The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
notes to those statements included in Item 1 of this Quarterly Report on Form
10-Q.
As permitted by SEC Final Rule Release No. 33-10890, Management’s Discussion and
Analysis, Selected Financial Data, and Supplementary Financial Information, this
section discusses our results of operations for the current quarter ended March
31, 2022 compared to the immediately preceding prior quarter ended December 31,
2021 as well as the corresponding quarter of the prior year ended March 31,
2021. In this report, we are changing the basis of comparison from the
corresponding quarter of the prior year to the immediately preceding prior
quarter, in order to provide readers greater insight into our quarterly
performance. For our future Quarterly Reports on Form 10-Q, we will present a
discussion of our results of operations for the current quarter compared to the
immediately preceding prior quarter only.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this report that are subject to risks and
uncertainties. These forward-looking statements include information about, among
other things, possible or assumed future results of our business, financial
condition, liquidity, results of operations, plans and objectives. When we use
the words ”believe,” ”expect,” ”anticipate,” ”estimate,” ”plan,”
”continue,” ”intend,” ”should,” ”may,” ”would,” ”will” or similar
expressions, we intend to identify forward-looking statements. Statements
regarding the following subjects, among others, are forward-looking by their
nature:
•our business and investment strategy;
•our ability to accurately forecast the payment of future dividends on our
common and preferred stock, and the amount of such dividends;
•our ability to determine accurately the fair market value of our assets;
•availability of investment opportunities in real estate-related and other
securities, including our valuation of potential opportunities that may arise as
a result of current and future market dislocations;
•effect of the novel coronavirus, or COVID-19, pandemic on real estate market,
financial markets and our Company, including the impact on the value,
availability, financing and liquidity of mortgage assets;
•how COVID-19 may affect us, our operations and our personnel;
•our expected investments;
•changes in the value of our investments, including negative changes resulting
in margin calls related to the financing of our assets;
•changes in interest rates and mortgage prepayment rates;
•prepayments of the mortgage and other loans underlying our mortgage-backed
securities, or MBS, or other asset-backed securities, or ABS;
•rates of default, delinquencies, forbearance, deferred payments or decreased
recovery rates on our investments;
•general volatility of the securities markets in which we invest;
•our ability to maintain existing financing arrangements and our ability to
obtain future financing arrangements;
•our ability to affect our strategy to securitize residential mortgage loans;
•interest rate mismatches between our investments and our borrowings used to
finance such purchases;
•effects of interest rate caps on our adjustable-rate investments;
•the degree to which our hedging strategies may or may not protect us from
interest rate volatility;
•the impact of and changes to various government programs, including in response
to COVID-19;
•impact of and changes in governmental regulations, tax law and rates,
accounting guidance, and similar matters;
•market trends in our industry, interest rates, the debt securities markets or
the general economy;
•estimates relating to our ability to make distributions to our stockholders in
the future;
•our understanding of our competition;
•our ability to find and retain qualified personnel;
•our ability to maintain our classification as a real estate investment trust,
or REIT, for U.S. federal income tax purposes;
•our ability to maintain our exemption from registration under the Investment
Company Act of 1940, as amended, or 1940 Act;
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•our expectations regarding materiality or significance; and
•the effectiveness of our disclosure controls and procedures.
Special Note Regarding COVID-19 pandemic
During the quarter ended March 31, 2022, the financial markets continued to
improve from the disruptions driven by the COVID-19 pandemic. However, there is
still uncertainty about the future of COVID-19 and variants and its impact on
our business, operations, personnel, or the U.S. economy as a whole. Any
forecasts in this regard would be highly uncertain and could not be predicted
with any certainty, including the scope and duration of the pandemic, the
effectiveness of our work from home or remote work arrangements, third-party
providers’ ability to support our operation, and any actions taken by
governmental authorities and other third parties in response to the pandemic,
and the other factors discussed above and throughout this Quarterly Report on
Form 10-Q. The uncertain future development of this crisis could materially and
adversely affect our business, operations, operating results, financial
condition, liquidity or capital levels.
Forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. You should not place undue reliance on these
forward-looking statements. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. If a change occurs, our business, financial condition, liquidity,
results of operations and prospects may vary materially from those expressed in
our forward-looking statements. Any forward-looking statement speaks only as of
the date on which it is made. New risks and uncertainties arise from time to
time, and it is impossible for us to predict those events or how they may affect
us. Except as required by law, we are not obligated to, and do not intend to,
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
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Executive Summary
We are a publicly traded REIT that is primarily engaged in the business of
investing directly or having a beneficial interest in a diversified portfolio of
mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency
RMBS, Agency CMBS, and other real estate-related assets. We use leverage to
increase returns while managing the difference or spread between longer duration
assets and shorter duration financing. Our principal business objective is
seeking to provide an opportunity for stockholders to realize attractive
risk-adjusted returns through the generation of distributable income and through
asset performance linked to residential mortgage credit fundamentals. We
selectively invest in residential mortgage assets with a focus on credit
analysis, projected prepayment rates, interest rate sensitivity and expected
return.
We currently focus our investment activities primarily on acquiring residential
mortgage loans, Non-Agency RMBS and Agency mortgage-backed securities, or MBS.
At March 31, 2022, based on the fair value of our interest earning assets,
approximately 86% of our investment portfolio was residential mortgage loans,
10% of our investment portfolio was Non-Agency RMBS, and 4% of our investment
portfolio was Agency MBS. At December 31, 2021, based on the fair value of our
interest earning assets, approximately 82% of our investment portfolio was
residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS,
and 6% of our investment portfolio was Agency MBS.
We use leverage to seek to increase our potential returns and to finance the
acquisition of our assets. We expect to finance our investments using a variety
of financing sources, including securitizations, warehouse facilities and
repurchase agreements. We may seek to manage our debt and interest rate risk by
utilizing interest rate hedges, such as interest rate swaps, caps, options and
futures to reduce the effect of interest rate fluctuations related to our
financing sources. As of March 31, 2022, we did not own any interest rate
hedges.
Our investment strategy is intended to take advantage of opportunities in the
current interest rate and credit environment. We update the execution of our
strategy to changing market conditions by shifting our asset allocations across
various asset classes as interest rates and credit cycles change over time. We
expect to take a long-term view of assets and liabilities.
Business Update
We remained active in the residential mortgage market during the first quarter,
as we took advantage of opportunities to acquire higher yielding assets compared
to prior periods. During the quarter, we committed to acquire $807 million in
residential mortgage loans. We settled on $570 million of those loans during the
quarter and the remaining $237 million are expected to settle in the second
quarter. Overall, our recourse borrowing during the quarter increased by $163
million, commensurate to the financing needed for the loan acquisitions
described above. In addition to the increased recourse borrowings, our
short-term funding costs increase by 23 basis points during the quarter due to
higher interest rates.
Also, during the first quarter, we sponsored CIM 2022-R1, a securitization of
seasoned reperforming residential mortgage loans with a principal balance of
$328 million. Securities issued by CIM 2022-R1, with an aggregate balance of
approximately $264 million, were sold in a private placement to institutional
investors. These senior securities represented approximately 80% of the capital
structure. We retained subordinate interests in securities with an aggregate
balance of approximately $64 million and certain interest-only securities. We
also retained an option to call the securitized mortgage loans at any time
beginning in February 2027. Our average cost of debt of this securitization is
3.17%.
During the quarter, certain of our subsidiaries acquired the assets owned by
Hains Point, LLC, a consolidated investment company fund. The assets transferred
included the subordinated interests in the CMLTI 2019-E and SLST 2019-1
securitization trusts. As a result of these transfers and as the primary
beneficiary of both CMLTI 2019-E and SLST 2019-1, we consolidated the related
securitization trusts at fair value. This consolidation increased our loan
portfolio and our securitized debt by of $1.0 billion and $775 million,
respectively. The subordinated interests in CMLTI 2019-E and SLST 2019-1 were
eliminated upon consolidation of these securitization trusts.
Chimera continues its focus on growing its residential credit portfolio with the
completion of its first securitization of the year along with acquiring an
additional $807 million on residential loans. As of the end of first quarter,
96% of Chimera’s capital is allocated to residential credit assets.
Market Conditions and our Strategy
The dramatic increase in headline inflation and widening of credit spreads which
began in the fourth quarter of 2021 continued during the first quarter of 2022.
Adding to inflation concerns, Russia’s invasion of Ukraine drove energy prices
substantially higher, with crude oil up 35% over the quarter. As inflation
pressures continued to rise coupled with a tight labor market, several members
of the Federal Reserve Board made hawkish public statements, indicating the
possibility that the Fed Funds
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Rate could increase by 200 to 250 basis points by year end. The Federal Reserve
has also announced not only that it has stopped purchasing Agency MBS, but also
a possible reduction of its Agency MBS portfolio. As a result of these Federal
Reserve announcements, mortgage rates moved higher and Agency spreads widened
further during the quarter. As mortgage rates near 5%, both mortgage origination
and refinance activity have slowed substantially. Nonetheless, the housing
market remained strong during the quarter, with housing prices and rents
reaching record highs on tight inventory.
With the move in interest rates, the 2-year Treasury rates increased 160 basis
points and the 10-year Treasury rates increased 83 basis points, causing the
pace of mortgage securitizations to increase in the first quarter, as issuers
looked to lock in term financing. The uptick in issuances led to widening in
credit spreads, as issuers and investors feared the pace of Federal Reserve
activity (both increased rates and sales of Agency MBS). Wider mortgage spreads
led to price drops in mortgage securities, both in Agencies and non-Agencies.
The forward market outlook hints at the possibility of a recession in the next
12 to 24 months, as evidenced by the inverted yield curve.
As a result of the conditions described above, we experienced mark downs in our
Agency and Residential Credit portfolios. In addition, our securitized debt also
experienced mark downs, resulting in unrealized gains that offset some of the
book value reduction on our asset portfolio. This drove a decline in our book
value per common share to $10.15, or $1.69 per common share as of March 31, 2022
as compared to $11.84 as of December 31, 2021.
While the current market conditions present us with challenges, we believe that
our strategy of buying, financing, and securitizing residential mortgage loans
will continue to generate positive risk adjusted returns over the long run. We
continue to be active in the residential loan market, as evidenced by our loan
commitments during the first quarter and believe we can continue to add
attractive assets to our portfolio as market conditions permit.
Business Operations
Net Income (Loss) Summary
The table below presents our net income (loss) on a GAAP basis for the quarters
ended March 31, 2022, December 31, 2021 and March 31, 2021.
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Net Income (Loss)
(dollars in thousands, except share and per share data)
(unaudited)
For the Quarters Ended
March 31, 2022 December 31, 2021 March 31, 2021 QoQ Change YoY Change
Net interest income:
Interest income (1) $ 202,175 $ 221,162 $ 243,127 $ (18,987) $ (40,952)
Interest expense (2) 64,473 66,598 108,066 (2,125) (43,593)
Net interest income 137,702 154,564 135,061 (16,862) 2,641
Increase (decrease) in provision for
credit losses 240 92 (126) 148 366
Other investment gains (losses):
Net unrealized gains (losses) on
financial instruments at fair value (370,167) (108,286) 270,012 (261,881) (640,179)
Net realized gains (losses) on sales of
investments – – 37,796 – (37,796)
Gains (losses) on extinguishment of debt – 980 (237,137) (980) 237,137
Total other gains (losses) (370,167) (107,306) 70,671 (262,861) (440,838)
Other expenses:
Compensation and benefits 11,353 11,460 13,439 (107) (2,086)
General and administrative expenses 5,711 5,574 5,198 137 513
Servicing and asset manager fees 9,291 8,900 9,281 391 10
Transaction expenses 3,804 4,241 16,437 (437) (12,633)
Total other expenses 30,159 30,175 44,355 (16) (14,196)
Income (loss) before income taxes (262,864) 16,991 161,503 (279,855) (424,367)
Income taxes (70) (743) 3,912 673 (3,982)
Net income (loss) $ (262,794) $ 17,734 $ 157,591 $ (280,528) $ (420,385)
Dividends on preferred stock 18,408 18,452 18,438 (44) (30)
Net income (loss) available to common
shareholders $ (281,202) $
(718) $ 139,153 $ (280,484) $ (420,355)
Net income (loss) per share available to
common shareholders:
Basic $ (1.19) $ (0.00) $ 0.60 $ (1.19) $ (1.79)
Diluted $ (1.19) $ (0.00) $ 0.54 $ (1.19) $ (1.73)
Weighted average number of common shares
outstanding:
Basic 237,012,702 236,896,512 230,567,231 116,190 6,445,471
Diluted 237,012,702 236,896,512 261,435,081 116,190 (24,422,379)
Dividends declared per share of common
stock $ 0.33 $ 0.33 $ 0.30 $ 0.03 $ –
(1) Includes interest income of consolidated VIEs of $131,066, $138,538 and
$158,100 for the quarters ended March 31, 2022, December 31, 2021 and March 31,
2021, respectively. See Note 9 to consolidated financial statements for further
discussion.
(2) Includes interest expense of consolidated VIEs of $42,491, $43,469 and
$65,205 for the quarters ended March 31, 2022, December 31, 2021 and March 31,
2021, respectively. See Note 9 to consolidated financial statements for further
discussion.
See accompanying notes to consolidated financial statements.
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Results of Operations for the Quarters Ended March 31, 2022, December 31, 2021
and March 31, 2021.
Our primary source of income is interest income earned on our assets, net of
interest expense paid on our financing liabilities.
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
For the quarter ended March 31, 2022, our net loss available to common
shareholders was $281 million, or $1.19 per average basic common share, compared
to a net loss of $718 thousand, or $0.00 per average basic common share, for the
quarter ended December 31, 2021. The higher net loss available to common
shareholders for the quarter ended March 31, 2022, as compared to the quarter
ended December 31, 2021, was primarily driven by mark downs in our portfolio’s
asset prices due to an increase in interest rates and the credit spread
widening. During the quarter ended March 31, 2022, we had net unrealized losses
on financial instruments at fair value of $370 million, partially offset by net
interest income of $138 million.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
For the quarter ended March 31, 2022, our net loss available to common
shareholders was $281 million, or $1.19 per average basic common share, compared
to a net income of $139 million, or $0.60 per average basic common share for the
quarter ended March 31, 2021. The higher net loss available to common
shareholders for the quarter ended March 31, 2022, was primarily driven by mark
downs in our portfolio’s asset prices due to an increase in interest rates and
the credit spread widening as compared to the quarter ended March 31, 2021.
Interest Income
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
Interest income decreased by $19 million, or 9%, to $202 million for the quarter
ended March 31, 2022 as compared to $221 million for the quarter ended December
31, 2021. This decrease in our interest income was driven by a decrease in our
average interest earning assets and slightly lower yields on our Loans held for
investments and Non-Agency RMBS as compared to quarter ended December 31, 2021.
We reduced our average interest earning asset balances by $279 million to $13.6
billion as compared to $13.9 billion from the quarter ended December 31, 2021.
During the quarter ended March 31, 2022 our interest income decreased by $8
million on our Loans held for investments, $6 million on our Non-Agency RMBS,
and $5 million on our Agency CMBS investments.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
Interest income decreased by $41 million, or 17%, to $202 million for the
quarter ended March 31, 2022 as compared to $243 million for the quarter ended
March 31, 2021. This decrease in our interest income during quarter ended March
31, 2022 was primarily driven by a decline in our average interest earning
assets and slightly lower yields on our Loans held for investments and
Non-Agency RMBS as compared to the quarter ended March 31, 2021. We reduced our
average interest earning asset balances by $1.7 billion to $13.6 billion as
compared to $15.3 billion from the same period of 2021 to respond to rising
interest rates and residential credit cycle changes. This reduction in our Loans
held for investments, Agency CMBS and Non-Agency RMBS portfolios decreased our
interest income earned on Loans held for investments by $27 million, Non-Agency
RMBS by $10 million and Agency CMBS by $4 million.
Interest Expense
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
Interest expense decreased by $3 million, or 3%, to $64 million for the quarter
ended March 31, 2022 as compared to $67 million for the quarter ended December
31, 2021. This decrease in our interest expense during the quarter ended March
31, 2022 was primarily driven by a reduction in our average interest bearing
liability balances as compared to the quarter ended December 31, 2021. During
the quarter ended March 31, 2022 we reduced our average interest bearing
liability balances by $385 million to $11.1 billion, as compared to $11.5
billion, from the quarter ended December 31, 2021. During the quarter ended
March 31, 2022 interest expense on both securitized debt and total secured
financing agreements decreased by $1 million.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
Interest expense decreased by $44 million, or 40%, to $64 million for the
quarter ended March 31, 2022 as compared to $108 million for the quarter ended
March 31, 2021. This decrease was primarily driven by our de-levering efforts to
reduce secured
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financing agreements balances, lower financing rates on secured financing
agreements and calls of our higher rate securitized debt financing, replacing it
with lower rates available.
During the quarter ended March 31, 2022 we reduced our average interest bearing
liability balances by $2.1 billion to $11.1 billion as compared to $13.1
billion, from the quarter ended March 31, 2021. During the quarter ended
March 31, 2022 interest expense on securitized debt decreased by $24 million and
the average cost of funding on this same debt decreased by 90 basis points as
compared to the quarter ended March 31, 2021. Additionally, due to lower average
balances and financing rates our interest expense on secured financing
agreements collateralized by Loans held for investment and Non-Agency RMBS
decreased by $11 million and $7 million, respectively, as compared to the
quarter ended March 31, 2021.
Economic Net Interest Income
Our Economic net interest income is a non-GAAP financial measure that equals
GAAP net interest income adjusted for interest expense on long term debt and any
interest earned on cash. We believe this presentation is useful to investors
because it depicts the economic value of our investment strategy by showing all
components of interest expense and net interest income of our investment
portfolio. However, Economic net interest income should not be viewed in
isolation and is not a substitute for net interest income computed in accordance
with GAAP. Where indicated, interest expense, adjusting for interest payments on
long term debt and any interest earned on cash, is referred to as Economic
interest expense. Where indicated, net interest income reflecting interest
payments on long term debt and any interest earned on cash, is referred to as
Economic net interest income.
The following table reconciles the Economic net interest income to GAAP net
interest income and Economic interest expense to GAAP interest expense for the
periods presented.
Economic
GAAP GAAP Interest Economic GAAP Net Net
Interest Interest Expense on Long Interest Interest Interest
Income Expense Term Debt Expense Income Other (1) Income
For the Quarter Ended March 31,
2022 $ 202,175 $ 64,473 $
– $ 64,473 $ 137,702 $ (18) $ 137,684
For the Quarter Ended December
31, 2021
$ 221,162 $ 66,598 $
– $ 66,598 $ 154,564 $ (12) $ 154,552
For the Quarter Ended September
30, 2021
$ 220,579 $ 71,353 $
(239) $ 71,114 $ 149,226 $ 220 $ 149,446
For the Quarter Ended June 30,
2021
$ 252,677 $ 80,610 $
(959) $ 79,651 $ 172,067 $ 936 $ 173,003
For the Quarter Ended March 31,
2021
$ 243,127 $ 108,066 $
(1,076) $ 106,990 $ 135,061 $ 1,065 $ 136,126
(1) Primarily interest expense on Long term debt and interest income on cash and
cash equivalents.
Net Interest Rate Spread
The following table shows our average earning assets held, interest earned on
assets, yield on average interest earning assets, average debt balance, Economic
interest expense, economic average cost of funds, Economic net interest income
and net interest rate spread for the periods presented.
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For the Quarter Ended
March 31, 2022 December 31, 2021
(dollars in thousands) (dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets:
Interest-earning assets (1):
Agency RMBS $ 113,723 $ 253 0.9 % $ 104,684 $ 71 0.3 %
Agency CMBS 559,478 22,870 16.4 % 851,886 27,711 13.0 %
Non-Agency RMBS 1,310,359 45,675 13.9 % 1,406,876 51,644 14.7 %
Loans held for investment 11,599,206 133,359 4.6 % 11,498,173 141,724 4.9 %
Total $ 13,582,766 $ 202,157 6.0 % $ 13,861,619 $ 221,150 6.4 %
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Secured financing agreements collateralized by:
Agency RMBS $ 20,342 $ 31 0.6 % $ 23,824 $ 40 0.7 %
Agency CMBS 435,545 270 0.2 % 731,577 346 0.2 %
Non-Agency RMBS 817,261 5,448 2.7 % 839,898 5,837 2.8 %
Loans held for investment 1,948,974 12,839 2.6 % 1,872,915 13,281 2.8 %
Securitized debt 7,870,127 45,885 2.3 % 8,009,117 47,094 2.4 %
Total $ 11,092,249 $ 64,473 2.3 % $ 11,477,331 $ 66,598 2.3 %
Economic net interest income/net interest rate
spread $ 137,684 3.7 % $ 154,552 4.1 %
Net interest-earning assets/net interest margin $ 2,490,517 4.1 % $ 2,384,288 4.5 %
Ratio of interest-earning assets to interest
bearing liabilities 1.22 1.21
(1) Interest-earning assets at amortized cost
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For the Quarter Ended
March 31, 2022 March 31, 2021
(dollars in thousands) (dollars in thousands)
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
Assets:
Interest-earning assets (1):
Agency RMBS $ 113,723 $ 253 0.9 % $ 116,517 $ 317 1.1 %
Agency CMBS 559,478 22,870 16.4 % 1,360,895 26,607 7.8 %
Non-Agency RMBS 1,310,359 45,675 13.9 % 1,577,137 55,800 14.2 %
Loans held for investment 11,599,206 133,359 4.6 % 12,253,034 160,392 5.2 %
Total $ 13,582,766 $ 202,157 6.0 % $ 15,307,583 $ 243,116 6.4 %
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
Secured financing agreements collateralized by:
Agency RMBS $ 20,342 $ 31 0.6 % $ 66,951 $ 149 0.9 %
Agency CMBS 435,545 270 0.2 % 1,236,361 580 0.2 %
Non-Agency RMBS 817,261 5,448 2.7 % 1,002,935 12,479 5.0 %
Loans held for investment 1,948,974 12,839 2.6 % 2,253,811 24,216 4.3 %
Securitized debt 7,870,127 45,885 2.3 % 8,588,423 69,566 3.2 %
Total $ 11,092,249 $ 64,473 2.3 % $ 13,148,481 $ 106,990 3.3 %
Economic net interest income/net interest rate
spread $ 137,684 3.7 % $ 136,126 3.1 %
Net interest-earning assets/net interest margin $ 2,490,517 4.1 % $ 2,159,102 3.6 %
Ratio of interest-earning assets to interest
bearing liabilities 1.22 1.16
(1) Interest-earning assets at amortized cost
Economic Net Interest Income and the Average Earning Assets
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
Our Economic net interest income (which is a non-GAAP measure, see “Economic net
interest income” discussion earlier for details) decreased by $17 million to
$138 million for the quarter ended March 31, 2022 from $155 million compared to
the quarter ended December 31, 2021. Our net interest rate spread, which equals
the yield on our average interest-earning assets less the economic average cost
of funds, decreased by 40 basis points for the quarter ended March 31, 2022, as
compared to the quarter ended December 31, 2021. The net interest margin, which
equals the Economic net interest income as a percentage of the net average
balance of our interest-earning assets less our interest-bearing liabilities,
decreased by 40 basis points for the quarter ended March 31, 2022, as compared
to December 31, 2021. Our Average net interest-earning assets decreased by $106
million to $2.5 billion for the quarter ended March 31, 2022, compared to $2.4
billion for the quarter ended December 31, 2021. The decrease in our net
interest rate spread is primarily due to the decline in yields on our Non-Agency
RMBS and Loans held for investment portfolios.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
Our Economic net interest income (which is a non-GAAP measure, see “Economic net
interest income” discussion earlier for details) increased by $2 million to $138
million for the quarter ended March 31, 2022 from $136 million for the quarter
ended March 31, 2021. Our net interest rate spread, which equals the yield on
our average interest-earning assets less the economic average cost of funds,
increased by 60 basis points for the quarter ended March 31, 2022, as compared
to the same period of 2021. The net interest margin, which equals the Economic
net interest income as a percentage of the net average balance of our
interest-earning assets less our interest-bearing liabilities, increased by 50
basis points for the quarter ended March 31, 2022, as compared to the same
period of 2021. Our Average net interest-earning assets increased by $331
million to $2.5 billion for the quarter ended March 31, 2022, compared to $2.2
billion for the same period of 2021. The increase in our net interest rate
spread for the quarter ended March 31, 2022 is primarily due to our de-levering
efforts to reduce secured financing agreements
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balances, lower financing rates on secured financing agreements and calls of our
higher rate securitized debt financing, replacing it with lower rates as
compared to the quarter ended March 31, 2021.
Economic Interest Expense and the Cost of Funds
The borrowing rate at which we are able to finance our assets using secured
financing agreements and securitized debt is typically correlated to LIBOR and
the term of the financing. The table below shows our average borrowed funds,
Economic interest expense, average cost of funds (inclusive of realized losses
on interest rate swaps), average one-month LIBOR, average three-month LIBOR and
average one-month LIBOR relative to average three-month LIBOR.
Average One-Month
Economic LIBOR Relative to
Average Debt Interest Average Cost of Average One-Month Average Three-Month Average Three-Month
Balance Expense Funds LIBOR LIBOR LIBOR
(Ratios
have been annualized, dollars in thousands)
For the Quarter Ended March 31, 2022 $ 11,092,249 $ 64,473
2.32 % 0.23 % 0.52 % (0.29) %
For the Quarter Ended December 31,
2021 $ 11,477,331 $ 66,598 2.32 % 0.09 % 0.16 % (0.07) %
For the Quarter Ended September 30,
2021 $ 11,902,369 $ 71,114 2.39 % 0.09 % 0.13 % (0.04) %
For the Quarter Ended June 30, 2021 $ 12,422,089 $ 79,651
2.56 % 0.10 % 0.16 % (0.06) %
For the Quarter Ended March 31, 2021 $ 13,148,481 $ 106,990
3.25 % 0.12 % 0.20 % (0.08) %
Average interest-bearing liabilities decreased by $385 million for the quarter
ended March 31, 2022, as compared to quarter ended December 31, 2021. Economic
interest expense decreased slightly by $2 million for the quarter ended
March 31, 2022, as compared to quarter ended December 31, 2021.
Average interest-bearing liabilities decreased by $2.1 billion for the quarter
ended March 31, 2022, as compared to the quarter ended March 31, 2021. Economic
interest expense decreased by $43 million for the quarter ended March 31, 2022,
as compared to the quarter ended March 31, 2021. The decrease in average
interest-bearing liabilities and Economic interest expense during the quarter
ended March 31, 2022 as compared to the quarter ended March 31, 2021, is a
result of the decrease in the amount of our secured financing agreements and
replacing our higher cost securitized debt with lower cost securitized debt.
Provision for Credit Losses
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
For the quarter ended March 31, 2022 and December 31, 2021, we recorded a net
increase in provision of credit losses of $240 thousand and $92 thousand,
respectively. The increase in the allowance for credit losses for the quarter
ended March 31, 2022 and December 31, 2021, is primarily due to increases in
expected losses and delinquencies. In addition, certain Non-Agency RMBS
positions, which had previously been in an unrealized gain position as of the
prior year-end, are now in an unrealized loss position as of the end of the
current period due to the decline in fair value. These Non-Agency RMBS positions
now in an unrealized loss have resulted in the recognition of an allowance for
credit losses which was previously limited by unrealized gains on these
investments.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
For the quarter ended March 31, 2022 and March 31, 2021, we recorded a net
increase in provision of credit losses of $240 thousand and a decrease in
provision of credit losses of $126 thousand, respectively. The changes in the
allowance for credit losses for the quarter ended March 31, 2022 and March 31,
2022 are primarily due to changes in expected losses and delinquencies.
Net Unrealized Gains (Losses) on Financial Instruments at Fair Value
During the first quarter of 2022, there was an increase in headline inflation,
an inversion of yield curve, an increase in expected Fed Funds Rate and widening
of credit spreads. As a result, we experienced mark to market losses in our
Agency MBS and Residential Credit portfolios compared to prior periods. In
addition, our securitized debt also experienced mark downs, resulting in mark to
market gains that offset some of the mark to market losses on our asset
portfolio. During the quarter ended March 31, 2022 we had Net unrealized losses
of $598 million, $48 million and $29 million on Loans held for investments, Non-
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Agency RMBS and, Agency MBS, respectively, which were offset by Net unrealized
gains on Securitized debt collateralized by loans held for investment of $257
million.
Quarter ended March 31, 2022 compared to the Quarter ended December 31, 2021
We recorded Net unrealized losses on financial instruments at fair value of $370
million for the quarter ended March 31, 2022, as compared to the Net unrealized
losses on financial instruments at fair value of $108 million for the quarter
ended December 31, 2021.
Quarter ended March 31, 2022 compared to the Quarter ended March 31, 2021
We recorded Net unrealized losses on financial instruments at fair value of $370
million as compared to Net unrealized gains on financial instruments at fair
value of $270 million for the quarter ended March 31, 2021.
Gains and Losses on Sales of Assets
We do not forecast sales of investments as we generally expect to invest for
long term gains. However, from time to time, we may sell assets to create
liquidity necessary to pursue new opportunities, achieve targeted leverage
ratios as well as for gains when prices indicate a sale is most beneficial to
us, or is the most prudent course of action to maintain a targeted risk adjusted
yield for our investors.
There were no investment sales during the quarter ended March 31, 2022 and
December 31, 2021. We had net realized gains of $38 million on sale of
investments during the quarter ended March 31, 2021.
Extinguishment of Securitized Debt
When we acquire our outstanding securitized debt, we extinguish the outstanding
debt and recognize a gain or loss based on the difference between the carrying
value of the debt and the cost to acquire the debt which is reflected in the
Consolidated Statements of Operations as a gain or loss on extinguishment of
debt.
We did not acquire any securitized debt collateralized by Non-Agency RMBS during
the quarters ended March 31, 2022 and March 31, 2021. During the quarter ended
December 31, 2021, we acquired securitized debt collateralized by Non-Agency
RMBS with an amortized cost balance of $370 thousand for $478 thousand. This
transaction resulted in net loss on extinguishment of debt of $108 thousand.
We did not acquire any securitized debt collateralized by loans held for
investment during the quarter ended March 31, 2022. During the quarter ended
December 31, 2021, we acquired securitized debt collateralized by loans held for
investment with an amortized cost balance of $23 million for $22 million. This
transaction resulted in net gain on extinguishment of debt of $1 million. During
the quarter ended March 31, 2021, we acquired securitized debt collateralized by
loans held for investment with an amortized cost balance of $2.7 billion for
$2.9 billion. This transaction resulted in net loss on extinguishment of debt of
$234 million.
Compensation, General and Administrative Expenses and Transaction Expenses
The table below shows our total compensation and benefit expense, general and
administrative, or G&A expenses, and transaction expenses as compared to average
total assets and average equity for the periods presented.
Total Compensation, G&A Total
Compensation, G&A and Total Compensation, G&A and
and Transaction Expenses Transaction Expenses/Average Transaction Expenses/Average
Assets Equity
(Ratios have
been annualized, dollars in thousands)
For the Quarter Ended March 31, 2022 $ 20,868 0.54 % 2.36 %
For the Quarter Ended December 31, 2021 $ 21,275 0.54 % 2.24 %
For the Quarter Ended September 30,
2021 $ 21,426 0.54 % 2.29 %
For the Quarter Ended June 30, 2021 $ 21,148 0.52 % 2.35 %
For the Quarter Ended March 31, 2021 $ 35,074 0.82 % 3.82 %
Compensation and benefit costs were approximately $11 million, $11 million and
$13 million for the quarters ended March 31, 2022, December 31, 2021 and March
31, 2021, respectively.
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G&A expenses were approximately $6 million, $6 million and $5 million for the
quarters ended March 31, 2022, December 31, 2021, and March 31, 2021,
respectively, and remained relatively unchanged. The G&A expenses are primarily
comprised of legal, market data and research, auditing, consulting, information
technology, and independent investment consulting expenses.
We incurred transaction expenses in relation to securitizations of $4 million,
$4 million and $16 million for the quarters ended March 31, 2022, December 31,
2021, and March 31, 2021, respectively. The transaction expenses remained
relatively unchanged for the quarter ended March 31, 2022 and December 31, 2021.
The transaction expense decreased by $12 million during quarter ended March 31,
2022 as compared to the quarter ended March 31, 2021 due to lower call and
securitization activity.
Servicing and Asset Manager Fees
Servicing fees and asset manager expenses remained relatively unchanged at $9
million for the quarters ended March 31, 2022, December 31, 2021 and March 31,
2021. These servicing fees are primarily related to the servicing costs of the
whole loans held in consolidated securitization vehicles and are paid from
interest income earned by the VIEs. The servicing fees generally range from 11
to 50 basis points of unpaid principal balances of our consolidated VIEs.
Earnings available for distribution
Earnings available for distribution is a non-GAAP measure and is defined as GAAP
net income excluding unrealized gains or losses on financial instruments carried
at fair value with changes in fair value recorded in earnings, realized gains or
losses on the sales of investments, gains or losses on the extinguishment of
debt, interest expense on long term debt, changes in the provision for credit
losses, and transaction expenses incurred. In addition, stock compensation
expense charges incurred on awards to retirement eligible employees is reflected
as an expense over a vesting period (36 months) rather than reported as an
immediate expense.
As defined, Earnings available for distribution is the Economic net interest
income, as defined previously, reduced by compensation and benefits expenses
(adjusted for awards to retirement eligible employees), general and
administrative expenses, servicing and asset manager fees, income tax benefits
or expenses incurred during the period, as well as the preferred dividend
charges. We view Earnings available for distribution as a consistent measure of
our investment portfolio’s ability to generate income for distribution to common
stockholders. Earnings available for distribution is one of the metrics, but not
the exclusive metric, that our board of directors uses to determine the amount,
if any, of dividends on our common stock. In addition, Earnings available for
distribution is different than REIT taxable income and the determination of
whether we have met the requirement to distribute at least 90% of our annual
REIT taxable income (subject to certain adjustments) to our stockholders in
order to maintain qualification as a REIT is not based on Earnings available for
distribution. Therefore, Earnings available for distribution should not be
considered as an indication of our REIT taxable income, a guaranty of our
ability to pay dividends, or as a proxy for the amount of dividends we may pay,
because Earnings available for distribution excludes certain items that impact
our cash needs. We believe Earnings available for distribution as described
above helps us and investors evaluate our financial performance period over
period without the impact of certain transactions. Therefore, Earnings available
for distribution should not be viewed in isolation and is not a substitute for
net income or net income per basic share computed in accordance with GAAP. In
addition, our methodology for calculating Earnings available for distribution
may differ from the methodologies employed by other REITs to calculate the same
or similar supplemental performance measures, and accordingly, our Earnings
available for distribution may not be comparable to the Earnings available for
distribution reported by other REITs.
The following table provides GAAP measures of net income and net income per
diluted share available to common stockholders for the periods presented and
details with respect to reconciling the line items to Earnings available for
distribution and related per average diluted common share amounts. Earnings
available for distribution is presented on an adjusted dilutive shares basis.
Certain prior period amounts have been reclassified to conform to the current
period’s presentation.
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For the Quarters Ended
March 31, 2022 December 31, September 30, June 30, 2021 March 31, 2021
2021 2021
(dollars in thousands, except per share data)
GAAP Net income (loss) available to common
stockholders $ (281,202) $ (718) $ 313,030 $ 144,883 $ 139,153
Adjustments:
Net unrealized (gains) losses on financial
instruments at fair value 370,167 108,286
(239,524) (36,108) (270,012)
Net realized (gains) losses on sales of
investments
– – – (7,517) (37,796)
(Gains) losses on extinguishment of debt – (980) 25,622 21,777 237,137
Interest expense on long term debt – – 238 959 1,076
Increase (decrease) in provision for credit
losses 240 92 (386) 453 (126)
Transaction expenses 3,804 4,241 3,432 5,745 16,437
Stock Compensation expense for retirement
eligible awards 723 (363) (365) (361) 661
Earnings available for distribution $ 93,732 $ 110,558
$ 102,047 $ 129,831 $ 86,530
GAAP net income (loss) per diluted common
share $ (1.19) $
(0.00) $ 1.30 $ 0.60 $ 0.54
Earnings available for distribution per
adjusted diluted common share
$ 0.39 $ 0.46
$ 0.42 $ 0.54 $ 0.36
The table below summarizes the reconciliation from weighted-average diluted
shares under GAAP to the weighted-average adjusted diluted shares used for
Earnings available for distribution for the periods reported below.
For the Quarters Ended
March 31, 2022 December
31, 2021 September 30, 2021 June 30, 2021 March 31, 2021
Weighted average diluted shares – GAAP 237,012,702
236,896,512 240,362,602 241,739,536
261,435,081
Potentially dilutive shares (1) 2,421,546 2,672,393 – – –
Non-participating Warrants – – – – (20,282,173)
Adjusted weighted average diluted
shares – Earnings available for
distribution 239,434,248 239,568,905 240,362,602 241,739,536 241,152,908
(1) Potentially dilutive shares related to restricted stock units and
performance stock units excluded from the computation of weighted average GAAP
diluted shares because their effect would have been anti-dilutive given the GAAP
net loss available to common shareholders for the quarters ended March 31, 2022
and December 31, 2021.
Our Earnings available for distribution for the quarter ended March 31, 2022
were $94 million, or $0.39 per average diluted common share, and decreased by
$17 million, or $0.07 per average diluted common share, as compared to $111
million, or $0.46 per average diluted common share, for the quarter ended
December 31, 2021. The decrease in Earnings available for distribution was
driven by lower interest income due to lower average interest earning assets and
slightly lower yields on Non-Agency RMBS and Loans held for investments during
the quarter ended March 31, 2022 as compared to the quarter ended December 31,
2021.
Our Earnings available for distribution for the quarter ended March 31, 2022
were $94 million, or $0.39 per average diluted common share, and increased by $7
million, or $0.03 per average diluted common share, as compared to $87 million,
or $0.36 per average diluted common share, for the quarter ended March 31, 2021.
The increase in Earnings available for distribution was driven by lower interest
expense due to lower financing rate on our securitized debt and secured
financing agreements during the quarter ended March 31, 2022 as compared to the
quarter ended March 31, 2021.
Net Income (Loss) and Return on Total Stockholders’ Equity
The table below shows our Net Income and Economic net interest income as a
percentage of average stockholders’ equity and Earnings available for
distribution as a percentage of average common stockholders’ equity. Return on
average equity is defined as our GAAP net income (loss) as a percentage of
average equity. Average equity is defined as the average of our beginning and
ending stockholders’ equity balance for the period reported. Economic net
interest income and Earnings available for distribution are non-GAAP measures as
defined in previous sections.
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Economic Net Interest Earnings available for
Return on Average Equity Income/Average Equity * distribution/Average Common Equity
(Ratios have been annualized)
For the Quarter Ended March 31, 2022 (29.72) % 15.57 % 14.38 %
For the Quarter Ended December 31, 2021 1.87 % 16.30 % 15.45 %
For the Quarter Ended September 30, 2021 35.47 % 15.99 % 14.54 %
For the Quarter Ended June 30, 2021 18.16 % 19.24 % 19.47 %
For the Quarter Ended March 31, 2021 17.16 % 14.82 % 12.62 %
* Excludes long term debt expense.
Return on average equity decreased by 3,159 basis points for the quarter ended
March 31, 2022, as compared to the quarter ended December 31, 2021. This
decrease is driven primarily by unrealized asset pricing losses on our financial
instruments. Economic net interest income as a percentage of average equity
decreased by 73 basis points for the quarter ended March 31, 2022 compared to
the quarter ended December 31, 2021. Earnings available for distribution as a
percentage of average common equity decreased by 107 basis points for the
quarter ended March 31, 2022 compared to the quarter ended December 31, 2021.
The decrease in Earnings available for distribution as a percentage of average
common equity for the quarter ended March 31, 2022 as compared to the quarter
ended December 31, 2021, was primarily driven by a decline in average interest
earning assets and lower yields on Non-Agency RMBS and Loans held for
investments.
Return on average equity decreased by 4,688 basis points for the quarter ended
March 31, 2022, as compared to the quarter ended March 31, 2021. This decrease
is driven primarily by unrealized asset pricing losses on our financial
instruments. Economic net interest income as a percentage of average equity
increased by 75 basis points for the quarter ended March 31, 2022 compared to
the quarter ended March 31, 2021. Earnings available for distribution as a
percentage of average common equity increased by 176 basis points for the
quarter ended March 31, 2022 compared to the quarter ended March 31, 2021. This
increase in Earnings available for distribution as a percentage of average
common equity for the quarter ended March 31, 2022 as compared to the quarter
ended March 31, 2021, was primarily driven by lower interest expense due to
lower financing rate on our securitized debt and secured financing agreements
during the quarter ended March 31, 2022 as compared to the quarter ended March
31, 2021.
Financial Condition
Portfolio Review
During the quarter ended March 31, 2022, we focused our efforts on taking
advantage of the opportunity to acquire higher yielding assets. During the
quarter ended March 31, 2022, on an aggregate basis, we purchased $1.1 billion
of investments and received $899 million in principal payments related to our
Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.
The following table summarizes certain characteristics of our portfolio at
March 31, 2022 and December 31, 2021.
March 31, 2022 December
31, 2021
Interest earning assets at period-end (1) $ 14,941,502 $ 14,893,829
Interest bearing liabilities at period-end $ 11,518,763 $ 11,075,655
GAAP Leverage at period-end 3.5:1 3.0:1
GAAP Leverage at period-end (recourse) 1.0:1 0.9:1
(1) Excludes cash and cash equivalents.
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March 31, 2022 December 31, 2021 March 31, 2022 December 31, 2021
Portfolio Composition Amortized Cost
Fair Value
Non-Agency RMBS 7.8 % 10.1 % 9.7 % 12.1 %
Senior 4.1 % 4.5 % 6.2 % 6.5 %
Subordinated 2.4 % 4.2 % 2.6 % 4.4 %
Interest-only 1.3 % 1.4 % 0.9 % 1.2 %
Agency RMBS 0.8 % 0.8 % 0.5 % 0.4 %
Pass-through – % – % – % – %
Interest-only 0.8 % 0.8 % 0.5 % 0.4 %
Agency CMBS 3.4 % 5.3 % 3.4 % 5.2 %
Project loans 2.3 % 4.2 % 2.4 % 4.2 %
Interest-only 1.1 % 1.1 % 1.0 % 1.0 %
Loans held for investment 88.0 % 83.8 % 86.4 % 82.3 %
Fixed-rate percentage of portfolio 95.8 % 95.4 % 94.9 % 94.4 %
Adjustable-rate percentage of portfolio 4.2 % 4.6 % 5.1 % 5.6 %
GAAP leverage at period-end is calculated as a ratio of our secured financing
agreements and securitized debt liabilities over GAAP book value. GAAP recourse
leverage is calculated as a ratio of our secured financing agreements over
stockholders equity.
The following table presents details of each asset class in our portfolio at
March 31, 2022 and December 31, 2021. The principal or notional value represents
the interest income earning balance of each class. The weighted average figures
are weighted by each investment’s respective principal/notional value in the
asset class.
March 31, 2022
Principal or
Notional Value at Weighted
Period-End Average Weighted Weighted Average Weighted Average 3
Weighted Average 12 Weighted Average 3 Weighted Average 12
(dollars in Amortized Cost
Average Fair Weighted Average Yield at Period-End Month Prepay Rate Month Prepay Rate Month CDR at Month CDR at Weighted Average Weighted Average
thousands) Basis Value Coupon (1) at Period-End at Period-End Period-End Period-End Loss Severity(2) Credit Enhancement
Non-Agency Mortgage-Backed Securities
Senior $ 1,250,785 $ 47.25 $ 74.28 4.5 % 17.7 % 14.1 % 15.0 % 2.0 % 2.0 % 27.6 % 2.1 %
Subordinated $ 512,981 $ 67.98 $ 76.88 4.6 % 7.1 % 18.2 % 23.3 % 0.3 % 0.4 % 30.3 % 5.1 %
Interest-only $ 3,644,165 $ 4.97 $ 3.72 1.7 % 12.2 % 18.8 % 24.2 % 0.8 % 1.4 % 20.8 % 0.1 %
Agency RMBS
Interest-only $ 1,501,720 $ 8.13 $ 4.93 1.1 % 1.3 % 24.2 % 26.3 % N/A N/A N/A N/A
Agency CMBS
Project loans $ 329,515 $ 102.01 $ 108.10 4.4 % 4.2 % – % – % N/A N/A N/A N/A
Interest-only $ 2,779,083 $ 5.55 $ 5.29 0.7 % 4.0 % 12.8 % 10.7 % N/A N/A N/A N/A
Loans held for investment $ 12,799,611 $ 99.02 $ 100.97 5.4 % 4.8 % 13.9 % 15.5 % 1.1 % 0.8 % 59.5 % N/A
(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated
using each investment’s respective amortized cost.
(2) Calculated based on reported losses to date, utilizing widest data set
available (i.e., life-time losses, 12-month loss, etc.)
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December 31, 2021
Principal or
Notional Value at
Period-End Weighted Average Weighted Weighted Average Weighted Average 3 Weighted Average 12 Weighted Average 3 Weighted Average 12
(dollars in Amortized Cost
Average Fair Weighted Average Yield at Period-End Month Prepay Rate at Month Prepay Rate Month CDR at Month CDR at Weighted Average Weighted Average
thousands) Basis Value Coupon (1) Period-End at Period-End Period-End Period-End Loss Severity(2) Credit Enhancement
Non-Agency Mortgage-Backed
Securities
Senior $ 1,283,788 $ 48.02 $ 76.78 4.5 % 18.0 % 14.1 % 14.6 % 1.6 % 1.9 % 23.6 % 2.8 %
Subordinated $ 845,432 $ 68.10 $ 77.12 3.8 % 7.1 % 18.6 % 19.3 % 0.2 % 0.5 % 28.9 % 3.6 %
Interest-only $ 3,904,665 $ 4.90 $ 4.42 1.7 % 13.2 % 22.2 % 25.5 % 1.0 % 1.8 % 23.4 % – %
Agency RMBS
Interest-only $ 992,978 $ 10.37 $ 6.09 1.3 % 0.3 % 25.6 % 26.6 % N/A N/A N/A N/A
Agency CMBS
Project loans $ 560,565 $ 101.77 $ 109.61 4.3 % 4.1 % – % – % N/A N/A N/A N/A
Interest-only $ 2,578,640 $ 5.70 $ 5.69 0.7 % 4.6 % 14.0 % 30.9 % N/A N/A N/A N/A
Loans held for investment $ 11,519,255 $ 99.22 $ 106.58 5.5 % 4.9 % 16.1 % 15.0 % 0.9 % 0.4 % 50.5 % N/A
(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated
using each investment’s respective amortized cost.
(2) Calculated based on reported losses to date, utilizing widest data set
available (i.e., life-time losses, 12-month loss, etc.)
Based on the projected cash flows for our Non-Agency RMBS that are not of high
credit quality, a portion of the original purchase discount is designated as
Accretable Discount, which reflects the purchase discount expected to be
accreted into interest income, and a portion is designated as Non-Accretable
Difference, which represents the contractual principal on the security that is
not expected to be collected. The amount designated as Non-Accretable Difference
may be adjusted over time, based on the actual performance of the security, its
underlying collateral, actual and projected cash flow from such collateral,
economic conditions and other factors. If the performance of a security is more
favorable than previously estimated, a portion of the amount designated as
Non-Accretable Difference may be transferred to Accretable Discount and accreted
into interest income over time. Conversely, if the performance of a security is
less favorable than previously estimated, a provision for credit loss may be
recognized resulting in an increase in the amounts designated as Non-Accretable
Difference.
The following table presents changes to Accretable Discount (net of premiums) as
it pertains to our Non-Agency RMBS portfolio, excluding premiums on
interest-only investments, during the previous five quarters.
For
the Quarters Ended
(dollars in thousands)
Accretable Discount (Net of Premiums) December 31,
September 30,
March 31, 2022 2021 2021 June 30, 2021 March 31, 2021
Balance, beginning of period $ 333,546 $ 352,545 $ 338,024 $ 358,562 $ 409,690
Accretion of discount (19,470) (22,172) (21,820) (37,986) (24,023)
Purchases – – 1,995 (3,453) –
Sales – – – (17,123) (41,651)
Elimination in consolidation (60,361) – – – –
Transfers from/(to) credit reserve,
net 4,779 3,173 34,346 38,024 14,546
Balance, end of period $ 258,494 $ 333,546 $ 352,545 $ 338,024 $ 358,562
We invest a significant majority of our capital in pools of Non-Agency RMBS and
Loans held for investment. These investments carry risk for credit losses. As we
are exposed to risk for credit losses, it is important for us to closely monitor
credit losses incurred, as well as how expectations of credit losses are
expected to change. We estimate future credit losses based on historical
experience, market trends, current delinquencies as well as expected recoveries.
The net present value of these expected credit losses can change, sometimes
significantly from period to period as new information becomes available. When
credit loss experience and expectations improve, we will collect more principal
on our investments. If credit loss experience deteriorates, we will collect less
principal on our investments. The favorable or unfavorable changes in credit
losses are reflected in the yield on our investments in mortgage loans and
recognized in earnings over the remaining life of our investments. The following
table presents changes to net present value of expected credit losses for our
Non-Agency RMBS and Loans held for investment portfolios during the previous
five quarters. Gross losses are discounted at the rate used to amortize any
discounts or premiums on our investments into income. A decrease (negative
balance) in the “Increase/(decrease)”
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line item in the tables below represents a favorable change in expected credit
losses. An increase (positive balance) in the “Increase/(decrease)” line item in
the tables below represents an unfavorable change in expected credit losses.
For the Quarters Ended
(dollars in thousands)
Non-Agency RMBS December 31, September 30,
March 31, 2022 2021 2021 June 30, 2021 March 31, 2021
Balance, beginning of period $ 106,240 $ 107,686 $ 129,053 $ 133,607 $ 157,527
Realized losses 7,995 (987) (229) (2,482) (3,927)
Accretion 3,049 2,928 3,374 3,466 4,152
Purchased losses – – 1,006 3,066 –
Sold losses – – – (678) (733)
Losses removed due to consolidation (10,191) – – – –
Increase/(decrease) (12,503) (3,387) (25,518) (7,926) (23,412)
Balance, end of period $ 94,590 $ 106,240 $ 107,686 $ 129,053 $ 133,607
For the Quarters Ended
(dollars in thousands)
Loans held for investment December 31, September 30,
March 31, 2022 2021 2021 June 30, 2021 March 31, 2021
Balance, beginning of period $ 369,028 $ 340,431 $ 420,323 $ 448,763 $ 511,190
Realized losses (12,260) (8,368) (7,641) (13,244) (8,512)
Accretion 4,251 4,074 4,487 4,795 3,420
Purchased losses 14,883 3,485 5,524 – –
Losses added due to consolidation 49,774 – – – –
Increase/(decrease) (16,026) 29,406 (82,262) (19,991) (57,335)
Balance, end of period $ 409,650 $ 369,028 $ 340,431 $ 420,323 $ 448,763
Liquidity and Capital Resources
General
Liquidity measures our ability to meet cash requirements, including ongoing
commitments to repay our borrowings, purchase RMBS, residential mortgage loans
and other assets for our portfolio, pay dividends and other general business
needs. Our principal sources of capital and funds for additional investments
primarily include earnings, principal paydowns and sales from our investments,
borrowings under securitizations and re-securitizations, secured financing
agreements and other financing facilities including warehouse facilities, and
proceeds from equity or other securities offerings.
As discussed earlier, during the first quarter of 2022, we experienced mark
downs in our Agency, Residential Credit and securitized debt portfolios as a
result of the increase in headline inflation, an inversion of yield curve, an
increase in expected Fed Funds Rate and widening of credit spreads. There is
still uncertainty and risks related to the COVID-19 pandemic and potentially
new, more infectious variants. If these conditions become more pronounced, we
may experience an adverse impact on our liquidity. We have sought and expect to
continue to seek longer-term, more durable financing to reduce our risk to
margin calls related to shorter-term repurchase financing.
Our ability to fund our operations, meet financial obligations and finance
target asset acquisitions may be impacted by our ability to secure and maintain
our master secured financing agreements, warehouse facilities and secured
financing agreements facilities with our counterparties. Because secured
financing agreements and warehouse facilities are short-term commitments of
capital, lenders may respond to market conditions making it more difficult for
us to renew or replace on a continuous basis our maturing short-term borrowings
and have and may continue to impose more onerous conditions when rolling forward
such financings. If we are not able to renew our existing facilities or arrange
for new financing on terms acceptable to us, or if we default on our covenants
or are otherwise unable to access funds under our financing facilities or if we
are required to post more collateral or face larger haircuts, we may have to
curtail our asset acquisition activities and dispose of assets.
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To meet our short term (one year or less) liquidity needs, we expect to continue
to borrow funds in the form of secured financing agreements and, subject to
market conditions, other types of financing. The terms of the secured financing
transaction borrowings under our master secured financing agreement generally
conform to the terms in the standard master secured financing agreement as
published by the Securities Industry and Financial Markets Association, or
SIFMA, or similar market accepted agreements, as to repayment and margin
requirements. In addition, each lender typically requires that we include
supplemental terms and conditions to the standard master secured financing
agreement. Typical supplemental terms and conditions include changes to the
margin maintenance requirements, net asset value, required haircuts or the
percentage that is subtracted from the value of MBS that collateralizes the
financing, purchase price maintenance requirements, and requirements that all
disputes related to the secured financing agreement be litigated or arbitrated
in a particular jurisdiction. These provisions may differ for each of our
lenders.
Based on our current portfolio, leverage ratio and available borrowing
arrangements, we believe our assets will be sufficient to enable us to meet
anticipated short-term liquidity requirements. If our cash resources are
insufficient to satisfy our liquidity requirements, we may have to sell
additional investments, potentially at a loss, issue debt or additional common
or preferred equity securities.
To meet our longer-term liquidity needs (greater than one year), we expect our
principal sources of capital and funds to continue to be provided by earnings,
principal paydowns and sales from our investments, borrowings under
securitizations and re-securitizations, secured financing agreements and other
financing facilities, as well as proceeds from equity or other securities
offerings.
In addition to the principal sources of capital described above, we may enter
into warehouse facilities and use longer dated structured secured financing
agreements. The use of any particular source of capital and funds will depend on
market conditions, availability of these facilities, and the investment
opportunities available to us.
Current Period
We held cash and cash equivalents of approximately $166 million and $386 million
at March 31, 2022 and December 31, 2021, respectively. As a result of our
operating, investing and financing activities described below, our cash position
decreased
by $220 million from December 31, 2021 to March 31, 2022.
Our operating activities provided net cash of approximately $136 million and
$122 million for the quarters ended March 31, 2022 and 2021, respectively. The
cash flows from operations were primarily driven by interest received in excess
of interest paid of $159 million and $145 million during the quarters ended
March 31, 2022 and 2021, respectively.
Our investing activities used cash of $187 million and provided cash of $814
million for the quarters ended March 31, 2022 and 2021, respectively. During the
quarter ended March 31, 2022, we used cash on investment purchases of $1.1
billion, primarily consisting of Loans held for investment of $1.0 billion,
Agency MBS of $45 million and Non-Agency RMBS of $23 million. This cash used was
offset in part by cash received for principal repayments on Agency MBS,
Non-Agency RMBS and Loans held for investment of $899 million. During the
quarter ended March 31, 2021, we received cash from sale of investments of $1.1
billion primarily consisting of Loans held for investments of $903 million, and
principal repayments on our Agency MBS, Non-Agency RMBS, and Loans held for
investments of $776 million. This cash provided was offset in part by cash used
on investment purchases of $1.1 billion, primarily consisting of Loans held for
investments.
Our financing activities used cash of $169 million and $888 million for the
quarters ended March 31, 2022 and 2021, respectively. During the quarter ended
March 31, 2022, we primarily used cash for repayment of principal on our
securitized debt of $497 million and paid common and preferred dividends of $97
million. This cash used was offset in part by cash received for securitized debt
collateralized by loans issuance of $262 million and net proceeds received on
our secured financing agreements of $163 million. During the quarter ended March
31, 2021, we used cash for repayment of principal on our securitized debt of
$3.4 billion, net payments on our secured financing agreements of $594 million,
settlement of warrants of $220 million, and paid common and preferred dividends
of $88 million. This cash paid was offset in part by cash received for
securitized debt collateralized by loans issuance of $3.4 billion.
Our recourse leverage was 1.0:1 and 0.9:1 at March 31, 2022 and at December 31,
2021, respectively and remained relatively unchanged. Our recourse leverage
excludes the securitized debt which can only be repaid from the proceeds on the
assets securing this debt in their respective VIEs. Our recourse leverage is
presented as a ratio of our secured financing agreements, which are recourse to
our assets and our equity.
At March 31, 2022 and December 31, 2021, the remaining maturities and borrowing
rates on our RMBS and loan secured financing agreements were as follows.
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March 31, 2022 December 31, 2021
(dollars in thousands)
Weighted Average Weighted Average
Principal (1) Borrowing Rates Range of Borrowing Rates Principal (1) Borrowing Rates Range of Borrowing Rates
Overnight $ – NA NA $ – NA NA
1 to 29 days 1,561,598 1.57% 0.30% – 2.35% 1,018,670 0.73% 0.11% – 1.95%
30 to 59 days 162,097 1.44% 0.95% – 1.67% 379,031 1.66% 1.55% – 1.70%
60 to 89 days 146,974 2.48% 1.49% – 2.71% 342,790 1.86% 0.90% – 2.35%
90 to 119 days 78,400 1.50% 1.50% – 1.50% 67,840 1.66% 1.66% – 1.66%
120 to 180 days 847,135 3.64% 1.73% – 4.38% 157,944 1.38% 0.95% – 1.45%
180 days to 1 year 406,705 2.95% 0.94% – 3.45% 895,210 3.70% 1.95% – 4.38%
1 to 2 years – NA NA 143,239 3.05% 3.05% – 3.05%
2 to 3 years – NA NA – NA NA
Greater than 3 years 221,496 5.56% 5.56% – 5.56% 256,889 5.56% 5.56% – 5.56%
Total $ 3,424,405 2.53% $ 3,261,613 2.30%
(1) The principal balance for secured financing agreements in the table above is
net of $3 million of deferred financing cost as of March 31, 2022 and
December 31, 2021, respectively.
Average remaining maturity of Secured financing agreements secured by:
March 31, 2022 December 31, 2021
Agency RMBS (in thousands) 4 Days 4 Days
Agency CMBS (in thousands) 11 Days 13 Days
Non-Agency RMBS and Loans held for
investment (in thousands) 178 Days 257 Days
We collateralize the secured financing agreements we use to finance our
operations with our MBS investments and mortgage loans held in trusts controlled
by us. Our counterparties negotiate a ‘haircut’, which is the difference
expressed in percentage terms between the fair value of the collateral and the
amount the counterparty will lend to us, when we enter into a financing
transaction. The size of the haircut reflects the perceived risk and market
volatility associated with holding the MBS by the lender. The haircut provides
lenders with a cushion for daily market value movements that reduce the need for
a margin call to be issued or margin to be returned as normal daily increases or
decreases in MBS market values occur. Haircuts have remained relatively stable
during first quarter of 2022. At March 31, 2022, the weighted average haircut on
our remaining secured financing agreements collateralized by Agency RMBS IOs was
15.0%, Agency CMBS was 7.6% and Non-Agency RMBS and Loans held for investment
was 24.4%. At December 31, 2021, the weighted average haircut on our remaining
secured financing agreements collateralized by Agency RMBS IOs was 15.0%, Agency
CMBS was 6.7% and Non-Agency RMBS and Loans held for investment was 27.9%.
The fair value of the Non-Agency MBS is more difficult to determine in current
financial conditions, as well as more volatile period to period than Agency MBS,
the Non-Agency MBS typically requires a larger haircut. In addition, when
financing assets using standard form of SIFMA Master Repurchase Agreements, the
counterparty to the agreement typically nets its exposure to us on all
outstanding repurchase agreements and issues margin calls if movement of the
fair values of the assets in the aggregate exceeds their allowable exposure to
us. A decline in asset fair values could create a margin call or may create no
margin call depending on the counterparty’s specific policy. In addition,
counterparties consider a number of factors, including their aggregate exposure
to us as a whole and the number of days remaining before the repurchase
transaction closes prior to issuing a margin call. To minimize the risk of
margin calls, as of March 31, 2022, we have entered into $1.1 billion of
financing arrangements for which the collateral cannot be adjusted as a result
of changes in market value, minimizing the risk of a margin call as a result in
price volatility. We refer to these agreements as non mark-to-market (non-MTM)
facilities. These non-MTM facilities generally have higher costs of financing,
but lower the risk of a margin call which could result in sales of our assets at
distressed prices. All non-MTM facilities are collateralized by non-agency RMBS
collateral, which tends to have increased volatile price changes during periods
of market stress. We believe these non-MTM facilities significantly reduce our
financing risks. See Note 5 to our Consolidated Financial Statements for a
discussion on how we determine the fair values of the RMBS collateralizing our
secured financing agreements.
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At March 31, 2022, the weighted average borrowing rates for our secured
financing agreements collateralized by Agency RMBS IOs was 0.6%, Agency CMBS was
0.4% and Non-Agency MBS and Loans held for investment was 2.8%. At December 31,
2021, the weighted average borrowing rates for our secured financing agreements
collateralized by Agency RMBS IOs was 0.7%, Agency CMBS was 0.2%, and Non-Agency
MBS and Loans held for investment was 2.8%.
The table below presents our average daily secured financing agreements balance
and the secured financing agreements balance at each period end for the periods
presented. Our balance at period-end tends to fluctuate from the average daily
balances due to the adjusting of the size of our portfolio by using leverage.
Average secured financing Secured financing agreements
Period agreements balances balance at period end
(dollars in thousands)
Quarter End March 31, 2022 $ 3,222,122 $ 3,424,405
Quarter End December 31, 2021 $ 3,468,212 $ 3,261,613
Quarter End September 30, 2021 $ 3,824,615 $ 3,788,336
Quarter End June 30, 2021 $ 3,792,547 $ 3,554,428
Quarter End March 31, 2021 $ 4,560,057 $ 4,045,912
We are not required to maintain any specific leverage ratio. We believe the
appropriate leverage for the particular assets we are financing depends on the
credit quality and risk of those assets. At March 31, 2022 and December 31,
2021, the carrying value of our total interest-bearing debt was approximately
$11.5 billion and $11.1 billion, respectively, which represented a leverage
ratio of approximately 3.5:1 and 3.0:1, respectively. We include our secured
financing agreements and securitized debt in the numerator of our leverage ratio
and stockholders’ equity as the denominator.
At March 31, 2022, we had secured financing agreements with 11 counterparties.
All of our secured financing agreements are secured by Agency MBS, Non-Agency
RMBS and Loans held for investment and cash. Under these secured financing
agreements, we may not be able to reclaim our collateral but will still be
obligated to pay our repurchase obligations. We mitigate this risk by ensuring
our counterparties are highly rated. As of March 31, 2022 and December 31, 2021,
we had $4.5 billion and $4.4 billion, respectively, of securities or cash
pledged against our secured financing agreements obligations.
We expect to enter into new secured financing agreements at maturity. When we
renew our secured financing agreements, there is a risk that we will not be able
to renew them or obtain favorable interest rates and haircuts as a result of
uncertainty in the market including, but not limited to, uncertainty as a result
of the COVID-19 pandemic.
Exposure to Financial Counterparties
We actively manage the number of secured financing agreements counterparties to
reduce counterparty risk and manage our liquidity needs. The following table
summarizes our exposure to our secured financing agreements counterparties at
March 31, 2022:
March 31, 2022
Country Number of Counterparties Secured Financing Exposure (1)
Agreement
(dollars in thousands)
United States 7 2,179,175 829,687
Japan 1 937,172 224,397
Canada 1 230,388 45,933
Netherlands 1 45,354 2,675
South Korea 1 32,316 2,115
Total 11 $ 3,424,405 $ 1,104,807
(1) Represents the amount of securities and/or cash pledged as collateral to
each counterparty less the aggregate of secured financing agreement.
We regularly monitor our exposure to financing counterparties for credit risk
and allocate assets to these counterparties based, in part, on the credit
quality and internally developed metrics measuring counterparty risk. Our
exposure to a particular counterparty is calculated as the excess collateral
which is pledged relative to the secured financing agreement balance. If our
exposure to our financing counterparties exceeds internally developed
thresholds, we develop a plan to reduce the exposure to an acceptable level. At
March 31, 2022, we did not have any exposure to a counterparty which exceeded
10% of our equity.
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At March 31, 2022, we did not use credit default swaps or other forms of credit
protection to hedge the exposures summarized in the table above.
Stockholders’ Equity
In February 2021, our Board of Directors increased the authorization of our
share repurchase program, or the Repurchase Program, to $250 million. Such
authorization does not have an expiration date, and at present, there is no
intention to modify or otherwise rescind such authorization. Shares of our
common stock may be purchased in the open market, including through block
purchases, through privately negotiated transactions, or pursuant to any trading
plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The
timing, manner, price and amount of any repurchases will be determined at our
discretion and the program may be suspended, terminated or modified at any time
for any reason. Among other factors, we intend to only consider repurchasing
shares of our common stock when the purchase price is less than the last
publicly reported book value per common share. In addition, we do not intend to
repurchase any shares from directors, officers or other affiliates. The program
does not obligate us to acquire any specific number of shares, and all
repurchases will be made in accordance with Rule 10b-18, which sets certain
restrictions on the method, timing, price and volume of stock repurchases.
We did not repurchase any of its common stock during the quarter ended March 31,
2022. We repurchased approximately 161 thousand shares of our common stock at an
average price of $11.39 per share for a total of $2 million during the quarter
ended March 31, 2021. The approximate dollar value of shares that may yet be
purchased under the Repurchase Program is $226 million as of March 31, 2022.
Additionally, we issued shares of our common stock as discussed below under
“Restricted Stock Unit and Performance Share Unit Grants,” and a de minimis
amount under our Dividend Reinvestment Plan.
In February 2022, we entered into separate Distribution Agency Agreements (the
“Sales Agreements”) with each of
Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC,
Morgan Stanley & Co. LLC and
RBC Capital Markets, LLC (the “Sales Agents”). Pursuant to the terms of the
Sales Agreements, we may offer and sell
shares of our common stock, having an aggregate offering price of up to
$500,000,000, from time to time through any of
the Sales Agents under the Securities Act of 1933. During the quarter ended
March 31, 2022, we did not issue any shares under the at-the-market sales
program.
We declared dividends to common shareholders of $79 million, or $0.33 per share,
and $70 million, or $0.30 per share, during the quarters ended March 31, 2022
and 2021, respectively.
We declared dividends to Series A preferred stockholders of $3 million, or $0.50
per preferred share, during the quarters ended March 31, 2022 and 2021,
respectively.
We declared dividends to Series B preferred stockholders of $7 million, or $0.50
per preferred share, during the quarters ended March 31, 2022 and 2021,
respectively.
We declared dividends to Series C preferred stockholders of $5 million, or
$0.484375 per preferred share, during the quarters ended March 31, 2022 and
2021, respectively.
We declared dividends to Series D preferred stockholders of $4 million, or $0.50
per preferred share, during the quarters ended March 31, 2022 and 2021,
respectively.
On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A
Preferred Stock with an outstanding liquidation preference of $145 million
became callable at a redemption price equal to the liquidation preference plus
accrued and unpaid dividends through, but not including, the redemption date.
The dividend rate on shares of Series A Preferred Stock is 8.00% per annum. Our
fixed-to-floating rate series B, C and D preferred stock are LIBOR based and
will become floating on their respective call dates.
Restricted Stock Unit and Performance Share Unit Grants
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Grants of Restricted Stock Units, or RSUs
During the quarter ended March 31, 2022 and 2021, we granted RSU awards to
senior management. These RSU awards are designed to reward our senior management
for services provided to us. Generally, the RSU awards vest equally over a
three-year period beginning from the grant date and will fully vest after three
years. For employees who are retirement eligible, defined as years of service to
us plus age, is equal to or greater than 65, the service period is considered to
be fulfilled and all grants are expensed immediately. The RSU awards are valued
at the market price of our common stock on the grant date and generally the
employees must be employed by us on the vesting dates to receive the RSU awards.
We granted 128 thousand RSU awards during the quarter ended March 31, 2022, with
a grant date fair value of $2 million. We granted 182 thousand RSU awards during
the quarter ended March 31, 2021, with a grant date fair value of $2 million. In
addition, during the quarter ended March 31, 2021, we granted certain of our
senior management 1 million RSU awards that vest in five equal tranches with one
tranche vested immediately and the remaining four will vest equally over a
four-year period. These additional RSUs are not subject to retirement eligible
provisions and had a grant date fair value of $10 million.
Grants of Performance Share Units, or PSUs
PSU awards are designed to align compensation with our future performance. The
PSU awards granted during the year ended December 31, 2021 and 2020, include a
three-year performance period ending on December 31, 2024 and December 31, 2023,
respectively. The final number of shares awarded will be between 0% and 200% of
the PSUs granted based on our Economic Return compared to a peer group. Our
three-year Economic Return is equal to our change in book value per common share
plus common stock dividends. Compensation expense will be recognized on a
straight-line basis over the three-year vesting period based on an estimate of
our Economic Return in relation to the entities in the peer group and will be
adjusted each period based on our best estimate of the actual number of shares
awarded. During the quarter ended March 31, 2022, we granted 128 thousand PSU
awards to senior management with a grant date fair value of $2 million. During
the quarter ended March 31, 2021, we granted 182 thousand PSU awards to senior
management with a grant date fair value of $2 million.
At March 31, 2022 and December 31, 2021, there were approximately 2.9 million
unvested shares of RSUs and PSUs issued to our employees and directors,
respectively.
Contractual Obligations and Commitments
The following tables summarize our contractual obligations at March 31, 2022 and
December 31, 2021. The estimated principal repayment schedule of the securitized
debt is based on expected cash flows of the residential mortgage loans or RMBS,
as adjusted for expected principal write-downs on the underlying collateral of
the debt.
March 31, 2022
(dollars in thousands)
Greater Than or
One to Three Three to Five Equal to Five
Contractual Obligations Within One Year Years Years Years Total
Secured financing agreements $ 3,202,909 $ – $ 221,496 $ – $ 3,424,405
Securitized debt, collateralized by
Non-Agency RMBS 2,193 1,517 565 29 4,304
Securitized debt at fair value,
collateralized by Loans held for investment 1,989,813 2,898,571 1,790,442 1,631,291 8,310,117
Interest expense on MBS secured financing
agreements (1) 9,626 – 958 – 10,584
Interest expense on securitized debt (1) 196,238 277,683 161,465 141,714 777,100
Total $ 5,400,779 $ 3,177,771 $ 2,174,926 $ 1,773,034 $ 12,526,510
(1) Interest is based on variable rates in effect as of March 31, 2022.
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December 31, 2021
(dollars in thousands)
Greater Than or
One to Three Three to Five Equal to Five
Contractual Obligations Within One Year Years Years Years Total
Secured financing agreements $ 2,861,485 $ 143,239 $ 256,889 $ – $ 3,261,613
Securitized debt, collateralized by
Non-Agency RMBS 4,374 2,361 949 82 7,766
Securitized debt at fair value,
collateralized by Loans held for investment 2,031,445 2,886,255 1,697,760 1,145,995 7,761,455
Interest expense on MBS secured financing
agreements (1) 7,687 352 1,270 – 9,309
Interest expense on securitized debt (1) 170,798 223,316 117,998 101,367 613,479
Total $ 5,075,789 $ 3,255,523 $ 2,074,866 $ 1,247,444 $ 11,653,622
(1) Interest is based on variable rates in effect as of December 31, 2021.
Not included in the table above are the unfunded construction loan commitments
of $17 million and $23 million as of March 31, 2022 and December 31, 2021,
respectively. We expect the majority of these commitments will be paid within
one year and are reported under Payable for investments purchased in our
Consolidated Statements of Financial Condition.
Capital Expenditure Requirements
At March 31, 2022 and December 31, 2021, we had no material commitments for
capital expenditures.
Dividends
To maintain our qualification as a REIT, we must pay annual dividends to our
stockholders of at least 90% of our taxable income (subject to certain
adjustments). Before we pay any dividend, we must first meet any operating
requirements and scheduled debt service on our financing facilities and other
debt payable.
Critical Accounting Policies and Estimates
Accounting policies are integral to understanding our Management’s Discussion
and Analysis of Financial Condition and Results of Operations. The preparation
of financial statements in accordance with GAAP requires management to make
certain judgments and assumptions, on the basis of information available at the
time of the financial statements, in determining accounting estimates used in
the preparation of these statements. Our significant accounting policies and
accounting estimates are described in Note 2 to the Consolidated Financial
Statements. Critical accounting policies are described in this section. An
accounting policy is considered critical if it requires management to make
assumptions or judgments about matters that are highly uncertain at the time the
accounting estimate was made or require significant management judgment in
interpreting the accounting literature. If actual results differ from our
judgments and assumptions, or other accounting judgments were made, this could
have a significant and potentially adverse impact on our financial condition,
results of operations and cash flows.
The accounting policies and estimates which we consider most critical relate to
the recognition of revenue on our investments, including recognition of any
losses, and the determination of fair value of our financial instruments.
The consolidated financial statements include, on a consolidated basis, our
accounts, the accounts of our wholly-owned subsidiaries, and variable interest
entities, or VIEs, for which we are the primary beneficiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Although our estimates contemplate current
conditions and how we expect them to change in the future, it is reasonably
possible that actual conditions could be different than anticipated in those
estimates, which could materially adversely impact our results of operations and
our financial condition. Management has made significant estimates in several
areas, including current expected credit losses of Non-Agency
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RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS and
interest rate swaps and income recognition on Loans held for investments and
Non-Agency RMBS. Actual results could differ materially from those estimates.
Recent Accounting Pronouncements
Refer to Note 2 in the Notes to Consolidated Financial Statements for a
discussion of accounting guidance we have recently adopted or expect to be
adopted in the future.
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