On Thursday, B.Riley adjusted its outlook on Great Ajax Corp . (NYSE:AJX), lowering the shares price target to $6 from the previous $8, while still maintaining a Buy rating. The revision follows Great Ajax's proposed management agreement with Rithm Capital Corp. (NYSE:RITM) and subsequent updates to the firm's financial model.
The analyst from B.Riley noted the market's reaction to the deal has been excessive with the company's shares trading at half the estimated book value post-deal. The new price target of $6 is based on a recalculated book value of approximately $7 per share, taking into account several factors such as discounted loan sales, preferred equity exchanges, and share issuances to Rithm Capital.
The firm anticipates an immediate earnings increase of about $0.38 per share on a GAAP basis, resulting from the preferred equity exchange, debt repayment, sale of low yield loans, and cancellation of put option liabilities.
B.Riley views the strategic shift under Rithm Capital's guidance positively, as Great Ajax transitions to capitalize on emerging opportunities in commercial real estate with a new deleveraged capital structure.
The analyst expects Great Ajax to become Rithm Capital's commercial mortgage real estate investment trust (mREIT) and to benefit from an acquisition environment that is becoming increasingly attractive as the Federal Reserve is expected to cut short-term rates. However, investors are cautioned to anticipate limited earnings in the near term, although a net interest margin improvement is likely following the sale of lower-yielding assets.
The report also revised Great Ajax's FY24/25 earnings per share estimates from $0.11/$0.20 to $0.02/$0.45, reflecting the impact of loan sales and dilution from preferred exchanges and issuances to Rithm Capital. At the time of the report, Great Ajax was trading at 0.5 times the firm's $7 book value estimate, in contrast to the average of 0.76 times among the credit/hybrid group. The analyst concluded that the current valuation represents an opportunity for investors to enter at an attractive price.
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