AG MORTGAGE INVESTMENT TRUST, INC. In this quarterly report on Form 10-Q, or this "report," we refer toAG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager,AG REIT Management, LLC , as our "Manager," and we refer to the direct parent company of our Manager,Angelo, Gordon & Co., L.P. , as "Angelo Gordon ." The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Forward-Looking Statements
We make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including theFederal Reserve , and the potential effects of actual and proposed legislation on us, our views on certain macroeconomic trends, and the impact of the novel coronavirus ("COVID-19"). When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation: •the uncertainty and economic impact of the COVID-19 pandemic and of responsive measures implemented by various governmental authorities, businesses and other third parties; •changes in our business and investment strategy; •our ability to predict and control costs; •changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; •changes in the yield curve; •changes in prepayment rates on the loans we own or that underlie our investment securities; •increased rates of default or delinquencies and/or decreased recovery rates on our assets; •our ability to obtain and maintain financing arrangements on terms favorable to us or at all, particularly in light of the current disruption in the financial markets; •changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets; •conditions in the market for Agency RMBS, Non-Agency RMBS and CMBS securities, Excess MSRs and loans; •legislative and regulatory actions by theU.S. Department of the Treasury , theFederal Reserve and other agencies and instrumentalities in response to the economic effects of the COVID-19 pandemic •how COVID-19 may affect us, our operations and personnel; •the forbearance program included in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"); •our ability to make distributions to our stockholders in the future; •our ability to maintain our qualification as a REIT for federal tax purposes; and •our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended. We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. 61 --------------------------------------------------------------------------------
Special Note Regarding COVID-19 Pandemic
As a result of the global COVID-19 pandemic and our disposition of assets to preserve liquidity, we incurred large realized losses in the quarter endedMarch 31, 2020 and a sharp decline in book value. Our Net Loss Available to Common Stockholders during this period was$(490.7) million and our book value per share decreased$(14.98) per share from$17.61 as ofDecember 31, 2019 to$2.63 as ofMarch 31, 2020 . We recognized net realized losses of$89.2 million on the sale of real estate securities, loans and related collateral and realized losses of$61.9 million on the termination of the related derivatives. The Company also recognized a$(313.9) million increase in net unrealized losses for the period comprised of unrealized losses on securities and unrealized losses on loans of$203.4 million and$110.5 million , respectively. These losses were due directly to the disruptions of the financial markets caused by the COVID-19 pandemic and the Company's responses thereto, including$2.4 billion in asset sales and a significant decrease in asset valuations in March. Included in unrealized losses on both securities and loans are net unrealized gain reversals due to sales during the first quarter of 2020 totaling$105.4 million . The remaining losses of$208.5 million relate to mark to market losses on securities and loans still held. In the three month period endedMarch 31, 2020 , we reduced the size of our GAAP investment portfolio from$4.0 billion to$1.3 billion , and atMarch 31, 2020 , our equity capital allocation was 5% to Agency RMBS and 95% to Credit Investments. In an effort to prudently manage our portfolio through unprecedented market volatility and preserve long-term stockholder value, we completed the sale of our 30 year fixed rate Agency securities during the quarter. We believe the resulting capital allocation will impact our yield, cost of funds and leverage ratio described below.We believe the reduction in the size of our investment portfolio will limit our earnings going forward. We do not yet know the full extent of the effects of the COVID-19 pandemic on our business, operations, personnel, or theU.S. economy as a whole. We cannot predict future developments, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third-party providers' ability to support our operations, the nature and effect of any actions taken by governmental authorities and other third parties in response to the pandemic, and the other factors discussed above and throughout this report as discussed more fully under "Risk Factors." Future developments with respect to the COVID-19 pandemic could continue to materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.
Executive Summary
OnMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 as a pandemic. OnMarch 13, 2020 , theU.S. declared a national emergency concerning the COVID-19 pandemic, and several states and municipalities have subsequently declared public health emergencies. These conditions have caused a significant disruption in theU.S. and world economies. To slow the spread of COVID-19, many countries, including theU.S. , have implemented social distancing measures, which have prohibited large gatherings, including at sporting events, movie theaters, religious services and schools. Further, many regions, including the majority ofU.S. states, have implemented additional measures, such as shelter-in-place and stay-at-home orders. Many businesses have moved to a remote working environment, temporarily suspended operations, laid off a significant percentage of their workforce and/or shut down completely. Moreover, the COVID-19 pandemic and certain of the actions taken to reduce its spread have resulted in lost business revenue, rapid and significant increases in unemployment, changes in consumer behavior and significant reductions in liquidity and the fair value of many assets, including those in which we invest. Although many of the government restrictions are in the process of being relaxed, these conditions, or some level thereof, and others are expected to continue over the near term and may prevail throughout 2020. Beginning in mid-March, economic conditions caused financial and mortgage-related asset markets to come under extreme duress, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. These events, in turn, resulted in falling prices of our assets and increased margin calls from our repurchase agreement counterparties. To conserve capital, protect assets and to pause the escalating negative impacts caused by the market dislocation and allow the markets for many of our assets to stabilize, onMarch 20, 2020 , we notified our repurchase agreement counterparties that we did not expect to fund the existing and anticipated future margin calls under our repurchase agreements and commenced discussions with our counterparties with regard to entering into forbearance agreements. In an effort to manage our portfolio through this unprecedented turmoil in the financial markets and to improve liquidity, we executed the following measures during the three months endedMarch 31, 2020 : •Reduced GAAP investment portfolio from$4.0 billion atDecember 31, 2019 to$1.3 billion atMarch 31, 2020 and investment portfolio on a non-GAAP basis from$4.4 billion atDecember 31, 2019 to$1.6 billion atMarch 31, 2020 through sales, directly or as a result of financing counterparty seizures. 62 -------------------------------------------------------------------------------- •Reduced financing arrangement balance on a GAAP basis from$3.2 billion atDecember 31, 2019 to$969.9 million atMarch 31, 2020 and financing arrangements on a non-GAAP basis from$3.5 billion atDecember 31, 2019 to$1.2 billion atMarch 31, 2020 . •Reduced our GAAP leverage ratio and Economic Leverage Ratio from 4.1x and 4.1x atDecember 31, 2019 , respectively, to 3.1x and 3.3x atMarch 31, 2020 , respectively. •Unwound entire portfolio of pay-fixed, receive-variable interest rate swaps held directly and through investments in debt and equity of affiliates, recording net realized losses of$(65.4) million on a GAAP basis and$(67.9) million on a non-GAAP basis for the three months endedMarch 31, 2020 .
In addition, subsequent to
•Entered three consecutive forbearance agreements, pursuant to which the forbearing counterparties agreed not to exercise any of their rights or remedies under their applicable financing arrangement with the Company throughJune 15, 2020 . •Entered into agreements with our financing counterparties to exit forbearance, pursuant to which each Participating Counterparty agreed to permanently waive all existing and prior events of default under our financing agreements and reinstate our financing arrangements described in more detail below under the "Financing arrangements" heading of this Item 2. •Sold real estate securities for proceeds of approximately$232.3 million and residential and commercial loans for proceeds of approximately$416.9 million . •Further reduced financing arrangement balance on a GAAP basis from$969.9 million atMarch 31, 2020 to$242.2 million atMay 31, 2020 and financing arrangements on a non-GAAP basis from$1.2 billion atMarch 31, 2020 to$518.3 million atMay 31, 2020 . Financing arrangements exclude securitized debt and subordinated debt . •Reduced our debt obligations to approximately$710 million , net of approximately$25 million of cash posted as collateral to our financing counterparties. Debt obligations include all financing arrangements, securitized debt and subordinated debt. Of this amount, approximately$280 million are recourse debt obligations, approximately$410 million are non-recourse debt obligations and approximately$20 million are subordinated debt obligations.
Reconciliations of GAAP and non-GAAP financial measures appear below.
InMarch 2020 , our Manager transitioned to a fully remote work force, to protect the safety and well-being of our personnel. Our Manager's prior investments in technology, business continuity planning and cyber-security protocols have enabled us to continue working with limited operational impact.
Our company
We are a hybrid mortgage REIT that opportunistically invests in a diversified risk adjusted portfolio of Agency RMBS and Credit Investments. Our Credit Investments include Residential Investments and Commercial Investments. We are aMaryland corporation and are externally managed by our Manager, a wholly-owned subsidiary ofAngelo Gordon , pursuant to a management agreement. Our Manager, pursuant to a delegation agreement dated as ofJune 29, 2011 , has delegated toAngelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust ("REIT") forU.S. federal income tax purposes. Accordingly, we generally will not be subject toU.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. Our common stock is traded on theNew York Stock Exchange ("NYSE") under the symbol MITT. Our 8.25% Series A Cumulative Redeemable Preferred Stock, our 8.00% Series B Cumulative Redeemable Preferred Stock, and our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock trade on the NYSE under the symbols MITT PrA, MITT PrB, and MITT PrC, respectively. Prior toDecember 31, 2019 , we conducted our business through the following segments; (i) Securities and Loans and (ii)Single-Family Rental Properties . OnNovember 15, 2019 , we sold our portfolio of single-family rental properties and no longer separate our business into segments. We reclassified the operating results of ourSingle-Family Rental Properties segment to discontinued operations and excluded the income associated with the portfolio from continuing operations for all periods presented. See Note 14 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding our discontinued operations. 63 --------------------------------------------------------------------------------
Our target investments
Historically, our investment portfolio has been comprised of Agency RMBS, Residential Investments and Commercial Investments, each of which is described in more detail below. We intend to continue to focus on our core portfolio strengths of residential and commercial credit assets. In periods where we have working capital in excess of our short-term liquidity needs, we may invest the excess in more liquid assets until such time as we are able to re-invest that capital in credit assets that meet our underwriting requirements. Our investment and capital allocation decisions depend on prevailing market conditions, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. In light of recent market turmoil related to the COVID-19 pandemic, we expect to maintain a defensive posture in the near term as it relates to new investments until we have greater clarity with respect to COVID-19 developments on market and economic conditions.
Agency RMBS
Prior to the COVID-19 pandemic, our investment portfolio was comprised primarily
of residential mortgage-backed securities ("RMBS"). Certain of the assets that
were in our RMBS portfolio had a guarantee of principal and interest by a U.S.
government agency such as the Government National Mortgage Association , or
Ginnie Mae , or by a government-sponsored entity such as the Federal National
Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage
Corporation, or Freddie Mac (each, a "GSE"). We referred to these securities as
Agency RMBS. Our Agency RMBS portfolio included:
•Fixed rate securities (held as mortgage pass-through securities);
•Sequential pay fixed rate collateralized mortgage obligations ("CMOs");
•CMOs are structured debt instruments representing interests in specified pools
of mortgage loans subdivided into multiple classes, or tranches, of securities,
with each tranche having different maturities or risk profiles.
•Inverse Interest Only securities (CMOs where the holder is entitled only to the
interest payments made on the mortgages underlying certain mortgage backed
securities ("MBS") whose coupon has an inverse relationship to its benchmark
rate, such as LIBOR);
•Interest Only securities (CMOs where the holder is entitled only to the
interest payments made on the mortgages underlying certain MBS "interest-only
strips");
•Certain Agency RMBS for which the underlying collateral is not identified until
shortly (generally two days) before the purchase or sale settlement date
("TBAs"); and
•Excess mortgage servicing rights ("Excess MSRs") whose underlying collateral is
securitized in a trust held by a U.S. government agency or GSE.
•Excess MSRs are interests in an MSR, representing a portion of the interest
payment collected from a pool of mortgage loans, net of a basic servicing fee
paid to the mortgage servicer. An MSR provides a mortgage servicer with the
right to service a mortgage loan or a pool of mortgages in exchange for a
portion of the interest payments made on the mortgage or the underlying
mortgages. An MSR is made up of two components: a basic servicing fee and an
Excess MSR. The basic servicing fee is the compensation received by the mortgage
servicer for the performance of its servicing duties.
Residential Investments
The Residential Investments that we own include RMBS that are not issued or guaranteed byGinnie Mae or a GSE or that are collateralized by non-U.S. mortgages, which we collectively refer to as our Non-Agency RMBS. The mortgage loan collateral for residential Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued byU.S. government agencies orU.S. government-sponsored entities, or are non-U.S. mortgages. Our Non-Agency RMBS include investment grade and non-investment grade fixed and floating-rate securities.
We categorize certain of our Residential Investments by weighted average credit score at origination:
•Prime (weighted average credit score above 700) •Alt-A/Subprime •Alt-A (weighted average credit score between 700 and 620); and •Subprime (weighted average credit score below 620).
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--------------------------------------------------------------------------------The Residential Investments that we do not categorize by weighted average credit score at origination include our:
•CRTs (described below) •Non-U.S. RMBS •Non-Agency RMBS which are collateralized by non-U.S. mortgages. •Interest Only securities (Non-Agency RMBS backed by interest-only strips) •Excess MSRs whose underlying collateral is securitized in a trust not held by aU.S. government agency or GSE; •Excess MSRs are grouped within "Interest Only and Excess MSR" throughout Part I, Item 2 of this Report and are grouped within Excess mortgage servicing rights or Excess MSRs in the Notes to the Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report; •Re/Non-Performing Loans (described below); •Non-QM Loans (described below); and •Land Related Financing (described below).
Credit Risk Transfer securities ("CRTs") include:
•Unguaranteed and unsecured mezzanine, junior mezzanine and first loss securities issued either by GSEs or issued by other third-party institutions to transfer their exposure to mortgage default risk to private investors. These securities reference a specific pool of newly originated single family mortgages from a specified time period (typically around the time of origination). The risk of loss on the reference pool of mortgages is transferred to investorswho may experience losses when adverse credit events such as defaults, liquidations or delinquencies occur in the underlying mortgages. Owners of these securities generally receive an uncapped floating interest rate equal to a predetermined spread over one-month LIBOR.
Re/Non-Performing Loans include:
•RPLs or NPLs in securitized form that are issued by an entity in which we own an equity interest and that we hold alongside other private funds under the management ofAngelo Gordon . The securitizations typically take the form of equity and various classes of notes. These investments are included in the "RMBS" and "Investments in debt and equity of affiliates" line items on our consolidated balance sheets. •RPLs or NPLs that we hold through interests in certain consolidated trusts. These investments are secured by residential real property, including prime, Alt-A, and subprime mortgage loans, and are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets.
Non-QM Loans include:
•Residential mortgage loans that do not qualify for theConsumer Finance Protection Bureau's (the "CFPB") safe harbor provision for "qualifying mortgages," or "QM," that we hold alongside other private funds under the management ofAngelo Gordon . These investments are held in one of our unconsolidated subsidiaries,Mortgage Acquisition Trust I LLC ("MATT") (see the "Contractual obligations" section of this Item 2 for more detail), and are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. •Non-QM loans in securitized form that are issued by MATT. The securitizations typically take the form of various classes of notes. These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets.
Land Related Financing includes:
•First mortgage loans we originate to third party land developers and home builders for the acquisition and horizontal development of land. These loans may be held through our unconsolidated subsidiaries or in securitized form. These loans are included either in the "Investments in debt and equity of affiliates" or in the "RMBS" line items on our consolidated balance sheets.
Commercial Investments
We also invest in Commercial Investments. Our Commercial Investments include:
•Commercial mortgage-backed securities ("CMBS"); •Interest Only securities (CMBS backed by interest-only strips);
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•Commercial real estate loans secured by commercial real property, including
first mortgages, mezzanine loans, preferred equity, first or second lien loans,
subordinate interests in first mortgages, bridge loans to be used in the
acquisition, construction or redevelopment of a property and mezzanine financing
secured by interests in commercial real estate; and
•Freddie Mac K-Series (described below).
CMBS include:
•Fixed and floating-rate CMBS, including investment grade and non-investment grade classes. CMBS are secured by, or evidence ownership interest in, a single commercial mortgage loan or a pool of commercial mortgage loans.
Freddie Mac K-Series ("K-Series") include:
•CMBS, Interest-Only securities and CMBS principal-only securities which are regularly-issued by Freddie Mac as structured pass-through securities backed by multifamily mortgage loans. These K-Series feature a wide range of investor options which include guaranteed senior and interest-only bonds as well as unguaranteed senior, mezzanine, subordinate and interest-only bonds. Our K-Series portfolio includes unguaranteed senior, mezzanine, subordinate and interest-only bonds. Throughout Item 2, we categorize our Freddie Mac K-Series interest-only bonds as part of our Interest-Only securities.
Investment classification
Throughout this Report, (1) we use the terms "credit portfolio" and "credit investments" to refer to our Residential Investments, Commercial Investments, and, if applicable, ABS, inclusive of investments held within affiliated entities but exclusive of AG Arc (discussed below); (2) we refer to our Re/Non-Performing Loans (exclusive of our RPLs or NPLs in securitized form that we purchase from an affiliate or affiliates of the Manager), Non-QM Loans (exclusive of those in securitized form), Land Related Financing (exclusive of loans in securitized form), and commercial real estate loans, collectively, as our "loans"; (3) we use the term "credit securities" to refer to our credit portfolio, excluding Excess MSRs and loans; and (4) we use the term "real estate securities" or "securities" to refer to our Agency RMBS portfolio, exclusive of Excess MSRs, and our credit securities. Our "investment portfolio" refers to our combined Agency RMBS portfolio and credit portfolio and encompasses all of the investments described above. We also use the term "GAAP investment portfolio" which consists of (i) our Agency RMBS, exclusive of (x) TBAs and (y) any investments classified as "Other assets" on our consolidated balance sheets (our "GAAP Agency RMBS portfolio"), and (ii) our credit portfolio, exclusive of (x) all investments held within affiliated entities and (y) any investments classified as "Other assets" on our consolidated balance sheets (our "GAAP credit portfolio"). See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of our investments held within affiliated entities. For a reconciliation of our investment portfolio to our GAAP investment portfolio, see theGAAP Investment Portfolio Reconciliation Table below. This presentation of our investment portfolio is consistent with how our management team evaluates our business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition.
We, alongside private funds under the management ofAngelo Gordon , throughAG Arc LLC , one of our indirect subsidiaries ("AG Arc"), formedArc Home LLC ("Arc Home"). Arc Home, through its wholly-owned subsidiary, originates conforming, Government, Jumbo, Non-QM and other non-conforming residential mortgage loans, retains the mortgage servicing rights associated with the loans that it originates, and purchases additional mortgage servicing rights from third-party sellers. Discontinued Operations OnNovember 15, 2019 , we sold our portfolio of single-family rental properties to a third party. We reclassified the operating results of our single-family rental properties segment to discontinued operations and excluded the income associated with the portfolio from continuing operations for all periods presented. See Note 14 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding our discontinued operations. 66 --------------------------------------------------------------------------------
Market conditions
Though 2020 began with an improved interest rate environment for our business and industry as a whole, the impact of the global response to the COVID-19 pandemic on the financial markets has resulted in unprecedented market disruption. Beginning in the middle of the first quarter of 2020 and continuing into the second quarter, financial and mortgage-related asset markets have experienced significant volatility as a result of the spread of COVID-19. We expect this volatility may continue in the near term due to the heightened uncertainty relating to COVID-19's duration and potential impact. During the first quarter of 2020, the significant dislocation in the financial markets caused, among other things, credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. These conditions have put significant pressure on the mortgage REIT industry, including financing operations, mortgage asset pricing and liquidity demands. After a series of rate cuts in 2019, theU.S. Federal Reserve responded to the effects of the COVID-19 pandemic with a series of large-scale actions, including cutting the Fed Funds target rate by 150 basis points, back to the zero bound.The Fed also committed in March to unlimited purchases ofU.S. Treasuries and Agency RMBS, in a round of quantitative easing known as QE4. As the conditions created by the COVID-19 outbreak became more acute, financial markets began to experience severe dislocations and volatility. In order to maintain adequate liquidity in preparation for the expected economic contraction, many companies began to increase cash levels notably in March, in turn de-levering their businesses. In fixed income markets specifically, this created acute selling pressures inU.S. Treasuries and Agency MBS, the two markets with the deepest liquidity profile and hence the greatest potential for raising cash. In order to increase liquidity, fixed income investors were compelled to sellU.S. Treasuries and Agency MBS, given their greater liquidity as compared to other fixed income assets, leading to an excess supply of these assets in need of redistribution. Pressure in financing markets and the need to meet margin obligations created additional selling pressure inU.S. Treasury and Agency MBS markets. This negative feedback loop was ultimately disrupted in part by theFederal Reserve's asset purchases and other institutions' ability to invest available cash on attractive terms. Other markets, including the market for residential credit and commercial real estate securities, also saw de-levering flows and similar cyclical feedback loops taking place, albeit on a lesser scale. The de-levering flows impacted the Agency MBS market due to its greater liquidity relative to other less liquid asset classes, and the sector saw meaningful underperformance versus comparable hedges for a short period of time in mid-March. Other securitized asset markets saw similar dramatic underperformance in pricing. Policy makers' actions appear to have stabilized Agency MBS spreads and other securitized credit markets, both of which tightened into the second quarter of 2020.
Recent government activity
TheU.S. economy remained strong through January and February of 2020. Despite this, theFederal Reserve has been conducting large scale overnight repo operations since late 2019 to address disruptions in theU.S. Treasury , Agency debt and Agency RMBS financing markets. These operations have been increased substantially due to the funding disruptions resulting from the economic crisis and market dislocations resulting from the COVID-19 pandemic. TheFederal Reserve has taken a number of other actions to stabilize markets as a result of the impact of the COVID-19 pandemic. OnSunday, March 15, 2020 , theFederal Reserve announced a$700 billion asset purchase program to provide liquidity to theU.S. Treasury and Agency RMBS markets. Specifically, theFederal Reserve announced that it would purchase at least$500 billion ofU.S. Treasuries and at least$200 billion of Agency RMBS. TheFederal Reserve also lowered the federal funds rate by 100 basis points to a range of 0.0% - 0.25%, after having already lowered the federal funds rate by 50 basis points onMarch 3, 2020 . The markets forU.S. Treasuries, MBS and other mortgage and fixed income markets continued to deteriorate following this announcement as investors liquidated investments in response to the economic crisis. Many of these markets experienced severe dislocations during the second half of March, which resulted in forced selling of assets to satisfy margin calls. To address these issues in the fixed income and funding markets, on the morning ofMonday, March 23, 2020 , theFederal Reserve announced a program to acquireU.S. Treasuries and Agency RMBS in the amounts needed to support smooth market functioning. Since that date, theFederal Reserve and theFederal Housing Finance Agency ("FHFA") have taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed into law onMarch 27, 2020 . One provision of the CARES Act provides up to 360 days of forbearance relief from mortgage loan payments for borrowers with federally backed (e.g. Fannie Mae or Freddie Mac) mortgageswho experience financial hardship related to the pandemic. Combined with expected widespread unemployment stemming from the economic slowdown caused by the pandemic, residential mortgage assets came under extreme spread pressure. The CARES Act also prohibits foreclosures for 60 days and evictions by landlords for 120 days after its enactment. These legislative actions have created uncertainty around the ultimate effects on delinquencies, defaults, prepayment speeds, low interest rates and home price appreciation. 67 -------------------------------------------------------------------------------- The FHFA has instructed the GSEs on how they will handle servicer advances for loans that back Agency RMBS that enter into forbearance, which should limit prepayments during the forbearance period that could have resulted otherwise. In addition, governors of several states have issued executive orders prohibiting evictions and foreclosures for specified periods of time, and many courts have enacted emergency rules delaying hearings related to evictions or foreclosures. Further, the FHFA recently announced a loan payment deferment plan for Agency multi-family borrowers facing hardship from revenue losses caused by COVID-19, with the condition that these borrowers suspend all evictions for renters unable to pay rent due to the impact of COVID-19. We anticipate that the number of borrowers with residential loans and those loans that underlie the securities in which we invest that become delinquent or default on their financial obligations may increase significantly as a result of the ongoing pandemic and such increased levels could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders. The CARES Act also provides many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity. This over$2 trillion COVID-19 relief bill, among other things, provided for direct payments to each American making up to$75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), provided funding to hospitals and health care providers, provided loans and investments to businesses, states and municipalities and provided grants to the airline industry. OnApril 24, 2020 ,President Trump signed an additional funding bill into law that provides an additional$484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts. The scope and nature of any future actions theFederal Reserve and other governmental authorities will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic and the upcoming presidential and Congressional elections inthe United States . We cannot predict how, in the long term, these and other actions, as well as the negative impacts from the ongoing COVID-19 pandemic, will affect the efficiency, liquidity and stability of the financial, credit and mortgage markets, and thus, our business. Greater uncertainty frequently leads to wider asset spreads or lower prices and higher hedging costs. The current regulatory environment may be impacted by future legislative developments, such as changes to Fannie Mae and Freddie Mac, including their continued existence and their roles in the market. The impact of such potential reforms on our operations remains unclear.
Results of operations
Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our target assets in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income available to common stockholders is our net interest income, less our cost of hedging, which represents the difference between the interest earned on our investment portfolio and the costs of financing and hedging our investment portfolio. Prior to the sale of our 30 year fixed rate Agency RMBS portfolio inMarch 2020 , our net interest income varied primarily as a result of changes in market interest rates, prepayment speeds, as measured by the Constant Prepayment Rate ("CPR") on the Agency RMBS in our investment portfolio, and our funding and hedging costs. As a result of the global COVID-19 pandemic and our disposition of assets to preserve liquidity, we incurred large realized losses in the quarter endedMarch 31, 2020 and a sharp decline in book value. Additionally, we believe the reduction in the size of our investment portfolio will limit our earnings going forward. 68 --------------------------------------------------------------------------------
Three Months Ended
The table below presents certain information from our consolidated statements of operations for the three months endedMarch 31, 2020 andMarch 31, 2019 (in thousands): Three Months Ended March 31, 2020 March 31, 2019 Increase/(Decrease)
Statement of Operations Data: Net Interest Income Interest income$ 40,268 $ 41,490 $ (1,222) Interest expense 19,971 22,094 (2,123) Total Net Interest Income 20,297 19,396 901 Other Income/(Loss) Net realized gain/(loss) (151,143) (20,583) (130,560) Net interest component of interest rate swaps 923 1,781 (858) Unrealized gain/(loss) on real estate securities and loans, net (313,897) 46,753 (360,650) Unrealized gain/(loss) on derivative and other instruments, net 5,686 (10,086) 15,772 Foreign currency gain/(loss), net 1,649 - 1,649 Other income 3 414 (411) Total Other Income/(Loss) (456,779) 18,279 (475,058) Expenses Management fee to affiliate 2,149 2,345 (196) Other operating expenses 2,342 3,781 (1,439) Equity based compensation to affiliate 88 126 (38) Excise tax (815) 92 (907) Servicing fees 579 371 208 Total Expenses 4,343 6,715 (2,372) Income/(loss) before equity in earnings/(loss) from affiliates (440,825) 30,960 (471,785) Equity in earnings/(loss) from affiliates (44,192) (771) (43,421) Net Income/(Loss) from Continuing Operations (485,017) 30,189 (515,206) Net Income/(Loss) from Discontinued Operations - (1,034) 1,034 Net Income/(Loss) (485,017) 29,155 (514,172) Dividends on preferred stock 5,667 3,367 2,300 Net Income/(Loss) Available to Common Stockholders$ (490,684) $ 25,788 $ (516,472) Interest income
Interest income is calculated using the effective interest method for our GAAP
investment portfolio and calculated based on the actual coupon rate and the
outstanding principal balance on our
69
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Interest income decreased from March 31, 2019 to March 31, 2020 primarily due to
a decrease in the weighted average yield on our GAAP investment portfolio and
U.S. Treasury securities, if any, during the period of 0.54% from 5.02% for the
three months ended March 31, 2019 to 4.48% for the three months ended March 31,
2020 . This was offset by an increase in the weighted average cost of our GAAP
investment portfolio and U.S. Treasury securities, if any, of $0.3 billion from
$3.3 billion at March 31, 2019 to $3.6 billion at March 31, 2020 . We expect our
interest income going forward to be materially lower compared to comparable
prior periods as a result of the changes in our investment portfolio as set
forth in the tables of the "Investment activities" section below as a result of
the COVID-19 pandemic.
Interest expense
Interest expense is calculated based on the actual financing rate and the
outstanding financing balance of our GAAP investment portfolio and
Interest expense decreased fromMarch 31, 2019 toMarch 31, 2020 primarily due to a decrease in the weighted average financing rate on our GAAP investment portfolio andU.S. Treasury securities, if any, during the period, by 0.52% from 3.16% for the three months endedMarch 31, 2019 to 2.64% for the three months endedMarch 31, 2020 . Our weighted average financing balance on our GAAP investment portfolio andU.S. Treasury securities, if any, remained flat during the three months endedMarch 31, 2019 andMarch 31, 2020 . Refer to the "Financing activities" section below for a discussion of the material changes in our cost of funds. We do not expect our interest expense, set forth in the consolidated statements of operations table above, to be indicative of our future interest expense due to the changes in our financing arrangements described in the "Financing activities" section below.
Net realized gain/(loss)
Net realized gain/(loss) represents the net gain or loss recognized on any (i)
sales and seizures by financing counterparties of real estate securities out of
our GAAP investment portfolio, including any associated deficiencies recognized,
(ii) sales of loans out of our GAAP investment portfolio, transfers of loans
from our GAAP investment portfolio to real estate owned included in Other
assets, and sales of Other assets, (iii) settlement of derivatives and other
instruments, and (iv) prior to the adoption of ASU 2016-13,
other-than-temporary-impairment ("OTTI") charges recorded during the period. See
Note 2, Note 3, Note 4 and Note 5 to the "Notes to Consolidated Financial
Statements (unaudited)" for further discussion on OTTI. The following table
presents a summary of Net realized gain/(loss) for the three months ended March
31, 2020 and March 31, 2019 (in thousands):
Three Months Ended
March 31, 2020 March 31, 2019
Sale/seizures of real estate securities and related collateral
$ (86,305) $ 2,062 Sale of loans and loans transferred to or sold from Other assets
(2,967) 173
Settlement of derivatives and other instruments (61,871) (19,776)
OTTI - (3,042)
Total Net realized gain/(loss) $
(151,143)
As previously discussed, in order to preserve liquidity and meet margin calls, we sold approximately$2.4 billion of securities during the three months endedMarch 31, 2020 due to the unprecedented market conditions experienced as a result of the global COVID-19 pandemic. During the three months endedMarch 31, 2020 , we recognized net realized losses of$86.3 million on the sale or seizure of such securities and realized losses of$61.9 million on the termination of the related derivatives. We also recognized$3.0 million of net realized losses on residential loans during the three months endedMarch 31, 2020 , primarily due to the sale of one loan.
Net interest component of interest rate swaps
Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps.
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Net interest component of interest rate swaps decreased from March 31, 2019 to
March 31, 2020 due to a decrease in the average 3 month LIBOR rate as well as a
decrease in the weighted average notional period over period. Average 3 month
LIBOR, the interest rate upon which the floating leg of these derivative
instruments is based, decreased from 2.687% for the three months ended March 31,
2019 to 1.535% for the three months ended March 31, 2020 . In addition, the
weighted average swap notional decreased from $1.9 billion for the three months
ended March 31, 2019 to $1.5 billion for the three months ended March 31, 2020 .
Refer to the "Hedging activities" section below for a discussion of material
changes in our interest rate swap portfolio.
Unrealized gain/(loss) on real estate securities and loans, net
The disruptions of the financial markets due to the COVID-19 pandemic have caused credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. These conditions have put significant downward pressure on the fair value of our assets and resulted in unrealized losses for the three months endedMarch 31, 2020 . During the first quarter of 2020, the Company recognized a$313.9 million increase in net unrealized losses comprised of unrealized losses on securities and unrealized losses on loans of$203.4 million and$110.5 million , respectively. These losses were due directly to the disruptions of the financial markets caused by the COVID-19 pandemic and the Company's response thereto, including$2.4 billion in asset sales and a significant decrease in asset valuations in March. Included in unrealized losses on both securities and loans are net unrealized gain reversals due to sales during the first quarter of 2020 totaling$105.4 million . The remaining losses of$208.5 million relate to mark to market losses on securities and loans still held atMarch 31, 2020 .
Unrealized gain/(loss) on derivative and other instruments, net
For the three months ended
Foreign currency gain/(loss), net
Foreign currency gain/(loss), net pertains to the effects of remeasuring the monetary assets and liabilities of our foreign investments intoU.S. dollars using foreign currency exchange rates at the end of the reporting period. Refer to Note 2 of the "Notes to the Consolidated Financial Statements" for details on what specifically is included in the "Foreign currency gain/(loss), net" line item. During the three months endedMarch 31, 2020 , the value of GBP relative to USD decreased, resulting in a gain on the liabilities held in foreign currencies.
Other income
Other income primarily includes certain fees we receive on our loans and CMBS portfolios. Other income decreased fromMarch 31, 2019 toMarch 31, 2020 due to the fact that we did not originate any loans during Q1 2019.
Management fee to affiliate
Our management fee is based upon a percentage of our Stockholders' Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders' Equity. Management fees decreased fromMarch 31, 2019 toMarch 31, 2020 primarily due to a decrease in our Stockholders' Equity as calculated pursuant to our Management Agreement.
On
71
--------------------------------------------------------------------------------Other operating expenses
These amounts are primarily comprised of professional fees, directors' and
officers' ("D&O") insurance and directors' fees, as well as certain expenses
reimbursable to the Manager. We are required to reimburse our Manager or its
affiliates for operating expenses which are incurred by our Manager or its
affiliates on our behalf, including certain salary expenses and other expenses
relating to legal, accounting, due diligence, and other services. Refer to the
"Contractual obligations" section below for more detail on certain expenses
reimbursable to the Manager. The following table presents a summary of expenses
within Other operating expenses broken out between non-investment related
expenses and investment related expenses for the three months ended March 31,
2020 and March 31, 2019 (in thousands):
Three Months Ended
March 31, 2020 March 31, 2019
Non Investment Related Expenses
Affiliate expense reimbursement - Operating expenses $ 1,879 $ 1,745
Professional fees 545 440
D&O insurance 174 174
Directors' compensation 218 221
Restructuring related expenses (1) 1,500 -
Other 229 234
Total Corporate Expenses 4,545 2,814
Investment Related Expenses
Affiliate expense reimbursement - Deal related expenses 162 194
Affiliate expense reimbursement - Transaction related expenses and deal related performance fees (2)
- 41
Professional fees 47 46
Residential mortgage loan related expenses 692 182
Transaction related expenses and deal related performance
fees (2) (3,219) 354
Other 115 150
Total Investment Expenses (2,203) 967
Total Other operating expenses $
2,342
(1)Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement. Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement. (2)For the three months endedMarch 31, 2020 andMarch 31, 2019 , total transaction related expenses and deal related performance fees were$(3.4) million and$0.4 million , respectively. For the three months endedMarch 31, 2020 , the$(3.4) million includes$(0.2) million of deferred financing costs that are included within interest expense. For the three months endedMarch 31, 2019 , the$0.4 million excludes a de minimis amount of deferred financing costs that are included within interest expense. The decrease in Transaction related expenses and deal related performance fees from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 is primarily a result of accrued deal related performance fees being reversed in the current period due to a decline in the price of the related assets, as well as the seizure of such assets by financing counterparties.
Equity based compensation to affiliate
Equity based compensation to affiliate represents the amortization of the fair value of our restricted stock units granted to our Manager, less the present value of dividends expected to be paid on the underlying shares through the requisite period.
For the three months ended
72
--------------------------------------------------------------------------------Excise tax
Excise tax represents a four percent tax on the required amount of any ordinary income and net capital gains not distributed during the year. The quarterly expense is calculated in accordance with applicable tax regulations. For the three months endedMarch 31, 2020 andMarch 31, 2019 , our excise tax decreased primarily due to losses associated with COVID-19.
Servicing fees
We incur servicing fee expenses in connection with the servicing of our Residential mortgage loans. As ofMarch 31, 2020 andMarch 31, 2019 , we owned Residential mortgage loans with a fair value of$767.0 million and$202.0 million , respectively. This increase in the fair value of the Residential mortgage loans was a result of our purchases of Residential mortgage loan pools in 2019 and 2020. For the three months endedMarch 31, 2020 andMarch 31, 2019 , our servicing fees increased primarily due to our purchases of residential mortgage loans described above.
Equity in earnings/(loss) from affiliates
Equity in earnings/(loss) from affiliates represents our share of earnings and profits of investments held within affiliated entities. A majority of these investments are comprised of real estate securities, loans and our investment in AG Arc. The decrease from the quarter endedMarch 31, 2019 to the quarter endedMarch 31, 2020 primarily pertains to our share of the unrealized losses on investments held within affiliated entities.
Discontinued operations
OnNovember 15, 2019 , we sold our portfolio of single-family rental properties to a third party at a price of approximately$137 million . We recognized a gain of$0.2 million as a result of the transaction. We reclassified the operating results of the single-family rental properties segment to discontinued operations and excluded the income from continuing operations for all periods presented. Book value per share
As of
Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP, including all vested shares granted to our Manager, and our independent directors under our equity incentive plans as of quarter-end. Book value is calculated using stockholders' equity less net proceeds of our 8.25% Series A Cumulative Redeemable Preferred Stock ($49.9 million ), 8.00% Series B Cumulative Redeemable Preferred Stock ($111.3 million ), and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ($111.2 million ) as the numerator. The liquidation preference for the Series A, Series B and Series C Preferred Stock is$51.8 million ,$115 million and$115 million , respectively.
Presentation of investment, financing and hedging activities
In the "Investment activities," "Financing activities," "Hedging activities" and
"Liquidity and capital resources" sections of this Item 2, where we disclose our
investment portfolio and the related financing arrangements, we have presented
this information inclusive of (i) unconsolidated ownership interests in
affiliates that are accounted for under GAAP using the equity method and (ii)
TBAs, which are accounted for as derivatives under GAAP. Our investment
portfolio and the related financing arrangements are presented along with a
reconciliation to GAAP. This presentation of our investment portfolio is
consistent with how our management team evaluates the business, and we believe
this presentation, when considered with the GAAP presentation, provides
supplemental information useful for investors in evaluating our investment
portfolio and financial condition. See Note 2 to the "Notes to Consolidated
Financial Statements (unaudited)" for a discussion of investments in debt and
equity of affiliates and TBAs.
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--------------------------------------------------------------------------------Net interest margin and leverage ratio
GAAP net interest margin and non-GAAP net interest margin, a non-GAAP financial measure, are calculated by subtracting the weighted average cost of funds from the weighted average yield for our GAAP investment portfolio or our investment portfolio, respectively, which both exclude cash held by us and any net TBA position. The weighted average yield on our Agency RMBS portfolio and our credit portfolio represents an effective interest rate, which utilizes all estimates of future cash flows and adjusts for actual prepayment and cash flow activity as of quarter-end. The calculation of weighted average yield is weighted on fair value. The weighted average cost of funds is the sum of the weighted average funding costs on total financing arrangements outstanding at quarter-end, including all non-recourse financing arrangements, and our weighted average hedging cost, which is the weighted average of the net pay rate on our interest rate swaps, the net receive/pay rate on ourTreasury long and short positions, respectively, and the net receivable rate on our IO index derivatives, if any. Both elements of cost of funds are weighted by the outstanding financing arrangements on our GAAP investment portfolio or our investment portfolio and securitized debt at quarter-end, exclusive of repurchase agreements associated withU.S. Treasury securities, if any. As our capital allocation shifts, our weighted average yields and weighted average cost of funds will also shift. Our Agency Investments, given their liquidity and high credit quality, are eligible for higher levels of leverage, while our Credit Investments, with less liquidity and/or more exposure to credit risk and prepayment, utilize lower levels of leverage. As a result, our leverage ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the availability and price of our financing, the diversification of our counterparties and their available capacity to finance our assets, and anticipated regulatory developments. Over the past several quarters, we have generally maintained a leverage ratio range of 4.0 to 5.0 times to finance our investment portfolio, on a fully deployed capital basis. Our debt-to-equity ratio is directly correlated to the composition of our portfolio; specifically, the higher percentage of Agency Investments we hold, the higher our leverage ratio is, while the higher percentage of Credit Investments we hold, the lower our leverage ratio is. As previously mentioned, in an effort to prudently manage our portfolio through unprecedented market volatility and preserve long-term stockholder value, we completed the sale of our 30 year fixed rate Agency securities during the first quarter of 2020. We believe the resulting capital allocation impacts the weighted average yield, weighted average cost of funds and leverage ratio illustrated below.
Net interest margin and leverage ratio are metrics that management believes should be considered when evaluating the performance of our investment portfolio. See the "Financing activities" section below for more detail on our leverage ratio.
The chart below sets forth the net interest margin and leverage ratio from our
investment portfolio as of
Investments in Debt
Weighted Average GAAP Investment Portfolio and Equity of Affiliates Investment Portfolio (a)
Yield 5.20 % 8.42 % 5.96 %
Cost of Funds (b) 2.88 % 4.94 % 3.25 %
Net Interest Margin 2.32 % 3.48 % 2.71 %
Leverage Ratio (c) 3.1x (d) 3.3x
March 31, 2019
Investments in Debt
Weighted Average GAAP Investment Portfolio and Equity of Affiliates Investment Portfolio (a)
Yield 5.05 % 6.10 % 5.18 %
Cost of Funds (b) 2.96 % 4.95 % 3.01 %
Net Interest Margin 2.09 % 1.15 % 2.17 %
Leverage Ratio (c) 4.2x (d) 4.6x
(a)Excludes any net TBA position.
(b)Includes cost of non-recourse financing arrangements.
(c)The leverage ratio on our GAAP investment portfolio represents GAAP leverage.
The leverage ratio on our investment portfolio represents Economic Leverage as
defined below in the "Financing Activities" section.
(d)Refer to the "Financing activities" section below for an aggregate breakout
of leverage.
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--------------------------------------------------------------------------------Core Earnings
We are not disclosing Core Earnings, a non-GAAP financial measure, for the first quarter of 2020, as we determined that this measure, as we have historically calculated it, would not appropriately capture the materially negative economic impact of the COVID-19 pandemic on our business, liquidity, results of operations, financial condition, and ability to make distributions to our stockholders. As financial markets stabilize, we will evaluate whether core earnings or other non-GAAP financial measures would help both management and investors evaluate our operating performance for future periods.
Investment activities
Historically, our investment portfolio has been comprised of Agency RMBS, Residential Investments and Commercial Investments. Our allocation to each of these investments is set forth in more detail below. Our investment and capital allocation decisions depend on prevailing market conditions, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. The risk-reward profile of our investment opportunities changes continuously with the market, with labor, housing and economic fundamentals, and withU.S. monetary policy, among others. As a result, in reacting to market conditions and taking into account a variety of other factors, including liquidity, duration, interest rate expectations and hedging, the mix of our assets changes over time as we opportunistically deploy capital. In light of recent market turmoil related to the COVID-19 pandemic, we expect to maintain a defensive posture in the near term as it relates to new investments until we have greater clarity of market and economic conditions resulting from the COVID-19 pandemic and as related restrictions are reduced and states "re-open." In Q1 2020, we reduced the size of our GAAP investment portfolio from$4.0 billion to$1.3 billion , and atMarch 31, 2020 , our equity capital allocation was 5% to Agency RMBS and 95% to Credit Investments. We have expertise in Agency RMBS, and may choose to allocate additional capital in those assets should the opportunity arise; however, in the near term we expect our capital to be almost entirely allocated to Credit Investments. Overall, our intention is to allocate capital to investment opportunities with attractive risk/return profiles in our target asset classes. We evaluate investments in Agency RMBS using factors including, among others, expected future prepayment trends, supply of and demand for Agency RMBS, costs of financing, costs of hedging, liquidity, expected future interest rate volatility and the overall shape of theU.S. Treasury and interest rate swap yield curves. Prepayment speeds, as reflected by the CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our Agency RMBS portfolio increase, the related purchase premium amortization increases, thereby reducing the net yield on such assets. Our credit investments are subject to risk of loss with regard to principal and interest payments. We evaluate each investment in our credit portfolio based on the characteristics of the underlying collateral, the securitization structure, expected return, geography, collateral type, and the cost and availability of financing, among others. We maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management team and a quarterly credit review process for each investment that examines the need for a potential reduction in accretable yield, missed or late contractual payments, significant declines in collateral performance, prepayments, projected defaults, loss severities and other data which may indicate a potential issue in our ability to recover our capital from the investment. These processes are designed to enable our Manager to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets. Therefore, potential future losses may also stem from issues with our investments that are not identified by our credit reviews. 75
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The following table presents a detailed break-down of our investment portfolio
as of
Percent of Investment
Portfolio
Fair Value Fair Value Leverage Ratio (a)
March 31 , December 31 ,
March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019 2020 2019
Agency RMBS $ 37,620 $ 2,333,626 2.3 % 52.8 % 1.1x 7.1x
Residential Investments 1,284,972 1,493,869 79.3 % 33.8 % 3.8x 2.7x
Commercial Investments 298,508 589,709 18.4 % 13.4 % 2.3x 2.1x
Total: Investment Portfolio $ 1,621,100 $ 4,417,204 100.0 % 100.0 % 3.3x 4.1x
Investments in Debt and Equity
of Affiliates (b) $ 342,468 $ 373,126 N/A N/A (c) (c)
Total: GAAP Investment
Portfolio $ 1,278,632 $ 4,044,078 N/A N/A 3.1x 4.1x
(a)The leverage ratio on our investment portfolio represents Economic Leverage
as defined below in the "Financing Activities" section and is calculated by
dividing each investment type's total recourse financing arrangements by its
allocated equity (described in the chart below). Cash posted as collateral has
been allocated pro-rata by each respective asset class' Economic Leverage
amount. The Economic Leverage Ratio excludes any fully non-recourse financing
arrangements. The leverage ratio on our Agency RMBS includes any net receivables
on TBA. The leverage ratio on our GAAP Investment Portfolio represents GAAP
leverage.
(b)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
(c)Refer to the "Financing activities" section below for an aggregate breakout
of leverage.
Refer to the Executive Summary above for information on securities and loans sold subsequent to quarter end.
We allocate our equity by investment using the fair value of our investment portfolio, less any associated leverage, inclusive of any long TBA position (at cost). We allocate all non-investment portfolio related assets and liabilities to our investment portfolio based on the characteristics of such assets and liabilities in order to sum to stockholders' equity per the consolidated balance sheets. Our equity allocation method is a non-GAAP methodology and may not be comparable to the similarly titled measure or concepts of other companies,who may use different calculations and allocation methodologies.
The following table presents a summary of the allocated equity of our investment
portfolio as of
Allocated Equity Percent of Equity
March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019
Agency RMBS $ 17,967 $ 295,358 5.0 % 34.8 %
Residential Investments 244,927 359,923 68.3 % 42.4 %
Commercial Investments 95,771 193,765 26.7 % 22.8 %
Total $ 358,665 $ 849,046 100.0 % 100.0 %
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The following table presents a reconciliation of our Investment Portfolio to our
GAAP Investment Portfolio as of
GAAP Investment Portfolio Reconciliation
Unrealized Mark- Weighted Average Weighted Weighted Average
Instrument Current Face Amortized Cost to-Market Fair Value (1) Coupon (2) Average Yield Life (Years) (3)Agency RMBS: Inverse Interest Only$ 96,198 $ 16,281 $ (2,675)$ 13,606 5.34 % 4.40 % 3.93 Interest Only 120,325 11,678 (2,152) 9,526 3.10 % (1.17) % 2.49 Excess MSR (4) 2,829,289 19,089 (4,601) 14,488 N/A 4.90 % 6.30 Total Agency RMBS 3,045,812 47,048 (9,428) 37,620 4.10 % 3.18 % 6.08 Credit Investments: Residential Investments Prime (5) 107,377 74,064 1,299 75,363 4.49 % 7.81 % 12.10 Alt-A/Subprime (5) 72,260 50,139 2,334 52,473 4.53 % 7.27 % 12.20 Credit Risk Transfer 42,222 42,367 (22,425) 19,942 5.34 % 5.35 % 13.32 Non-U.S. RMBS 22,281 27,932 (2,291) 25,641 4.24 % 4.11 % 3.33 Interest Only and Excess MSR (4)(6) 232,527 370 38 408 0.74 % NM 5.28 Re/Non-Performing Loans 1,085,425 937,007 (89,254) 847,753 3.92 % 5.34 % 6.25 Non-QM Loans 1,365,916 255,271 (23,356) 231,915 1.71 % 7.40 % 3.71 Land Related Financing 31,283 31,081 396 31,477 12.69 % 12.79 % 2.50 Total Residential Investments 2,959,291 1,418,231 (133,259) 1,284,972 3.18 % 5.97 % 5.40 Commercial Investments CMBS 162,840 154,233 (42,086) 112,147 4.23 % 5.44 % 4.03 Freddie Mac K-Series 26,304 11,358 (2,100) 9,258 3.83 % 9.30 % 10.88 Interest Only (7) 865,185 21,569 (2,517) 19,052 0.44 % 7.30 % 4.27 Commercial Real Estate Loans (8) 170,127 169,408 (11,357) 158,051 6.26 % 6.53 % 2.11 Total Commercial Investments 1,224,456 356,568 (58,060) 298,508 1.79 % 6.26 % 4.08 Total Credit Investments 4,183,747 1,774,799 (191,319) 1,583,480 2.69 % 6.03 % 5.01
Total: Investment Portfolio
2.77 % 5.96 % 5.46
Investments in Debt and Equity of
Affiliates $ 1,889,611 $ 368,362 $ (25,894) $ 342,468 1.91 % 8.42 % 4.04
Total: GAAP Investment Portfolio $ 5,339,948 $ 1,453,485 $ (174,853) $ 1,278,632 3.17 % 5.20 % 5.98
(1)Refer to "Off-balance sheet arrangements" section below and Note 2 to the
"Notes of the Consolidated Financial Statements" section for more detail on what
is included in our "Investments in debt and equity of affiliates" line item on
our consolidated balance sheet and a discussion of our Investments in debt and
equity of affiliates.
(2)Equity residuals, principal only securities and Excess MSRs with a zero
coupon rate are excluded from this calculation.
(3)Weighted average life is based on projected life. Typically, actual
maturities of investments and loans are shorter than stated contractual
maturities. Maturities are affected by the contractual lives of the underlying
mortgages, periodic payments of principal and prepayments of principal.
(4)Within Agency RMBS, Excess MSRs whose underlying collateral is securitized in
a trust held by a U.S. government agency or GSE. Within Residential Investments,
Excess MSRs whose underlying collateral is securitized in a trust not held by a
U.S. government agency or GSE.
(5)Non-Agency RMBS with credit scores above 700, between 700 and 620 and below
620 at origination are classified as Prime, Alt-A, and Subprime, respectively.
The weighted average credit scores of our Prime and Alt-A/Subprime Non-Agency
RMBS were 721 and 670, respectively.
(6)A majority of the Interest Only and Excess MSR line is made up of two
Residential Interest Only positions. The overall impact of these investments'
yields on the Investment Portfolio is immaterial.
(7)Comprised of Freddie Mac K-Series interest-only bonds.
(8)Yield on Commercial Real Estate Loans includes any exit fees.
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The following table presents a reconciliation of our Investment Portfolio to our
GAAP Investment Portfolio as of
Unrealized Mark- Weighted Average Weighted Weighted Average
Instrument Current Face Amortized Cost to-Market Fair Value (1) Coupon (2) Average Yield Life (Years) (3)
Agency RMBS:
30 Year Fixed Rate $ 2,125,067 $ 2,184,190 $ 57,108 $ 2,241,298 3.73 % 3.17 % 5.85
Inverse Interest Only 217,031 37,611 627 38,238 4.37 % 6.66 % 4.97
Interest Only 259,161 35,333 570 35,903 3.56 % 5.02 % 4.01
Excess MSR (4) 3,042,841 20,188 (2,001) 18,187 N/A 8.33 % 5.56
Total Agency RMBS 5,644,100 2,277,322 56,304 2,333,626 3.77 % 3.30 % 5.57
Credit Investments:
Residential Investments
Prime (5) 297,932 213,056 28,831 241,887 4.92 % 7.44 % 11.63
Alt-A/Subprime (5) 141,464 110,605 12,107 122,712 4.40 % 6.89 % 8.23
Credit Risk Transfer 270,397 270,988 8,967 279,955 5.17 % 5.27 % 5.66
Non-U.S. RMBS 44,867 54,340 3,391 57,731 3.21 % 3.58 % 2.53
Interest Only and Excess MSR (4) 244,115 1,592 (376) 1,216 0.77 % 7.73 % 6.34
Re/Non-Performing Loans 605,844 493,734 16,449 510,183 4.14 % 6.48 % 6.56
Non-QM Loans 1,141,131 250,087 4,189 254,276 1.69 % 5.35 % 1.71
Land Related Financing 25,607 25,395 514 25,909 12.27 % 12.40 % 3.00
Total Residential Investments 2,771,357 1,419,797 74,072 1,493,869 3.53 % 6.24 % 4.99
Commercial Investments
CMBS 277,020 262,233 784 263,017 4.87 % 5.57 % 4.07
Freddie Mac K-Series 235,810 100,427 17,723 118,150 5.01 % 11.34 % 8.34
Interest Only (6) 3,650,693 46,606 3,250 49,856 0.23 % 6.64 % 3.02
Commercial Real Estate Loans (7) 158,686 158,000 686 158,686 6.82 % 7.17 % 1.92
Total Commercial Investments 4,322,209 567,266 22,443 589,709 0.82 % 7.25 % 3.33
Total Credit Investments 7,093,566 1,987,063 96,515 2,083,578 1.74 % 6.53 % 3.98
Total: Investment Portfolio
2.34 % 4.82 % 4.69
Investments in Debt and Equity of
Affiliates $ 1,676,838 $ 361,992 $ 11,134 $ 373,126 1.82 % 6.75 % 2.71
Total: GAAP Investment Portfolio $ 11,060,828 $ 3,902,393 $ 141,685 $ 4,044,078 2.41 % 4.57 % 4.94
(1)Refer to "Off-balance sheet arrangements" section below and Note 2 to the
"Notes of the Consolidated Financial Statements" section for more detail on what
is included in our "Investments in debt and equity of affiliates" line item on
our consolidated balance sheet and a discussion of Investments in debt and
equity of affiliates.
(2)Equity residuals, principal only securities and Excess MSRs with a zero
coupon rate are excluded from this calculation.
(3)Weighted average life is based on projected life. Typically, actual
maturities of investments and loans are shorter than stated contractual
maturities. Maturities are affected by the contractual lives of the underlying
mortgages, periodic payments of principal and prepayments of principal.
(4)Within Agency RMBS, Excess MSRs whose underlying collateral is securitized in
a trust held by a U.S. government agency or GSE. Within Residential Investments,
Excess MSRs whose underlying collateral is securitized in a trust not held by a
U.S. government agency or GSE.
(5)Non-Agency RMBS with credit scores above 700, between 700 and 620 and below
620 at origination are classified as Prime, Alt-A, and Subprime, respectively.
The weighted average credit scores of our Prime and Alt-A/Subprime Non-Agency
RMBS were 719 and 674, respectively.
(6)Comprised of Freddie Mac K-Series interest-only bonds.
(7)Yield on Commercial Real Estate Loans includes any exit fees.
78
--------------------------------------------------------------------------------The following table presents the fair value ($ in thousands) and the CPR experienced on our GAAP Agency RMBS portfolio for the periods presented:
Fair Value CPR (1)(2)
Agency RMBS March 31, 2020 December 31, 2019 March 31, 2020 December 31, 2019
30 Year Fixed Rate (3) $ - $ 2,241,298 9.4 % 8.1 %
Fixed Rate CMO (4) - - - % 8.2 %
Inverse Interest Only 13,606 38,238 14.9 % 11.7 %
Interest Only 9,526 35,903 12.2 % 10.3 %
Total/Weighted Average $ 23,132 $ 2,315,439 9.5 % 8.2 %
(1)Represents the weighted average monthly CPRs published during the quarter
ended of March 31, 2020 and year ended December 31, 2019 for our in-place
portfolio during the same period.
(2)Source: Bloomberg.
(3)We held 30 Year Fixed Rate Agency RMBS during 2020, but sold them prior to
March 31, 2020 .
(4)We held Fixed Rate CMOs during 2019, but sold them prior to December 31,
2019 .
The following table presents the fair value of the securities and loans in our
credit portfolio, and a reconciliation to our GAAP credit portfolio (in
thousands):
Fair Value
March 31, 2020 December 31, 2019
Non-Agency RMBS (1) $ 297,194 $ 835,325
CMBS (2) 140,457 431,023
Total Credit securities 437,651 1,266,348
Residential loans (3) 987,778 658,544
Commercial real estate loans 158,051 158,686
Total loans 1,145,829 817,230
Total Credit investments $ 1,583,480 $ 2,083,578
Less: Investments in Debt and Equity of Affiliates $ 341,933 $ 372,571
Total GAAP Credit Portfolio $ 1,241,547 $ 1,711,007
(1)Includes investments in Prime, Alt-A/Subprime, Credit Risk Transfer, Non-U.S
RMBS, Interest-Only and Excess MSR, Re/Non-Performing Loans, Non-QM Loans, and
Land Related Financing held in securitized form.
(2)Includes CMBS, Freddie Mac K-Series, and Interest-Only investments.
(3)Includes Re/Non-Performing Loans, Non-QM Loans, and Land Related Financing
not held in securitized form.
79
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The following table presents certain information grouped by vintage as it
relates to our credit securities portfolio as of
Unrealized
Mark-to- Weighted Average Weighted Weighted Average
Credit Securities: Current Face Amortized Cost Market Fair Value (1) Coupon (2) Average Yield Life (Years) (3)
Pre 2009 $ 74,461 $ 53,535 $ 1,414 $ 54,949 4.82 % 7.65 % 15.23
2010 980 865 (59) 806 1.86 % 6.58 % 2.48
2011 4,376 3,919 (479) 3,440 4.42 % 4.87 % 4.19
2013 73,028 13,895 (1,642) 12,253 2.05 % 7.29 % 2.39
2014 29,862 21,753 1,682 23,435 4.43 % 18.49 % 5.96
2015 409,105 53,919 571 54,490 1.37 % 4.34 % 5.24
2016 216,287 12,951 (462) 12,489 0.90 % 9.09 % 4.44
2017 247,326 40,745 (2,607) 38,138 0.98 % 5.82 % 3.62
2018 227,390 62,200 (21,438) 40,762 1.42 % 5.09 % 5.84
2019 1,213,460 226,345 (47,593) 178,752 1.44 % 10.15 % 4.31
2020 303,403 24,824 (6,687) 18,137 0.92 % 14.19 % 3.74
Total: Credit Securities $ 2,799,678 $ 514,951 $ (77,300) $ 437,651 1.47 % 8.72 % 4.71
Investments in Debt and
Equity of Affiliates $ 1,536,378 $ 134,006 $ (12,778) $ 121,228 0.80 % 14.15 % 4.05
Total: GAAP Basis $ 1,263,300 $ 380,945 $ (64,522) $ 316,423 2.01 % 6.64 % 5.52
(1)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
(2)Equity residual investments and principal only securities are excluded from
this calculation.
(3)Weighted average life is based on projected life. Typically, actual
maturities of mortgage-backed securities are shorter than stated contractual
maturities. Actual maturities are affected by the contractual lives of the
underlying mortgages, periodic payments of principal and prepayments of
principal.
The following table presents certain information grouped by vintage as it
relates to our credit securities portfolio as of
Unrealized
Mark-to- Weighted Average Weighted Weighted Average Life
Credit Securities: Current Face Amortized Cost
Market Fair Value (1) Coupon (2) Average Yield (Years) (3)
Pre 2009 $ 278,125 $ 198,225 $ 25,099 $ 223,324 5.07 % 7.12 % 12.67
2010 1,070 948 42 990 1.97 % 6.68 % 2.94
2011 4,812 4,302 29 4,331 4.44 % 5.73 % 4.93
2012 3,740 3,062 510 3,572 4.05 % 7.61 % 3.42
2013 76,869 17,724 1,367 19,091 2.18 % 7.06 % 2.58
2014 974,525 38,454 4,320 42,774 0.31 % 10.46 % 0.56
2015 895,235 108,425 17,520 125,945 0.84 % 9.24 % 4.22
2016 1,139,729 80,162 11,595 91,757 0.60 % 8.67 % 4.57
2017 1,054,591 176,767 8,632 185,399 0.88 % 6.43 % 4.27
2018 275,234 104,090 3,040 107,130 2.08 % 5.48 % 5.77
2019 1,498,432 449,682 12,353 462,035 2.07 % 6.05 % 2.73
Total:
$ 84,507 $ 1,266,348 1.24 % 6.92 % 3.78 Investments in Debt and Equity of Affiliates$ 1,311,008 $ 123,152 $ 8,803 $ 131,955 0.78 % 9.50 % 2.50 Total: GAAP Basis$ 4,891,354 $ 1,058,689 $ 75,704 $ 1,134,393 1.31 % 6.62 % 4.13 (1)Certain Re/Non-Performing Loans held in securitized form are recorded net of non-recourse securitized debt. (2)Equity residual investments and principal only securities are excluded from this calculation. (3)Weighted average life is based on projected life. Typically, actual maturities of mortgage-backed securities are shorter than stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. 80 --------------------------------------------------------------------------------
The following table presents the fair value of our credit securities portfolio
by credit rating as of
Credit Rating - Credit Securities (1) March 31, 2020 (2) December 31, 2019 (2)
AAA $ 687 $ 4,975
A 11,859 13,792
BBB 13,332 65,454
BB 37,923 106,311
B 62,432 226,083
Below B 31,161 103,985
Not Rated 280,257 745,748
Total: Credit Securities $ 437,651 $ 1,266,348
Less: Investments in Debt and Equity of
Affiliates $ 121,228 $ 131,955
Total: GAAP Basis $ 316,423 $ 1,134,393
(1)Represents the minimum rating for rated assets of S&P, Moody and Fitch credit
ratings, stated in terms of the S&P equivalent.
(2)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
The following tables present the geographic concentration of the underlying
collateral for our Non-Agency RMBS and CMBS portfolios ($ in thousands):
March 31, 2020
Non-Agency RMBS CMBS (1)
State Fair Value (2) Percentage (2) State Fair Value Percentage
California $ 65,697 28.5 % California $ 19,519 13.9 %
New York 26,407 11.5 % Florida 17,304 12.3 %
Florida 23,331 10.1 % Texas 15,631 11.1 %
Maryland 9,289 4.0 % New York 15,093 10.7 %
New Jersey 8,154 3.5 % New Jersey 10,686 7.6 %
Other 164,316 42.4 % Other 62,224 44.4 %
Total $ 297,194 100.0 % Total $ 140,457 100.0 %
(1)CMBS includes all commercial credit securities, including CMBS, Freddie Mac
K-Series, and Interest-Only investments.
(2)Non-Agency RMBS fair value includes $66.9 million of investments where there
was no data regarding the underlying collateral. These positions were excluded
from the percent calculation.
December 31, 2019
Non-Agency RMBS CMBS (1)
State Fair Value (2) Percentage (2) State Fair Value Percentage
California $ 174,569 24.5 % California $ 52,647 12.2 %
Florida 62,796 8.8 % New York 46,317 10.7 %
New York 57,931 8.1 % Texas 45,619 10.6 %
Texas 33,890 4.8 % Florida 45,032 10.4 %
New Jersey 22,736 3.3 % New Jersey 31,396 7.3 %
Other 483,403 50.5 % Other 210,012 48.8 %
Total $ 835,325 100.0 % Total $ 431,023 100.0 %
(1)CMBS includes all commercial credit securities, including CMBS, Freddie Mac
K-Series, and Interest-Only investments.
(2)Non-Agency RMBS fair value includes $123.0 million of investments where there
was no data regarding the underlying collateral. These positions were excluded
from the percent calculation.
81
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See Note 4 to the "Notes to Consolidated Financial Statements (unaudited)" for a
breakout of geographic concentration of credit risk within loans we include in
the "Residential mortgage loans, at fair value" line item on our consolidated
balance sheets.
The following tables present certain information regarding credit quality for
certain categories within our Non-Agency RMBS and CMBS portfolios ($ in
thousands):
March 31, 2020
Non-Agency RMBS*
Weighted Weighted Weighted
Average 60+ Days Average Loan Average Credit
Category Fair Value Delinquent Age (Months) Enhancement
Prime $ 75,363 10.6 % 133.3 16.1 %
Alt-A/Subprime 52,473 13.0 % 163.6 17.7 %
Credit Risk Transfer 19,942 0.4 % 16.1 0.5 %
Non-U.S. RMBS 25,641 6.3 % 105.6 7.1 %
CMBS*
Weighted Weighted Weighted
Average 60+ Days Average Loan Average Credit
Category Fair Value Delinquent Age (Months) Enhancement
CMBS $ 112,147 0.6 % 23.5 9.9 %
Freddie Mac K Series 9,258 0.1 % 19.0 0.0 %
December 31, 2019
Non-Agency RMBS*
Weighted Weighted Weighted
Average 60+ Days Average Loan Average Credit
Category Fair Value Delinquent Age (Months) Enhancement
Prime $ 241,887 10.6 % 136.7 9.8 %
Alt-A/Subprime 122,712 12.8 % 162.3 17.7 %
Credit Risk Transfer 279,955 0.4 % 24.5 1.8 %
Non-U.S. RMBS 57,731 7.3 % 147.8 15.8 %
CMBS*
Weighted Weighted Weighted
Average 60+ Days Average Loan Average Credit
Category Fair Value Delinquent Age (Months) Enhancement
CMBS $ 263,017 0.2 % 22.1 9.3 %
Freddie Mac K Series 118,150 0.6 % 45.3 0.4 %
*Sources: Intex, Trepp
82--------------------------------------------------------------------------------
The following table presents detail on our commercial real estate loan portfolio
on
Weighted Average
Gross Life Extended
Loan Premium Unrealized Coupon (Years) Initial Stated Maturity
(1)(2) Current Face (Discount) Amortized Cost Losses Fair Value (3) (4) Yield (5) (6) Maturity Date Date (7) Location Collateral Type
Loan G (8) $ 52,089 $ - $ 52,089 $ (4,226) $ 47,863 5.76 % 5.76 % 1.46 July 9, 2020 July 9, 2022 CA Condo, Retail,
Hotel
Loan H (8)(9) 36,000 - 36,000 (1,800) 34,200 4.71 % 4.71 % 0.19 March 9, 2019 June 9, 2020 AZ Office
Loan I (10) 14,646 (181) 14,465 (819) 13,646 11.51 % 12.85 % 2.05 February 9, 2021 February 9, 2023 MN Office, Retail
Loan J (8) 5,220 - 5,220 (1,500) 3,720 6.23 % 6.23 % 2.20 January 1, 2023 January 1, 2024 NY Hotel, Retail
Loan K (11) 11,172 - 11,172 (1,000) 10,172 10.59 % 11.74 % 0.93 May 22, 2021 February 22, 2024 NY Hotel, Retail
Loan L (11) 51,000 (538) 50,462 (2,012) 48,450 5.41 % 5.75 % 4.37July 22, 2022 July 22, 2024 IL Hotel, Retail$ 170,127 $ (719) $ 169,408 $ (11,357) $ 158,051 6.26 % 6.53 % 2.11 (1)We have the contractual right to receive a balloon payment for each loan. (2)See our "Off-balance sheet arrangements" section below for details on our commitments on commercial real estate loans as ofMarch 31, 2020 . (3)Pricing is reflective of marks on unfunded commitments. (4)Each commercial real estate loan investment has a variable coupon rate. (5)Yield includes any exit fees. (6)Actual maturities of commercial real estate loans may be shorter than stated contractual maturities. Maturities are affected by prepayments of principal. (7)Represents the maturity date of the last possible extension option. (8)Loan G, Loan H, and Loan J are first mortgage loans. (9)Subsequent to quarter end, Loan H was sold. (10)Loan I is a mezzanine loan. (11)Loan K and Loan L are comprised of first mortgage and mezzanine loans.
The following table presents detail on our commercial real estate loan portfolio
on
Weighted Average
Life Extended
Premium Gross Unrealized Coupon (Years) Initial Stated Maturity
Loan (1) Current Face (Discount) Amortized Cost Gains Fair Value (2) Yield (3) (4) Maturity Date Date (5) Location Collateral Type
Loan G (6) $ 45,856 $ - $ 45,856 $ - $ 45,856 6.46 % 6.46 % 0.53 July 9, 2020 July 9, 2022 CA Condo, Retail,
Hotel
Loan H (6) 36,000 - 36,000 - 36,000 5.49 % 5.49 % 0.19 March 9, 2019 June 9, 2020 AZ Office
Loan I (7) 11,992 (184) 11,808 184 11,992 12.21 % 14.51 % 1.04 February 9, 2021 February 9, 2023 MN Office, Retail
Loan J (6) 4,674 - 4,674 - 4,674 6.36 % 6.36 % 2.12 January 1, 2023 January 1, 2024 NY Hotel, Retail
Loan K (8) 9,164 - 9,164 - 9,164 10.71 % 11.86 % 1.72 May 22, 2021 February 22, 2024 NY Hotel, Retail
Loan L (8) 51,000 (502) 50,498 502 51,000 6.16 % 6.50 % 4.63July 22, 2022 July 22, 2024 IL Hotel, Retail$ 158,686 $ (686) $ 158,000 $ 686 $ 158,686 6.82 % 7.17 % 1.92 (1)We have the contractual right to receive a balloon payment for each loan. (2)Each commercial real estate loan investment has a variable coupon rate. (3)Yield includes any exit fees. (4)Actual maturities of commercial real estate loans may be shorter than stated contractual maturities. Weighted average maturities are affected by prepayments of principal. (5)Represents the maturity date of the last possible extension option. (6)Loan G, Loan H, and Loan J are first mortgage loans. (7)Loan I is a mezzanine loan. (8)Loan K and Loan L are comprised of first mortgage and mezzanine loans. 83 --------------------------------------------------------------------------------
Financing activities
Prior to the recent turmoil in the financial markets, we sought to achieve a balanced and diverse funding mix to finance our assets and operations, which included a combination of short-term borrowings, such as repurchase agreements with terms typically of 30-90 days, longer term repurchase agreement borrowings, and longer term financings, such as securitizations and revolving facilities, with terms longer than one year. We have explored and will continue in the near term to explore additional financing arrangements to further strengthen our balance sheet and position ourselves for future investment opportunities, including, without limitation, issuances of equity or debt securities and longer-termed financing arrangements; however, no assurance can be given that we will be able to access any such financing or the size, timing or terms thereof. In Q1 2020, in response to the unprecedented illiquidity and drop in demand for MBS due to the COVID-19 pandemic, which resulted in a significant decline in the value of our assets, which, in turn, resulted in an unusually high number of margin calls from our financing counterparties, we reduced our overall exposure to our financing counterparties by selling a significant portion of our investment portfolio and reducing the amount of our financing arrangements from$3.2 billion to$969.9 million on a GAAP basis and from$3.5 billion to$1.2 billion on a Non-GAAP basis, including a reduction in our repurchase agreement balance from$3.2 billion to$527.4 million . Our revolving facilities balance increased from$296.5 million to$703.8 million due primarily to the financing of our purchase of a residential mortgage loan portfolio with a gross aggregate acquisition fair value of$450.3 million . Additionally, theFederal Reserve cut the federal funds rate by a total of 150 basis points during Q1 2020. As previously described, we sold our entire portfolio of 30 year fixed rate Agency RMBS in March of 2020. As a result, our investment portfolio was primarily comprised of Credit Investments as ofMarch 31, 2020 . As financing costs on our Credit Investments are typically higher than financing costs on our Agency RMBS portfolio, our cost of financing increased from 2.51% atDecember 31, 2019 to 3.25% atMarch 31, 2020 . OnMarch 20, 2020 , we notified our financing counterparties that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic. SinceMarch 23, 2020 , we have received notifications of alleged events of default and deficiency notices from several of our financing counterparties. Subject to the terms of the applicable financing arrangement, if we fail to deliver additional collateral or otherwise meet margin calls when due, the financing counterparties may be able to demand immediate payment by us of the aggregate outstanding financing obligations owed to such counterparties, and if such financing obligations are not paid, may be permitted to sell the financed assets and apply the proceeds to our financing obligations and/or take ownership of the assets securing our financing obligations. During this period of market upheaval, we engaged in discussions with our financing counterparties with regard to entering into forbearance agreements pursuant to which each counterparty would agree to forbear from exercising its rights and remedies with respect to an event of default under the applicable financing arrangement for an agreed-upon period. Subsequent to quarter end, onApril 10, 2020 , we entered into a forbearance agreement for an initial 15 day period, a second forbearance agreement onApril 27, 2020 , for an extended period ending onJune 1, 2020 , and a third forbearance agreement onJune 1, 2020 for an additional period endingJune 15, 2020 (collectively, the "Forbearance Agreement") with certain of our financing counterparties (the "Participating Counterparties"). Pursuant to the terms of the Forbearance Agreement, the Participating Counterparties agreed to forbear from exercising any of their right and remedies in respect of events of default and any and all other defaults under the applicable financing arrangement with us for the duration of the forbearance period specified in the Forbearance Agreement (the "Forbearance Period"). OnJune 10, 2020 , we entered into a Reinstatement Agreement with the Participating Counterparties, pursuant to which the parties agreed to terminate the Forbearance Agreement and each Participating Counterparty agreed to permanently waive all existing and prior events of default under our financing agreements (each, a "Bilateral Agreement") and to reinstate each Bilateral Agreement, as it may be amended by agreement between the Participating Counterparty and the Company. As a result of the termination of the Forbearance Agreement and entry into the Reinstatement Agreement, default interest on the our outstanding borrowings under each Bilateral Agreement will cease to accrue as ofJune 10, 2020 and the interest rate shall be the non-default rate of interest or pricing rate, as set forth in the applicable Bilateral Agreements, all cash margin will be applied to outstanding balances we owe, and the DTC repo tracker coding for each Bilateral Agreement will be reinstated, thereby allowing principal and interest payments on the underlying collateral to flow to and be used by us, just as it was before the prior forbearance agreements were put in place. In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the various forbearance agreements are being terminated and released. We also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent. Additionally, the Reinstatement Agreement provides a set of financial covenants that override and replace the financial covenants in each Bilateral Agreement and sets forth various reporting requirements from the Company to the Participating Counterparties, releases, certain netting obligations and cross-default provisions. In connection with the negotiation and execution of the Reinstatement Agreement, we entered into certain amendments to the Bilateral Agreements with certain of the Participating Counterparties to reflect current market terms. In general, the amendments reflect increased haircuts and higher coupons. 84 -------------------------------------------------------------------------------- OnJune 10, 2020 , we also entered a separate reinstatement agreement withJPMorgan Chase Bank (the "JPM Reinstatement Agreement") on substantially the same terms as those set forth in the Reinstatement Agreement. The Reinstatement Agreement and the JPM Reinstatement Agreement collectively cover all of our existing financing arrangements as of the date of this Report. As previously described, through the end of March and subsequent to the end of the quarter, we sold certain assets in an effort to satisfy outstanding financing obligations and reduce our exposure to various counterparties. As ofJune 10, 2020 , we had met all margin call requirements. Refer to Note 13 in the "Notes to Consolidated Financial Statements (Unaudited)" for more information on outstanding deficiencies. We use leverage to finance the purchase of our target assets. In 2020 and 2019, our leverage has primarily been in the form of repurchase agreements, facilities, and securitized debt. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The size of the haircut reflects the perceived risk associated with the pledged asset. Haircuts may change as our financing arrangements mature or roll and are sensitive to governmental regulations. We experienced fluctuations in our haircuts that caused us to alter our business and financing strategies for the three months endedMarch 31, 2020 . As previously described, this resulted in us raising liquidity and de-risking our portfolio. Through asset sales and related debt pay-offs, we have reduced the aggregate number of our financing counterparties, bringing the counterparties we have debt outstanding with down from 30 as ofDecember 31, 2019 to 18 as ofMarch 31, 2020 . We have further reduced the number of our outstanding financing counterparties to 5 on a GAAP basis and to 6 on a non-GAAP basis subsequent to quarter end. Our repurchase agreements are accounted for as financings and require the repurchase of the transferred securities or loans or repayment of the advance at the end of each agreement's term, typically 30 to 90 days. If we maintain the beneficial interest in the specific assets pledged during the term of the borrowing, we receive the related principal and interest payments. If we do not maintain the beneficial interest in the specific assets pledged during the term of the borrowing, we will have the related principal and interest payments remitted to us by the lender. Interest rates on borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at which time we may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. We have also entered into revolving facilities to purchase certain loans in our investment portfolio. These facilities typically have longer stated maturities than repurchase agreements. Interest rates on these facilities are based on prevailing rates corresponding to the terms of the borrowings, and interest is paid on a monthly basis. Additionally, these facilities contain representations, warranties, covenants, including financial covenants, events of default and indemnities that are customary for agreements of these types. In response to declines in fair value of pledged assets due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically require us to post additional assets as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. The following table presents the quarter-end balance, average quarterly balance and maximum balance at any month-end for our (i) financing arrangements on our investment portfolio andU.S Treasury securities ("Non-GAAP Basis" below), and (ii) financing arrangements through affiliated entities, excluding any financing utilized in our investment in AG Arc, with a reconciliation of all quarterly figures to GAAP ("GAAP Basis" below) (in thousands). Refer to the "Hedging Activities" section below for more information on repurchase agreements secured byU.S. Treasury securities. Average Maximum Quarter-End Quarterly Balance at Quarter Ended Balance Balance Any Month-End March 31, 2020 Non-GAAP Basis$ 1,231,231 $ 2,878,844 $ 3,904,578 Less: Investments in Debt and Equity of Affiliates 261,374 260,737 280,195 GAAP Basis$ 969,857 $ 2,618,107 $ 3,624,383 December 31, 2019 Non-GAAP Basis$ 3,490,884 $ 3,703,921 $ 3,929,708 Less: Investments in Debt and Equity of Affiliates 257,416 240,602 257,830 85 --------------------------------------------------------------------------------
GAAP Basis $ 3,233,468 $ 3,463,319 $ 3,671,878
September 30, 2019
Non-GAAP Basis $ 3,720,937 $ 3,301,725 $ 3,720,937 Less: Investments in Debt and Equity of
Affiliates 195,949 238,144 279,478
GAAP Basis $ 3,524,988 $ 3,063,581 $ 3,441,459
June 30, 2019
Non-GAAP Basis $ 3,074,536 $ 3,166,610 $ 3,263,481 Less: Investments in Debt and Equity of
Affiliates 183,286 216,024 238,045
GAAP Basis $ 2,891,250 $ 2,950,586 $ 3,025,436
March 31, 2019
Non-GAAP Basis $ 3,290,383 $ 3,069,958 $ 3,290,383 Less: Investments in Debt and Equity of
Affiliates 177,548 174,672 179,524
GAAP Basis $ 3,112,835 $ 2,895,286 $ 3,110,859
December 31, 2018
Non-GAAP Basis $ 2,860,227 $ 2,851,744 $ 2,866,872 Less: Investments in Debt and Equity of
Affiliates 139,739 125,851 139,739
GAAP Basis $ 2,720,488 $ 2,725,893 $ 2,727,133
September 30, 2018
Non-GAAP Basis $ 2,913,543 $ 2,862,935 $ 2,913,543 Less: Investments in Debt and Equity of
Affiliates 102,149 92,833 102,149
GAAP Basis $ 2,811,394 $ 2,770,102 $ 2,811,394
June 30, 2018
Non-GAAP Basis $ 2,719,376 $ 2,792,123 $ 2,932,186 Less: Investments in Debt and Equity of
Affiliates 85,194 170,006 213,489
GAAP Basis $ 2,634,182 $ 2,622,117 $ 2,718,697
March 31, 2018
Non-GAAP Basis $ 3,035,398 $ 2,954,404 $ 3,043,392 Less: Investments in Debt and Equity of
Affiliates 208,819 77,309 208,819
GAAP Basis $ 2,826,579 $ 2,877,095 $ 2,834,573
December 31, 2017
Non-GAAP Basis $ 3,011,591 $ 2,882,548 $ 3,011,591 Less: Investments in Debt and Equity of
Affiliates 7,184 8,849 9,807
GAAP Basis $ 3,004,407 $ 2,873,699 $ 3,001,784
September 30, 2017
Non-GAAP Basis $ 2,703,069 $ 2,596,533 $ 2,746,151 Less: Investments in Debt and Equity of
Affiliates 8,517 8,697 8,869
GAAP Basis $ 2,694,552 $ 2,587,836 $ 2,737,282
June 30, 2017
Non-GAAP Basis $ 2,265,227 $ 2,209,991 $ 2,339,133 Less: Investments in Debt and Equity of
Affiliates 8,485 8,806 9,116
GAAP Basis $ 2,256,742 $ 2,201,185 $ 2,330,017
March 31, 2017
Non-GAAP Basis $ 1,887,767 $ 1,813,668 $ 1,887,766 Less: Investments in Debt and Equity of
Affiliates 8,424 8,788 9,172
GAAP Basis $ 1,879,343 $ 1,804,880 $ 1,878,594
The balance on our financing arrangements can reasonably be expected to (i)
increase as the size of our investment portfolio increases primarily through
equity capital raises and as we increase our investment allocation to Agency
RMBS and (ii) decrease as the size of our portfolio decreases through asset
sales, principal paydowns, and as we increase our investment allocation to
credit investments. Credit investments, due to their risk profile, have lower
leverage ratios than Agency RMBS,
86
--------------------------------------------------------------------------------which restricts our financing counterparties from providing as much financing to us and lowers the balance of our total financing.
Financing arrangements on our investment portfolio
As ofMarch 31, 2020 , we had received notifications from several of our financing counterparties of alleged events of default under their financing agreements, and of those counterparties' intentions to accelerate our performance obligations under the relevant agreements as a result of our inability to meet certain margin calls as a result of market disruptions created by the COVID-19 pandemic. As discussed above, until a formal agreement was reached, we negotiated with our financing counterparties regarding the lenders' forbearance from exercising their rights and remedies under their applicable financing arrangements. While as ofMarch 31, 2020 certain lenders had accelerated our obligations under their applicable financing arrangements, once subject to the Reinstatement Agreement, the Participating Counterparties agreed to extend the maturity dates of each of their respective repurchase agreements as determined by their respective Bilateral Agreements. As a result, we have not presented the maturity of our financing arrangements as ofMarch 31, 2020 in the tables below. Additionally, due to declines in the fair value of our portfolio, certain haircuts were negative as ofMarch 31, 2020 . Subsequent to quarter end, as a result of asset sales and delevering, we had positive equity in our investments and positive haircuts. As ofJune 10, 2020 we had met all margin calls related to our financing arrangements. Refer to Note 13 in the "Notes to Consolidated Financial Statements (Unaudited)" for more information on outstanding deficiencies. We continue to take steps to manage and de-lever our portfolio. Through asset sales and related debt pay-offs, we have reduced our exposure to various counterparties, bringing the counterparties with debt outstanding down from 30 as ofDecember 31, 2019 to 18 as ofMarch 31, 2020 . See Note 7 to the "Notes to Consolidated Financial Statements (unaudited)" for a description of our material financing arrangements as ofMarch 31, 2020 . Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each repurchase agreement, typical supplemental terms include requirements of minimum equity, leverage ratios, performance triggers or other financial ratios. The following table presents a summary of the financing arrangements on our investment portfolio as ofMarch 31, 2020 andDecember 31, 2019 (in thousands). March 31, 2020 December 31, 2019 Repurchase agreements$ 527,442 $ 3,194,409 Revolving facilities (1) 703,789 296,475 Total: Non-GAAP Basis$ 1,231,231 $ 3,490,884
Investments in Debt and Equity of Affiliates
257,416
Total: GAAP Basis $ 969,857 $ 3,233,468 (1)Increasing our borrowing capacity under a majority of our revolving facilities requires consent of the lenders.
The following table presents a summary of the financing arrangements on our
Investment Portfolio as of
Agency Credit Total
Weighted Weighted Weighted
Average Average Average
Balance Funding Cost Balance Funding Cost Balance Funding Cost
Total: Non-GAAP Basis $ 21,522 1.87 % $ 1,209,709 3.36 % $ 1,231,231 3.33 %
Investments in Debt and
Equity of Affiliates $ - - $ 261,374 4.94 % $ 261,374 4.94 %
Total: GAAP Basis $ 21,522 1.87 % $ 948,335 2.92 % $ 969,857 2.90 %
87--------------------------------------------------------------------------------
The following table presents a summary of the financing arrangements by maturity
on our Investment Portfolio as of
Agency Credit Total
Weighted Weighted Weighted
Financing Arrangements Average Average Average
Maturing Within: (1) Balance Funding Cost Balance Funding Cost Balance Funding Cost
30 days or less $ 1,011,185 2.05 % $ 587,325 2.92 % $ 1,598,510 2.37 %
31-60 days 1,098,093 1.96 % 470,568 3.29 % 1,568,661 2.36 %
61-90 days - - 71,753 2.99 % 71,753 2.99 %
91-180 days - - 20,384 3.79 % 20,384 3.79 %
Greater than 180 days - - 231,576 3.90 % 231,576 3.90 %
Total: Non-GAAP Basis $ 2,109,278 2.01 % $ 1,381,606 3.23 % $ 3,490,884 2.49 %
Investments in Debt and
Equity of Affiliates $ - - $ 257,416 3.94 % $ 257,416 3.94 %
Total: GAAP Basis $ 2,109,278 2.01 % $ 1,124,190 3.07 % $ 3,233,468 2.38 %
(1)As of December 31, 2019 , our weighted average days to maturity is 94 days and
our weighted average original days to maturity is 164 days on a GAAP Basis. As
of December 31, 2019 , our weighted average days to maturity is 92 days and our
weighted average original days to maturity is 196 days on a Non-GAAP Basis.
Repurchase agreements
The following table presents, as ofMarch 31, 2020 , a summary of the repurchase agreements on our real estate securities ($ in thousands). It also reconciles these items to GAAP: Weighted Average Weighted Average Weighted Average Balance Rate Funding Cost Haircut Total: Non-GAAP Basis$ 394,878 2.56 % 2.56 % 2.1 % Investments in Debt and Equity of Affiliates$ 82,556 3.64 % 3.64 % 12.4 % Total: GAAP Basis$ 312,322 2.27 % 2.27 % (0.6) %
The following table presents, as of
Weighted Weighted Weighted Weighted
Repurchase Agreements Maturing Average Average Average Days Average Within: Balance Rate Funding Cost to Maturity Haircut 30 days or less$ 1,598,510 2.37 % 2.37 % 14 9.8 % 31-60 days 1,366,178 2.13 % 2.13 % 46 7.0 % 61-90 days 71,753 2.99 % 2.99 % 67 23.5 % 91-180 days 20,384 3.79 % 3.79 % 176 21.1 % Greater than 180 days 2,973 3.79 % 3.79 % 283 23.7 % Total: Non-GAAP Basis$ 3,059,798 2.29 % 2.29 % 31
9.0 %
Investments in Debt and Equity of
Affiliates $ 72,443 3.76 % 3.76 % 67 29.8 %
Total: GAAP Basis $ 2,987,355 2.25 % 2.25 % 30 8.5 %
The decrease in the balance of our repurchase agreements from December 31, 2019
to March 31, 2020 is due primarily to selling collateral in order to meet margin
calls.
The following table presents, as of
Weighted Average Weighted Average Weighted Average
Balance Rate Funding Cost Haircut
Total: GAAP Basis $ 129,194 2.63 % 2.99 % 7.0 %
88--------------------------------------------------------------------------------
The following table presents, as of
Weighted Weighted Weighted Weighted
Repurchase Agreements Maturing Average Average Average Days Average
Within: Balance Rate Funding Cost to Maturity Haircut
31-60 days $ 24,584 3.14 % 3.14 % 56 33.7 %
Greater than 180 days 107,010 3.61 % 3.80 % 727 19.3 %
Total: GAAP Basis $ 131,594 3.53 % 3.68 % 602 22.0 %
The following table presents, as of
Weighted Average Weighted Average Weighted Average
Balance Rate Funding Cost Haircut
Total: GAAP Basis $ 3,370 3.76 % 5.13 % 9.4 %
The following table presents, as of
Weighted Weighted Weighted Weighted
Repurchase Agreements Maturing Average Average Average Days Average
Within: Balance Rate Funding Cost to Maturity Haircut
Greater than 180 days $ 3,017 4.46 % 5.89 % 1,097 35.4 %
Financing facilities
The following table presents information regarding revolving facilities as of
March 31, 2020 and December 31, 2019 ($ in thousands). It also reconciles these
items to GAAP.
March 31, 2020 December 31, 2019
Funding Cost Maximum Aggregate Funding Cost
Facility Investment Maturity Date Rate (1) Balance Borrowing Capacity Rate (1) Balance
Revolving facility B
(2)(3) Re/Non-performing loans June 28, 2021 3.61 % 3.61 % $ 20,627 $ 110,000 3.80 % 3.80 % $ 21,546
Revolving facility C
(2)(3) Commercial loans August 10, 2023 2.80 % 3.05 % 94,007 100,000 3.85 % 4.01 % 89,956
Revolving facility D
(2)(3) Non-QM loans February 16, 2021 2.84 % 5.62 % 172,059 312,130 3.61 % 4.02 % 177,899
Revolving facility E (2) Re/Non-performing loans November 25, 2020 2.90 % 2.90 % 1,670 1,670 3.73 % 3.73 % 1,808
Revolving facility F (2) Re/Non-performing loans July 25, 2021 3.42 % 3.42 % 5,089 14,120 3.55 % 3.55 % 5,266
Revolving facility G
(2)(3) Re/Non-performing loans January 26, 2021 3.16 % 3.26 % 410,337 440,000 - - -
Total: Non-GAAP Basis $ 703,789 $ 977,920 $ 296,475
Investments in Debt and
Equity of Affiliates $ 178,818 $ 327,920 $ 184,973
Total: GAAP Basis $ 524,971 $ 650,000 $ 111,502
(1)Funding costs represent the stated rate inclusive of any deferred financing
costs.
(2)Under the terms of our financing agreements, the counterparties may, in
certain cases, sell or re-hypothecate the pledged collateral.
(3)Increasing our borrowing capacity under this facility requires consent of the
lender. See Note 7 to the "Notes to Consolidated Financial Statements
(unaudited)" for more detail on Revolving Facility G.
The increase in our Revolving facility G balance from
89
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As previously mentioned, on May 28, 2020 , we entered into a MLPSA. The MLPSA
provided for the Loan Sale which closed on May 28, 2020 , resulting in Revolving
facility G being paid off.
Other financing transactions
In 2014, we entered into a resecuritization transaction, pursuant to which we
created a special purpose entity ("SPE") to facilitate the transaction. We
determined that the SPE was a variable interest entity ("VIE") and that the VIE
should be consolidated by us under ASC 810-10. The transferred assets were
recorded as a secured borrowing (the "Consolidated December 2014 VIE"). See Note
2 to the "Notes to Consolidated Financial Statements (unaudited)" for more
detail on Consolidated December 2014 VIE.
The following table details certain information related to the Consolidated
Weighted Average
Current Face Fair Value Coupon Yield Life (Years) (1)
Consolidated tranche (2) $ 6,011 $ 5,836 3.33 % 1.29 % 0.93
Retained tranche 7,680 5,354 5.30 % 18.18 % 6.74
Total resecuritized asset (3) $ 13,691 $ 11,190 4.43 % 9.37 % 4.19
(1)This is based on projected life. Typically, actual maturities of investments
and loans are shorter than stated contractual maturities. Maturities are
affected by the contractual lives of the underlying mortgages, periodic payments
of principal and prepayments of principal.
(2) As of March 31, 2020 , we have recorded secured financing of $5.8 million on
our consolidated balance sheets in the "Securitized debt, at fair value" line
item. We recorded the proceeds from the issuance of the secured financing in the
"Cash Flows from Financing Activities" section of the consolidated statement of
cash flows at the time of securitization.
(3)As of March 31, 2020 , the fair market value of the total resecuritized asset
is included on our consolidated balance sheets as "Non-Agency RMBS."
The following table details certain information related to the Consolidated
Weighted Average
Current Face Fair Value Coupon Yield Life (Years) (1)
Consolidated tranche (2) $ 7,204 $ 7,230 3.46 % 4.11 % 1.96 Retained tranche 7,851 6,608 5.37 % 18.14 % 7.64 Total resecuritized asset (3)$ 15,055 $ 13,838 4.46 % 10.81 % 4.92 (1)This is based on projected life. Typically, actual maturities of investments and loans are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. (2)As ofDecember 31, 2019 , we have recorded secured financing of$7.2 million on our consolidated balance sheets in the "Securitized debt, at fair value" line item. We recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows at the time of securitization. (3)As ofDecember 31, 2019 , the fair market value of the total resecuritized asset is included on our consolidated balance sheets as "Non-Agency RMBS." InAugust 2019 , we entered into a securitization transaction of certain of our residential mortgage loans, pursuant to which we created an SPE to facilitate the transaction. We determined that the SPE was a VIE and that the VIE should be consolidated by us under ASC 810-10. The transferred assets were recorded as a secured borrowing (the "ConsolidatedAugust 2019 VIE"). See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more detail on the ConsolidatedAugust 2019 VIE. 90 --------------------------------------------------------------------------------
The following table details certain information related to the Consolidated
Weighted Average
Current Unpaid
Principal Balance Fair Value Coupon Yield Life (Years) (1)
Residential mortgage loans (2) $ 258,424 $ 214,176 4.03 % 4.73 % 6.90
Securitized debt (3) 211,749 191,346 2.92 % 2.80 % 5.00 (1)Weighted average life is based on projected life. Typically, actual maturities of investments and loans are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. (2)This represents all loans contributed to the ConsolidatedAugust 2019 VIE. (3)As ofMarch 31, 2020 , we have recorded secured financing of$191.3 million on the consolidated balance sheets in the "Securitized debt, at fair value" line item. We recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows at the time of securitization.
The following table details certain information related to the Consolidated
Weighted Average
Current Unpaid
Principal Balance Fair Value Coupon Yield Life (Years) (1)
Residential mortgage loans (2) $ 263,956 $ 255,171 3.96 % 5.11 % 7.66
Securitized debt (3) 217,455 217,118 2.92 % 2.86 % 5.00 (1)Weighted average life is based on projected life. Typically, actual maturities of investments and loans are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. (2)This represents all loans contributed to the ConsolidatedAugust 2019 VIE. (3)As ofDecember 31, 2019 , we have recorded secured financing of$217.1 million on the consolidated balance sheets in the "Securitized debt, at fair value" line item. We recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows at the time of securitization.
Leverage
We define GAAP leverage as the sum of (1) our GAAP financing arrangements net of any restricted cash posted on such financing arrangements, (2) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled, and (3) securitized debt, at fair value. We define Economic Leverage, a non-GAAP metric, as the sum of: (i) our GAAP leverage, exclusive of any fully non-recourse financing arrangements, (ii) financing arrangements held through affiliated entities, net of any restricted cash posted on such financing arrangements, exclusive of any financing utilized through AG Arc, any adjustment related to unsettled trades as described in (2) in the previous sentence, and any fully non-recourse financing arrangements and (iii) our net TBA position (at cost). Our calculations of GAAP leverage and Economic Leverage exclude financing arrangements and net receivables/payables on unsettled trades pertaining toU.S. Treasury securities due to the highly liquid and temporary nature of these investments. Historically, we reported non-GAAP "At-Risk" leverage, which included non-recourse financing arrangements, but we believe that the adjustments made to our GAAP leverage in order to compute Economic Leverage, including the exclusion of non-recourse financing arrangements, allow investors the ability to identify and track the leverage metric that management uses to evaluate and operate the business. Our obligation to repay our non-recourse financing arrangements is limited to the value of the pledged collateral thereunder and does not create a general claim against us as an entity. The calculations in the tables below divide GAAP leverage and Economic Leverage by our GAAP stockholders' equity to derive our leverage ratios. The following tables present a reconciliation of our Economic Leverage ratio back to GAAP ($ in thousands). 91 -------------------------------------------------------------------------------- March 31, 2020 Leverage Stockholders' Equity Leverage Ratio GAAP Leverage$ 1,122,525 $ 358,665 3.1x Non-recourse financing arrangements (197,182) Financing arrangements through affiliated entities 250,511 Net TBA (receivable)/payable adjustment (392) Economic Leverage$ 1,175,462 $ 358,665 3.3x December 31, 2019 Leverage Stockholders' Equity Leverage Ratio GAAP Leverage$ 3,441,451 $ 849,046 4.1x Non-recourse financing arrangements (224,348) Financing arrangements through affiliated entities 257,416 Economic Leverage$ 3,474,519 $ 849,046 4.1x Hedging activities Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions inU.S. Treasury securities. In addition, we may utilize Eurodollar Futures,U.S. Treasury Futures, British Pound Futures and Euro Futures (collectively, "Futures"). Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. Refer to the tables below for a summary of our derivative instruments. Our centrally cleared trades require that we post an "initial margin" to our counterparties of an amount determined by theChicago Mercantile Exchange ("CME") and theLondon Clearing House ("LCH"), the central clearinghouses ("CCPs") through which those trades are cleared, which is generally intended to be set at a level sufficient to protect the CCPs from the maximum estimated single-day price movement in that market participant's contracts. We also exchange cash "variation margin" with our counterparties on our centrally cleared trades based upon daily changes in the fair value as measured by the CCPs. The daily exchange of variation margin associated with a CCP instrument is legally characterized as the daily settlement of the derivative instrument itself. Accordingly, we account for the daily receipt or payment of variation margin associated with our centrally cleared interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap and future derivative asset or liability, respectively. The carrying amount of centrally cleared interest rate swaps and futures reflected in our consolidated balance sheets is equal to the unsettled fair value of such instruments. See Note 8 to the "Notes to Consolidated Financial Statements (unaudited)" for more information.
On
The following table summarizes certain information on our non-hedge derivatives and other instruments (in thousands) as of the dates indicated.
March 31, 2020 December 31, 2019
Notional amount of non-hedge Weighted Average Weighted Average
derivatives and other instruments: Notional Currency Notional Amount Life (Years) Notional Amount Life (Years) Pay Fix/Receive Float Interest Rate Swap Agreements (1)(2) USD $ - -$ 1,943,281 4.25 Payer Swaptions USD 350,000 0.43 650,000 0.42 Short positions on British Pound Futures (3) GBP 7,563 0.21 6,563
0.21
Short positions on Euro Futures(4) EUR 1,625 0.21 1,500 0.21 92
-------------------------------------------------------------------------------- (1)As ofDecember 31, 2019 , there were$94.5 million notional amount of pay fix/receive float interest rate swap agreements held through investments in debt and equity of affiliates. (2)As ofDecember 31, 2019 , the weighted average life of interest rate swaps on a GAAP basis was 4.32 years and the weighted average life of interest rate swaps held through investments in debt and equity of affiliates was 2.83 years. (3)Each British Pound Future contract embodies £62,500 of notional value. (4)Each Euro Future contract embodies €125,000 of notional value.
Interest rate swaps
To help mitigate exposure to increases in interest rates, we may use currently-paying and forward-starting, one- or three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. This arrangement helps hedge our exposure to higher interest rates because the variable-rate payments received on the swap agreements help to offset additional interest accruing on the related borrowings due to the higher interest rate, leaving the fixed-rate payments to be paid on the swap agreements as our effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the swap agreements and actual borrowing rates.
During the quarter ended
As ofDecember 31, 2019 , our interest rate swap positions consisted of pay-fixed interest rate swaps. The following table presents information about our interest rate swaps as ofDecember 31, 2019 ($ in thousands). It also reconciles these items to GAAP. Weighted Average Weighted Average Weighted Average Maturity Notional Amount Pay-Fixed Rate Receive-Variable Rate Years to Maturity 2020$ 105,000 1.54 % 1.91 % 0.20 2022 837,531 1.64 % 1.91 % 2.69 2023 5,750 3.19 % 1.91 % 3.85 2024 650,000 1.52 % 1.90 % 4.80 2026 180,000 1.50 % 1.89 % 6.70 2029 165,000 1.77 % 1.94 % 9.85 Total/Wtd Avg$ 1,943,281 1.60 % 1.91 % 4.25 Investments in Debt and Equity of Affiliates$ 94,531 1.61 % 1.93 % 2.83 Total/Wtd Avg: GAAP Basis$ 1,848,750 1.60 % 1.91 % 4.32
(1) 100% of our receive variable interest rate swap notional amount resets quarterly based on three-month LIBOR.
Dividends
Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. In addition, prior to the time we have fully deployed the net proceeds of our follow-on offerings to acquire assets in our target asset classes we may fund our quarterly distributions out of such net proceeds. As described above, our distribution requirements are based on taxable income rather than GAAP net income. The primary differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes and (vi) methods of depreciation. Undistributed taxable income is based on current estimates and is not finalized until we file our annual tax return for that tax 93 --------------------------------------------------------------------------------
year, typically in September of the following year. We estimate that we do not
have any undistributed taxable income as of
OnMarch 27, 2020 , we announced that our Board of Directors approved a suspension of our quarterly dividends on our common stock, 8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock, and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, beginning with the common dividends that normally would have been declared inMarch 2020 and the preferred dividend that would have been declared inMay 2020 , in order to conserve capital and preserve liquidity. Based on current circumstances, it is our intention to suspend quarterly dividends on common and preferred stock for the foreseeable future. Refer to Note 12 in the "Notes to Consolidated Financing Statements (Unaudited)" for more information on the Company's preferred stock. No common stock dividends were declared during the three months endedMarch 31, 2020 . The following tables detail our common stock dividends during the three months endedMarch 31, 2019 :
2019
Declaration Date Record Date Payment Date Dividend Per Share
3/15/2019 3/29/2019 4/30/2019 $ 0.50
The following tables detail our preferred stock dividends on our 8.25% Series A
and 8.00% Series B Preferred Stock during the three months ended March 31, 2020
and March 31, 2019 .
2020
Dividend Declaration Date Record Date Payment Date
Dividend Per Share
8.25% Series A 2/14/2020 2/28/2020 3/17/2020 $ 0.51563
Dividend Declaration Date Record Date Payment Date Dividend Per Share
8.00% Series B 2/14/2020 2/28/2020 3/17/2020 $ 0.50
Dividend Declaration Date Record Date Payment Date Dividend Per Share
8.000% Series C 2/14/2020 2/28/2020 3/17/2020 $ 0.50
2019
Dividend Declaration Date Record Date Payment Date
Dividend Per Share
8.25% Series A 2/15/2019 2/28/2019 3/18/2019 $ 0.51563
Dividend Declaration Date Record Date Payment Date Dividend Per Share
8.00% Series B 2/15/2019 2/28/2019 3/18/2019 $ 0.50
Liquidity and capital resources
Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs. Our principal sources of cash as ofMarch 31, 2020 consisted of proceeds from sales of assets in an effort to prudently manage our portfolio through unprecedented market volatility resulting from the global pandemic of the COVID-19 virus, borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase real estate securities, loans and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations. AtMarch 31, 2020 , we had$92.3 million of cash available to support our liquidity needs. Refer to the "Contractual obligations" section of this Item 2 for additional obligations that could impact our liquidity. As previously discussed, onJune 1, 2020 , we entered into a third forbearance agreement with the Participating Counterparties, providing for a forbearance period ending onJune 15, 2020 . Pursuant to the terms of the Forbearance Agreement, we must comply with a set of restrictive covenants set forth in the Forbearance Agreement, including restrictions on the use of our cash, restrictions on our incurrence of additional debt, and restrictions on the sale of our assets. We also granted to the Participating Counterparties a lien and security interest in all of our unencumbered assets. Upon entering into the Reinstatement Agreement 94 --------------------------------------------------------------------------------
with the Participating Counterparties, we are no longer subject to the restrictive covenants set forth in the Forbearance Agreement and the lien and security interest granted to the Participating Counterparties on all of our unencumbered assets were terminated and released.
Leverage
The amount of leverage, or debt, we may deploy for particular assets depends upon our Manager's assessment of the credit and other risks of those assets, and also depends on any limitations placed upon us through covenants contained in our financing arrangements. We generate income principally from the yields earned on our investments and, to the extent that leverage is deployed, on the difference between the yields earned on our investments and our cost of borrowing and the cost of any hedging activities. Subject to maintaining both our qualification as a REIT forU.S. federal income tax purposes and our Investment Company Act exemption, to the extent leverage is deployed, we may use a number of sources to finance our investments. As previously described, due to market volatility during the quarter endedMarch 31, 2020 , we executed on various asset sales in an effort to create additional liquidity and de-risk our portfolio. As a result of these asset sales and related debt pay-offs, we have reduced the number of financing counterparties we have, bringing the overall number of counterparties with debt outstanding down from 30 as ofDecember 31, 2019 to 18 as ofMarch 31, 2020 with debt outstanding of$1.2 billion , inclusive of financing arrangements through affiliated entities. These agreements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each lending agreement, typical supplemental terms include requirements of minimum equity, leverage ratios, performance triggers or other financial ratios. Under our financing arrangements, we may be required to pledge additional assets to our lenders in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional securities or cash. Certain securities that are pledged as collateral under our financing arrangements are in unrealized loss positions.
See "Financing arrangements on our investment portfolio" section above for
information on the contractual maturity of our financing arrangements at
As described above in the "Financing activities" section of this Item 2, we entered into a resecuritization transaction in 2014 and a securitization transaction of certain of our residential mortgage loans inAugust 2019 that resulted in the consolidation of those VIEs created with the SPEs. We recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows. See Note 3 and 4 to the "Notes to Consolidated Financial Statements (unaudited)" for more detail. Subsequent to quarter end, we entered into the Forbearance Agreement pursuant to which the consent of the Participating Counterparties was required in order for us to increase our leverage. As described above, upon entering in to the Reinstatement Agreement, we are no longer subject to the restrictive covenants set forth in the Forbearance Agreement, though the Reinstatement Agreement limits our Recourse Indebtedness to Stockholder's Equity (both as defined therein) leverage ratio to no greater than 3:1. The following table presents information atMarch 31, 2020 with respect to each counterparty that provides us with financing for which we had greater than 5% of our stockholders' equity at risk ($ in thousands). Stockholders' Equity Weighted Average Percentage of Counterparty at Risk Maturity (days) Stockholders' EquityCredit Suisse Securities, LLC - Non-GAAP $ 34,269 105 9.5 % Non-GAAP Adjustments (a) (32,539) 978 (9.0) % Credit Suisse Securities, LLC - GAAP $ 1,731 1,083 0.5 %
(a)Represents stockholders' equity at risk, weighted average maturity and percentage of stockholders' equity from financing arrangements held in investments in debt and equity of affiliates.
95
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The following table presents information at December 31, 2019 with respect to
each counterparty that provides us with financing for which we had greater than
5% of our stockholders' equity at risk ($ in thousands).
Stockholders' Equity Weighted Average Percentage of
Counterparty at Risk Maturity (days) Stockholders' Equity
Credit Suisse Securities, LLC -
Non-GAAP $ 47,996 72 5.7 %
Non-GAAP Adjustments (a) (44,588) 47 (5.3) %
Credit Suisse Securities, LLC - GAAP $ 3,408 119 0.4 %
Barclays Capital Inc $ 77,334 277 9.1 %
Citigroup Global Markets Inc. 50,263 22 5.9 %
(a)Represents stockholders' equity at risk, weighted average maturity and percentage of stockholders' equity from financing arrangements held in investments in debt and equity of affiliates.
Margin requirements
The fair value of our real estate securities and loans fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls in the ordinary course of our business. In seeking to manage effectively the margin requirements established by our lenders, we maintain a position of cash and unpledged Agency RMBS. We refer to this position as our "liquidity." The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. Typically, if interest rates increase or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will need to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in our target assets. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which may force us to liquidate assets into potentially unfavorable market conditions and harm our results of operations and financial condition. Further, an unexpected rise in interest rates and a corresponding fall in the fair value of our securities may also force us to liquidate assets under difficult market conditions, thereby harming our results of operations and financial condition, in an effort to maintain sufficient liquidity to meet increased margin calls. Similar to the margin calls that we receive on our borrowing agreements, we may also receive margin calls on our derivative instruments when their fair values decline. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the terms of the derivatives involved. We may also receive margin calls on our derivatives based on the implied volatility of interest rates. Our posting of collateral with our counterparties can be done in cash or securities, and is generally bilateral, which means that if the fair value of our interest rate hedges increases, our counterparty will be required to post collateral with us. Refer to the "Liquidity risk - derivatives" section of Item 3 below for a further discussion on margin. OnMarch 20, 2020 , we notified our financing counterparties that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic. SinceMarch 23, 2020 , we have received notifications of alleged events of default and deficiency notices from several of our financing counterparties. Subject to the terms of the applicable financing arrangement, if we fail to deliver additional collateral or otherwise meet margin calls when due, the financing counterparties may be able to demand immediate payment by us of the aggregate outstanding financing obligations owed to such counterparties, and if such financing obligations are not paid, may be permitted to sell the financed assets and apply the proceeds to our financing obligations and/or take ownership of the assets securing our financing obligations. During this period of market upheaval, we engaged in discussions with our financing counterparties and entered into the Forbearance Agreement. During the Forbearance Period, we did not have 96 -------------------------------------------------------------------------------- any obligation to make any margin payments as it related to the Participating Counterparties. As described above, onJune 10 , we entered into a Reinstatement Agreement with the Participating Counterparties and the JPM Reinstatement Agreement which reinstates each Bilateral Agreement. As a result, we will be responsible for making any future margin payments with respect to any financing arrangements relating to these agreements.
As of
Cash Flows As ofMarch 31, 2020 , our cash, cash equivalents, and restricted cash totaled$133.7 million representing a net increase of$8.3 million from$125.4 million atDecember 31, 2019 . Cash provided by continuing operating activities of$7.4 million was attributable to net interest income less operating expenses. Cash provided by continuing investing activities of$1,976.3 million was attributable to sales of investments and principal repayments of investments less purchases of investments. Cash used in continuing financing activities of$(1,975.4) million was primarily attributable to repayments of financing arrangements and dividend payments offset by borrowings under financing arrangements.
Equity distribution agreement
OnMay 5, 2017 , we entered into an equity distribution agreement with each ofCredit Suisse Securities (USA) LLC andJMP Securities LLC (collectively, the "Sales Agents"), which we refer to as the "Equity Distribution Agreements," pursuant to which we may sell up to$100.0 million aggregate offering price of shares of our common stock from time to time through the Sales Agents, under the Securities Act of 1933. The Equity Distribution Agreements were amended onMay 2, 2018 in conjunction with the filing of our shelf registration statement registering up to$750.0 million of its securities, including capital stock (the "2018 Registration Statement"). For the three months endedMarch 31, 2020 , we did not sell any shares of common stock under the Equity Distribution Agreements. For the three months endedMarch 31, 2019 , we sold 503.7 thousand shares of common stock under the Equity Distribution Agreements for net proceeds of approximately$8.6 million . As ofMarch 31, 2020 , we have sold approximately 1.5 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately$26.6 million .
Common stock offering
OnFebruary 14, 2019 , we completed a public offering of 3,000,000 shares of our common stock and subsequently issued an additional 450,000 shares pursuant to the underwriters' exercise of their over-allotment option at a price of$16.70 per share. Net proceeds to us from the offering were approximately$57.4 million , after deducting estimated offering expenses.
Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock issuance
OnSeptember 17, 2019 , we completed a public offering of 4,000,000 shares of 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") and subsequently issued 600,000 shares of Series C Preferred Stock pursuant to the underwriters' exercise of their over-allotment option with a liquidation preference of$25.00 per share. We received total gross proceeds of$115.0 million and net proceeds of approximately$111.2 million , net of underwriting discounts, commissions and expenses. The Series C Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption. Under certain circumstances upon a change of control, the Series C Preferred Stock is convertible to shares of our common stock. Holders of Series C Preferred Stock have no voting rights, except under limited conditions, and holders are entitled to receive cumulative cash dividends before holders of our common stock are entitled to receive any dividends. The initial dividend rate for the Series C Preferred Stock, from and including the date of original issue to, but not including,September 17, 2024 , is equal to 8.000% per annum of the$25.00 per share liquidation preference. On and afterSeptember 17, 2024 , dividends on the Series C Preferred Stock will accumulate at a percentage of the$25.00 liquidation preference equal to an annual floating rate of the three-month LIBOR plus a spread of 6.476% per annum. Shares of our Series C Preferred Stock are redeemable at$25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at our option commencing onSeptember 17, 2024 , or earlier under certain circumstances intended to preserve our qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 17th day of each March, June, September and December. 97 --------------------------------------------------------------------------------
Contractual obligations
Management agreement
OnJune 29, 2011 , we entered into an agreement with our Manager pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders' Equity, per annum. For purposes of calculating the management fee, "Stockholders' Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders' equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders' Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders' equity shown on our financial statements. For the three months endedMarch 31, 2020 andMarch 31, 2019 , we incurred management fees of approximately$2.1 million and$2.3 million , respectively. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel,who , notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses which are incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager. Of the$2.3 million and$3.8 million of Other operating expenses for the three months endedMarch 31, 2020 andMarch 31, 2019 , respectively, we have accrued$2.0 million in both periods, representing a reimbursement of expenses. OnApril 6, 2020 , we executed an amendment to the management agreement pursuant to which the Manager agreed to defer our payment of the management fee and reimbursement of expenses as detailed above throughSeptember 30, 2020 , or such other time as we and the Manager agree.
Subordinated debt
OnApril 10, 2020 , in connection with the initial Forbearance Agreement, we issued a secured promissory note (the "Note") to the Manager evidencing a$10 million loan made by the Manager to us. Additionally, onApril 27, 2020 , in connection with the second forbearance agreement, we entered into an amendment to the Note to reflect an additional$10 million loan by the Manager to us. The$10 million loan made onApril 10, 2020 is payable onMarch 31, 2021 , and the$10 million loan made onApril 27, 2020 is payable onJuly 27, 2020 . The unpaid balance of the Note accrues interest at a rate of 6.0% per annum. Interest on the Note is payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note.
The Manager has agreed to subordinate our obligations with respect to the Note
and liens held by the Manager for the security of the performance of our
obligations under the Note to our obligations to the Participating
Counterparties and to the secured promissory note payable to Royal Bank of
Canada, which we repaid in full on
Share-based compensation
Pursuant to the Manager Equity Incentive Plan and the Equity Incentive Plan, we can award up to 277,500 shares of common stock in the form of restricted stock, stock options, restricted stock units or other types of awards to our directors, officers, advisors, consultants and other personnel and to our Manager. As ofMarch 31, 2020 , 11,456 shares of common stock were available to be awarded under the equity incentive plans. Awards under the equity incentive plans are forfeitable until they become vested. An award will become vested only if the vesting conditions set forth in the applicable award agreement (as determined by the compensation committee) are satisfied. The vesting conditions may include performance of services for a specified period, achievement of performance goals, or a combination of both. The compensation committee also has the authority to provide for accelerated vesting of an award upon the occurrence of certain events in its discretion. 98 -------------------------------------------------------------------------------- As ofMarch 31, 2020 , we have granted an aggregate of 105,794 and 40,250 shares of restricted common stock to our independent directors and Manager, respectively, and 120,000 restricted stock units to our Manager under our equity incentive plans. As ofMarch 31, 2020 , all the shares of restricted common stock granted to our Manager and independent directors have vested and 99,991 restricted stock units granted to our Manager have vested. The 20,009 restricted stock units that have not vested as ofMarch 31, 2020 were granted to the Manager onJuly 1, 2017 , and represent the right to receive an equivalent number of shares of our common stock when the units vest onJuly 1, 2020 . The units do not entitle the recipient the rights of a holder of our common stock, such as dividend and voting rights, until shares are issued in settlement of the vested units. The vesting of such units is subject to the continuation of the management agreement. If the management agreement terminates, all unvested units then held by the Manager or the Manager's transferee shall be immediately cancelled and forfeited without consideration.
Unfunded commitments
See our "Off-balance sheet arrangements" section below and Note 13 of the "Notes to Consolidated Financial Statements" for a details on our unfunded commitments as ofMarch 31, 2020 .
MATT Financing Arrangement Restructuring
OnApril 3, 2020 , we, alongside private funds under the management ofAngelo Gordon , restructured our financing arrangements in MATT ("Restructured Financing Arrangement"). The Restructured Financing Arrangement requires all principal and interest on the underlying assets in MATT be used to paydown principal and interest on the outstanding financing arrangements. As of theApril 3, 2020 , the financing arrangement within MATT will be non-recourse to us. The Restructured Financing Arrangement provides for a termination date ofOctober 1, 2021 . At the earlier of the termination date or the securitization or sale by us of the remaining assets subject to the Restructured Financing Arrangement, the financing counterparty will be entitled to 35% of the remaining equity in the assets. We have an approximate 44.6% interest in MATH.
Other
As ofMarch 31, 2020 andDecember 31, 2019 , we are obligated to pay accrued interest on our financing arrangements in the amount of$1.5 million and$10.8 million , respectively, inclusive of accrued interest accounted for through investments in debt and equity of affiliates, and exclusive of accrued interest on any financing utilized through AG Arc. The change in accrued interest on our financing arrangements was due primarily to the repayment of financing arrangements in conjunction with the sales of various assets by us and the seizures of various assets by financing counterparties in Q1 2020.
Off-balance sheet arrangements
We may enter into long TBA positions to facilitate the future purchase or sale of Agency RMBS. We may also enter into short TBA positions to hedge Agency RMBS. We record TBA purchases/shorts and sales/covers on the trade date and present the amount net of the corresponding payable or receivable until the settlement date of the transaction. As ofMarch 31, 2020 , we had a net long TBA position with a net payable amount of$0.4 million . We recorded$2.7 million of derivative assets and$2.3 million of derivative liabilities, in the "Other assets" and "Other liabilities" line items, respectively, on our consolidated balance sheets. Our investments in debt and equity of affiliates are primarily comprised of real estate securities, Excess MSRs, loans, our interest in AG Arc, and certain derivatives. Investments in debt and equity of affiliates are accounted for using the equity method of accounting. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. The below table details our investments in debt and equity of affiliates as ofMarch 31, 2020 andDecember 31, 2019 (in thousands): 99 --------------------------------------------------------------------------------
March 31, 2020 December 31, 2019
Assets (1) Liabilities Equity Assets (1) Liabilities Equity
Agency Excess MSR $ 535 $ - $ 535 $ 555 $ - $ 555
Total Agency RMBS 535 - 535 555 - 555
Re/Non-Performing Loans 76,532 (59,054) 17,478 87,216 (56,811) 30,405
Non-QM Loans 231,915 (202,039) 29,876 254,276 (200,257) 54,019
Land Related Financing 22,655 - 22,655 16,979 - 16,979
Total Residential Investments 331,102 (261,093) 70,009 358,471 (257,068) 101,403
Freddie Mac K-Series 9,131 - 9,131 12,237 - 12,237
CMBS Interest Only 1,700 - 1,700 1,863 - 1,863
Total Commercial 10,831 - 10,831 14,100 - 14,100
Total Credit Investments 341,933 (261,093) 80,840 372,571 (257,068) 115,503
Total Investments excluding AG Arc 342,468 (261,093) 81,375 373,126 (257,068) 116,058
AG Arc, at fair value 18,519 - 18,519 28,546 - 28,546
Cash and Other
assets/(liabilities) (2) 20,642 (1,324) 19,318 12,953 (1,246) 11,707
Investments in debt and equity of
affiliates $ 381,629 $ (262,417) (1)Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (2)Includes financing arrangements on real estate owned as ofMarch 31, 2020 andDecember 31, 2019 of$(0.3) million for both periods. The table below details our additional commitments as ofMarch 31, 2020 (in thousands): Remaining Commitment Type Date of Commitment Total Commitment Funded Commitment Commitment MATH (a)(b) March 29, 2018$ 46,820 $ 44,590$ 2,230 Commercial loan G (c)(d) July 26, 2018 84,515 52,089 32,426 Commercial loan I (c) January 23, 2019 20,000 14,646 5,354 Commercial loan J (c)(e) February 11, 2019 30,000 5,220 24,780 Commercial loan K (c) February 22, 2019 20,000 11,172 8,828 LOTS (a) Various 44,995 22,655 22,340 Total$ 246,330 $ 150,372 $ 95,958 (a)Refer to "Contractual obligations" section above for more information regarding MATH and LOTS. (b)Subsequent to quarter end, the financing arrangement in this entity was restructured and the commitment was removed. Refer to "Contractual obligations" section above for further details. (c)We entered into commitments on commercial loans relating to construction projects. See Note 4 to the "Notes to the Consolidated Financial Statements (unaudited)" for further details. (d)We expect to receive financing of approximately$21.1 million on our remaining commitment, which would cause our remaining equity commitment to be approximately$11.3 million . This financing is not committed and actual financing could vary significantly from our expectations. (e)We expect to receive financing of approximately$16.1 million on our remaining commitment, which would cause our remaining equity commitment to be approximately$8.7 million . Of the expected financing,$8.1 million is committed by the financing counterparty. Subsequent to quarter end,$6.5 million was committed by the financing counterparty. Actual financing could vary significantly from our expectations. 100 --------------------------------------------------------------------------------
Certain related person transactions
Our Board of Directors has adopted a policy regarding the approval of any "related person transaction," which is any transaction or series of transactions in which (i) we or any of our subsidiaries is or are to be a participant, (ii) the amount involved exceeds$120,000 , and (iii) a "related person" (as defined underSEC rules) has a direct or indirect material interest. Under the policy, a related person would need to promptly disclose to our Secretary or Assistant Secretary any related person transaction and all material facts about the transaction. Our Secretary or Assistant Secretary, in consultation with outside counsel, to the extent appropriate, would then assess and promptly communicate that information to the audit committee of our Board of Directors. Based on its consideration of all of the relevant facts and circumstances, the audit committee will review, approve or ratify such transactions as appropriate. The audit committee will not approve or ratify a related person transaction unless it shall have determined that such transaction is in, or is not inconsistent with, our best interests and does not create a conflict of interest. If we become aware of an existing related person transaction that has not been approved under this policy, the transaction will be referred to the audit committee which will evaluate all options available, including ratification, revision or termination of such transaction. Our policy requires any directorwho may be interested in a related person transaction to recuse himself or herself from any consideration of such related person transaction.
Grants of restricted common stock
See "Share-based compensation" section above for detail on our grants of restricted common stock.
In connection with our investments in Re/Non-Performing Loans and non-QM loans, we may engage asset managers to provide advisory, consultation, asset management and other services. Beginning inNovember 2015 , we also engagedRed Creek Asset Management LLC ("Asset Manager"), an affiliate of the Manager and direct subsidiary ofAngelo Gordon , as the asset manager for certain of our Re/Non-Performing Loans. Beginning inSeptember 2019 , we engaged the Asset Manager as the asset manager for our non-QM loans. We pay the Asset Manager separate arm's-length asset management fees as assessed and confirmed periodically by a third party valuation firm for our Re/Non-Performing Loans and non-QM loans. In the third quarter of 2019, the third party assessment of asset management fees resulted in our updating the fee amount for our Re/Non-Performing Loans. We also utilized the third party valuation firm to establish the fee level for non-QM loans in the third quarter of 2019. For the three months endedMarch 31, 2020 , the fees paid by us to the Asset Manager totaled$0.3 million and$0.1 million , respectively. In connection with the Forbearance Agreement, we deferred the payment of all fees payable to the Asset Manager as it is an affiliate of the Manager. For the three months endedMarch 31, 2020 , we deferred$0.1 million of fees owed to the Asset Manager and plan to continue to defer fees throughSeptember 30, 2020 or such other time as we and the Manager agree. Arc Home OnDecember 9, 2015 , we, alongside private funds under the management ofAngelo Gordon , through AG Arc, formed Arc Home, aDelaware limited liability company. Arc Home originates conforming, Government, Jumbo, Non-QM and other non-conforming residential mortgage loans, retains the mortgage servicing rights associated with the loans it originates, and purchases additional mortgage servicing rights from third-party sellers. We have an approximate 44.6% interest in AG Arc. Our investment in Arc Home, which is conducted through AG Arc, one of our indirect subsidiaries, is reflected on the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. See "Off-balance sheet arrangements" section above for the fair value as Arc Home ofMarch 31, 2020 andDecember 31, 2019 . Arc Home may sell loans to us or to affiliates of our Manager. Arc Home may also enter into agreements with us, third parties, or affiliates of our Manager to sell Excess MSRs on the mortgage loans that it either purchases from third parties or originates. We, directly or through our subsidiaries, have entered into agreements with Arc Home to purchase rights to receive the excess servicing spread related to certain of its MSRs and as ofMarch 31, 2020 andDecember 31, 2019 , these Excess MSRs had fair values of approximately$14.5 million and$18.2 million , respectively. In connection with our investments in Excess MSRs purchased through Arc Home, we pay an administrative fee to Arc Home. For the three months endedMarch 31, 2020 andMarch 31, 2019 , the administrative fees paid by us to Arc Home totaled$0.1 million for both periods. 101 --------------------------------------------------------------------------------
See our "Off-balance sheet arrangements" and "MATT Financing Arrangement Restructuring" sections above.
LOT SP I LLC and LOT SP II LLC
See our "Off-balance sheet arrangements" section above.
Management agreement
OnJune 29, 2011 we entered into a management agreement with our Manager, which governs the relationship between us and our Manager and describes the services to be provided by our Manager and its compensation for those services. The terms of our management agreement, including the fees payable by us toAngelo Gordon , were not negotiated at arm's length, and its terms may not be as favorable to us as if they had been negotiated with an unaffiliated party. Our Manager, pursuant to the delegation agreement dated as ofJune 29, 2011 , has delegated toAngelo Gordon the overall responsibility of its day-to-day duties and obligations arising under our management agreement. For further detail on the Management Agreement, see the "Contractual obligations-Management agreement" section of this Item 2. Subordinated debt
See our "Contractual obligations-Subordinated debt" section above.
Other transactions with affiliates
Our Board of Directors has adopted a policy regarding the approval of any "affiliated transaction," which is any transaction or series of transactions in whichAngelo Gordon arranges for the purchase and sale of a security or other investment between or among us, on the one hand, and an entity or entities underAngelo Gordon 's management, on the other hand (an "Affiliated Transaction"). In order for us to enter into an Affiliated Transaction, the Affiliated Transaction must be approved by ourChief Risk Officer and the Chief Compliance Officer ofAngelo Gordon . For most instruments, if market bids are available, the trading desk will request external bids from the market while simultaneously submitting an internal bid to Compliance and/or Risk. If the highest bid is an external bid, the security or other instrument will be sold to the external bidder and no affilaited transaction will take place. If the highest bid is the internal bid, the price will be the midpoint between the internal bid and the highest external bid. If market bids are not available or prove to be impracticable inAngelo Gordon 's reasonable judgment, appropriate pricing will generally be based on a valuation analysis prepared by an independent third party. Our Affiliated Transactions are reviewed by our Audit Committee on a quarterly basis to confirm compliance with the policy. InOctober 2018 , in accordance with our Affiliated Transactions Policy, we acquired certain real estate securities and loans from an affiliate of the Manager (the "October 2018 Selling Affiliate"). As of the date of the trade, the real estate securities and loans acquired from theOctober 2018 Selling Affiliate had a total fair value of$0.5 million . As procuring market bids for the real estate securities and loans was determined to be impracticable in the Manager's reasonable judgment, appropriate pricing was based on a valuation prepared by independent third-party pricing vendors. The third-party pricing vendors allowed us to confirm third-party market pricing and best execution. InMarch 2019 , in accordance with our Affiliated Transactions Policy, we executed one trade whereby we acquired a real estate security from an affiliate of the Manager (the "March 2019 Selling Affiliate"). As of the date of the trade, the security acquired from theMarch 2019 Selling Affiliate had a total fair value of$0.9 million . TheMarch 2019 Selling Affiliate sold the real estate security through a BWIC. Prior to the submission of the BWIC by theMarch 2019 Selling Affiliate, we submitted our bid for the real estate security to theMarch 2019 Selling Affiliate. The pre-submission of our bid allowed us to confirm third-party market pricing and best execution. InJune 2019 , we, alongside private funds under the management ofAngelo Gordon , participated through our unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of$408.0 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches, which had a fair value of$42.9 million as ofJune 30, 2019 . We have a 44.6% interest in the retained subordinate tranches. InJuly 2019 , in accordance with our Affiliated Transactions Policy, we acquired certain real estate securities from an affiliate of the Manager (the "July 2019 Selling Affiliate"). As of the date of the trade, the real estate securities acquired from theJuly 2019 Selling Affiliate had a total fair value of$2.0 million . As procuring market bids for the real estate securities was 102 -------------------------------------------------------------------------------- determined to be impracticable in the Manager's reasonable judgment, appropriate pricing was based on a valuation prepared by independent third-party pricing vendors. The third-party pricing vendors allowed us to confirm third-party market pricing and best execution. InSeptember 2019 , we, alongside private funds managed byAngelo Gordon , participated through our unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of$415.1 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches, which had a fair value of$28.7 million as ofSeptember 30, 2019 . We have a 44.6% interest in the retained subordinate tranches. InOctober 2019 , in accordance with our Affiliated Transactions Policy, we acquired certain real estate securities from an affiliate of the Manager (the "October 2019 Selling Affiliate"). As of the date of the trade, the real estate securities acquired from theOctober 2019 Selling Affiliate had a total fair value of$2.2 million . TheOctober 2019 Selling Affiliate sold the real estate securities through a BWIC. Prior to the submission of the BWIC by theOctober 2019 Selling Affiliate, we submitted its bid for the real estate securities to theOctober 2019 Selling Affiliate. The pre-submission of our bid allowed us to confirm third-party market pricing and best execution. InNovember 2019 , we, alongside private funds managed byAngelo Gordon , participated through our unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of$322.1 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches, which had a fair value of$21.4 million as ofDecember 31, 2019 . We have a 44.6% interest in the retained subordinate tranches. InFebruary 2020 , we, alongside private funds managed byAngelo Gordon , participated through our unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of$348.2 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches, which had a fair value of$26.6 million as ofMarch 31, 2020 . We have a 44.6% interest in the retained subordinate tranches.
Critical accounting policies
We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as ofMarch 31, 2020 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. Moreover, the uncertainty over the ultimate impact that that the COVID-19 pandemic will have on the global economy generally, and on our business in particular, makes any estimates and assumptions inherently less certain than they would be absent the current and potential impacts of the COVID-19 pandemic. Accounting policies and estimates related to specific components of our consolidated financial statements are disclosed in the notes to our consolidated financial statements. A discussion of the critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Note 2 to the "Notes to Consolidated Financial Statements (unaudited)." Some of the critical accounting policies described therein include but are not limited to: Valuation of financial instruments, Accounting for real estate securities, Accounting for residential and commercial mortgage loans, Interest income recognition and Financing arrangements. Additionally, we rely upon the independent pricing of our assets at each quarter end to arrive at what we believe to be reasonable estimates of fair value, whenever available. For more information on our fair value measurements, see Note 6 to the "Notes to Consolidated Financial Statements (unaudited). 103 --------------------------------------------------------------------------------
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Compliance with Investment Company Act and REIT Tests
We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes, of the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive ofU.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things,U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this Report. Accordingly, in order to maintain our exempt status, we monitor our subsidiaries' compliance with Section 3(c)(5)(C) of the Investment Company Act, which exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The staff of theSecurities and Exchange Commission , or theSEC , generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). As ofDecember 31, 2019 , we determined that our subsidiaries maintained compliance with both the 55% Test and the 80% Test requirements. Due to the recent market conditions as a result of the COVID-19 pandemic and the resultant issues related to our financing arrangements, we sold assets to meet margin calls on our financing arrangements, and some of our subsidiaries currently fail to meet the 55% Test, and as a result must rely on Section 3(c)(7) to avoid registration as investment companies. As a result, we no longer maintain our exempt status. As we cannot rely on our historical exemption from regulation as an investment company, we now must rely upon Rule 3a-2, which provides a safe harbor exemption, not to exceed one year, for companies that have a bona fide intent to be engaged in an excepted activity but that temporarily fail to meet the requirements for another exemption from registration as an investment company. As required by the rule, after we learned that we would become out of compliance, our board of directors promptly adopted a resolution declaring our bona fide intent to be engaged in excepted activities and we are currently working to restore our assets to compliance. We calculate that at least 75% of our assets were real estate assets, cash and cash items and government securities for the year endedDecember 31, 2019 . We also calculate that a sufficient portion of our revenue qualifies for the 75% gross income test and for the 95% gross income test rules for the year endedDecember 31, 2019 . Overall, we believe that we met the REIT income and asset tests. We also believe that we met all other REIT requirements, including the ownership of our stock and the distribution of our taxable income. Therefore, for the year endedDecember 31, 2019 , we believe that we qualified as a REIT under the Code. 104
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