|
||||||||||||||||||||||||||
| SEC Info℠ | | | Home | | | Search | | | My Interests | | | Help | | | Sign In | | | Please Sign In | |||||||
|
||||||||||||||||||||||||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 5/15/23 Arlington Asset Investment Corp. 10-Q 3/31/23 86:17M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 4.82M
2: EX-31.01 Certification -- §302 - SOA'02 HTML 29K
3: EX-31.02 Certification -- §302 - SOA'02 HTML 30K
4: EX-32.01 Certification -- §906 - SOA'02 HTML 27K
5: EX-32.02 Certification -- §906 - SOA'02 HTML 27K
11: R1 Document And Entity Information HTML 93K
12: R2 Consolidated Balance Sheets HTML 113K
13: R3 Consolidated Balance Sheets (Parenthetical) HTML 68K
14: R4 Consolidated Statements of Comprehensive Income HTML 121K
(Unaudited)
15: R5 Consolidated Statements of Changes in Equity HTML 78K
(Unaudited)
16: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 136K
17: R7 Organization and Basis of Presentation HTML 36K
18: R8 Summary of Significant Accounting Policies HTML 77K
19: R9 Investments in Agency MBS HTML 54K
20: R10 Investments in Credit Securities HTML 53K
21: R11 Loans Held for Investment HTML 40K
22: R12 Investments in MSR Financing Receivables HTML 69K
23: R13 Investments in SFR Properties HTML 44K
24: R14 Consolidation of Variable Interest Entities HTML 161K
25: R15 Borrowings HTML 216K
26: R16 Derivative Instruments HTML 394K
27: R17 Offsetting of Financial Assets and Liabilities HTML 320K
28: R18 Fair Value Measurements HTML 385K
29: R19 Income Taxes HTML 41K
30: R20 Earnings (Loss) Per Share HTML 59K
31: R21 Stockholders' Equity HTML 74K
32: R22 Long-Term Incentive Plan HTML 210K
33: R23 Summary of Significant Accounting Policies HTML 136K
(Policies)
34: R24 Investments in Agency MBS (Tables) HTML 48K
35: R25 Investments in Credit Securities (Tables) HTML 48K
36: R26 Investments in MSR Financing Receivables (Tables) HTML 56K
37: R27 Consolidation of Variable Interest Entities HTML 155K
(Tables)
38: R28 Borrowings (Tables) HTML 202K
39: R29 Derivative Instruments (Tables) HTML 390K
40: R30 Offsetting of Financial Assets and Liabilities HTML 317K
(Tables)
41: R31 Fair Value Measurements (Tables) HTML 337K
42: R32 Earnings (Loss) Per Share (Tables) HTML 55K
43: R33 Long-Term Incentive Plan (Tables) HTML 165K
44: R34 Organization and Basis of Presentation - HTML 28K
Additional Information (Details)
45: R35 Summary of Significant Accounting Policies - HTML 46K
Additional Information (Details)
46: R36 Investments in Agency MBS - Additional Information HTML 28K
(Details)
47: R37 Investments in Agency MBS - Additional Information HTML 32K
About Gains and Losses Recognized with Respect to
Investments in Agency MBS (Details)
48: R38 Investments in Credit Securities - Additional HTML 27K
Information (Details)
49: R39 Investments in Credit Securities - Additional HTML 32K
Information About Gains and Losses Recognized with
Respect to Investments in Credit Securities
(Details)
50: R40 Loans Held For Investment - Additional Information HTML 63K
(Details)
51: R41 Investments in MSR Financing Receivables - HTML 43K
Additional Information (Details)
52: R42 Investments in MSR Financing Receivables - HTML 34K
Schedule of Investment in MSR Finance Receivables
(Details)
53: R43 Investments in SFR Properties - Additional HTML 47K
Information (Details)
54: R44 Consolidation of Variable Interest Entities - HTML 32K
Additional Information (Details)
55: R45 Consolidation of Variable Interest Entities - HTML 60K
Schedule of Carrying Values of Assets and
Liabilities of Consolidated VIE, Net of
Elimination Entries (Details)
56: R46 Consolidation of Variable Interest Entities - HTML 46K
Schedule of Accrual Status of Residential Mortgage
Loans of Consolidated VIE (Details)
57: R47 Borrowings - Additional Information (Details) HTML 65K
58: R48 Borrowings - Outstanding Repurchase Agreement HTML 49K
Borrowings (Details)
59: R49 Borrowings - Information Regarding Outstanding HTML 29K
Repurchase Agreement Borrowings During the Period
(Details)
60: R50 Borrowings - Long-term Unsecured Debt Instruments HTML 54K
(Details)
61: R51 Derivative Instruments - Fair Value of Derivative HTML 38K
Instruments (Details)
62: R52 Derivative Instruments - Interest Rate Swap HTML 45K
Agreements (Details)
63: R53 Derivative Instruments - Additional Information HTML 30K
(Details)
64: R54 Derivative Instruments - TBA Commitments (Details) HTML 55K
65: R55 Derivative Instruments - Derivative Gains and HTML 48K
Losses Recognized Within the Periods (Details)
66: R56 Derivative Instruments - Volume of Activity, in HTML 43K
terms of Notional Amount, Related to Derivative
Instruments (Details)
67: R57 Derivative Instruments - Cash Collateral Posted in HTML 29K
Respect of Derivative and Other Financial
Instruments (Details)
68: R58 Offsetting of Financial Assets and Liabilities - HTML 92K
Derivative Instruments and Short-term Borrowing
Arrangements, including those Subject to Master
Netting or Similar Arrangements (Details)
69: R59 Fair Value Measurements - Summary of Significant HTML 58K
Inputs to Fair Value Measurement (Details)
70: R60 Fair Value Measurements - Additional Information HTML 65K
(Details)
71: R61 Fair Value Measurements - Financial Instruments HTML 78K
Measured at Fair Value on a Recurring Basis
(Details)
72: R62 Fair Value Measurements - Change in Fair Value of HTML 63K
Level 3 Financial Assets and Liabilities that are
Measured at Fair Value on Recurring Basis
(Details)
73: R63 Income Taxes - Additional Information (Details) HTML 51K
74: R64 Earnings (Loss) Per Share - Computations of Basic HTML 52K
and Diluted Earnings (Loss) Per Share (Details)
75: R65 Earnings (Loss) Per Share - Additional Information HTML 30K
(Details)
76: R66 Stockholders' Equity - Additional Information HTML 150K
(Details)
77: R67 Long-Term Incentive Plan (Additional Information) HTML 120K
(Details)
78: R68 Long-Term Incentive Plan - Share Based HTML 38K
Compensation Performance-based Stock Award Grants
Activity (Details)
79: R69 Long-Term Incentive Plan - Share Based HTML 46K
Compensation Award Valuation Assumptions (Details)
80: R70 Long-Term Incentive Plan - Share Based HTML 35K
Compensation Award Valuation Assumptions
(Parenthetical) (Details)
81: R71 Long-Term Incentive Plan - Schedule of Unvested HTML 55K
Restricted Stock Units Roll Forward (Details)
84: XML IDEA XML File -- Filing Summary XML 164K
82: XML XBRL Instance -- aaic-20230331_htm XML 4.74M
83: EXCEL IDEA Workbook of Financial Reports XLSX 188K
7: EX-101.CAL XBRL Calculations -- aaic-20230331_cal XML 160K
6: EX-101.DEF XBRL Definitions -- aaic-20230331_def XML 1.34M
10: EX-101.LAB XBRL Labels -- aaic-20230331_lab XML 1.72M
8: EX-101.PRE XBRL Presentations -- aaic-20230331_pre XML 1.49M
9: EX-101.SCH XBRL Schema -- aaic-20230331 XSD 269K
85: JSON XBRL Instance as JSON Data -- MetaLinks 514± 889K
86: ZIP XBRL Zipped Folder -- 0000950170-23-022105-xbrl Zip 505K
| 10-Q |
``` 11111
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i March 31, i 2023 /
OR
i ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: i 001-34374
i ARLINGTON ASSET INVESTMENT CORP.
(Exact name of Registrant as specified in its charter)
i Virginia |
|
i 54-1873198 |
(State or Other Jurisdiction of Incorporation or Organization) |
|
(I.R.S. Employer Identification No.) |
i 6862 Elm Street, i Suite 320 |
|
i 22101 |
(Address of Principal Executive Offices) |
|
(Zip Code) |
( i 703) i 373-0200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
i Class A Common Stock |
|
i AAIC |
|
i NYSE |
i 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock |
|
i AAIC PrB |
|
i NYSE |
i 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock |
|
i AAIC PrC |
|
i NYSE |
i 6.000% Senior Notes due 2026 |
|
i AAIN |
|
i NYSE |
i 6.75% Senior Notes due 2025 |
|
i AIC |
|
i NYSE |
|
|
|
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
☐ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
i Non-accelerated filer |
|
☒
|
|
Small reporting company |
|
i ☒ |
|
|
|
|
|
|
|
Emerging growth company |
|
i ☐ |
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No i ☒
Number of shares outstanding of each of the registrant’s classes of common stock, as of April 28, 2023:
Title |
|
Outstanding |
Class A Common Stock |
|
i 28,360,447 shares |
ARLINGTON ASSET INVESTMENT CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2023
INDEX
|
|
|
|
|
|
Page |
PART I — FINANCIAL INFORMATION |
|
|
||||
|
|
Item 1. |
|
Consolidated Financial Statements and Notes — (unaudited) |
|
1 |
|
|
|
|
|
1 |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
5 |
|
|
|
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
33 |
|
|
Item 3. |
|
|
50 |
|
|
|
Item 4. |
|
|
54 |
|
PART II — OTHER INFORMATION |
|
|
||||
|
|
Item 1. |
|
|
55 |
|
|
|
Item 1A. |
|
|
55 |
|
|
|
Item 2. |
|
|
55 |
|
|
|
Item 3. |
|
|
55 |
|
|
|
Item 4. |
|
|
55 |
|
|
|
Item 5. |
|
|
55 |
|
|
|
Item 6. |
|
|
55 |
|
|
|
|
|
|
58 |
|
i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
||||
ASSETS |
|
|
|
|
|
|
||
Cash and cash equivalents (includes $- i 0- and $ i 296,
respectively, from |
|
$ |
i 12,833 |
|
|
$ |
i 28,021 |
|
Restricted cash of consolidated VIEs |
|
|
i — |
|
|
|
i 2,191 |
|
Agency mortgage-backed securities, at fair value |
|
|
i 460,984 |
|
|
|
i 443,540 |
|
MSR financing receivables, at fair value |
|
|
i 183,058 |
|
|
|
i 180,365 |
|
Credit securities, at fair value |
|
|
i 102,564 |
|
|
|
i 104,437 |
|
Mortgage loans, at fair value |
|
|
i 27,798 |
|
|
|
i 29,264 |
|
Mortgage loans of consolidated VIEs, at fair value |
|
|
i 1,344 |
|
|
|
i 193,957 |
|
Deposits |
|
|
i 11,171 |
|
|
|
i 1,823 |
|
Other assets (includes $ i 1,850 and $ i 2,067, respectively, from consolidated VIEs) |
|
|
i 8,252 |
|
|
|
i 18,720 |
|
Total assets |
|
$ |
i 808,004 |
|
|
$ |
i 1,002,318 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
Liabilities: |
|
|
|
|
|
|
||
Repurchase agreements |
|
$ |
i 484,348 |
|
|
$ |
i 515,510 |
|
Secured debt of consolidated VIEs, at fair value |
|
|
i 160 |
|
|
|
i 169,345 |
|
Long-term unsecured debt |
|
|
i 86,508 |
|
|
|
i 86,405 |
|
Other liabilities (includes $- i 0- and $ i 262, respectively, from consolidated VIEs) |
|
|
i 21,843 |
|
|
|
i 13,718 |
|
Total liabilities |
|
|
i 592,859 |
|
|
|
i 784,978 |
|
Commitments and contingencies |
|
|
|
|
|
|
||
Stockholders’ Equity: |
|
|
|
|
|
|
||
Series B Preferred stock, $ i i 0.01 / par
value, i i i i 379,668 / / / shares
issued and outstanding |
|
|
i 9,001 |
|
|
|
i 9,001 |
|
Series C Preferred stock, $ i i 0.01 / par
value, i i i i 957,133 / / / shares
issued and outstanding |
|
|
i 23,820 |
|
|
|
i 23,820 |
|
Class A common stock, $ i i 0.01 / par
value, i i 450,000,000 / shares authorized, i i 28,360,447 / |
|
|
i 284 |
|
|
|
i 282 |
|
Additional paid-in capital |
|
|
i 2,024,979 |
|
|
|
i 2,024,298 |
|
Accumulated deficit |
|
|
( i 1,842,939 |
) |
|
|
( i 1,840,061 |
) |
Total stockholders’ equity |
|
|
i 215,145 |
|
|
|
i 217,340 |
|
Total liabilities and stockholders’ equity |
|
$ |
i 808,004 |
|
|
$ |
i 1,002,318 |
|
|
|
|
|
|
|
|
||
|
|
|
|
|
||||
Assets and liabilities of consolidated VIEs |
|
|
|
|
|
|
||
Cash and restricted cash |
|
$ |
i — |
|
|
$ |
i 2,487 |
|
Mortgage loans, at fair value |
|
|
i 1,344 |
|
|
|
i 193,957 |
|
Other assets |
|
|
i 1,850 |
|
|
|
i 2,067 |
|
Secured debt, at fair value |
|
|
( i 160 |
) |
|
|
( i 169,345 |
) |
Other liabilities |
|
|
i — |
|
|
|
( i 262 |
) |
Net investment in consolidated VIEs |
|
$ |
i 3,034 |
|
|
$ |
i 28,904 |
|
See notes to consolidated financial statements.
1
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
(Unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Interest income |
|
|
|
|
|
|
||
MSR financing receivables |
|
$ |
i 4,685 |
|
|
$ |
i 3,382 |
|
Agency mortgage-backed securities |
|
|
i 4,976 |
|
|
|
i 1,492 |
|
Credit securities and loans |
|
|
i 2,762 |
|
|
|
i 853 |
|
Mortgage loans of consolidated VIEs |
|
|
i 1,398 |
|
|
|
i 1,354 |
|
Other |
|
|
i 179 |
|
|
|
i 325 |
|
Total interest and other income |
|
|
i 14,000 |
|
|
|
i 7,406 |
|
Rent revenues from single-family properties |
|
|
i — |
|
|
|
i 1,064 |
|
Interest expense |
|
|
|
|
|
|
||
Repurchase agreements |
|
|
i 6,125 |
|
|
|
i 276 |
|
Long-term debt secured by single-family properties |
|
|
i — |
|
|
|
i 408 |
|
Long-term unsecured debt |
|
|
i 1,541 |
|
|
|
i 1,370 |
|
Secured debt of consolidated VIEs |
|
|
i 681 |
|
|
|
i 1,188 |
|
Total interest expense |
|
|
i 8,347 |
|
|
|
i 3,242 |
|
Single-family property operating expenses |
|
|
i — |
|
|
|
i 1,531 |
|
Net operating income |
|
|
i 5,653 |
|
|
|
i 3,697 |
|
Investment and derivative loss, net |
|
|
( i 3,851 |
) |
|
|
( i 827 |
) |
General and administrative expenses |
|
|
|
|
|
|
||
Compensation and benefits |
|
|
i 2,255 |
|
|
|
i 2,065 |
|
Other general and administrative expenses |
|
|
i 1,656 |
|
|
|
i 1,219 |
|
Total general and administrative expenses |
|
|
i 3,911 |
|
|
|
i 3,284 |
|
Loss before income taxes |
|
|
( i 2,109 |
) |
|
|
( i 414 |
) |
Income tax provision |
|
|
i 109 |
|
|
|
i 2,287 |
|
Net loss |
|
|
( i 2,218 |
) |
|
|
( i 2,701 |
) |
Dividend on preferred stock |
|
|
( i 660 |
) |
|
|
( i 742 |
) |
Net loss attributable to common stock |
|
$ |
( i 2,878 |
) |
|
$ |
( i 3,443 |
) |
Basic loss per common share |
|
$ |
( i 0.10 |
) |
|
$ |
( i 0.12 |
) |
Diluted loss per common share |
|
$ |
( i 0.10 |
) |
|
$ |
( i 0.12 |
) |
Weighted-average common shares outstanding |
|
|
|
|
|
|
||
Basic |
|
|
i 28,004 |
|
|
|
i 29,832 |
|
Diluted |
|
|
i 28,004 |
|
|
|
i 29,832 |
|
See notes to consolidated financial statements.
2
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
(Unaudited)
|
|
Series B |
|
|
Series B |
|
|
Series C |
|
|
Series C |
|
|
Class A |
|
|
Class A |
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
|||||||||
Balances, December 31, 2021 |
|
|
i 373,610 |
|
|
$ |
i 8,852 |
|
|
|
i 1,117,034 |
|
|
$ |
i 27,356 |
|
|
|
i 30,676,931 |
|
|
$ |
i 307 |
|
|
$ |
i 2,030,315 |
|
|
$ |
( i 1,842,703 |
) |
|
$ |
i 224,127 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 2,701 |
) |
|
|
( i 2,701 |
) |
Issuance of Class A common |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 404,746 |
|
|
|
i 4 |
|
|
|
( i 4 |
) |
|
|
— |
|
|
|
— |
|
Forfeiture of Class A common |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 12,167 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Repurchase of Class A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1,009,566 |
) |
|
|
( i 10 |
) |
|
|
( i 3,487 |
) |
|
|
— |
|
|
|
( i 3,497 |
) |
Issuance of preferred stock |
|
|
i 6,058 |
|
|
|
i 149 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 149 |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 761 |
|
|
|
— |
|
|
|
i 761 |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 742 |
) |
|
|
( i 742 |
) |
Balances, March 31, 2022 |
|
|
i 379,668 |
|
|
$ |
i 9,001 |
|
|
|
i 1,117,034 |
|
|
$ |
i 27,356 |
|
|
|
i 30,059,944 |
|
|
$ |
i 301 |
|
|
$ |
i 2,027,585 |
|
|
$ |
( i 1,846,146 |
) |
|
$ |
i 218,097 |
|
|
|
Series B |
|
|
Series B |
|
|
Series C |
|
|
Series C |
|
|
Class A |
|
|
Class A |
|
|
Additional |
|
|
Accumulated |
|
|
Total |
|
|||||||||
Balances, December 31, 2022 |
|
|
i 379,668 |
|
|
$ |
i 9,001 |
|
|
|
i 957,133 |
|
|
$ |
i 23,820 |
|
|
|
i 28,186,827 |
|
|
$ |
i 282 |
|
|
$ |
i 2,024,298 |
|
|
$ |
( i 1,840,061 |
) |
|
$ |
i 217,340 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 2,218 |
) |
|
|
( i 2,218 |
) |
Issuance of Class A common |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 198,324 |
|
|
|
i 2 |
|
|
|
( i 2 |
) |
|
|
— |
|
|
|
— |
|
Repurchase of Class A |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 24,704 |
) |
|
|
— |
|
|
|
( i 74 |
) |
|
|
— |
|
|
|
( i 74 |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 757 |
|
|
|
— |
|
|
|
i 757 |
|
Dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 660 |
) |
|
|
( i 660 |
) |
Balances, March 31, 2023 |
|
|
i 379,668 |
|
|
$ |
i 9,001 |
|
|
|
i 957,133 |
|
|
$ |
i 23,820 |
|
|
|
i 28,360,447 |
|
|
$ |
i 284 |
|
|
$ |
i 2,024,979 |
|
|
$ |
( i 1,842,939 |
) |
|
$ |
i 215,145 |
|
See notes to consolidated financial statements.
3
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net loss |
|
$ |
( i 2,218 |
) |
|
$ |
( i 2,701 |
) |
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
|
|
||
Investment and derivative loss, net |
|
|
i 3,851 |
|
|
|
i 827 |
|
Net discount accretion |
|
|
( i 4,308 |
) |
|
|
( i 1,820 |
) |
Other |
|
|
i 792 |
|
|
|
i 1,598 |
|
Changes in operating assets |
|
|
|
|
|
|
||
Interest receivable |
|
|
( i 221 |
) |
|
|
i 372 |
|
Other assets |
|
|
( i 118 |
) |
|
|
( i 1,016 |
) |
Changes in operating liabilities |
|
|
|
|
|
|
||
Interest payable and other liabilities |
|
|
i 765 |
|
|
|
i 2,444 |
|
Accrued compensation and benefits |
|
|
( i 2,959 |
) |
|
|
( i 1,977 |
) |
Net cash used in operating activities |
|
|
( i 4,416 |
) |
|
|
( i 2,273 |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of agency mortgage-backed securities |
|
|
( i 42,729 |
) |
|
|
( i 78,874 |
) |
Purchases of credit securities |
|
|
i — |
|
|
|
( i 20,585 |
) |
Purchases of MSR financing receivables |
|
|
( i 6,075 |
) |
|
|
( i 3,187 |
) |
Purchases of single-family residential real estate |
|
|
i — |
|
|
|
( i 61,098 |
) |
Proceeds from sales of agency mortgage-backed securities |
|
|
i 26,016 |
|
|
|
i 259,415 |
|
Proceeds from sales of credit securities |
|
|
i 22,578 |
|
|
|
i — |
|
(Payments) proceeds from sales of single-family residential real estate |
|
|
( i 40 |
) |
|
|
i 351 |
|
Receipt of principal payments on agency mortgage-backed securities |
|
|
i 6,179 |
|
|
|
i 12,717 |
|
Receipt of principal payments on credit securities |
|
|
i 1,309 |
|
|
|
i 308 |
|
Receipt of principal payments on loans |
|
|
i 6,380 |
|
|
|
i 105 |
|
Receipt of principal payments on mortgage loans of consolidated VIE |
|
|
i 5,105 |
|
|
|
i 14,855 |
|
Receipt of distributions on MSR financing receivables |
|
|
i 4,931 |
|
|
|
i 15,119 |
|
Restricted cash balance of VIE upon consolidation |
|
|
i — |
|
|
|
i 9,637 |
|
Restricted cash balance of VIE upon deconsolidation |
|
|
( i 2,719 |
) |
|
|
i — |
|
Proceeds from derivatives and deposits, net |
|
|
i 1,368 |
|
|
|
i 3,026 |
|
Other |
|
|
i 50 |
|
|
|
i 1,351 |
|
Net cash provided by investing activities |
|
|
i 22,353 |
|
|
|
i 153,140 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Repayments of repurchase agreements, net |
|
|
( i 31,161 |
) |
|
|
( i 161,761 |
) |
Repayments of secured debt of consolidated VIE |
|
|
( i 3,495 |
) |
|
|
( i 13,576 |
) |
Repurchase of common stock |
|
|
i — |
|
|
|
( i 3,497 |
) |
Proceeds from issuance of preferred stock |
|
|
i — |
|
|
|
i 149 |
|
Proceeds from long-term debt secured by single-family properties |
|
|
i — |
|
|
|
i 38,632 |
|
Dividends paid |
|
|
( i 660 |
) |
|
|
( i 742 |
) |
Net cash used in financing activities |
|
|
( i 35,316 |
) |
|
|
( i 140,795 |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
|
( i 17,379 |
) |
|
|
i 10,072 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
i 30,212 |
|
|
|
i 21,786 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
i 12,833 |
|
|
$ |
i 31,858 |
|
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash payments for interest |
|
$ |
i 8,001 |
|
|
$ |
i 3,278 |
|
Cash (refunds) payments for income taxes |
|
$ |
( i 52 |
) |
|
$ |
i — |
|
Non-cash investing activity: |
|
|
|
|
|
|
||
Assets of VIE upon consolidation |
|
$ |
i — |
|
|
$ |
i 287,282 |
|
Assets of VIE upon deconsolidation |
|
$ |
( i 189,360 |
) |
|
$ |
i — |
|
Non-cash financing activity: |
|
|
|
|
|
|
||
Liabilities of VIE upon consolidation |
|
$ |
i — |
|
|
$ |
i 266,697 |
|
Liabilities of VIE upon deconsolidation |
|
$ |
( i 166,783 |
) |
|
$ |
i — |
|
See notes to consolidated financial statements.
4
ARLINGTON ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
Note 1. Organization and Basis of Presentation
Arlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the “Company”) is an investment firm that focuses primarily on investing in mortgage related assets and residential real estate. The Company’s investment capital is currently allocated between mortgage servicing rights (“MSR”) related assets, credit investments and agency mortgage-backed securities (“MBS”).
The Company’s MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. The Company’s credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
The Company also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to its SFR investment strategy.
The Company is a Virginia corporation. The Company is internally managed and does not have an external investment advisor.
The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company is required to distribute annually i 90% of its REIT taxable income (subject to certain adjustments). So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. Federal or state corporate income taxes on its taxable income that it distributes to its shareholders on a timely basis. At present, it is the Company’s intention to distribute i 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
The unaudited interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The Company’s consolidated financial statements include the accounts of Arlington Asset and all other entities in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Although the Company bases these estimates and assumptions on historical experience and all other reasonably available information that the Company believes to be relevant under the circumstances, such estimates frequently require management to exercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ materially from these estimates.
Certain prior period amounts in the consolidated financial statements and the accompanying notes may have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, total assets or total liabilities.
/
5
Note 2. Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three months or less. As of March 31, 2023 and December 31, 2022, approximately i 68% and i 84%, respectively, of the Company’s cash equivalents were invested in money market funds that invest primarily in U.S. Treasuries and other securities backed by the U.S. government.
/Investment Security Purchases and Sales
Purchases and sales of investment securities are recorded on the settlement date of the transfer unless the trade qualifies as a “regular-way” trade and the associated commitment qualifies for an exemption from the accounting guidance applicable to derivative instruments. A regular-way trade is an investment security purchase or sale transaction that is expected to settle within the period of time following the trade date that is prevalent or traditional for that specific type of security. Any amounts payable or receivable for unsettled security trades are recorded as “sold securities receivable” or “purchased securities payable” in the consolidated balance sheets.
Interest Income Recognition for Investments in Agency MBS, Mortgage Loans of Consolidated VIEs and Credit Securities of High Credit Quality
The Company recognizes interest income for its investments in agency MBS, mortgage loans of consolidated variable interest entities (“VIEs”) and credit securities that are considered to be of high credit quality (that is, those with a Standard & Poor's rating of AA or higher or an equivalent rating from another rating agency) by applying the “interest method” permitted by GAAP, whereby purchase premiums and discounts are amortized and accreted, respectively, as an adjustment to contractual interest income accrued at each investment’s stated interest rate. The interest method is applied at the individual instrument level based upon each instrument’s effective interest rate. The Company calculates each instrument’s effective interest rate at the time of purchase or initial recognition by solving for the discount rate that equates the present value of that instrument's remaining contractual cash flows (assuming no principal prepayments) to its purchase cost. Because each instrument’s effective interest rate does not reflect an estimate of future prepayments, the Company refers to this manner of applying the interest method as the “contractual effective interest method.” When applying the contractual effective interest method, as principal prepayments occur, a proportional amount of the unamortized premium or unaccreted discount is recognized in interest income such that the contractual effective interest rate on any remaining security or loan balance is unaffected.
For mortgage loans of consolidated VIEs, the Company ceases the accrual of interest income (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded. While a loan is in non-accrual status, the Company recognizes interest income only when interest payments occur.
Interest Income Recognition for Investments in Other Credit Securities and MSR Financing Receivables
The Company recognizes interest income for its investments in credit securities (other than those considered to be of high credit quality) and MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment. The amount of periodic interest income recognized is determined by applying the investment’s effective interest rate to its amortized cost basis (or “reference amount”). At the time of acquisition, the investment’s effective interest rate is calculated by solving for the single discount rate that equates the present value of the Company’s best estimate of the amount and timing of the cash flows expected to be collected from the investment to its purchase cost. To prepare its best estimate of cash flows expected to be collected, the Company develops a number of assumptions about the future performance of the pool of loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses. For investments in MSR financing receivables, the Company's estimate of cash flows expected to be collected reflects all components of its mortgage servicing counterparty's payment obligation, which is comprised of cash flows referenced to the monthly net cash flows of the underlying reference pool of MSRs net of (i) the counterparty's periodic interest payments and principal repayments related to advances obtained via its third-party secured financing facility collateralized by MSRs to which the Company's MSR financing receivables are referenced and (ii) fees payable to the counterparty. In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the investment are re-estimated based upon current information and events. The following table provides a description of how periodic changes in the estimate of cash flows
6
expected to be collected affect interest income recognition prospectively for investments in credit securities and MSR financing receivables:
Scenario: |
|
|
Effect on Interest Income Recognition for Investments in Credit Securities and MSR Financing Receivables: |
|
|
|
|
A positive change in cash flows occurs.
Actual cash flows exceed prior estimates and/or a positive change occurs in the estimate of expected remaining cash flows. |
|
|
A revised effective interest rate is calculated and applied prospectively such that the positive change in cash flows is recognized as incremental interest income over the remaining life of the investment.
|
|
|
|
The amount of periodic interest income recognized over the remaining life of the investment will be reduced accordingly. Generally, the investment’s effective interest rate is reduced accordingly and applied on a prospective basis. However, if the revised effective interest rate is negative, the investment’s existing effective interest rate is retained while the reference amount to which the existing effective interest rate will be prospectively applied is reduced to the present value of cash flows expected to be collected, discounted at the investment’s existing effective interest rate. |
An adverse change in cash flows occurs.
Actual cash flows fall short of prior estimates and/or an adverse change occurs in the estimate of expected remaining cash flows.
|
|
|
Other Significant Accounting Policies
Certain of the Company’s other significant accounting policies are summarized in the following notes:
Investments in agency MBS, subsequent measurement |
Note 3 |
Investments in credit securities, subsequent measurement Loans held for investment, subsequent measurement Investments in MSR financing receivables, subsequent measurement Investments in SFR properties |
Note 4 Note 5 Note 6 Note 7 |
Consolidation of variable interest entities Borrowings |
Note 8 Note 9 |
To-be-announced agency MBS transactions, including “dollar rolls” |
Note 10 |
Derivative instruments |
Note 10 |
Balance sheet offsetting |
Note 11 |
Fair value measurements Income taxes |
Note 12 Note 13 |
Stock-based compensation |
Note 16 |
Refer to the Company’s 2022 Annual Report on Form 10-K for a complete inventory and summary of the Company’s significant accounting policies.
Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting pronouncements and their actual or expected effect on the Company’s consolidated financial statements:
Standard |
Description |
Date of Adoption |
Effect on the Consolidated Financial Statements |
Recently Issued Accounting Guidance Not Yet Adopted |
|||
ASU Nos. 2020-04, 2021-01, and 2022-06, Reference Rate Reform (Topic 848)
|
The amendments in these updates provide optional practical expedients and exceptions for applying GAAP to the modification of receivables, debt or lease contracts as well as cash flow and fair value hedge accounting relationships that reference a rate, such as the London Interbank Offered Rate (“LIBOR”), that is expected to be discontinued because of reference rate reform.
|
Not yet adopted. |
To date, any modifications due to reference rate reform have |
7
|
The practical expedients and exceptions provided by these updates are effective from March 12, 2020 through December 31, 2024. |
|
not had a material impact to the Company.
The Company has not elected to apply hedge accounting for financial reporting purposes.
The Company does not currently expect the adoption of ASU Nos. 2020-04, 2021-01 and 2022-06 to have a material effect on its consolidated financial statements. |
Note 3. Investments in Agency MBS
i The Company has elected to classify its investments in agency MBS as trading securities. Accordingly, the Company’s investments in agency MBS are reported in the accompanying consolidated balance sheets at fair value. As of March 31, 2023 and December 31, 2022, the fair value of the Company’s investments in agency MBS was $ i 460,984 and $ i 443,540, respectively. / As of March 31, 2023, all the Company’s investments in agency MBS represent undivided (or “pass-through”) beneficial interests in specified pools of fixed-rate mortgage loans.
All periodic changes in the fair value of agency MBS that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. i The following table provides additional information about the gains and losses recognized as a component of “investment and derivative gain (loss), net” in the Company’s consolidated statements of comprehensive income for the periods indicated with respect to investments in agency MBS:
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
||
Agency MBS still held at period end |
|
$ |
i 7,028 |
|
|
$ |
( i 17,414 |
) |
Agency MBS sold during the period |
|
|
( i 245 |
) |
|
|
( i 8,543 |
) |
Total |
|
$ |
i 6,783 |
|
|
$ |
( i 25,957 |
) |
The Company also invests in and finances fixed-rate agency MBS on a generic pool basis through sequential series of to-be-announced security transactions commonly referred to as “dollar rolls.” Dollar rolls are accounted for as a sequential series of derivative instruments. Refer to “Note 10. Derivative Instruments” for further information about dollar rolls.
/
Note 4. Investments in Credit Securities
i The Company has elected to classify its investments in credit securities as trading securities. Accordingly, the Company’s investments in credit securities are reported in the accompanying consolidated balance sheets at fair value. As of March 31, 2023 and December 31, 2022, the fair value of the Company’s investments in credit securities was $ i 102,564 and $ i 104,437, respectively. / As of March 31, 2023, the Company’s investments in credit securities primarily consist of non-agency MBS collateralized by pools of business purpose residential mortgage loans or commercial mortgage loans and ABS collateralized by pools of residential solar panel loans.
All periodic changes in the fair value of credit securities that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. i The following table provides additional information about the gains and losses recognized as a component of “investment and derivative gain (loss), net” in the Company’s consolidated statements of comprehensive income for the periods indicated with respect to investments in credit securities:
8
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
||
Credit securities still held at period end |
|
$ |
( i 689 |
) |
|
$ |
( i 842 |
) |
Credit securities sold during the period |
|
|
i — |
|
|
|
i — |
|
Total |
|
$ |
( i 689 |
) |
|
$ |
( i 842 |
) |
Note 5. Loans Held for Investment
As of March 31, 2023 and December 31, 2022, the Company held a position in a syndicated loan secured by a first lien position in healthcare facilities and guaranteed by the operator of the facilities. As of March 31, 2023 and December 31, 2022, the total outstanding principal balance was $ i 82,243 and $ i 86,579, respectively, of which the Company held a pari-passu position of $ i 27,798 and $ i 29,264, respectively. The loan bears interest at a floating note rate equal to i SOFR plus 5.61%. The loan had a maturity date of i March 23, 2023. On March 23, 2023, the loan was amended to grant the borrower a three-month extension of the maturity date to i June 23, 2023 and to grant the borrower an option for an additional three-month extension of the maturity date to i September 23, 2023. The loan has monthly principal amortization based upon a 30-year amortization schedule with the remaining principal balance due at loan maturity.
As of December 31, 2022, the Company was party to a participation agreement pursuant to which the Company had committed to fund up to $ i 30,000 of a $ i 130,000 revolving credit facility that matures on i July 7, 2024. Under the terms of the participation agreement, the Company was required to fund the last $ i 30,000 of advances under the revolving credit facility. Any draws under the revolving credit facility bore interest at i SOFR plus 3.86% with a SOFR floor of i 1.00% and are secured by a first lien on all accounts receivable and a second lien on all other assets of the borrower. The borrower was also required to pay an unused commitment fee of i 0.50%. As of December 31, 2022, the Company’s funded loan advances were $ i 4,914, which is included in the line item "other assets" in the accompanying consolidated balance sheets. On February 27, 2023, our $ i 30,000 commitment was terminated.
i The Company has elected to account for its loans held for investment at fair value on a recurring basis with periodic changes in fair value recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. As of March 31, 2023 and December 31, 2022, the Company’s investment was $ i 27,798 and $ i 34,178, respectively, at fair value. The Company recognizes interest income on its loans held for investment based upon the effective interest rate of the loans which is equal to the contractual note rate of each loan.
/
Note 6. Investments in MSR Financing Receivables
The Company does not hold the requisite licenses to purchase or hold MSRs directly. However, the Company has entered into agreements with a licensed, GSE approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. Under the terms of the arrangement, for an MSR acquired by the mortgage servicing counterparty (i) the Company purchases the “excess servicing spread” from the mortgage servicer counterparty, entitling the Company to monthly distributions of the servicing fees collected by the mortgage servicing counterparty in excess of i 12.5 basis points per annum (and to distributions of corresponding proceeds of sale of the MSRs), and (ii) the Company funds the balance of the MSR purchase price to the parent company of the mortgage servicing counterparty and, in exchange, has an unsecured right to payment of certain amounts determined by reference to the MSR, generally equal to the servicing fee revenue less the excess servicing spread and the costs of servicing (and to distributions of corresponding proceeds of sale of the MSRs), net of fees earned by the mortgage servicing counterparty and its affiliates including an incentive fee equal to a percentage of the total return of the MSR in excess of a hurdle rate of return. The Company has committed to invest a total minimum of $ i 50,000 in capital with the counterparty with $ i 25,000 of the minimum commitment expiring on i December 31, 2023 and $ i 25,000 of the minimum commitment expiring on i April 1, 2024. As of March 31, 2023, the Company has fully funded its minimum capital commitment.
Under the arrangement, the Company is obligated to provide funds to the mortgage servicing counterparty to fund the counterparty’s advances of payments on the serviced pool of mortgage loans. The mortgage servicing counterparty is required to return to the Company subsequent servicing advances collected from the underlying borrowers. The mortgage servicing counterparty is entitled to reimbursement from the GSEs of any servicing advances that are not subsequently collected from the underlying borrowers. As of March 31, 2023 and December 31, 2022, the Company had provided funds of $ i 4,202 and $ i 6,046, respectively, to its mortgage servicing counterparty related to the counterparty’s servicing advances made pursuant to the MSRs to which the Company’s MSR financing receivables are referenced.
9
As a means to increase potential returns to the Company, at the Company’s election, it can request the mortgage servicing counterparty utilize leverage on the MSRs to which the Company’s MSR financing receivables are referenced to finance the purchase of additional MSRs. As of March 31, 2023 and December 31, 2022, the Company’s counterparty had drawn $ i 1,010 and $ i 7,863, respectively, of financing secured by the MSRs to which the Company’s MSR financing receivables are referenced.
The Company accounts for transactions executed under its arrangement with the mortgage servicing counterparty as financing transactions and reflects the associated financing receivables in the line item “MSR financing receivables” on its consolidated balance sheets. The Company has elected to account for its MSR financing receivables at fair value with changes in fair value that are not attributed to interest income recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment.
As of March 31, 2023 and December 31, 2022, the fair value of the Company’s investments in MSR financing receivables was $ i 183,058 and $ i 180,365, respectively. i The following table presents activity related to the carrying value of the Company’s investments in MSR financing receivables for the periods indicated:
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Balance at period beginning |
|
$ |
i 180,365 |
|
|
$ |
i 125,018 |
|
Capital investments |
|
|
i 6,075 |
|
|
|
i 3,187 |
|
Capital distributions |
|
|
( i 4,932 |
) |
|
|
( i 15,120 |
) |
Accretion of interest income |
|
|
i 4,685 |
|
|
|
i 3,382 |
|
Changes in valuation inputs and assumptions |
|
|
( i 3,135 |
) |
|
|
i 22,758 |
|
Balance at period end |
|
$ |
i 183,058 |
|
|
$ |
i 139,225 |
|
Note 7. Investments in SFR Properties
The Company previously allocated investment capital to a strategy of investing in SFR properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to an SFR investment strategy. The Company conducted its SFR investment strategy through a wholly-owned subsidiary, McLean SFR Investment, LLC ("McLean SFR").
To execute its strategy of investing in SFR properties, the Company entered into an agreement with a third-party investment advisory firm to identify, acquire and manage investments in SFR properties on behalf of the Company. Under the terms of the agreement, the Company had committed to fund up to $ i 55,000 of capital to fund the acquisition of SFR properties. On January 18, 2023, the Company's capital commitment amount was reduced to zero as a result of its sale of its remaining portfolio of SFR properties on December 1, 2022. Under the terms of the advisory agreement, the Company was obligated to pay the third-party firm a minimum fee plus an incentive fee equal to a percentage of the total investment return in excess of a hurdle rate of return. The Company terminated its agreement with the third-party investment advisory firm on April 28, 2023. Upon the termination of the agreement, the Company paid a termination fee equal to a fixed amount less inception to date minimum fees paid to the third-party firm as well as the incentive fee earned. The Company accrued the termination fee and incentive fees earned as of March 31, 2023 and December 31, 2022.
The Company’s investments in SFR properties were initially recognized on the settlement date of their acquisition at cost. The Company allocated the initial acquisition cost of each property to land and building on the basis of their relative fair values at the time of acquisition. To determine the relative fair value of land and building at the time of acquisition, the Company used available market data, such as property specific county tax assessment records.
Subsequent to the acquisition of a property, expenditures which improved or extended the life of the property were capitalized as a component of the property’s cost basis. Expenditures for ordinary maintenance and repairs were recognized as an expense as incurred and were reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.
10
The Company subsequently recognized depreciation of each property’s buildings and capitalized improvements over the expected useful lives of those assets. The Company calculated depreciation on a straight-line basis over a useful life of i 27.5 years for buildings and useful lives ranging from five to i 27.5 years for capitalized improvements. The Company reported depreciation expense as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.
/Pursuant to its SFR investment strategy, the Company leased its SFR properties to tenants who occupied the properties. The leases generally had terms of one year or more and were classified as operating leases. Rental revenue, net of any concessions, was recognized over the term of each lease on a straight-line basis. If the Company determined that collectability of lease payments was not probable, any lease receivables previously recognized were reversed and rental revenue was limited to cash received.
Costs directly associated with the origination of a lease, such as a commission paid to a property manager when a lease agreement was obtained, were deferred at the commencement of the lease and subsequently recognized ratably as an expense over the lease term, consistent with the recognition of rental revenue from the lease. The ratable expense recognition of lease direct costs was reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income. In addition to the expense items previously mentioned, “single-family property operating expenses” also included accruals for, but not limited to, third-party property management fees, local real estate tax assessments, utilities, homeowners’ association dues and property insurance.
The Company evaluated its SFR properties for impairment whenever circumstances indicated that their carrying amounts may not be recoverable. Significant indicators of potential impairment included, but were not limited to, declines in home values, adverse changes in rental or occupancy rates and relevant unfavorable changes in the broader economy. If indicators of potential impairment existed, the Company performed a recoverability test by comparing the property’s net carrying amount to its estimate of the undiscounted future net cash flows expected to be obtained from the use and eventual disposition of the property. If the property’s carrying amount exceeded the Company’s estimate of the undiscounted future net cash flows expected to be obtained from the property, the Company would have recognized an impairment loss equal to the amount that the property’s net carrying amount exceeded the property’s estimated fair value.
From time to time, the Company identified SFR properties to be sold. At the time that any such properties were identified, the Company performed an evaluation to determine whether or not such properties should be classified as held for sale. Factors considered as part of the Company's held for sale evaluation process included whether the following conditions had been met: (i) the Company had committed to a plan to sell a property; (ii) the property was immediately available for sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell a property had been initiated; (iv) the sale of a property was probable within one year (generally determined based upon listing for sale); (v) the property was being actively marketed for sale at a price that was reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicated that it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. To the extent that these factors were all present, the Company ceased depreciating the property, measured the property at the lower of its carrying amount or its fair value less estimated costs to sell, and presented the property separately on its consolidated balance sheets.
On August 19, 2022, the Company completed a sale of i 371 SFR properties for a gross sale price of $ i 130,026 for a gain of $ i 14,391 that is net of accrued incentive fees to the Company's third-party investment firm.
On December 1, 2022, the Company completed a sale of McLean SFR, which included all of the Company's remaining investments in SFR properties and its long-term debt facility secured by SFR properties, for a gross sale price of $ i 87,050, including the assumption of the debt liability (see Note 9 "Borrowings"), for a gain of $ i 1,789 that is net of accrued incentive fees and termination fees to the Company's third-party investment advisory firm.
During the three months ended March 31, 2022, the Company recognized $ i 715 of depreciation expense related to its SFR properties.
/
Note 8. Consolidation of Variable Interest Entities
The vehicles that issue the Company’s investments in securitized mortgage assets are considered VIEs. The Company is required to consolidate any VIE in which it holds a variable interest if it determines that it holds a controlling financial interest in the VIE and is, therefore, determined to be the primary beneficiary of the VIE. The Company is determined to be the primary beneficiary of a VIE in which it holds a variable interest if it both (i) holds the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The economic performance of the trusts that issue the Company’s investments in securitized mortgage assets is most significantly impacted by the performance of the mortgage loans that are held by the trusts. The party that is determined to have
11
the most power to direct the loss mitigation actions that are taken with respect to delinquent or otherwise troubled mortgage loans held by the trust is, therefore, deemed to hold the most power to direct the activities that most significantly impact the trust’s economic performance. As a passive investor, the Company does not have the power to direct the loss mitigation activities of most of the trusts that have issued its securitized mortgage assets.
On September 30, 2020, the Company acquired for $ i 10,693 an investment that represents a majority interest in the first loss position of a securitized pool of business purpose residential mortgage loans. As majority holder of the first loss position, the Company is required to approve any material loss mitigation action proposed by the servicer with respect to a troubled loan. The Company also has the option (but not the obligation) to purchase delinquent loans from the trust. As a result of these contractual rights, the Company determined that it is the party with the most power to direct the loss mitigation activities and, therefore, the economic performance of the trust. As holder of the majority of the first loss position issued by the trust, the Company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets.
On February 3, 2022, the Company acquired for $ i 20,585 investments in the first loss position and the excess interest-only strip of a securitized pool of recently originated, performing “non-qualified” residential mortgage loans. The Company’s investment in the excess interest-only strip provided it with the option (but not the obligation) to purchase delinquent loans from the trust. As a result of this contractual right, the Company determined that it had the power to circumvent the loss mitigation activities that would otherwise be performed by the servicer and, therefore, was the party with the most power to impact the economic performance of the trust. As a result of its investments, the Company also had the obligation to absorb losses or the right to receive benefits that could potentially be significant to the trust. Accordingly, the Company determined that it was the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets. On March 7, 2023, the Company sold all of its investments in the securitized pool of "non-qualified" residential mortgage loans and, as a result, deconsolidated the issuing securitization trust.
The carrying values of the assets and liabilities of the consolidated VIEs, net of elimination entries, are as follows as of the dates indicated:
|
|
|
||||||||||
|
|
VIE of Business Purpose Residential Mortgage Loans |
|
|
VIE of Residential Mortgage Loans |
|
|
Total |
|
|||
Cash of consolidated VIEs |
|
$ |
i — |
|
|
$ |
i — |
|
|
$ |
i — |
|
Restricted cash of consolidated VIEs (1) |
|
|
i — |
|
|
|
i — |
|
|
|
i — |
|
Mortgage loans of consolidated VIEs, at fair value |
|
|
i 1,344 |
|
|
|
i — |
|
|
|
i 1,344 |
|
Other assets of consolidated VIEs |
|
|
i 1,850 |
|
|
|
i — |
|
|
|
i 1,850 |
|
Secured debt of consolidated VIEs, at fair value |
|
|
( i 160 |
) |
|
|
i — |
|
|
|
( i 160 |
) |
Other liabilities of consolidated VIEs |
|
|
i — |
|
|
|
i — |
|
|
|
i — |
|
Net investment in consolidated VIEs |
|
$ |
i 3,034 |
|
|
$ |
i — |
|
|
$ |
i 3,034 |
|
|
|
|
||||||||||
|
|
VIE of Business Purpose Residential Mortgage Loans |
|
|
VIE of Residential Mortgage Loans |
|
|
Total |
|
|||
Cash of consolidated VIEs |
|
$ |
i 296 |
|
|
$ |
i — |
|
|
$ |
i 296 |
|
Restricted cash of consolidated VIEs (1) |
|
|
i 16 |
|
|
|
i 2,175 |
|
|
|
i 2,191 |
|
Mortgage loans of consolidated VIEs, at fair value |
|
|
i 2,320 |
|
|
|
i 191,637 |
|
|
|
i 193,957 |
|
Other assets of consolidated VIEs |
|
|
i 1,389 |
|
|
|
i 678 |
|
|
|
i 2,067 |
|
Secured debt of consolidated VIEs, at fair value |
|
|
( i 200 |
) |
|
|
( i 169,145 |
) |
|
|
( i 169,345 |
) |
Other liabilities of consolidated VIEs |
|
|
( i 1 |
) |
|
|
( i 261 |
) |
|
|
( i 262 |
) |
Net investment in consolidated VIEs |
|
$ |
i 3,820 |
|
|
$ |
i 25,084 |
|
|
$ |
i 28,904 |
|
12
The debt of the Company’s consolidated VIEs have recourse solely to the assets of the respective VIE; it has no recourse to the general credit of the Company.
Consolidated VIE of Business Purpose Residential Mortgage Loans
The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan.
Consolidated VIE of Residential Mortgage Loans
On March 7, 2023, the Company sold all of its investments in the securitized pool of residential mortgage loans and, as a result, deconsolidated the issuing securitization trust. The pool of mortgage loans of the previously consolidated VIE consisted of performing, first lien “non-qualified” residential mortgage loans. “Non-qualified” residential mortgage loans are loans that do not fully comply with the “ability-to-repay” rule and related guidelines of the Truth-in-Lending Act established by the Consumer Finance Protection Bureau pursuant to the authority granted under the Dodd-Frank Act. A “qualified” residential mortgage loan (i.e., a residential mortgage loan that fully complies with the “ability-to-repay” rule of the Truth-in-Lending Act) must meet certain debt-to-income ratio requirements and cannot have certain features, such as an interest-only period, negative amortization, balloon payments or terms longer than 30 years. Qualified mortgage loans have limited upfront fees and points and, generally, cannot have prepayment penalties except for limited circumstances. Lenders of qualified mortgage loans are afforded certain legal protections not available to non-qualified mortgage loan lenders.
Accounting for Consolidated VIEs
The Company has elected to account for the mortgage loans and debt of its consolidated VIEs at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income.
As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for the mortgage loans of its consolidated VIEs by applying the “interest method” permitted by GAAP, whereby the premium or discount recognized at the initial recognition of each loan is amortized or accreted as an adjustment to contractual interest income accrued at the loan’s contractual interest rate. The Company ceases the accrual of interest income for a mortgage loan (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded.
The following table presents information about the accrual status of the loans of the Company’s consolidated VIE of business purpose residential mortgage loans as of March 31, 2023:
|
|
Aggregate Fair Value |
|
|
Aggregate Unpaid Principal Balance |
|
|
Difference |
|
|||
Less than 90 days past due and in accrual status |
|
$ |
i — |
|
|
$ |
i — |
|
|
$ |
— |
|
90 days or more past due and in non-accrual status |
|
|
i 1,344 |
|
|
|
i 1,371 |
|
|
|
( i 27 |
) |
Total mortgage loans of consolidated VIE |
|
$ |
i 1,344 |
|
|
$ |
i 1,371 |
|
|
$ |
( i 27 |
) |
Note 9. Borrowings
Repurchase Agreements
The Company finances the purchase of mortgage investments through repurchase agreements, which are accounted for as collateralized borrowing arrangements. In a repurchase transaction, the Company sells a mortgage investment to a counterparty under a master repurchase agreement in exchange for cash and concurrently agrees to repurchase the same asset at a future date in an amount equal to the cash initially exchanged plus an agreed-upon amount of interest. Mortgage investments sold under agreements to repurchase remain on the Company’s consolidated balance sheets because the Company maintains effective control over such assets throughout the duration of the arrangement. Throughout the contractual term of a repurchase agreement, the Company recognizes a
13
“repurchase agreement” liability on its consolidated balance sheets to reflect the obligation to repay to the counterparty the proceeds received upon the initial transfer of the mortgage investment. The difference between the proceeds received by the Company upon the initial transfer of the mortgage investment and the contractually agreed-upon repurchase price is recognized as interest expense ratably over the term of the repurchase arrangement.
Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.
The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from i 30 to i 60 days, but may be as short as one day or as long as one year. The Company’s mortgage loan repurchase agreement arrangement has a maturity date of i October 23, 2023 and an interest rate that resets monthly at a rate equal to i SOFR plus i 2.61% / . Under the terms of the Company’s mortgage loan repurchase agreement, the Company may request extensions of the maturity date of the agreement for up to i 364 days, subject to the lender’s approval.
As of March 31, 2023 and December 31, 2022, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10% of equity. i The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated:
|
|
|
|
|
||||
Agency MBS repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
i 385,923 |
|
|
$ |
i 406,072 |
|
Agency MBS collateral, at fair value |
|
|
i 413,190 |
|
|
|
i 425,023 |
|
Net amount (1) |
|
|
i 27,267 |
|
|
|
i 18,951 |
|
Weighted-average rate |
|
|
i 4.94 |
% |
|
|
i 4.47 |
% |
Weighted-average term to maturity |
|
i 13.0 days |
|
|
i 12.0 days |
|
||
Non-agency MBS repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
i 79,372 |
|
|
$ |
i 88,953 |
|
MBS collateral, at fair value |
|
|
i 88,015 |
|
|
|
i 98,933 |
|
Net amount (1) |
|
|
i 8,643 |
|
|
|
i 9,980 |
|
Weighted-average rate |
|
|
i 5.53 |
% |
|
|
i 5.02 |
% |
Weighted-average term to maturity |
|
i 20.0 days |
|
|
i 20.0 days |
|
||
Mortgage loans repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
i 19,053 |
|
|
$ |
i 20,485 |
|
Mortgage loans collateral, at fair value |
|
|
i 27,798 |
|
|
|
i 29,264 |
|
Net amount (1) |
|
|
i 8,745 |
|
|
|
i 8,779 |
|
Weighted-average rate |
|
|
i 7.34 |
% |
|
|
i 6.84 |
% |
Weighted-average term to maturity |
|
i 206.0 days |
|
|
i 235.0 days |
|
||
Total mortgage investments repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
i 484,348 |
|
|
$ |
i 515,510 |
|
Mortgage investments collateral, at fair value |
|
|
i 529,003 |
|
|
|
i 553,220 |
|
Net amount (1) |
|
|
i 44,655 |
|
|
|
i 37,710 |
|
Weighted-average rate |
|
|
i 5.13 |
% |
|
|
i 4.66 |
% |
Weighted-average term to maturity |
|
i 21.7 days |
|
|
i 22.2 days |
|
||
The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three months ended March 31, 2023 and 2022:
|
|
|
|
|
||||
Weighted-average outstanding balance during the three months ended |
|
$ |
i 505,369 |
|
|
$ |
i 342,364 |
|
Weighted-average rate during the three months ended |
|
|
i 4.85 |
% |
|
|
i 0.32 |
% |
14
Long-Term Unsecured Debt
As of March 31, 2023 and December 31, 2022, the Company had $ i 86,508 and $ i 86,405, respectively, of outstanding long-term unsecured debentures, net of unamortized debt issuance costs of $ i 1,173 and $ i 1,276, respectively. The Company’s long-term unsecured debentures consisted of the following as of the dates indicated:
|
|
|
|
|
||||||||||||||||||||
|
|
Senior |
|
|
Senior |
|
|
Trust |
|
|
Senior |
|
|
Senior |
|
|
Trust |
|
||||||
Outstanding |
|
$ |
i 34,931 |
|
|
$ |
i 37,750 |
|
|
$ |
i 15,000 |
|
|
$ |
i 34,931 |
|
|
$ |
i 37,750 |
|
|
$ |
i 15,000 |
|
Annual |
|
|
i 6.75 |
% |
|
|
i 6.000 |
% |
|
i LIBOR+ |
|
|
|
i 6.75 |
% |
|
|
i 6.000 |
% |
|
i LIBOR+ |
|
||
Interest |
|
i Quarterly |
|
|
i Quarterly |
|
|
i Quarterly |
|
|
i Quarterly |
|
|
i Quarterly |
|
|
i Quarterly |
|
||||||
Weighted- |
|
|
i 6.75 |
% |
|
|
i 6.000 |
% |
|
|
i 7.58 |
% |
|
|
i 6.75 |
% |
|
|
i 6.000 |
% |
|
|
i 6.83 |
% |
Maturity |
|
|
|
|
|
i 2033 - i 2035 |
|
|
|
|
|
|
i 2033 - i 2035 |
|
||||||||||
The Senior Notes due 2025 and the Senior Notes due 2026 are publicly traded on the New York Stock Exchange under the ticker symbols “AIC” and “AAIN,” respectively. The Senior Notes due 2025 and Trust Preferred Debt may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing the Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.
Long-Term Debt Secured by Single-family Properties
On September 28, 2021, McLean SFR, a wholly-owned subsidiary of Arlington Asset, entered into a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. As a result of the sale of McLean SFR on December 1, 2022, the obligations under the loan agreement were assumed by the acquiror of McLean SFR (see Note 7 "Investments in Single-Family Residential Properties").
Under the terms of the loan agreement, loan advances were available to be drawn up to i 74% of the fair value of eligible SFR properties up to a maximum loan amount of $ i 150,000. Advances under the loan agreement were able to be drawn during the advance period, which would end on the earlier of the date the outstanding principal balance equals the maximum loan amount or March 28, 2023. The outstanding principal balance was due on i October 9, 2026 and advances under the loan agreement bore interest at a fixed rate of i 2.76%. The loan was secured by a first priority interest in all the assets of McLean SFR and a first priority pledge of the equity interest of McLean SFR.
/
Note 10. Derivative Instruments
In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either “other assets” or “other liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment and derivative gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.
Types and Uses of Derivative Instruments
Interest Rate Hedging Instruments
The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS and MSR financing receivable fair values and future interest cash flows on the
15
Company’s short-term financing arrangements. Interest rate hedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.
The Company exchanges cash “variation margin” with the counterparties to its interest rate hedging instruments on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.
The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last trading day of the reporting period.
To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”
In addition to interest rate hedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.
The Company’s agency MBS investment portfolio may include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of economically relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.
In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.
In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.
Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables
16
recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.
Derivative Instrument Population and Fair Value
The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:
|
|
|
|
|
||||||||||||
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
||||
Interest rate swaps |
|
$ |
i 117 |
|
|
$ |
( i 11 |
) |
|
$ |
i 8 |
|
|
$ |
i — |
|
TBA commitments |
|
|
i 23 |
|
|
|
( i 10,637 |
) |
|
|
i 5,652 |
|
|
|
( i 22 |
) |
Total |
|
$ |
i 140 |
|
|
$ |
( i 10,648 |
) |
|
$ |
i 5,660 |
|
|
$ |
( i 22 |
) |
/
Interest Rate Swaps
The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make (or receive) annual interest payments based upon a fixed interest rate and receive (or make) annual variable interest payments based upon the daily SOFR over the preceding annual period.
The following table presents information about the Company’s interest rate swap agreements that were in effect as of March 31, 2023:
|
|
|
|
|
Weighted-average: |
|
|
|
|
|||||||||||||||
|
|
Notional |
|
|
Fixed Receive |
|
|
Variable (Pay) |
|
|
Net (Pay) |
|
|
Remaining |
|
|
Fair |
|
||||||
Receive-fixed |
|
$ |
i 60,000 |
|
|
|
i 3.58 |
% |
|
|
( i 4.82 |
)% |
|
|
( i 1.24 |
)% |
|
|
i 5.7 |
|
|
$ |
i 117 |
|
Pay-fixed |
|
|
i 25,000 |
|
|
|
( i 4.20 |
)% |
|
|
i 4.82 |
% |
|
|
i 0.62 |
% |
|
|
i 2.8 |
|
|
|
( i 11 |
) |
Total / weighted-average |
|
$ |
i 85,000 |
|
|
|
i 1.29 |
% |
|
|
( i 1.98 |
)% |
|
|
( i 0.69 |
)% |
|
|
i 4.9 |
|
|
$ |
i 106 |
|
The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2022:
|
|
|
|
|
Weighted-average: |
|
|
|
|
|||||||||||||||
|
|
Notional |
|
|
Fixed Receive |
|
|
Variable (Pay) |
|
|
Net (Pay) |
|
|
Remaining |
|
|
Fair |
|
||||||
Receive-fixed |
|
$ |
i 60,000 |
|
|
|
i 3.58 |
% |
|
|
( i 4.30 |
)% |
|
|
( i 0.72 |
)% |
|
|
i 4.9 |
|
|
$ |
i 8 |
|
TBA Commitments
The following tables present information about the Company’s TBA commitments as of the dates indicated:
|
|
|
||||||||||||||
|
|
Notional Amount: |
|
|
Contractual Forward Price |
|
|
Market Price |
|
|
Fair Value |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
( i 70,000 |
) |
|
$ |
( i 61,009 |
) |
|
$ |
( i 62,725 |
) |
|
$ |
( i 1,716 |
) |
4.0% 30-year MBS purchase commitments |
|
|
i 50,000 |
|
|
|
i 47,957 |
|
|
|
i 47,781 |
|
|
|
( i 176 |
) |
4.0% 30-year MBS sale commitments |
|
|
( i 140,000 |
) |
|
|
( i 130,665 |
) |
|
|
( i 133,788 |
) |
|
|
( i 3,123 |
) |
4.5% 30-year MBS sale commitments |
|
|
( i 229,000 |
) |
|
|
( i 218,642 |
) |
|
|
( i 224,241 |
) |
|
|
( i 5,599 |
) |
Total TBA commitments, net |
|
$ |
( i 389,000 |
) |
|
$ |
( i 362,359 |
) |
|
$ |
( i 372,973 |
) |
|
$ |
( i 10,614 |
) |
17
|
|
|
||||||||||||||
|
|
Notional Amount: |
|
|
Contractual Forward Price |
|
|
Market Price |
|
|
Fair Value |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
( i 70,000 |
) |
|
$ |
( i 62,828 |
) |
|
$ |
( i 61,516 |
) |
|
$ |
i 1,312 |
|
4.0% 30-year MBS sale commitments |
|
|
( i 150,000 |
) |
|
|
( i 142,255 |
) |
|
|
( i 140,830 |
) |
|
|
i 1,425 |
|
4.5% 30-year MBS sale commitments |
|
|
( i 205,000 |
) |
|
|
( i 200,365 |
) |
|
|
( i 197,472 |
) |
|
|
i 2,893 |
|
Total TBA commitments, net |
|
$ |
( i 425,000 |
) |
|
$ |
( i 405,448 |
) |
|
$ |
( i 399,818 |
) |
|
$ |
i 5,630 |
|
Derivative Instrument Gains and Losses
The following tables provide information about the derivative gains and losses recognized within the periods indicated:
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|||
Interest rate derivatives: |
|
|
|
|
|
||
Interest rate swaps: |
|
|
|
|
|
||
Net interest expense (1) |
$ |
( i 118 |
) |
|
$ |
( i 291 |
) |
Unrealized gains, net |
|
i 792 |
|
|
|
i 3,466 |
|
Gains realized upon early termination, net |
|
i 385 |
|
|
|
i 3,161 |
|
Total interest rate swap gains, net |
|
i 1,059 |
|
|
|
i 6,336 |
|
U.S. Treasury note futures, net |
|
i — |
|
|
|
( i 782 |
) |
Options on U.S. Treasury note futures, net |
|
i — |
|
|
|
( i 4 |
) |
Total interest rate derivative gains, net |
|
i 1,059 |
|
|
|
i 5,550 |
|
TBA commitments: |
|
|
|
|
|
||
TBA dollar roll income (2) |
|
i 74 |
|
|
|
i 823 |
|
Other losses on TBA commitments, net |
|
( i 6,543 |
) |
|
|
( i 4,706 |
) |
Total losses on TBA commitments, net |
|
( i 6,469 |
) |
|
|
( i 3,883 |
) |
Total derivative (losses) gains, net |
$ |
( i 5,410 |
) |
|
$ |
i 1,667 |
|
Derivative Instrument Activity
The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:
|
|
For the Three Months Ended March 31, 2023 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
i 60,000 |
|
|
$ |
i 50,000 |
|
|
$ |
i — |
|
|
$ |
( i 25,000 |
) |
|
$ |
i 85,000 |
|
TBA commitments, net |
|
|
i 425,000 |
|
|
|
i 1,353,000 |
|
|
|
( i 1,389,000 |
) |
|
|
i — |
|
|
|
i 389,000 |
|
|
|
For the Three Months Ended March 31, 2022 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled Settlements |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
i 150,000 |
|
|
$ |
i 70,000 |
|
|
$ |
i — |
|
|
$ |
( i 45,000 |
) |
|
$ |
i 175,000 |
|
10-year U.S. Treasury note futures |
|
|
i 25,000 |
|
|
|
i 50,000 |
|
|
|
( i 50,000 |
) |
|
|
( i 25,000 |
) |
|
|
i — |
|
Purchased call options on 10-year U.S. |
|
|
i 25,000 |
|
|
|
i — |
|
|
|
( i 25,000 |
) |
|
|
i — |
|
|
|
i — |
|
TBA commitments, net |
|
|
i — |
|
|
|
i 325,000 |
|
|
|
( i 325,000 |
) |
|
|
i — |
|
|
|
i — |
|
18
/
Cash Collateral Posted and Received for Derivative and Other Financial Instruments
The following table presents information about the cash collateral posted by the Company in respect of its derivative and other financial instruments, which is included in the line item “deposits” in the accompanying consolidated balance sheets, for the dates indicated:
|
|
|
|
|
||||
Cash collateral posted for: |
|
|
|
|
|
|
||
Interest rate swaps (cash initial margin) |
|
$ |
i 1,690 |
|
|
$ |
i 1,823 |
|
TBA commitments, net |
|
|
i 9,481 |
|
|
|
i — |
|
Total cash collateral posted, net |
|
$ |
i 11,171 |
|
|
$ |
i 1,823 |
|
Note 11. Offsetting of Financial Assets and Liabilities
The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as collateralized short-term financing arrangements on a gross basis.
Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.
The daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.
The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements, and associated collateral, including those subject to master netting (or similar) arrangements:
|
|
As of March 31, 2023 |
|
|||||||||||||||||||||
|
|
Gross Amount |
|
|
Amount Offset |
|
|
Net Amount |
|
|
Gross Amount Not Offset in the |
|
|
Net |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Cash |
|
|
|
|
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate swaps |
|
$ |
i 117 |
|
|
$ |
i — |
|
|
$ |
i 117 |
|
|
$ |
( i 11 |
) |
|
$ |
i — |
|
|
$ |
i 106 |
|
TBA commitments |
|
|
i 23 |
|
|
|
i — |
|
|
|
i 23 |
|
|
|
( i 23 |
) |
|
|
i — |
|
|
|
i — |
|
Total derivative instruments |
|
|
i 140 |
|
|
|
i — |
|
|
|
i 140 |
|
|
|
( i 34 |
) |
|
|
i — |
|
|
|
i 106 |
|
Total assets |
|
$ |
i 140 |
|
|
$ |
i — |
|
|
$ |
i 140 |
|
|
$ |
( i 34 |
) |
|
$ |
i — |
|
|
$ |
i 106 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate swaps |
|
$ |
i 11 |
|
|
$ |
i — |
|
|
$ |
i 11 |
|
|
$ |
( i 11 |
) |
|
$ |
i — |
|
|
$ |
i — |
|
TBA commitments |
|
|
i 10,637 |
|
|
|
i — |
|
|
|
i 10,637 |
|
|
|
( i 23 |
) |
|
|
( i 9,481 |
) |
|
|
i 1,133 |
|
Total derivative instruments |
|
|
i 10,648 |
|
|
|
i — |
|
|
|
i 10,648 |
|
|
|
( i 34 |
) |
|
|
( i 9,481 |
) |
|
|
i 1,133 |
|
Repurchase agreements |
|
|
i 484,348 |
|
|
|
i — |
|
|
|
i 484,348 |
|
|
|
( i 484,348 |
) |
|
|
i — |
|
|
|
i — |
|
Total liabilities |
|
$ |
i 494,996 |
|
|
$ |
i — |
|
|
$ |
i 494,996 |
|
|
$ |
( i 484,382 |
) |
|
$ |
( i 9,481 |
) |
|
$ |
i 1,133 |
|
19
|
|
As of December 31, 2022 |
|
|||||||||||||||||||||
|
|
Gross Amount |
|
|
Amount Offset |
|
|
Net Amount |
|
|
Gross Amount Not Offset in the |
|
|
Net |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Cash |
|
|
|
|
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
TBA commitments |
|
$ |
i 5,652 |
|
|
$ |
i — |
|
|
$ |
i 5,652 |
|
|
$ |
( i 22 |
) |
|
$ |
i — |
|
|
$ |
i 5,630 |
|
Interest rate swaps |
|
|
i 8 |
|
|
|
i — |
|
|
|
i 8 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 8 |
|
Total derivative instruments |
|
|
i 5,660 |
|
|
|
i — |
|
|
|
i 5,660 |
|
|
|
( i 22 |
) |
|
|
i — |
|
|
|
i 5,638 |
|
Total assets |
|
$ |
i 5,660 |
|
|
$ |
i — |
|
|
$ |
i 5,660 |
|
|
$ |
( i 22 |
) |
|
$ |
i — |
|
|
$ |
i 5,638 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
TBA commitments |
|
$ |
i 22 |
|
|
$ |
i — |
|
|
$ |
i 22 |
|
|
$ |
( i 22 |
) |
|
$ |
i — |
|
|
$ |
i — |
|
Total derivative instruments |
|
|
i 22 |
|
|
|
i — |
|
|
|
i 22 |
|
|
|
( i 22 |
) |
|
|
i — |
|
|
|
i — |
|
Repurchase agreements |
|
|
i 515,510 |
|
|
|
i — |
|
|
|
i 515,510 |
|
|
|
( i 515,510 |
) |
|
|
i — |
|
|
|
i — |
|
Total liabilities |
|
$ |
i 515,532 |
|
|
$ |
i — |
|
|
$ |
i 515,532 |
|
|
$ |
( i 515,532 |
) |
|
$ |
i — |
|
|
$ |
i — |
|
Note 12. Fair Value Measurements
Fair Value of Financial Instruments
The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:
|
Level 1 Inputs - |
Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company at the measurement date; |
|
Level 2 Inputs - |
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and |
|
Level 3 Inputs - |
Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use. |
The Company measures the fair value of the following assets and liabilities:
Investments in Financial Assets
Agency MBS – The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources and reviews their documented valuation methodologies to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement date.
20
Credit securities – The Company's investments in commercial MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company's investments in commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow measurement. The Company’s investments in non-agency MBS collateralized by a pool of business purpose residential mortgage loans and ABS collateralized by residential solar panel loans are classified within Level 3 of the fair value hierarchy.
To measure the fair value of the Company’s non-agency MBS investment secured by a pool of business purpose residential mortgage loans, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business purpose residential mortgage loans that serve as collateral, including loan-level probabilities of default and loss-given-default. As of March 31, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans serving as collateral to the Company's non-agency MBS investment represented less than i 5% of the original collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. i The following table presents the weighted-average of the significant inputs to the fair value measurement of the Company’s non-agency MBS secured by business purpose residential mortgage loans as of dates indicated:
|
|
|
|
||||
Probability of default |
|
i 69.8 |
% |
|
|
i 27.8 |
% |
Loss-given-default |
|
i 33.2 |
% |
|
|
i 18.3 |
% |
Inputs to fair value measurements of the Company’s investments in ABS collateralized by residential solar panel loans includes quoted prices obtained from dealers and, when available, observable market information for the same or similar securities. In determining fair value, dealers may use a market approach or an income approach, depending upon the type and level of relevant market information available as of the measurement date. The significant inputs used in the fair value measurements performed by dealers are often unobservable as ABS collateralized by residential solar panel loans trade infrequently. The Company reviews the fair value estimates obtained from dealers and performs procedures to validate their reasonableness, including comparisons to an internally derived discounted future cash flow measurement and, when available, recent trading activity observed for similar securities.
Loans – The Company’s commercial mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the loan over its expected remaining life, discounted at a current market rate. The significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment are the estimated probability of default and the discount rate, which is based on current market yields and interest rate spreads for a similar loan. As of March 31, 2023, the estimated probability of default and discount rate for the Company’s mortgage loan investment were i 0% and i 10.4%, respectively. As of December 31, 2022, the estimated probability of default and discount rate for the Company’s mortgage loan investment were i 0% and i 10.0%, respectively.
Mortgage loans and secured debt of consolidated VIEs – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated VIEs. The fair value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE.
As of March 31, 2023 and December 31, 2022, pursuant to the practical expedient, the Company measured the fair value of both the mortgage loans and the debt obligations of its consolidated VIE of business purpose residential mortgage loans based upon the fair value of the mortgage loans of the VIE. As of December 31, 2022, the senior debt obligations of the consolidated VIE had been fully extinguished and only the subordinate debt obligation of the consolidated VIE remained. The business purpose residential mortgage loans and subordinate debt obligation of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the business purpose residential mortgage loans of the consolidated VIE as of March 31, 2023 and December 31, 2022, the Company used significant judgment to develop assumptions about the future performance of each business purpose residential mortgage loan, which included determining loan-level probabilities of default and loss-given-default. As of March 31, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans represented less than i 5% of the original
21
collateral pool. Because the repayment of business purpose residential mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan, relatively high delinquency and default rates are common and expected attributes of this asset class. The following table presents the weighted-average of the significant inputs to the fair value measurement of the business purpose residential mortgage loans of the Company’s consolidated VIE as of the periods indicated:
|
|
|
|
||||
Probability of default |
|
i 63.7 |
% |
|
|
i 44.1 |
% |
Loss-given-default |
|
i 7.9 |
% |
|
|
i 11.3 |
% |
On March 7, 2023, the Company sold all of its investments in its previously consolidated VIE of residential mortgage loans and, as a result, deconsolidated the VIE. As of December 31, 2022, the Company measured the fair value of both the residential mortgage loans and the debt obligations of its consolidated VIE of residential mortgage loans based upon the fair value of the debt obligations as the fair value of the debt securities issued by the VIE were more observable to the Company than the fair value of the underlying mortgage loans.
The senior and mezzanine debt obligations of the consolidated VIE of residential mortgage loans were classified within Level 2 of the fair value hierarchy. Inputs to the fair value measurements of the senior and mezzanine debt obligations of the consolidated VIE included quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources, including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources were based upon observable transactions for securities with similar characteristics.
The residential mortgage loans and the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans (held by the Company as investments and eliminated against the associated debt of the VIE in consolidation) were classified within Level 3 of the fair value hierarchy. To measure the fair value of the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans, the Company used an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from each security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company used significant judgment to develop assumptions about the future performance of the pool of residential mortgage loans that served as collateral, including assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement included the estimated rate of prepayment, rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represented a market participant’s current required rate of return for a similar instrument. The following table presents the weighted-average of the significant inputs to the fair value measurement of the subordinate and excess interest-only debt obligations of its consolidated VIE of residential mortgage loans as of December 31, 2022:
|
Subordinate Debt Obligation |
|
|
Excess Interest-Only Debt Obligations |
|
||
Annualized voluntary prepayment rate |
|
i 10.0 |
% |
|
|
i 10.0 |
% |
Annualized default rate |
|
i 0.5 |
% |
|
|
i 0.5 |
% |
Loss-given-default |
|
i 17.5 |
% |
|
|
i 17.5 |
% |
Discount rate |
|
i 7.8 |
% |
|
|
i 17.7 |
% |
MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company uses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:
The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of the periods indicated:
22
|
|
|
|
|
||||
Discount rate |
|
|
i 9.0 |
% |
|
|
i 8.5 |
% |
Annualized prepayment rate |
|
|
i 6.6 |
% |
|
|
i 7.0 |
% |
Annual per-loan cost of servicing (current loans) |
|
$ |
i 60.00 |
|
|
$ |
i 65.00 |
|
Pursuant to the Company’s MSR financing receivable arrangements, upon the consummation of three-year performance periods ending December 31, 2023 and April 1, 2024, the Company’s mortgage servicing counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its counterparty. The present value of the expected incentive fee payment is estimated based upon the timing and amount of capital contributions from (and cash distributions to) the Company to (from) its mortgage servicing counterparty to date as well as the future expected cash flows from the MSR financing receivables over the remaining performance periods, which is derived from the current fair value of the underlying reference MSRs. As of March 31, 2023 and December 31, 2022, the present value of expected future incentive fee payments reflected in fair value of the Company’s MSR financing receivables was $ i 11,293 and $ i 12,568, respectively. During the three months ended March 31, 2023, the Company paid $ i 1,144 in incentive fee payments to the Company's mortgage servicing counterparty.
Derivative instruments
Exchange-traded derivative instruments – Exchange-traded derivative instruments, which include U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices for identical instruments in liquid markets.
Interest rate swaps – Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally cleared interest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, three-month LIBOR or SOFR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the SOFR curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value.
Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the commitment under measurement.
Other
Long-term unsecured debt - As of March 31, 2023 and December 31, 2022, the carrying value of the Company’s long-term unsecured debt was $ i 86,508 and $ i 86,405, respectively, net of unamortized debt issuance costs, and consists of Senior Notes and trust preferred debt issued by the Company. The Company’s estimate of the fair value of long-term unsecured debt is $ i 79,124 and $ i 79,900 as of March 31, 2023 and December 31, 2022, respectively. The Company’s Senior Notes, which are publicly traded on the New York Stock Exchange, are classified within Level 1 of the fair value hierarchy. Trust preferred debt is classified within Level 2 of the fair value hierarchy as the fair value is estimated based on the quoted prices of the Company’s publicly traded Senior Notes.
Investments in equity securities of publicly-traded companies – As of March 31, 2023 and December 31, 2022, the Company had investments in equity securities of publicly-traded companies at fair value of $ i 174 and $ i 234, respectively, which is included in the line item “other assets” in the accompanying consolidated balance sheets. Investments in publicly traded stock are classified within Level 1 of the fair value hierarchy as their fair value is measured based on unadjusted quoted prices in active exchange markets for identical assets.
Investments in equity securities of non-public companies and investment funds – As of March 31, 2023 and December 31, 2022, the Company had investments in equity securities of non-public companies and investment funds measured at fair value of $ i 2,999 and $ i 2,964, respectively, which are included in the line item “other assets” in the accompanying consolidated balance sheets.
23
Investments in equity securities of non-public companies and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, the Company estimates fair value by estimating the enterprise value of the investee which it then allocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration of recent investments in, or tender offers for, the equity securities of the investee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in estimating the fair value of an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value the equity cash flows available for distribution and the terminal value of the entity. As of March 31, 2023, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were i 100 percent, i 20 percent, and i 17 percent, respectively. As of December 31, 2022, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were i 97 percent, i 15 percent, and i 16 percent, respectively.
Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, restricted cash, deposits, receivables, repurchase agreements, payables, and other assets (aside from those previously discussed) and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.
Fair Value Hierarchy
Financial Instruments Measured at Fair Value on a Recurring Basis
The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
||||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency MBS |
|
$ |
i 460,984 |
|
|
$ |
i — |
|
|
$ |
i 460,984 |
|
|
$ |
i — |
|
MSR financing receivables |
|
|
i 183,058 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 183,058 |
|
Loans |
|
|
i 27,798 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 27,798 |
|
Credit securities |
|
|
i 102,564 |
|
|
|
i — |
|
|
|
i 98,933 |
|
|
|
i 3,631 |
|
Mortgage loans of consolidated VIEs |
|
|
i 1,344 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 1,344 |
|
Derivative assets |
|
|
i 140 |
|
|
|
i — |
|
|
|
i 140 |
|
|
|
i — |
|
Other assets |
|
|
i 3,173 |
|
|
|
i 174 |
|
|
|
i — |
|
|
|
i 2,999 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Secured debt of consolidated VIEs |
|
|
i 160 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 160 |
|
Derivative liabilities |
|
|
i 10,648 |
|
|
|
i — |
|
|
|
i 10,648 |
|
|
|
i — |
|
|
|
|
||||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency MBS |
|
$ |
i 443,540 |
|
|
$ |
i — |
|
|
$ |
i 443,540 |
|
|
$ |
i — |
|
MSR financing receivables |
|
|
i 180,365 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 180,365 |
|
Loans |
|
|
i 29,264 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 29,264 |
|
Credit securities |
|
|
i 104,437 |
|
|
|
i — |
|
|
|
i 98,933 |
|
|
|
i 5,504 |
|
Mortgage loans of consolidated VIE |
|
|
i 193,957 |
|
|
|
i — |
|
|
|
i — |
|
|
|
i 193,957 |
|
Derivative assets |
|
|
i 5,660 |
|
|
|
i — |
|
|
|
i 5,660 |
|
|
|
i — |
|
Other assets |
|
|
i 3,198 |
|
|
|
i 234 |
|
|
|
i — |
|
|
|
i 2,964 |
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Secured debt of consolidated VIE |
|
|
i 169,345 |
|
|
|
i — |
|
|
|
i 159,464 |
|
|
|
i 9,881 |
|
Derivative liabilities |
|
|
i 22 |
|
|
|
i — |
|
|
|
i 22 |
|
|
|
i — |
|
24
Level 3 Financial Assets and Liabilities
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the periods indicated:
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|||
Beginning balance |
$ |
i 412,054 |
|
|
$ |
i 195,767 |
|
Net (loss) gain included in "Investment and derivative |
|
( i 4,296 |
) |
|
|
i 15,215 |
|
Additions from consolidation of VIEs |
|
i — |
|
|
|
i 276,594 |
|
Transfers to real estate owned by consolidated VIE |
|
( i 659 |
) |
|
|
i — |
|
Purchases |
|
i 6,075 |
|
|
|
i 3,187 |
|
Sales |
|
i — |
|
|
|
i — |
|
Payments, net |
|
( i 12,836 |
) |
|
|
( i 30,618 |
) |
Subtractions from deconsolidation of VIEs |
|
( i 185,820 |
) |
|
|
i — |
|
Accretion of discount, net |
|
i 4,312 |
|
|
|
i 3,173 |
|
Ending balance |
$ |
i 218,830 |
|
|
$ |
i 463,318 |
|
Net unrealized (losses) gains included in earnings for the |
$ |
( i 3,609 |
) |
|
$ |
i 15,215 |
|
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the periods indicated:
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|||
Beginning balance |
$ |
i 9,881 |
|
|
$ |
i 508 |
|
Net loss (gain) included in "Investment and derivative |
|
i 53 |
|
|
|
( i 251 |
) |
Additions from consolidation of VIEs |
|
i — |
|
|
|
i 14,278 |
|
Payments, net |
|
( i 277 |
) |
|
|
( i 860 |
) |
Subtractions from deconsolidation of VIEs |
|
( i 9,481 |
) |
|
|
i — |
|
Amortization of premium, net |
|
( i 16 |
) |
|
|
( i 60 |
) |
Ending balance |
$ |
i 160 |
|
|
$ |
i 13,615 |
|
Net unrealized losses (gains) included in earnings for the |
$ |
i 1 |
|
|
$ |
( i 251 |
) |
Note 13. Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing upon filing its tax return for its taxable year ended December 31, 2019. As a REIT, the Company is required to distribute annually i 90% of its REIT taxable income. So long as the Company continues to qualify as a REIT, it will generally not be subject to U.S. federal or state corporate income taxes on its taxable income to the extent that it distributes all of its annual taxable income to its shareholders on a timely basis. At present, it is the Company’s intention to distribute i 100% of its taxable income, although the Company will not be required to do so. The Company intends to make distributions of its REIT taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year. Accordingly, the Company does not expect to incur an income tax liability on its REIT taxable income.
As of March 31, 2023, the Company had estimated federal net operating loss (“NOL”) carryforwards of $ i 163,963 that can be used to offset future taxable ordinary income and reduce its REIT distribution requirements. NOL carryforwards totaling $ i 14,450 expire in i 2028 and NOL carryforwards totaling $ i 149,513 have no expiration period. For the NOL carryforwards that have no expiration period, the Company is limited to utilizing NOL carryforwards to i 80% of the taxable income in any one year. As of March 31, 2023, the Company had estimated federal net capital loss (“NCL”) carryforwards of $ i 136,225 that can be used to offset future net capital gains. The scheduled expirations of the Company’s NCL carryforwards are $ i 105,155 in 2023, $ i 14,187 in 2026 and $ i 16,883 in 2027. The Company’s estimated NOL and NCL carryforwards as of March 31, 2023 are subject to potential adjustments up to the time of filing of the Company’s income tax returns.
25
The Company and subsidiaries have made joint elections to treat such subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. As such, each of these TRSs is taxable as a C corporation and subject to federal, state and local income taxes based upon their taxable income. For the three months ended March 31, 2023 and 2022, the Company recognized a provision for income taxes of $ i 109 and $ i 2,287, respectively, on the pre-tax net income of its TRSs.
The Company recognizes uncertain tax positions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return and the financial statements. As of March 31, 2023 and December 31, 2022, the Company assessed the need for recording a provision for any uncertain tax position and has made the determination that such provision is not necessary. If the Company were to incur income tax related interest and penalties, the Company’s policy is to classify them as a component of provision for income taxes.
The Company is subject to examination by the Internal Revenue Service (“IRS”) and state and local authorities in jurisdictions where the Company has significant business operations. The Company’s federal tax returns for 2019 and forward remain subject to examination by the IRS.
/
Note 14. Earnings (Loss) Per Share
Basic earnings (loss) per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested shares of restricted stock, restricted stock units, and performance share units. i The following table presents the computations of basic and diluted earnings (loss) per share for the periods indicated:
|
Three Months Ended March 31, |
|
|||||
(Shares in thousands) |
2023 |
|
|
2022 |
|
||
Basic weighted-average common shares outstanding |
|
i 28,004 |
|
|
|
i 29,832 |
|
Performance share units, unvested restricted stock units, |
|
i — |
|
|
|
i — |
|
Diluted weighted-average common shares outstanding |
|
i 28,004 |
|
|
|
i 29,832 |
|
Net loss attributable to common stock |
$ |
( i 2,878 |
) |
|
$ |
( i 3,443 |
) |
Basic loss per common share |
$ |
( i 0.10 |
) |
|
$ |
( i 0.12 |
) |
Diluted loss per common share |
$ |
( i 0.10 |
) |
|
$ |
( i 0.12 |
) |
The diluted loss per share for the three months ended March 31, 2023 and 2022 did not include the antidilutive effect of i 473,904 and i 482,445 shares of unvested shares of restricted stock, restricted stock units, and performance share units, respectively.
/
Note 15. Stockholders’ Equity
Common Stock
The Company has authorized common share capital of i 450,000,000 shares of Class A common stock, par value $ i 0.01 per share, and i 100,000,000 shares of Class B common stock, par value $ i 0.01 per share. Holders of the Class A and Class B common stock are entitled to i one vote and i three votes per share, respectively, on all matters voted upon by the shareholders. Shares of Class B common stock are convertible into shares of Class A common stock on a one-for-one basis at the option of the Company in certain circumstances including either (i) upon sale or other transfer, or (ii) at the time the holder of such shares of Class B common stock ceases to be employed by the Company. As of March 31, 2023 and December 31, 2022, there were i i no / outstanding shares of Class B common stock. The Class A common stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC.”
Common Equity Distribution Agreements
On August 10, 2018, the Company entered into separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to i 12,597,423 shares of the Company’s Class A common stock.
26
Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
During the three months ended March 31, 2023 and the year ended December 31, 2022, there were i i no / issuances of common stock under the common equity distribution agreements.
As of March 31, 2023, the Company had i 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.
Common Share Repurchase Program
On July 31, 2020, the Company announced that its Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to i 18,000,000 shares of Class A common stock (the "Repurchase Program"). Repurchases under the Repurchase Program may be made from time to time on the open market and in private transactions at management’s discretion in accordance with applicable federal securities laws. The timing of repurchases and the exact number of shares of Class A common stock to be repurchased will depend upon market conditions and other factors. The Repurchase Program is funded using the Company’s cash on hand and cash generated from operations. The Repurchase Program has no expiration date and may be suspended or terminated at any time without prior notice.
There were i no shares of Class A common stock repurchased by the Company during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company repurchased i 2,794,574 shares of Class A common stock for a total purchase price of $ i 9,316. As of March 31, 2023, there remain available for repurchase i 10,195,704 shares of Class A common stock under the Repurchase Program.
Preferred Stock
The Company has authorized preferred share capital of (i) i i 100,000 / shares designated as Series A Preferred Stock that is unissued; (ii) i 2,000,000 shares designated as 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock (the “Series B Preferred Stock”), par value of $ i 0.01 per share; (iii) i 2,500,000 shares designated as 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series C Preferred Stock”), par value of $ i 0.01 per share; and (iv) i 20,400,000 shares of undesignated preferred stock. The Company’s Board of Directors has the authority, without further action by the shareholders, to issue additional preferred stock in one or more series and to fix the terms and rights of the preferred stock. The Company’s preferred stock ranks senior to its common stock with respect to the payment of dividends and the distribution of assets upon a voluntary or involuntary liquidation, dissolution, or winding up of the Company. The Company’s preferred stock ranks on parity with each other. The Series B Preferred Stock and Series C Preferred Stock are publicly traded on the New York Stock Exchange under the ticker symbols “AAIC PrB” and “AAIC PrC,” respectively.
The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have i no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend at a rate of i 7.00% per annum of their $ i 25.00 per share liquidation preference (equivalent to $ i 1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $ i 25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option. i Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series B Preferred Stock to date in 2023.
The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series C Preferred Stock have i no voting rights, except under limited conditions, and are entitled to receive a cumulative cash dividend (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to i 8.250% per annum of the $ i 25.00 per share liquidation preference (equivalent to $ i 2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of i 5.664% per annum of the $ i 25.00 per share liquidation preference. Shares of Series C Preferred Stock are redeemable at $ i 25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared), exclusively at the Company’s option commencing on i March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve the Company’s qualification as a REIT. i Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. The Company has declared and paid all required quarterly dividends on the Company’s Series C Preferred Stock to date in 2023.
27
Preferred Equity Distribution Agreements
The Company is party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which the Company may offer and sell, from time to time, up to i 1,647,370 shares of the Company’s Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of the Company’s Series B Preferred Stock may be offered and sold through the preferred equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
There were i no issuances of Series B Preferred Stock during the three months ended March 31, 2023. During the year ended December 31, 2022, the Company issued i 6,058 shares of Series B Preferred Stock at a weighted average public offering price of $ i 24.87 per share for proceeds net of selling commissions and expenses of $ i 149 under the Series B preferred equity distribution agreement. As of March 31, 2023, the Company had i 1,602,566 shares of Series B Preferred Stock available for sale under the preferred equity distribution agreement.
Shareholder Rights Agreement
On June 1, 2009, the Board of Directors approved a shareholder rights agreement (“Rights Plan”) and the Company’s shareholders approved the Rights Plan at its annual meeting of shareholders on June 2, 2010. On April 9, 2018, the Board of Directors approved a first amendment to the Rights Plan (“First Amendment”) to extend the term for an additional i three years and the Company’s shareholders approved the First Amendment at its annual meeting of shareholders on June 14, 2018. On April 11, 2022, the Board of Directors approved a second amendment to the Rights Plan (“Second Amendment”) to further extend the term until i June 4, 2025 and the Company's shareholders approved the Second Amendment at its annual meeting of shareholders on June 16, 2022. The Second Amendment also decreased the Purchase Price (as defined under the Rights Plan) from $ i 70.00 to $ i 21.30.
Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of i 4.9% or more of the outstanding shares of our Class A common stock upon a determination by our Board of Directors (an “Acquiring Person”), all of our other Class A and Class B common shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the Acquiring Person.
The Board of Directors adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOL carryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the Internal Revenue Code. The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if it experienced an “ownership change” under Section 382 of the Internal Revenue Code. In general, an “ownership change” would occur if there is a cumulative change in the ownership of the Company’s common stock of more than 50% by one or more “5% shareholders” during a three-year period. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock, each, an Acquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.
The Rights Plan, as amended by the Second Amendment, and any outstanding rights will expire at the earliest of (i) June 4, 2025, (ii) the time at which the rights are redeemed or exchanged pursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Internal Revenue Code or any successor statute if the Board of Directors determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, or (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.
/
Note 16. Long-Term Incentive Plan
The Company provides its employees and its non-employee directors with long-term incentive compensation in the form of stock-based awards. On April 29, 2021, the Board of Directors adopted the Arlington Asset Investment Corp. 2021 Long-Term Incentive Plan (the “2021 Plan”), which was approved by the Company’s shareholders and became effective on July 15, 2021. The 2021 Plan replaced the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (the “2014 Plan”). No additional grants will be made under the 2014 Plan. However, previous grants under the 2014 Plan and any long-term incentive plans prior to the 2014 Plan (collectively, the “Prior Plans”) will remain in effect subject to the terms of the Prior Plans and the applicable award agreement.
Under the 2021 Plan, a maximum number of i 5,256,076 shares of Class A common stock of the Company, subject to adjustment as set forth in the 2021 Plan, were authorized for issuance and may be issued to employees, directors, consultants, advisors and independent contractors who provide bona fide services to the Company and its affiliates. If an award under the 2021 Plan or Prior
28
Plans is canceled, terminated, forfeited or otherwise settled without the issuance of shares subject to such award, those shares will be available for future grants under the 2021 Plan. In addition, shares delivered or withheld for tax obligations arising from an award, other than a stock option or stock appreciation right (“SAR”), will be available for future grants under the 2021 Plan. As of March 31, 2023, i 4,265,184 shares remained available for issuance under the 2021 Plan; however, the shares remaining available for issuance would be reduced by the potential future issuance of shares of common stock for the settlement of outstanding performance-based stock awards and dividend equivalents for such awards. If these outstanding performance-based stock awards are earned at “target” level performance, an additional i 1,625,783 shares would be issued resulting in i 2,639,401 shares remaining available for issuance under the 2021 Plan as of March 31, 2023.
Under the 2021 Plan, the Compensation Committee of the Company’s Board of Directors may grant restricted stock, restricted stock units (“RSUs”), stock options, SARs and/or other stock-based awards. Under the 2021 Plan, shares issued upon the exercise of a stock option or SAR or shares subject to a restricted stock award and any shares issued in settlement of restricted stock unit award, reduced by the number of any shares withheld to satisfy withholding taxes, may not be sold or transferred before the earlier of (i) the first anniversary of the exercise of the option or SAR or vesting of the restricted stock award or the settlement of restricted stock unit award, or (ii) the date the participant is no longer employed by or providing services to the Company or an affiliate. Non-employee members of the Board of Directors may not be granted awards under the 2021 Plan during any twelve-month period with respect to the number of shares that have a fair market value on the date of grant that exceeds $ i 160. The 2021 Plan will terminate on the tenth anniversary of its effective date unless sooner terminated by the Board of Directors.
Stock-based compensation costs are initially measured at the estimated fair value of the awards on the grant date developed using appropriate valuation methodologies, as adjusted for estimates of future award forfeitures. Valuation methodologies used and subsequent expense recognition is dependent upon each award’s service and performance conditions.
Performance-based Stock Awards
The Company has granted performance-based RSUs and performance stock units (collectively, “Performance-based Stock Awards”) to employees of the Company that are convertible into shares of Class A common stock following the achievement of performance goals over the applicable performance periods. Compensation costs for Performance-based Stock Awards subject to nonmarket-based performance conditions (i.e., performance not predicated on changes in the Company’s stock price) are measured at the closing stock price on the dates of grant, adjusted for the probability of achieving certain benchmarks included in the performance metrics. These initial cost estimates are recognized as expense over the requisite performance periods, as adjusted for changes in estimated, and ultimately actual, performance and forfeitures. Compensation costs for components of Performance-based Stock Awards subject to market-based performance conditions (i.e., performance predicated on changes in the Company’s stock price) are measured at the dates of grant using a Monte Carlo simulation model which incorporates into the valuation the inherent uncertainty regarding the achievement of the market-based performance metrics. These initial valuation amounts are recognized as expense over the requisite performance periods, subject only to adjustments for changes in estimated, and ultimately actual, forfeitures.
The Compensation Committee has granted Performance-based Stock Awards with performance goals based on (i) the compound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during the applicable performance period (“Absolute TSR Awards”), (ii) the compound annualized total shareholder return relative to a peer index during the applicable performance period (“Relative TSR Awards”), (iii) the compound annualized growth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committee plus dividends on a reinvested basis) during the applicable performance period (“Book Value Awards”), and (iv) the share price of the Company's common stock during the applicable performance period ("Stock Price Awards").
The Compensation Committee of the Board of Directors of the Company approved the following Performance-based Stock Award grants for the periods indicated:
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||
Absolute TSR Awards granted |
|
|
i — |
|
|
|
i 174,581 |
|
Absolute TSR Award grant date fair value per share |
|
$ |
i — |
|
|
$ |
i 6.03 |
|
Relative TSR Awards granted |
|
|
i — |
|
|
|
i 87,291 |
|
Relative TSR Award grant date fair value per share |
|
$ |
i — |
|
|
$ |
i 5.83 |
|
Book Value Awards granted |
|
|
i — |
|
|
|
i 103,000 |
|
Book Value Award grant date fair value per share |
|
$ |
i — |
|
|
$ |
i 3.37 |
|
29
/
For the Company’s Book Value Awards, the grant date fair value per share is based on the close price on the date of grant. For the Company’s Absolute TSR Awards and Relative TSR Awards, the grant date fair value per share is based on a Monte Carlo simulation model. i The following assumptions, determined as of the date of grant, were used in the Monte Carlo simulation model to measure the grant date fair value per share of the Company’s Absolute TSR Awards and Relative TSR Awards for the periods indicated:
|
|
Absolute TSR Awards |
|
|
Relative TSR Awards |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Closing stock price on date of grant |
|
$ |
i — |
|
|
$ |
i 3.58 |
|
|
$ |
i — |
|
|
$ |
i 3.58 |
|
Beginning average stock price on |
|
$ |
i — |
|
|
$ |
i 3.60 |
|
|
$ |
i — |
|
|
$ |
i 3.60 |
|
Expected volatility (2) |
|
|
i — |
|
|
|
i 69.20 |
% |
|
|
i — |
|
|
|
i 69.20 |
% |
Dividend yield (3) |
|
|
i — |
|
|
|
i 0.00 |
% |
|
|
i — |
|
|
|
i 0.00 |
% |
Risk-free rate (4) |
|
|
i — |
|
|
|
i 1.01 |
% |
|
|
i — |
|
|
|
i 1.01 |
% |
The vesting of the Performance-based Stock Awards is subject to both continued employment under the terms of the award agreement and the achievement of the Company performance goals established by the Compensation Committee.
For Absolute TSR Awards and Relative TSR Awards granted, the Compensation Committee established a i i three-year / performance period. The actual number of shares of Class A common stock that will be issued to each participant at the end of the applicable performance period will vary between i 0% and i 250% of the number of the Absolute TSR Awards and Relative TSR Awards granted, depending on performance results. If the minimum threshold level of performance goals is not achieved, no awards are earned. To the extent the performance results are between the minimum threshold level and maximum level of performance goals, between i 50% to i 250% of the number of Absolute TSR Awards and Relative TSR Awards are earned. Upon settlement, vested Absolute TSR Awards and Relative TSR Awards are converted into shares of the Company’s Class A common stock on a one-for-one basis. As of March 31, 2023, there are a total i 400,293 Absolute TSR Awards and Relative TSR Awards outstanding.
For Book Value Awards granted during the year ended December 31, 2022, the Compensation Committee established a one-year performance period that ended on December 31, 2022. The actual number of shares of Class A common stock that could be issued to each participant at the end of the performance period varied between i 0% and i 100% of the number of Book Value Awards granted, depending on performance results. Based on the actual performance measurements, i 41,410 shares of the i 103,000 Book Value Awards granted were earned and were converted into an equal number of shares of restricted stock in February 2023 that will vest on the third anniversary of the original Book Value Award grant date subject to continued employment under the terms of the award agreement. As of March 31, 2023, there are i no remaining outstanding Book Value Awards.
For Stock Price Awards granted, the Compensation Committee established a i three-year performance period. If the market price of the Company's common stock is equal to or greater than a stock price performance goal for i 45 consecutive trading days at any time during the performance period, between i 75% to i 300% of the number of Stock Price Awards are earned and become restricted stock units that will vest ratably over a three-year period beginning on the third anniversary of the date of grant subject to continued employment under the terms of the award agreement. If the minimum threshold level of stock price performance goals are never achieved, no awards are earned. As of March 31, 2023, the market price of the Company's common stock had not met any of the price performance goals for 45 consecutive trading days. As of March 31, 2023, there are i 1,225,490 Stock Price Awards outstanding.
Performance-based Stock Awards do not have any voting rights. No dividends are paid on outstanding Performance-based Stock Awards during the applicable performance period. Instead, dividend equivalents are accrued on outstanding Performance-based Stock Awards during the applicable performance period, deemed invested in shares of Class A common stock and are paid out in shares of Class A common stock at the end of the performance period to the extent that the underlying Performance-based Stock Awards vest.
For the three months ended March 31, 2023 and 2022, the Company recognized $ i 334 and $ i 195, respectively, of compensation expense related to Performance-based Stock Awards. As of March 31, 2023, the Company had i 1,625,783 Performance-based Stock
30
Awards outstanding. As disclosed above, the actual number of shares of common stock that could be issued for settlement of the Performance-based Stock Awards can be greater or less than the amount of Performance-based Stock Awards outstanding depending upon the actual results compared to the performance goals. As of March 31, 2023 and December 31, 2022, the Company had unrecognized compensation expense related to Performance-based Stock Awards of $ i 2,990 and $ i 3,314, respectively. The unrecognized compensation expense as of March 31, 2023 is expected to be recognized over a weighted average period of i 3.0 years.
During the three months ended March 31, 2023, Relative TSR Awards that had a performance period ending in that period were earned at i 60% of target resulting in the issuance of i 19,914 shares of Class A common stock at an intrinsic value of $ i 60. Also during the three months ended March 31, 2023, Book Value Awards that had a performance period ending on December 31, 2022 were earned at i 40% of target resulting in the issuance of i 41,410 shares of restricted stock that will vest on the third anniversary of the original Book Value Award grant date. During the three months ended March 31, 2022, there were i no Performance-based Stock Awards that had performance periods ending in that period.
Employee Restricted Stock Awards
Compensation costs for restricted stock awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual, forfeitures.
The Company grants restricted common shares to employees that either vest ratably over a three-year period or cliff vest at the end of a three-year period based on continued employment over these specified periods. A summary of these unvested restricted stock awards is presented below:
|
|
Number of Shares |
|
|
Weighted-average |
|
|
Weighted- |
|
|||
Share Balance as of December 31, 2021 |
|
|
i 759,035 |
|
|
$ |
i 4.16 |
|
|
|
i 1.5 |
|
Granted |
|
|
i 384,291 |
|
|
|
i 3.42 |
|
|
|
— |
|
Forfeitures |
|
|
( i 12,167 |
) |
|
|
i 3.57 |
|
|
|
— |
|
Vestitures |
|
|
( i 300,317 |
) |
|
|
i 4.44 |
|
|
|
|
|
Share Balance as of December 31, 2022 |
|
|
i 830,842 |
|
|
|
i 3.72 |
|
|
|
i 1.2 |
|
Granted |
|
|
i 137,000 |
|
|
|
i 2.95 |
|
|
|
— |
|
Conversion of Book Value Awards |
|
|
i 41,410 |
|
|
|
i 3.37 |
|
|
|
— |
|
Vestitures |
|
|
( i 181,125 |
) |
|
|
i 4.40 |
|
|
|
— |
|
Share Balance as of March 31, 2023 |
|
|
i 828,127 |
|
|
$ |
i 3.43 |
|
|
|
i 1.3 |
|
For the three months ended March 31, 2023 and 2022, the Company recognized $ i 323 and $ i 466, respectively, of compensation expense related to restricted stock awards. As of March 31, 2023 and December 31, 2022, the Company had unrecognized compensation expense related to restricted stock awards of $ i 1,343 and $ i 1,262, respectively. The unrecognized compensation expense as of March 31, 2023 is expected to be recognized over a weighted average period of i 1.3 years. For the three months ended March 31, 2023 and 2022, the intrinsic value of restricted stock awards that vested were $ i 547 and $ i 0 respectively.
Director Restricted Stock Units
Compensation costs for RSU awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual, forfeitures. Compensation costs for RSUs that do not require future service conditions are expensed immediately.
The Company’s non-employee directors are compensated in both cash and RSUs. RSUs awarded to non-employee directors vest immediately on the award grant date and are convertible into shares of Class A common stock. For RSUs granted under the Company’s 2021 Plan, 2014 Plan, and certain of the Prior Plans, the RSUs are convertible into shares of Class A common stock at the later of the date the non-employee director ceases to be a member of the Company’s Board or the first anniversary of the grant date. For RSUs granted under certain Prior Plans, the RSUs are convertible into shares of Class A common stock one year after the non-employee director ceases to be a member of the Company’s Board. The non-employee director RSUs do not have any voting rights but are entitled to cash dividend equivalent payments. As of March 31, 2023 and December 31, 2022, the Company had i i 548,272 / of non-employee director RSUs outstanding. There were no non-employee director RSUs grants during the three months ended March 31, 2023 and 2022.
31
The grant date fair value of a non-employee director RSU grant is based on the closing price of the Class A common stock on the New York Stock Exchange on the date of grant. For the three months ended March 31, 2023 and 2022, the Company recognized $ i 100 and $ i 100, respectively, of director fees related to non-employee director RSUs. There were no non-employee director RSUs that were converted into shares of Class A common stock for the three months ended March 31, 2023 and 2022.
/32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires or provides, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” refer to Arlington Asset Investment Corp. (“Arlington Asset”) and its subsidiaries. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.
The discussion of our consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, please see “Cautionary Statement About Forward-Looking Information” in Item 3 of Part I of this Quarterly Report on Form 10-Q and the risk factors included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 and our subsequent Quarterly Reports on Form 10-Q.
We are an investment firm that currently focuses primarily on investing in mortgage related assets. Our investment capital is currently allocated between the following asset classes:
Our MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. Our credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. Our agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
We also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, we sold our portfolio of SFR properties and are currently no longer anticipating allocating capital to an SFR investment strategy.
We may also invest in other asset classes that our management team believes may offer attractive risk adjusted returns outside the real estate or mortgage asset classes.
We are internally managed and do not have an external investment advisor.
Factors that Affect our Results of Operations and Financial Condition
Our business is materially affected by a variety of industry and economic factors, including:
Current Market Conditions and Trends
The 10-year U.S. Treasury rate was 3.47% as of March 31, 2023, a 40 basis point decrease from the prior quarter end. The interest rate curve, measured as the spread between the 2-year and 10-year U.S. Treasury, continued to be inverted at a negative 56 basis points as of March 31, 2023. With the decline in the 10-year U.S. Treasury rate, residential mortgage rates decreased modestly during the first quarter of 2023 evidenced by the Fannie Mae average primary mortgage rate decreasing by 10 basis points to 6.32% as of March 31, 2023. The spread between the current coupon agency MBS and the 10-year swap rate widened slightly by three basis
33
points during the first quarter of 2023. The rate of inflation began to decline from its peak reached during 2022 with the Consumer Price Index declining to 5.0% for the twelve-month period ending March 31, 2023.
In order to address the persistently high inflation, the U.S. Federal Reserve has continued to take actions with the objective of lowering inflation by significantly raising interest rates. During the first quarter of 2023, the Federal Open Market Committee (“FOMC”) raised its target range for the federal funds rate at each of its two scheduled meetings for a total increase of 50 basis points to a target range of 4.75% to 5.00% at its last meeting on March 22, 2023. In addition, the FOMC announced that it will continue reducing its holdings of Treasury securities and agency debt and agency MBS. As of March 31, 2023, the market is projecting an approximately 50% likelihood that the FOMC could have one additional 25 basis point increase in the next three months followed by rate cuts over the subsequent nine months of approximately 75 basis points based on federal funds futures.
Prepayment speeds in the fixed-rate residential mortgage market continued to decline during the first quarter of 2023 primarily due to the rise in the primary mortgage rate driven by the increase in the 10-year U.S. Treasury rate over recent periods. Pay-up premiums on agency MBS, which represent the price premium of agency MBS backed by specified pools over a TBA security, remained relatively unchanged during the first quarter of 2023. Valuation multiples of MSRs remained relatively consistent during the first quarter of 2023.
The recent trend of declining housing price gains continued in 2023, evidenced by the Standard & Poor’s CoreLogic Case-Shiller U.S. National Home Price NSA index reporting a 3.8% annual gain in January 2023, the seventh consecutive month of declining home price gains. If the Federal Reserve continues to increase interest rates, more expensive mortgage financing along with a challenging macroeconomic environment may cause housing price gains to continue to decelerate in the near future.
The following table presents certain key market data as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
Change - First Quarter 2023 |
|
|||||||||||
30-Year FNMA Fixed Rate MBS (1) |
|
||||||||||||||||||||||
3.0% |
$ |
97.55 |
|
|
$ |
93.11 |
|
|
$ |
86.81 |
|
|
$ |
87.71 |
|
|
$ |
89.59 |
|
|
$ |
1.88 |
|
3.5% |
|
99.75 |
|
|
|
96.17 |
|
|
|
89.83 |
|
|
|
90.82 |
|
|
|
92.80 |
|
|
|
1.98 |
|
4.0% |
|
101.58 |
|
|
|
98.62 |
|
|
|
92.68 |
|
|
|
93.77 |
|
|
|
95.56 |
|
|
|
1.79 |
|
4.5% |
|
103.25 |
|
|
|
100.39 |
|
|
|
95.18 |
|
|
|
96.31 |
|
|
|
97.92 |
|
|
|
1.61 |
|
5.0% |
|
105.16 |
|
|
|
102.07 |
|
|
|
97.34 |
|
|
|
98.52 |
|
|
|
99.69 |
|
|
|
1.17 |
|
Investment Spreads |
|
||||||||||||||||||||||
FNMA Current Coupon vs. |
108 bps |
|
|
129 bps |
|
|
180 bps |
|
|
155 bps |
|
|
158 bps |
|
|
3 bps |
|
||||||
30 Year Fixed Mortgage Rate |
|
||||||||||||||||||||||
Freddie Mac Average Primary |
|
4.67 |
% |
|
|
5.70 |
% |
|
|
6.70 |
% |
|
|
6.42 |
% |
|
|
6.32 |
% |
|
-10 bps |
|
|
U.S. Treasury Rates ("UST") |
|
||||||||||||||||||||||
2-year UST |
|
2.33 |
% |
|
|
2.95 |
% |
|
|
4.28 |
% |
|
|
4.43 |
% |
|
|
4.03 |
% |
|
-40 bps |
|
|
5-year UST |
|
2.46 |
% |
|
|
3.04 |
% |
|
|
4.09 |
% |
|
|
4.00 |
% |
|
|
3.57 |
% |
|
-43 bps |
|
|
10-year UST |
|
2.34 |
% |
|
|
3.01 |
% |
|
|
3.83 |
% |
|
|
3.87 |
% |
|
|
3.47 |
% |
|
-40 bps |
|
|
2-year UST to 10-year UST spread |
1 bps |
|
|
6 bps |
|
|
-45 bps |
|
|
-56 bps |
|
|
-56 bps |
|
|
0 bps |
|
||||||
Interest Rate Swap Rates |
|
||||||||||||||||||||||
2-year swap |
|
2.55 |
% |
|
|
3.28 |
% |
|
|
4.55 |
% |
|
|
4.71 |
% |
|
|
4.36 |
% |
|
-35 bps |
|
|
5-year swap |
|
2.52 |
% |
|
|
3.08 |
% |
|
|
4.14 |
% |
|
|
4.02 |
% |
|
|
3.63 |
% |
|
-39 bps |
|
|
10-year swap |
|
2.41 |
% |
|
|
3.09 |
% |
|
|
3.88 |
% |
|
|
3.84 |
% |
|
|
3.46 |
% |
|
-38 bps |
|
|
2-year swap to 2-year UST spread |
22 bps |
|
|
33 bps |
|
|
27 bps |
|
|
28 bps |
|
|
33 bps |
|
|
5 bps |
|
||||||
10-year swap to 10-year UST spread |
7 bps |
|
|
8 bps |
|
|
5 bps |
|
|
-3 bps |
|
|
-1 bps |
|
|
2 bps |
|
||||||
London Interbank Offered Rates ("LIBOR") and Secured Overnight Financing Rate ("SOFR") |
|
||||||||||||||||||||||
1-month LIBOR |
|
0.45 |
% |
|
|
1.79 |
% |
|
|
3.14 |
% |
|
|
4.39 |
% |
|
|
4.86 |
% |
|
47 bps |
|
|
3-month LIBOR |
|
0.96 |
% |
|
|
2.29 |
% |
|
|
3.75 |
% |
|
|
4.77 |
% |
|
|
5.19 |
% |
|
42 bps |
|
|
SOFR |
|
0.30 |
% |
|
|
1.69 |
% |
|
|
3.04 |
% |
|
|
4.36 |
% |
|
|
4.80 |
% |
|
44 bps |
|
|
Twelve Month Percent Change in Consumer Price Index ("CPI") |
|
||||||||||||||||||||||
1-month LIBOR |
|
8.50 |
% |
|
|
9.10 |
% |
|
|
8.20 |
% |
|
|
6.50 |
% |
|
|
5.00 |
% |
|
-150 bps |
|
|
Recent Regulatory Activity
Elimination of LIBOR
On March 5, 2021, the Financial Conduct Authority ("FCA"), which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published or will no longer be representative after June 30, 2023. The FCA's announcement coincides with the March 5, 2021 announcement of LIBOR's administrator, ICE Benchmark Administration ("IBA"), indicating that, as a result of not having access to input data necessary to calculate LIBOR tenors relevant to us on a representative basis after June 30, 2023, IBA would have to cease publication of such LIBOR tenors immediately after the last publication on June 30, 2023. These announcements mean that any of our LIBOR-based financial instruments that extend beyond June 30, 2023 will need to be converted to a replacement rate.
34
The U.S. Federal Reserve and the Federal Reserve Bank of New York jointly convened the ARRC, a steering committee comprised of private sector entities, each with an important presence in markets effected by LIBOR, and official-sector entities, including banking and financial sector regulators. The ARCC’s initial objectives were to identify risk-free alternative reference rates for USD LIBOR, identify best practices for contract robustness and create an implementation plan. The ARRC has recommended SOFR and, in some cases, the forward-looking term rate based on SOFR published by CME Group Benchmark Administration Limited ("CME Term SOFR") plus, in each case, a recommended spread adjustment, as LIBOR's replacement.
The U.S. federal government enacted the Adjustable Interest Rate (LIBOR) Act ("LIBOR Act") to provide for uniform nationwide solution for certain contracts that do not have clear and practical provisions for replacing LIBOR after June 30, 2023. On December 16, 2022, the Federal Reserve Board implemented a final rule that implements the LIBOR Act and identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month and 12-month LIBOR in U.S. contracts that do not mature before LIBOR ends and that lack adequate fallback provisions that would replace LIBOR with a practicable replacement benchmark rate. The final rule also restates the safe harbor protections contained in the LIBOR Act for selection or use of the replacement benchmark rate selected by the Federal Reserve Board and clarifies who would be considered a determining person able to choose to use the replacement benchmark rate selected by the Federal Reserve Board for certain LIBOR contracts.
Any of our LIBOR-based borrowings that extend beyond June 30, 2023 will need to be converted to a replacement rate. We are party to various financial instruments which include LIBOR as a reference rate that mature or expire after June 30, 2023. As of March 31, 2023, these financial instruments include preferred stock and unsecured notes issued by us.
As of March 31, 2023, we had $15.0 million of junior subordinated debt outstanding that require quarterly interest payments at three-month LIBOR plus a spread of 2.25% to 3.00% and matures between 2033 and 2035. Under the terms of the indenture agreement for the notes, if the publication of LIBOR is not available, the current fallback is for the independent calculation agent to obtain quotations for what LIBOR should be from major banks in the interbank market. If the calculation agent is unable to obtain such quotations, then the LIBOR in effect for future interest payments would be LIBOR in effect for the immediately preceding interest payment period. The calculation agent has informed us that they believe the LIBOR Act will nullify these fallback provisions and therefore the application of the LIBOR Act would result in a benchmark replacement of the applicable spread-adjusted CME Term SOFR.
As of March 31, 2023, we had 957,133 shares of Series C Preferred Stock outstanding with a liquidation preference of $23.9 million. The Series C Preferred Stock is entitled to receive a cumulative cash dividend (i) from and including the original issue to, but excluding, March 30, 2024 at a fixed rate of 8.250% per annum of the $25.00 per share liquidation preference, and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum of the $25.00 liquidation preference. Under the terms of our Articles of Incorporation, if the publication of LIBOR is not available, the current fallback is for us to obtain quotations for what LIBOR should be from major banks in the interbank market. If we are unable to obtain such quotations, we are required to appoint an independent calculation agent, which will determine LIBOR based on sources it deems reasonable in its sole discretion. If the calculation agent is unable or unwilling to determine LIBOR, then the LIBOR in effect for future dividend payments would be LIBOR in effect for the immediately preceding dividend payment period. We expect all of these provisions to be invalidated by the LIBOR Act. We expect to appoint an independent calculation agent to determine whether there is an industry accepted substitute or successor base rate to three-month LIBOR. If the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent shall use such substitute or successor base rate. We expect that the calculation agent will select the SOFR-based rate selected by Federal Reserve in its final rule.
Portfolio Overview
The following table summarizes our asset and capital allocation of our investment strategies as of March 31, 2023 (dollars in thousands):
|
|
|
||||||||||||||
|
|
Assets |
|
|
Invested Capital |
|
|
Invested Capital |
|
|
Leverage (2) |
|
||||
MSR financing receivables |
|
$ |
183,058 |
|
|
$ |
183,058 |
|
|
|
62 |
% |
|
|
— |
|
Credit investments (3) |
|
|
133,396 |
|
|
|
35,349 |
|
|
|
12 |
% |
|
|
2.8 |
|
Agency MBS (4) |
|
|
88,011 |
|
|
|
76,358 |
|
|
|
26 |
% |
|
|
0.3 |
|
Total invested capital |
|
$ |
404,465 |
|
|
|
294,765 |
|
|
|
100 |
% |
|
|
|
|
Cash and other corporate capital, net |
|
|
|
|
|
6,888 |
|
|
|
|
|
|
|
|||
Total investable capital |
|
|
|
|
$ |
301,653 |
|
|
|
|
|
0.4 |
|
|||
35
MSR Financing Receivables
As of March 31, 2023, we had $183.1 million of MSR financing receivable investments at fair value. We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows us to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. The transactions are accounted for as a financing receivable in our consolidated financial statements. The following tables present further information about our MSR financing receivable investments as of March 31, 2023 (dollars in thousands):
Amortized Cost Basis (1) |
|
|
Unrealized Gain |
|
|
Fair Value |
|
|||
$ |
139,153 |
|
|
$ |
43,905 |
|
|
$ |
183,058 |
|
MSR Financing Receivable Underlying Reference Amounts: |
|
|
|
|
|
|
|
|||||||||||||||||||
MSRs |
|
|
Financing |
|
|
Advances |
|
|
Cash and Other Net Receivables |
|
|
Counterparty Incentive Fee Accrual |
|
|
MSR Financing Receivables |
|
|
Implicit |
|
|||||||
$ |
178,180 |
|
|
$ |
(1,010 |
) |
|
$ |
4,202 |
|
|
$ |
12,979 |
|
|
$ |
(11,293 |
) |
|
$ |
183,058 |
|
|
|
0.0 |
|
Underlying Reference MSRs: |
|
|||||||||||||||||||||||||
Holder of Loans |
|
Unpaid Principal Balance |
|
|
Weighted-Average Note Rate |
|
|
Weighted-Average Servicing Fee |
|
|
Weighted-Average Loan Age |
|
Price |
|
|
Multiple (1) |
|
|
Fair Value |
|
||||||
Fannie Mae |
|
$ |
12,343,228 |
|
|
|
3.09 |
% |
|
|
0.25 |
% |
|
29 months |
|
|
1.33 |
% |
|
|
5.33 |
|
|
$ |
164,564 |
|
Freddie Mac |
|
|
1,006,719 |
|
|
|
3.72 |
% |
|
|
0.25 |
% |
|
25 months |
|
|
1.35 |
% |
|
|
5.41 |
|
|
|
13,616 |
|
Total/weighted-average |
|
$ |
13,349,947 |
|
|
|
3.14 |
% |
|
|
0.25 |
% |
|
29 months |
|
|
1.33 |
% |
|
|
5.33 |
|
|
$ |
178,180 |
|
Credit Investment Portfolio
The following table presents information about our credit investments as of March 31, 2023 (dollars in thousands):
|
|
Market Price |
|
|
Fair Value (1) |
|
|
Financing |
|
|
Invested |
|
|
Leverage |
|
|||||
AAA rated commercial MBS |
|
$ |
98.93 |
|
|
$ |
98,933 |
|
|
$ |
79,372 |
|
|
$ |
19,780 |
|
|
|
4.0 |
|
Commercial mortgage loan |
|
|
100.00 |
|
|
|
27,798 |
|
|
|
19,053 |
|
|
|
8,904 |
|
|
|
2.1 |
|
Business purpose residential MBS (3) |
|
|
79.80 |
|
|
|
4,780 |
|
|
|
— |
|
|
|
4,780 |
|
|
|
— |
|
Solar ABS |
|
|
37.25 |
|
|
|
1,885 |
|
|
|
— |
|
|
|
1,885 |
|
|
|
— |
|
Total/weighted-average |
|
|
|
|
$ |
133,396 |
|
|
$ |
98,425 |
|
|
$ |
35,349 |
|
|
|
2.8 |
|
|
36
Our classes of credit investments as of March 31, 2023 are summarized as follows:
Commercial MBS - We hold two AAA rated senior position commercial MBS which are summarized as follows:
Commercial mortgage loan - Our commercial mortgage loan investment is a $27.8 million participation in an unrated $82.2 million syndicated mortgage loan secured by a first lien position in 42 midwestern health care facilities. The mortgage loan is guaranteed by the parent operating company. The loan carries a variable note rate of one-month term SOFR plus 5.61% and matures on June 23, 2023.
Business purpose residential MBS - We hold residual interests in two securitized pools of business purpose residential mortgage loans with a combined fair value of $4.8 million. As of March 31, 2023, the underlying collateral pools are comprised of 20 first lien mortgage loans or foreclosed real estate with an unpaid principal balance of $5.8 million. The underlying collateral pools as of March 31, 2023 represented less than 5% of the original collateral pools. We expect substantial realization of the remaining value to occur within the next several quarters.
Solar ABS - We hold a first loss position in a securitized pool of loans for the purchase and installation of solar panels on residential real estate with a fair value of $1.9 million and unpaid principal balance of $5.1 million. As of March 31, 2023, the underlying collateral pool was comprised of 9,485 loans with an unpaid principal balance of $347 million and a delinquency rate of 1.9%.
Agency MBS Investment Portfolio
Our agency MBS investment portfolio consisted of the following as of March 31, 2023 (dollars in thousands):
|
|
Fair Value |
|
|
Agency MBS |
|
$ |
460,984 |
|
Net short TBA Position |
|
|
(372,973 |
) |
Total agency MBS investment portfolio |
|
$ |
88,011 |
|
Our agency MBS consisted of the following as of March 31, 2023 (dollars in thousands):
|
|
Unpaid Principal Balance |
|
|
Net Unamortized Purchase Premiums (Discounts) |
|
|
Amortized Cost Basis |
|
|
Net Unrealized Gain (Loss) |
|
|
Fair Value |
|
|
Market Price |
|
|
Coupon |
|
|
Weighted |
|
||||||||
30-year fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
3.0% |
|
$ |
68,297 |
|
|
$ |
(2,443 |
) |
|
$ |
65,854 |
|
|
$ |
(4,466 |
) |
|
$ |
61,388 |
|
|
$ |
89.88 |
|
|
|
3.00 |
% |
|
|
10.1 |
|
4.0% |
|
|
184,901 |
|
|
|
191 |
|
|
|
185,092 |
|
|
|
(8,148 |
) |
|
|
176,944 |
|
|
|
95.70 |
|
|
|
4.00 |
% |
|
|
9.5 |
|
4.5% |
|
|
227,337 |
|
|
|
(4,718 |
) |
|
|
222,619 |
|
|
|
26 |
|
|
|
222,645 |
|
|
|
97.94 |
|
|
|
4.50 |
% |
|
|
9.7 |
|
5.5% |
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
104.71 |
|
|
|
5.50 |
% |
|
|
6.0 |
|
Total/weighted-average |
|
$ |
480,542 |
|
|
$ |
(6,970 |
) |
|
$ |
473,572 |
|
|
$ |
(12,588 |
) |
|
$ |
460,984 |
|
|
$ |
95.93 |
|
|
|
4.09 |
% |
|
|
9.7 |
|
37
|
|
Unpaid Principal Balance |
|
|
Net Unamortized Purchase Premiums (Discounts) |
|
|
Amortized Cost Basis |
|
|
Net Unrealized Gain (Loss) |
|
|
Fair Value |
|
|
Market |
|
|
Coupon |
|
|
Weighted |
|
||||||||
Fannie Mae |
|
$ |
221,765 |
|
|
$ |
(4,069 |
) |
|
$ |
217,696 |
|
|
$ |
(4,942 |
) |
|
$ |
212,754 |
|
|
$ |
95.94 |
|
|
|
4.09 |
% |
|
|
9.5 |
|
Freddie Mac |
|
|
258,777 |
|
|
|
(2,901 |
) |
|
|
255,876 |
|
|
|
(7,646 |
) |
|
|
248,230 |
|
|
|
95.92 |
|
|
|
4.09 |
% |
|
|
9.9 |
|
Total/weighted-average |
|
$ |
480,542 |
|
|
$ |
(6,970 |
) |
|
$ |
473,572 |
|
|
$ |
(12,588 |
) |
|
$ |
460,984 |
|
|
$ |
95.93 |
|
|
|
4.09 |
% |
|
|
9.7 |
|
The annualized prepayment rate for our agency MBS was 3.52% for the three months ended March 31, 2023. As of March 31, 2023, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 28% and 15% in specified pools of high loan-to-value and low balance loans, respectively, while the remainder includes specified pools of loans originated in certain geographical areas. Weighted average pay-up premiums on our agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately 0.11 of a percentage point as of March 31, 2023.
As of March 31, 2023, our agency MBS investment portfolio also included a net short TBA position. In accordance with GAAP, we account for our TBA positions as derivative instruments. Information about our net short TBA positions as of March 31, 2023 is as follows (dollars in thousands):
|
|
Notional Amount: |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Net Long (Short) |
|
|
Implied |
|
|
Implied |
|
|
Net Carrying |
|
||||
|
|
Position (1) |
|
|
Cost Basis (2) |
|
|
Fair Value (3) |
|
|
Amount (4) |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
(70,000 |
) |
|
$ |
(61,009 |
) |
|
$ |
(62,725 |
) |
|
$ |
(1,716 |
) |
4.0% 30-year MBS purchase commitments |
|
|
50,000 |
|
|
|
47,957 |
|
|
|
47,781 |
|
|
|
(176 |
) |
4.0% 30-year MBS sale commitments |
|
|
(140,000 |
) |
|
|
(130,665 |
) |
|
|
(133,788 |
) |
|
|
(3,123 |
) |
4.5% 30-year MBS sale commitments |
|
|
(229,000 |
) |
|
|
(218,642 |
) |
|
|
(224,241 |
) |
|
|
(5,599 |
) |
Total net long (short) agency TBA positions |
|
$ |
(389,000 |
) |
|
$ |
(362,359 |
) |
|
$ |
(372,973 |
) |
|
$ |
(10,614 |
) |
Results of Operations
Net Operating Income
Net operating income primarily represents the interest and other income recognized from our investments in financial assets and rent revenues recognized from SFR properties net of the interest expense incurred from repurchase agreement financing arrangements or other short and long-term borrowing transactions and SFR property operating expenses.
Net operating income does not include TBA agency MBS dollar roll income (expense), which we believe represents the economic equivalent of net interest income (expense) earned (incurred) from our investments in non-specified fixed-rate agency MBS, nor does it include the net interest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In our consolidated statements of comprehensive income, TBA agency MBS dollar roll income (expense) and the net interest income or expense from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “investment and derivative gain (loss), net.”
Investment and Derivative Gain (Loss), Net
“Investment and derivative gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of our investments in financial assets, periodic changes in the fair value (whether realized or unrealized) of derivative instruments and realized gain (loss) on sale of SFR properties.
General and Administrative Expenses
“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annual cash incentive compensation is based on meeting estimated annual performance measures and discretionary
38
components. Non-cash stock-based compensation includes expenses associated with stock-based awards granted to employees, including performance share units that are earned only upon the attainment of Company performance measures over the relevant measurement period.
“Other general and administrative expenses” primarily consists of the following:
Three months ended March 31, 2023 compared to the three months ended March 31, 2022
The following table presents the summary financial information for the three months ended March 31, 2023 and 2022, respectively (dollars in thousands, except per share amounts):
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Interest and other income |
|
$ |
14,000 |
|
|
$ |
7,406 |
|
Rent revenues from single-family residential properties |
|
|
— |
|
|
|
1,064 |
|
Interest expense |
|
|
(8,347 |
) |
|
|
(3,242 |
) |
Single-family residential property operating expenses |
|
|
— |
|
|
|
(1,531 |
) |
Net operating income |
|
|
5,653 |
|
|
|
3,697 |
|
Investment and derivative loss, net |
|
|
(3,851 |
) |
|
|
(827 |
) |
General and administrative expenses |
|
|
(3,911 |
) |
|
|
(3,284 |
) |
Loss before income taxes |
|
|
(2,109 |
) |
|
|
(414 |
) |
Income tax provision |
|
|
109 |
|
|
|
2,287 |
|
Net loss |
|
|
(2,218 |
) |
|
|
(2,701 |
) |
Dividend on preferred stock |
|
|
(660 |
) |
|
|
(742 |
) |
Net loss attributable to common stock |
|
$ |
(2,878 |
) |
|
$ |
(3,443 |
) |
Diluted loss per common share |
|
$ |
(0.10 |
) |
|
$ |
(0.12 |
) |
Weighted-average diluted common shares |
|
|
28,004 |
|
|
|
29,832 |
|
Interest and Other Income
Interest and other income increased $6.6 million, or 89.2%, from $7.4 million for the three months ended March 31, 2022 to $14.0 million for the three months ended March 31, 2023. The increase from the comparative period is primarily the result of higher average investment yields on our agency MBS and higher average investment balances in higher yielding MSR financing receivables and credit investments.
39
The components of interest and other income are summarized in the following tables for the periods indicated (dollars in thousands):
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
|
|
2022 |
|
|||||||||||||||||||
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
||||||
Agency MBS |
|
$ |
470,077 |
|
|
$ |
4,976 |
|
|
|
4.23 |
% |
|
$ |
392,218 |
|
|
$ |
1,492 |
|
|
|
1.52 |
% |
Credit investments |
|
|
151,474 |
|
|
|
2,762 |
|
|
|
7.29 |
% |
|
|
56,196 |
|
|
|
853 |
|
|
|
6.07 |
% |
Mortgage loans of consolidated VIEs |
|
|
176,170 |
|
|
|
1,398 |
|
|
|
3.17 |
% |
|
|
190,142 |
|
|
|
1,354 |
|
|
|
2.85 |
% |
MSR financing receivables |
|
|
136,015 |
|
|
|
4,685 |
|
|
|
13.78 |
% |
|
|
108,275 |
|
|
|
3,382 |
|
|
|
12.49 |
% |
Other |
|
|
|
|
|
179 |
|
|
|
|
|
|
|
|
|
325 |
|
|
|
|
||||
Total |
|
$ |
933,736 |
|
|
$ |
14,000 |
|
|
|
6.00 |
% |
|
$ |
746,831 |
|
|
$ |
7,406 |
|
|
|
3.97 |
% |
The effects of changes in the composition of our investments in financial assets on interest and other income are summarized below (dollars in thousands):
|
|
Three Months Ended March 31, 2023 |
|
|||||||||
|
|
vs. |
|
|||||||||
|
|
Three Months Ended March 31, 2022 |
|
|||||||||
|
|
Rate |
|
|
Volume |
|
|
Total Change |
|
|||
Agency MBS |
|
$ |
3,188 |
|
|
$ |
296 |
|
|
$ |
3,484 |
|
Credit investments |
|
|
338 |
|
|
|
1,571 |
|
|
|
1,909 |
|
Mortgage loans of consolidated VIEs |
|
|
146 |
|
|
|
(102 |
) |
|
|
44 |
|
MSR financing receivables |
|
|
437 |
|
|
|
866 |
|
|
|
1,303 |
|
Other |
|
|
— |
|
|
|
(146 |
) |
|
|
(146 |
) |
Total |
|
$ |
4,109 |
|
|
$ |
2,485 |
|
|
$ |
6,594 |
|
Rent Revenues from SFR Properties
We began to acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. The homes we purchased may have required minor refurbishment prior to a tenant occupying the property. In addition, there was typically a lease marketing period prior to a new tenant occupying the home. In general, the time period between the date of settlement of the home purchase and the date the house was occupied by a tenant averaged between 30 to 60 days. Accordingly, the timing of the earnings benefit to us was dictated by the pace of home purchases, the level of any property level refurbishments and the length of the lease marketing period.
During the year ended December 31, 2022, we sold all our SFR rental properties in two separate transactions in August 2022 and December 2022. Going forward, we do not anticipate allocating capital to an SFR investment strategy.
For the three months ended March 31, 2022, we had rental income of $1.1 million.
Interest Expense
Interest expense increased $5.1 million, or 159.4%, from $3.2 million for the three months ended March 31, 2022 to $8.3 million for the three months ended March 31, 2023. The increase from the comparative period is primarily the result of higher interest rates on repurchase agreement financings, partially offset by lower interest rates on secured debt of consolidated VIEs and the subtraction of long-term debt secured by SFR properties.
The components of interest expense are summarized in the following tables for the periods indicated (dollars in thousands):
40
|
|
Three Months Ended March 31, |
|
|||||||||||||||||||||
|
|
|
|
2022 |
|
|||||||||||||||||||
|
|
Average |
|
|
Interest |
|
|
Cost |
|
|
Average |
|
|
Interest |
|
|
Cost |
|
||||||
Repurchase agreements |
|
$ |
505,369 |
|
|
$ |
6,125 |
|
|
|
4.85 |
% |
|
$ |
342,364 |
|
|
$ |
276 |
|
|
|
0.32 |
% |
Long-term debt secured by SFR properties |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
57,134 |
|
|
|
408 |
|
|
|
2.86 |
% |
|
Long-term unsecured debt |
|
|
86,456 |
|
|
|
1,541 |
|
|
|
7.13 |
% |
|
|
86,062 |
|
|
|
1,370 |
|
|
|
6.37 |
% |
Secured debt of consolidated VIEs |
|
|
163,279 |
|
|
|
681 |
|
|
|
1.67 |
% |
|
|
174,763 |
|
|
|
1,188 |
|
|
|
2.72 |
% |
Total |
|
$ |
755,104 |
|
|
$ |
8,347 |
|
|
|
4.42 |
% |
|
$ |
660,323 |
|
|
$ |
3,242 |
|
|
|
1.96 |
% |
The effects of changes in the composition of our debt obligations on interest expense are summarized below (dollars in thousands):
|
|
Three Months Ended March 31, 2023 |
|
|||||||||
|
|
vs. |
|
|||||||||
|
|
Three Months Ended March 31, 2022 |
|
|||||||||
|
|
Rate |
|
|
Volume |
|
|
Total Change |
|
|||
Repurchase agreements |
|
$ |
5,718 |
|
|
$ |
131 |
|
|
$ |
5,849 |
|
Long-term debt secured by SFR properties |
|
|
— |
|
|
|
(408 |
) |
|
|
(408 |
) |
Long-term unsecured debt |
|
|
165 |
|
|
|
6 |
|
|
|
171 |
|
Secured debt of consolidated VIEs |
|
|
(429 |
) |
|
|
(78 |
) |
|
|
(507 |
) |
Total |
|
$ |
5,454 |
|
|
$ |
(349 |
) |
|
$ |
5,105 |
|
SFR Properties Operating Expenses
We began to acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. During the period prior to a lease commencement date as well as subsequently, we incurred property costs such as real estate taxes, insurance, homeowner association fees and depreciation. For the three months ended March 31, 2022, we had property operating expenses of $1.5 million, including $0.7 million of depreciation expense. During the year ended December 31, 2022, we sold all our SFR rental properties in two separate transactions in August 2022 and December 2022.
Investment and Derivative Gain (Loss), Net
As prevailing longer-term interest rates increase (decrease), the fair value of and MSR financing receivables and TBA sale commitments generally increase (decrease). Conversely, the fair value of our investments in fixed-rate agency MBS and TBA purchase commitments generally decreases (increases) in response to increases (decreases) in prevailing interest rates. We may enter into interest rate derivative hedging instruments intended to economically hedge changes attributable to changes in benchmark interest rates to either our agency MBS or MSR financing receivables. While our interest rate derivative hedging instruments are designed to mitigate the sensitivity of the fair value of either our agency MBS or MSR financing receivables to fluctuations in interest rates, they are not generally designed to mitigate the sensitivity of our net book value to spread risk, which is the risk of an increase of the market spread between the market yield on our agency MBS and MSR financing receivables and the benchmark yield on U.S. Treasury securities or interest rate swaps. Accordingly, changes in the spread between the market yields of agency MBS or MSR financing receivables and benchmark interest rates may result in a net gain or loss in the fair value of our investments and interest rate hedging instruments.
The following table presents information about the gains and losses recognized due to the changes in the fair value of our investments and interest rate hedging instruments for the periods indicated (dollars in thousands):
41
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Gain (loss) on agency MBS investments, net |
|
$ |
6,783 |
|
|
$ |
(25,957 |
) |
(Loss) gain on credit investments, net |
|
|
(2,073 |
) |
|
|
1,289 |
|
(Loss) gain on MSR financing receivables, net |
|
|
(3,135 |
) |
|
|
22,758 |
|
TBA commitments, net: |
|
|
|
|
|
|
||
TBA dollar roll income |
|
|
74 |
|
|
|
823 |
|
Other loss from TBA commitments, net |
|
|
(6,543 |
) |
|
|
(4,706 |
) |
Total loss on TBA commitments, net |
|
|
(6,469 |
) |
|
|
(3,883 |
) |
Interest rate derivatives: |
|
|
|
|
|
|
||
Net interest expense on interest rate swaps |
|
|
(118 |
) |
|
|
(291 |
) |
Other gain from interest rate derivative |
|
|
1,177 |
|
|
|
5,841 |
|
Total gain on interest rate derivatives, net |
|
|
1,059 |
|
|
|
5,550 |
|
Other investments, net |
|
|
(16 |
) |
|
|
(584 |
) |
Investment and derivative loss, net |
|
$ |
(3,851 |
) |
|
$ |
(827 |
) |
General and Administrative Expenses
General and administrative expenses increased by $0.6 million from $3.3 million for the three months ended March 31, 2022 to $3.9 million for three months ended March 31, 2023 . The increase in general and administrative expenses for the three months ended March 31, 2023 is primarily due to increases in professional services expense.
Income Tax Provision
Our TRSs are subject to U.S. federal and state corporate income taxes. As a result, for the three months ended March 31, 2023 and 2022, we recognized a provision for income taxes of $0.1 million and $2.3 million, respectively, on the pre-tax net income of our TRSs. As noted in “Non-GAAP Earnings Available for Distribution” below, our computation of non-GAAP earnings available for distribution includes a provision for income taxes on the earnings available for distribution of our TRSs. TRS earnings available for distribution is comprised of net interest income generated by TRSs net of the TRSs’ general and administrative expenses. In our consolidated financial consolidated statements of comprehensive income prepared in accordance with GAAP, the “income tax provision (benefit)” includes (i) the income tax provision for TRS earnings available for distribution and (ii) an income tax provision for (or benefit from) periodic increases (or decreases) in the fair value of the investments of our TRSs, which are recognized in net income as a component of “investment and derivative gain (loss) net.” Below is a reconciliation of the income tax provision for TRS earnings available for distribution, a non-GAAP financial measure, to the income tax provision determined in accordance with GAAP for the periods indicated (dollars in thousands):
|
|
Three Months Ended March 31, |
|
|||||
|
|
|
|
2022 |
|
|||
Income tax provision for TRS earnings available for |
|
$ |
453 |
|
|
$ |
229 |
|
Income tax (benefit) provision for TRS investment |
|
|
(344 |
) |
|
|
2,058 |
|
GAAP income tax provision |
|
$ |
109 |
|
|
$ |
2,287 |
|
42
Non-GAAP Earnings Available for Distribution
In addition to the results of operations determined in accordance with GAAP, we also report a non-GAAP financial measure "earnings available for distribution". We define earnings available for distribution as net income available to common stock determined in accordance with GAAP adjusted for the following items:
Realized and unrealized gains and losses recognized with respect to our mortgage related investments and economic hedging instruments, which are reported in line item “investment and derivative gain (loss), net” of our consolidated statements of comprehensive income, other than TBA dollar roll income and interest rate swap net interest income or expense, are excluded from the computation of earnings available for distribution as such gains on losses are not reflective of the economic interest income earned or interest expense incurred from our interest-bearing financial assets and liabilities during the indicated reporting period. Because our long-term-focused investment strategy for our mortgage related investment portfolio is to generate a net spread on the leveraged assets while prudently hedging periodic changes in the fair value of those assets attributable to changes in benchmark interest rates, we generally expect the fluctuations in the fair value of our mortgage related investments and economic hedging instruments to largely offset one another over time. In addition, certain of our investments are held by our TRS which is subject to U.S. federal and state corporate income taxes. In calculating earnings available for distribution, any income tax provision or benefit associated with gains or losses on our mortgage related investments and economic hedging instruments are also excluded from earnings available for distribution.
TBA dollar roll income (expense) represents the economic equivalent of net interest income (expense) generated from our transactions in non-specified fixed-rate agency MBS, executed through sequential series of forward-settling purchase and sale transactions that are settled on a net basis (known as “dollar roll” transactions). Dollar roll income (expense) is generated (incurred) as a result of delaying, or “rolling,” the settlement of a forward-settling purchase (sale) of a TBA agency MBS by entering into an offsetting “spot” sale (purchase) with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering another forward-settling purchase (sale) with the same counterparty of a TBA agency MBS of the same essential characteristics for a later settlement date at a price discount relative to the spot sale (purchase). The price discount of the forward-settling purchase (sale) relative to the contemporaneously executed spot sale (purchase) reflects compensation to the seller for the interest income (inclusive of expected prepayments) that, at the time of sale, is expected to be foregone as a result of relinquishing beneficial ownership of the MBS from the settlement date of the spot sale until the settlement date of the forward purchase, net of implied repurchase financing costs. We calculate dollar roll income (expense) as the excess of the spot sale (purchase) price over the forward-settling purchase (sale) price and recognize this amount ratably over the period beginning on the settlement date of the sale (purchase) and ending on the settlement date of the forward purchase (sale). In our consolidated statements of comprehensive income prepared in accordance with GAAP, TBA agency MBS dollar roll income (expense) is reported as a component of the overall periodic change in the fair value of TBA forward commitments within the line item “investment and derivative gain (loss), net.”
We utilize interest rate swap agreements to economically hedge a portion of our exposure to variability in future interest cash flows, attributable to changes in benchmark interest rates, associated with future roll-overs of our short-term repurchase agreement financing arrangements. Accordingly, the net interest income earned or expense incurred (commonly referred to as “net interest carry”) from our interest rate swap agreements in combination with repurchase agreement interest expense recognized in accordance with GAAP represents our effective “economic interest expense.” In our consolidated statements of comprehensive income prepared in accordance with GAAP, the net interest income earned or expense incurred from interest rate swap agreements is reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “investment and derivative gain (loss), net.”
The following table provides a reconciliation of GAAP net income (loss) available (attributable) to common stock to non-GAAP earnings available for distribution for the periods indicated (amounts in thousands):
43
|
Three Months Ended March 31, |
|
|||||
|
|
|
2022 |
|
|||
Net loss attributable to common stock |
$ |
(2,878 |
) |
|
$ |
(3,443 |
) |
Add (less): |
|
|
|
|
|
||
Investment and derivative loss, net |
|
3,851 |
|
|
|
827 |
|
Income tax (benefit) provision for TRS investment (loss) gain |
|
(344 |
) |
|
|
2,058 |
|
Depreciation of single-family residential properties |
|
— |
|
|
|
715 |
|
Stock-based compensation expense |
|
757 |
|
|
|
761 |
|
Add back: |
|
|
|
|
|
||
TBA dollar roll income |
|
74 |
|
|
|
823 |
|
Interest rate swap net interest expense |
|
(118 |
) |
|
|
(291 |
) |
Non-GAAP earnings available for distribution |
$ |
1,342 |
|
|
$ |
1,450 |
|
Non-GAAP earnings available for distribution per |
$ |
0.05 |
|
|
$ |
0.05 |
|
Weighted average diluted common shares |
|
28,478 |
|
|
|
30,315 |
|
Earnings available for distribution is used by management to evaluate the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as assist with the determination of the appropriate level of periodic dividends to common stockholders. In addition, we believe that earnings available for distribution assists investors in understanding and evaluating the financial performance of our long-term-focused, net interest spread-based investment strategy and core business activities over periods of time as well as our earnings capacity.
A limitation of utilizing this non-GAAP financial measure is that the effect of accounting for all events or transactions in accordance with GAAP does, in fact, reflect the financial results of our business and these effects should not be ignored when evaluating and analyzing our financial results. In addition, our calculation of earnings available for distribution may not be comparable to other similarly titled measures of other companies. Therefore, we believe that earnings available for distribution should be considered as a supplement to, and in conjunction with, net income and comprehensive income determined in accordance with GAAP. Furthermore, there may be differences between earnings available for distribution and taxable income determined in accordance with the Internal Revenue Code. As a REIT, we are required to distribute at least 90% of our REIT taxable income (subject to certain adjustments) to qualify as a REIT and all of our taxable income in order to not be subject to any U.S. federal or state corporate income taxes. Accordingly, earnings available for distribution may not equal our distribution requirements as a REIT.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, meet margin calls on our short-term borrowings and hedging instruments, and for other general business purposes. Our primary sources of funds for liquidity consist of existing cash balances, short-term borrowings (for example, repurchase agreements), principal and interest payments from our mortgage investments and proceeds from sales of mortgage investments. Other sources of liquidity include proceeds from the offering of common stock, preferred stock, debt securities, or other securities registered pursuant to our effective shelf registration statement filed with the Securities and Exchange Commission (“SEC”).
Liquidity, or ready access to funds, is essential to our business. Perceived liquidity issues may affect our counterparties’ willingness to engage in transactions with us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time. If we cannot obtain funding from third parties our results of operations could be negatively impacted.
As of March 31, 2023, our debt-to-equity leverage ratio was 2.7 to 1 measured as the ratio of the sum of our total debt to our stockholders’ equity as reported on our consolidated balance sheet. In evaluating our liquidity and leverage ratios, we also monitor our “at risk” leverage ratio. Our “at risk” leverage ratio is measured as the ratio of the sum of our repurchase agreement financing, net payable or receivable for unsettled securities, net contractual forward price of our TBA commitments, leverage within our MSR financing receivable less our cash and cash equivalents compared to our investable capital. Our investable capital is calculated as the sum of our stockholders’ equity and long-term unsecured debt. As of March 31, 2023, our “at risk” leverage ratio was 0.4 to 1.
As of March 31, 2023, our liquid assets totaled $60.6 million consisting of cash and cash equivalents of $12.8 million and settled unencumbered agency MBS of $47.8 million at fair value.
44
Sources of Funding
We believe that our existing cash balances, net investments in mortgage investments, cash flows from operations, borrowing capacity, and other sources of liquidity will be sufficient to meet our cash requirements for at least the next twelve months. We may, however, seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash. However, we may be required to sell our assets in such instances at depressed prices.
Cash Flows
As of March 31, 2023, our cash totaled $12.8 million, representing a net decrease of $17.4 million from $30.2 million as of December 31, 2022. Cash used in operating activities of $4.4 million during the three months ended March 31, 2023 was attributable primarily to net interest income less our general and administrative expenses. Cash provided by investing activities of $22.3 million during the three months ended March 31, 2023 was primarily generated by sales of agency MBS and credit securities, distributions received on our MSR financing receivables, receipt of principal payments from agency MBS and credit securities and principal receipts on loans and mortgage loans of consolidated VIEs, partially offset by purchases of new agency MBS, MSR financing receivables. Cash used in financing activities of $35.3 million during the three months ended March 31, 2023 was primarily from repayments of repurchase agreements, net repayments of secured debt of consolidated VIEs and dividend payments to preferred stockholders.
Debt Capital
Repurchase Agreements
We have short-term financing facilities that are structured as repurchase agreements with various financial institutions to fund our mortgage investments. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financing objectives. Funding for mortgage investments through repurchase agreements continues to be available to us at rates we consider to be attractive from multiple counterparties.
Our repurchase agreements to finance our acquisition of MBS include provisions contained in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association (“SIFMA”) and may be amended and supplemented in accordance with industry standards for repurchase facilities. Certain of our repurchase agreements include financial covenants, with which the failure to comply would constitute an event of default. Similarly, each repurchase agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. As provided in the standard master repurchase agreement as typically amended, upon the occurrence of an event of default or termination, the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us.
Our repurchase agreement to finance our acquisition of mortgage loans is subject to a master repurchase agreement between our wholly-owned subsidiary, for which we provide a full guarantee of performance, and a third party lender. The agreement contains financial covenants including our maintenance of a minimum level of net worth, liquidity and profitability, with which the failure to comply would constitute an event of default. Similarly, the agreement includes events of insolvency and events of default on other indebtedness as similar financial covenants. Upon the occurrence of an event of default or termination, the counterparty has the option to terminate all other indebtedness arrangements with us and to demand immediate payment of any amount due from us.
Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (commonly referred to as a “margin call”), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our mortgage investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates, higher prepayments or higher actual or expected credit losses. Our repurchase agreements generally provide that valuations for mortgage investments securing our repurchase agreements are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances and under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the mortgage investments securing our repurchase agreements. In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in the event of a margin call, we must provide cash or additional securities on the same business day that the margin call is made if the lender provides us notice prior to the margin notice deadline on such day.
45
To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should we encounter increases in interest rates, prepayments or expected credit losses, margin calls on our repurchase agreements could result in a material adverse change in our liquidity position.
Our repurchase agreement counterparties apply a “haircut” to the value of the pledged collateral, which means the collateral is valued, for the purposes of the repurchase agreement transaction, at less than fair value. Upon the renewal of a repurchase agreement financing at maturity, a lender could increase the “haircut” percentage applied to the value of the pledged collateral, thus reducing our liquidity.
Our repurchase agreements generally mature within 30 to 60 days, but may have maturities as short as one day and as long as one year. In the event that market conditions are such that we are unable to continue to obtain repurchase agreement financing for our mortgage investments in amounts and at interest rates consistent with our financing objectives, we may liquidate such investments and may incur significant losses on any such sales of mortgage investments.
The following table provides information regarding our outstanding repurchase agreement borrowings as of the date and period indicated (dollars in thousands):
|
|
|
||
Agency MBS repurchase financing: |
|
|
|
|
Repurchase agreements outstanding |
|
$ |
385,923 |
|
Agency MBS collateral, at fair value |
|
|
413,190 |
|
Net amount (1) |
|
|
27,267 |
|
Weighted-average rate |
|
|
4.94 |
% |
Weighted-average term to maturity |
|
13.0 days |
|
|
Non-agency MBS repurchase financing: |
|
|
|
|
Repurchase agreements outstanding |
|
$ |
79,372 |
|
MBS collateral, at fair value |
|
|
88,015 |
|
Net amount (1) |
|
|
8,643 |
|
Weighted-average rate |
|
|
5.53 |
% |
Weighted-average term to maturity |
|
20.0 days |
|
|
Mortgage loans repurchase financing: |
|
|
|
|
Repurchase agreements outstanding |
|
$ |
19,053 |
|
Mortgage loans collateral, at fair value |
|
|
27,798 |
|
Net amount (1) |
|
|
8,745 |
|
Weighted-average rate |
|
|
7.34 |
% |
Weighted-average term to maturity |
|
206.0 days |
|
|
Total mortgage investments repurchase financing: |
|
|
|
|
Repurchase agreements outstanding |
|
$ |
484,348 |
|
Mortgage investments collateral, at fair value |
|
|
529,003 |
|
Net amount (1) |
|
|
44,655 |
|
Weighted-average rate |
|
|
5.13 |
% |
Weighted-average term to maturity |
|
21.7 days |
|
|
Maximum amount outstanding at any month-end during the period |
|
$ |
522,351 |
|
To limit our exposure to counterparty risk, we diversify our repurchase agreement funding across multiple counterparties. As of March 31, 2023, we had outstanding repurchase agreement balances with eight counterparties and have master repurchase agreements in place with a total of 14 counterparties located throughout North America, Europe and Asia. As of March 31, 2023, no more than 4.1% of our stockholders’ equity was at risk with any one counterparty, with the top five counterparties representing approximately 17.2% of our stockholders’ equity.
Long-Term Unsecured Debt
As of March 31, 2023, we had $86.5 million of total long-term unsecured debt, net of unamortized debt issuance costs of $1.2 million. Our 6.75% Senior Notes due 2025 with a principal amount of $34.9 million outstanding as of March 31, 2023 accrue and require payment of interest quarterly at an annual rate of 6.75% and mature on March 15, 2025. Our 6.00% Senior Notes due 2026 with a principal amount of $37.8 million outstanding as of March 31, 2023 accrue and require payment of interest quarterly at an annual rate of 6.00% and mature on August 1, 2026. Our trust preferred debt with a principal amount of $15.0 million outstanding as of March 31, 2023 accrue and require the payment of interest quarterly at three-month LIBOR plus 2.25% to 3.00% and mature
46
between 2033 and 2035. Our Senior Notes due 2025 and trust preferred debt may be redeemed in whole or part at any time and from time to time at our option at a redemption price equal to the principal amount plus accrued and unpaid interest. Our Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at our option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest.
Derivative Instruments
In the normal course of our operations, we are a party to financial instruments that are accounted for as derivative financial instruments including (i) interest rate hedging instruments such as interest rate swaps, U.S. Treasury note futures, put and call options on U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, options on agency MBS, and TBA sale commitments and (ii) derivative instruments that economically serve as investments such as TBA purchase commitments.
Interest Rate Hedging Instruments
We exchange cash variation margin with the counterparties to our interest rate hedging instruments at least on a daily basis based upon daily changes in fair value as measured by the central clearinghouse through which those derivatives are cleared. In addition, the central clearinghouse requires market participants to deposit and maintain an “initial margin” amount which is determined by the clearinghouse and is generally intended to be set at a level sufficient to protect the clearinghouse from the maximum estimated single-day price movement in that market participant’s contracts. However, the futures commission merchants (“FCMs”) through which we conduct trading of our cleared and exchanged-traded hedging instruments may require incremental initial margin in excess of the clearinghouse’s requirement. The clearing exchanges have the sole discretion to determine the value of our hedging instruments for the purpose of setting initial and variation margin requirements or otherwise. In the event of a margin call, we must generally provide additional collateral on the same business day. To date, we have not had any margin calls on our hedging agreements that we were not able to satisfy. However, if we encounter significant changes in long-term interest rates, margin calls on our hedging agreements could result in a material adverse change in our liquidity position.
As of March 31, 2023, we had outstanding interest rate swaps with the following aggregate notional amount and corresponding initial margin held in collateral deposit with the FCM (dollars in thousands):
|
|
|
||||||
|
|
Notional |
|
|
Collateral |
|
||
|
|
Amount |
|
|
Deposit |
|
||
Interest rate swaps |
|
$ |
85,000 |
|
|
$ |
1,690 |
|
The FCMs through which we conduct trading of our hedging instruments may limit their exposure to us (due to an inherent one business day lag in the variation margin exchange process) by applying a maximum “ceiling” on their level of risk, either overall and/or by instrument type. The FCMs generally use the amount of initial margin that we have posted with them as a measure of their level of risk exposure to us. We currently have FCM relationships with two large financial institutions. To date, among our two FCM arrangements, we have had sufficient excess capacity above and beyond what we believe to be a sufficient and appropriate hedge position. However, if our FCMs substantially lowered their risk exposure thresholds, we could experience a material adverse change in our liquidity position and our ability to hedge appropriately.
TBA Dollar Roll Transactions
TBA dollar roll transactions represent a form of off-balance sheet financing accounted for as derivative instruments. In a TBA dollar roll transaction, we do not intend to take physical delivery of the underlying agency MBS and will generally enter into an offsetting position and net settle the paired-off positions in cash. However, under certain market conditions, it may be uneconomical for us to roll our TBA positions into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery to settle a long TBA position, we would have to fund our total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. If we were required to make physical delivery to settle a short TBA position, we could be required to delivery agency MBS from our balance that has a value in excess of the short TBA positon which would result in us incurring a loss.
Margin Requirements for Agency MBS Purchase and Sale Commitments
Our commitments to purchase and sell agency MBS, including TBA commitments, are subject to master securities forward transaction agreements published by SIFMA as well as supplemental terms and conditions with each counterparty. Under the terms of these agreements, we may be required to pledge collateral to our counterparty in the event the fair value of the agency MBS underlying our purchase and sale commitments change and such counterparty demands collateral through a margin call. Margin calls on agency MBS commitments are generally caused by factors such as changing interest rates or prepayments. Our agency MBS commitments provide that valuations for our commitments and any pledged collateral are to be obtained from a generally recognized
47
source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the agency MBS commitment and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.
MSR Financing Receivable Commitments
We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enables us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. We have committed to invest a total minimum of $50 million of capital with the counterparty with $25 million of the minimum commitment expiring on December 31, 2023 and $25 million of the minimum commitment expiring on April 1, 2024. As of March 31, 2023, we have fully funded the total minimum commitment. At any time prior to the minimum commitment expiration dates, we have the option to request the mortgage servicing counterparty to sell the related MSR investments and repay us amounts owed to us under the MSR financing transaction less a minimum fee the mortgage servicing counterparty would have earned over the remaining original commitment periods.
At our election, we can request the mortgage servicing counterparty utilize leverage on the MSRs to which our MSR financing receivables are referenced to finance the purchase of additional MSRs to increase potential returns to us. As of March 31, 2023, our mortgage servicing counterparty has a $100 million credit facility that is secured by its MSRs including MSRs to which our MSR financing receivables are referenced. As of March 31, 2023, our mortgage servicing counterparty had drawn $58.4 million and had $41.6 million of availability under its credit facility. As of March 31, 2023, we had the ability to utilize approximately 68% of our mortgage servicing counterparty’s available undrawn capacity under its credit facility. In general, our mortgage servicing counterparty can obtain advances of up to 60% of the fair value of the MSR collateral value pledged. Under our mortgage servicing counterparty’s credit facility, if the fair value of our pledged MSR collateral declines and the lender demands additional collateral from our mortgage servicing counterparty through a margin call, we would be required to provide the mortgage servicing counterparty with additional funds to meet such margin call. If we were unable to satisfy such margin call, the lender could liquidate the MSR collateral position to which our MSR financing receivables are referenced to satisfy the loan obligation, thereby reducing the value of our MSR financing receivables. Draws under the facility bear interest at term SOFR plus 2.90% with a SOFR floor of 1.60% and a maturity date of April 28, 2023 with a one-year borrower extension option.
Under the arrangement, we are obligated to provide funds to the mortgage servicing counterparty to fund its advances of payments on the serviced pool of mortgage loans within the referenced MSR. The mortgage servicing counterparty is required to return to us any subsequent servicing advances collected or reimbursed by the GSEs. At our option, we could request the mortgage servicing counterparty to fund any servicing advances with draws under its credit facility, subject to available borrowing capacity, while we would be required to fund such financing costs.
As of March 31, 2023, our mortgage servicing counterparty has drawn $58.4 million of financing under its credit facility, including $1.0 million attributable to us, collateralized by an estimated $327.7 million of MSRs, including $4.9 million attributable to us, and $6.1 million of servicer advances, including $0.2 million attributable to us.
Equity Capital
Common Equity Distribution Agreements
We are party to separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which we may offer and sell, from time to time, shares of our common stock. Pursuant to the common equity distribution agreements, shares of our common stock may be offered and sold through the equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions. As of March 31, 2023, we had 11,302,160 shares of Class A common stock available for sale under the common equity distribution agreements.
Preferred Stock
As of March 31, 2023, we had Series B Preferred Stock outstanding with a liquidation preference of $9.5 million. The Series B Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrB.” The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series B Preferred Stock have no voting rights, except under limited conditions and are entitled to receive a cumulative cash dividend at a rate of 7.00% per annum of their $25.00 per share liquidation preference (equivalent to $1.75 per annum per share). Shares of Series B Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option. Dividends are payable quarterly in arrears on the 30th day of each
48
December, March, June and September, when and as declared. We have declared and paid all required quarterly dividends on our Series B Preferred Stock to date.
As of March 31, 2023, we had Series C Preferred Stock outstanding with a liquidation preference of $23.9 million. The Series C Preferred Stock is publicly traded on the New York Stock Exchange under the ticker symbol “AAIC PrC.” The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by us. Holders of Series C Preferred Stock have no voting rights except under limited conditions and will be entitled to receive cumulative cash dividends (i) from and including the original issue date to, but excluding, March 30, 2024 at a fixed rate equal to 8.250% per annum of the $25.00 per share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including March 30, 2024, at a floating rate equal to three-month LIBOR plus a spread of 5.664% per annum. Shares of Series C Preferred Stock are redeemable at $25.00 per share, plus accumulated and unpaid dividends (whether or not authorized or declared) exclusively at our option commencing on March 30, 2024 or earlier upon the occurrence of a change in control or under circumstances where it is necessary to preserve our qualification as a REIT. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible into shares of our common stock. Dividends are payable quarterly in arrears on the 30th day of March, June, September and December of each year, when and as declared. We have declared and paid all required quarterly dividends on our Series C Preferred Stock to date.
Preferred Equity Distribution Agreement
We are party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which we may offer and sell, from time to time, shares of our Series B Preferred Stock. Pursuant to the Series B preferred equity distribution agreement, shares of our Series B Preferred Stock may be offered and sold through the preferred equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from us, in privately negotiated transactions.
As of March 31, 2023, we had 1,602,566 shares of Series B Preferred Stock available for sale under the Series B preferred equity distribution agreement.
REIT Distribution Requirements
We have elected to be taxed as a REIT under the Internal Revenue Code. As a REIT, we are required to distribute annually 90% of our REIT taxable income (subject to certain adjustments) to our shareholders. So long as we continue to qualify as a REIT, we will generally not be subject to U.S. federal or state corporate income taxes on our taxable income that we distribute to our shareholders on a timely basis. At present, it is our intention to distribute 100% of our taxable income, although we will not be required to do so. We intend to make distributions of our taxable income within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
As of March 31, 2023, we had estimated NOL carryforwards of $164.0 million that can be used to offset future taxable ordinary income and reduce our future distribution requirements. As of March 31, 2023, we also had estimated NCL carryforwards of $136.2 million that can be used to offset future net capital gains.
Off-Balance Sheet Arrangements and Other Commitments
As of March 31, 2023 and December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose entities or VIEs, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes that have, or are reasonably likely to have, a material current or future effect on our financial condition. Our economic interests held in unconsolidated VIEs are generally limited in nature to those of a passive holder of beneficial interests in securitized financial assets. As of March 31, 2023 and December 31, 2022, we had consolidated for financial reporting purposes one and two, respectively, securitization trusts for which we determined that our investments provided us with both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We were not required to consolidate for financial reporting purposes any other VIEs as of March 31, 2023 and December 31, 2022, as we did not have the power to direct the activities that most significantly impact the economic performance of such entities. For further information about our consolidated VIEs, refer to "Note 8. Consolidation of Variable Interest Entities" under Item 1 of this Quarterly Report on Form 10-Q.
As of March 31, 2023 and December 31, 2022, we had not guaranteed any obligations of unconsolidated entities. As of March 31, 2023 and December 31, 2022, we had not entered into any commitment or intent to provide funding to unconsolidated entities other than the aforementioned asset-backed revolving credit facility funding commitment.
49
Critical Accounting Estimates
Refer to the heading titled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of our critical accounting estimates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. The primary market risks that we are exposed to are interest rate risk, prepayment risk, extension risk, spread risk, credit risk, liquidity risk and regulatory risk. See “Item 1 — Business” in our Annual Report on Form 10-K for the year ended December 31, 2022 for discussion of our risk management strategies related to these market risks. The following is additional information regarding certain of these market risks.
Interest Rate Risk
We are exposed to interest rate risk in our agency MBS and MSR related assets. Our investments in mortgage investments are also financed with short-term borrowing facilities, such as repurchase agreements, which are interest rate sensitive financial instruments. Our exposure to interest rate risk fluctuates based upon changes in the level and volatility of interest rates, mortgage prepayments, and in the shape and slope of the yield curve, among other factors. Through the use of interest rate hedging instruments, we attempt to economically hedge a portion of our exposure to changes, attributable to changes in benchmark interest rates, in agency MBS fair values and future interest cash flows on our short-term financing arrangements. Our primary interest rate hedging instruments include interest rate swaps as well as U.S. Treasury note futures, options on U.S. Treasury note futures, options on agency MBS and TBA sale commitments.
Changes in both short- and long-term interest rates affect us in several ways, including our financial position. As interest rates rise, the value of fixed-rate agency MBS may be expected to decline, prepayment rates may be expected to decrease and duration may be expected to extend, while the values of our interest rate hedging instruments and MSR financing receivables are generally expected to increase due to lower expectations of prepayments in the referenced pools of mortgage loans. Conversely, if interest rates decline, the value of fixed-rate agency MBS is generally expected to increase while the value of our interest rate hedging instruments and MSR related assets are expected to decline. We manage our interest rate risk through investment allocation between our agency MBS and MSR related assets and the utilization of interest rate hedging instruments.
The tables that follow illustrate the estimated change in fair value for our current investments in agency MBS, MSR financing receivable and derivative instruments under several hypothetical scenarios of interest rate movements. For the purposes of this illustration, interest rates are defined by the U.S. Treasury yield curve. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” Our estimate of the change in the fair value of agency MBS is based upon the same assumptions we use to manage the impact of interest rates on the portfolio. The interest rate sensitivity of our agency MBS and TBA commitments is derived from The Yield Book, a third-party model. The interest rate sensitivity of our MSR financing receivable is derived from an internal model. Actual results could differ significantly from these estimates. The effective durations are based on observed fair value changes, as well as our own estimate of the effect of interest rate changes on the fair value of the investments, including assumptions regarding prepayments based, in part, on age and interest rate of the mortgages underlying the agency MBS, prior exposure to refinancing opportunities, and an overall analysis of historical prepayment patterns under a variety of historical interest rate conditions.
The interest rate sensitivity analyses illustrated by the tables that follow have certain limitations, most notably the following:
50
These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):
|
|
|
||||||||||
|
|
|
|
|
Value |
|
|
Value |
|
|||
|
|
|
|
|
with 50 |
|
|
with 50 |
|
|||
|
|
|
|
|
Basis Point |
|
|
Basis Point |
|
|||
|
|
|
|
|
Increase in |
|
|
Decrease in |
|
|||
|
|
Value |
|
|
Interest Rates |
|
|
Interest Rates |
|
|||
Agency MBS |
|
$ |
460,984 |
|
|
$ |
450,059 |
|
|
$ |
470,680 |
|
TBA commitments |
|
|
(10,614 |
) |
|
|
(1,684 |
) |
|
|
(19,429 |
) |
MSR financing receivables |
|
|
183,058 |
|
|
|
185,585 |
|
|
|
180,095 |
|
Interest rate swaps |
|
|
106 |
|
|
|
(1,069 |
) |
|
|
1,281 |
|
Equity available to common stock (1) |
|
|
181,725 |
|
|
|
181,099 |
|
|
|
180,835 |
|
Equity available to common stock percent change |
|
|
|
|
|
(0.34 |
)% |
|
|
(0.49 |
)% |
|
|
|
|
||||||||||
|
|
|
|
|
Value |
|
|
Value |
|
|||
|
|
|
|
|
with 100 |
|
|
with 100 |
|
|||
|
|
|
|
|
Basis Point |
|
|
Basis Point |
|
|||
|
|
|
|
|
Increase in |
|
|
Decrease in |
|
|||
|
|
Value |
|
|
Interest Rates |
|
|
Interest Rates |
|
|||
Agency MBS |
|
$ |
460,984 |
|
|
$ |
438,045 |
|
|
$ |
478,939 |
|
TBA commitments |
|
|
(10,614 |
) |
|
|
8,199 |
|
|
|
(26,182 |
) |
MSR financing receivables |
|
|
183,058 |
|
|
|
188,450 |
|
|
|
176,190 |
|
Interest rate swaps |
|
|
106 |
|
|
|
(2,244 |
) |
|
|
2,456 |
|
Equity available to common stock (1) |
|
|
181,725 |
|
|
|
180,658 |
|
|
|
179,612 |
|
Equity available to common stock percent change |
|
|
|
|
|
(0.59 |
)% |
|
|
(1.16 |
)% |
|
Spread Risk
Our mortgage investments expose us to “spread risk.” Spread risk, also known as “basis risk,” is the risk of an increase in the spread between market participants’ required rate of return (or “market yield”) on our mortgage investments and prevailing benchmark interest rates, such as the U.S. Treasury or interest rate swap rates.
The spread risk inherent to our investments in agency MBS and the resulting fluctuations in fair value of these securities can occur independent of changes in prevailing benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U. S. Federal Reserve, liquidity, or changes in market participants’ required rates of return on different assets. While we use interest rate hedging instruments to attempt to mitigate the sensitivity of our net book value to changes in prevailing benchmark interest rates, such instruments are generally not designed to mitigate spread risk inherent to our investment in agency MBS. Consequently, the value of our agency MBS and, in turn, our net book value, could decline independent of changes in interest rates.
The tables that follow illustrate the estimated change in fair value for our investments in agency MBS and TBA commitments under several hypothetical scenarios of agency MBS spread movements. Changes in fair value are measured as percentage changes from their respective fair values presented in the column labeled “Value.” The sensitivity of our agency MBS and TBA commitments to changes in MBS spreads is derived from The Yield Book, a third-party model. The analysis to follow reflects an assumed spread duration for our investment in agency MBS of 4.8 years, which is a model-based assumption that is dependent upon the size and composition of our investment portfolio as well as economic conditions present as of March 31, 2023.
These analyses are not intended to provide a precise forecast. Actual results could differ materially from these estimates (dollars in thousands, except per share amounts):
51
|
|
|
||||||||||
|
|
|
|
|
Value with |
|
|
Value with |
|
|||
|
|
|
|
|
10 Basis Point |
|
|
10 Basis Point |
|
|||
|
|
|
|
|
Increase in |
|
|
Decrease In |
|
|||
|
|
|
|
|
Agency MBS |
|
|
Agency MBS |
|
|||
|
|
Value |
|
|
Spreads |
|
|
Spreads |
|
|||
Agency MBS |
|
$ |
460,984 |
|
|
$ |
458,317 |
|
|
$ |
463,651 |
|
TBA commitments |
|
|
(10,614 |
) |
|
|
(8,369 |
) |
|
|
(12,860 |
) |
Equity available to common stock (1) |
|
|
181,725 |
|
|
|
181,304 |
|
|
|
182,146 |
|
Equity available to common stock percent change |
|
|
|
|
|
(0.23 |
)% |
|
|
0.23 |
% |
|
|
|
|
||||||||||
|
|
|
|
|
Value with |
|
|
Value with |
|
|||
|
|
|
|
|
25 Basis Point |
|
|
25 Basis Point |
|
|||
|
|
|
|
|
Increase in |
|
|
Decrease In |
|
|||
|
|
|
|
|
Agency MBS |
|
|
Agency MBS |
|
|||
|
|
Value |
|
|
Spreads |
|
|
Spreads |
|
|||
Agency MBS |
|
$ |
460,984 |
|
|
$ |
454,317 |
|
|
$ |
467,651 |
|
TBA commitments |
|
|
(10,614 |
) |
|
|
(5,001 |
) |
|
|
(16,228 |
) |
Equity available to common stock (1) |
|
|
181,725 |
|
|
|
180,672 |
|
|
|
182,778 |
|
Equity available to common stock percent change |
|
|
|
|
|
(0.58 |
)% |
|
|
0.58 |
% |
|
Credit Risk
Unlike our agency MBS investments, our credit investments do not carry a credit guarantee from a GSE or government agency. Accordingly, our credit investments expose us to credit risk. Credit risk, sometimes referred to as non-performance or non-payment risk, is the risk that we will not receive, in full, the contractually required principal or interest cash flows stemming from our investments due to an underlying borrower’s or issuer’s default on their obligation. Upon a mortgage loan borrower’s default, a foreclosure sale or other liquidation of the underlying mortgaged property will result in a credit loss if the liquidation proceeds fall short of the mortgage loan’s unpaid principal balance and unpaid accrued interest.
Some of our credit investments have credit enhancements that mitigate our exposure to the credit risk of the underlying mortgage loans. Credit losses incurred on the underlying mortgage loans collateralizing our investments in non-agency MBS are allocated on a “reverse sequential” basis. Accordingly, any credit losses realized on the underlying mortgage loans are first absorbed by the beneficial interests subordinate to our non-agency MBS, if any, to the extent of their respective principal balance, prior to being allocated to our investments.
Other of our non-agency MBS investments represent “first loss” positions. Accordingly, for such investments, credit losses realized on the underlying pool of mortgage loans are first allocated to our security, to the extent of its principal balance, prior to being allocated to the respective securitization’s more senior credit positions.
We accept exposure to credit risk at levels we deem prudent within our overall investment strategy and our evaluation of the potential risk-adjusted returns. We attempt to manage our exposure to credit risk through prudent asset selection resulting from pre-acquisition due diligence, on-going performance monitoring subsequent to acquisition, and the disposition of assets for which we identify negative credit trends.
There is no guarantee that our attempts to manage our credit risk will be successful. We could experience substantial losses if the credit performance of the mortgage loans to which we are exposed falls short of our expectations.
Cautionary Statement About Forward-Looking Information
When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, as such, may involve known and unknown risks, uncertainties and assumptions. The forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, statements about the following:
52
Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently in our possession. These beliefs, assumptions and expectations may change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, the performance of our portfolio and our business, financial condition, liquidity and results of operations may vary materially from those expressed, anticipated or contemplated in our forward-looking statements. You should carefully consider these risks, along with the following factors that could cause actual results to vary from our forward-looking statements, before making an investment in our securities:
53
These and other risks, uncertainties and factors, including those described elsewhere in this Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible 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.
Item 4. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer, J. Rock Tonkel, Jr., and our Chief Financial Officer, Richard E. Konzmann, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
54
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time involved in civil lawsuits, legal proceedings and arbitration matters that we consider to be in the ordinary course of our business. There can be no assurance that these matters individually or in the aggregate will not have a material adverse effect on our financial condition or results of operations in a future period. We are also subject to the risk of litigation, including litigation that may be without merit. As we intend to actively defend such litigation, significant legal expenses could be incurred. An adverse resolution of any future litigation against us could materially affect our financial condition, results of operations and liquidity. Furthermore, we operate in highly-regulated markets that currently are under intense regulatory scrutiny, and we have received, and we expect in the future that we may receive, inquiries and requests for documents and information from various federal, state and foreign regulators. We believe that the continued scrutiny of MBS, structured finance, and derivative market participants increases the risk of additional inquiries and requests from regulatory or enforcement agencies and other parties. We cannot provide any assurance that these inquiries and requests will not result in further investigation of or the initiation of a proceeding against us or that, if any such investigation or proceeding were to arise, it would not materially adversely affect our Company.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022. The materialization of any risks and uncertainties identified in our Cautionary Statement About Forward-Looking Information contained in this report together with those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See “Cautionary Statement About Forward-Looking Information” in Part I, Item 3 of this report or our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit |
|
Exhibit Title |
|
|
|
3.01 |
|
|
|
|
|
3.02 |
|
|
|
|
|
3.03 |
|
55
|
|
|
3.04 |
|
|
|
|
|
3.05 |
|
|
|
|
|
4.01 |
|
|
|
|
|
4.02 |
|
|
|
|
|
4.03 |
|
|
|
|
|
4.04 |
|
|
|
|
|
4.05 |
|
|
|
|
|
4.06 |
|
|
|
|
|
4.07 |
|
|
|
|
|
4.08 |
|
|
|
|
|
4.09 |
|
|
|
|
|
4.10 |
|
|
|
|
|
4.11 |
|
|
|
|
|
4.12 |
|
|
|
|
|
4.13 |
|
|
|
|
|
4.14 |
|
|
|
|
|
4.15 |
|
|
|
|
|
4.16 |
|
|
|
|
|
31.01 |
|
|
|
|
|
31.02 |
|
|
|
|
|
56
32.01 |
|
|
|
|
|
32.02 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.*** |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document*** |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document*** |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document*** |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document*** |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document*** |
|
|
|
104 |
|
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, has been formatted in Inline XBRL. |
|
|
|
|
|
|
|
|
|
|
|
|
** Furnished herewith.
*** Submitted electronically herewith. Attached as Exhibit 101 are the following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at March 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022; (iii) Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2023 and 2022; and (iv) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
ARLINGTON ASSET INVESTMENT CORP. |
||
|
By: |
|
|
|
|
|
|
|
|
|
Executive Vice President, Chief Financial Officer and Treasurer |
|
|
|
(Principal Financial Officer) |
Date: May 15, 2023 |
|
|
|
58
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/9/26 | ||||
| 8/1/26 | ||||
| 6/4/25 | ||||
| 3/15/25 | ||||
| 12/31/24 | ||||
| 7/7/24 | ||||
| 4/1/24 | ||||
| 3/30/24 | ||||
| 12/31/23 | ||||
| 10/23/23 | ||||
| 9/23/23 | ||||
| 8/1/23 | ||||
| 6/30/23 | ||||
| 6/23/23 | ||||
| Filed on: | 5/15/23 | |||
| 4/28/23 | ||||
| For Period end: | 3/31/23 | 10-K, 8-K | ||
| 3/28/23 | ||||
| 3/23/23 | ||||
| 3/22/23 | ||||
| 3/7/23 | ||||
| 2/27/23 | ||||
| 1/18/23 | ||||
| 12/31/22 | 10-K, 10-K/A | |||
| 12/16/22 | ||||
| 12/1/22 | 8-K | |||
| 9/30/22 | 10-Q, 4 | |||
| 8/19/22 | 8-K | |||
| 6/30/22 | 10-Q | |||
| 6/16/22 | 4, 8-K, DEF 14A, PRE 14A | |||
| 4/11/22 | 8-A12B/A, 8-K | |||
| 3/31/22 | 10-Q | |||
| 2/3/22 | ||||
| 12/31/21 | 10-K | |||
| 9/28/21 | 4 | |||
| 7/15/21 | 8-A12B, 8-K, CERT | |||
| 4/29/21 | DEF 14A, DEFA14A | |||
| 3/5/21 | ||||
| 9/30/20 | 10-Q | |||
| 7/31/20 | 10-Q, 8-K | |||
| 3/12/20 | ||||
| 12/31/19 | 10-K | |||
| 8/10/18 | 424B5, 8-K | |||
| 6/14/18 | 4, 8-K, DEF 14A, PRE 14A | |||
| 4/9/18 | ||||
| 6/2/10 | 4, 8-K, DEF 14A, PRE 14A | |||
| 6/1/09 | 4, DEF 14A, PRE 14A | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/03/23 Arlington Asset Investment Corp. DEFM14A 11/02/23 1:4.8M Toppan Merrill/FA 11/03/23 Ellington Financial Inc. 424B3 11/02/23 1:3.6M Toppan Merrill/FA 10/24/23 Ellington Financial Inc. S-4/A 7:4.4M Toppan Merrill/FA 8/02/23 Ellington Financial Inc. S-4 14:4.2M Toppan Merrill/FA 7/18/23 Ellington Financial Inc. S-4 16:4.3M Toppan Merrill/FA |