Ellington adds to its NPL, servicing with Great Ajax acquisition

Ellington Financial's proposed acquisition of fellow real estate investment trust Great Ajax creates synergies for its nonperforming and reperforming mortgage loan portfolios as well as in servicing.

"We are extremely excited about the opportunity to add a significant portfolio of strategic assets, including over $1 billion of highly creditworthy first-lien residential RPL and NPL investments at attractive prices, which complement our existing investment portfolio nicely and align with our expertise and existing management platform," Laurence Penn, Ellington's CEO, said in a press release. "We believe that the benefits of this acquisition also include greater operating efficiencies, a larger market capitalization, and a closer relationship with Gregory Funding, Great Ajax's highly respected affiliated mortgage servicer."

Most of the RPLs and NPLs were financed through term, non-mark-to-market, non-recourse securitizations, which reduces volatility.

In addition, Ellington plans to replace some of the lower-yielding assets it will acquire and replace them using "higher-yielding strategies."

The all-stock transaction is valued at $172.5 million, pricing Great Ajax's shares at $7.33 each. Ellington will issue 12.5 million new shares of stock. Each share of Great Ajax will become 0.5308 shares of Ellington after the deal closes.

This is the second transaction Ellington has signed in a little over a month. It previously agreed at the end of May to buy Arlington Asset Investment in a stock and cash deal valued at approximately $154 million.

Ellington is using the Arlington transaction to build its mortgage-servicing rights portfolio. Gregory, which does both residential and commercial servicing, is controlled by an affiliate of Great Ajax.

Excluding the deal with Arlington, Ellington shareholders will own 84% of the combination, with Great Ajax stockholders owning 16%. If the Arlington deal closes as expected, Great Ajax shareholders will control 14% of Ellington. 

Both transactions are positive for Ellington because they increase scale and market capitalization, said a Keefe, Bruyette & Woods report on the Great Ajax deal. KBW served as Ellington's financial advisor for this transaction.

"The increased scale should benefit operating efficiencies," Bose George, a KBW analyst, said in a research note. "In addition, the greater market capitalization should benefit the company's valuation, reflecting the fact that larger cap mortgage REITs are trading at premium price/book multiples relative to their smaller cap peers."

Penn will lead the combined company after both mergers, with co-Chief Investment Officers Michael Vranos and Mark Tecotzky, and Chief Financial Officer J.R. Herlihy staying in their current roles.

"We are pleased to combine our investment portfolios and create a company that we believe will be well positioned for growth and value creation," said Lawrence Mendelsohn, Great Ajax's chairman and CEO. "We look forward to working closely with the Ellington Financial team to complete the transaction and deliver value for our stockholders."

The merger price is significantly above where Great Ajax was trading recently. On June 30, before the deal was announced, it closed at $6.13 per share. When it was revealed prior to the stock market trading starting, Great Ajax opened at $6.79 and closed at $6.95.

The July 5 opening price was $6.87 per share. However, the 52-week high, reached last Aug. 2, was $11.21 per share.

Prior to Great Ajax, Mendelsohn was an executive at Wilshire Credit Corp., which he co-owned with Andrew Wiederhorn. The activities of both men at that company led to criminal convictions, with Mendelsohn pleading guilty to one count of filing a false tax return. He was sentenced to six months home confinement and ordered to pay restitution.

Besides KBW, Vinson & Elkins is Ellington's legal advisor.

Piper Sandler & Co. is the financial advisor for Great Ajax and Mayer Brown is legal advisor. The Great Ajax board appointed a special committee to discuss the transaction, with BTIG as its financial advisor and Sheppard Mullin LLP as legal advisor.

The participants aim to close this deal by the end of 2023.