBS. Although we will evaluate all potentially accretive opportunities, our new investment strategy is focused on originating and/or acquiring loans and securities collateralized by various commercial real estate assets and investing in certain target assets, including senior loans, subordinated debt, mezzanine loans secured by pledges of equity interests in entities that own commercial real estate or other forms of subordinated debt in connection with commercial real estate, preferred equity or debt instruments secured by mortgages on commercial real estate, SBC Loans, as well as commercial mortgage servicing rights, commercial real estate properties and operating businesses in the commercial real estate sector. We do not anticipate investing further in residential mortgage loans, RPLs or NPLs, and we have begun to sell our residential mortgage loans and RMBS. Given the change in focus of our business, we intend to, over time, reposition much of our existing portfolio. We believe commercial real estate offers an attractive investment opportunity given market dynamics that are creating significant refinancing challenges and funding gaps.

Through our New Manager, we have access to Rithm’s extensive expertise and network, creating opportunities to source, underwrite, and structure credit investments in the commercial real estate sector.

Our Portfolio

The following table outlines the carrying value of our portfolio of mortgage loan assets, investments in securities and REO as of December 31, 2024 and 2023 ($ in millions):

We closely monitor the status of our mortgage loans held-for-investment and held-for-sale, as well as the mortgage loans underlying our RMBS and, through our Servicer, work with our borrowers to improve their payment records.

Market Trends and Outlook

Summary

The U.S. economy expanded at a solid rate during the fourth quarter of 2024, as real gross domestic product (“GDP”) rose an annualized 2.3%, which put real growth at 2.5% in 2024 versus 3.2% in 2023. Longer-term Treasury yields rose during both the fourth quarter and in the full year2024, with most of the increase due to higher real yields from Treasury Inflation Protected Securities (“TIPS”). Interest rates remained elevated in 2024, despite the Federal Reserve initiating its first federal funds target rate cut in more than four years in September 2024, followed by additional cuts in the fourth quarter of 2024. The unemployment rate was 4.1% in December 2024, identical to the unemployment rate report for September 2024, but higher than the rate reported for year-end 2023. In addition to the steady unemployment rate, other signs of a solid labor market during the fourth quarter included a strengthening in nonfarm payroll growth, continued low levels of claims for unemployment benefits, and a rising ratio of job openings to unemployed job seekers.

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Inflation

Although inflation slowed during 2024, progress towards lower inflation stalled in the second half of the year. The 12-month increase in the overall Consumer Price Index (“CPI”) was 2.9% in December 2024, versus 2.4% in September 2024 and 3.4% in December 2023, while core CPI price inflation (i.e., excluding food and energy prices) for December 2024, stood at 3.2%, only slightly lower than the 3.3% core CPI inflation rate reported for September 2024, but down from 3.9% for December 2023.

Treasury Yields

The nominal 10-year Treasury yield rose to 4.57% at the end of 2024 from 3.78% in September 2024 and 3.88% at the end of 2023. Most of this increase was due to higher real yields from TIPS, which rose to 2.23% in December 2024, from 1.59% in September 2024, and 1.71% at the end of 2023. The 10-year breakeven inflation rate was 2.34% in December 2024, versus 2.19% in September 2024, and 2.17% at the end of 2023.

Labor Markets

Average payroll growth picked up to 170,000 jobs per month in the fourth quarter versus an average of 159,000 jobs per month in the third quarter. For 2024, payroll rose an average of 186,000 per month versus 251,000 per month in 2023. The unemployment rate was unchanged at 4.1% in December 2024 compared to September 2024, however, 0.3% higher from December 2023. Judged by the ratio of job openings to unemployed job seekers, which rose to 1.18 in December 2024, from 1.06 in September 2024, the labor market tightened during the fourth quarter; however, improved overall over the course of 2024 when compared to December 2023 ratio of 1.45. Also, year-over-year growth in average hourly earnings was 3.9% in December 2024, the same wage rate as for September 2024, but slower than the 4.3% wage growth reported for December 2023.

Housing Market

Home sales remained at low levels in 2024, as total home sales (new and existing) averaged 4.75 million, which is relatively unchanged from the average of 4.77 million for 2023. However, home price growth picked up with the 12-month increase in the median resale price of an existing home at 6.0% in December 2024 compared to 4.1% in December 2023.

The economic conditions discussed above influence our investment strategy and results. The Federal Open Market Committee (“FOMC”) lowered the federal funds rate target range by 25 basis points on December 18, 2024, but projected fewer 2025 rate cuts compared to its projections made in September 2024. Additionally, Federal Reserve Chairman Jerome Powell signaled that the recalibration phase of lowering the policy rate is over and the FOMC has entered a phase where further reductions in the policy rate will require further progress in lowering inflation toward the 2% target. The 30-year fixed mortgage rate rose to 6.85% at the end of the fourth quarter from 6.08% at the end of the third quarter of 2024, up from 6.6% at the end of 2023.

Commercial Real Estate

The commercial real estate market in 2024 faced headwinds due to persistent inflation and elevated interest rates, which suppressed transaction volumes, kept financing costs high, and left capitalization rates relatively flat. Despite the overall challenges facing CRE, multifamily and industrial assets continued to perform well, driven by resilient demand and limited new supply, though performance varied by market. The office sector continues to struggle with high vacancy rates and tenant right sizing; however certain Class A office markets experienced a resurgence in demand, offering signs that the office market may be beginning to reverse. Looking ahead to 2025, stabilization in inflation and potential interest rate cuts could improve liquidity and lead to cap rate contraction, though investors remain cautious about underwriting assumptions. Overall, multifamily and industrial sectors are expected to maintain strong fundamentals, while distressed office assets may present selective opportunistic investments.

Factors That May Affect Our Operating Results

Acquisitions — In light certain financial challenges, including the significant losses we have incurred to date and limited sources of financing, we do not expect to be able to acquire significant new commercial mortgage assets in the near future.

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Financing — We previously securitized 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 sales through a real estate mortgage investment conduit (“REMIC”). We completed the securitization transactions pursuant to Rule 144A under the Securities Act, in which we issued notes primarily secured by seasoned, performing and non-performing mortgage loans primarily secured by first liens on one-to-four family residential properties. Currently there is substantial uncertainty in the securitization markets which has limited our access to financing.

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

Expenses — Our expenses primarily consist of the fees and expenses payable by us under the Management Agreement and the Servicing Agreements. Additionally, our Former Manager incurred and our New Manager incurs direct, out-of-pocket costs and expenses related to managing our business, which are contractually reimbursable by us. Additionally, pursuant to the Management Agreement, we also pay all of the New Manager’s costs and expenses and reimburse the New Manager (to the extent incurred by the New Manager) on a monthly basis for the costs and expenses of providing services under the Management Agreement, including reimbursing the New Manager or its affiliates, as applicable, for our allocable share of the compensation (whether paid in cash, stock or other forms), including annual base salary, bonus, any related withholding taxes and employee benefits, paid to (i) the New Manager’s personnel serving as our chief financial officer based on the percentage of his or her time spent managing the Company’s affairs and (ii) other corporate finance, tax, accounting, middle office, internal audit, legal, risk management, operations, compliance and other non-investment personnel of the New Manager and its affiliates who spend all or a portion of their time managing our affairs. Loan transaction expense is the cost of performing due diligence on pools of mortgage loans. Professional fees are primarily for legal, accounting and tax services. Real estate operating expense consists of the ownership and operating costs of our REO properties, and includes any charges for impairments to the carrying value of these assets, which may be significant. Interest expense, which is subtracted from our Interest income to arrive at Net interest income, consists of the costs to borrow money.

Changes in Market Interest Rates — The FOMC recently cut the federal funds rate by 50 basis points which has had a favorable impact on the cost of funds of our repurchase lines of credit. Increases in interest rates, in general, may over time cause: (1) the value of our mortgage loan and MBS portfolio to further decline; (2) coupons on our ARM and Hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to higher interest rates; (3) impact adversely our ability to securitize, re-securitize or sell our assets on attractive terms; (4) reduce the ability or desire of borrowers to refinance their loans; (5) mortgage related assets may become more illiquid during periods of interest rate volatility; (6) difficulties refinancing our securitizations and increases in the costs of our repurchase facility financings; (7) increase our financing costs as we seek to renew or replace borrowing facilities; and (8) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to increase. Conversely, decreases in interest rates, in general, may over time cause: (1) prepayments on our mortgage loan and MBS portfolio to increase, thereby accelerating the accretion of our purchase discounts; (2) the value of our mortgage loan and MBS portfolio to increase; (3) coupons on our ARM and Hybrid ARM mortgage loans and MBS to reset, although on a delayed basis, to lower interest rates; (4) the interest expense associated with our borrowings to decrease; and (5) to the extent we enter into interest rate swap agreements as part of our hedging strategy, the value of these agreements to decrease.

Critical Accounting Policies and Use of Estimates

The Company’s significant accounting policies are described detail in Note 2 — Basis of Presentation and Significant Accounting Policies to the consolidated financial statements included in this Annual Report. As disclosed in the Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the presentation of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

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The mortgage and financial sectors operate in a challenging and uncertain economic environment. Financial and real estate companies continue to be affected by, among other things, market volatility, heightened interest rates and inflationary pressures. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of December 31, 2024; however, uncertainty over the current macroeconomic conditions makes any estimates and assumptions as of December 31, 2024, inherently less certain than they would be absent the current economic environment. Actual results may materially differ from those estimates. Market volatility and inflationary pressures and their impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions.

Allowance for Credit Losses

We adopted ASU 2016-13, Financial Instruments - Credit Losses, otherwise known as CECL using the prospective transition approach for PCD assets on January 1, 2020. Under CECL, we determine the allowance for credit losses by comparing the contractual cash flows for our mortgage loans held-for-investment, investments in securities, held-to-maturity (“HTM”) and investments in beneficial interests by comparing the contractual cash flows to the projected cash flows as determined by management.

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. We may adjust our loan pools as the underlying risk factors change over time. We have aggregated our mortgage loan portfolio into loan pools based on similar risk factors. Excluded from the aggregate pools are loans that pay in full subsequent to the acquisition closing date but prior to pooling. Securities HTM and beneficial interests are assessed at the individual security level.

To the extent actual loan performance differs from management’s expectations, our allowance for credit losses could increase or decrease. While no single factor determines the level of our allowance for credit losses, expected borrower performance and underlying property value are two key drivers that factor into our scenario based cash flow projections. Our historical data has demonstrated the number of payments made by a borrower, either in succession or as an aggregate, to be a significant factor in predicting repayment. Additionally, we include an estimate of underlying property value. Accordingly, if our delinquency estimate is overstated and our valuation estimates are overstated, there could be a negative impact on our allowance for credit losses.

Mortgage Loans

Our loans are classified as (i) held-for-investment at amortized cost net of the allowance for credit losses or (ii) held-for-sale at lower of cost or market. When we have the intent and ability to hold loans for the foreseeable future or to maturity/payoff, such loans are classified as held-for-investment. When we have the intent to sell loans, such loans are classified as held-for-sale.

Mortgage Loans Held-for-Investment

Investments in mortgage loans held-for-investment are carried at amortized cost net of any allowance for credit losses. Upon acquisition, the mortgage loans are recorded as three separate elements: (i) the amount of purchase discount which we expect to recover through eventual repayment of the investment, (ii) an allowance for future expected credit loss and (iii) the par value of the investment. The purchase discount and interest income expected to be recovered through eventual repayment of the loans gives rise to an accretable yield. The accretable yield is recognized as interest income on a prospective level yield basis over the life of the loans based on the expected cash flows to be collected. Periodically, the mortgage loans are assessed for any allowance for credit loss that may be required by comparing the expected contractual cash flows to the projected cash flows. For purposes of determining the need for an allowance for credit losses, we aggregate our mortgage loans in pools based on like characteristics and legal entity ownership. If the net present value of the contractual cash flows for any pool exceeds the net present value of the projected cash flows for the same pool, an allowance for credit losses will be recorded. Conversely, if the net present value of the contractual cash flows for any pool is less than the net present value of the projected cash flows for the same pool, no allowance will be recorded and any existing allowance will be reversed.

When the timing and amount of cash flows expected to be collected are reasonably estimable, we use these expected cash flows to apply the effective interest method of income recognition. Any allowance for credit losses is determined under CECL as discussed in “Allowance for Credit Losses” above.

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Mortgage Loans Held-for-Sale

Mortgage loans held-for-sale are carried at the lower of cost or fair value. We account for any excess of cost over fair value as a valuation allowance and include changes in the valuation allowance in earnings in the period in which the change occurs. Interest income is recognized on a cash basis because the loans are in varying stages of delinquency. Purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred discounts or premiums are an adjustment to the basis of the loan and are included in the quarterly determination of the lower of cost or fair value adjustments and/or the gain or loss recognized at the time of sale.

CMBS Available-for-Sale, at Fair Value

The Company elected the fair value option for its investments in CMBS. Any changes in fair value are recorded through earnings in the period they occur. Income on CMBS is recognized using the effective interest method. The CMBS are marked-to-market using prices received from a third party pricing vendor subject to review by the Company’s Manager.

RMBS Available-for-Sale, at Fair Value

Investments in RMBS not classified as HTM are classified as available-for-sale (“AFS”). Accordingly, each security is marked-to-market on each balance sheet date and any gain or loss recorded to other comprehensive loss. Income is accrued on RMBS using the effective interest method. Any periodic loss that is determined to be other than temporary would be recorded in earnings in the period the loss occurs. The RMBS are marked-to-market using prices received from a third party pricing vendor subject to review by the Company’s Manager.

Investments in Securities, Held-to-Maturity

We designate the 5.01% of RMBS held to satisfy the European risk retention provisions for certain secured borrowing transactions as HTM because the securities cannot be sold until all classes of the secured borrowing are redeemed. RMBS HTM are carried at amortized cost, net of any allowance for credit losses, and interest income is accrued using the effective interest method. Periodically, each RMBS HTM is assessed for any credit loss that may be required by comparing the expected contractual cash flows to the projected cash flows. If the net present value of the contractual cash flows exceeds the net present value of the projected cash flows, an allowance for credit losses will be recorded. Conversely, if the net present value of the contractual cash flows is less than the net present value of projected cash flows, no allowance will be recorded and any existing allowance will be reversed.

Transfers of securities from AFS to HTM are non-cash transactions and are recorded at fair value and on the date of transfer. Any unrealized gains or losses continue to be reported in accumulated other comprehensive loss and amortized into interest income on a level-yield basis over the remaining life of the securities. This amortization offsets the effect on interest income of the amortization of the discount resulting from the transfer recorded at fair value.

Because these securities are designated as HTM, we do not mark these securities to market through earnings or through other comprehensive loss. Any allowance for credit losses is determined under CECL as discussed in “Allowance for Credit Losses” above. Transfers of securities from AFS to HTM are non-cash transactions and are recorded at fair value and on the date of transfer. Any unrealized gains or losses continue to be reported in accumulated other comprehensive loss and amortized into interest income on a level-yield basis over the remaining life of the securities. This amortization offsets the effect on interest income of the amortization of the discount resulting from the transfer recorded at fair value.

Investments in Beneficial Interests, Net

Investments in beneficial interests are carried at amortized cost net of any allowance for credit losses. Upon acquisition, the investments are recorded as three separate elements: (i) the amount of purchase discount which we expect to recover through eventual repayment of the investment, (ii) an allowance for future expected credit loss and (iii) the par value of the investment. The purchase discount expected to be recovered through eventual repayment of the investment gives rise to an accretable yield. The accretable yield is recognized as interest income on a prospective level yield basis over the life of the investment based on the expected cash flows to be collected. Periodically, each beneficial interest is assessed for any credit loss that may be required by comparing the expected contractual cash flows to the projected cash flows. If the net present value of the contractual cash flows exceeds the net present value of the projected cash flows, an allowance for credit losses will be recorded. Conversely, if the net present value of the contractual cash flows is less than the net present value of projected cash flows, no allowance will be recorded and any existing allowance will be reversed.

Any allowance for credit losses is determined under CECL as discussed in “Allowance for Credit Losses” above.

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Fair Value

Fair Value of financial instruments — 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 less active or not active for identical or similar assets or liabilities; or other inputs that are observable, such as interest rates, yield curves, volatilities, prepayment rates, loss severities, credit risks and default rates 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.

Consolidation

The determination of whether or not to consolidate a VIE under GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interests. To make these judgments, management has conducted an analysis, on a case-by-case basis, of whether we are the primary beneficiary, the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE, and are therefore required to consolidate the entity. Management continually reconsiders whether we should consolidate a variable interest entity. Upon the occurrence of certain events, management will reconsider its conclusion regarding the status of an entity as a variable interest entity.

Recent Accounting Pronouncements

See Note 2 — Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included in this Annual Report.

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Results of Operations

Our net loss is primarily generated from net interest income offset by losses on mark-to-market adjustments on mortgage loans held for sale, losses on the sale of our mortgage loans and securities, as well as servicing fee expense, management fee expense and general and administrative expenses. In 2023, our net loss was also impacted by a loss on joint venture refinancing on beneficial interests, which did not reoccur in 2024. Changes in various factors such as market interest rates, prepayment speeds, estimated future cash flows, and credit quality could affect the amount of net interest income for a given period. Changes in market interest rates directly impact the borrowing cost on our repurchase lines of credit.

Our operating results may also be affected by credit losses in excess of initial estimates or unanticipated credit events experienced by borrowers whose mortgage loans underlie our investments in mortgage loans, beneficial interests, CMBS and RMBS.

During the year ended December 31, 2024, we executed the Strategic Transaction with Rithm. As a result, we incurred incremental costs related to the termination of the management agreement with Former Manager.

For the discussion of results of operations for the year ended December 31, 2023, compared to year ended December 31, 2022, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2023, dated February 28, 2024, and filed with the SEC.

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Net Interest Income before the Allowance for Credit Losses

Year Ended December 31, 2024 versus Year Ended December 31, 2023

Net interest income before the allowance for credit losses decreased $3.7 million versus the prior year period, primarily as a result of lower average balances of our investments in mortgage loans and RMBS, partially offset by acquisitions of CMBS. During the year ended December 31, 2024, we sold mortgage loans with a total UPB of $440.4 million and RMBS with a total UPB of $62.5 million, and we acquired CMBS with $255.9 million in UPB as of the year end, as a result of our strategic transition into the commercial real estate sector. Comparatively, during the year ended December 31, 2023, we sold no mortgage loans and sold or redeemed approximately $69.4 million in RMBS.

Allowance for Credit Losses

Year Ended December 31, 2024 versus Year Ended December 31, 2023

Our allowance for credit losses decreased $3.1 million versus the prior year period, primarily as a result of lower impairments of our investments in beneficial interests in the current year period, partially offset by the reversal of the allowance for credit losses on our loans held-for-sale in the prior year period. Loans held-for-sale are not subject to accounting under CECL and the allowance was reversed and reclassified to the mark-to-market loss recorded during the same period.

The interest income detail and interest expense for the years ended December 31, 2024 and 2023, are presented in the table below ($ in thousands):

Table 1: Interest Income Detail & Interest Expense

The average carrying balance of our mortgage loan portfolio decreased for the year ended December 31, 2024, versus 2023, primarily due to loan sales as we reposition our balance sheet into investments in CMBS. Additionally, the average carrying balances of our RMBS and beneficial interests decreased for the year ended December 31, 2024, as compared to 2023 balances, due to paydowns, sales and redemptions, partially offset by investments in CMBS.

Our interest expense decreased in 2024 as compared to 2023, as a result of the redemption of our convertible senior notes due in April 2024 (the “2024 Notes”). The average carrying balance of borrowings under repurchase transactions and secured borrowings also decreased in the year ended December 31, 2024, as compared to 2023, primarily due to paydowns and asset sales.

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The average carrying balances for our portfolio and debt are included in the table below ($ in thousands):

Table 2: Average Balances

Loss from Investments in Affiliates

Year Ended December 31, 2024 versus Year Ended December 31, 2023

Our loss from investment in affiliates in 2024, as compared to 2023, remained relatively flat. During the year ended December 31, 2024, we paid a termination fee and the final management fee to our Former Manager. We expect to liquidate our remaining investment in our Former Manager during the first quarter of 2025. Also, during the year ended December 31, 2024, we liquidated our investments in two affiliates and reclassified our investment in Gaea to other investments, at fair value on our consolidated balance sheets. We no longer have substantial influence over Gaea and as a result are no longer able to account for our investment using the equity method of accounting.

Loss on Joint Venture Refinancing on Beneficial Interests

During the year ended December 31, 2023, we recorded an $11.0 million loss on the redemption of several of our joint ventures. While the underlying loans from the joint ventures were re-securitized into new joint ventures where we continued to own the same proportionate interest of each class of securities, the transactions are treated as the redemption of the notes and certificates from the original trust. The redemptions proceeds were not sufficient to recover our carrying value of the beneficial interests. As a result, we recorded a loss on the redemptions. Comparatively, two joint ventures were redeemed and not re-securitized during the year ended December 31, 2024. The loss associated with the 2024 redemptions was recorded in the year ended December 31, 2023 as an impairment of the two beneficial interests being redeemed as the net proceeds was known prior to the filing of our Form 10-K.

Other Loss/Income

Year Ended December 31, 2024 versus Year Ended December 31, 2023

Our other loss increased for the year ended December 31, 2024 versus the prior year, primarily due to losses on the sale of our mortgage loans held-for-sale, partially offset by mark-to-market gains on our CMBS and lower losses on our sale of securities. The losses were incurred as we repositioned our balance sheet to investments in CMBS. Comparatively, we did not sell any mortgage loans in 2023. A breakdown of other loss/income is provided in the table below ($ in thousands):

Table 3: Other (Loss)/Income

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Expenses

Year Ended December 31, 2024 versus Year Ended December 31, 2023

Total expenses increased for the year ended December 31, 2024, as compared to the year ended December 31, 2023, primarily as a result of the management termination fee paid to the Former Manager in shares of our Common Stock, the requirement to pay management fee to both our New Manager and the Former Manger from June 10, 2024, through August 26, 2024, and borrowing costs related to the Strategic Transaction. These increases were partially offset by lower servicing fees as the average balance of our mortgage loan portfolio declined year over year. Additionally, we recorded fair value gains on the 2024 Warrants that were classified as liabilities prior to the closing date of the Strategic Transaction and reclassified to equity on June 11, 2024.

A breakdown of other expense is provided in the table below ($ in thousands):

Table 4: Other Expense

Mortgage Loan Portfolio

Our loan portfolio activity for the years ended December 31, 2024 and 2023, is presented below ($ in thousands):

Table 5: Loan Portfolio Activity

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Table 6: Loan Portfolio Composition

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

(1)At December 31, 2024 and 2023, our loan portfolio consists of fixed rate (62.6% of UPB), ARM (7.3% of UPB) and Hybrid ARM (30.1% of UPB); and fixed rate (60.0% of UPB), ARM (6.4% of UPB) and Hybrid ARM (33.6% of UPB), respectively.

(2)Represents 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.

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

Table 7: Portfolio Characteristics

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

Portfolio at December 31, 2024:

(1) Includes 249 loans that were classified from mortgage loans held-for investment, net to mortgage loans held-for-sale, net with a total UPB of $38.7 million and a carrying value of $27.8 million.

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Portfolio at December 31, 2023:

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

Table 8: Loans by State

The following table identifies our mortgage loans for our top 10 states by number of loans, loan value, collateral value and percentages thereof at December 31, 2024 and 2023 ($ in thousands):

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Liquidity and Capital Resources

Source and Uses of Cash

During the year ended December 31, 2024, our primary sources of cash have consisted of proceeds from the sale of residential mortgage loans and securities, as well as paydowns and interest income from our investment portfolio. Historically, our primary sources of cash have also included proceeds from our securities offerings, our secured borrowings, repurchase agreements, principal and interest payments on our loan portfolio, principal paydowns on securities, and sales of properties held-for-sale. Depending on market conditions, we expect that our primary financing sources will continue to include secured borrowings, repurchase agreements, and securities offerings in addition to transaction or asset specific funding arrangements and credit facilities (including term loans and revolving facilities).

We also may have difficulty accessing the capital markets on favorable terms or at all. Additionally, market events, including inflation and the related Federal Reserve bank actions, may still adversely impact our future operating cash flows due to the inability of some of our borrowers to make scheduled payments on time or at all, and through increased interest rates on secured borrowings and repurchase lines of credit. From time to time, we may invest with third parties and acquire interests in loans and other real estate assets through investments in joint ventures using special purpose entities that can result in investments AFS, investments HTM and investments in beneficial interests, which are included on our consolidated balance sheets.

As of December 31, 2024 and 2023, substantially all of our invested capital was in residential mortgage loans, CMBS, RMBS and beneficial interests. We also held approximately $64.3 million of cash and cash equivalents, an increase of $11.4 million from our balance of $52.8 million at December 31, 2023. Our average cash balance during the year was $68.5 million, an increase of $17.9 million from our average cash balance of $50.6 million during the year ended December 31, 2023.

Operating, Investing and Financing Cash Flows

Our operating cash inflows for the year ended December 31, 2024, were $0.3 million. Comparatively, our operating cash outflows for the year ended December 31, 2023, were $46.5 million. Our primary operating cash inflow is cash interest payments on our mortgage loans of $28.8 million and $43.5 million for the years ended December 31, 2024 and 2023, respectively. Non-cash interest income accretion on our mortgage loans was $3.0 million and $8.1 million for the years ended December 31, 2024 and 2023, respectively. Non-cash interest income on beneficial interests was $5.2 million and $8.0 million during the years ended December 31, 2024 and 2023, respectively. Interest income on debt securities was $10.5 million and $9.5 million during the years ended December 31, 2024 and 2023, respectively.

For the year ended December 31, 2024, our investing cash inflows of $297.3 million were driven by the net proceeds from the sales of our mortgage loans of $384.1 million, net proceeds on sales of our RMBS and CMBS of $65.0 million, proceeds from refinancing and sale of debt securities AFS and beneficial interests of $44.5 million, principal and interest collections on our debt securities HTM of $12.3 million, and principal payments and payoffs of our mortgage loan portfolio of $52.5 million, partially offset by purchases of CMBS of $255.3 million. For the year ended December 31, 2023, our investing cash inflows of $172.8 million were driven by payoffs of our mortgage loan portfolio of $85.7 million, proceeds from refinancing and sale of debt securities AFS and beneficial interests of $79.5 million, sales of RMBS of $61.7 million, and principal and interest collections on our securities HTM of $29.8 million, partially offset by the purchase of debt securities and beneficial interests of $74.3 million and acquisitions of mortgage loans of $14.4 million.

Our financing cash flows were driven primarily by funding used to acquire mortgage assets, as well as the debt service on our 2024 Notes and our notes payable, net (“2027 Notes”). We fund our mortgage loan pools primarily through secured borrowings and repurchase agreements and we fund our debt securities primarily through repurchase agreements. For the year ended December 31, 2024, we had net financing cash outflows of $286.1 million, primarily driven by the redemption of our 2024 Notes of $103.5 million, pay downs of our secured borrowings of $154.7 million and net repayments on our repurchase transactions of $19.2 million. For the year ended December 31, 2023, we had net financing cash outflows of $121.4 million primarily driven by net repayments of $70.1 million on repurchase transactions, and pay downs of $57.5 million on secured borrowings. For the years ended December 31, 2024 and 2023, we paid $12.3 million and $20.9 million, respectively, in combined dividends and distributions.

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Financing Activities — Equity Offerings

On February 28, 2020, our Board of Directors approved a stock repurchase program of up to $25.0 million of our Common Stock. The amount and timing of any repurchases depends on a number of factors, including, but not limited to, the price and availability of the Common Stock, the trading volume and general circumstances and market conditions. To date, we have repurchased 525,039 shares of Common Stock for an aggregate purchase price of $5.1 million leaving $19.1 million remaining under the authorization. No shares were repurchased during the years ended December 31, 2024 and 2023.

As of December 31, 2024, we held 1,664,365 shares of treasury stock consisting of 777,414 shares received through distributions of our shares of Common Stock previously held by our Former Manager, 361,912 shares received through our Former Servicer and 525,039 shares acquired through open market purchases. As of December 31, 2024, we held 1,035,785 shares of treasury stock consisting of 148,834 shares received through distributions of our shares of Common Stock previously held by our Former Manager, 361,912 shares received through our Servicer and 525,039 shares acquired through open market purchases.

On June 11, 2024, we entered into a termination and release agreement with the Former Manager and issued approximately 3.2 million shares of Common Stock to our Former Manager at a share price of $4.87 per share. In connection with the Strategic Transaction, we issued 2.9 million shares of Common Stock to Rithm at a purchase price of $4.87 per share, for aggregate proceeds of approximately $14.0 million. During the year ended December 31, 2024, we exchanged the remaining 424,949 shares of our outstanding 7.25% Series A Fixed-to-Floating Rate Preferred Stock and 1,135,590 shares of our outstanding 5.00% Series B Fixed-to-Floating Rate Preferred Stock and the associated warrants for a total of 12,046,218 newly issued shares of our Common Stock. No preferred stock or warrants were exchanged during year ended December 31, 2023.

During year ended December 31, 2024, we did not sell any shares of Common Stock under our At the Market program. Comparatively, during the year ended December 31, 2023, we sold 2,621,742 shares of Common Stock for proceeds, net of issuance costs of $17.2 million. Under our At the Market program, through our agents, we may sell shares of Common Stock with an aggregate offering price of up to $100.0 million. In accordance with the terms of the agreements, we may offer and sell shares of our Common Stock at any time and from time to time through the sales agents. Sales of the shares, if any, will be made by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of the sale. On September 6, 2024, the Company filed a registration statement with the SEC on Form S-3 to increase the maximum aggregate offering price to up to $400 million of Common Stock, preferred stock, debt securities, warrants and units available to be sold in public offerings or pursuant to the “at the market” program, as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. The shelf registration statement was declared effective by the SEC on November 13, 2024.

Financing Activities - Debt

We finance our investment activities using secured borrowings, borrowings under repurchase transactions and corporate debt notes, which in the year ended December 31, 2024, included our 2027 Notes and 2024 Notes. The 2024 Notes were redeemed in full in 2024.

We are not required by our investment guidelines to maintain any specific debt-to-equity ratio, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets. We do, however, have debt covenants related to our various borrowing arrangements that have minimum liquidity and tangible net worth requirements, as well as maximum leverage ratio requirements. Generally, we are required to maintain minimum levels of Liquidity (as defined in the indenture governing the 2027 Notes) (in cash and cash equivalents) and tangible net worth of $30.0 million and $240.0 million, respectively. Similarly, our Consolidated Recourse Indebtedness to our Stockholders’ Equity ratio (as defined in the indenture governing the 2027 Notes) cannot exceed 4.0 to 1.0, excluding our secured borrowings.

See Note 8 — Debt to the consolidated financial statements included in this report, for additional details on our financing arrangements.

Under the indenture governing the 2027 Notes, a subsidiary guarantor’s guarantee will terminate upon: (i) the sale, exchange, disposition or other transfer (including by way of consolidation) of the subsidiary guarantor or the sale or disposition of all or substantially all the assets of the subsidiary guarantor otherwise permitted by the indenture, (ii) satisfaction of the requirements for legal or covenant defeasance or discharge of the 2027 Notes, or (iii) no default or event of default has occurred and is continuing under the indenture.

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The following table presents summarized financial information for the guarantors and our Operating Partnership, on a combined basis after eliminating (i) intercompany transactions and balances among the guarantor entities and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor ($ in thousands):

Table 9: Summary of Issuer and Guarantor Financial Statements

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.

We generally need to distribute at least 90% of our taxable income each year (subject to certain adjustments) to our shareholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities. Dividends declared for the year ended December 31, 2024, were $12.3 million.

We will continue to monitor market conditions and the potential impact the ongoing volatility and uncertainty may have on our business. Our Board of Directors will continue to evaluate the payment of dividends as market conditions evolve, and no definitive determination has been made at this time. While the terms and timing of the approval and declaration of cash dividends, if any, on shares of our capital stock is at the sole discretion of our Board of Directors and we cannot predict how market conditions may evolve, we intend to distribute to our stockholders an amount equal to at least 90% of our REIT taxable income determined before applying the deduction for dividends paid and by excluding net capital gains consistent with our intention to maintain our qualification as a REIT under the Internal Revenue Code.

Off-Balance Sheet Arrangements

Other than our investments in RMBS and beneficial interests issued by joint ventures, our investment in Gaea Real Estate Corp and our investment in our Former Manager, 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. 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.

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Table 10: Investments in Joint Ventures

We form joint ventures with third party institutional accredited investors to purchase mortgage loans and other mortgage related assets. The RMBS and beneficial interests we carry on our consolidated balance sheets are primarily 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 RMBS retained from our joint ventures is presented below ($ in thousands):

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(1)Ajax Mortgage Loan Trust 2021-E made an election to be taxed as a REMIC however the residual class was placed with an unrelated third party.

(2)Weighted average of Class A notes.

(3)Weighted average ownership of Class A notes.

(4)Total principal includes 5.01% EU risk retention component classified as investments in securities HTM on our consolidated balance sheets.

A summary of our investments in beneficial interests issued by joint ventures is presented below ($ in thousands):

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(1)Ajax Mortgage Loan Trust 2021-E was formed on July 19, 2021 and an election to be taxed as a REMIC however the residual class was placed with an unrelated third party.

(2)The trust certificate has no stated principal balance and is tied to the unpaid balance of the underlying mortgage loans.

(3)Includes the addition of Class B notes classified as beneficial interests on our consolidated balance sheets. Total original outstanding principal and principal balance retained of the Class B notes is $25.9 million and $6.0 million, respectively.

(4)Includes the addition of Class B notes classified as beneficial interests on our consolidated balance sheets. Total original outstanding principal and principal balance retained of the Class B notes is $22.1 million and $3.8 million, respectively.

Contractual Obligations

For 2024, our contractual obligations include secured borrowings, borrowings under repurchase transactions and our 2027 Notes. For additional information on our borrowing obligations, please see “Note 8 — Debt” in our consolidated financial statements included in this Annual Report.