We may acquire B-Notes, mortgage loans typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. Further, B-Notes typically are secured by a single property and reflect the risks associated with significant concentration.
Significant losses related to our commercial loans held for investment would result in operating losses for us and may limit our ability to pay dividends to our stockholders. As of December 31, 2022, we do not hold any commercial loans held-for-investment.
If we foreclose on an asset, we may come to own and operate the property securing the loan, which would expose us to the risks inherent in that activity.
When we foreclose on an asset, we may take title to the property securing that asset, and if we do not or cannot sell the property, we would then come to own and operate it as “real estate owned.” Owning and operating real property involves risks that are different (and in many ways more significant) than the risks faced in owning an asset secured by that property. In addition, we may end up owning a property that we would not otherwise have decided to acquire directly at the price of our original investment or at all. We may not manage these properties as well as they might be managed by another owner, and our returns to investors could suffer. If we foreclose on and come to own property, our financial performance and returns to stockholders could suffer.
Liability relating to environmental matters may impact the value of properties that we may acquire or foreclose on.on and may impact the owner's ability to make payments on loans related to the property.
If we acquire or foreclose on properties with respect to which we have extended mortgage loans, we may be subject to environmental liabilities arising from such foreclosed properties. Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.
The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow usinguse real estate as collateral.collateral when borrowing. To the extent that an owner of a property underlying one of our debt investments becomes liable for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us and our ability to make distributionspay dividends to our stockholders. If we acquire any properties, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributionspay dividends to our stockholders.
We use leverage in executing our business strategy, which may adversely affect the return on our assets, and may reduce cash available for distribution to our stockholders as well asand/or increase losses when economic conditions are unfavorable.
We use leverage to finance our assets through borrowings from repurchase agreements and other secured and unsecured forms of borrowing. The amount of leverage we may deploy for particular assets will depend upon our Manager’s assessment of the credit and other risks of those assets and is limited by our debt covenants.
Our access to financing depends upon a number of factors over which we have little or no control, including:
Any weakness or volatility in the financial markets, the residential and commercial mortgage markets or the economy generally could adversely affect the factors listed above. In addition, such weakness or volatility could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. Some of our target assets may be more difficult to finance than others and the market for such financing can change based on many factors over which we have little or no control.
We depend on repurchase agreement financing to acquire our target assets, and our inability to access this funding on acceptable terms could have a material adverse effect on our results of operations, financial condition and business.
When we engage in repurchase transactions, we generally sell securities to lenders (repurchase agreement counterparties) and receive cash from these lenders. The lenders are obligated to resell the same or similar securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us we may incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). As of December 31, 2017, one2022, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $131.5$40.2 million, or 5% of our stockholders’ equity. Refer to Note 7 - “Borrowings” of our consolidated financial statements included in Part IV, Item 15 of this Report, for additional detail. We may incur a loss on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Further, if we default on one of our obligations under a repurchase transaction, the lender can terminate the transaction and ceaserefrain from entering into any other repurchase transactions with us. Some of our repurchase agreements contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.
The amount of financing we receive, or may in the future receive, under our repurchase agreements secured loans and other financing arrangements, is directly related to the lenders’ valuation of the assets that secure the outstanding borrowings. Lenders under our repurchase agreements and secured loans typically have the absolute right to reevaluate the market value of the assets that secure outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call or increase collateral requirements. A margin call or increased collateral requirements, even if we believe that the decrease in value is temporary including as a result of market volatility. Either decision would require us to transfer additional assets to such lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Any such margin call or increased collateral requirements could have a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributionspay dividends to our stockholders, and could cause the value of our capital stock to decline. We may be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity, which could cause us to incur losses. Moreover, to the extent we are forced to sell assets at such time, given market conditions, we may be selling at the same time as others facing similar pressures, which could exacerbate a difficult market environment, and which could result in our incurring significantly greater losses on our sale of such assets. In an extreme case of market duress, a market may not even
be present for certain of our assets at any price. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.
Further, financial institutions providing the repurchase facilities may require us to maintain a certain amount of cash uninvested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. In addition, the FHLBI could increase our collateral requirements. As a result, we may not be able to leverage our assets as fully as desired, which could reduce our return on stockholders' equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.
We are subject to various covenants contained in our existing financing arrangements and may become subject to additional covenants in connection with future financings. Many of our master repurchase agreements as well as our FHLBI financing arrangements and swap agreements, require us to maintain compliance with various financial covenants, including a minimum tangible net worth, specified financial ratios such(such as total debt to total assetsassets) and financial information delivery obligations. These covenants may limit our flexibility to pursue certain investments or incur additional debt. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements, and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the posting of additional collateral and/or enforce their interests against existing collateral. We may also be subject to cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default. Further, this could also make it difficult for us to satisfy the distribution requirements necessary to maintain our status as a REIT for U.S. federal income tax purposes.
Our use or future use of repurchase agreements to finance our target assets may give our lenders greater rights in the event thatif either we or a lender files for bankruptcy.
Our borrowings or future borrowings under repurchase agreements for our target assets may qualify for special treatment under the U.S. Bankruptcy Code, givingCode. This would give our lenders the ability to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to take possession of and liquidate the assets that we have pledged under their repurchase agreements, without delay, in the event thatif we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the U.S. Bankruptcy Code may make it difficult for us to recover our pledged assets in the event thatif a lender party to such agreement files for bankruptcy.
We enter into hedging transactions that could expose us to contingent liabilities in the future.
Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.
We pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates on our liabilities and currency exchange rates. Our hedging activity varies in scope based on the level and volatility of interest rates, currency exchange rates, the type of assets held and other changing market conditions. Hedging may fail to protect or could adversely affect usour earnings because, among other things:
In addition, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable
international requirements. Any actions taken by regulators could constrain our investment strategy and could increase our costs, either of which could materially and adversely impact our results of operations.
We may enter into derivative contracts that expose us to contingent liabilities, and those contingent liabilities may not appear on our balance sheet. We may invest in synthetic securities, credit default swaps, and other credit derivatives, which expose us to additional risks.
We may invest in synthetic securities, credit default swaps, and other credit derivatives that reference other real estate securities or indices. These investments may present risks in excess of those resulting from the referenced security or index. These investments are typically a contractual relationship with counterparties and not an acquisition of a referenced security or other asset. In these types of investments, we have no right to directly enforce compliance with the terms of the referenced security or other assets and we have no voting or other consensual rights of ownership with respect to the referenced security or other assets. In the event of insolvency of a counterparty, we will be treated as a general creditor of the counterparty and will have no claim of title with respect to the referenced security.
The markets for these types of investments may not be liquid. Many of these investments incorporate “pay as you go” credit events. For example, the terms of credit default swaps are still evolving and may change significantly, which could make it more difficult to assign such an instrument or determine the “loss” pursuant tounder the underlying agreement. In a credit default swap, the party wishing to “buy” protection will pay a premium. When interest rates, spreads or the prevailing credit premiums on credit default swaps change, the amount of the termination payment due could change by a substantial amount. In an illiquid market, the determination of this change could be difficult to ascertain and, as a result, we may not achieve the desired benefit of entering into this contractual relationship.
We conduct our operations so that neither we, nor our operating partnership, IAS Operating Partnership LP (the “Operating Partnership”), nor the subsidiaries of the Operating Partnership are required to register as an investment company under the 1940 Act.
Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. We believe neither we nor our Operating Partnership will be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because neither we nor our Operating Partnership will engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities.Act. Rather, through our Operating Partnership’s wholly-ownedwholly owned or majority-owned subsidiaries, we and our Operating Partnership will be primarily engaged in the non-investment company businesses of these subsidiaries, namely the business of purchasing or otherwise acquiring real property, mortgages and other interests in real estate.
Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that 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 the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
We are a holding company that conducts business through the Operating Partnership and the Operating Partnership’s wholly-ownedwholly owned or majority-owned subsidiaries. Both we and the Operating Partnership conduct our operations so that we comply with the 40% test. Accordingly, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a value in excess of 40% of the value of the Operating Partnership's total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Compliance with the 40% test limits the types of businesses in which we are permitted to engage through our subsidiaries. Furthermore, certain of the Operating Partnership’s current subsidiaries and future subsidiaries that we may form in the future intend to rely upon an exception from the definition of investment company under Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exception generally requires that at least 55% of a subsidiary’s portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). In analyzing a subsidiary's compliance with Section 3(c)(5)(C) of the 1940 Act, we classify investments based in large measure on SEC staff guidance, including no-action letters, and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate-related asset.
We may in the future organize one or more subsidiaries that seek to rely on other exceptions from being deemed an investment company under the 1940 Act. Any such subsidiary would need to be structured to comply with any guidance that may be issued by the SEC staff.staff, including no-action letters, and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate-related asset.
There can be no assurance that the laws and regulations governing the 1940 Act status of REITs will not change in a manner that adversely affects our operations or inhibits our ability to pursue our strategies. Any issuance of more specific or different guidance relating to the relevant exemptions and exceptions from the definition of an investment company under the 1940 Act could similarly affect or inhibit our operations. If we, the Operating Partnership or its subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required to (a) change the investments that we hold or the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company. Any of these events could cause us to incur losses and negatively affect the value of our capital stock, the sustainability of our business model, and our ability to make distributions,pay dividends, which could have an adverse effect on our business and the market price for our shares of capital stock. In addition, if it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties or injunctive relief imposed by the SEC.
The U.S. government, Federal Reserve, U.S. Treasury, SEC and other US and foreign governmental and regulatory bodies have taken a number of economic actions and regulatory initiatives from time-to-time designed to stabilize and stimulate the economy and the financial markets, and additional actions and initiatives may occur in the future.
More broadly, uncertainties regarding geopolitical developments can produce volatility in global financial markets. In this regard, the United Kingdom (“U.K.”) electorate voted in June 2016 to exit the European Union (“Brexit”), which resulted in increased financial market volatility. Although negotiations between the U.K. and European Union regarding Brexit began in June 2017, it is still uncertain what terms may be agreed and what impact those terms may have on global markets. This may impact foreign exchange rates and create regulatory changes, which could have an adverse effect on our U.K. commercial real estate loan investment.
There can be no assurance that, in the long term, actions that governments and regulatory bodies or central banks have taken in the past or may take in the future will improve the efficiency and stability of mortgage or financial markets. To the extent the financial markets do not respond favorably to any of these actions or such actions do not function as intended, our business may be harmed. In addition, because the programs are designed, in part, to improve the markets for certain of our target assets, the establishment of these programs may result in increased competition for attractive opportunities in our target assets or, in the case of government-backed refinancing and modification programs, may have the effect of reducing the revenues associated with certain of our target assets. We cannot predict whether or when additional actions or initiatives to stabilize and stimulate the economy and the financial markets may occur, and such actions could have an adverse effect on our business, results of operations and financial condition.
We may change any of our strategies, policies or procedures without stockholder consent.
We may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in us making investments in asset categories different from those described in this Report. These changes could adversely affect our business, financial condition, results of operations, the market price of our capital stock and our ability to make distributions to our stockholders.
We are highly dependent on information systems and systems failures or cyber-attacks could significantly disrupt our business, which may, in turn, negatively affect the market price of our capital stock and our ability to pay dividends.
Our business is highly dependent on third parties’ information systems, including those of our Manager and other service providers. Although our Manager has implemented, and other service providers may implement, various measures to manage risks relating to these types of systems, such measures could prove to be inadequate and, if compromised, the systems could become inoperable for extended periods of time, cease to function properly or fail to adequately secure confidential information. We do not control the cyber security plans and systems put in place by our Manager and third-party service providers, and such service providers may have limited indemnification obligations to us or our Manager. Any failure or interruption of such systems or cyber-attacks or security breaches could cause delays or other problems in our securities trading activities and financial, accounting and other data processing activities, which could have a material adverse effect on our operating results and negatively affect the market price of our capital stock and our ability to pay dividends to our stockholders. In addition, we also face the risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate our securities transactions.
Computer malware, viruses and computer hacking and phishing attacks have become more prevalent and severe in our industry and may occur on our Manager’s and other service providers’ systems in the future. Cyber-attacks and other security threats could originate from a wide variety of sources, including cyber criminals, nation state hackers, hacktivists and other outside parties. There has been an increase in the frequency and sophistication of the cyber and security threats our Manager faces, with attacks ranging from those common to businesses generally to those that are more advanced and persistent, which may target our Manager due to the confidential and sensitive information it holds about its investors, funds, and potential investments. It is difficult to determine what, if any, negative
impact may directly result from any specific interruption or cyber-attacks or security breaches of such networks or systems or any failure to maintain the performance, reliability and security of our technical infrastructure. As a result, any computer malware, viruses and computer hacking and phishing attacks may disrupt our normal business operations and expose us to reputational damage and lost business, revenues and profits. Any insurance we maintain against the risk of this type of loss may not be sufficient to cover all actual losses or may not apply to circumstances relating to any particular breach.breach or other cyber event.
Our Manager utilizes quantitative models to support investment decisions and investment processes, including those related to our portfolio management and risk analysis, which may contain errors.
Our Manager utilizes quantitative models to support investment decisions and investment processes, including those related to our portfolio management and risk analysis. Any errors in the underlying models or model assumptions could have unanticipated and adverse consequences on our business and reputation.
We may repurchase shares of our common stock or other securitiesand preferred stock from time to time. Share repurchases may negatively impact our compliance with covenants in our financing agreements and regulatory requirements (including maintaining exclusions from the requirements of the 1940 Act and qualification as a REIT). Any compliance failures associated with share repurchases could have a material negative impact on our business, financial condition and results of operations. Share repurchases also may negatively impact our ability to invest in our target assets in the future.
As of December 31, 2017, 18,239,0822022, 1,816,398 shares of common stock were available under our Board authorizedBoard-authorized share repurchase program. In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of our Series B Preferred Stock and 3,683,530 shares of our Series C Preferred Stock. As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program.
We may engage in share repurchases from time-to-time through open market purchases, including block purchases or privately negotiated transactions, or pursuant tounder any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Exchange Act. Certain of our financing agreements have financial covenants, including covenants related to maintaining a certain level of stockholdersstockholders' equity, that may be impacted by our share repurchases. In addition, we generally fund share repurchases with interest income or income from the sale of our assets. The sale of assets to fund share repurchases could impact the allocation of our portfolio for purposes of maintaining an exclusion from the requirements of the 1940 Act and could impact our ability to comply with income and asset tests required to qualify as a REIT. The failure to comply with covenants in our financing agreements, to maintain our exemption from the 1940 Act or to qualify as a REIT could have a material negative impact on our business, financial condition and results of operations. In addition, our decision to repurchase shares of our common stock or other securities and reduce our stockholders' equity could negatively impactadversely affect our competitive position with peer mortgage REIT companies and other competitors and could negatively impact our ability in the future to invest in assets that have a greater potential return than the repurchase of our common stock.
Our independent registered public accounting firm has advised us that it identified an issue related to an independence requirement contained in the Securities Exchange Act of 1934 regulations regarding auditor independence.
In May 2016, PricewaterhouseCoopers LLP (“PwC”) advised us that it had identified an issue related to its independence under Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”) with respect to certain of PwC’s lenders who own certain Invesco registered funds managed by our Manager or certain other investment adviser affiliates of Invesco Ltd., our Manager's parent company. The Company and such funds are required to have their financial statements audited by a public accounting firm that qualifies as independent under various SEC rules. As discussed below, the Staff of the Securities and Exchange Commission (the “SEC Staff”) has issued a “no-action” letter to another mutual fund complex under substantially similar circumstances and subsequently issued a letter extending the relief provided by such letter indefinitely.
The Loan Rule prohibits accounting firms, such as PwC, from having certain financial relationships with their audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm is not independent if it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” For purposes of the Loan Rule, audit clients include the Company, all of the registered investment companies advised by affiliates of Invesco Ltd., as well as Invesco Ltd. and its other subsidiaries (collectively, the “Invesco Fund Complex”) for which PwC also serves as independent auditor. PwC informed us it has relationships with lenders who hold, as record owner, more than ten percent of the shares of certain funds within the Invesco Fund Complex. These relationships call into question PwC’s independence under the Loan Rule with respect to those funds, as well as the Company and all other funds in the Invesco Fund Complex.
In June 2016, the SEC Staff issued a “no-action” letter to another mutual fund complex (see Fidelity Management & Research Company et al., No-Action Letter) related to the audit independence issue described above. In that letter, the SEC Staff confirmed that it would not recommend enforcement action against an audit client that relied on audit services performed by an audit firm that was not in compliance with the Loan Rule in certain specified circumstances. The circumstances described in the no-action letter are substantially similar to the circumstances that called into question PwC’s independence under the Loan Rule with respect to the Invesco Fund Complex, including the Company. We therefore believe that we can rely on the letter to continue to issue financial statements that are audited by PwC, and we intend to do so. In September 2017, the SEC Staff issued a letter extending the relief in the June 2016 no-action letter referenced above. The extension makes no changes to the circumstances in the original no-action letter and does not include a new expiration date, providing indefinite relief.
If in the future the independence of PwC is called into question under the Loan Rule by circumstances that are not addressed in the SEC Staff’s no-action letter we will need to take other action and incur additional costs in order for our filings with the SEC containing financial statements to be deemed compliant with applicable securities laws. Such action may include obtaining the review and audit of the financial statements filed by the Company by another independent registered public accounting firm. In addition, under such circumstances the Company’s eligibility to issue securities under its existing
registration statements on Form S-3 and Form S-8 may be impacted and certain financial reporting covenants with our counterparties may be impacted. A default under our financing agreements could have a material adverse effect on our business, results of operations, financial condition and stock price.
Risks Related to Accounting
The preparation of our financial statements involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.
Financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, determining the fair value of investment securities and interest income recognition and reserves for loan losses.recognition. These estimates, judgments and assumptions are inherently uncertain, and, if they prove to be wrong, we face the risk that charges to income will be required. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies”Policies and Estimates” in Part II of this Report for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our business, financial condition and results of operations.
Changes in the fair value of our interest rate swap agreementsderivatives may result in volatility in our U.S. GAAP earnings.
We enter into derivative transactions to reduce the impact that changes in interest rates will have on our net interest margin. Changes in the fair value of our interest rate swap agreementsderivatives are recorded in our consolidated statement of operations as "gain“gain (loss) on derivative instruments, net"net” and may result in volatility in our U.S. GAAP earnings. The total changes in fair value may exceed our consolidated net income in any period or for a full year. Volatility in our net income may adversely affect the price of our capital stock.
Our reported U.S. GAAP financial results differ from our REIT taxable income, that impactwhich impacts our dividend distribution requirements and, therefore,requirements. Therefore, our U.S. GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
Generally, the cumulative net income we report over the life of an asset will be the same for U.S. GAAP and tax purposes, although the timing of this income recognition over the life of the asset could be materially different. Differences exist in the accounting for U.S. GAAP net income and REIT taxable income, which can lead to significant variances in the amount and timing of when income and losses are recognized under these two measures. Due to these differences, our reported U.S. GAAP financial results could materially differ from our determination of REIT taxable income, which impacts our dividend distribution requirements. Therefore, our U.S. GAAP results may not be an accurate indicator of future REIT taxable income and dividend distributions. Capital gains and losses in a period may impact REIT taxable income and impact the dividend paid in future periods.
Risks Related to Our Relationship with Our Manager
We are dependent on our Manager and its key personnel for our success.
We have no separate facilities and are completely reliant on our Manager. We do not have any employees. Our executive officers are employees of our Manager or one of its affiliates. Our Manager has significant discretion as to the implementation of our investment and operating policies and strategies. Accordingly, we believe that our success depends to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the executive officers and key personnel of our Manager. The executive officers and key personnel of our Manager evaluate, negotiate, close and monitor our investments; therefore, our success depends on their continued service. The departure of any of the executive officers or key personnel of our Manager who provide management services to us could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our Manager’s professionals. The initial term of our management agreement with our Manager expired on July 1, 2011. The agreement automatically renews for successive one-year terms, and the management agreement is currently in a renewal term. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan. Moreover, our Manager is not obligated to dedicate certain of its personnel exclusively to us nor is it obligated to dedicate any specific portion of its time to our business.
We pay our Manager substantial management fees regardless of the performance of our portfolio. Our Manager’s entitlement to a management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its
time and effort to seeking investments that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our capital stock.
There are conflicts of interest in our relationship with our Manager and Invesco, which could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with Invesco and our Manager. Specifically, each of our officers and certain members of our board of directors are employees of our Manager or one of its affiliates. Our Manager and our executive officers may have conflicts between their duties to us and their duties to, and interests in, Invesco. We compete for investment opportunities directly with other clients ofclient accounts and funds managed by our Manager or Invesco and its
subsidiaries. A substantial number of separateclient accounts and funds managed by our Manager have limited exposure to our target assets. In addition, in the future our Manager may have additional clients or fund products that compete directly with us for investment opportunities.
Our Manager and our executive officers may choose to allocate favorable investments to other clients of Invesco instead of to us. Further, when there are turbulent conditions in the mortgage markets, distress in the credit markets or other times when we will need focused support and assistance from our Manager, Invesco or entities for which our Manager also acts as an investment manager will likewise require greater focus and attention, placing our Manager’s resources in high demand. In such situations, we may not receive the level of support and assistance that we may receivehave received if we were internally managed or if our Manager did not act as a manager for other entities. Our Manager has investment allocation policies in place where appropriate intended to enable us to share equitably with the other clients and fund products of our Manager or Invesco and its subsidiaries. There is no assurance that our Manager’s allocation policies that address some of the conflicts relating to our access to investment and financing sources will be adequate to address all of the conflicts that may arise. Therefore, we may compete for investment or financing opportunities sourced by our Manager and, as a result, we may either not be presented with the opportunity or have to compete with other clients and fund products of our Manager or clients and fund products of Invesco and its subsidiaries to acquire these investments or have access to these sources of financing.
Our Manager would have a conflict in recommending our participation in any equity investment it manages.
Our Manager has a conflict of interest in recommending our participation in any equity investment it manages because the fees payable to it may be greater than the fees payable by us under the management agreement. With respect to equity investments we have made in partnerships managed by an affiliate of our Manager, our Manager has agreed to waive base management fees at the equity investment level to avoid duplication.duplication of fees. To address any potential conflict of interest, we require the terms of any equity investment managed by our Manager to be approved by our audit committee consisting of our independent directors. However, there can be no assurance that all conflicts of interest will be eliminated.
The management agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party, and it may be costly and difficult to terminate.
Our executive officers and certain members of our board of directors are employees of our Manager or one of its affiliates. Our management agreement with our Manager was negotiated between related parties and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of the management agreement with our Manager without cause is difficult and costly. Our independent directors review our Manager’s performance and the management fees annually, and the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors based upon: (1) our Manager’s unsatisfactory performance that is materially detrimental to us, or (2) a determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors. Additionally, upon such a termination, the management agreement provides that we will pay our Manager a termination fee equal to three times the sum of our average annual management fee during the 24-month period before termination, calculated as of the end of the most recently completed fiscal quarter. These provisions may increase the cost of terminating the management agreement and may adversely affect our ability to terminate our Manager without cause. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.
Pursuant toUnder the management agreement, our Manager does not assume any responsibility other than to render the services called for thereunder and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual, as opposed to a fiduciary, relationship with us. Under the terms of the management agreement, our Manager, its officers, stockholders, members, managers, partners, directors and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement, as
determined by a final non-appealable order of a court of competent jurisdiction. We have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement.
Our board of directors approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager.
Our Manager is authorized to follow very broad investment guidelines. Our board of directors will periodically review our investment guidelines and our investment portfolio but does not, and is not required to, review all of our proposed investments, except that an investment in a security structured or issued by an entity managed by Invesco must be approved by a majority of our independent directors prior toAudit Committee before such investment.investment may be made. In addition, in conducting periodic reviews, our board of directors may rely primarily on information provided to them by our Manager. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager has great latitude within the broad parameters of our investment guidelines in determining the types and amounts of Agency RMBS, CMBS, non-Agency RMBS, GSE CRT, mortgage loanstarget assets and mortgage and real-estate financing arrangements (including mezzanine debt and private equity interests) it may decide are attractive investments for us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results.
Risks Related to Our Capital Stock
The market price and trading volume of our capital stock may be volatile.
The market price of our capital stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our capital stock may fluctuate and cause significant price variations to occur. If the market price of our capital stock declines significantly, our stockholders may be unable to resell their shares at or above the price our stockholders paid for their shares. We cannot assure you that the market price of our capital stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our capital stock are included in the risk factors described in this Report.
Common stock eligible for future sale may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock. Also, we may issue additional shares in public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute existing stockholders’ interests in us.
We have not established a minimum distributiondividend payment level, and we cannot assure our stockholders of our ability to pay distributionsdividends in the future.
We pay quarterly distributions and make other distributionsdividends to our stockholders in an amount such that we distribute all or substantially all of our REIT taxable income in each year, subject to certain adjustments. We have not established a minimum distributiondividend payment level, and our ability to pay distributionsdividends may be adversely affected by a number of factors, including the risk factors described in this Report. All distributionsdividends will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification, applicable provisions of Maryland law and other factors as our board of directors may deem relevant from time to time. We believe that a change in any one of the following factors and other factors described in the risk factors in this Report could adversely affect our results of operations and impair our ability to pay distributionsdividends to our stockholders:
•our ability to make profitable investments;
•margin calls or other expenses that reduce our cash flow;
•defaults in our asset portfolio or decreases in the value of our portfolio; and
•the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
We cannot assure our stockholders that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of our distributions may include a return inof capital.
Investing in our capital stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may result in a high amount of risk when compared to alternative investment options and volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our capital stock may not be suitable for someone with lower risk tolerance.
A change in market interest rates may cause a material decrease in the market price of our capital stock.
One of the factors that investors may consider in deciding whether to buy or sell shares of our capital stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our capital stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions are likely to adversely affect the market price of our capital stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our capital stock could decrease as potential investors may require a higher distribution yield or seek other securities paying higher distributions or interest.
Future offerings of debt or equity securities that would rank senior to our common stock may adversely affect the market price of our common stock.
We have issued Series A Preferred Stock,shares of Series B Preferred Stock and Series C Preferred Stock issued and 5.00% Exchangeable Senior Notes due 2018.outstanding. If we decide to issue debt or equity securities in the future whichthat would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. For example, our preferred shares and debt have a preference on liquidating distributions orand a preference on dividend or interest payments that could limit our ability to make a distribution to the holders of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us. Holders of our common stock also bear the risk of holders of our exchangeable notes making an election to exchange their notes for common stock, which could result in significant dilution to our existing stockholders. In addition, future issuances and sales of preferred stock on parity to our Series A Preferred Stock, Series B Preferred Stock or the Series C Preferred Stock, or the perception that such issuances and sales could occur, may also cause prevailing market prices for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and our common stock to decline and may adversely affect our ability to raise additional capital in the financial markets at times and prices favorable to us.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”), may have the effect of deterring a third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Under the MGCL, certain “business combinations” between us and an “interested stockholder” (defined
generally as any person who beneficially owns 10% or more of our then outstandingthen-outstanding voting capital stock) or an affiliate thereof are prohibited for five years after the most recent date on which the stockholder becomes an interested stockholder. Pursuant toUnder the statute, our board of directors has, by resolution, exempted business combinations between us and any other person, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person).
The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which (for example,
a classified board) we do not yet have. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium over the then currentthen-current market price.
Our charter also contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors.
Ownership limitations may restrict change of control of business combination opportunities in which our stockholders might receive a premium for their shares.
In order forFor us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. To preserve our REIT qualification, among other purposes, our charter generally prohibits any person from directly or indirectly owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailingthen-prevailing market price or which holders might believe to be otherwise in their best interests.
Our authorized but unissued shares of capital stock may prevent a change in our control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
The change of control conversion feature of our Series AB Preferred Stock Series B Preferred Stock,and Series C Preferred Stock and our Exchangeable Senior Notes may make it more difficult for a party to acquire us or discourage a party from acquiring us.
The change of control conversion feature of our Series AB Preferred Stock Series B Preferred Stock,and Series C Preferred Stock and our Exchangeable Senior Notes may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing certain of our change of control transactions under circumstances that otherwise could provide the holders of our common stock, Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that stockholders may otherwise believe is in their best interests.
We are the sole general partner of our Operating Partnership and could become liable for the debts and other obligations of our Operating Partnership beyond the amount of our initial expenditure.Partnership.
We are the sole general partner of our Operating Partnership and directly or indirectly conduct all of our business activities through the Operating Partnership and its subsidiaries. As the sole general partner, we are liable for our Operating Partnership’s debts and other obligations. Therefore, if our Operating Partnership is unable to pay its debts and other obligations, we will be liable for such debts and other obligations beyond the amount of our expenditure for ownership interests in our Operating Partnership.obligations. These obligations could include unforeseen contingent
liabilities and could materially adversely affect our financial condition, operating results and ability to make distributionspay dividends to our stockholders.
Our Exchangeable Senior Notes are recourse obligations to us.
In 2013, our Operating Partnership issued $400,000,000 in aggregate principal amount of 5.00% Exchangeable Senior Notes due March 15, 2018 (the “Notes”). As of December 31, 2017, $143.4 million of the Notes remain outstanding. Because the Company is the sole general partner of the Operating Partnership, these amounts are full recourse obligations of the Company. If we are not able to extend, refinance or repurchase the Notes, we may not have the ability to repay these amounts when they come due. Our inability to repay the Notes could cause the acceleration of our other borrowings, which would have a material adverse effect on our business.
The indenture governing the Notes contains cross-default provisions whereby a default or acceleration of borrowings under other agreements could result in a default under the indenture. If a cross-default occurred, we may not be able to pay our liabilities or access capital from external sources in order to refinance our borrowings. If some or all of our borrowings default and it causes a default under other borrowings, our business, financial condition and results of operations could be materially and adversely affected.
Tax Risks
Investment in our capital stock has various U.S. federal income tax risks.
This summary of certain tax risks is limited to the U.S. federal tax risks addressed below. Additional risks or issues may exist that are not addressed in this Report and that could affect the U.S. federal income tax treatment of us or our stockholders.
We strongly urge you to seek advice based on your particular circumstances from an independent tax advisor concerning the effects of U.S. federal, state and local income tax law on an investment in our capital stock and on your individual tax situation.
Legislative, regulatory or administrative changes could adversely affect us or our stockholders.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, either prospectively or with retroactive effect, and may adversely affect us and/or our stockholders.
On December 22, 2017, tax legislation commonly referred to as the Tax Cuts and Jobs Act was signed into law, generally applying in taxable years beginning after December 31, 2017. The Tax Cuts and Jobs Act makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations. In the case of individuals, the income tax brackets are adjusted, the top federal income rate is reduced to 37%, special rules reduce taxation of certain income earned through pass-through entities and reduce the top effective rate applicable to ordinary dividends from REITs to 29.6% (through a 20% deduction for ordinary REIT dividends received in combination with the 37% top rate) and various deductions are eliminated or limited, including limiting the deduction for state and local taxes to $10,000 per year. Most of the changes applicable to individuals are temporary and apply only to taxable years beginning after December 31, 2017 and before January 1, 2026. The top corporate income tax is reduced to 21%. There are only minor changes to the REIT rules (other than the 20% deduction applicable to individuals for ordinary REIT dividends received).
The Tax Cuts and Jobs Act makes numerous other large and small changes to the tax rules that may affect our stockholders and may directly or indirectly affect us. For example, the Tax Cuts and Jobs Act amends the rules for accrual of income so that income is taken into account no later than when it is taken into account on applicable financial statements, even if financial statements take such income into account before it accrues under otherwise applicable Internal Revenue Code rules. Such rule may cause us to recognize income before receiving any corresponding receipt of cash. In addition, the Tax Cuts and Jobs Act reduces the limit for individual's mortgage interest expense to interest on $750,000 of mortgages and would not permit deduction of interest on home equity loans (after grandfathering in all existing mortgages). Such change and the reduction in deductions for state and local taxes (including property taxes) may adversely affect the residential mortgage markets in which we invest.
While the changes in the Tax Cuts and Jobs Act generally appear to be favorable with respect to REITs, the extensive changes to non-REIT provisions in the Code may have unanticipated effects on us or our stockholders. Moreover, Congressional leaders have recognized that the process of adopting extensive tax legislation in a short amount of time without hearings and substantial time for review is likely to have led to drafting errors, issues needing clarification and unintended consequences that will have to be reviewed in subsequent tax legislation. At this point, it is not clear if or when Congress will address these issues or when the Internal Revenue Service will issue administration guidance on the changes made in the Tax Cuts and Jobs Act.
You are urged to consult with your tax advisor with respect to the Tax Cuts and Jobs Act and any other regulatory or administrative developments and proposals and their potential effect on investment in our common stock.
Our failure to qualify as a REIT would subject us to U.S. federal income tax and potentially increased state and local taxes, which would reduce the amount of cash available for distribution to our stockholders.
We believe that we have been organized and operated, and we intend to continue to operate, in a manner that enables us to qualify as a REIT for U.S. federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.
Moreover, new legislation, court decisions or administrative guidance, in each case, possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Thus, while we intend to operate so that we will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.
If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax at regular corporate income tax rates on our taxable income, and distributionswhich would be determined without a deduction for dividends distributed to our stockholders would not be deductible by us in determining our taxable income.stockholders. In such a case, we might need to borrow money or sell assets in order to pay our taxes. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders.stockholders or for investment and could have a significant adverse effect on the value of our stockholders' equity. Furthermore, if we fail to maintain our qualification as a REIT, wethe distribution requirements for REIT qualification would no longer would be required to distribute substantially all ofrelevant and could affect our taxable income to our stockholders.distribution decisions. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.
ComplyingLegislative, regulatory or administrative changes could adversely affect us or our stockholders.
Legislative, regulatory or administrative changes could be enacted or promulgated at any time, with REIT requirementseither prospective or retroactive effect, and may causeadversely affect us and/or our stockholders.
On December 22, 2017, tax legislation commonly referred to forego otherwise attractive investment opportunities or financing or hedging strategies.
To qualify as a REIT forthe Tax Cuts and Jobs Act was signed into law. The Tax Cuts and Jobs Act made significant changes to the U.S. federal income tax purposes, we must continually satisfy various tests regardingrules for taxation of individuals and corporations that may affect our stockholders and may directly or indirectly affect us. Most of the sourceschanges applicable to individuals are temporary and apply only to taxable years beginning before January 1, 2026, including the 20% deduction generally available to non-corporate taxpayers with respect to REIT dividends that are not capital gain dividends or qualified dividend income.
Future changes to the tax laws are possible. In particular, the federal income taxation of our income, the nature and diversification of our assets, and the amounts we distribute to our stockholders. To meet these tests, weREITs may be requiredmodified, possibly with retroactive effect, by legislative, administrative or judicial action at any time.
You are urged to forego investments we might otherwise makeconsult with your tax advisor with respect to legislative, regulatory or financing or hedging strategies we might otherwise employ. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinderadministrative developments and proposals and their potential effect on investment in our investment performance.stock.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we generally must ensure that at the end of each calendar quarter at least 75% of the value of our total assets consists of cash, cash items, government securities, including GSE CRT securities, and qualifying real estate assets, including certain MBS and certain mortgage loans. The remainder of our investmentinvestments in securities (other than government securities, securities of our TRSs and qualifying real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities, securities of our TRSs and qualifying real estate assets), no more than 20% (beginning with our 2018 taxable year) of the value of our total securities can be represented by securities of one or
more TRSs, and no more than 25% of the value of our assets may consist of “nonqualified publicly offered REIT debt instruments.” If we fail to comply with these requirements at the end of any quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfoliodispose of otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt, sell assets or take other actions to make such distributions.
To qualify as a REIT, we must distribute dividends equal to at least 90% of our REIT taxable income (including certain items of non-cash income) to our stockholders each calendar year, determined without regard to the deduction for dividends paid and excluding net capital gains. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, including our net capital gain, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to makedistribute sufficient distributionsdividends to our stockholders to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax.
Our taxable income may be substantially different from our cash flow. Differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may invest in debt instruments requiringthat require us to accrue original issue discount (“OID”) or recognize market discount income that generate taxable income in excess of economic income or in advance of the corresponding cash flow. We may also acquire distressed debt investments that are subsequently modified by agreement with the borrower. If amendments to the outstanding debt are “significant modifications” under applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt exchange with the borrower, with a gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of purchasing it prior tobefore modification. Under the Tax Cuts and Jobs Act, we generally willmay be required to take certain amounts in income no later than the time such amounts are reflected on certain financial statements. The application of this rule may require the accrual of income with respect to our debt instruments or mortgage-backed securities, such as original issue discount or market discount, earlier than would be the case under the general tax rules, although the precise application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for debt instruments or mortgage-backed securities issued with original issue discount, for tax years beginning after December 31, 2018. Finally, we may be required under the terms of the indebtedness that we incur, to use cash received from interest payments to make principal paymentpayments on that indebtedness, all with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (1) sell assets in adverse market conditions, (2) borrow on unfavorable terms, (3) distribute amounts that would otherwise be invested or used to repay debt, or (4) make a taxable distribution of our shares of common stock in order to comply with the REIT distribution requirements. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
We may choose to pay dividends in our own stock, in which case our stockholders may be required to pay income taxes in excess of the cash dividends received.
Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, we may give stockholders a choice, subject to various limits and requirements, of receiving a dividend in cash or in common stock of the REIT. As long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the stock distribution as a dividend (to the extent applicable rules treat such distribution as being made out of the REIT’s earnings and profits). Taxable stockholders receiving such dividendsstock will be required to include in income, as a dividend, the full amountvalue of the dividend incomesuch stock to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
Our ownership of and relationship with any TRS that we may form or acquire is subject to limitations, and a failure to comply with the limits wouldcould jeopardize our REIT qualification and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. Overall, no more than 20% (beginning with our 2018 taxable year) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs at the end of any calendar quarter. In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its
parent REIT that are not conducted on an arm’s length basis. There can be no assurance that we will be able to comply with the TRS limitations or to avoid application of the 100% excise tax discussed above.
Our domestic TRSs would pay U.S. federal, state and local income tax on their taxable income, and their after-tax net income would be available for distribution to us but would not be required to be distributed to us. If we were to organize a TRS as a non-U.S. corporation (or non-U.S. entity treated as a corporation for U.S. federal income tax purposes), we may generate income inclusions relating to the earnings of the non-U.S. TRS,TRS. Dividends from TRSs and deemed inclusions from non-U.S. TRSs, together with other income that is not treated as qualifying income for purposes of the treatment of which under the REIT75% gross income tests is not clear.test, cannot exceed 25% of our gross income in any year.
Liquidation of our assets to repay obligations to our lenders may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT.
Characterization of the repurchase agreements we enter into to finance our investments as sales for tax purposes rather than as secured borrowing transactions, or the failure of aour mezzanine loanloans to qualify as a real estate asset,assets, could adversely affect our ability to qualify as a REIT.
We have entered into repurchase agreements with a variety of counterparties to finance assets in which we invest. When we enter into a repurchase agreement, we generally sell assets to our counterparty to the agreement and receive cash from the counterparty. The counterparty is obligated to resell the assets back to us at the end of the term of the transaction. We believe that, for U.S. federal income tax purposes, we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured borrowing transactions notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT.
In addition, we holdhave owned in the past and may in the future acquire mezzanine loans whichthat are loans secured by an equity interestsinterest in a partnership or limited liability companyan entity disregarded as separate from its owner that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant tounder which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS
as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We may acquire or originate mezzanine loans that do not meet all of the requirements for reliance onof this safe harbor. The IRS could challenge treatment of such loans as real estate assets for purposes of the REIT asset and gross income tests, and if such a challenge were sustained, we could fail to qualify as a REIT.
The “taxable mortgage pool” rules may limit our financing options.
Certain securitizations and other financing structures could result in the creation of taxable mortgage pools for federal income tax purposes. A taxable mortgage pool owned by our Operating Partnership would be treated as a corporation for U.S. federal income tax purposes and may cause us to fail the REIT asset tests. Accordingly, if we were to consider a securitization that would create a taxable mortgage pool, we would have to undertake such securitization through a TRS or a subsidiary that qualified as a REIT. These rules may limit our financing options.
The tax on prohibited transactions will limit our ability to engage in certain transactions, including certain methods of securitizing mortgage loans, which would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level and may limit the structures we utilize for our securitization transactions, even though the sales or such structures might otherwise be beneficial to us.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code limit our ability to enter into hedging transactions. In order toTo qualify as a REIT, we must satisfy two gross income tests annually. For these purposes, income with respect to certain hedges of interest-rate risk on our liabilities or certain foreign currency risks will be disregarded. Income from other hedges will be non-qualifying income for purposes of both gross income tests. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
Purchases of mortgages at a discount may affect our ability to satisfy the REIT asset and gross income tests.
Whether our loan holdings are treated as real estate assets and interest income thereon is treated as qualifying income for purposes of the 75% gross income test depends on whether the loans are adequately secured by real property. If a mortgage loan is secured by both real property and personal property, the value whichof the personal property exceeds 15% of the value of all property securing such loan, and the value of the real property at the time the REIT commits to make or acquire the loan is less
than the highest principal amount (i.e., the face amount) of the loan during the year, interest earned on the loan will be treated as qualifying income only in proportion to the ratio of the value of the real property at the time the REIT commits to make or acquireacquires the loan to the highest principal amount of the loan during the year. Similarly, the IRS issued guidance for determining the extent to which an interest in an “eligible REMIC” (relating to the Home Affordable Refinance Program) is treated as a real estate asset and generates qualifying income for purposes of the 75% gross income test. Failure to accurately apply these rules and manage our income and assets could cause us to fail to qualify as a REIT.
Our qualification as a REIT could be jeopardized as a result of our interests in joint ventures or investment funds.
We currently own, and may continue to acquire, interests in partnerships or limited liability companies that are joint ventures or investment funds. We may not have timely access to information from such partnerships and limited liability companies related to monitoring and managing our REIT qualification. If a partnership or limited liability company in which we own an interest but do not control takes or expects to take actions that could jeopardize our REIT qualification or require us to pay tax, we may be forced to dispose of our interest in such entity. It is possible that a partnership or limited liability company could take an action which could cause us to fail a REIT gross income or asset test and that we would not become aware of such action in time to dispose of our interest in the partnership or limited liability company or take other corrective action on a timely basis. In that case, we could fail to qualify as a REIT unless we are able to qualify for a statutory REIT “savings” provision, which may require us to pay a significant penalty tax to maintain our REIT qualification.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.
We acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectibilitycollectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.
Some of the debt instruments that we acquire may have been issued with OID.original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such debt instruments will be made. If such debt instruments or MBS and GSE CRT turn out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibilityuncollectability is provable.
In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding instrument are "significant modifications"“significant modifications” under the applicable Treasury regulations,Regulations, the modified instrument will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in the unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for federal tax purposes.
Finally, in the event thatif any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectibility.collectability. Similarly, we may be required to accrue interest income with respect to debt instruments at its stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while we would, in general, ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.
Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
Even if we qualify as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage-related taxes. In addition, our domestic TRSs will be subject to federal corporate income tax on their taxable incomes.
Dividends paid by REITs do not qualify for the reduced tax rates that apply to other corporate dividends.
The maximum tax rate for “qualified dividends” paid by corporations to individuals is currently 20%. Dividends paid by REITs, however, generally are not “qualified dividends” and generally are treated as ordinary income. For taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers generally will be entitled to a 20% deduction for ordinary REIT dividends received resulting in combinationthat, combined with the newcurrent top individual tax rate of 37%, results in a maximum tax rate of 29.6% on ordinary REIT dividends. The more favorable rates applicable to qualified dividends could cause potential investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay qualified dividends, which could adversely affect the value of the stock of REITs, including our capital stock.
Dividends paid by REITs may be subject to Medicare tax on net investment income.
High-income U.S. individuals, estates, and trusts will be subject to an additional 3.8% tax on net investment income. For these purposes, net investment income includes dividends and gains from sales of stock. In the case of an individual, the tax will be 3.8% of the lesser of the individuals’ net investment income or the excess of the individuals’ modified adjusted gross income over $250,000 in the case of a married individual filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, or $200,000 in the case of a single individual.
The 20% deduction for qualified REIT dividends is not taken into account for these purposes.
Tax-exempt stockholders may realize unrelated business taxable income if we generate excess inclusion income.
If we acquire REMIC residual interests or equity interests in taxable mortgage pools (in a manner consistent with our REIT qualification) and generate “excess inclusion income,” a portion of our dividends received by a tax-exempt stockholder will be treated as unrelated business taxable income. Excess inclusion income would also be subject to adverse federal income tax rules in the case of U.S. taxable stockholders and non-U.S. stockholders.
Changing the nature of our assets may complicate our ability to satisfy the REIT gross income and asset tests.
We have large holdings of RMBS that are qualifying assets for purposes of the REIT asset tests and generate interest income that is qualifying income for purposes of the REIT gross income tests.tests, but substantially decreased such holdings in 2020. The REIT asset tests do not require that all assets be qualifying assets, nor do the REIT gross income tests require that all income be qualifying income. Our substantial RMBS holdings have given us room to make investments that may not qualify, all or in part, as real estate assets or that may generate income that may not qualify, all or in part, under one or both of the gross income tests. Reductions in our RMBS holdings would reducehave reduced our room for non-qualifying assets and income. In addition, if the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and gross income therefrom and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the 1940 Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estatecertain assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT qualification requirements and Investment Company Act considerations. Furthermore, we may make investments in which the proper application of the REIT gross income and assets tests may not be clear. Mistakes in classifying assets or income for REIT purposes or in projecting the amount of qualifying and non-qualifying income could cause us to fail to qualify as a REIT.
Our qualification as a REIT may depend upon the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets we acquire.
When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining, among other things, whether such securities represent debt or equity securities for U.S. federal income tax purposes, the value of such securities, and alsothe extent to what extentwhich those securities constitute qualified real estate assets for purposes of the REIT asset tests and produce qualified income for purposes of the 75% gross income test. The inaccuracy of any such opinions, advice or statements may adversely affect our ability to qualify as a REIT.
Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs under which we contract to purchase to-be-announced Agency MBS ("long TBAs") as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our long TBAs should be treated as “real estate assets,” and (ii) for purposes of the 75% gross income test, any gain recognized by us in connection with the disposition of our long TBAs by offset, including in dollar roll transactions, should be qualifying income. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of counsel is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
General Risk Factors
Our business is subject to extensive regulation.
Our business is subject to extensive regulation by federal and state governmental authorities, self-regulatory organizations, and securities exchanges. We are required to comply with numerous federal and state laws. The laws, rules and regulations comprising this regulatory framework change frequently, as can the interpretation and enforcement of existing laws, rules, and regulations. From time to time, we may receive requests from federal and state agencies for records, documents, and information regarding our policies, procedures, and practices regarding our business activities. We may incur significant ongoing costs to comply with these government regulations.
These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative proceedings concerning the mortgage industry generally. Although we believe that we have structured our operations and investments to comply with existing legal and regulatory requirements and interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity, and results of operations.
We may be adversely affected by the current and future economic, regulatory and other actions of government bodies and their agencies.
The U.S. government, Federal Reserve, U.S. Treasury, SEC and other U.S. and foreign governmental and regulatory bodies have taken a number of economic actions and regulatory initiatives from time-to-time designed to stabilize and stimulate the economy and the financial markets, and additional actions and initiatives may occur in the future. While our current exposure to transactions in foreign currencies is limited, uncertainties regarding geopolitical developments can produce volatility in global financial markets, which could have a negative impact on our business in the future.
There can be no assurance that, in the long term, actions that governments and regulatory bodies or central banks have taken in the past or may take in the future will improve the efficiency and stability of mortgage or financial markets. To the extent the financial markets do not respond favorably to any of these actions or such actions do not function as intended, our business may be harmed. In addition, because the programs are designed, in part, to improve the markets for certain of our target assets, the establishment of these programs may result in increased competition for attractive opportunities in our target assets or, in the case of government-backed refinancing and modification programs, may have the effect of reducing the revenues associated with certain of our target assets. We cannot predict whether or when additional actions or initiatives to stabilize and stimulate the economy and the financial markets may occur, and such actions could have an adverse effect on our business, results of operations and financial condition.
We may change any of our strategies, policies or procedures without stockholder consent and make investment decisions with which our stockholders may not agree and/or fail to meet our investment criteria.
We may change any of our strategies, policies or procedures with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time without the consent of our stockholders, which could result in an investment portfolio with a different risk profile. Our stockholders will be unable to evaluate the manner in which we invest or the economic merit of our expected investments and, as a result, we may make investment decisions with which our stockholders may not agree. We can provide no assurance that we will be able to identify and make investments that are consistent with our investment objectives. A change in our investment strategy may increase our exposure to interest rate risk, default risk, real estate market fluctuations, rules, regulations and governmental actions. Furthermore, a change in our asset allocation could result in us making investments in asset categories different from those described in this Report. The failure of our management to make investments that meet our investment criteria could cause a material adverse effect on our business, financial condition, liquidity, results of operations and ability to pay dividends to our stockholders and could cause the value of our capital stock to decline.
We may enter into transactions and take certain actions in connection with such transactions that could affect the price of our common stock.
We may conduct transactions (including acquisitions) that would offer business and strategic opportunities. In the event of such transactions, we could:
•use a significant portion of our available cash;
•issue equity securities, which would dilute the current percentage ownership of our stockholders;
•incur substantial debt;
•incur or assume contingent liabilities, known or unknown; and
•incur amortization expenses related to intangibles.
Any such actions by us could harm our business, financial condition, results of operations, or prospects and could adversely affect the market price of our common stock.
The market price and trading volume of our capital stock may be volatile.
The market price of our capital stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our capital stock may fluctuate and cause significant price variations to occur. If the market price of our capital stock declines significantly, our stockholders may be unable to resell their shares at or above the price our stockholders paid for their shares. We cannot assure you that the market price of our capital stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our capital stock are included in the risk factors described in this Report.
Common stock eligible for future sale may have adverse effects on our share price.
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. Further, certain stock change of ownership tests may limit our ability to raise significant amounts of equity capital or could limit our future use of tax losses to offset income tax obligations, which may adversely affect us or our stockholders.
Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock. Also, we may issue additional shares in public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute existing stockholders’ interests in us.
Investing in our capital stock may involve a high degree of risk.
The investments we make in accordance with our investment objectives may carry a high amount of risk when compared to alternative investment options and may lead to volatility or loss of principal. Our investments may be highly speculative and aggressive, and therefore an investment in our capital stock may not be suitable for someone with lower risk tolerance.
A change in market interest rates may cause a material decrease in the market price of our capital stock.
One of the factors that investors may consider in deciding whether to buy or sell shares of our capital stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our capital stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions are likely to adversely affect the market price of our capital stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our capital stock could decrease as potential investors may require a higher distribution yield or seek other securities paying higher distributions or interest.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our principal executive office is located at 1555 Peachtree Street, NE, Suite 1800, Atlanta, Georgia 30309. As part of our management agreement, our Manager is responsible for providing office space and office services required in rendering services to us.
Item 3. Legal Proceedings.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of December 31, 2017,2022, we were not involved in any such legal proceedings.
Item 4. Mine and Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is traded on the NYSE under the symbol “IVR.” The following table sets forth,
Dividend Information
We intend to pay quarterly dividends and to distribute to our stockholders all or substantially all of our taxable income in each year (subject to certain adjustments) consistent with the distribution requirements applicable to REITs, which will enable us to qualify for the periods indicated,tax benefits accorded to a REIT under the highInternal Revenue Code. We have not established a minimum dividend payment level and low sale priceour ability to pay dividends may be adversely affected for the reasons described in Part I. Item 1A. “Risk Factors” of this Report. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Directors may deem relevant from time to time. No cash dividends can be paid on our common stock as reportedunless we have paid full cumulative dividends on our preferred stock. From the NYSE.date of issuance of our preferred stock through December 31, 2022, we have paid full cumulative dividends on our preferred stock.
|
| | | | | | | |
| | High | | Low |
| 2017 |
| Fourth quarter | $ | 18.86 |
| | $ | 16.66 |
|
| Third quarter | $ | 17.26 |
| | $ | 16.38 |
|
| Second quarter | $ | 17.34 |
| | $ | 15.30 |
|
| First quarter | $ | 15.84 |
| | $ | 14.15 |
|
| 2016 |
| Fourth quarter | $ | 16.04 |
| | $ | 14.18 |
|
| Third quarter | $ | 16.28 |
| | $ | 13.42 |
|
| Second quarter | $ | 14.73 |
| | $ | 11.95 |
|
| First quarter | $ | 12.95 |
| | $ | 9.74 |
|
Holders
As of February 16, 2018,17, 2023, there were 111134 common stockholders of record.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates on its undistributed taxable income. We intend to continue to pay regular quarterly dividends to our stockholders. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service obligations. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make 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.
The following table sets forth the dividends declared per share of our common stock for the periods indicated.
|
| | | | | |
| Date Declared | Dividends Declared Per Share |
| | Amount | | Date Paid |
| 2017 | | | |
| December 14, 2017 | $ | 0.42 |
| | January 26, 2018 |
| September 14, 2017 | $ | 0.41 |
| | October 26, 2017 |
| June 15, 2017 | $ | 0.40 |
| | July 26, 2017 |
| March 15, 2017 | $ | 0.40 |
| | April 26, 2017 |
| 2016 | | | |
| December 15, 2016 | $ | 0.40 |
| | January 26, 2017 |
| September 14, 2016 | $ | 0.40 |
| | October 26, 2016 |
| June 15, 2016 | $ | 0.40 |
| | July 26, 2016 |
| March 15, 2016 | $ | 0.40 |
| | April 26, 2016 |
The following table sets forth the dividends declared per share of our common stock and the related tax characterization for the fiscal tax years ended December 31, 2017 and 2016.
|
| | | | | | | | | | | | |
| | | | | Tax Characterization of Dividends |
| Fiscal Tax Year | | Dividends Declared | | Ordinary Dividends | | Capital Gain Distribution | | Carry Forward |
| Common Stock Dividends | | | | | | | | |
| Fiscal tax year 2017 | | 1.630000 |
| | 1.480040 |
| | — |
| | 0.149960 |
|
Fiscal tax year 2016 (1) | | 1.600000 |
| | 1.857840 |
| | — |
| | — |
|
| |
(1) | Ordinary dividends include $0.257840 of spillover dividend carried-forward from fiscal tax year 2015. |
Performance Graph
The following graph matchescompares the cumulative 5-year total return of holders of Invesco Mortgage Capital Inc.'s common stock with the cumulative total returns of the S&P 500 index and the FTSE NAREIT Mortgage REITs index. The graph assumes that the value of the investment in our common stock and in each of the indices (including reinvestment of dividends) was $100 on December 31, 20122017 and tracks it through December 31, 2017.2022.
|
| | | | | | |
| Index | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 |
| Invesco Mortgage Capital Inc. | 100.00 | 85.08 | 100.84 | 90.98 | 120.22 | 158.05 |
| S&P 500 | 100.00 | 132.39 | 150.51 | 152.59 | 170.84 | 208.14 |
| FTSE NAREIT Mortgage REITs | 100.00 | 98.04 | 115.57 | 105.31 | 129.38 | 154.98 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Index | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
| Invesco Mortgage Capital Inc. | | 100.00 | | 90.40 | | 116.59 | | 28.77 | | 26.08 | | 14.46 |
| S&P 500 | | 100.00 | | 95.62 | | 125.72 | | 148.85 | | 191.58 | | 156.88 |
| FTSE NAREIT Mortgage REITs | | 100.00 | | 97.48 | | 118.27 | | 96.07 | | 111.09 | | 81.53 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Use of Proceeds
We used the net proceeds from our common and preferred stock offerings to acquire our target assets in accordance with our objectives and strategies described in Item 1, Business - Investment Strategy. We focus on purchasing our target assets, subject to our investment guidelines and to the extent consistent with maintaining our REIT qualification and exclusion from the requirements of the 1940 Act. Our Manager determines the percentage of our stockholders' equity that will be invested in each of our target assets.
Repurchases of Common Equity Securities
In December 2011, our board of directors approved a share repurchase program with no stated expiration date. As of December 31, 2017,2022, there were 18,239,0821,816,398 common shares available for repurchase under the program. No shares of common stock were purchased during the quarter and year ended December 31, 2017. The shares may be repurchased from time to time through privately negotiated transactions or open market transactions, including under a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any combination of such methods. The manner, price, number and timing of share repurchases will be subject to a variety of factors, including market conditions and applicable SEC rules. During the quarter ended December 31, 2022, we did not repurchase any shares of our common stock.
Repurchases of Preferred Equity Securities
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock with no stated expiration date. As of December 31, 2022, we had authority to purchase 1,337,634l shares of our Series B Preferred Stock and 1,316,470 shares of our Series C Preferred Stock under the current share repurchase program. The shares may be repurchased from time to time through privately negotiated transactions or open market transactions, including under a trading plan in accordance with Rules 10b5-1 and 10b-18 under Exchange Act or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. During the quarter ended December 31, 2022, we did not repurchase any shares of our preferred stock.
Equity Compensation Plans
We will provide the equity compensation plan information required in Item 201(d) of Regulation S-K in our definitive Proxy Statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report and is incorporatedincorporate into this Item 5 by reference.
Item 6. Selected Financial Data.[Reserved]
The selected historical financial information as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 presented in the tables below have been derived from our audited financial statements. The information presented below is not necessarily indicative of the trends in our performance.
The information presented below is only a summary and does not provide all of the information contained in our historical financial statements, including the related notes. You should read the information below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements, including the related notes, included elsewhere in this Report.
Balance Sheet Data
|
| | | | | | | | | | | | | | |
| | As of December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Mortgage-backed and credit risk transfer securities, at fair value | 18,190,754 |
| | 14,981,331 |
| | 16,065,935 |
| | 17,248,895 |
| | 17,348,657 |
|
Residential loans, held-for-investment (1) | — |
| | — |
| | — |
| | 3,365,003 |
| | 1,810,262 |
|
| Commercial loans, held-for-investment | 191,808 |
| | 273,355 |
| | 209,062 |
| | 145,756 |
| | 64,599 |
|
Total assets (1) | 18,657,256 |
| | 15,706,238 |
| | 16,767,309 |
| | 21,218,097 |
| | 20,337,245 |
|
| Repurchase agreements | 14,080,801 |
| | 11,160,669 |
| | 12,126,048 |
| | 13,622,677 |
| | 15,451,675 |
|
| Secured loans | 1,650,000 |
| | 1,650,000 |
| | 1,650,000 |
| | 1,250,000 |
| | — |
|
Asset-backed securities (1) | — |
| | — |
| | — |
| | 2,924,787 |
| | 1,640,355 |
|
| Exchangeable senior notes | 143,231 |
| | 397,041 |
| | 394,573 |
| | 392,113 |
| | 389,652 |
|
| Total stockholders’ equity | 2,630,491 |
| | 2,241,560 |
| | 2,241,035 |
| | 2,610,315 |
| | 2,376,115 |
|
| Non-controlling interest | 26,387 |
| | 28,624 |
| | 25,873 |
| | 28,535 |
| | 27,120 |
|
| Total equity | 2,656,878 |
| | 2,270,184 |
| | 2,266,908 |
| | 2,638,850 |
| | 2,403,235 |
|
| |
(1) | As of December 31, 2014 and December 31, 2013, our consolidated balance sheets included assets and liabilities of consolidated variable interest entities (“VIEs”). We deconsolidated these VIEs in 2015. As of December 31, 2014 and December 31, 2013, total assets of the consolidated VIEs were $3,380,597 and $1,819,295, respectively, and total liabilities of the consolidated VIEs were $2,938,512 and $1,648,400, respectively. Refer to Note 3 - "Variable Interest Entities" of our consolidated financial statements for further discussion.
|
Statements of Operations Data
|
| | | | | | | | | | | | | | |
| | For the Years ended December 31, |
| $ in thousands, except share amounts | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Interest income | 545,055 |
| | 478,682 |
| | 650,132 |
| | 687,080 |
| | 680,491 |
|
| Interest expense | 196,591 |
| | 157,354 |
| | 277,973 |
| | 281,895 |
| | 332,252 |
|
| Net interest income | 348,464 |
| | 321,328 |
| | 372,159 |
| | 405,185 |
| | 348,239 |
|
| (Reduction in) provision for loan losses | — |
| | — |
| | (213 | ) | | (142 | ) | | 884 |
|
| Net interest income after provision for loan losses | 348,464 |
| | 321,328 |
| | 372,372 |
| | 405,327 |
| | 347,355 |
|
| Other income (loss) | 49,339 |
| | (21,824 | ) | �� | (203,697 | ) | | (570,001 | ) | | (136,737 | ) |
| Expenses | 44,746 |
| | 41,806 |
| | 54,620 |
| | 52,866 |
| | 53,144 |
|
| Net income (loss) | 353,057 |
| | 257,698 |
| | 114,055 |
| | (217,540 | ) | | 157,474 |
|
| Net income (loss) attributable to non-controlling interest | 4,450 |
| | 3,287 |
| | 1,344 |
| | (2,482 | ) | | 1,640 |
|
| Net income (loss) attributable to Invesco Mortgage Capital Inc. | 348,607 |
| | 254,411 |
| | 112,711 |
| | (215,058 | ) | | 155,834 |
|
| Dividends to preferred stockholders | 28,080 |
| | 22,864 |
| | 22,864 |
| | 17,378 |
| | 10,851 |
|
| Net income (loss) attributable to common stockholders | 320,527 |
| | 231,547 |
| | 89,847 |
| | (232,436 | ) | | 144,983 |
|
| Earnings per share: | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | | | | | |
| Basic | 2.87 |
| | 2.07 |
| | 0.74 |
| | (1.89 | ) | | 1.09 |
|
| Diluted | 2.75 |
| | 1.98 |
| | 0.74 |
| | (1.89 | ) | | 1.09 |
|
| Dividends declared per common share | 1.63 |
| | 1.60 |
| | 1.70 |
| | 1.95 |
| | 2.30 |
|
| Weighted average number of shares of common stock: | | | | | | | | | |
| Basic | 111,610,393 |
| | 111,973,404 |
| | 121,377,585 |
| | 123,104,934 |
| | 132,714,012 |
|
| Diluted | 123,040,827 |
| | 130,254,003 |
| | 122,843,838 |
| | 124,529,934 |
| | 134,173,691 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 Part IV, Item 15 of this Report.
Overview
We are a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities ("MBS"(“MBS”) and mortgage loans.other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we primarily invest in the following:
Residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively "Agency RMBS");
Commercial mortgage-backed securities (“CMBS”);
RMBS that are not guaranteed by a U.S. government agency ("non-Agency RMBS");
Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT");
Residential and commercial mortgage loans; and
Other real estate-related financing arrangements.
We have elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of an “Investment Company” under the 1940 Act. We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd.
Capital Activities
In August 2017, we completed a public offering of 11,500,000 shares of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”) at the price of $25.00 per share. Total proceeds were $287.5 million before issuance costs of $9.4 million.
On December 14, 2017, we declared the following dividends:
a dividend of $0.42 per share of common stock payable on January 26, 2018 to stockholders of record as of the close of business on December 26, 2017;
a dividend of $0.4844 per share of Series A Preferred Stock payable on January 25, 2018 to stockholders of record as of the close of business on January 1, 2018;
During the three months and year ended December 31, 2017, we did not repurchase any shares of our common stock.
In December 2017, we entered into an equity distribution agreement with a placement agent under which we may sell up to 17,000,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions. These shares will be registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). As of December 31, 2017, we have not sold any shares of common stock under the equity distribution agreement.
Factors Impacting Our Operating Results
Our operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of our assets. Our net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (“CPR”) on our target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The market value of our assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which we invest.
Market Conditions
Macroeconomic factors that affect our business include creditinterest rates, spread premiums, market interest rates, governmental policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.
Financial conditions eased during 2017, buoyed by a strong stock market and low levels of volatility. The S&P 500 Index returned 21.8% for the year, culminating with a 6.6% return during the fourth quarter. Investors were encouraged by the continued strength of the economy, the benefits of tax reform, and the prospect of easing regulatory burdens on business. While energy prices were higher during the year, the broader CRB Commodity Price Index increased just 0.7%.
In 2017, an improving labor market coupled with relatively lowOf these macroeconomic factors, government policy initiatives, inflation, interest rates and energy prices have been supportiveinterest rate volatility had the most direct impacts on our performance during 2022. Contributing factors included:
•Financial conditions tightened steadily through the first three quarters of U.S. consumer spending. Specifically, in 2017 U.S. gross domestic product grew by 2.3%, with the consensus forecast for 2018 at 2.6%. Monthly increases in payroll employment averaged 204,000 jobs per month for the fourth quarter of 2017, above the average of 171,000 over the last twelve months. Monthly payrolls are forecasted to increase by 170,000 jobs per month in 2018.
Inflation remained subdued, with the U.S. Personal Consumption Expenditure Core Price Index continuing to register below the Federal Reserve’s inflation target of 2%. Despite benign inflation readings in 2017,2022 as the Federal Reserve’s Open Market Committee raised(“FOMC”) began an aggressive campaign of increasing the Federal Funds target rate three timesa total of 425 basis points in response to inflation levels that had not been seen in decades. This took the target from a range of 0% to 0.25% to a range of 4.25% to 4.50% to end the year.
•Given the uncertainty around Federal Reserve policy, interest rates were quite volatile during the year causing yieldsand the yield curve became inverted, meaning short term rates were higher than long term rates. The yield on shorter maturity Treasuriesthe 2 year Treasury rose by 369 basis points, to 4.07%, while the yield on the 10 year Treasury increased by 236 basis points, to 3.37%.
•The Federal Reserve concluded their net purchases of Agency RMBS in March, with runoff of their $2.7 trillion portfolio commencing in June. In addition, commercial banks sharply reduced their purchases of Agency RMBS in 2022 as well, as the decline in bank deposits, increase sharply while yields on longer maturity Treasuries fell (commonly referred to as a "flattening"in loan activity, and regulatory capital challenges diminished their appetite for securities. These market participants had been the largest sources of demand for the sector since the onset of the yield curve). The inflation outlook continuesCOVID-19 pandemic.
Agency RMBS underperformed Treasuries over the course of 2022, ending the year with one of the worst total returns for the sector on record. In addition to have meaningful implicationsthe factors discussed above, performance was negatively impacted by market expectations for future Federal Reservefurther restrictive monetary policy. We expectPrepayment speeds slowed as borrowers faced a sharp increase in mortgage rates, but this reduction in supply was offset by the rate environment to remain relatively volatile, asdecrease in demand from the Federal Reserve continuesand commercial banks discussed above. Production coupon mortgages underperformed their Treasury hedges, trailing by approximately 360 basis points, while payups on specified pool collateral fell as the value of prepayment protection was reduced amidst higher mortgage rates and slowing prepayment speeds. Dollar rolls for TBA investments, which had been a bright spot during most of the year, underperformed in the second half of the year as mortgage rates increased and production waned.
The following market conditions were also notable for the company in 2022:
•Most risk assets were under considerable pressure during 2022 with the S&P 500 suffering a loss of 19.4%, while the NASDAQ was down 33.1% as a result of rising interest rates and high inflation. Financial conditions eased somewhat during the fourth quarter, as confidence began to signalgrow that inflation had peaked and the FOMC was nearing the end of their tightening cycle. Equity performance was mixed during the fourth quarter, as the S&P 500 advanced by 7.1% and the NASDAQ lost 1%.
•The employment picture remained a willingnessbright spot as gains in non-farm payrolls averaged 375,000 per month, for a total of 4.5 million jobs added during the year. The unemployment rate improved during the year, decreasing from 3.9% at the end of 2021 to 3.5% in December.
•Consumer activity held up well through most of the year, with retail sales remaining generally positive before moderating during the fourth quarter. Higher prices weighed on consumer confidence measures, however, as sentiment fell throughout the first three quarters before rebounding slightly along with financial conditions.
•Year-over-year price growth, as measured by the consumer price index (“CPI”), peaked at a 40 year high of 9.1% in June, before slowing steadily during the second half of the year, ending 2022 at 6.5%. Likewise, commodities also saw significant increases during 2022, with West Texas Intermediate crude oil recording a 16.7% increase and the Commodity Research Bureau commodity index gaining 19.5%. Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”), which reflect investors' expectations of future inflation, indicating confidence that the FOMC will be successful at bringing inflation levels significantly lower as the inflation rate implied by 2 year and 5 year TIPs was 2.31% and 2.38%, respectively, at the end of the year.
•CMBS risk premiums increased due to monetary policy tightening and moderating improvement of commercial real estate fundamentals. Commercial real estate occupancy and rental rates began to stabilize across most property sectors while headwinds for property valuations increased given elevated borrowing costs. Despite an increase in the fourth quarter, CMBS loan delinquencies finished the year lower and remain significantly below COVID-19 peak levels. The lodging and retail sector reported the highest level of CMBS loan delinquencies while multi-family and industrial property sectors continued to post relatively lower delinquency levels. We expect fundamental improvement to continue to moderate as the pace of positive net absorption slows and lending conditions tighten.
•While tight supply and stable underlying demand persisted for most of 2022, the housing market recovery that began in 2021 slowed and ultimately reversed due to the dramatic increase in mortgage rates. National home prices declined during the second half of the year, but still finished higher compared to 2021. Despite the potential for a slowing economy, borrower defaults are likely to remain contained given strong loan underwriting and high levels of borrower equity.
As we enter 2023, both the FOMC and the Federal Funds rate.
During 2017,futures market expect additional rate increases during the performancefirst half of Agency RMBS was positive. Both fixed-rate Agency RMBS and Hybrid ARM Agency RMBS outperformed similar duration Treasuries, even as the Federal Reserve began to taper their reinvestment activityyear, with market expectations reflecting approximately 0.50% of additional hikes. While further changes in Agency RMBS. The outlook for Agency RMBS remains mixed, as the potential for increased interest rate volatility and the continued tapering of reinvestment activitymonetary policy by the Federal Reserve weighs onmay bring challenges in the market. On the positive side,coming months, we believe that a higherpotential reduction in interest rate volatility combined with compelling valuations and favorable funding conditions will support an attractive investment environment has the potential to spur investment demand on the part of both foreign and domestic banks, while at the same time keeping refinancing activity muted.
During 2017, spreads (defined as the yieldfor Agency RMBS in excess of risk-free rates) on CMBS and GSE CRT securities tightened, reflecting improving real estate values, strong investor demand and steady financial conditions. Financing markets remained accommodating in the fourth quarter, though repurchase agreement rates moved higher in line with increases in the Federal Funds rate and typical year end bank balance sheet pressures.
As we move into 2018, we expect that the U.S. will continue to experience moderate economic growth, and that core inflation will remain below the Federal Reserve’s policy objective of 2%, which should allow the Federal Reserve to continue its efforts to tighten monetary policy. Investor concerns include historically high valuations across both the equity and fixed income markets, the potential for additional protectionist trade policies, and the prospect of further increases in interest rates and price volatility. Other concerns include the actions of central banks, and their impact on the global economy, the sustainability of China's economic growth, and the potential impact of the Brexit process and resulting stress in the European banking system.
In addition, the regulatory landscape for our repurchase agreement counterparties continues to evolve which may affect their funding methods and lending practices. While we are not directly subject to compliance with the implementation of rules regarding financial institutions, the effect of these regulations and others could impact our ability to finance our assets in the future.
2023.
Investment Activities
The table below shows the allocation of our equity as of December 31, 2017 and 2016:
|
| | | | | |
| | As of December 31, |
| 2017 | | 2016 |
| Agency RMBS | 45 | % | | 41 | % |
Commercial Credit (1) | 35 | % | | 32 | % |
Residential Credit (2) | 20 | % | | 27 | % |
| Total | 100 | % | | 100 | % |
| |
(1) | CMBS, Commercial Loans and investments in unconsolidated ventures (which are included in Other Assets), are considered commercial credit. |
| |
(2) | Non-Agency RMBS and GSE CRT are considered residential credit. |
The table below shows the breakdown of our investment portfolio as of December 31, 20172022 and 2016:2021.
| | | | | | | | | | | |
| $ in thousands | As of December 31, |
| 2022 | | 2021 |
| Agency RMBS: | | | |
| 30 year fixed-rate, at fair value | 4,661,737 | | | 7,701,523 | |
| Agency CMO, at fair value | 84,956 | | | 30,757 | |
| Non-Agency CMBS, at fair value | 36,787 | | | 62,909 | |
| Non-Agency RMBS, at fair value | 8,413 | | | 9,070 | |
| Commercial loan, at fair value | — | | | 23,515 | |
| Investments in unconsolidated ventures | 552 | | | 12,476 | |
| Subtotal | 4,792,445 | | | 7,840,250 | |
TBAs, at implied cost basis (1) | 1,437 | | | 1,636,906 | |
| Total investment portfolio, including TBAs | 4,793,882 | | | 9,477,156 | |
|
| | | | | |
| $ in thousands | As of December 31, |
| | 2017 | | 2016 |
| Agency RMBS: | | | |
| 30 year fixed-rate, at fair value | 7,640,540 |
| | 2,981,717 |
|
| 15 year fixed-rate, at fair value | 2,974,782 |
| | 3,557,928 |
|
| Hybrid ARM, at fair value | 1,719,385 |
| | 2,474,301 |
|
| ARM, at fair value | 241,200 |
| | 307,873 |
|
| Agency CMO, at fair value | 273,943 |
| | 344,041 |
|
| CMBS, at fair value | 3,216,417 |
| | 2,551,720 |
|
| Non-Agency RMBS, at fair value | 1,257,608 |
| | 1,995,551 |
|
| GSE CRT, at fair value | 866,879 |
| | 768,200 |
|
| Commercial loans, at amortized cost | 191,808 |
| | 273,355 |
|
| Investment in unconsolidated ventures | 25,972 |
| | 33,301 |
|
| Total Investment portfolio | 18,408,534 |
| | 15,287,987 |
|
During 2017, weWe sold $27.3 billion and purchased $5.4$25.7 billion of 30 year fixed-rate Agency RMBS and $827.0 millionduring the year ended December 31, 2022 primarily to rotate into higher yielding securities, in some cases changing coupon rates or the type of CMBS. Wespecified pool collateral. Purchases were primarily funded our purchases through a modest increase in leverage, reinvestment of cash flowswith proceeds from principal repayments andthe sales, paydowns of securities and by leveraging proceeds from our Series C Preferred Stock offering in August 2017. We increased our holdingsthe issuance of 30 year fixed-rate Agency RMBS and CMBS as the return on equity profile for these securities remained attractive. common stock.
As of December 31, 20172022 and 2021 our holdings of 30 year fixed-rate Agency RMBS represented 42%97% and 81% of our total investment portfolio, including TBAs, respectively. The table below shows the coupon distributions of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, |
| | | | | 2022 | | 2021 |
| $ in thousands | | | | | Fair Value | | Percentage | | Fair Value | | Percentage |
| | | | | | | | | | | |
| 2.0% | | | | | — | | | — | % | | 2,408,404 | | | 31.3 | % |
| 2.5% | | | | | — | | | — | % | | 2,877,568 | | | 37.3 | % |
| 3.0% | | | | | — | | | — | % | | 2,178,476 | | | 28.3 | % |
| 3.5% | | | | | — | | | — | % | | 237,075 | | | 3.1 | % |
| | | | | | | | | | | |
| 4.5% | | | | | 1,392,304 | | | 29.9 | % | | — | | | — | % |
| 5.0% | | | | | 1,694,939 | | | 36.4 | % | | — | | | — | % |
| 5.5% | | | | | 1,574,494 | | | 33.7 | % | | — | | | — | % |
| Total 30 year fixed-rate Agency RMBS | | | | | 4,661,737 | | | 100.0 | % | | 7,701,523 | | | 100.0 | % |
Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles. We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments. The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, |
| | | | | 2022 | | 2021 |
| $ in thousands | | | | | Fair Value | | Percentage | | Fair Value | | Percentage |
| Specified pool characteristic: | | | | | | | | | | | |
| Geographic location | | | | | 1,302,391 | | | 27.9 | % | | 2,125,213 | | | 27.6 | % |
| Loan balance | | | | | 1,033,014 | | | 22.2 | % | | 921,716 | | | 12.0 | % |
| Generic | | | | | 158,230 | | | 3.4 | % | | 1,991,947 | | | 25.9 | % |
| High loan-to-value ("LTV") ratio | | | | | 750,724 | | | 16.1 | % | | 648,529 | | | 8.4 | % |
| Low credit score | | | | | 1,417,378 | | | 30.4 | % | | 865,992 | | | 11.2 | % |
| Investment property | | | | | — | | | — | % | | 1,148,126 | | | 14.9 | % |
| Total 30 year fixed-rate Agency RMBS | | | | | 4,661,737 | | | 100.0 | % | | 7,701,523 | | | 100.0 | % |
We invest in TBAs as an alternative means of investing in and financing Agency RMBS. As of December 31, 2022, the implied cost basis of TBAs did not represent a material amount of our total investment portfolio, versus 20% of our total investment portfolio17% as of December 31, 2016.2021. We have also increased ourdecreased the allocation to CMBS based on our view that these assets benefit from property price appreciation and limited supply. Available returnsTBAs as implied financing rates in non-Agency RMBS have declined relative tothe Agency RMBS and CMBS as a result of credit spread tightening, limiting our reinvestmentTBA dollar roll market increased more than those available in the sector.
We have continued to hold 15 year fixed-rate Agency RMBS securities and commercial real estate loans that have relatively lower interest rate risk, which reduces our book value per diluted common share volatility. Additionally, we hold Hybrid ARM Agency RMBS and ARM Agency RMBS that we believe have lower durations and better cash flow certainty relative to current coupon 30 year fixed-rate Agency RMBS. Further, we own Agency collateralized mortgage obligations (“CMOs”), some of which are interest-only securities (“IOs”).
Our portfolio of investments that have credit exposure include CMBS, non-Agency RMBS, GSE CRTs and commercial real estate loans. Rather than relying on the rating agencies, we utilize proprietary models as well as third party applications to quantify and monitor the credit risk associated with our portfolio holdings. Our analysis generally begins at the underlying asset level, where we gather detailed information on loan, borrower, and property characteristics that inform our expectationsrepurchase market for future performance. In addition to base case cash flow projections, we perform a range of scenario stresses to gauge the sensitivity of returns to potential deviations in underlying asset behavior. We perform this detailed credit analysis at the time of initial purchase and regularly throughout the holding period of each investment.
Our CMBS portfolio generally consists of assets originated during and after 2010. These assets continued to benefit from rating agency upgrades, property price appreciation and limited supply. CMBS investments represent approximately 17% of our total investment portfolio as of December 31, 2017.
With respect to our non-Agency RMBS portfolio, we primarily invest in RMBS collateralized by prime and Alt-A loans. In addition, we have invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and reperforming mortgage loans that we believe provide attractive risk adjusted returns. We also invest in GSE CRTs, which have the added benefit of paying a floating rate coupon and reduce our need to hedge interest rate risk. The majority of our GSE CRT holdings are concentrated in 2013 and 2014 vintages, where reference loans have significant embedded home price appreciation. From a fundamental perspective, we continue to view GSE CRT as an attractive asset class based on the strength of the U.S. housing market and the strong performance of reference mortgage loans to date.most coupons.
As of December 31, 2017,2022 and 2021, our commercial real estate loan portfolio includes eight mezzanine loans that we either purchased or originated. Our commercial real estate loan portfolio representsholdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, and 7%including TBAs. Our non-Agency CMBS portfolio is comprised of our allocated equity and hasfixed-rate securities that are rated single-A (or equivalent) or higher by a weighted average maturity of 1.2 years. Our largely floating rate commercial real estate loan portfolio continues to benefit from favorable fundamentals and increasing LIBOR. The commercial real estate loan portfolio's weighted average loan-to-value ratio is approximately 69%, based on the most recently attained independent property appraisals and the relevant loan amounts. For further details on our commercial loan portfolio, refer to Note 5 - "Commercial Loans Held-for-Investment" of our consolidated financial statements in Part IV, Item 15 of this Report. We evaluate the collectibility of our commercial loans held-for investment using the factors described in Note 2 - "Summary of Significant Accounting Policies" of our consolidated financial statements in Part IV, Item 15 of this Report. We determined that no provision for loan losses for our commercial loans was requirednationally recognized statistical rating organization as of December 31, 2017.
New credit risk retention rules for commercial mortgage-backed securities became effective under the Dodd-Frank Wall Street Reform and Consumer Protection Act on December 24, 2016. The credit risk retention rules require originators and/2022. Approximately 71% of non-Agency CMBS are rated double-A (or equivalent) or an investor to retain at least 5% of the fair market value of the CMBS or sell all orhigher by a portion of this amount to a qualified third-party purchaser (“B-piece investor”). There is a minimum five year holding period for the retained investment. Despite the implementation of the credit risk retention rules, issuance volumes in 2017 finished higher than the prior year.
Portfolio Characteristics
The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and CMBS portfolionationally recognized statistical rating organization as of December 31, 2017 as a percentage of fair value:2022.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2003 | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | Total |
| Prime | 0.6 | % | | 1.9 | % | | 5.4 | % | | 5.0 | % | | 10.2 | % | | 2.9 | % | | — | % | | — | % | | — | % | | — | % | | 12.4 | % | | 10.6 | % | | 2.3 | % | | 0.3 | % | | — | % | | 51.6 | % |
| Alt-A | — | % | | 1.0 | % | | 9.9 | % | | 9.3 | % | | 11.1 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 31.3 | % |
Re-REMIC (1) | — | % | | — | % | | — | % | | — | % | | 0.7 | % | | — | % | | 0.6 | % | | 5.1 | % | | 3.9 | % | | 2.2 | % | | 1.2 | % | | — | % | | — | % | | — | % | | — | % | | 13.7 | % |
| Subprime/reperforming | — | % | | — | % | | — | % | | — | % | | 0.3 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 0.1 | % | | 3.0 | % | | — | % | | — | % | | 3.4 | % |
| Total Non-Agency | 0.6 | % | | 2.9 | % | | 15.3 | % | | 14.3 | % | | 22.3 | % | | 2.9 | % | | 0.6 | % | | 5.1 | % | | 3.9 | % | | 2.2 | % | | 13.6 | % | | 10.7 | % | | 5.3 | % | | 0.3 | % | | — | % | | 100.0 | % |
| GSE CRT | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 31.2 | % | | 36.0 | % | | 7.5 | % | | 21.8 | % | | 3.5 | % | | 100.0 | % |
| CMBS | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 3.8 | % | | 18.9 | % | | 12.1 | % | | 15.3 | % | | 35.9 | % | | 4.1 | % | | 1.9 | % | | 8.0 | % | | 100.0 | % |
| |
(1) | For Re-REMICs, the table reflects the year in which the resecuritizations were issued. The vintage distribution of the securities that collateralize our Re-REMIC investments is 8.4% for 2005, 8.1% for 2006 and 83.5% for 2007. |
The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and CMBS portfolio asAs of December 31, 2017:2022 and 2021, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs.
As of December 31, 2021,we held an investment in one commercial real estate mezzanine loan that had an LTV ratio of approximately 68.0%. The loan was repaid in full in October 2022. |
| | | | | | | | | | | | | |
Non-Agency RMBS State | | Percentage | | GSE CRT State | | Percentage | | CMBS State | | Percentage |
| California | | 44.7 | % | | California | | 19.0 | % | | California | | 14.8 | % |
| New York | | 9.0 | % | | Texas | | 6.1 | % | | New York | | 14.6 | % |
| Florida | | 6.4 | % | | New York | | 4.5 | % | | Texas | | 9.5 | % |
| New Jersey | | 3.9 | % | | Florida | | 4.3 | % | | Florida | | 6.3 | % |
| Virginia | | 3.3 | % | | Virginia | | 4.3 | % | | Pennsylvania | | 4.1 | % |
| Maryland | | 3.3 | % | | Illinois | | 3.8 | % | | Illinois | | 3.7 | % |
| Massachusetts | | 2.9 | % | | Massachusetts | | 3.4 | % | | New Jersey | | 3.3 | % |
| Illinois | | 2.4 | % | | Washington | | 3.3 | % | | Michigan | | 3.0 | % |
| Washington | | 2.1 | % | | New Jersey | | 3.3 | % | | Ohio | | 3.0 | % |
| Arizona | | 2.0 | % | | Pennsylvania | | 3.1 | % | | Virginia | | 2.9 | % |
| Other | | 20.0 | % | | Other | | 44.9 | % | | Other | | 34.8 | % |
| Total | | 100.0 | % | | | | 100.0 | % | | Total | | 100.0 | % |
Financing and Other Liabilities.Liabilities
We enter into repurchase agreements to finance the majority of our target assets. These agreements are secured by our Agency RMBS, CMBS, non-Agency RMBS and GSE CRTs. In addition, theseinvestment portfolio through repurchase agreements. Repurchase agreements are generally settled on a short-term basis, usually ranging from one to twelvesix months, and bear interest at rates that have historically movedare expected to move in close relationship to LIBOR. At each settlement date, we refinance each repurchase agreement at the market interest rate at that time. As of December 31, 2017, we had entered into repurchase agreements totaling $14.1 billion (2016: $11.2 billion). We increased our investment portfolio and related repurchase agreement borrowings throughout 2017 as market conditions improved and residential and commercial credit fundamentals remained strong. Our higher repurchase agreements balance as of December 31, 2017 also reflects incremental borrowings associated with leveraging the proceeds of our August 2017 Preferred C stock offering.
Our wholly-owned subsidiary, IAS Services LLC, is a member of the FHLBI. As a member of the FHLBI, IAS Services LLC has borrowed funds from the FHLBI in the form of secured advances. As of December 31, 2017, IAS Services LLC had $1.65 billion in outstanding secured advances. For the year ended December 31, 2017, IAS Services LLC had weighted average borrowings of $1.65 billion with a weighted average borrowing rate of 1.17% and a weighted average maturity of 6.3 years.
On January 12, 2016, new FHFA rules were adopted that exclude captive insurance companies from Federal Home Loan Bank membership. Under the new rules, IAS Services LLC is permitted to remain a member of the Federal Home Loan Bank until February 2021, and the FHLBI is permitted to honor the contractual maturity of our existing advances. Accordingly, we do not expect there to be any impact to our existing FHLBI borrowings under the FHFA Rule.
SOFR.
The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:quarter.
| | | | | | | | | | | | | | | | | |
| $ in thousands | Collateralized borrowings under repurchase agreements |
| Quarter Ended | Quarter-end balance | | Average quarterly balance (1) | | Maximum balance (2) |
| March 31, 2021 | 8,240,887 | | | 8,359,010 | | | 8,708,686 | |
| June 30, 2021 | 7,851,204 | | | 7,945,494 | | | 8,004,924 | |
| September 30, 2021 | 7,873,798 | | | 7,846,536 | | | 7,886,360 | |
| December 31, 2021 | 6,987,834 | | | 7,442,784 | | | 7,776,070 | |
| March 31, 2022 | 5,837,420 | | | 6,218,445 | | | 6,636,913 | |
| June 30, 2022 | 3,262,530 | | | 4,059,917 | | | 4,902,191 | |
| September 30, 2022 | 3,887,291 | | | 3,907,505 | | | 4,165,996 | |
| December 31, 2022 | 4,234,823 | | | 3,825,218 | | | 4,234,823 | |
|
| | | | | | | | |
| $ in thousands | Collateralized borrowings under repurchase agreements and secured loans |
| Quarter Ended | Quarter-end balance | | Average quarterly balance | | Maximum balance outstanding |
| March 31, 2016 | 12,837,159 |
| | 13,137,569 |
| | 13,501,433 |
|
| June 30, 2016 | 13,418,647 |
| | 13,075,770 |
| | 13,418,647 |
|
| September 30, 2016 | 13,710,502 |
| | 13,826,469 |
| | 13,984,960 |
|
| December 31, 2016 | 12,810,669 |
| | 13,215,697 |
| | 13,626,829 |
|
| March 31, 2017 | 13,939,899 |
| | 13,901,254 |
| | 14,086,600 |
|
| June 30, 2017 | 13,768,948 |
| | 13,716,749 |
| | 13,768,948 |
|
| September 30, 2017 | 15,738,838 |
| | 15,010,514 |
| | 15,738,838 |
|
| December 31, 2017 | 15,730,801 |
| | 15,762,094 |
| | 15,815,972 |
|
In 2013, our wholly-owned subsidiary, IAS Operating Partnership LP, issued $400.0 million in Exchangeable Senior Notes (the “Notes”). We retired $256.6 million(2)Amount represents the maximum borrowings at month-end during each of the Notes in 2017 in anticipation of the upcoming scheduled maturity of the Notes on March 15, 2018. As of December 31, 2017, $143.4 million of the Notes remain outstanding. The following table summarizes retirements of the Notes during the year ended December 31, 2017.respective periods.
|
| | | | | | | |
$ in thousands | Year Ended December 31, 2017 |
Reacquisition price41 | 262,069 |
|
Par value of Notes retired | (256,590 | ) |
Write off of unamortized debt issuance cost associated with Notes retired | 1,335 |
|
Net loss on extinguishment of debt | 6,814 |
|
We have committed to invest up to $122.9 million in unconsolidated ventures that are sponsored by an affiliateHedging Instruments.Instruments
We generally hedge as much of our interest rate and foreign exchange risk as we deem prudent in lightbecause of market conditions. No assurance can be given that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Our investment policies do not contain specific requirements as to the percentages or amount of risk that we are required to hedge.
Hedging may fail to protect or could adversely affect us because, among other things:
•available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
•the duration of the hedges may not match the duration of the related liabilities;
•our counterparty in the hedging transaction may default on its obligation to pay;
•the credit quality of our counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
•the value of derivatives used for hedging may be adjusted from time-to-time in accordance with accounting rules to reflect changes in fair value.
As of December 31, 2017, we have enteredWe enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates underfor a portion of our borrowings. TheseUnder these swap agreements, provide forwe generally pay fixed interest rates indexed off of one-month and three-month LIBOR and effectively fix thereceive floating interest rates on $9.1 billion (2016: $6.5 billion)indexed to SOFR. To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of borrowings.our overall risk management strategy. Prior to transitioning interest rate swaps to swaps that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps were generally indexed to one- or three-month LIBOR.
We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the year ended December 31, 2017,2022, we moderately increased our leverage to fund the purchase of MBS and GSE CRT
securities and entered intoterminated existing interest rate swaps with a notional amount of $2.6$10.0 billion to hedge the interest rates on the associated repurchase agreement debt. We have two types of interest rate swap arrangements: bilateraland entered into new interest rate swaps and centrally clearedwith a notional amount of $10.1 billion, excluding interest rate swaps. We are required to pledge collateral onswaps with forward start dates, as part of our interest rate swaps. As a result of rulebook changes governing central clearing activities effective January 3, 2017, the dailyoverall risk management strategy. Daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Ascollateral and is recorded as a resultrealized gain or loss in our consolidated statement of this change, cash collateral pledgedoperations. We realized a net gain of $593.0 million on our centrally cleared interest rate swaps is settled against the fair value of these swaps. Due in part to this rule change, the fair value of our interest rate swap liabilities decreased from $134.2 million as of December 31, 2016 to $32.8 million as of December 31, 2017 and our due from counterparties decreased from $86.5 million as of December 31, 2016 to $620,000 as of December 31, 2017.
Duringduring the year ended December 31, 2016, we terminated swaps with a notional amount of $5.0 billion and realized losses of $69.1 million. The terminated swaps were predominantly maturing in 2016 and offered little protection from rising rates. Additionally, our investment and repurchase agreement balances decreased2022 primarily due to asset sales to facilitate stock repurchases, further reducing our need for hedging. Our overallrising interest rate risk did not change materially as a result of the swap terminations.rates.
As of December 31, 2017 and December 31, 2016, weWe have no outstanding interest rate swaptions. During the year ended December 31, 2016, interest rate swaptions expired unexercised and we realized net losses of $1.5 million. We periodically purchase interest rate swaptions to reduce the impact that interest rate volatility has on our portfolio.
As of December 31, 2017, we held $76.9 million (2016: $62.3 million) in notional amount of currency forward contracts. During the year ended December 31, 2017, we settled currency forward contracts of $269.8 million (2016: $307.5 million) in notional amount and realized a net loss of $5.1 million (2016: gain of $12.6 million). We useentered into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in Pound Sterlingforeign currencies. We did not have any currency forward contracts outstanding as of December 31, 2022. As of December 31, 2021 we had €11.7 million or $13.6 million notional amount of forward contracts related to our investment in an unconsolidated venture. During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million (2021: €70.8 million or $84.8 million) in notional amount related to our investment in an unconsolidated venture and Euro.realized a net gain of $919,000 (2021: $209,000 net gain).
Capital Activities
During the year ended December 31, 2022, we sold 5,686,598 shares of common stock under our equity distribution agreement with placement agents for proceeds of $81.6 million, net of approximately $1.3 million in commissions and fees. During the year ended December 31, 2021, we sold 5,574,402 shares of common stock under our equity distribution agreements for proceeds of $180.5 million, net of approximately $2.6 million in commissions and fees. We did not have any remaining shares authorized under our at-the-market program as of December 31, 2022.
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock. As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program.
In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock. The reverse stock split was effected following the close of business on June 3, 2022. For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, unless otherwise noted.
For information on dividends declared and paid during the year ended December 31, 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.
During the year ended December 31, 2022, we did not repurchase any shares of our common stock.
Book Value per Diluted Common Share
We calculate book value per diluted common share as follows: |
| | | | | | | | |
| | Years Ended December 31, |
| In thousands except per share amounts | 2017 | | 2016 | | 2015 |
| Numerator (adjusted equity): | | | | | |
| Total equity | 2,656,878 |
| | 2,270,184 |
| | 2,266,908 |
|
| Less: Liquidation preference of Series A Preferred Stock | (140,000 | ) | | (140,000 | ) | | (140,000 | ) |
| Less: Liquidation preference of Series B Preferred Stock | (155,000 | ) | | (155,000 | ) | | (155,000 | ) |
| Less: Liquidation preference of Series C Preferred Stock | (287,500 | ) | | — |
| | — |
|
| Total adjusted equity | 2,074,378 |
| | 1,975,184 |
| | 1,971,908 |
|
| | | | | | |
| Denominator (number of shares - diluted): | | | | | |
| Common stock outstanding | 111,624 |
| | 111,595 |
| | 113,620 |
|
| Non-controlling interest OP units | 1,425 |
| | 1,425 |
| | 1,425 |
|
| Number of shares - diluted | 113,049 |
|
| 113,020 |
| | 115,045 |
|
| | | | | | |
| Book value per diluted common share | 18.35 |
| | 17.48 |
| | 17.14 |
|
While our portfolio benefited from credit spread tightening in 2017, agency and commercial credit investments declined in valuation due to higher interest rates. However, these declines were more than offset by our interest rate hedges and increase in residential credit investment valuations. As a result, our book value per diluted common share increased 5.0% in 2017. | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| In thousands except per share amounts | 2022 | | 2021 | | 2020 |
| Numerator (adjusted equity): | | | | | |
| Total equity | 804,075 | | | 1,402,135 | | | 1,367,158 | |
| Less: Liquidation preference of Series A Preferred Stock | — | | | — | | | (140,000) | |
| Less: Liquidation preference of Series B Preferred Stock | (113,441) | | | (155,000) | | | (155,000) | |
| Less: Liquidation preference of Series C Preferred Stock | (195,412) | | | (287,500) | | | (287,500) | |
| Total adjusted equity | 495,222 | | | 959,635 | | | 784,658 | |
| | | | | |
| Denominator (number of shares): | | | | | |
| Common stock outstanding | 38,711 | | | 32,987 | | | 20,322 | |
| | | | | |
| Book value per common share | 12.79 | | | 29.09 | | | 38.61 | |
Our book value per diluted common share increased 2.0%decreased 56% as of December 31, 2022 compared to December 31, 2021 as Agency RMBS were negatively impacted by interest rate volatility, sharply higher interest rates, an inverted yield curve and market expectations for even more restrictive monetary policy, resulting in 2016 dueone of the sector's worst total returns on record.
Our book value per common share decreased 25% as of December 31, 2021 compared to tighter credit spreads, whichDecember 31, 2020. The increase in interest rate volatility and prepayment speeds, combined with reduced investor demand for prepayment protection and the potential for an earlier than expected taper of MBS purchases from the Federal Reserve resulted in an increase in valuations for our residential and commercial credit investments. Although we saw a benefit from credit spreads tightening in 2016, interest rates also rose, causing our agency portfolio to decrease in value. The decrease was partially offset by ourAgency RMBS sharply underperforming interest rate hedges. swap hedges during the first half of 2021. Book value per common share further decreased in the second half of 2021 as the Federal Reserve's announced tapering and subsequent acceleration of the pace of tapering in December 2021 negatively impacted Agency RMBS valuations.
Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, future impairments ofallowances for credit losses on our available-for-sale MBS, and GSE CRTs,a change in our interest income recognition provision for loan losses, and a change in our tax liability among other effects.
Mortgage-Backed and Credit Risk Transfer Securities. We have elected the fair value option for all of our MBS purchased on or after September 1, 2016; our GSE CRTs purchased on or after August 24, 2015; and all of our RMBS IOs. Under the fair value option, changes in fair value are recognized in the consolidated statement of operations. In our view, the fair value option election more appropriately reflects the results of our operations because MBS and GSE CRT fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments. As of December 31, 2022, $4.7 billion (December 31, 2021: $7.7 billion) or 99% (December 31, 2021: 99%) of our MBS are accounted for under the fair value option.
We record our MBS except RMBS IOs, purchased prior tobefore September 1, 2016, as available-for-sale and report themthese MBS at fair value. RMBS IOs andWe recorded our GSE CRTs arepurchased before August 24, 2015 as hybrid financial instruments and reported these GSE CRTs at fair value. FairWe did not hold any GSE CRTs as of December 31, 2022 or December 31, 2021.
We determine the fair value is determinedof our MBS by obtaining valuations from an independent source. If the fair value of a security is not available from a third-party pricing service, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. It is possible that changes in these inputs could change the valuation estimate and lead us to impairmentestablish allowances for credit losses on our available-for-sale MBS.
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016. Prior to September 1, 2016, we have also elected the fair value option for our RMBS IOs. We have also previously elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under the fair value option, changes in fair value are recognized in the consolidated statement of operations. In our view, the fair value option election more appropriately reflects the results of our operations because MBS and GSE CRT fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments. As of December 31, 2017, $6.5 billion (December 31, 2016: $427.5 million) or 35.6% (December 31, 2016: 2.9%) of our MBS and GSE CRT are accounted for under the fair value option.
Further information is provided in Note 2 - “Summary of Significant Accounting Policies” and Note 4 - “Mortgage-Backed and Credit Risk Transfer Securities.”
Other-than-temporary Impairment. We regularly review our available-for-sale portfolio for other-than-temporary impairment. This determination involves both qualitative and quantitative data. It is possible that estimates may be incorrect, economic conditions may change or we may be forced to sell the investment before recovery of our amortized cost. Further information is provided in Note 2 - “Summary of Significant Accounting Policies” and Note 4 - “Mortgage-Backed and Credit Risk Transfer Securities.”
Commercial Loans. Commercial loans held-for-investment are carried at amortized cost, net of any provision for loan losses. We generally consider various factors in evaluating whether a commercial loan is impaired. These factors include, but are not limited to, the loan-to-value ratios, the most recent financial information available for each loan and associated properties, economic trends and the loan sponsor or the borrowing entity's ability to ensure that properties associated with the loan are managed and operating sufficiently.
Changes in our estimates can significantly impact the provision for loan losses. It is also possible that we will experience credit losses that are different from our current estimates or that the timing of those losses may differ from our estimates. Further information on the provision for loan losses is provided in Note 2 - “Summary of Significant Accounting Policies.”
Interest Income Recognition. Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method.
Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows. We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price. Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment, unless those changes will be reflected in an allowance for credit losses. In situations where an allowance for credit losses is limited by the fair value of the investment, we compute the yield as the rate that equates expected future cash flows to the current fair value of the investment. In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities. For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security, unless those changes will be reflected in an allowance for credit losses, and the security's yield is revised prospectively.
the most significant factors impacting our projected cash flows is changes in long-term interest rates. When interest rates fall, prepayments will generally increase and when interest rates rise, prepayments will generally decrease. However, there are a variety of factors that may impact the rate of prepayments on our securities. Accordingly, under different conditions, we could report materially different amounts. Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for an estimate of the percentage change in our net interest income, including interest paid or received under interest rate swaps, caused by an instantaneous 50 and 100 basis points increase or decrease in interest rates.
For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows. We do not estimate prepayments in applying the effective interest method.
Interest income on GSE CRTs purchased prior tobefore August 24, 2015 iswas accrued based on the coupon rate of the debt host contract which reflectsreflected the credit risk of GSE unsecured senior debt with a similar maturity. Premiums or discounts associated with the purchase of credit risk transfer securities arewere amortized or accreted into interest income over the life of the debt host contract using the effective interest method. Interest income on GSE CRTs purchased on or after August 24, 2015 iswas based on estimated future cash flows.
Prior to the deconsolidation of our residential securitizations (“Residential Securitizations”), interest income from our residential loans was recognized on an accrual basis with the related premiums amortized into interest income using the effective interest method over the weighted average life of these loans. As needed, these estimated cash flows were updated and a revised yield was computed based on the current amortized cost of the investment.
Interest income from our commercial and other loans iswas recognized when earned and deemed collectible or until a loan becomes past due based on the terms of the loan agreement.collectible.
Accounting for Derivative Financial Instruments.We use derivatives to manage interest rate and currency exchange risk.risk and as an alternative means of investing in and financing Agency RMBS. We record all derivatives on our consolidated balance sheets at fair value. Our interest rate swaps, currency forward contracts and TBAs are valued using a market approach through the use of quoted prices available in an active market. All of our interest rate swaps were centrally cleared by a registered clearing organization as of December 31, 2022.
Effective December 31, 2013, we voluntarily discontinued hedge accounting for our interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges. As a result of discontinuing hedge accounting, changes in the fair value of the interest rate swaps are recorded in gain (loss) on derivative instruments, net in our consolidated statement of operations, rather than in accumulated other comprehensive income (loss). Further information is provided in Note 98 - “Derivatives and Hedging Activities.”
Income Taxes.We have elected to be taxed as a REIT. Accordingly, we generally will not be subject to U.S. federal and applicable state and local corporate income tax to the extent that we make qualifying distributions and provided we satisfy on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. The REIT qualifications rules are complex and failure to apply them correctly could subject us to U.S. federal, state and local income taxes.
Expected ImpactActivities” of New Authoritative Guidance on Future Financial Information
In January 2016, the FASB issued guidance to improve certain aspects of classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. We are required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted. We have determined that this new accounting standard will not have an impact on our financial condition or results of operations but will simplify financial statement disclosures.
In June 2016, the FASB issued an amendment to the guidance on reporting credit losses for assets measured at amortized cost and available-for-sale securities. We are required to adopt the new guidance in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the potential impacts of the new guidance on our consolidated financial statements as well as available transition methods.
In August 2016, the FASB issued new guidance that is intended to reduce diversityincluded in practice in how certain transactions are classified in the statement of cash flows. Additionally, in November 2016, the FASB issued new guidance on classification and presentation of changes in restricted cash on the statement of cash flows. We are required to adopt the new accounting standards in the first quarter of 2018 using a retrospective transition method for each period presented. Early adoption is permitted. We have determined that this new guidance will impact the presentation of certain cash payments and receipts among the operating, investing and financing sections of our consolidated statements of cash flows primarily related to distributions from investments in unconsolidated ventures and basis recovered on certain investment securities.
In August 2017, the FASB issued guidance to improve accounting for hedging activities. The purposePart IV, Item 15 of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. We are required to adopt the new guidance in the first quarter of 2019. We have determined that this new guidance is not expected to have an impact on our consolidated financial statements because we have elected not to apply hedge accounting to all new derivative contracts entered into after January 1, 2014.Report.
Results of Operations
Our consolidated results of operations for the years ended December 31, 2017, 20162022, 2021 and 20152020 are summarized below:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands except share data | 2022 | | 2021 | | 2020 |
| Interest income | | | | | |
| Mortgage-backed and other securities | 192,566 | | | 167,056 | | | 277,400 | |
| Commercial and other loans | 1,947 | | | 2,146 | | | 2,766 | |
| Total interest income | 194,513 | | | 169,202 | | | 280,166 | |
| Interest expense | | | | | |
Repurchase agreements (1) | 51,560 | | | (11,290) | | | 73,607 | |
| Secured loans | — | | | — | | | 8,655 | |
| Total interest expense | 51,560 | | | (11,290) | | | 82,262 | |
| Net interest income | 142,953 | | | 180,492 | | | 197,904 | |
| | | | | |
| Other income (loss) | | | | | |
| Gain (loss) on investments, net | (1,079,339) | | | (366,509) | | | (961,938) | |
| (Increase) decrease in provision for credit losses | — | | | 1,768 | | | (1,768) | |
| Equity in earnings (losses) of unconsolidated ventures | (407) | | | 870 | | | 1,163 | |
| Gain (loss) on derivative instruments, net | 559,007 | | | 122,611 | | | (851,050) | |
| Realized and unrealized credit derivative income (loss), net | — | | | — | | | (35,312) | |
| Net gain (loss) on extinguishment of debt | — | | | — | | | 14,742 | |
| Other investment income (loss), net | 186 | | | 1 | | | 2,137 | |
| Total other income (loss) | (520,553) | | | (241,259) | | | (1,832,026) | |
| Expenses | | | | | |
| Management fee — related party | 16,906 | | | 21,080 | | | 29,367 | |
| General and administrative | 8,418 | | | 8,153 | | | 10,863 | |
| Total expenses | 25,324 | | | 29,233 | | | 40,230 | |
| | | | | |
| Net income (loss) | (402,924) | | | (90,000) | | | (1,674,352) | |
| Dividends to preferred stockholders | (28,218) | | | (37,795) | | | (44,426) | |
| Gain on repurchase and retirement of preferred stock | 14,179 | | | — | | | — | |
| Issuance and redemption costs of redeemed preferred stock | — | | | (4,682) | | | — | |
| Net income (loss) attributable to common stockholders | (416,963) | | | (132,477) | | | (1,718,778) | |
| Earnings (loss) per share: | | | | | |
| Net income (loss) attributable to common stockholders | | | | | |
| Basic | (12.21) | | | (4.82) | | | (98.93) | |
| Diluted | (12.21) | | | (4.82) | | | (98.93) | |
| Weighted average number of shares of common stock: | | | | | |
| Basic | 34,160,080 | | | 27,513,223 | | | 17,373,039 | |
| Diluted | 34,160,080 | | | 27,513,223 | | | 17,373,039 | |
|
| | | | | | | | |
| | Years Ended December 31, |
| In thousands except share amounts | 2017 | | 2016 | | 2015 |
| Interest Income | | | | | |
| Mortgage-backed and credit risk transfer securities | 521,547 |
| | 456,444 |
| | 523,893 |
|
Residential loans (1) | — |
| | — |
| | 110,908 |
|
| Commercial loans | 23,508 |
| | 22,238 |
| | 15,331 |
|
| Total interest income | 545,055 |
| | 478,682 |
| | 650,132 |
|
| Interest Expense | | | | | |
| Repurchase agreements | 163,881 |
| | 124,000 |
| | 166,892 |
|
| Secured loans | 19,370 |
| | 10,887 |
| | 6,579 |
|
| Exchangeable senior notes | 13,340 |
| | 22,467 |
| | 22,461 |
|
Asset-backed securities (1) | — |
| | — |
| | 82,041 |
|
| Total interest expense | 196,591 |
| | 157,354 |
| | 277,973 |
|
| Net interest income | 348,464 |
| | 321,328 |
| | 372,159 |
|
| Reduction in provision for loan losses | — |
| | — |
| | (213 | ) |
| Net interest income after reduction in provision for loan losses | 348,464 |
| | 321,328 |
| | 372,372 |
|
| Other income (loss) | | | | | |
| Gain (loss) on investments, net | (19,704 | ) | | (17,542 | ) | | (18,005 | ) |
| Equity in earnings (losses) of unconsolidated ventures | (1,327 | ) | | 2,392 |
| | 12,630 |
|
| Gain (loss) on derivative instruments, net | 18,155 |
| | (62,815 | ) | | (219,048 | ) |
| Realized and unrealized credit derivative income (loss), net | 51,648 |
| | 61,143 |
| | 19,782 |
|
| Net loss on extinguishment of debt, net | (6,814 | ) | | — |
| | — |
|
| Other investment income (loss), net | 7,381 |
| | (5,002 | ) | | 944 |
|
| Total other income (loss) | 49,339 |
| | (21,824 | ) | | (203,697 | ) |
| Expenses | | | | | |
| Management fee — related party | 37,556 |
| | 34,541 |
| | 38,632 |
|
| General and administrative | 7,190 |
| | 7,265 |
| | 7,769 |
|
Consolidated securitization trusts (1) | — |
| | — |
| | 8,219 |
|
| Total expenses | 44,746 |
| | 41,806 |
| | 54,620 |
|
| Net income | 353,057 |
| | 257,698 |
| | 114,055 |
|
| Net income attributable to non-controlling interest | 4,450 |
| | 3,287 |
| | 1,344 |
|
| Net income attributable to Invesco Mortgage Capital Inc. | 348,607 |
| | 254,411 |
| | 112,711 |
|
| Dividends to preferred stockholders | 28,080 |
| | 22,864 |
| | 22,864 |
|
| Net income attributable to common stockholders | 320,527 |
| | 231,547 |
| | 89,847 |
|
| Earnings per share: | | | | | |
| Net income attributable to common stockholders | | | | | |
| Basic | 2.87 |
| | 2.07 |
| | 0.74 |
|
| Diluted | 2.75 |
| | 1.98 |
| | 0.74 |
|
| Weighted average number of shares of common stock: | | | | | |
| Basic | 111,610,393 |
| | 111,973,404 |
| | 121,377,585 |
|
| Diluted | 123,040,827 |
| | 130,254,003 |
| | 122,843,838 |
|
| |
(1) | The consolidated statement of operations for year ended December 31, 2015 includes income and expenses of consolidated VIEs. We deconsolidated these VIEs in 2015. Refer to Note 2 - “Summary of Significant Accounting Policies” of our consolidated financial statements for further discussion. |
Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and earning asset yields as of and for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
Average earning assets (1) | 5,137,339 | | | 8,808,105 | | | 7,895,394 | |
Average earning asset yields (2) | 3.79 | % | | 1.92 | % | | 3.55 | % |
|
| | | | | | | | |
| | As of and for the Years Ended |
| | December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
Average Balances (1): | | | | | |
| Agency RMBS: | | | | | |
| 15 year fixed-rate, at amortized cost | 3,297,267 |
| | 2,722,301 |
| | 1,698,573 |
|
| 30 year fixed-rate, at amortized cost | 5,874,757 |
| | 3,646,480 |
| | 4,368,662 |
|
| ARM, at amortized cost | 267,265 |
| | 353,937 |
| | 446,714 |
|
| Hybrid ARM, at amortized cost | 1,969,767 |
| | 2,800,812 |
| | 3,219,463 |
|
| Agency-CMO, at amortized cost | 302,060 |
| | 375,888 |
| | 423,409 |
|
| CMBS, at amortized cost | 2,818,244 |
| | 2,582,003 |
| | 3,173,737 |
|
| Non-Agency RMBS, at amortized cost | 1,441,527 |
| | 2,167,679 |
| | 2,660,689 |
|
| GSE CRT, at amortized cost | 784,203 |
| | 650,189 |
| | 665,471 |
|
| U.S. Treasury securities, at amortized cost | — |
| | 45,375 |
| | — |
|
| Residential loans, at amortized cost | — |
| | — |
| | 3,198,666 |
|
| Commercial loans, at amortized cost | 270,314 |
| | 265,708 |
| | 166,150 |
|
| Average earning assets | 17,025,404 |
| | 15,610,372 |
| | 20,021,534 |
|
Average Earning Asset Yields (2): | | | | | |
| Agency RMBS: | | | | | |
| 15 year fixed-rate | 1.98 | % | | 1.98 | % | | 2.23 | % |
| 30 year fixed-rate | 2.79 | % | | 2.72 | % | | 2.80 | % |
| ARM | 2.32 | % | | 2.28 | % | | 2.30 | % |
| Hybrid ARM | 2.26 | % | | 2.12 | % | | 2.13 | % |
| Agency-CMO | 1.54 | % | | 2.47 | % | | 3.16 | % |
| CMBS | 4.50 | % | | 4.30 | % | | 4.37 | % |
| Non-Agency RMBS | 6.22 | % | | 4.97 | % | | 4.85 | % |
GSE CRT (3) | 2.58 | % | | 0.98 | % | | 0.54 | % |
| U.S. Treasury securities | — | % | | 1.15 | % | | — | % |
| Residential loans | — | % | | — | % | | 3.47 | % |
| Commercial loans | 8.70 | % | | 8.35 | % | | 8.36 | % |
| Average earning asset yields | 3.20 | % | | 3.07 | % | | 3.25 | % |
| |
(1) | Average amounts for each period are based on weighted month-end balances. |
| |
(2) | Average earning asset yields for the period are calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of the amortized cost of the investments. All yields are annualized. |
| |
(3) | GSE CRT average earning asset yield excludes coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP. |
(2)Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized.
Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately $17.0$5.1 billion during the year ended December 31, 2017 (2016: $15.62022 (2021: $8.8 billion; 2015: $20.02020: $7.9 billion). Average earning assets decreased for the year ended December 31, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings. Average earning asset yields increased for the year ended December 31, 2022 compared to 2021 primarily due to our rotation into higher yielding Agency RMBS.
Average earning assets increased for the year ended December 31, 2021 compared to 2020 as we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic. Average earning asset yields decreased during the year ended December 31, 20172021 compared to 2016 primarily2020 due to the investment of proceeds fromchanges in our Series C Preferred Stock offering in 30 year fixed-rate Agency RMBS and CMBS.
Average earning assets declined during the year ended December 31, 2016 compared to 2015 primarily due to the deconsolidation of our Residential Securitizations in December 2015.portfolio composition.
We earned total interest income of $545.1$194.5 million (2016: $478.7during 2022 (2021: $169.2 million; 2015: $650.12020: $280.2 million) during 2017.. Our interest income consists of coupon interest and net premium amortization(premium amortization) discount accretion on MBS and GSE CRTsother securities as well as interest income on residentialcommercial and commercialother loans as shown in the table below.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
| Interest Income | | | | | |
| Mortgage-backed and other securities - coupon interest | 198,290 | | | 207,506 | | | 298,613 | |
| Mortgage-backed and other securities - net (premium amortization) discount accretion | (5,724) | | | (40,450) | | | (21,213) | |
| Mortgage-backed and other securities - interest income | 192,566 | | | 167,056 | | | 277,400 | |
| Commercial and other loans | 1,947 | | | 2,146 | | | 2,766 | |
| Total interest income | 194,513 | | | 169,202 | | | 280,166 | |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Interest Income | | | | | |
| MBS and GSE CRT - coupon interest | 616,697 |
| | 574,692 |
| | 641,181 |
|
| MBS and GSE CRT - net premium amortization | (95,150 | ) | | (118,248 | ) | | (117,288 | ) |
| MBS and GSE CRT - interest income | 521,547 |
| | 456,444 |
| | 523,893 |
|
| Residential loans | — |
| | — |
| | 110,908 |
|
| Commercial loans | 23,508 |
| | 22,238 |
| | 15,331 |
|
| Total interest income | 545,055 |
| | 478,682 |
| | 650,132 |
|
TotalMortgage-backed and other securities interest income increased $66.4$25.5 million for the year ended December 31, 2022 compared to 2021 despite lower average earning assets due to a 187 basis point increase in average earning asset yields. Interest income on our commercial loan decreased during the year ended December 31, 20172022 compared to 2016,2021 primarily due to higher couponthe repayment of the commercial loan in October 2022.
Mortgage-backed and other securities interest on MBS and GSE CRT earning assets. MBS and GSE CRTincome decreased $110.3 million for the year ended December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease in average earning assets rose $1.4 billion to $17.0 billionasset yields. Almost all of our investment portfolio (excluding TBAs) was invested in 2017 as detailed in the table above. Lower net premium amortization increased interest income by $23.1 millionAgency RMBS during the year ended December 31, 2017 primarily due to slower prepayment speeds. Interest income on our floating rate commercial real estate loans increased $1.3 million during the year ended December 31, 2017 primarily due to increasing LIBOR rates.
Total interest income declined during the year ended December 31, 2016 compared to 2015 primarily due to the deconsolidation of our Residential Securitizations in December 2015. Coupon interest on our MBS and GSE CRT declined for the year ended December 31, 2016 compared to 2015 due to lower average earning assets. Average earning MBS and GSE CRT assets decreased by $1.3 billion as of and for the year ended December 31, 2016 compared to 2015 as paydowns on securities were primarily reinvested into share repurchases.
The yield on our average investment portfolio during the year ended December 31, 2017 was 3.20% (2016: 3.07%; 2015: 3.25%). Our average earning asset yields increased during the year ended December 31, 2017 compared to 2016 primarily due to slower prepayment speeds and higher index rates on floating and adjustable rate securities.
The decrease in our earning asset yields for 2016 and 2015 was primarily attributable to portfolio reallocation to lower duration Agency RMBS. Our asset allocation to Agency RMBS increased from 51% as of December 31, 2015 to 63% as of December 31, 2016.
2021.
Prepayment Speeds
Our RMBS andportfolio (and previously our GSE CRT portfolioportfolio) is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds on our RMBS and GSE CRT portfolio are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected.
The standard measure of prepayment speeds is the constant prepayment rate, also known as the conditional prepayment rate or "CPR". CPR measures prepaymentsfollowing table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio during 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
| Agency RMBS | (6,755) | | | (41,881) | | | (32,737) | |
| Agency CMBS | — | | | — | | | (1,744) | |
| Non-Agency CMBS | 1,624 | | | 2,695 | | | 14,721 | |
| Non-Agency RMBS | (552) | | | (1,264) | | | 1,107 | |
| GSE CRT | — | | | — | | | (2,560) | |
| U.S. Treasury Securities | (41) | | | — | | | — | |
| Net (premium amortization) discount accretion | (5,724) | | | (40,450) | | | (21,213) | |
Net premium amortization decreased $34.7 million during 2022 compared to 2021 primarily as a percentageresult of repositioning our Agency RMBS portfolio into securities with lower book prices.
Net premium amortization increased $19.2 million during 2021 compared to 2020 primarily due to sales of non-Agency CMBS purchased at discounts and the current outstanding loan balance and is expressed as a compound annual rate. The following tables provide the three month CPR for ourpurchase of Agency RMBS and GSE CRTs throughout 2017, 2016 and 2015.
|
| | | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2017 | | September 30, 2017 | | June 30, 2017 | | March 31, 2017 |
| 15 year Agency RMBS | 9.3 |
| | 10.2 |
| | 9.5 |
| | 8.1 |
|
| 30 year Agency RMBS | 7.9 |
| | 9.3 |
| | 9.2 |
| | 10.8 |
|
| Agency/ Hybrid ARM RMBS | 14.9 |
| | 18.6 |
| | 16.3 |
| | 15.7 |
|
| Non-Agency RMBS | 11.8 |
| | 15.3 |
| | 12.6 |
| | 13.3 |
|
| GSE CRT | 11.8 |
| | 12.4 |
| | 9.7 |
| | 13.1 |
|
| Weighted average CPR | 9.9 |
| | 12.2 |
| | 11.2 |
| | 11.7 |
|
|
| | | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2016 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 |
| 15 year Agency RMBS | 8.9 |
| | 9.5 |
| | 10.4 |
| | 10.2 |
|
| 30 year Agency RMBS | 17.6 |
| | 16.2 |
| | 13.7 |
| | 10.8 |
|
| Agency/ Hybrid ARM RMBS | 20.5 |
| | 21.7 |
| | 18.4 |
| | 12.5 |
|
| Non-Agency RMBS | 17.9 |
| | 16.5 |
| | 15.2 |
| | 11.1 |
|
| GSE CRT | 21.0 |
| | 17.9 |
| | 14.0 |
| | 9.2 |
|
| Weighted average CPR | 16.3 |
| | 16.1 |
| | 14.9 |
| | 11.2 |
|
|
| | | | | | | | | | | |
| | Three Months Ended |
| | December 31, 2015 | | September 30, 2015 | | June 30, 2015 | | March 31, 2015 |
| 15 year Agency RMBS | 10.7 |
| | 13.1 |
| | 10.7 |
| | 9.4 |
|
| 30 year Agency RMBS | 12.5 |
| | 14.8 |
| | 13.9 |
| | 11.1 |
|
| Agency/ Hybrid ARM RMBS | 13.9 |
| | 15.2 |
| | 17.3 |
| | 14.2 |
|
| Non-Agency RMBS | 12.5 |
| | 15.3 |
| | 14.0 |
| | 10.3 |
|
| GSE CRT | 10.5 |
| | 12.6 |
| | 13.9 |
| | 9.5 |
|
| Weighted average CPR | 12.6 |
| | 14.7 |
| | 14.4 |
| | 11.4 |
|
Weighted average prepayment speeds were slowerat premiums during the year ended December 31, 2017 than 2016 resultingsecond half of 2020 and in lower net premium amortization. We recognized $95.2 million and $118.2 million of net premium amortization during the years ended December 31, 2017 and 2016, respectively, on our RMBS and GSE CRT portfolio.
We recognized $118.2 million and $117.3 million of net premium amortization during the years ended December 31, 2016 and 2015, respectively, on our RMBS and GSE CRT portfolio. Although weighted average prepayment speeds were higher during the year ended December 31, 2016 than 2015, net premium amortization was relatively constant because of lower average earning assets following share repurchases in 2015 and the first quarter of 2016.2021.
Our interest income is subject to interest rate risk. Refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” for more information relating to interest rate risk and its impact on our operating results.
Interest Expense and Cost of Funds
The table below presents our average borrowings and cost of funds for the years ended December 31, 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
Total average borrowings (1) | 4,495,581 | | | 7,892,617 | | | 6,926,790 | |
Maximum borrowings during the period (2) | 6,636,913 | | | 8,708,686 | | | 23,132,234 | |
Cost of funds (3) | 1.15 | % | | (0.14) | % | | 1.19 | % |
(1)Average borrowings for each period are based on weighted month-end balances.
(2)Amount represents the maximum borrowings at month-end during each of the respective periods.
(3)Average cost of funds is calculated by dividing annualized interest expense, including amortization of net deferred gain (loss) on de-designated interest rate swaps, by our average borrowings.
Total average borrowings decreased $3.4 billion in 2022 compared to 2021 as we reduced the size of our investment portfolio and related repurchase agreement borrowings given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings. Our cost of funds increased 129 basis points in 2022 compared to 2021 primarily due to increases in the Federal Funds target rate.
Total average borrowings increased $965.8 million in 2021 compared to 2020 because we resumed investing in Agency RMBS in July 2020 and financing purchases with repurchase agreements. The increase in repurchase agreement borrowings was partially offset by the repayment of $1.65 billion of secured loans during 2020. Our cost of funds decreased 133 basis points in 2021 compared to 2020 primarily due to decreases in the Federal Funds target rate.
The table below presents the components of interest expense for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | For the Years Ended | | | | | | | | | | | | | | | |
| | December 31, | | Years ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 | $ in thousands | 2022 | | 2021 | | 2020 |
| Interest Expense | | | | | | Interest Expense | | | | | |
| Interest expense on repurchase agreement borrowings | 189,425 |
| | 118,846 |
| | 100,135 |
| Interest expense on repurchase agreement borrowings | 71,268 | | | 10,710 | | | 97,401 | |
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (25,544 | ) | | 5,154 |
| | 66,757 |
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (19,708) | | | (22,000) | | | (23,794) | |
| Repurchase agreements interest expense | 163,881 |
| | 124,000 |
| | 166,892 |
| Repurchase agreements interest expense | 51,560 | | | (11,290) | | | 73,607 | |
| Secured loans | 19,370 |
| | 10,887 |
| | 6,579 |
| Secured loans | — | | | — | | | 8,655 | |
| Exchangeable senior notes | 13,340 |
| | 22,467 |
| | 22,461 |
| |
| Asset-backed securities | — |
| | — |
| | 82,041 |
| |
| Total interest expense | 196,591 |
| | 157,354 |
| | 277,973 |
| Total interest expense | 51,560 | | | (11,290) | | | 82,262 | |
Our interest expense on repurchase agreement borrowings rose $70.6increased $60.6 million for the year ended December 31, 20172022 compared to 2016 primarily2021 due to a $1.3 billion increase in average borrowings. We increased our average borrowings in the second halfhigher cost of 2017 after investing the proceeds of our August 2017 offering of Series C Preferred Stock. Interest expense on repurchase agreement borrowings was also impacted by the increases in the Federal Funds target interest rate.funds. Our interest expense on repurchase agreement borrowings rose $18.7decreased $86.7 million for the year ended December 31, 20162021 compared to 2015 primarily2020 due to higher borrowing rates.a lower cost of funds.
Our repurchase agreementagreements interest expense as reported in our consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above. Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $25.5 million during the year ended December 31, 2017. Amortization of net deferred losses on de-designated interest rate swaps increased our total interest expense by $5.2 million and $66.8 million for the years ended December 31, 2016 and 2015, respectively. Amounts recorded in accumulated other comprehensive income (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. Most of our de-designated interest rate swap agreements that had deferred losses were fully amortized by the end of 2016. During the next twelve months, we estimate that $25.8 millionAmortization of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive incomedecreased our total interest expense by $19.7 million, $22.0 million and $23.8 million during the years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively. We expect to reclassify the remaining $10.4 million of net unrealized gains recorded in AOCI as a decrease to interest expense.
Our secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread. Interest expense for our secured loans increased for the year ended December 31, 2017 compared to 2016 primarily due to higher borrowing rates as a result of the increases in the Federal Funds target interest rate. For the year ended December 31, 2017, IAS Services LLC had a weighted average borrowing rate of 1.17% as compared to 0.66% for the year ended December 31, 2016.
Interest expense on our secured loans from FHLBI increased for the year ended December 31, 2016 compared to 2015 primarily due to higher borrowing rates as a result of the December 2015 increase in the Federal Funds target interest rate as well as higher average borrowings. For the year ended December 31, 2016, IAS Services LLC had a weighted average borrowing rate of 0.66% as compared to 0.41% for the year ended December 31, 2015.
Our exchangeable senior notes ("Notes") due in March 2018 bear interest at 5.00% per annum. During the year ended December 31, 2017, interest expense on our Notes decreased compared to the same period in 2016 because we retired Notes with a par value of $256.6 million.
Our total interest expense increased $39.2 million for the year ended December 31, 2017 compared to 2016 primarily due to a $79.1 million increase in interest expense on repurchase agreement borrowings and secured loans offset by a $30.7 million decrease in amortization of net deferred (gain) loss on de-designated interest rate swaps and a $9.1 million decrease in interest expense on exchangeable senior notes.
Our total interest expense decreased $120.6 million for the year ended December 31, 2016 compared to 2015 primarily due to an $82.0 million decrease in interest expense on asset-backed securities as a result of the deconsolidation of our Residential Securitizations in December 2015. In addition to the deconsolidation, amortization of net deferred losses on de-designated interest rate swaps decreased by $61.6 million for the year ended December 31, 2016. These decreases were offset by an $18.7 million increase in interest expense on repurchase agreements outstanding due to higher borrowing rates.on the consolidated statements of operations in 2023.
The table below presentsWe repaid our average borrowingssecured loans during 2020 and cost of funds as of anddid not incur interest expense for secured loans during the years ended December 31, 2017, 20162022 and 2015.2021.
|
| | | | | | | | |
| | As of and for the Years Ended |
| | December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
Average Borrowings (1): | | | | | |
Agency RMBS (2) | 10,494,355 |
| | 8,872,694 |
| | 9,118,307 |
|
CMBS (2) | 2,323,689 |
| | 2,176,963 |
| | 2,632,338 |
|
| Non-Agency RMBS | 1,142,769 |
| | 1,750,730 |
| | 2,439,849 |
|
| GSE CRT | 643,070 |
| | 459,738 |
| | 484,414 |
|
| U.S. Treasury securities | — |
| | 54,882 |
| | — |
|
| Exchangeable senior notes | 228,846 |
| | 395,910 |
| | 393,440 |
|
| Asset-backed securities | — |
| | — |
| | 2,774,833 |
|
| Total average borrowings | 14,832,729 |
| | 13,710,917 |
| | 17,843,181 |
|
Maximum borrowings during the period (3) | 15,959,127 |
| | 14,381,178 |
| | 18,416,608 |
|
|
| | | | | | | | |
Average Cost of Funds (4): | | | | | |
Agency RMBS (2) | 1.18 | % | | 0.69 | % | | 0.39 | % |
CMBS (2) | 1.73 | % | | 1.14 | % | | 0.93 | % |
| Non-Agency RMBS | 2.49 | % | | 1.90 | % | | 1.58 | % |
| GSE CRT | 2.55 | % | | 2.14 | % | | 1.73 | % |
| U.S. Treasury securities | — | % | | 0.25 | % | | — | % |
| Exchangeable senior notes | 5.83 | % | | 5.67 | % | | 5.71 | % |
| Asset-backed securities | — | % | | — | % | | 2.96 | % |
| Cost of funds | 1.33 | % | | 1.15 | % | | 1.56 | % |
Effective cost of funds (non-GAAP measure) (5) | 2.02 | % | | 1.87 | % | | 2.22 | % |
| |
(1) | Average amounts for each period are based on weighted month-end balances. |
| |
(2) | Agency RMBS and CMBS average borrowings and average cost of funds include borrowings under repurchase agreements and secured loans. |
| |
(3) | Amount represents the maximum borrowings at month-end during each of the respective periods. |
| |
(4) | Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings. |
| |
(5) | For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures". |
Total average borrowings rose $1.1 billion in 2017 compared to 2016. As discussed above, total average borrowings increased primarily because we entered into repurchase agreements to finance our increased holdings of 30 year fixed-rate Agency RMBS. The increase in our cost of funds for 2017 versus 2016 was primarily due to the increases in the Federal Funds target interest rate.
The decrease in average borrowings and our cost of funds for 2016 versus 2015 was primarily the result of deconsolidation of our Residential Securitizations in December 2015 and a decline in average repurchase agreement borrowings. Average borrowings and average cost of funds on asset-backed securities were $2.8 billion and 2.96%, respectively, for the year ended December 31, 2015. In addition, average repurchase agreement borrowings declined by $1.4 billion in 2016 compared to 2015.
Net Interest Income
The table below presents the components of net interest income for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | For the Years Ended | | | | | | | | | | | | | | | |
| | December 31, | | Years ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 | $ in thousands | 2022 | | 2021 | | 2020 |
| Interest Income | | | | | | Interest Income | | | | | |
| Mortgage-backed and credit risk transfer securities | 521,547 |
| | 456,444 |
| | 523,893 |
| |
| Residential loans | — |
| | — |
| | 110,908 |
| |
| Commercial loans | 23,508 |
| | 22,238 |
| | 15,331 |
| |
| Mortgage-backed and other securities | | Mortgage-backed and other securities | 192,566 | | | 167,056 | | | 277,400 | |
| Commercial and other loans | | Commercial and other loans | 1,947 | | | 2,146 | | | 2,766 | |
| Total interest income | 545,055 |
| | 478,682 |
| | 650,132 |
| Total interest income | 194,513 | | | 169,202 | | | 280,166 | |
| Interest Expense | | | | | | Interest Expense | | | | | |
| Interest expense on repurchase agreement borrowings | 189,425 |
| | 118,846 |
| | 100,135 |
| Interest expense on repurchase agreement borrowings | 71,268 | | | 10,710 | | | 97,401 | |
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (25,544 | ) | | 5,154 |
| | 66,757 |
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (19,708) | | | (22,000) | | | (23,794) | |
| Repurchase agreements interest expense | 163,881 |
| | 124,000 |
| | 166,892 |
| Repurchase agreements interest expense | 51,560 | | | (11,290) | | | 73,607 | |
| Secured loans | 19,370 |
| | 10,887 |
| | 6,579 |
| Secured loans | — | | | — | | | 8,655 | |
| Exchangeable senior notes | 13,340 |
| | 22,467 |
| | 22,461 |
| |
| Asset-backed securities | — |
| | — |
| | 82,041 |
| |
| Total interest expense | 196,591 |
| | 157,354 |
| | 277,973 |
| Total interest expense | 51,560 | | | (11,290) | | | 82,262 | |
| Net interest income | 348,464 |
| | 321,328 |
| | 372,159 |
| Net interest income | 142,953 | | | 180,492 | | | 197,904 | |
| Net interest rate margin | 1.87 | % | | 1.92 | % | | 1.69 | % | Net interest rate margin | 2.64 | % | | 2.06 | % | | 2.36 | % |
Our net interest income, which equals total interest income less total interest expense, totaled $348.5$143.0 million (2016: $321.3 million; 2015: $372.2 million) for the year ended December 31, 2017. The increase in net interest income for the year ended December 31, 2017 compared to 2016 was primarily driven by interest income on higher average earning assets that exceeded the increase in interest expense driven by higher average borrowings and borrowing rates.
2022 (2021: $180.5 million; 2020: $197.9 million). The decrease in net interest income for the year ended December 31, 20162022 compared to 20152021 was primarily due lower overallto higher interest expense as the Federal Reserve raised the Federal Funds target rate. Our short-term borrowings are generally more sensitive to changes in interest rates than our investment portfolio, balance and reinvesting cash flows from repaymentwhich is largely comprised of principal and interest on our higher yielding credit assets and 30 year fixed-rate Agency RMBS portfolio into 15 year fixed-rate Agency RMBS. The decrease in net interest income for 2021 compared to 2020 was primarily due to the sale of MBS and GSE CRT in the first half of 2020 as previously discussed.
Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.87% (2016: 1.92%; 2015: 1.69%)2.64% for the year ended December 31, 2017.2022 (2021: 2.06%; 2020: 2.36%). The increase in net interest rate margin for the year ended December 31, 2022 compared to 2021 was primarily due to our rotation into higher yielding Agency RMBS, which was partially offset by higher interest rates on our borrowings. The decrease in net interest rate margin for 2017 versus 20162021 compared to 2020 was primarily due to the flattening of U.S. Treasury yield curve. The increasechange in the Federal Funds rate in 2017 had more impact on our short termportfolio composition, including related repurchase agreement cost of funds than on our longer term asset yields. The increase in net interest rate margin for 2016 versus 2015 was primarily due to lower amortization of net deferred losses on de-designated interest rate swaps into interest expense.agreements borrowings.
Provision for Loan Losses
We evaluate the collectibility of our commercial loans held-for investment using the factors described in Note 2 - "Summary of Significant Accounting Policies" of our consolidated financial statements in Part IV, Item 15 of this Report. We determined that no provision for loan losses for our commercial loans was required as of December 31, 2017 and 2016.
We reversed our provision for loan losses for residential loans held-for-investment for the year ended December 31, 2015 when we deconsolidated our Residential Securitizations in December 2015.
Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
| Net realized gains (losses) on sale of MBS and GSE CRT | (1,163,910) | | | (281,224) | | | (363,781) | |
| Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments | — | | | — | | | (101,138) | |
| | | | | |
| Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option | 118,365 | | | (85,702) | | | (492,047) | |
| Net unrealized gains (losses) on commercial loan | 404 | | | 417 | | | (1,164) | |
| Net realized gains (losses) on U.S. Treasury securities | (34,198) | | | — | | | — | |
| Realized loss on loan participation interest | — | | | — | | | (3,808) | |
| | | | | |
| Total gain (loss) on investments, net | (1,079,339) | | | (366,509) | | | (961,938) | |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Realized gains and losses on sale of investments | (1,665 | ) | | (7,439 | ) | | 2,232 |
|
| Other-than-temporary impairment losses | (11,962 | ) | | (8,909 | ) | | — |
|
| Net unrealized gains and losses on MBS accounted for under the fair value option | (21,368 | ) | | (5,791 | ) | | (558 | ) |
| Net unrealized gains and losses on GSE CRT accounted for under the fair value option | 15,269 |
| | 4,598 |
| | (56 | ) |
| Net unrealized gains and losses on trading securities | 22 |
| | (1 | ) | | — |
|
| Total gain (loss) on deconsolidation of VIEs, net | — |
| | — |
| | (19,623 | ) |
| Total | (19,704 | ) | | (17,542 | ) | | (18,005 | ) |
As partDuring the year ended December 31, 2022, we sold MBS for cash proceeds of $27.3 billion (2021: MBS of $16.3 billion; 2020: MBS and GSE CRTs of $25.0 billion) and realized net losses of $1.2 billion (2021: net losses of $281.2 million; 2020: net losses of $363.8 million). Realized net losses during the year ended December 31, 2022 and 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS. We sold securities during the year ended December 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic. A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our investment process, all ofrepurchase agreement counterparties seized and sold our mortgage-backed and credit risk transfer securities are continuously reviewed to determine if they continuewhen we were unable to meet our risk and return targets. This process involves looking at changing market assumptions and the impact those assumptions will have on the individual securities.margin calls in March 2020.
We assess our investmentdid not record any impairment during the years ended December 31, 2022 and 2021 because we intended to sell or more likely than not would be required to sell the securities for other-than-temporarybefore recovery of amortized cost basis. We recorded $94.1 million of impairment on a quarterly basis. Whennon-Agency RMBS and CMBS securities during the fair valueyear ended December 31, 2020, because we intended to sell or more likely than not would be required to sell the securities before recovery of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary."basis. For additional information regarding our assessment analysis of other-than temporaryaccounting policy for impairment, on our investment securities, refer to Note 42 – “Mortgage-Backed and Credit Risk Transfer Securities”“Summary of Significant Accounting Policies” of our consolidated financial statements. We recorded $12.0 millionstatements included in other-temporary-impairments ("OTTI") on RMBS interest-only and non-Agency RMBS securities for the year ended December 31, 2017 (2016: $8.9 million). We did not record any OTTI for the year ended December 31, 2015.Part IV, Item 15 of this Report.
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and all of our GSE CRTs purchased on or after August 24, 2015. Prior toBefore September 1, 2016, we had also elected the fair value option for our RMBS IOs. Under the fair value option, changes in fair value are recognized in income in the consolidated statements of operations. As of December 31, 2017, $6.52022, $4.7 billion or 35.6%99% (December 31, 2016: $427.5 million2021: $7.7 billion or 2.9%99%) of our MBS and GSE CRT are accounted for under the fair value option.
We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $118.4 million in 2022 (2021: net unrealized losses of $85.7 million on our MBS portfolio accounted for under the fair value option; 2020; net unrealized losses of $492.0 million on our MBS and GSE CRT portfolio accounted for under the fair value option). Net unrealized gains in the year ended December 31, 2022 reflect reclassifications on securities that were sold as well as tighter spreads and favorable rates on assets held at year end. Net unrealized losses in the years ended December 31, 2021 and 2020 primarily reflect wider interest rate spreads.
In October 2022, our commercial loan with a principal balance of $23.9 million was repaid in full. We recorded unrealized gains of $404,000 and $417,000 on our commercial loan investment during the years ended December 31, 2022 and 2021, respectively, and unrealized losses of $1.2 million during the year ended December 31, 2020. We valued our commercial loan investment based upon a valuation from an independent pricing service.
We recorded a realized loss of $19.6$3.8 million on our loan participation interest during year ended December 31, 2020. We sold the loan participation interest in April 2020.
We recorded net realized losses of $34.2 million on U.S. Treasury securities during the year ended December 31, 2022 due to rising interest rates. We did not invest in U.S. Treasury securities during the years ended December 31, 2021 and 2020.
(Increase) Decrease in Provision for Credit Losses
As of December 31, 2022, approximately $42.5 million of our $4.8 billion of MBS are classified as available-for-sale and subject to evaluation for credit losses. We did not record any provisions for credit losses during the year ended December 31, 2022. We recorded a provision for credit losses of $1.8 million on a single non-Agency CMBS for the year ended December 31, 2020. We recorded a $1.8 million decrease in the provision for credit losses during the year endedDecember 31, 2021 because the security fully repaid in June 2021. Refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated statementfinancial statements included in Part IV, Item 15 of operations related to the deconsolidation ofthis Report for additional information on how we calculate our Residential Securitizations in December 2015. The deconsolidation of the Residential Securitizations did not qualifyprovision for presentation and disclosure as discontinued operations. The following table presents the components of the loss on deconsolidation.credit losses.
|
| | |
$ in thousands | As of December 9, 2015 |
Gain (loss) related to derecognition of Residential Securitizations, net | (13,260 | ) |
Gain (loss) related to remeasurement of retained interest, net | 3,068 |
|
Gain (loss) on sale of the securities, net | (9,431 | ) |
Total gain (loss) on deconsolidation of VIEs, net | (19,623 | ) |
Equity in Earnings (Losses) of Unconsolidated Ventures
For the year ended December 31, 2017,2022, we recorded equity in losses of unconsolidated ventures of $1.3 million (2016:$407,000 (2021: equity in earnings of $2.4 million; 2015:$870,000; 2020: equity in earnings of $12.6$1.2 million). We recorded equity inEarnings and losses for the year ended December 31, 2017 primarily due to unrealized losses on portfolio investments which were partially offset by realized gains on portfolio asset dispositions.
Equity in earnings of unconsolidated ventures decreased $10.2 million in 2016 compared to 2015are driven primarily due to lower realized and unrealized gains onby the underlying portfolio investments than in the 2015 period.investments.
Gain (Loss) on Derivative Instruments, net
We record all derivatives on our consolidated balance sheets at fair value. We have elected not to apply hedge accounting to any derivative contracts entered into after January 1, 2014. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations.
The tables below summarize the components of our gain (loss) on derivative instruments, net for the years ended December 31, 2017, 20162022, 2021 and 2015:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2022 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 593,035 | | | 86,872 | | | 11,426 | | | 691,333 | |
| | | | | | | |
| Currency Forward Contracts | 919 | | | — | | | (271) | | | 648 | |
| TBAs | (134,488) | | | — | | | 1,514 | | | (132,974) | |
| Total | 459,466 | | | 86,872 | | | 12,669 | | | 559,007 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2021 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 185,232 | | | (15,803) | | | (5,869) | | | 163,560 | |
| Interest Rate Swaptions | (553) | | | — | | | — | | | (553) | |
| Currency Forward Contracts | 209 | | | — | | | 970 | | | 1,179 | |
| TBAs | (28,731) | | | — | | | (12,844) | | | (41,575) | |
| Total | 156,157 | | | (15,803) | | | (17,743) | | | 122,611 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2020 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (857,753) | | | 8,047 | | | (24,068) | | | (873,774) | |
| | | | | | | |
| Currency Forward Contracts | (1,301) | | | — | | | (345) | | | (1,646) | |
| TBAs | 14,477 | | | — | | | 9,893 | | | 24,370 | |
| Total | (844,577) | | | 8,047 | | | (14,520) | | | (851,050) | |
During the year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new swaps with a notional amount of $10.1 billion, excluding terminations and additions of forward starting swaps. We realized a net gain of $593.0 million on interest rate swaps during the year ended December 31, 2022 due to rising interest rates. As of December 31, 2022, we had $4.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 28 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.
During the year ended December 31, 2021, we terminated existing swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion, excluding terminations and additions related to the transition of interest rate swaps to swaps that are indexed to SOFR in the fourth quarter of 2021 and terminations and additions of forward starting swaps. We realized a net gain of $185.2 million on interest rate swaps during the year ended December 31, 2021 due to rising interest rates.
In March 2020, we terminated interest rate swaps as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic. Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings. We realized a net loss of $904.7 million on these interest rate swaps during the first half of 2020 primarily due to falling interest rates. We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2017 |
Derivative not designated as hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 72,894 |
| | (77,076 | ) | | 28,316 |
| | 24,134 |
|
| Currency Forward Contracts | (5,056 | ) | | — |
| | (923 | ) | | (5,979 | ) |
| Total | 67,838 |
| | (77,076 | ) | | 27,393 |
| | 18,155 |
|
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2016 |
Derivative not designated as hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (69,090 | ) | | (104,804 | ) | | 100,503 |
| | (73,391 | ) |
| Interest Rate Swaptions | (1,485 | ) | | — |
| | 1,485 |
| | — |
|
| Currency Forward Contracts | 12,632 |
| | — |
| | (2,056 | ) | | 10,576 |
|
| Total | (57,943 | ) | | (104,804 | ) | | 99,932 |
| | (62,815 | ) |
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2015 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (31,881 | ) | | (184,373 | ) | | (554 | ) | | (216,808 | ) |
| Interest Rate Swaptions | (10,328 | ) | | — |
| | 8,521 |
| | (1,807 | ) |
| TBAs | (2,292 | ) | | — |
| | 558 |
| | (1,734 | ) |
| Futures Contracts | (943 | ) | | — |
| | (90 | ) | | (1,033 | ) |
| Currency Forward Contracts | 1,172 |
| | — |
| | 1,162 |
| | 2,334 |
|
| Total | (44,272 | ) | | (184,373 | ) | | 9,597 |
| | (219,048 | ) |
As of December 31, 20172022 and 2016,2021, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest atbased upon SOFR.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | December 31, 2022 | | December 31, 2021 |
| Derivative instrument | | Notional Amounts | | Weighted Average Fixed Pay Rate | | Weighted Average Floating Receive Rate | | Weighted Average Years to Maturity | | Notional Amounts | | Weighted Average Fixed Pay Rate | | Weighted Average Floating Receive Rate | | Weighted Average Years to Maturity |
Interest Rate Swaps (1) | | 5,800,000 | | | 0.45 | % | | 4.30 | % | | 6.3 | | 6,300,000 | | | 0.30 | % | | 0.05 | % | | 5.7 |
(1)Excludes $975.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022that will receive floating interest based upon SOFR (December 31, 2021: $1.3 billion).
As of December 31, 2022 and 2021, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | December 31, 2022 | | December 31, 2021 |
| Derivative instrument | | Notional Amounts | | Weighted Average Floating Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Years to Maturity | | Notional Amounts | | Weighted Average Floating Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Years to Maturity |
Interest Rate Swaps (1) | | 2,350,000 | | | 4.30 | % | | 2.78 | % | | 9.3 | | 1,750,000 | | | 0.05 | % | | 0.98 | % | | 4.9 |
(1)Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will pay floating interest based upon SOFR (December 31, 2021: none).
We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates. As of December 31, 2022, we did not have any currency forward contracts outstanding. As of December 31, 2021 we had $13.6 million of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. As of December 31, 2022, we did not have a one-month and three-month LIBOR rate:
|
| | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| Derivative instrument | Notional Amounts (1) | | Average Fixed Pay Rate | | Average Receive Rate | | Average Maturity (Years) | | Notional Amounts | | Average Fixed Pay Rate | | Average Receive Rate | | Average Maturity (Years) |
| Interest Rate Swaps | 8,620,000 |
| | 2.11 | % | | 1.48 | % | | 4.2 | | 6,500,000 |
| | 2.14 | % | | 0.79 | % | | 4.6 |
| |
(1) | Excludes 500.0 million of notional amount for an interest rate swap with a forward start date of 5/24/2018. |
net notional amount of TBAs. During the year ended December 31, 2017,2022, we entered into swaps with arecorded $133.0 million of realized and unrealized losses on TBAs primarily due to rising interest rates, in addition to wider interest rate spreads on Agency RMBS. As of December 31, 2021, we had $1.6 billion notional amount of $2.6 billion. Contractual net interest expense decreased from $104.8TBAs and recorded $41.6 million forof realized and unrealized losses on TBAs during the year ended December 31, 20162021 primarily due to $77.1a sharp increase in mortgage rates in the first quarter of 2021. As of December 31, 2020, we had $1.7 billion notional amount of TBAs and recorded $24.4 million forof realized and unrealized gains during the year ended December 31, 2017 primarily as a result of higher LIBOR. Our average receive rate was 1.48% for the year ended December 31, 2017 versus 0.79% for the year ended December 31, 2016.2020.
During the year ended December 31, 2016, we terminated swaps with a notional amount of $5.0 billion and realized losses of $69.1 million. The terminated swaps were predominantly maturing in 2016 and offered little protection from rising rates. Additionally, our investment and repurchase agreement balances decreased due to asset sales to facilitate stock repurchases, further reducing our need for hedging. Our overall interest rate risk did not change materially as a result of the swap terminations. As a result of swap terminations in 2016 and higher LIBOR, our contractual net interest expense decreased from $184.4 million in 2015 to $104.8 million in 2016.
Realized and Unrealized Credit Derivative Income (Loss), net
The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| GSE CRT embedded derivative coupon interest | 23,343 |
| | 24,343 |
| | 24,822 |
|
| Gain (loss) on settlement of GSE CRT embedded derivatives | — |
| | (6,017 | ) | | (2,184 | ) |
| Change in fair value of GSE CRT embedded derivatives | 28,305 |
| | 42,817 |
| | (4,227 | ) |
| Credit Default Swap ("CDS") premium income | — |
| | — |
| | 723 |
|
| Realized gain (loss) on settlement of CDS | — |
| | — |
| | 1,044 |
|
| Change in fair value of CDS | — |
| | — |
| | (396 | ) |
| Total | 51,648 |
| | 61,143 |
| | 19,782 |
|
During the year ended December 31, 2017, we recorded an unrealized gain on the change in the fair value of our GSE CRT embedded derivatives of $28.3 million compared to an unrealized gain in the year ended December 31, 2016 of $42.8 million. While credit spreads continued to tighten throughout 2017, high premiums and shorter expected maturities resulted in a smaller increase in market prices.2020.
During the year ended December 31, 2016, we recorded an unrealized gain on the change in the fair value of our GSE CRT embedded derivatives compared to an unrealized loss in the year ended December 31, 2015. The increase in the value of our GSE CRT holdings during the year ended December 31, 2016 primarily resulted from broad credit spread tightening, increasing market demand for floating rate securities and positive rating actions by two nationally recognized statistical rating organizations.
We terminated our sole CDS contract in October 2015 in exchange for a payment to us of $1 million.
|
| | | | | | | | |
| 56 | | | | Year Ended December 31 |
| $ in thousands | | | | | 2020 |
| GSE CRT embedded derivative coupon interest | | | | | 6,323 | |
| Gain (loss) on settlement of GSE CRT embedded derivatives | | | | | (31,354) | |
| Change in fair value of GSE CRT embedded derivatives | | | | | (10,281) | |
| Total realized and unrealized credit derivative income (loss), net | | | | | (35,312) | |
During the year ended December 31, 2020, we recorded realized and unrealized credit derivative losses of $41.6 million, excluding embedded derivative coupon interest. We sold all of our GSE CRTs that were accounted for as hybrid financial instruments with embedded derivatives during the year ended December 31, 2020.
Net LossGain (Loss) on Extinguishment of Debt
The following table summarizes retirementsAs discussed in Note 6 - “Borrowings” of our Notesconsolidated financial statements in Part IV, Item 15 of this Report, during 2020, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements. We recorded early termination and legal fees paid to our counterparties that were associated with the year ended December 31, 2017.termination of these repurchase agreements as a loss on extinguishment of debt and settlements of counterparty claims for less than the principal balance of our repurchase agreements as a gain on extinguishment of debt in our consolidated statement of operations.
|
| | |
$ in thousands | Year Ended December 31, 2017 |
Reacquisition price | 262,069 |
|
Par value of Notes retired | (256,590 | ) |
Write off of unamortized debt issuance cost associated with Notes retired | 1,335 |
|
Net loss on extinguishment of debt | 6,814 |
|
Other Investment Income (Loss), net
Our other investment income, net for the years ended December 31, 2022 and 2021 consisted of foreign currency transaction gains and losses. Other investment income, net for the year ended December 31, 2020 primarily consisted of quarterly dividends on FHLBI stock. Other investment income (loss), net primarily consistsdecreased during the year ended December 31, 2021 compared to 2020 due to the redemption of (i) quarterly dividends fromour FHLBI stock and an investment in an exchange-traded fund and (ii) foreign exchange rate gains and losses related to a commercial loan investment denominated in a foreign currency.stock. The table below summarizes the components of other investment income (loss), net for the years ended December 31, 2017, 20162022, 2021 and 2015.2020:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
| Dividend income | — | | | — | | | 2,072 | |
| Gain (loss) on foreign currency transactions, net | 186 | | | 1 | | | 65 | |
| Total | 186 | | | 1 | | | 2,137 | |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| FHLBI dividend income | 3,247 |
| | 3,185 |
| | 2,819 |
|
| Gain (loss) on foreign currency transactions, net | 4,134 |
| | (8,187 | ) | | (1,875 | ) |
| Total | 7,381 |
| | (5,002 | ) | | 944 |
|
We are required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured advances from the FHLBI. We earn dividend income on our investment in FHLBI stock, and the amount of our dividend income varies based upon the number of shares that we are required to own.
We incurred foreign currency gains on the revaluation of a commercial loan investment (notional amount of £34.5 million) for the year ended December 31, 2017 due to an improvement in the Pound Sterling/ U.S. Dollar foreign exchange rate. We incurred foreign currency losses for the year ended December 31, 2016 due to the significant decline in the Pound Sterling/ U.S. Dollar foreign exchange rate. Foreign currency losses for the year ended December 31, 2015 relate to a foreign currency loan which prepaid in the second quarter 2015. We enter into currency forward contracts as an economic hedge against our foreign currency exposure. Changes in the fair value of our currency forward contracts are recognized in gain (loss) derivative instruments, net in the consolidated statements of operations. During the year ended December 31, 2017, we recognized net losses of $6.0 million on our currency forward contracts (2016: net gains of $10.6 million; 2015: net gains of $2.3 million.
Expenses
For the year ended December 31, 2017,2022, we incurred management fees of $37.6$16.9 million (2016: $34.5 million; 2015: $38.6(2021: $21.1 million), which that are payable to our Manager under our management agreement. Management fees increaseddecreased for the year ended December 31, 20172022 compared to 2016 primarily2021 due to (i) a cumulative one-time adjustmentlower stockholders' equity management fee base in 2022. Our management fees are calculated quarterly in arrears. Refer to Note 11 – “Related Party Transactions” of $2.3our consolidated financial statements in Part IV, Item 15 of this Report for a discussion of our relationship with our Manager and a description of how our fees are calculated.
For the year ended December 31, 2021 we incurred management fees of $21.1 million in 2016 related(2020: $29.4 million) that are payable to a prior adjustment for the accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality and (ii) the partial year impact of issuing preferred stock in August 2017 totaling $1.6 million.
our Manager under our management agreement. Management fees decreased for the year ended December 31, 20162021 compared to 20152020 due to (i) a cumulative one-time adjustment of $2.3 million related to a prior adjustment for the accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality and (ii) the full year impact of shares repurchasedlower stockholders' equity management fee base in the second half of 2015 and first quarter of 2016. We repurchased 9.5 million shares of common stock in the second half of 2015 and 2.1 million shares of common stock in the first quarter of 2016.2021.
For the year ended December 31, 2017,2022, our general and administrative expenses not covered under our management agreement amounted to $7.2$8.4 million (2016: $7.3(2021: $8.2 million; 2015: $7.82020: $10.9 million). General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs. During 2015, we incurred expensesGeneral and administrative costs were lower for third party consulting, accounting, auditing and legal fees of approximately $950,000 related to the restatement of our financial statements.
For the year ended December 31, 2015, consolidated securitization trust expenses totaled $8.2 million. Consolidated securitization trust expenses consist2021 compared to 2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $2.6 million in 2020.
Gain on Repurchase and Retirement of direct operating expenses incurred by consolidated Residential Securitizations. We deconsolidatedPreferred Stock
In May 2022, our Residential Securitizationsboard of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock. The difference between the consideration transferred and the carrying value of the preferred stock resulted in a gain attributable to common stockholders of $14.2 million during the year ended December 201531, 2022.
Issuance and therefore did not incur any consolidated securitization trust expenses thereafter.Redemption Costs of Redeemed Preferred Stock
In June, 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock. The excess of the consideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $4.7 million in net income (loss) attributable to common stockholders during the year ended December 31, 2021.
Net Income (Loss) attributable to Common Stockholders
For the year ended December 31, 2017,2022, our net incomeloss attributable to common stockholders was $320.5$417.0 million (2016: $231.5(2021: $132.5 million net income; 2015: $89.8 millionloss attributable to common stockholders; 2020: $1.7 billion net income)loss attributable to common stockholders) or $2.87$12.21 basic and $2.75 diluted net incomeloss per average share available to common stockholders (2016: $2.07(2021: $4.82 basic and $1.98 diluted net incomeloss per average share available to common stockholders; 2015: $0.742020: $98.93 basic and diluted net incomeloss per average share available to common stockholders).
For the year ended December 31, 2017,2022, the $89.0 million increasechange in net incomeloss attributable to common stockholders compared to 2021 was primarily due toto: (i) net losses on investments of $1.1 billion versus $366.5 million in the 2021 period; (ii) net gains on derivative instruments of $559.0 million versus net gains on derivatives instruments of $18.2 million versus net losses on derivatives instruments of $62.8$122.6 million in the 2016 period, (ii) higher2021 period; (iii) lower net interest income of $348.5$143.0 million versus $321.3$180.5 million in the 2016 period2021 period; and (iii) higher dividends to(iv) a gain on repurchase and retirement of preferred stockholdersstock of $28.1 million versus $22.9$14.2 million in the 2016 period. As discussed above, net interest income and dividends to preferred stockholders were both higher in 2017 due to the issuance of $287.5 million of Series C Preferred Stock in August 2017.2022.
For the year ended December 31, 2016,2021, the $141.7 million increasechange in net income (loss)loss attributable to common stockholders compared to 2020 was primarily attributable todue to: (i) net losses on derivatives instrumentsinvestments of $62.8$366.5 million versus $961.9 million in the 2016 period2020 period; (ii) net gains on derivative instruments of $122.6 million versus net losses on derivatives instruments of $219.0$851.1 million in the 2015 period, (ii)2020 period; (iii) net losses on credit derivative incomederivatives of $61.1$35.3 million in the 2016 period versus net credit derivative income of $19.8 million in the 2015 period and (iii)2020 period; (iv) lower net interest income of $321.3$180.5 million versus $197.9 million in 2016the 2020 period versus $372.2and (v) net gains on debt extinguishment of $14.7 million in 2015. Net interest income in 2016 was lower than in 2015 primarily due to the impact of the deconsolidation of our Residential Securitizations in December 2015 as discussed below.
Our net income (loss) attributable to common shareholders for the year ended December 31, 2015 includes interest income, interest expense and securitization trust expenses of our consolidated Residential Securitizations. On December 9, 2015, we completed the sale of certain beneficial interests in our Residential Securitizations and deconsolidated the Residential Securitizations.
The following table summarizes the net income (loss) of the Residential Securitizations excluding the loss on deconsolidation. |
| | |
$ in thousands | Year ended
December 31, 2015 |
Interest income - Residential loans | 110,908 |
|
Interest expense - Asset-backed securities | 82,041 |
|
Net interest income | 28,867 |
|
Reduction in provision for loan losses | (213 | ) |
Net interest income after reduction in provision for loan losses | 29,080 |
|
Expenses - Consolidated securitization trusts | 8,219 |
|
Net income | 20,861 |
|
2020 period.For further information on the changes in net gains (losses)gain (loss) on investments, net gain (loss) on derivative instruments, net changes in net interest income, gains of repurchase and retirement of preferred stock, realized and unrealized credit derivative income (loss), net in the 2017, 2016 and 2015 period,gain (loss) on extinguishment of debt see preceding discussion under "Gain“Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net,"net”, “Net Interest Income”, “Gain on Repurchase and "RealizedRetirement of Preferred Stock”, “Realized and Unrealized Credit Derivative Income (Loss), net,"net” and “Net Gain (Loss) on Extinguishment of Debt.”
Non-GAAP Financial Measures
We useThe table below shows the following non-GAAP financial measures we use to analyze the Company'sour operating results and the most directly comparable U.S. GAAP measures. We believe these financialnon-GAAP measures are useful to investors in assessing our performance as discussed further discussed below:below.
core earnings (and by calculation, core earnings per common share),
effective interest income (and by calculation, effective yield),
effective interest expense (and by calculation, effective cost of funds),
effective net interest income (and by calculation, effective interest rate margin), and
repurchase agreement debt-to-equity ratio.
The most directly comparable U.S. GAAP measures are:
net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share),
total interest income (and by calculation, earning asset yield),
total interest expense (and by calculation, cost of funds),
net interest income (and by calculation, net interest rate margin), and
debt-to-equity ratio. | | | | | | | | |
| Non-GAAP Financial Measure | | Most Directly Comparable U.S. GAAP Measure |
| Earnings available for distribution (and by calculation, earnings available for distribution per common share) | | Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) |
| Effective interest income (and by calculation, effective yield) | | Total interest income (and by calculation, earning asset yields) |
| Effective interest expense (and by calculation, effective cost of funds) | | Total interest expense (and by calculation, cost of funds) |
| Effective net interest income (and by calculation, effective interest rate margin) | | Net interest income (and by calculation, net interest rate margin) |
| Economic debt-to-equity ratio | | Debt-to-equity ratio |
| | |
The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measuresmeasures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.
Core EarningsWe did not present earnings available for distribution for the year ended December 31, 2020 because earnings available for distribution excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition. In addition, earnings available for the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio.
Earnings Available for Distribution
Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate core earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; realizedTBA dollar roll income; gain on repurchase and unrealized (gain) loss on GSE CRT embedded derivatives, net;retirement of preferred stock; (gain) loss on foreign currency transactions, net;net and amortization of net deferred (gain) loss on de-designated interest rate swaps; net loss on extinguishment of debt;swaps.
By excluding the gains and cumulative adjustments attributable to non-controlling interest. We may add and have added additional reconciling items to our core earnings calculation as appropriate.
Welosses discussed above, we believe the presentation of core earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies. However, because not all of our peer companies use identical operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by excluding the impact of gains and losses described above from operating results.our peer companies. We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, the majoritya portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our consolidated balance sheet.sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our consolidated statementstatements of operations. In addition, certain gains and losses represent one-time events. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate. We added the gain on repurchase and retirement of preferred stock as a reconciling item to our earnings available for distribution calculation in the second quarter of 2022 because the gain does not represent earnings on our investment portfolio.
We believeTo maintain our qualification as a REIT, U.S. federal income tax law generally requires that providing transparency into core earnings enables our investors to consistently measure, evaluate and compare our operating performance to thatwe distribute at least 90% of our peers over multiple reporting periods.REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We have historically distributed at least 100% of our REIT taxable income. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs.
Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that core earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs, including our ability to make cash distributions.
needs.
The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings available for distribution for the following periods:
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands, except per share data | 2022 | | 2021 | | |
| Net income (loss) attributable to common stockholders | (416,963) | | | (132,477) | | | |
| Adjustments: | | | | | |
| (Gain) loss on investments, net | 1,079,339 | | | 366,509 | | | |
Realized (gain) loss on derivative instruments, net (1) | (459,466) | | | (156,157) | | | |
Unrealized (gain) loss on derivative instruments, net (1) | (12,669) | | | 17,743 | | | |
| | | | | |
TBA dollar roll income (2) | 28,843 | | | 40,058 | | | |
| Gain on repurchase and retirement of preferred stock | (14,179) | | | — | | | |
(Gain) loss on foreign currency transactions, net (3) | (186) | | | (1) | | | |
Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) | (19,708) | | | (22,000) | | | |
| | | | | |
| Subtotal | 601,974 | | | 246,152 | | | |
| Earnings available for distribution | 185,011 | | | 113,675 | | | |
| Basic earnings (loss) per common share | (12.21) | | | (4.82) | | | |
Earnings available for distribution per common share (5) | 5.42 | | | 4.13 | | | |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands, except per share data | 2017 | | 2016 | | 2015 |
| Net income attributable to common stockholders | 320,527 |
| | 231,547 |
| | 89,847 |
|
| Adjustments: | | | | | |
| (Gain) loss on investments, net | 19,704 |
| | 17,542 |
| | 18,005 |
|
Realized (gain) loss on derivative instruments, net (1) | (67,838 | ) | | 57,943 |
| | 44,272 |
|
Unrealized (gain) loss on derivative instruments, net (1) | (27,393 | ) | | (99,932 | ) | | (9,597 | ) |
Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2) | (28,305 | ) | | (36,800 | ) | | 6,411 |
|
(Gain) loss on foreign currency transactions, net (3) | (4,134 | ) | | 8,187 |
| | 1,875 |
|
Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) | (25,544 | ) | | 5,154 |
| | 66,757 |
|
| Net loss on extinguishment of debt | 6,814 |
| | — |
| | — |
|
| Subtotal | (126,696 | ) | | (47,906 | ) | | 127,723 |
|
| Cumulative adjustments attributable to non-controlling interest | 1,597 |
| | 653 |
| | (1,461 | ) |
Series B preferred stock dividend cumulative adjustment (5) | (2,870 | ) | | — |
| | — |
|
| Core earnings attributable to common stockholders | 192,558 |
| | 184,294 |
| | 216,109 |
|
| Basic earnings per common share | 2.87 |
| | 2.07 |
| | 0.74 |
|
Core earnings per share attributable to common stockholders (6) | 1.73 |
| | 1.65 |
| | 1.78 |
|
(1)U.S. GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components:
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | |
| Realized gain (loss) on derivative instruments, net | 459,466 | | | 156,157 | | | |
| Unrealized gain (loss) on derivative instruments, net | 12,669 | | | (17,743) | | | |
| Contractual net interest income (expense) on interest rate swaps | 86,872 | | | (15,803) | | | |
| Gain (loss) on derivative instruments, net | 559,007 | | | 122,611 | | | |
(2)A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency securities, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our consolidated statements of operations.
(3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the consolidated statements of operations.
(4) U.S. GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components:
| | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | |
| Interest expense on repurchase agreements outstanding | 71,268 | | | 10,710 | | | |
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (19,708) | | | (22,000) | | | |
| Repurchase agreements interest expense | 51,560 | | | (11,290) | | | |
| |
(1) | U.S. GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components: |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Realized gain (loss) on derivative instruments, net | 67,838 |
| | (57,943 | ) | | (44,272 | ) |
| Unrealized gain (loss) on derivative instruments, net | 27,393 |
| | 99,932 |
| | 9,597 |
|
| Contractual net interest expense | (77,076 | ) | | (104,804 | ) | | (184,373 | ) |
| Gain (loss) on derivative instruments, net | 18,155 |
| | (62,815 | ) | | (219,048 | ) |
| |
(2) | U.S. GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components: |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net | 28,305 |
| | 36,800 |
| | (6,411 | ) |
| GSE CRT embedded derivative coupon interest | 23,343 |
| | 24,343 |
| | 24,822 |
|
| Unrealized gain (loss) on CDS contract | — |
| | — |
| | 648 |
|
| CDS premium fee income | — |
| | — |
| | 723 |
|
| Realized and unrealized credit derivative income (loss), net | 51,648 |
| | 61,143 |
| | 19,782 |
|
| |
(3) | U.S. GAAP other investment income (loss), net on the consolidated statements of operations includes the following components: |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| FHLBI dividend income | 3,247 |
| | 3,185 |
| | 2,819 |
|
| Gain (loss) on foreign currency transactions, net | 4,134 |
| | (8,187 | ) | | (1,875 | ) |
| Other investment income (loss), net | 7,381 |
| | (5,002 | ) | | 944 |
|
| |
(4) | U.S. GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components: |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Interest expense on repurchase agreements outstanding | 189,425 |
| | 118,846 |
| | 100,135 |
|
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (25,544 | ) | | 5,154 |
| | 66,757 |
|
| Repurchase agreements interest expense | 163,881 |
| | 124,000 |
| | 166,892 |
|
The components of earnings available for distribution for the years ended December 31, 2022 and 2021 are:
| |
(5) | Cumulative dividends are charged to retained earnings when declared or earned under U.S. GAAP. We have historically declared quarterly dividends on Series B Preferred Stock prior to dividends accumulating. As of September 14, 2017, we declared cumulative dividends on Series B Preferred Stock from the date of issuance through December 27, 2017. In December 2017, the Company deferred declaring its next dividend on Series B Preferred Stock to February 2018. Due to the change in declaration date, we recorded $9.1 million in Series B Preferred Stock dividends for the year ended December 31, 2017 compared to $12.0 million for the year ended December 31, 2016. We reduced core earnings for the quarter ended December 31, 2017 for the cumulative impact of deferring the declaration date to February 2018 because we consider all dividends accumulated during a quarter a current component of our capital costs regardless of the dividend declaration date. |
| |
(6) | Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding. |
Core earnings | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | |
Effective net interest income(1) | 210,117 | | | 142,689 | | | |
| TBA dollar roll income | 28,843 | | | 40,058 | | | |
| | | | | |
| Equity in earnings (losses) of unconsolidated ventures | (407) | | | 870 | | | |
| (Increase) decrease in provision for credit losses | — | | | 1,768 | | | |
| Total expenses | (25,324) | | | (29,233) | | | |
| Subtotal | 213,229 | | | 156,152 | | | |
| Dividends to preferred stockholders | (28,218) | | | (37,795) | | | |
| Issuance and redemption costs of redeemed preferred stock | — | | | (4,682) | | | |
| Earnings available for distribution | 185,011 | | | 113,675 | | | |
(1)See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
Earnings available for distribution increased for the year ended December 31, 2017 increased $8.3 million from 20162022 compared to 2021 primarily due to a $23.2 millionan increase in effective net interest income that was partially offset by (i) equityincome. See below for a discussion of the change in losses of unconsolidated ventures of $1.3 millioneffective net interest income. As discussed above, we did not report earnings available for the year ended 2017 compared to equity in earnings of $2.4 million for 2016, (ii) a $3.0 million increase in management fees and (iii) an $8.1 million increase in preferred stock dividends.
Core earningsdistribution for the year ended December 31, 2016 decreased $31.8 million from 2015 primarily due to a $33.3 million decrease in effective net interest income and a $10.2 million decline in equity in earnings of unconsolidated ventures that was partially offset by (i) an $8.2 million decrease in securitization trust expenses and (ii) a $4.1 million decrease in management fees.2020.
See below for a discussion of changes in effective net interest income from 2015 through 2017.
Effective Interest Income / Effective Yield/ Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin
We calculatePrior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that iswas recorded as realized and unrealized credit derivative income (loss), net. We includeincluded our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest iswas not accounted for consistently under U.S. GAAP. We accountaccounted for GSE CRTs purchased prior tobefore August 24, 2015 as hybrid financial instruments, but we have elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option iswas recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments iswas recorded as realized and unrealized credit derivative income (loss). We addadded back GSE CRT embedded derivative coupon interest to our total interest income because we considerconsidered GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.
We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest expenseincome (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we makeor receipts on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs.
We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest expenseincome (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net; the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase
agreement interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.
We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provideprovides information that is useful to investors in understanding our borrowing costs and operating performance.
The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:
| | | | | | | | | | | | | | | Years Ended December 31, |
| | Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| $ in thousands | 2017 | | 2016 | | 2015 | $ in thousands | Reconciliation | | Yield/Effective Yield | | Reconciliation | | Yield/Effective Yield | | Reconciliation | | Yield/Effective Yield |
| $ in thousands | Reconciliation | | Yield/Effective Yield | | Reconciliation | | Yield/Effective Yield | | Reconciliation | | Yield/Effective Yield | |
| Total interest income | 545,055 |
| | 3.20 | % | | 478,682 |
| | 3.07 | % | | 650,132 |
| | 3.25 | % | Total interest income | 194,513 | | | 3.79 | % | | 169,202 | | | 1.92 | % | | 280,166 | | | 3.55 | % |
| Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net | 23,343 |
| | 0.14 | % | | 24,343 |
| | 0.15 | % | | 24,822 |
| | 0.12 | % | Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net | — | | | — | % | | — | | | — | % | | 6,323 | | | 0.08 | % |
| Effective interest income | 568,398 |
| | 3.34 | % | | 503,025 |
| | 3.22 | % | | 674,954 |
| | 3.37 | % | Effective interest income | 194,513 | | | 3.79 | % | | 169,202 | | | 1.92 | % | | 286,489 | | | 3.63 | % |
Our effective interest income increased for the year ended December 31, 20172022 versus 2016 primarily2021, despite lower average earnings assets, due to a 187 basis point increase in effective yields resulting from our rotation in higher average earning assets. yielding Agency RMBS.
Our average earning assets increased to $17.0 billioneffective interest income decreased for the year ended December 31, 2017 from $15.6 billion for the year ended December 31, 2016 driven by investment of the proceeds2021 versus 2020 due to lower asset yields primarily as a result of our Series C Preferred Stock offering. Theasset sales in the first half of 2020. Changes in effective yield for the year ended December 31, 20172021 versus 2016 rose 12 basis points2020 are primarily due to slower prepayment speeds and higher index rates on floating and adjustable rate assets.
Our effective interest income and effective yield forchanges in portfolio composition. Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2016 decreased from 2015 primarily due to the deconsolidation of our Residential Securitizations in December 2015. Interest income and average earning asset yield on residential loans was $110.9 million and 3.47% for the year ended December 31, 2015. In addition, our yield on average earning assets declined from 3.25% in 2015 to 3.07% in 2016.2021.
The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:
| | | | Years Ended December 31, | | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2022 | | 2021 | | 2020 |
| $ in thousands | Reconciliation | | Cost of Funds / Effective Cost of Funds | | Reconciliation | | Cost of Funds / Effective Cost of Funds | | Reconciliation | | Cost of Funds / Effective Cost of Funds | $ in thousands | Reconciliation | | Cost of Funds / Effective Cost of Funds | | Reconciliation | | Cost of Funds / Effective Cost of Funds | | Reconciliation | | Cost of Funds / Effective Cost of Funds |
| Total interest expense | 196,591 |
| | 1.33 | % | | 157,354 |
| | 1.15 | % | | 277,973 |
| | 1.56 | % | Total interest expense | 51,560 | | | 1.15 | % | | (11,290) | | | (0.14) | % | | 82,262 | | | 1.19 | % |
| Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps | 25,544 |
| | 0.17 | % | | (5,154 | ) | | (0.04 | )% | | (66,757 | ) | | (0.37 | )% | |
| Add: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net | 77,076 |
| | 0.52 | % | | 104,804 |
| | 0.76 | % | | 184,373 |
| | 1.03 | % | |
| Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps | | Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps | 19,708 | | | 0.44 | % | | 22,000 | | | 0.28 | % | | 23,794 | | | 0.34 | % |
| Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net | | Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net | (86,872) | | | (1.93) | % | | 15,803 | | | 0.20 | % | | (8,047) | | | (0.12) | % |
| Effective interest expense | 299,211 |
| | 2.02 | % | | 257,004 |
| | 1.87 | % | | 395,589 |
| | 2.22 | % | Effective interest expense | (15,604) | | | (0.34) | % | | 26,513 | | | 0.34 | % | | 98,009 | | | 1.41 | % |
Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2017 increased primarily2022 versus 2021 despite an increase in total interest expense, which reflects increases in the Federal Funds target rate, due to a $79.1$86.9 million increase inof contractual net interest income on interest rate swaps compared to $15.8 million of contractual net interest expense on repurchase agreement borrowings and secured loans offset by a $30.7 million decreasein 2021. The change in contractual net interest expense (income) on interest rate swaps and a $9.1 million decrease inwas driven by rising interest expense on exchangeable senior notes. See the preceeding caption "Interest Expense and Cost of Funds" for further discussion of these variances.rates.
Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2016 decreased from 20152021 versus 2020 primarily due to (i)a lower average cost of funds reflecting decreases in the deconsolidation of our Residential Securitizations in December 2015, and (ii) a decrease inFederal Funds target rate. Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps. The impactsswaps of the deconsolidation of our Residential Securitizations and lower interest rate swap expense were partially offset by an $18.7 million increase in interest expense on repurchase agreements outstanding due
to higher borrowing rates. We incurred $82.0 million of interest expense on asset-backed securities issued by the Residential Securitizations for the year ended December 31, 2015. We did not incur any interest expense on asset-backed securities for the year ended December 31, 2016. Net interest expense on interest rate swaps decreased from $184.4$15.8 million for the year ended December 31, 20152021 compared to $104.8$8.0 million of contractual net interest income for the year ended December 31, 2016 because we repositioned our hedging portfolio commencingsame period in the first quarter2020.
The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| $ in thousands | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin | | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin | | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin |
| Net interest income | 348,464 |
| | 1.87 | % | | 321,328 |
| | 1.92 | % | | 372,159 |
| | 1.69 | % |
| Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps | (25,544 | ) | | (0.17 | )% | | 5,154 |
| | 0.04 | % | | 66,757 |
| | 0.37 | % |
| Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net | 23,343 |
| | 0.14 | % | | 24,343 |
| | 0.15 | % | | 24,822 |
| | 0.12 | % |
| Less: Contractual net interest expense on interest rate swaps recorded as gain (loss) on derivative instruments, net | (77,076 | ) | | (0.52 | )% | | (104,804 | ) | | (0.76 | )% | | (184,373 | ) | | (1.03 | )% |
| Effective net interest income | 269,187 |
| | 1.32 | % | | 246,021 |
| | 1.35 | % | | 279,365 |
| | 1.15 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| $ in thousands | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin | | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin | | Reconciliation | | Net Interest Rate Margin / Effective Interest Rate Margin |
| Net interest income | 142,953 | | | 2.64 | % | | 180,492 | | | 2.06 | % | | 197,904 | | | 2.36 | % |
| Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps | (19,708) | | | (0.44) | % | | (22,000) | | | (0.28) | % | | (23,794) | | | (0.34) | % |
| Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net | — | | | — | % | | — | | | — | % | | 6,323 | | | 0.08 | % |
| Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net | 86,872 | | | 1.93 | % | | (15,803) | | | (0.20) | % | | 8,047 | | | 0.12 | % |
| Effective net interest income | 210,117 | | | 4.13 | % | | 142,689 | | | 1.58 | % | | 188,480 | | | 2.22 | % |
Effective net interest income and effective interest rate margin increased from $246.0 million for the year ended December 31, 20162022 versus 2021 due to $269.2 millionchanges in contractual net interest income (expense) on interest rate swaps and an increase in total interest income resulting from our rotation into higher yielding Agency RMBS, which were partially offset by higher total interest expense and a higher average cost of funds resulting from increases in the Federal Funds target rate.
Effective net interest income decreased for the year ended December 31, 2017. The increase in effective net interest income was2021 versus 2020 primarily due to lower asset yields as a $27.1 million increase in net interest income driven by higher average earning assets following the investment of proceedsresult of our Series C Preferred Stock offering. Our effectiveasset sales in the first half of 2020 that were partially offset by a lower average cost of funds reflecting decreases in the Federal Funds target rate. Effective interest rate margin declined to 1.32%deceased for the year ended December 31, 2017 from 1.35% in the same period in 2016 primarily2021 versus 2020 due to the flattening of the U.S. Treasury yield curve. The increasechanges in the Federal Funds rate in 2017 had more impact on our short term repurchase agreement cost of funds than on our longer term asset yields.portfolio composition.
Effective net interest income decreased from $279.4 million for the year ended December 31, 2015 to $246.0 million for the year ended December 31, 2016. The decrease in effective net interest income was primarily due to maturity and paydowns of high yielding assets, a lower overall portfolio balance and portfolio reallocation from 30 year fixed-rate Agency RMBS to 15 year fixed-rate Agency RMBS. The increase in effective interest rate margin for the year ended December 31, 2016 versus 2015 was primarily due to lower contractual net interest expense on interest rate swaps in the 2016 period. Net interest expense on interest rate swaps decreased because we repositioned our hedging portfolio commencing in the first quarter of 2016.
Repurchase AgreementEconomic Debt-to-Equity Ratio
The tables below show the allocation of our stockholders' equity to our targetedtarget assets, our debt-to-equity ratio, and our repurchase agreementeconomic debt-to-equity ratio as of December 31, 20172022 and December 31, 2016.2021. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total stockholders' equity. As of December 31, 2022, approximately 95% of our equity is allocated to Agency RMBS.
We present a repurchase agreementan economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year,TBA market carries similar risks to finance investments.Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our repurchase agreementeconomic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our refinancing risks,at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.
December 31, 2017also invest in TBAs and present a similar non-GAAP measure of leverage.
|
| | | | | | | | | | |
| $ in thousands | Agency RMBS | Commercial Credit (1) | Residential Credit (2) | Exchangeable Senior Notes and Other | Total |
| Investments | 12,849,851 |
| 3,434,196 |
| 2,124,487 |
| — |
| 18,408,534 |
|
Cash and cash equivalents (3) | 39,630 |
| 31,069 |
| 17,682 |
| — |
| 88,381 |
|
Derivative assets, at fair value (4) | 6,896 |
| — |
| — |
| — |
| 6,896 |
|
| Other assets | 77,893 |
| 64,904 |
| 6,669 |
| 3,979 |
| 153,445 |
|
| Total assets | 12,974,270 |
| 3,530,169 |
| 2,148,838 |
| 3,979 |
| 18,657,256 |
|
| | | | | | |
| Repurchase agreements | 11,111,755 |
| 1,396,330 |
| 1,572,716 |
| — |
| 14,080,801 |
|
Secured loans (5) | 533,463 |
| 1,116,537 |
| — |
| — |
| 1,650,000 |
|
| Exchangeable senior notes | — |
| — |
| — |
| 143,231 |
| 143,231 |
|
Derivative liabilities, at fair value (4) | 31,548 |
| 1,217 |
| — |
| �� |
| 32,765 |
|
| Other liabilities | 51,840 |
| 24,742 |
| 14,888 |
| 2,111 |
| 93,581 |
|
| Total liabilities | 11,728,606 |
| 2,538,826 |
| 1,587,604 |
| 145,342 |
| 16,000,378 |
|
| | | | | | |
| Total equity (allocated) | 1,245,664 |
| 991,343 |
| 561,234 |
| (141,363 | ) | 2,656,878 |
|
| Adjustments to calculate repurchase agreement debt-to-equity ratio: | | | | | |
Net equity in unsecured assets and exchangeable senior notes (6) | — |
| (217,780 | ) | — |
| 141,363 |
| (76,417 | ) |
| Collateral pledged against secured loans | (623,181 | ) | (1,304,315 | ) | — |
| — |
| (1,927,496 | ) |
| Secured loans | 533,463 |
| 1,116,537 |
| — |
| — |
| 1,650,000 |
|
| Equity related to repurchase agreement debt | 1,155,946 |
| 585,785 |
| 561,234 |
| — |
| 2,302,965 |
|
Debt-to-equity ratio (7) | 9.3 |
| 2.5 |
| 2.8 |
| NA |
| 6.0 |
|
Repurchase agreement debt-to-equity ratio (8) | 9.6 |
| 2.4 |
| 2.8 |
| NA |
| 6.1 |
|
| |
(1) | Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit. |
| |
(2) | Investments in non-Agency RMBS and GSE CRT are included in residential credit. |
| |
(3) | Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit. |
| |
(4) | Derivative assets and liabilities are allocated based on the hedging strategy for each class. |
| |
(5) | Secured loans are allocated based on amount of collateral pledged. |
| |
(6) | Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other. |
| |
(7) | Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity. |
| |
(8) | Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt. |
December 31, 20162022
| | | | | | | | | | | |
| $ in thousands | Agency RMBS | Credit Portfolio (1) | Total |
| Mortgage-backed securities | 4,746,693 | | 45,200 | | 4,791,893 | |
Cash and cash equivalents (2) | 175,535 | | — | | 175,535 | |
Restricted cash(3) | 103,246 | | — | | 103,246 | |
Derivative assets, at fair value (3) | 662 | | — | | 662 | |
| Other assets | 25,252 | | 807 | | 26,059 | |
| Total assets | 5,051,388 | | 46,007 | | 5,097,395 | |
| | | |
| Repurchase agreements | 4,234,823 | | — | | 4,234,823 | |
Derivative liabilities, at fair value (3) | 2,079 | | — | | 2,079 | |
| Other liabilities | 53,980 | | 2,438 | | 56,418 | |
| Total liabilities | 4,290,882 | | 2,438 | | 4,293,320 | |
| | | |
| Total stockholders' equity (allocated) | 760,506 | | 43,569 | | 804,075 | |
Debt-to-equity ratio (4) | 5.6 | | — | | 5.3 | |
Economic debt-to-equity ratio (5) | 5.6 | | — | | 5.3 | |
(1)Investments in non-Agency CMBS, non-Agency RMBS and unconsolidated joint ventures are included in credit portfolio.
(2)Cash and cash equivalents is allocated based on our financing strategy for each asset class.
(3)Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class.
(4)Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.
(5)Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.4 million as of December 31, 2022) to total stockholders' equity.
December 31, 2021
| | | | | | | | | | | |
| $ in thousands | Agency RMBS | Credit Portfolio (1) | Total |
| Mortgage-backed securities | 7,732,281 | | 71,978 | | 7,804,259 | |
Cash and cash equivalents (2) | 357,134 | | — | | 357,134 | |
Restricted cash (3) | 219,918 | | — | | 219,918 | |
Derivative assets, at fair value (3) | — | | 270 | | 270 | |
| Other assets | 25,728 | | 36,532 | | 62,260 | |
| Total assets | 8,335,061 | | 108,780 | | 8,443,841 | |
| | | |
| Repurchase agreements | 6,987,834 | | — | | 6,987,834 | |
Derivative liabilities, at fair value (3) | 14,356 | | — | | 14,356 | |
| Other liabilities | 35,596 | | 3,920 | | 39,516 | |
| Total liabilities | 7,037,786 | | 3,920 | | 7,041,706 | |
| | | |
| Total stockholders' equity (allocated) | 1,297,275 | | 104,860 | | 1,402,135 | |
Debt-to-equity ratio (4) | 5.4 | | — | | 5.0 | |
Economic debt-to-equity ratio (5) | 6.6 | | — | | 6.2 | |
(1)Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio.
(2)Cash and cash equivalents is allocated based on our financing strategy for each asset class.
(3)Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class.
(4)Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.
(5)Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.6 billion as of December 31, 2021) to total stockholders' equity.
|
| | | | | | | | | | |
| $ in thousands | Agency RMBS | Commercial Credit (1) | Residential Credit (2) | Exchangeable Senior Notes and Other | Total |
| Investments | 9,665,860 |
| 2,858,376 |
| 2,763,751 |
| — |
| 15,287,987 |
|
Cash and cash equivalents (3) | 76,067 |
| 36,139 |
| 49,582 |
| — |
| 161,788 |
|
Derivative assets, at fair value (4) | 3,085 |
| 101 |
| — |
| — |
| 3,186 |
|
| Other assets | 179,931 |
| 63,465 |
| 9,381 |
| 500 |
| 253,277 |
|
| Total assets | 9,924,943 |
| 2,958,081 |
| 2,822,714 |
| 500 |
| 15,706,238 |
|
| | | | | | |
| Repurchase agreements | 8,148,220 |
| 944,718 |
| 2,067,731 |
| — |
| 11,160,669 |
|
Secured loans (5) | 500,150 |
| 1,149,850 |
| — |
| — |
| 1,650,000 |
|
| Exchangeable senior notes | — |
| — |
| — |
| 397,041 |
| 397,041 |
|
Derivative liabilities, at fair value (4) | 133,832 |
| 396 |
| — |
| — |
| 134,228 |
|
| Other liabilities | 52,047 |
| 14,791 |
| 21,389 |
| 5,889 |
| 94,116 |
|
| Total liabilities | 8,834,249 |
| 2,109,755 |
| 2,089,120 |
| 402,930 |
| 13,436,054 |
|
| | | | | | |
| Total equity (allocated) | 1,090,694 |
| 848,326 |
| 733,594 |
| (402,430 | ) | 2,270,184 |
|
| Adjustments to calculate repurchase agreement debt-to-equity ratio: | | | | | |
Net equity in unsecured assets and exchangeable senior notes (6) | — |
| (306,656 | ) | — |
| 402,430 |
| 95,774 |
|
| Collateral pledged against secured loans | (585,504 | ) | (1,346,078 | ) | — |
| — |
| (1,931,582 | ) |
| Secured loans | 500,150 |
| 1,149,850 |
| — |
| — |
| 1,650,000 |
|
| Equity related to repurchase agreement debt | 1,005,340 |
| 345,442 |
| 733,594 |
| — |
| 2,084,376 |
|
Debt-to-equity ratio (7) | 7.9 |
| 2.5 |
| 2.8 |
| NA |
| 5.8 |
|
Repurchase agreement debt-to-equity ratio (8) | 8.1 |
| 2.7 |
| 2.8 |
| NA |
| 5.4 |
|
| | | | | | | | |
(1) | Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit. |
| 60 | |
(2) | Investments in non-Agency RMBS and GSE CRT are included in residential credit. |
| |
(3) | Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit. |
| |
(4) | Derivative assets and liabilities are allocated based on the hedging strategy for each class. |
| |
(5) | Secured loans are allocated based on amount of collateral pledged. |
| |
(6) | Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures and exchangeable senior notes and other. |
| |
(7) | Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity. |
| |
(8) | Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt. |
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repayment ofrepay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements.arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.
our repurchase agreements, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion. In addition, our lenders have the contractual right to increase the “haircut”, or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile. As a result of significant spread widening in both Agency and non-Agency securities in the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls. We sold portfolio assets to generate liquidity, in many cases at significantly distressed market prices. Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs. These events have led us to seek to avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements. See Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I. Item 1A. Risk Factors in this Report for more information on how the COVID-19 pandemic has impacted and may continue to impact our liquidity and capital resources.
We held cash, and cash equivalents and restricted cash of $88.4$278.8 million at December 31, 2017 (2016: $161.82022 (2021: $577.1 million). Our cash, and cash equivalents decreasedand restricted cash change due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of approximately $318.0$196.1 million for the year ended December 31, 2017 (2016: $329.72022 (2021: $152.3 million; 2015: $358.62020: $170.5 million).
Our investing activities usedprovided net cash of $3.1$2.4 billion for the year ended December 31, 2017 (2016: provided net2022 (2021: $120.7 million; 2020: $11.6 billion). Our primary source of cash of $949.0 million; 2015: provided net cash of $1.2 billion). Duringfrom investing activities during the year ended December 31, 2017, we used cash to purchase $6.32022 was proceeds from the sale of MBS of $27.3 billion and proceeds from the sale of U.S. Treasury securities of $468.1 million. We also generated $403.3 million from principal payments of MBS and GSE CRT securities. Purchases were partially funded by principal payments fromreceived cash of $459.5 million to settle derivative contracts during the year ended December 31, 2022. We used cash of $25.7 billion to purchase MBS and GSE CRT$502.3 million to purchase U.S. Treasury securities of $2.4 billion, proceeds from MBS and GSE CRT sales of $625.5 million, and principal payments from commercial loans held-for investment of $90.7 million.during the year ended December 31, 2022.
During the year ended December 31, 20162021, we utilized cash to purchase $2.7 billionsold MBS for proceeds of $16.3 billion. We also generated $825.2 million from principal payments of MBS and GSE CRT securities. In addition,received cash of $156.2 million to settle derivative contracts during the year ended December 31, 2016 we originated or purchased commercial loans2021. We used cash of $87.2 million. Cash used$17.1 billion to fund these purchases was more than offset by proceeds frompurchase MBS and GSE CRT sales of $1.0 billion, principal payments from MBS and GSE CRT securities of $2.6 billion and principal repayments from commercial loans held-for investment of $15.0 million.during the year ended December 31, 2021.
During the year ended December 31, 20152020, we utilizedsold MBS and GSE CRT for proceeds of $25.0 billion. We also generated $892.6 million from principal payments of MBS and GSE CRT during the year ended December 31, 2020. We used cash to purchase $2.4$13.6 billion of MBS and GSE CRT securities and $372.3 million of residential loans. In addition, during the year ended December 31, 2015,2020. We also used cash of $844.6 million on derivative contracts during the year ended December 31, 2020 primarily as we originated or purchased commercial loans of $158.0 million. Cash usedsold Agency securities and our sensitivity to fund these purchases was more than offset by proceeds from MBS and GSE CRT sales of $907.2 million, principal payments from MBS and GSE CRT securities of $2.6 billion and principal payments from residential loans held-for-investment of $549.6 million and principal repayments from commercial loans held-for investment of $92.8 million.interest rates decreased.
Our financing activities providedused net cash of $2.7$2.9 billion for the year ended December 31, 2017 (2016: used net cash of $1.2 billion; 2015: used net cash of $1.72022 (2021: $88.6 million; 2020:$11.6 billion). Our primary source of cash flows from financing activities for the year ended December 31, 2017 was net proceeds from our repurchase agreements of $2.9 billion and net proceeds from issuance of Series C Preferred Stock of $278.2 million. We used cash of $262.1 million to extinguish a portion of our exchangeable senior notes maturing in 2018 and to pay dividends of $212.7 million. As of December 31, 2017, we had $143.4 million in exchangeable senior notes outstanding. We have sufficient liquidity through available cash and cash equivalents and additional borrowing capacity through repurchase agreements to retire the exchangeable senior notes when they mature on March 15, 2018.
Our financing activities for the year ended December 31, 20162022 primarily consisted of net principal repayments on our repurchase agreements of $966.8 million. In addition, we$2.8 billion. We paid dividends of $204.5$140.3 million and repurchased 2.1used $115.1 million sharesto repurchase Series B and Series C Preferred Stock. Proceeds from the issuance of common stock for $25.0 million.
Our financing activitiesprovided $81.9 million during the year ended December 31, 20152022.
Our financing activities for the year ended December 31, 2021 primarily consisted of net principal repayments on our repurchase agreements of $1.5 billion$240.9 million. We paid dividends of $133.1 million and used cash of $140.0 million to redeem our Series A Preferred Stock during the year ended December 31, 2021. Proceeds from the issuance of common stock provided $430.5 million during the year ended December 31, 2021.
Our financing activities for the year ended December 31, 2020 primarily consisted of net principal repayments on our repurchase agreements of ABS issued by securitization trusts of $182.1 million, offset by net proceeds from our secured FHLBI advances of $400.0 million.$10.3 billion. In addition, we repaid secured loans of $1.65 billion and paid dividends of $239.4 million and repurchased 9.5 million shares$137.5 million. Proceeds from the issuance of common stock for $125.6 million.provided $420.7 million during the year ended December 31, 2020.
As of December 31, 2017, our wholly-owned subsidiary, IAS Services LLC, had $1.65 billion in outstanding secured advances from the FHLBI. As of December 31, 2017, the FHLBI advances were collateralized by CMBS and Agency RMBS with a fair value of $1.3 billion and $623.2 million, respectively.
As of December 31, 2017,2022, the average margin requirement (weighted by borrowing amount), or the percentage amount by which the collateral value must exceed the loan amount (also refer to as the “haircut”)haircut, under our repurchase agreements was 4.8%4.6% for Agency RMBS, 20.7% for non-Agency RMBS, 22.5% for GSE CRT, and 19.5% for CMBS. Across our repurchase agreement facilities, theRMBS. The haircuts rangeranged from a low of 3% to a high of 20% for Agency RMBS, a low of 10% to a high of 35% for non-Agency RMBS, a low of 20% to a high of 28% for GSE CRT, and a low of 10% to a high of 30% for CMBS.5%. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event wouldmay give some of our counterparties the option to terminate all repurchase transactions existingoutstanding with us and require any amount due byfrom us to the counterparties to be payable immediately.
Our total debt-to-equity ratio, which includes longer term financing, increased slightly to 6.0x as of December 31, 2017 (2016: 5.8x).
Effects of Margin Requirements, Leverage and Credit Spreads
Our securities have values that fluctuate according to market conditions and as discussed above, the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a “margin"margin call,”" which means that the lender will require us to pay the margin call in
cash or pledge additional collateral to meet that margin call.collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities 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 and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. 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. If interest rates increase as a result of a yield curve shift or for another reason 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 seek 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.calls or increased collateral requirements. 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 and increased collateral requirements but that also allows us to be substantially invested in securities. 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 would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.
We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.
Forward-Looking Statements Regarding Liquidity
As of December 31, 2022, we held $4.4 billion of Agency securities that are financed by repurchase agreements. We also had approximately $352.9 million of unencumbered investments and unrestricted cash of $175.5 million as of December 31, 2022. As of December 31, 2022, our known contractual obligations primarily consist of $4.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 28 days. We generally intend to refinance the majority of our repurchase agreement borrowings at market rates upon maturity. Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities. We are also committed to fund $6.3 million in additional capital to our unconsolidated joint ventures to cover future expenses should they occur.
Based upon our current portfolio leverage rate and availableexisting borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and forfund other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, and senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to
invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.
Contractual Obligations
We have entered into an agreement withTo maintain our Manager under 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. Refer to Note 12 – “Related Party Transactions” of our consolidated financial statements for a description of adjustments made to our stockholders' equity for purposes of calculating our management fee. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, 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. Refer to Note 12 – “Related Party Transactions” of our consolidated financial statements for details of our reimbursements to our Manager.
As of December 31, 2017, we had the following contractual obligations:
|
| | | | | | | | | | | | | | |
| | Payments Due by Period |
| $ in thousands | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
| Repurchase agreements | 14,080,801 |
| | 14,080,801 |
| | — |
| | — |
| | — |
|
| Secured loans | 1,650,000 |
| | — |
| | 300,000 |
| | 100,000 |
| | 1,250,000 |
|
| Exchangeable senior notes | 143,410 |
| | 143,410 |
| | — |
| | — |
| | — |
|
Total contractual obligations (1) | 15,874,211 |
| | 14,224,211 |
| | 300,000 |
| | 100,000 |
| | 1,250,000 |
|
| |
(1) | Excluded from total contractual obligations are the amounts due to our Manager under our management agreement, as those obligations do not have fixed and determinable payments. |
As of December 31, 2017, we have approximately $31.9 million, $3.6 million and $160.6 million in contractual interest payments related to our repurchase agreements, exchangeable senior notes and secured loans, respectively.
Off-Balance Sheet Arrangements
We have committed to invest up to $122.9 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invest in the partnershipsqualification as a limited partner. As of December 31, 2017, $112.7 million of our commitment has been called. We are committed to fund $10.2 million in additional capital to fund future investments and to cover future expenses should they occur.
As of December 31, 2017, we have unfunded commitments on our existing commercial loans of $4.8 million (2016: $9.7 million).
Stockholders’ Equity
We did not repurchase any shares of our common stock during the year ended December 31, 2017. During the year ended December 31, 2016, we repurchased and concurrently retired 2,063,451 shares of our common stock at a weighted average repurchase price of $12.12 per share for a net cost of $25.0 million, including acquisition expenses. As of December 31, 2017, we had authority to purchase 18,239,082 additional shares of our common stock through our share repurchase program.
Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the “Incentive Plan”). Under the Incentive Plan, a total of 1,000,000 shares of common stock are authorized for issuance. Unless terminated earlier, the Incentive Plan will terminate in 2019, but will continue to govern the unexpired awards. As of December 31, 2017, 792,520 shares of common stock remain available for future issuance under the Incentive Plan.
We recognized compensation expense of approximately $453,000 (2016: $340,000; 2015: $340,000) related to awards to our independent directors for the year ended December 31, 2017. During the year ended December 31, 2017, we issued 25,006 shares (2016: 25,068 shares; 2015: 23,776 shares) of common stock under the Incentive Plan to our independent directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $138,000 (2016: $100,000; 2015: $219,000) for the year ended December 31, 2017 related to restricted stock units awarded to employees of our Manager and its affiliates which is reimbursed by our Manager under the terms of our management agreement. At December 31, 2017 there was approximately $239,000 of
total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 39 months, with a weighted-average remaining vesting period of 15 months.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the year ended December 31, 2017.
|
| | | | | | |
| | Year Ended December 31, |
| | 2017 |
| | Restricted Stock Units | | Weighted Average Grant Date Fair Value (1) |
| Unvested at the beginning of the year | 18,807 |
| | $ | 14.37 |
|
| Shares granted during the year | 8,115 |
| | 15.55 |
|
| Shares vested during the year | (7,095 | ) | | 15.78 |
|
| Unvested at the end of the year | 19,827 |
| | $ | 14.35 |
|
| |
(1) | The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date. |
Dividends
We intend to continue to make regular quarterly distributions to holders of our common stock and preferred stock.REIT, U.S. federal income tax law generally requires that a REITwe distribute at least 90% of itsour REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that itgains. We must pay tax at regular corporate rates to the extent that itwe annually distributesdistribute less than 100% of itsour REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make 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.
Inflation
Virtually allAs discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our assets and liabilities are sensitivedividends, refer to interest rates. As a result, interest rates and other factors influenceNote 12 – “Stockholders' Equity” of our performance far more than inflation. Changesconsolidated financial statements in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.Part IV, Item 15 of this Report.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.
Exposure to Financial Counterparties
We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.
As of December 31, 2022, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $40.2 million, or 5% of our stockholders’ equity. The following table summarizes our exposure under repurchase agreements to counterparties by geographic concentration as of December 31, 2022. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are generally denominated in U.S. dollars.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Number of Counterparties | | | | | | Repurchase Agreement Financing | | | | | | Exposure |
| North America | 11 | | | | | | | 2,226,824 | | | | | | | 101,255 | |
| Europe (excluding United Kingdom) | 2 | | | | | | | 408,939 | | | | | | | 15,633 | |
| Asia | 3 | | | | | | | 1,098,293 | | | | | | | 54,939 | |
| United Kingdom | 1 | | | | | | | 500,767 | | | | | | | 19,090 | |
| Total | 17 | | | | | | | 4,234,823 | | | | | | | 190,917 | |
Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code"“Code”) at the end of each calendar quarter in 2017.2022. We also believe that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the year ended December 31, 2017.2022. Consequently, we believe we met the REIT income and asset test as of December 31, 2017.2022. We also met all REIT requirements regarding the stock ownership and distribution of dividends of our taxable income as of December 31, 2017.2022. Therefore, as of December 31, 2017,2022, we believe that we qualified as a REIT under the Code.
At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged
in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of “investment company” under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of December 31, 2017,2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The primary components of our market risk are related to interest rate, principal prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
For additional discussion of market risk, see Item Part I. Item 1A - Risk Factors of this Report.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically of limited durationshort-term in nature and will beare periodically refinanced at current market rates. We typically mitigate this interest rate risk through utilization ofby utilizing derivative contracts, primarily interest rate swap agreements.agreements.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. Most of our repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets are match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets are not match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities.
Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.
We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbersvalues for the same securities.
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.
Spread Risk
We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value per diluted common share and our liquidity to help us achieve our investment objectives. We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk. The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates. We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and maintainingseeking to maintain adequate liquidity. Changes in spreads impact our book value per diluted common share and our liquidity and could cause us to sell assets and to change our investment strategy in order to maintain liquidity and preserve book value per diluted common share.value.
Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads.
Prepayment Risk
As we receive prepayments of principal on our investments, premiums paidor discounts on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
Increased inflation, elevated interest rate volatility and other factors have made it more difficult to predict prepayment levels for the securities in our portfolio. As a result, it is possible that realized prepayment behavior will be materially different from our expectations.
Extension Risk
We compute the projected weighted-averageweighted average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.
However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Market Risk
Market Value Risk
Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income in accordance withunder ASC Topic 320. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the
estimated fair value of these securities would be expected to decrease; conversely, in a decreasingfalling interest rate environment, the estimated fair value of these securities would be expected to increase.
The COVID-19 pandemic, unprecedented fiscal and monetary policy responses to the COVID-19 pandemic, and the ongoing normalization of such policy responses have caused unprecedented volatility and illiquidity in fixed income markets. The amount of financing we receive under our repurchase agreements is directly related to our counterparties’ valuation of our assets that collateralize the outstanding repurchase agreement financing. As a result, if these market conditions persist, margin call risk remains elevated and our operating results and financial condition may be materially impacted.
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at December 31, 2017,2022 and 2021, assuming a static portfolio.portfolio and constant financing and credit spreads. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.
|
| | | | | |
| Change in Interest Rates | Percentage Change in Projected Net Interest Income | | Percentage Change in Projected Portfolio Value |
| +1.00% | (26.60 | )% | | (1.74 | )% |
| +0.50% | (10.59 | )% | | (0.60 | )% |
| -0.50% | 3.01 | % | | 0.81 | % |
| -1.00% | (4.42 | )% | | 1.02 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At December 31, 2022 | | At December 31, 2021 |
| Change in Interest Rates | | Percentage Change in
Projected Net Interest Income | | Percentage Change in
Projected Portfolio Value | | Percentage Change in
Projected Net Interest Income | | Percentage Change in
Projected Portfolio Value |
| +1.00% | | (2.97) | % | | (1.15) | % | | (3.27) | % | | (1.61) | % |
| +0.50% | | (1.54) | % | | (0.48) | % | | (0.19) | % | | (0.52) | % |
| -0.50% | | 1.56 | % | | 0.22 | % | | (1.96) | % | | (0.38) | % |
| -1.00% | | 2.90 | % | | 0.13 | % | | (16.33) | % | | (2.11) | % |
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumesscenarios assume interest rates at December 31, 2017.2022 and 2021. Furthermore, while we generally expect to retain such assets and the associatedanalysis reflects the estimated impact of interest rate riskincreases and decreases on a static portfolio, we actively manage the size and composition of our investment and swap portfolios, which can result in material changes to maturity, future purchases and sales of assets could materially change our interest rate risk profile.
Given the low interest rates at December 31, 2017, When applicable, our scenario analysis assumes a floor of 0% for U.S. Treasury yields and, to be consistent, we appliedalso apply a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on ourrelated funding costs; however, because prepayment speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on Agency and interest-only securities purchased at a premium, and accretion of discount on our non-Agency RMBS purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.costs.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Real Estate Risk
Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock)stock or other property sectors); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
Credit Risk
We believe that our investment strategy will generally keep our credit losses and financing costs low. However, we retain the risk of potential credit losses on all of our residential and commercial mortgage investments. We seek to manage this risk through our pre-acquisition due diligence process. In addition, we re-evaluate the credit risk inherent in our investments on a regular basis pursuant to fundamental considerations such as GDP, unemployment, interest rates, retail sales, store closings/openings, corporate earnings, housing inventory, affordability and regional home price trends. We also review key loan credit metrics including, but not limited to, payment status, current loan-to-value ratios, current borrower credit scores and debt yields. These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations. We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections. This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve. Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated. Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022.
CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels. Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans. Given tightening lending conditions, loans may continue to experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities. We also expect credit rating agencies to continue to reassess transactions negatively impacted by these adverse changes, which may result in our investments being downgraded.
Foreign Exchange Rate Risk
WeAs of December 31, 2022, we have an investment in a commercial loan denominated in foreign currency and an investmentof €43,000 in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S. dollars upon consolidation. We seekhave historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.
The unconsolidated joint venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.
Risk Management
To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:
•monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;
•attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
•exploring options to obtain financing arrangements that are not marked to market;
•using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and
•actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included under Item 15 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2017.2022. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act, Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the principal executive officer and principal financial officer, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2017.2022.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, audited the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. Their report dated February 20, 2018,21, 2023, which is included herein, expressed an unqualified opinion on the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 20172022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Our discussion of federal income tax considerations in Exhibit 99.1 attached hereto, which is incorporated herein by reference, supersedes and replaces, in its entirety, the disclosure under the heading “U.S. Federal Income Tax Considerations” in the prospectus dated March 29, 2016, which is a part of our Registration Statement on Form S-3 (File No. 333-210454), as amended and/or supplemented. Our updated discussion addresses recently enacted tax law changes.None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We will provide information that is responsive to certain portions of this Item 10 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Information about Director Nominees,” “Information about the Executive Officers of the Company,” “Corporate Governance,” “Information about the Board and its Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 10 by reference.
Each year, the chief executive officer of each company listed on the New York Stock Exchange (“NYSE”) must certify to the NYSE that he or she is not aware of any violation by us of NYSE corporate governance listing standards as of the date of certification, qualifying the certification to the extent necessary. Our chief executive officer submitted this certification to the NYSE in 20172022 as required pursuant to Section 303A of the NYSE Listed Company Manual and will submit a similar certification within 30 days of our 20182023 annual stockholders’ meeting. In addition, we have filed, as exhibits to this Report, the certifications of our chief executive officer and chief financial officer required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
Item 11. Executive Compensation.
We will provide information that is responsive to this Item 11 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Information About the Board and Its Committees - Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We will provide information that is responsive to this Item 12 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the caption “Security Ownership of Principal Stockholders,” “Security Ownership of Management,” “Executive Compensation,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We will provide information that is responsive to this Item 13 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Corporate Governance,” “Certain Relationships and Related Transactions,” “Information About Director Nominees,” “Related Person Transaction Policy,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 13 by reference.
Item 14. Principal Accounting Fees and Services.
We will provide information that is responsive to this Item 14 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Fees Paid to Independent Registered Public Accounting Firm,” “Pre-Approval Process and Policy,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 14 by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements: The financial statements contained herein are set forth on pages 80 -12375 - 106 of this Report. (a)(2) Financial Statement Schedules: Refer to Index to Financial Statement Schedules contained herein on page 7772 of this Report. (a)(3) Exhibits: Refer to Exhibit Index starting on page 7570 of this Report. Item 16. Form 10-K Summary.
Not applicable.
Exhibit Index
|
| | | | | | | | | | |
Exhibit
No.
| | Description | |
| 3.1 | | | |
| | | |
| 3.2 | | | |
| | | |
| 3.3 | | | |
| | | |
| 3.4 | | | |
| | | |
| 3.5 | | | |
| | | |
| 3.6 | | | |
| | | |
| 3.7 | | | |
| | | |
| 3.8 | | | |
| | | |
| 3.9 | | | |
| | | |
| 3.10 | | | |
| | | |
| 4.1 | | | |
| | | |
| 4.2 | | |
| | |
4.3 | | | |
| | | |
4.44.3 | | Indenture, dated March 12, 2013, by and among IAS Operating Partnership LP, as issuer, Invesco Mortgage Capital Inc., as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee, including the form of 5.00% Exchangeable Senior Notes due 2018 and the related guarantee, incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed with the SEC on March 15, 2013. |
| | |
4.5 | | | |
| | | |
10.14.4 | | | |
| | | |
10.210.1 | | Registration Rights Agreement, dated March 12, 2013, among IAS Operating Partnership LP, Invesco Mortgage Capital Inc., Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K, filed with the SEC on March 15, 2013. |
| | |
10.3 | | | |
| | | |
10.410.2 | | Amendment to Management Agreement, dated as of May 24, 2011, by and among Invesco Advisers, Inc. (formally known as Invesco Institutional (N.A.), Inc.), Invesco Mortgage Capital Inc., IAS Operating Partnership LP., and IAS Asset I LLC, incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed with the SEC on August 9, 2011. | |
| | | |
10.510.3 | | | |
| | | |
10.610.4 | | First Amended and RestatedThird Amendment to Management Agreement, of Limited Partnership, dated as of July 1, 2009, ofNovember 6, 2019, among Invesco Advisers, Inc., Invesco Mortgage Capital Inc., and IAS Operating Partnership LP., incorporated by reference to Exhibit 10.310.1 to our Quarterly Report on Form 10-Q, filed with the SEC on August 12, 2009.November 7, 2019. |
| | |
10.7 | | |
| | |
|
| § 10.5 | | |
10.8 | | |
| | |
§ 10.9 | | | |
| | | |
10.1010.6 | | | |
| | | |
| | | | | | | | | | | |
| 10.7 | | Equity Distribution Agreement with respect to the Series B Shares and Series C Shares, dated December 18, 2017,March 19, 2019, among Invesco Mortgage Capital Inc., IAS Operating Partnership LP, Invesco Advisers, Inc. and JMP SecuritiesJonesTrading Institutional Services LLC, incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K, filed with the SEC on DecemberMarch 19, 20172019. | |
| | | |
21.110.8 | | | |
| | | |
| 10.9 | | Equity Distribution Agreement, dated November 3, 2021, among Invesco Mortgage Capital Inc., IAS Operating Partnership LP, Invesco Advisers, Inc., JMP Securities LLC and JonesTrading Institutional Services LLC, incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K, filed with the SEC on November 3, 2021. | |
| | | |
| 21.1 | | | |
| | | |
| 23.1 | | | |
| | | |
23.231.1 | | |
| | |
31.1 | | | |
| | | |
| 31.2 | |
| |
| | | |
| 32.1 | | | |
| | | |
| 32.2 | | | |
| | | |
99.1101 | | |
| | |
101 | | The following series of audited XBRL-formatted documents are collectively included herewith as Exhibit 101. The financial information is extracted from Invesco Mortgage Capital Inc.’s audited consolidated financial statements and notes that are included in this Form 10-K Report. | |
| | | |
| | 101.INS XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
| | | |
| | 101.SCH XBRL Taxonomy Extension Schema Document | |
| | | |
| | 101.CAL XBRL Taxonomy Calculation Linkbase Document | |
| | | |
| | 101.LAB XBRL Taxonomy Label Linkbase Document | |
| | | |
| | 101.PRE XBRL Taxonomy Presentation Linkbase Document | |
| | | |
| | 101.DEF XBRL Taxonomy Definition Linkbase Document | |
| | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |
§ Management contract or compensatory plan or arrangement.
(b) Exhibits: Refer to (a)(3) above.
(c) Financial Statement Schedules: Refer to (a)(2) above.
INDEX TO FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENT SCHEDULES
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Invesco Mortgage Capital Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Invesco Mortgage Capital Inc. and its subsidiaries (the “Company”) as of December 31, 20172022 and December 31, 2016,2021, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders' equity and of cash flows for each of the twothree years in the period ended December 31, 2017,2022, including the related notes and financial statement schedule listed in the accompanying index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and December 31, 2016,2021, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 20172022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Mortgage-Backed Securities, at fair value
As described in Notes 2 and 10 to the consolidated financial statements, the Company’s mortgage-backed securities, at fair value were $4.8 billion as of December 31, 2022. Management determines the fair value of mortgage-backed securities using an independent primary pricing service. If the primary pricing service cannot provide a price, management seeks a value from other pricing services. The pricing service uses two types of valuation approaches to determine the valuation of the Company’s various mortgage-backed securities: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; and an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount.
The principal considerations for our determination that performing procedures relating to the valuation of mortgage-backed securities, at fair value is a critical audit matter are the high degree of auditor effort in performing procedures and evaluating audit evidence related to the fair value of the mortgage-backed securities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of mortgage-backed securities, at fair value. These procedures also included, among others, (i) developing an independent range of prices for the securities by obtaining independent pricing from third party vendors; (ii) comparing management’s estimate of fair value to the independent range of prices to evaluate the reasonableness of management’s estimate; and (iii) testing the completeness and accuracy of the data provided by management.
/s/ PRICEWATERHOUSECOOPERSPricewaterhouseCoopers LLP
Atlanta, Georgia
February 20, 201821, 2023
We have served as the Company’s auditor since 2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Invesco Mortgage Capital Inc.
We have audited the consolidated balance sheet of Invesco Mortgage Capital Inc. (a Maryland corporation) and subsidiaries (the “Company”) as of December 31, 2015 (not presented herein), and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for the year then ended. Our audit of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Invesco Mortgage Capital Inc. and subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ GRANT THORNTON LLP
Dallas, Texas
February 22, 2016 (Except as to Note 17 in the previously filed 2016 financial statements, which is not presented herein and is as of February 21, 2017)
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | As of |
| | As of | | December 31, 2022 | | December 31, 2021 |
| December 31, 2017 | | December 31, 2016 | |
| In thousands except share amounts | | |
| $ in thousands except share amounts | | $ in thousands except share amounts | December 31, 2022 | | December 31, 2021 |
| ASSETS | | | | ASSETS | |
| Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $17,474,616 and $14,422,198, respectively) | 18,190,754 |
| | 14,981,331 |
| |
| Commercial loans, held-for-investment | 191,808 |
| | 273,355 |
| |
| Mortgage-backed securities, at fair value (including pledged securities of $4,439,583 and $7,326,175, respectively) | | Mortgage-backed securities, at fair value (including pledged securities of $4,439,583 and $7,326,175, respectively) | 4,791,893 | | | 7,804,259 | |
| Cash and cash equivalents | 88,381 |
| | 161,788 |
| Cash and cash equivalents | 175,535 | | | 357,134 | |
| Restricted cash | | Restricted cash | 103,246 | | | 219,918 | |
| Due from counterparties | 620 |
| | 86,450 |
| Due from counterparties | 1,584 | | | 7,985 | |
| Investment related receivable | 73,217 |
| | 90,831 |
| Investment related receivable | 22,744 | | | 16,766 | |
| Derivative assets, at fair value | 6,896 |
| | 3,186 |
| Derivative assets, at fair value | 662 | | | 270 | |
| Other assets | 105,580 |
| | 109,297 |
| Other assets | 1,731 | | | 37,509 | |
| Total assets | 18,657,256 |
| | 15,706,238 |
| Total assets | 5,097,395 | | | 8,443,841 | |
| LIABILITIES AND EQUITY | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Liabilities: | | | | Liabilities: | |
| Repurchase agreements | 14,080,801 |
| | 11,160,669 |
| Repurchase agreements | 4,234,823 | | | 6,987,834 | |
| Secured loans | 1,650,000 |
| | 1,650,000 |
| |
| Exchangeable senior notes | 143,231 |
| | 397,041 |
| |
| Derivative liabilities, at fair value | 32,765 |
| | 134,228 |
| Derivative liabilities, at fair value | 2,079 | | | 14,356 | |
| Dividends and distributions payable | 50,193 |
| | 50,924 |
| |
| Investment related payable | 5,191 |
| | 9,232 |
| |
| Dividends payable | | Dividends payable | 25,162 | | | 29,689 | |
| | Accrued interest payable | 17,845 |
| | 21,066 |
| Accrued interest payable | 20,546 | | | 1,171 | |
| Collateral held payable | 7,327 |
| | 1,700 |
| Collateral held payable | 4,892 | | | 280 | |
| Accounts payable and accrued expenses | 2,200 |
| | 1,534 |
| Accounts payable and accrued expenses | 1,365 | | | 1,887 | |
| Due to affiliate | 10,825 |
| | 9,660 |
| Due to affiliate | 4,453 | | | 6,489 | |
| Total liabilities | 16,000,378 |
| | 13,436,054 |
| Total liabilities | 4,293,320 | | | 7,041,706 | |
| Commitments and contingencies (See Note 16) |
| |
| |
| Equity: | | | | |
| Commitments and contingencies (See Note 14) | | Commitments and contingencies (See Note 14) | | | |
| Stockholders' equity: | | Stockholders' equity: | |
| Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized: | | | | Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized: | |
| 7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference) | 135,356 |
| | 135,356 |
| |
| 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference) | 149,860 |
| | 149,860 |
| |
| 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference) | 278,108 |
| | — |
| |
| Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 111,624,159 and 111,594,595 shares issued and outstanding, respectively | 1,116 |
| | 1,116 |
| |
| 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 4,537,634 and 6,200,000 shares issued and outstanding, respectively ($113,441 and $155,000 aggregate liquidation preference, respectively) | | 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 4,537,634 and 6,200,000 shares issued and outstanding, respectively ($113,441 and $155,000 aggregate liquidation preference, respectively) | 109,679 | | | 149,860 | |
| 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 7,816,470 and 11,500,000 shares issued and outstanding, respectively ($195,412 and $287,500 aggregate liquidation preference, respectively) | | 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 7,816,470 and 11,500,000 shares issued and outstanding, respectively ($195,412 and $287,500 aggregate liquidation preference, respectively) | 189,028 | | | 278,108 | |
| Common Stock, par value $0.01 per share; 67,000,000 and 450,000,000 shares authorized, respectively; 38,710,916 and 32,987,478 shares issued and outstanding, respectively | | Common Stock, par value $0.01 per share; 67,000,000 and 450,000,000 shares authorized, respectively; 38,710,916 and 32,987,478 shares issued and outstanding, respectively | 387 | | | 330 | |
| Additional paid in capital | 2,384,356 |
| | 2,379,863 |
| Additional paid in capital | 3,901,562 | | | 3,819,375 | |
| Accumulated other comprehensive income | 261,029 |
| | 293,668 |
| Accumulated other comprehensive income | 10,761 | | | 37,286 | |
| Retained earnings (distributions in excess of earnings) | (579,334 | ) | | (718,303 | ) | Retained earnings (distributions in excess of earnings) | (3,407,342) | | | (2,882,824) | |
| Total stockholders’ equity | 2,630,491 |
| | 2,241,560 |
| Total stockholders’ equity | 804,075 | | | 1,402,135 | |
| Non-controlling interest | 26,387 |
| | 28,624 |
| |
| Total equity | 2,656,878 |
| | 2,270,184 |
| |
| Total liabilities and equity | 18,657,256 |
| | 15,706,238 |
| |
| Total liabilities and stockholders' equity | | Total liabilities and stockholders' equity | 5,097,395 | | | 8,443,841 | |
The accompanying notes are an integral part of these consolidated financial statements.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| $ in thousands except share data | | |
| Interest income | | | | | |
| Mortgage-backed and other securities | 192,566 | | | 167,056 | | | 277,400 | |
| Commercial and other loans | 1,947 | | | 2,146 | | | 2,766 | |
| Total interest income | 194,513 | | | 169,202 | | | 280,166 | |
| Interest expense | | | | | |
Repurchase agreements (1) | 51,560 | | | (11,290) | | | 73,607 | |
| Secured loans | — | | | — | | | 8,655 | |
| Total interest expense | 51,560 | | | (11,290) | | | 82,262 | |
| Net interest income | 142,953 | | | 180,492 | | | 197,904 | |
| | | | | |
| | | | | |
| Other income (loss) | | | | | |
| Gain (loss) on investments, net | (1,079,339) | | | (366,509) | | | (961,938) | |
| (Increase) decrease in provision for credit losses | — | | | 1,768 | | | (1,768) | |
| Equity in earnings (losses) of unconsolidated ventures | (407) | | | 870 | | | 1,163 | |
| Gain (loss) on derivative instruments, net | 559,007 | | | 122,611 | | | (851,050) | |
| Realized and unrealized credit derivative income (loss), net | — | | | — | | | (35,312) | |
| Net gain (loss) on extinguishment of debt | — | | | — | | | 14,742 | |
| Other investment income (loss), net | 186 | | | 1 | | | 2,137 | |
| Total other income (loss) | (520,553) | | | (241,259) | | | (1,832,026) | |
| Expenses | | | | | |
| Management fee — related party | 16,906 | | | 21,080 | | | 29,367 | |
| General and administrative | 8,418 | | | 8,153 | | | 10,863 | |
| | | | | |
| Total expenses | 25,324 | | | 29,233 | | | 40,230 | |
| | | | | |
| Net income (loss) | (402,924) | | | (90,000) | | | (1,674,352) | |
| Dividends to preferred stockholders | (28,218) | | | (37,795) | | | (44,426) | |
| Gain on repurchase and retirement of preferred stock | 14,179 | | | — | | | — | |
| Issuance and redemption costs of redeemed preferred stock | — | | | (4,682) | | | — | |
| Net income (loss) attributable to common stockholders | (416,963) | | | (132,477) | | | (1,718,778) | |
| Earnings (loss) per share: | | | | | |
| Net income (loss) attributable to common stockholders | | | | | |
| Basic | (12.21) | | | (4.82) | | | (98.93) | |
| Diluted | (12.21) | | | (4.82) | | | (98.93) | |
| Weighted average number of shares of common stock: | | | | | |
| Basic | 34,160,080 | | | 27,513,223 | | | 17,373,039 | |
| Diluted | 34,160,080 | | | 27,513,223 | | | 17,373,039 | |
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| In thousands except share amounts | | |
| Interest Income | | | | | |
| Mortgage-backed and credit risk transfer securities | 521,547 |
| | 456,444 |
| | 523,893 |
|
Residential loans (1) | — |
| | — |
| | 110,908 |
|
| Commercial loans | 23,508 |
| | 22,238 |
| | 15,331 |
|
| Total interest income | 545,055 |
| | 478,682 |
| | 650,132 |
|
| Interest Expense | | | | | |
| Repurchase agreements | 163,881 |
| | 124,000 |
| | 166,892 |
|
| Secured loans | 19,370 |
| | 10,887 |
| | 6,579 |
|
| Exchangeable senior notes | 13,340 |
| | 22,467 |
| | 22,461 |
|
Asset-backed securities (1) | — |
| | — |
| | 82,041 |
|
| Total interest expense | 196,591 |
| | 157,354 |
| | 277,973 |
|
| Net interest income | 348,464 |
| | 321,328 |
| | 372,159 |
|
| Reduction in provision for loan losses | — |
| | — |
| | (213 | ) |
| Net interest income after reduction in provision for loan losses | 348,464 |
| | 321,328 |
| | 372,372 |
|
| Other income (loss) | | | | | |
| Gain (loss) on investments, net | (19,704 | ) | | (17,542 | ) | | (18,005 | ) |
| Equity in earnings (losses) of unconsolidated ventures | (1,327 | ) | | 2,392 |
| | 12,630 |
|
| Gain (loss) on derivative instruments, net | 18,155 |
| | (62,815 | ) | | (219,048 | ) |
| Realized and unrealized credit derivative income (loss), net | 51,648 |
| | 61,143 |
| | 19,782 |
|
| Net loss on extinguishment of debt | (6,814 | ) | | — |
| | — |
|
| Other investment income (loss), net | 7,381 |
| | (5,002 | ) | | 944 |
|
| Total other income (loss) | 49,339 |
| | (21,824 | ) | | (203,697 | ) |
| Expenses | | | | | |
| Management fee — related party | 37,556 |
| | 34,541 |
| | 38,632 |
|
| General and administrative | 7,190 |
| | 7,265 |
| | 7,769 |
|
Consolidated securitization trusts (1) | — |
| | — |
| | 8,219 |
|
| Total expenses | 44,746 |
| | 41,806 |
| | 54,620 |
|
| Net income | 353,057 |
| | 257,698 |
| | 114,055 |
|
| Net income attributable to non-controlling interest | 4,450 |
| | 3,287 |
| | 1,344 |
|
| Net income attributable to Invesco Mortgage Capital Inc. | 348,607 |
| | 254,411 |
| | 112,711 |
|
| Dividends to preferred stockholders | 28,080 |
| | 22,864 |
| | 22,864 |
|
| Net income attributable to common stockholders | 320,527 |
| | 231,547 |
| | 89,847 |
|
| Earnings per share: | | | | | |
| Net income attributable to common stockholders | | | | | |
| Basic | 2.87 |
| | 2.07 |
| | 0.74 |
|
| Diluted | 2.75 |
| | 1.98 |
| | 0.74 |
|
| Weighted average number of shares of common stock: | | | | | |
| Basic | 111,610,393 |
| | 111,973,404 |
| | 121,377,585 |
|
| Diluted | 123,040,827 |
| | 130,254,003 |
| | 122,843,838 |
|
| |
(1) | The consolidated statement of operations for the year ended December 31, 2015 includes income and expenses of consolidated variable interest entities ("VIEs"). We deconsolidated these VIEs in 2015. Refer to Note 2 - “Summary of Significant Accounting Policies” for further discussion. |
The accompanying notes are an integral part of these consolidated financial statements.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| In thousands | | |
| Net income | 353,057 |
| | 257,698 |
| | 114,055 |
|
| Other comprehensive income (loss): | | | | | |
| Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net | (9,885 | ) | | (37,632 | ) | | (191,053 | ) |
| Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net | 1,508 |
| | 6,134 |
| | (7,484 | ) |
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | (25,544 | ) | | 5,154 |
| | 66,757 |
|
| Currency translation adjustments on investment in unconsolidated venture | 863 |
| | 128 |
| | (32 | ) |
| Total other comprehensive income (loss) | (33,058 | ) | | (26,216 | ) | | (131,812 | ) |
| Comprehensive income (loss) | 319,999 |
| | 231,482 |
| | (17,757 | ) |
| Less: Comprehensive (income) loss attributable to non-controlling interest | (4,032 | ) | | (2,939 | ) | | 245 |
|
| Less: Dividends to preferred stockholders | (28,080 | ) | | (22,864 | ) | | (22,864 | ) |
| Comprehensive income (loss) attributable to common stockholders | 287,887 |
| | 205,679 |
| | (40,376 | ) |
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| $ in thousands | | |
| Net income (loss) | (402,924) | | | (90,000) | | | (1,674,352) | |
| Other comprehensive income (loss): | | | | | |
| Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net | (6,280) | | | 756 | | | (223,416) | |
| Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net | — | | | — | | | 13,940 | |
| Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses | — | | | — | | | 1,768 | |
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | (19,708) | | | (22,000) | | | (23,794) | |
| Currency translation adjustments on investment in unconsolidated venture | (537) | | | (75) | | | 1,144 | |
| Total other comprehensive income (loss) | (26,525) | | | (21,319) | | | (230,358) | |
| Comprehensive income (loss) | (429,449) | | | (111,319) | | | (1,904,710) | |
| Dividends to preferred stockholders | (28,218) | | | (37,795) | | | (44,426) | |
| Gain on repurchase and retirement of preferred stock | 14,179 | | | — | | | — | |
| Issuance and redemption costs of redeemed preferred stock | — | | | (4,682) | | | — | |
| Comprehensive income (loss) attributable to common stockholders | (443,488) | | | (153,796) | | | (1,949,136) | |
The accompanying notes are an integral part of these consolidated financial statements.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands except share amounts | Series A
Preferred Stock | | Series B
Preferred Stock | | Series C
Preferred Stock | | Common Stock | | Additional
Paid in
Capital | | Accumulated
Other
Comprehensive
Income (Loss) | | Retained Earnings (Distributions
in Excess
of Earnings) | | Total
Stockholders’
Equity | | |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2019 | 5,600,000 | | | 135,356 | | | 6,200,000 | | | 149,860 | | | 11,500,000 | | | 278,108 | | | 14,425,636 | | | 144 | | | 2,893,951 | | | 288,963 | | | (814,483) | | | 2,931,899 | | | |
| Cumulative effect of adoption of new accounting principle | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 342 | | | 342 | | | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,674,352) | | | (1,674,352) | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (230,358) | | | — | | | (230,358) | | | |
| Proceeds from issuance of common stock, net of offering costs | — | | | — | | | — | | | — | | | — | | | — | | | 4,254,974 | | | 43 | | | 420,694 | | | — | | | — | | | 420,737 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock awards | — | | | — | | | — | | | — | | | — | | | — | | | 7,750 | | | — | | | — | | | — | | | — | | | — | | | |
| Common stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | 1,633,851 | | | 16 | | | 74,218 | | | — | | | (111,436) | | | (37,202) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (44,426) | | | (44,426) | | | |
| Amortization of equity-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 518 | | | — | | | — | | | 518 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | 5,600,000 | | | 135,356 | | | 6,200,000 | | | 149,860 | | | 11,500,000 | | | 278,108 | | | 20,322,211 | | | 203 | | | 3,389,381 | | | 58,605 | | | (2,644,355) | | | 1,367,158 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | | (90,000) | | | (90,000) | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (21,319) | | | — | | | (21,319) | | | |
| Proceeds from issuance of common stock, net of offering costs | — | | | — | | | — | | | — | | | — | | | — | | | 12,646,902 | | | 126 | | | 429,378 | | | — | | | — | | | 429,504 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock awards | — | | | — | | | — | | | — | | | — | | | — | | | 18,365 | | | 1 | | | — | | | — | | | — | | | 1 | | | |
| Redemption of preferred stock | (5,600,000) | | | (135,356) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4,682) | | | (140,038) | | | |
| Common stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (105,992) | | | (105,992) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (37,795) | | | (37,795) | | | |
| Amortization of equity-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 616 | | | — | | | — | | | 616 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2021 | — | | | — | | | 6,200,000 | | | 149,860 | | | 11,500,000 | | | 278,108 | | | 32,987,478 | | | 330 | | | 3,819,375 | | | 37,286 | | | (2,882,824) | | | 1,402,135 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (402,924) | | | (402,924) | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (26,525) | | | — | | | (26,525) | | | |
| Proceeds from issuance of common stock, net of offering costs | — | | | — | | | — | | | — | | | — | | | — | | | 5,686,598 | | | 57 | | | 81,575 | | | — | | | — | | | 81,632 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Stock awards | — | | | — | | | — | | | — | | | — | | | — | | | 36,886 | | | — | | | — | | | — | | | — | | | — | | | |
| Payments in lieu of fractional shares in connection with one-for-ten reverse stock split | — | | | — | | | — | | | — | | | — | | | — | | | (46) | | | — | | | (1) | | | — | | | — | | | (1) | | | |
| Repurchase and retirement of preferred stock | — | | | — | | | (1,662,366) | | | (40,181) | | | (3,683,530) | | | (89,080) | | | — | | | — | | | — | | | — | | | 14,179 | | | (115,082) | | | |
| Common stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (107,555) | | | (107,555) | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (28,218) | | | (28,218) | | | |
| Amortization of equity-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 613 | | | — | | | — | | | 613 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2022 | — | | | — | | | 4,537,634 | | | 109,679 | | | 7,816,470 | | | 189,028 | | | 38,710,916 | | | 387 | | | 3,901,562 | | | 10,761 | | | (3,407,342) | | | 804,075 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Attributable to Common Stockholders | | | | | | |
| In thousands except share amounts | Series A Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock | | Common Stock | | Additional Paid in Capital | | Accumulated Other Comprehensive Income (loss) | | Retained earnings (Distributions in excess of earnings) | | Total Stockholders’ Equity | | Non- Controlling Interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| Balance at December 31, 2014 | 5,600,000 |
| | 135,356 |
| | 6,200,000 |
| | 149,860 |
| | — |
| | — |
| | 123,110,454 |
| | 1,231 |
| | 2,532,130 |
| | 448,847 |
| | (657,109 | ) | | 2,610,315 |
| | 28,535 |
| | 2,638,850 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 112,711 |
| | 112,711 |
| | 1,344 |
| | 114,055 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (130,223 | ) | | — |
| | (130,223 | ) | | (1,589 | ) | | (131,812 | ) |
| Proceeds from issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,945 |
| | — |
| | 191 |
| | — |
| | — |
| | 191 |
| | — |
| | 191 |
|
| Repurchase of shares of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,539,251 | ) | | (95 | ) | | (125,500 | ) | | — |
| | — |
| | (125,595 | ) | | — |
| | (125,595 | ) |
| Stock awards | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35,323 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (204,051 | ) | | (204,051 | ) | | — |
| | (204,051 | ) |
| Common unit dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,423 | ) | | (2,423 | ) |
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,864 | ) | | (22,864 | ) | | — |
| | (22,864 | ) |
| Amortization of equity-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 551 |
| | — |
| | — |
| | 551 |
| | 6 |
| | 557 |
|
| Balance at December 31, 2015 | 5,600,000 |
| | 135,356 |
| | 6,200,000 |
| | 149,860 |
| | — |
| | — |
| | 113,619,471 |
| | 1,136 |
| | 2,407,372 |
| | 318,624 |
| | (771,313 | ) | | 2,241,035 |
| | 25,873 |
| | 2,266,908 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 254,411 |
| | 254,411 |
| | 3,287 |
| | 257,698 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25,868 | ) | | — |
| | (25,868 | ) | | (348 | ) | | (26,216 | ) |
| Proceeds from issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,201 |
| | — |
| | 35 |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
| Repurchase of shares of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,063,451 | ) | | (20 | ) | | (24,980 | ) | | — |
| | — |
| | (25,000 | ) | | — |
| | (25,000 | ) |
| Stock awards | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 35,374 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (178,537 | ) | | (178,537 | ) | | — |
| | (178,537 | ) |
| Common unit dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,280 | ) | | (2,280 | ) |
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22,864 | ) | | (22,864 | ) | | — |
| | (22,864 | ) |
| Amortization of equity-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 434 |
| | — |
| | — |
| | 434 |
| | 6 |
| | 440 |
|
| Rebalancing of ownership percentage of non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,998 | ) | | 912 |
| | — |
| | (2,086 | ) | | 2,086 |
| | — |
|
| Balance at December 31, 2016 | 5,600,000 |
| | 135,356 |
| | 6,200,000 |
| | 149,860 |
| | — |
| | — |
| | 111,594,595 |
| | 1,116 |
| | 2,379,863 |
| | 293,668 |
| | (718,303 | ) | | 2,241,560 |
| | 28,624 |
| | 2,270,184 |
|
| Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 348,607 |
| | 348,607 |
| | 4,450 |
| | 353,057 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,640 | ) | | — |
| | (32,640 | ) | | (418 | ) | | (33,058 | ) |
| Proceeds from issuance of preferred stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 11,500,000 |
| | 278,108 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 278,108 |
| | — |
| | 278,108 |
|
| Stock awards | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 29,564 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (181,931 | ) | | (181,931 | ) | | — |
| | (181,931 | ) |
| Common unit dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,323 | ) | | (2,323 | ) |
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27,707 | ) | | (27,707 | ) | | — |
| | (27,707 | ) |
| Amortization of equity-based compensation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 541 |
| | — |
| | — |
| | 541 |
| | 7 |
| | 548 |
|
| Rebalancing of ownership percentage of non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,952 |
| | 1 |
| | — |
| | 3,953 |
| | (3,953 | ) | | — |
|
| Balance at December 31, 2017 | 5,600,000 |
| | 135,356 |
| | 6,200,000 |
| | 149,860 |
| | 11,500,000 |
| | 278,108 |
| | 111,624,159 |
| | 1,116 |
| | 2,384,356 |
| | 261,029 |
| | (579,334 | ) | | 2,630,491 |
| | 26,387 |
| | 2,656,878 |
|
The accompanying notes are an integral part of these consolidated financial statements.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | |
| In thousands | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities | | | | | |
| Net income | 353,057 |
| | 257,698 |
| | 114,055 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net | 95,150 |
| | 118,248 |
| | 117,288 |
|
| Amortization of residential loans and asset-backed securities premiums (discounts), net | — |
| | — |
| | (656 | ) |
| Amortization of commercial loan origination fees | (337 | ) | | (302 | ) | | (91 | ) |
| Reduction in provision for loan losses | — |
| | — |
| | (213 | ) |
| Unrealized (gain) loss on derivative instruments, net | (27,393 | ) | | (99,932 | ) | | (9,597 | ) |
| Unrealized (gain) loss on credit derivatives, net | (28,305 | ) | | (42,817 | ) | | 4,623 |
|
| (Gain) loss on investments, net | 19,704 |
| | 17,542 |
| | 18,005 |
|
| Realized (gain) loss on derivative instruments, net | (67,838 | ) | | 57,943 |
| | 44,272 |
|
| Realized (gain) loss on credit derivatives, net | — |
| | 6,017 |
| | 1,140 |
|
| Equity in (earnings) losses of unconsolidated ventures | 1,327 |
| | (2,392 | ) | | (12,630 | ) |
| Amortization of equity-based compensation | 548 |
| | 440 |
| | 557 |
|
| Amortization of deferred securitization and financing costs | 1,445 |
| | 2,468 |
| | 3,146 |
|
| Amortization of net deferred (gain) loss on de-designated interest rate swaps | (25,544 | ) | | 5,154 |
| | 66,757 |
|
| Net loss on extinguishment of debt | 6,814 |
| | — |
| | — |
|
| (Gain) loss on foreign currency transactions, net | (4,103 | ) | | 8,260 |
| | 1,964 |
|
| Changes in operating assets and liabilities: | | | | | |
| (Increase) decrease in operating assets | (7,774 | ) | | 3,966 |
| | 5,660 |
|
| Increase (decrease) in operating liabilities | 1,203 |
| | (2,578 | ) | | 4,305 |
|
| Net cash provided by operating activities | 317,954 |
| | 329,715 |
| | 358,585 |
|
| Cash Flows from Investing Activities | | | | | |
| Purchase of mortgage-backed and credit risk transfer securities | (6,277,918 | ) | | (2,660,925 | ) | | (2,352,380 | ) |
| Purchase of U.S. Treasury Securities | — |
| | (403,105 | ) | | — |
|
| Proceeds from sale of U.S. Treasury securities | — |
| | 524,478 |
| | — |
|
| (Contributions to) distributions from investments in unconsolidated ventures, net | 6,865 |
| | 7,632 |
| | 18,183 |
|
| Change in other assets | (3,457 | ) | | 623 |
| | (12,875 | ) |
| Principal payments from mortgage-backed and credit risk transfer securities | 2,373,953 |
| | 2,580,695 |
| | 2,602,138 |
|
| Proceeds from sale of mortgage-backed and credit risk transfer securities | 625,540 |
| | 1,034,295 |
| | 907,155 |
|
| Payments on sale of credit derivatives | — |
| | (6,017 | ) | | (1,140 | ) |
| Payment of premiums for interest rate swaptions | — |
| | — |
| | (1,486 | ) |
| Settlement (termination) of futures, forwards, swaps, swaptions and TBAs, net | 67,838 |
| | (56,458 | ) | | (33,945 | ) |
| Purchase of residential loans held-for-investment | — |
| | — |
| | (372,305 | ) |
| Principal payments from residential loans held-for-investment | — |
| | — |
| | 549,565 |
|
| Principal payments from commercial loans held-for-investment | 90,713 |
| | 15,000 |
| | 92,796 |
|
| Origination and advances of commercial loans, net of origination fees | (4,799 | ) | | (87,202 | ) | | (157,963 | ) |
| Net cash (used in) provided by investing activities | (3,121,265 | ) | | 949,016 |
| | 1,237,743 |
|
| Cash Flows from Financing Activities | | | | | |
| Proceeds from issuance of common stock | — |
| | 35 |
| | 191 |
|
| Repurchase of common stock | — |
| | (25,000 | ) | | (125,595 | ) |
| Proceeds from (cost of) issuance of preferred stock | 278,226 |
| | — |
| | (36 | ) |
| Due from counterparties | (620 | ) | | 29,445 |
| | (53,830 | ) |
| Change in collateral held payable | 5,627 |
| | (3,200 | ) | | (9,990 | ) |
| Proceeds from repurchase agreements | 146,886,038 |
| | 127,056,247 |
| | 140,861,204 |
|
| Principal repayments of repurchase agreements | (143,964,490 | ) | | (128,023,042 | ) | | (142,357,783 | ) |
| Proceeds from asset-backed securities | — |
| | — |
| | 336,077 |
|
| Principal repayments of asset-backed securities | — |
| | — |
| | (518,150 | ) |
| Proceeds from secured loans | — |
| | 125,000 |
| | 2,325,000 |
|
| Principal repayments of secured loans | — |
| | (125,000 | ) | | (1,925,000 | ) |
| Extinguishment of exchangeable senior notes | (262,069 | ) |
| — |
|
| — |
|
| Payments of deferred costs | (116 | ) | | (136 | ) | | — |
|
| Payments of dividends and distributions | (212,692 | ) | | (204,491 | ) | | (239,361 | ) |
| Net cash provided by (used in) financing activities | 2,729,904 |
| | (1,170,142 | ) | | (1,707,273 | ) |
| Net change in cash and cash equivalents | (73,407 | ) | | 108,589 |
| | (110,945 | ) |
| Cash and cash equivalents, beginning of period | 161,788 |
| | 53,199 |
| | 164,144 |
|
| Cash and cash equivalents, end of period | 88,381 |
| | 161,788 |
| | 53,199 |
|
| Supplement Disclosure of Cash Flow Information | | | | | |
| Interest paid | 220,299 |
| | 146,840 |
| | 211,414 |
|
| Non-cash Investing and Financing Activities Information | | | | | |
| Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities | (8,377 | ) | | (31,498 | ) | | (198,537 | ) |
| Dividends and distributions declared not paid | 50,193 |
| | 50,924 |
| | 51,734 |
|
| Net change in investment related payable (receivable) | (25,948 | ) | | 115,304 |
| | (131,440 | ) |
| Repurchase agreements, not settled | (1,416 | ) | | (1,416 | ) | | (50 | ) |
| Change in due from counterparties | 86,450 |
| | (5,886 | ) | | 1,425 |
|
| | | | | | | | | | | | | | | | | |
| $ in thousands | Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash Flows from Operating Activities | | | | | |
| Net income (loss) | (402,924) | | | (90,000) | | | (1,674,352) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Amortization of mortgage-backed and other securities premiums and (discounts), net | (1,118) | | | 37,397 | | | 15,980 | |
| Realized and unrealized (gain) loss on derivative instruments, net | (472,135) | | | (138,414) | | | 859,097 | |
| Realized and unrealized (gain) loss on credit derivatives, net | — | | | — | | | 41,635 | |
| (Gain) loss on investments, net | 1,079,339 | | | 366,509 | | | 961,938 | |
| Increase (decrease) in provision for credit losses | — | | | (1,768) | | | 1,768 | |
| (Gain) loss from investments in unconsolidated ventures in excess of distributions received | 45 | | | 9 | | | 229 | |
| Other amortization | (19,095) | | | (21,383) | | | (23,276) | |
| Net (gain) loss on extinguishment of debt | — | | | — | | | (14,742) | |
| | | | | |
| Changes in operating assets and liabilities: | | | | | |
| (Increase) decrease in operating assets | (5,230) | | | (1,166) | | | 51,645 | |
| Increase (decrease) in operating liabilities | 17,201 | | | 1,108 | | | (49,463) | |
| Net cash provided by (used in) operating activities | 196,083 | | | 152,292 | | | 170,459 | |
| Cash Flows from Investing Activities | | | | | |
| Purchase of mortgage-backed and credit risk transfer securities | (25,723,584) | | | (17,132,975) | | | (13,613,447) | |
| Purchase of U.S. Treasury securities | (502,290) | | | — | | | — | |
| Distributions from (contributions to) investments in unconsolidated ventures, net | 11,342 | | | 3,848 | | | 6,505 | |
| Change in other assets | — | | | — | | | 40,846 | |
| Principal payments from mortgage-backed and credit risk transfer securities | 403,327 | | | 825,189 | | | 892,592 | |
| Proceeds from sale of mortgage-backed and credit risk transfer securities | 27,281,250 | | | 16,273,956 | | | 25,028,464 | |
| Proceeds from sale of U.S. Treasury securities | 468,051 | | | — | | | — | |
| Payment on the sale of credit derivatives | — | | | — | | | (31,353) | |
| Settlement (termination) of forwards, swaps, swaptions and TBAs, net | 459,466 | | | 156,160 | | | (844,577) | |
| Redemption of Federal Home Loan Bank of Indianapolis stock | — | | | — | | | 74,250 | |
| Net change in due from counterparties and collateral held payable on derivative instruments | 2,594 | | | (5,430) | | | 1,093 | |
| Principal payments from commercial loan held-for-investment | 23,917 | | | — | | | 136 | |
| | | | | |
| Net cash provided by (used in) investing activities | 2,424,073 | | | 120,748 | | | 11,554,509 | |
| Cash Flows from Financing Activities | | | | | |
| Proceeds from issuance of common stock | 81,899 | | | 430,496 | | | 420,737 | |
| | | | | |
| | | | | |
| | | | | |
| Redemption of preferred stock | — | | | (140,038) | | | — | |
| Repurchase of preferred stock | (115,082) | | | — | | | — | |
| Cash paid in lieu of fractional shares in connection with one-for-ten reverse stock split | (1) | | | — | | | — | |
| Principal repayments of secured loans | — | | | — | | | (1,650,000) | |
| Proceeds from repurchase agreements | 66,872,266 | | | 82,347,113 | | | 75,698,735 | |
| Principal repayments of repurchase agreements and related fees | (69,625,277) | | | (82,587,978) | | | (85,987,597) | |
| | | | | |
| Net change in due from counterparties and collateral held payable on repurchase agreements | 8,419 | | | (4,743) | | | 33,773 | |
| Payments of deferred costs | (351) | | | (354) | | | (35) | |
| | | | | |
| Payments of dividends | (140,300) | | | (133,068) | | | (137,499) | |
| Net cash provided by (used in) financing activities | (2,918,427) | | | (88,572) | | | (11,621,886) | |
| Net change in cash, cash equivalents and restricted cash | (298,271) | | | 184,468 | | | 103,082 | |
| Cash, cash equivalents and restricted cash, beginning of period | 577,052 | | | 392,584 | | | 289,502 | |
| Cash, cash equivalents and restricted cash, end of period | 278,781 | | | 577,052 | | | 392,584 | |
| Supplement Disclosure of Cash Flow Information | | | | | |
| Interest paid | 51,892 | | | 10,363 | | | 149,230 | |
| Non-cash Investing and Financing Activities Information | | | | | |
| Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities classified as available-for-sale | (6,280) | | | 756 | | | (207,708) | |
| Dividends declared not paid | 25,162 | | | 29,689 | | | 18,970 | |
| Increase (decrease) in Agency CMBS purchase commitments | — | | | — | | | (99,557) | |
| Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments | (707) | | | 46 | | | 266 | |
| | | | | |
| Change in foreign currency translation adjustment on other investments | 537 | | | 75 | | | (1,144) | |
| Dividend paid in common stock | — | | | — | | | 74,234 | |
| | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Business Operations
Invesco Mortgage Capital Inc. (the “Company”, or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS”) and other mortgage-related assets.
As of December 31, 2022, we were invested in:
•residential and mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”);
•commercial mortgage-backed securities (“CMBS”) that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”);
•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”); and
•other real estate-related financing arrangements.
During the periods presented in these consolidated financial statements, we also invested in:
•CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);
•credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);
•a commercial mortgage loan; and
•U.S. Treasury securities.
We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) and mortgage loans.have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"“Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a leading independent global investment management firm. We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) as its sole general partner. As of December 31, 2017 we owned 98.7% of the Operating Partnership and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. We have one operating segment.
We primarily invest in:
Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association, or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");
Commercial mortgage-backed securities ("CMBS");
RMBS that are not guaranteed by a U.S. government agency (“non-Agency RMBS”);
Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT");
Residential and commercial mortgage loans; and
Other real estate-related financing agreements.
We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986 commencing with our taxable year ended December 31, 2009.1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the "Investment Company"“Investment Company” definition under the Investment Company Act of 1940.1940, as amended (the “1940 Act”).
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
For all periods presented in these consolidated financial statements, common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, which was effected following the close of business on June 3, 2022, unless otherwise noted.
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and consolidate the financial statements of the Company and its controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
Our consolidated financial statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Company and our controlled subsidiaries. During the period from January 1, 2015 through December 9, 2015, the consolidated financial statements also include the results of operations of certain residential loan securitization trusts (the "Residential Securitizations") that meet the definition of a variable interest entity ("VIE"). On December 9, 2015, we completed the sale of certain beneficial interests in the Residential Securitizations and deconsolidated the Residential Securitizations. Refer to Note 3 - "Variable Interest Entities" for additional information regarding the impact of consolidation and deconsolidation of the Residential Securitizations.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed and credit risk transfer securities provisionand allowances for loan losses and other-than-temporary impairment charges.credit losses. Actual results may differ from those estimates.
Translation of Foreign Currencies
The functional currency of the Company and its subsidiaries is U.S. dollars. Transactions in foreign currencies are recorded at the rates of exchange prevailing on the date of the transactions. At each balance sheet date, monetary assets and
liabilities that are denominated in foreign currencies are remeasured at the rates prevailing at the balance sheet date. Gains and losses arising on revaluation are included in other investment income (loss), net on the consolidated statements of operations. During the years ended December 31, 2017, 2016 and 2015, we incurred foreign currency gains of $4.1 million, $8.2 million of losses and $1.9 million of losses, respectively, primarily related to the revaluation of our commercial loan investments denominated in Pound Sterling.
Our reporting currency is U.S. dollars. Upon consolidation, the assets and liabilities of our investment in an unconsolidated venture whose functional currency is the Euro is translated to U.S. dollars using the period-end exchange rates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year, which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the investment in the unconsolidated venture are recorded in accumulated other comprehensive income (loss), a component of consolidated stockholders’ equity.
We generally hedge interest rate andhave historically hedged foreign currency exposure with derivative financial instruments. Refer to Note 98 - "Derivatives“Derivatives and Hedging Activities"Activities” for further information.
Fair Value Measurements
We report our mortgage-backedMBS and credit risk transfer securitiesGSE CRTs and derivative assets and liabilities at fair value as determined by an independent pricing service. We generally obtain one price per instrument from our primary pricing service. If the primary pricing service cannot provide a price, we will seek a value from other pricing services.
The pricing service uses two types of valuation approaches to determine the valuation of our various mortgage-backed and credit risk transfer securities: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; and an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. In instances where sufficient market activity may not exist, the pricing service may utilize proprietary valuation models that may consider market transactions in comparable securities and the various relationships between securities in determining fair value and/or market characteristics to estimate relevant cash flows, which are then discounted to calculate the fair values. Observable inputs may include a combination of benchmark yields, executed trades, broker/dealer quotes, issuer spreads, bids, offers and benchmark securities. In addition, the valuation models utilized by pricing services may consider additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. We and the pricing service continuously monitor market indicators and economic events to determine whether they may have an impact on our valuations.
The pricing service values interest rate swaps, and interest rate swaptions under the income approach using valuation models. The significant inputs in these models are readily available in public markets or can be derived from observable market transactions for substantially the full terms of the contracts.
The pricing service values U.S. Treasury futures, currency forward contracts and to-be-announced securities (“TBAs”) under the market approach through the use of quoted market prices available in an active market.
Overrides of prices from pricing services are rare in the current market environment for the assets we hold. Examples of instances that would cause an override include if we recently traded the same security or there is an indication of market activity that would cause the pricing service price to no longer be indicative of fair value. In the rare instance where a price is adjusted, we have a control process to monitor the reason for such adjustment.
To gain comfort that pricing service prices are representative of current market information, we compare the transaction prices of security purchases and sales to the valuation levels provided by the pricing services. Price differences exceeding pre-defined tolerance levels are identified and investigated and may be challenged. Trends are monitored over time and if there are indications that the valuations are not comparable to market activity, the pricing services are asked to provide detailed information regarding their methodology and inputs. Transparency tools are also available from the pricing services which help us understand data points and/or market inputs used for pricing securities.
We also review daily price movements for interest rate swaps, interest rate swaptions, U.S. Treasury futures, currency forward contracts and TBAs. Price movements exceeding pre-defined tolerance levels are investigated using an alternate price from another pricing service as well as available market information. Based on our findings, the primary pricing service may be challenged, or in rare cases, overridden with an alternate pricing source.
In addition, we perform due diligence procedures on all pricing services on at least an annual basis. A questionnaire is sent to pricing services which requests information such as changes in methodologies, business recovery preparedness, internal controls and confirmation that evaluations are generated based on market data. Physical visits are also made to each pricing service's office.
Virtual visits may take place in lieu of physical visits given concerns surrounding the COVID-19 pandemic.
An independent pricing service valued our commercial loan investment using a discounted cash flow analysis. The yield used in the discounted cash flow analysis was determined by comparing the features of the loan to the interest rates and terms required by lenders in the new loan origination market for similar loans and the yield required by investors acquiring mezzanine loans in the secondary market as well as a comparison of current market and collateral conditions to those present at origination.
As described in Note 1110 - "Fair“Fair Value of Financial Instruments,"” we evaluate the source used to fair value our assets and liabilities and make a determination on its categorization within the fair value hierarchy. If the price of a security is obtained from quoted prices for identical instruments in active markets, the security is classified as a level 1 security. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. If the inputs appear to be unobservable, the security would be classified as a level 3 security. Transfers between levels, if any, are determined at the end of the reporting period.
Mortgage-Backed and Credit Risk Transfer Securities
All of our mortgage-backed securities ("MBS") and GSE CRTs are reported at fair value. Fair value is determined by obtaining valuations from an independent source. If the fair value of a security is not available from a third-party pricing service, or such data appears unreliable, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors.
We record our purchases of MBS and GSE CRTs on the trade date. Although we generally intenddate and report these securities at fair value as described above in the Fair Value Measurements section of this Note 2 to hold mostour consolidated financial statements. Approximately $4.7 billion or 99% of our MBS and GSE CRTs until maturity, we may sell any of its mortgage-backed and credit risk transfer securities as part of our overall management of our investment portfolio.
We have electedare accounted for under the fair value option for allas of our MBS purchased onDecember 31, 2022 (December 31, 2021: $7.7 billion or after September 1, 2016. Prior to September 1, 2016, we had also elected the fair value option for our RMBS interest-only securities (“RMBS IOs”99%). RMBS IOs are hybrid financial instruments that contain embedded derivatives. Under the fair value option, we recognize changes in fair value are recognized in our consolidated statements of operations.operations as unrealized gains and losses. In our view, this election more appropriately reflects the results of our operations because MBS fair value changes are accounted for in the same manner as fair value changes in our economic hedging instruments.
Except We elected the fair value option for RMBS IOs,all MBS purchased prior toon or after September 1, 2016, are classifiedGSE CRTs purchased on or after August 24, 2015 and all RMBS interest-only securities.
We classify the remaining balance of our MBS as available-for-sale securities.($42.5 million or 1% as of December 31, 2022; $70.2 million or 1% as of December 31, 2021). Unrealized gains or losses on available-for-sale securities are recorded in accumulated other comprehensive income, a separate component of stockholders' equity, until sale or disposition of the investment. Upon sale or disposition, the cumulative gain or loss previously reported in stockholders' equity is recognized in income. Realized gains and losses from sales of MBS are determined based upon the specific identification method.
We have elected the fair value option for GSE CRTs purchased on or after August 24, 2015. GSE CRTs are hybrid financial instruments that contain embedded derivatives. Coupon payments on the securities are based on LIBOR, and principal payments are based on prepayments, losses and defined credit events in a reference pool of mortgage loans that collateralize Agency RMBS. We elected the fair value option for these securities due to the complexities associated with bifurcation of GSE CRTs into a debt host contract and an embedded derivative. Under the fair value option, changes in fair value for GSE CRTs are recognized in our consolidated statements of operations.
GSE CRTs purchased prior tobefore August 24, 2015 are alsowere reported at fair value but areand accounted for as hybrid financial instruments consisting of a debt host contract and an embedded derivative. Unrealized gains or losses arising from changes in fair value of the debt host contract, excluding other-than-temporary impairment, arewere recognized in accumulated other comprehensive income a separate component of stockholders’ equity, until sale or disposition of the investment. Upon sale or disposition of the debt host contract, the cumulative gain or loss previously reported in stockholders’ equity iswas recognized in income. Realized gains and losses from sales of GSE CRTs are determined based upon the specific identification method. Realized and unrealized gains or losses arising from changes in fair value of the embedded derivative arewere recognized in realized and unrealized credit derivative income (loss), net in our consolidated statements of operations. We elected the fair value option for GSE CRTs purchased on or after August 24, 2015 due to the complexities associated with bifurcation of GSE CRTs into a debt host contract and an embedded derivative. Realized gains and losses from sales of GSE CRTs were determined based upon the specific identification method.
Our interest income recognition policies for MBS and GSE CRTs isare described below in the Interest Income Recognition section of this Note 2 to our consolidated financial statements.
Allowances for Credit Losses on Available-for-Sale Securities
We are not required to measure expected credit losses for situations in which historic credit loss information, adjusted for current conditions and reasonable and supportable forecasts, results in an expectation that nonpayment of the amortized cost basis is zero. We consider our Agency portfolio to have zero loss expectation because (i) there have been no historical credit losses, (ii) full and timely payment of Agency RMBSprincipal and interest is guaranteed by the GSEs and (iii) the yields, while not risk free, generally trade based on prepayment and liquidity risk as opposed to be of high credit quality under applicable accounting guidance. risk.
For CMBS, non-Agency RMBS and GSE CRTs,non-Agency CMBS, we do not relyuse a discounted cash flow method to estimate and recognize an allowance for credit losses. We calculate the allowance for credit losses as the difference between the investment's amortized cost basis and expected cash flows discounted at the effective interest rate used to recognize interest income on ratings from third party agencies to determine the credit quality of the investment. WeIn developing an expectation of credit losses, we use internal models that analyze the loans underlying each securityinvestment and evaluatesevaluate factors including, but not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration to estimate the expected future cash flows.concentration. We place reliance on these internal models in determining credit quality.
While CMBS, non-Agency RMBSWe record an allowance for credit losses as a contra-asset on the consolidated balance sheets and GSE CRTs witha provision for credit losses in the consolidated statements of operations. Credit losses are accreted into earnings over time at the effective interest rate used to recognize interest income. Subsequent favorable or adverse changes in the amount of expected futurecredit losses would generally be purchased atare recognized immediately in earnings. If the allowance for credit losses has been reduced to zero, we reflect the remaining favorable changes as a discountprospective adjustment to par, the potentialeffective interest rate of the investment. The allowance for a significant adverse changecredit losses is
limited to the amount by which the investment’s amortized cost exceeds fair value. When the allowance for credit losses is limited, the effective interest rate used to recognize interest income and accrete credit losses is prospectively adjusted. We do not record an allowance for credit losses when an investment’s fair value exceeds its amortized cost. Recoveries of amounts previously written off relating to improvements in expected cash flows remains.are recognized in earnings when received. We therefore evaluate eachrecord provisions for credit losses, reductions in provisions for credit losses, accretion of credit losses, and recoveries of amounts previously written off within (increase) decrease in provision for credit losses in our consolidated statements of operations.
When we determine that we intend to sell, or more likely than not will be required to sell, an available-for-sale security in an unrealized loss position for other-than-temporary impairment at least quarterly.
The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (i) our intent to sell the security and whether it is more likely than not thatbefore we will be required to sell the security before recovery ofrecover its amortized cost, we write off any allowance for credit losses and (ii)write down the financial condition and near-term prospects of recovery ininvestment’s amortized cost to its fair valuevalue. We record the write off of the security. This includes a determinationallowance for credit losses within (increase) decrease in provision for credit losses on our consolidated statements of estimated future cash flows
through an evaluationoperations and write down of the characteristicsavailable-for-sale security within gain (loss) on investments, net in our consolidated statements of the underlying loans and the structural features of the investment. Underlying loan characteristics reviewed include, but areoperations.
We present accrued interest receivable separately from our investment portfolio on our consolidated balance sheets. We do not limited to, delinquency status, loan-to-value ratios, borrowerestimate an allowance for credit scores, occupancy status and geographic concentration.
We recognize in earnings and reflectlosses on accrued interest receivable because we write off accrued interest receivable as a reduction in the cost basis of the security the amount of any other-than-temporary impairment related to credit losses or impairments on securities that we intend to sell or for whichinterest income if it is more likely than not that we will need to sell before recoveries. The amountreceived when due.
U.S. Treasury Securities
U.S. Treasury securities are classified as trading securities and reported at fair value on our consolidated balance sheets. Purchases of U.S. Treasury Securities are recorded on the other-than-temporary impairment on debt securities related to other factors is recorded consistent with changestrade date. Changes in the fair value of allU.S. Treasury securities are recognized within gain (loss) on investments, net in our consolidated statements of operations. Coupon interest income is accrued based on the outstanding principal balance of the securities and their contractual terms. Interest income on U.S. Treasury securities is recognized within mortgage-backed and other available-for-sale securities interest income on our consolidated statements of operations.
Commercial Loan Held-For-Investment
We reported our commercial loan investment at fair value as a componentdescribed in the Fair Value Measurements section of consolidated stockholders’ equity in other comprehensive income or loss with no changethis Note 2 to the cost basis of the security.
Commercial Loans Held-For-Investment
consolidated financial statements. We carry commercial loans held-for-investment at amortized cost, net of any provision for loan losses. An individual loan is considered impaired when it is deemed probable that the Company will not be able to recover its investment and any other anticipated future payments. We generally consider the following factorsrecorded changes in evaluating whether a commercial loan is impaired:
Loan-to-value ratios;
The most recent financial information available for each loan and associated properties, including net operating income, debt service coverage ratios, occupancy rates, rent rolls, as well as any other factors we consider relevant, including, but not limited to, specific loan trigger events that would indicate an adverse change in expected cash flows or payment delinquency;
Economic trends, both macroeconomic as well as those directly affecting the properties associated with the loans, and the supply and demand trends in the market in which the subject property is located; and
The loan sponsor or borrowing entity’s ability to ensure that properties associated with the loan are managed and operated sufficiently.
When an individual commercial loan is deemed to be impaired, we record a provision to reduce the carrying value of the loan to the current present value of expected future cash flows discounted at the loan’s effective interest rate or if the loan is collateral dependent, we reduce the carrying value to the estimated fair value of the collateral, with a corresponding charge to provision for loan losseswithin gain (loss) on investments, net in our consolidated statements of operations.
Interest Income Recognition
Mortgage-Backed Securities
Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method.
Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows. We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price. Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment, unless those changes are reflected in an allowance for credit losses. In situations where an allowance for credit losses is limited by the fair value of the investment, we compute the yield as the rate that equates expected future cash flows to the current fair value of the investment. In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities.securities, including write-offs of amortized cost when certain amounts are deemed uncollectible. For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security, unless those changes are reflected in an allowance for credit losses, and the security's yield is revised prospectively.
For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows. We do not estimate prepayments in applying the effective interest method.
Credit Risk Transfer Securities
Interest income on GSE CRTs purchased prior tobefore August 24, 2015 iswas accrued based on the coupon rate of the debt host contract which reflectsreflected the credit risk of GSE unsecured senior debt with a similar maturity. Premiums or discounts associated with the purchase of credit risk transfer securities areGSE CRTs were amortized or accreted into interest income over the life of the debt host contract using the effective interest method. The difference between the coupon rate on the hybrid instrument and the coupon
rate on the GSE CRT debt host contract iswas considered premium income associated with the embedded derivative and iswas recorded in realized and unrealized credit derivative income (loss), net in our consolidated statements of operations. Interest income on GSE CRTs purchased on or after August 24, 2015 iswas based on estimated future cash flows.
Residential Loans
Prior to the deconsolidation of the Residential Securitizations, we recognized interest income from residential loans held by our consolidated VIEs on an accrual basisCommercial and amortized the related premiums and discounts into interest income using the effective interest method over the weighted average life of these loans. In estimating the weighted average life of these loans, there were a number of assumptions that were subject to estimation, including the rate and timing of principal payments, defaults, loss severity given default and other factors. Coupon interest was recognized as revenue when earned and deemed collectible or until a loan became more than 90 days past due, at which point the loan was placed on nonaccrual status. Interest previously accrued for loans that had been placed on non-accrual status was reversed against interest income in the period the loan was placed in nonaccrual status. Residential loans delinquent more than 90 days or in foreclosure were characterized as delinquent. Cash principal and interest that was advanced from servicers after a loan becomes greater than 90 days past due was recorded as a liability due to the servicer. When a delinquent loan previously placed on nonaccrual status had cured, meaning all delinquent principal and interest had been remitted by the borrower, the loan was placed back on accrual status.
CommercialOther Loans
We recognize interest income from commercial and other loans when earned and deemed collectible, or until a loan becomes past due based on the terms of the loan agreement. Any related origination fees net of origination costor costs on commercial and other loans for which we have elected the fair value option are amortized into interest income using the effective interest method over the life of the loan.recognized immediately in earnings. Interest received after a loan becomes past due or impaired is used to reduce the outstanding loan principal balance. When a delinquent loan previously placed on nonaccrual status has cured, meaning all delinquent principal and interest have been remitted by the borrower, the loan is placed back on accrual status. Alternately, loans that have been individually impaired may be placed back on accrual status if restructured and after the loan is considered re-performing. A restructured loan is considered re-performing when the loan has been current for at least 12 months.
Cash and Cash Equivalents
We consider all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. At December 31, 2017,2022, we had cash and cash equivalents in excess of the FDIC deposit insurance limit of $250,000 per institution. We mitigate our risk of loss by actively monitoring our counterparties.
Restricted Cash
Restricted cash represents cash posted with counterparties as collateral for various derivative instruments. Cash posted with counterparties as collateral is not available for general corporate purposes.
Due from Counterparties / Collateral Held Payable
Due from counterparties represents cash posted with our counterparties as collateral for our derivatives and repurchase agreements. Collateral held payable represents cash posted with us by counterparties as collateral under our derivatives and repurchase agreements. To the extentIf we receive collateral other than cash from our counterparties, such assets are not included in our consolidated balance sheets. Notwithstanding the foregoing, ifIf we either sell such assets or pledge the assets as collateral pursuant tounder a repurchase agreement, the cash received and the corresponding liability is reflected on the consolidated balance sheets.
Investment Related Receivable / Investment Related Payable
Investment related receivable consists of receivables for mortgage-backed and credit risk transfer securities that we have sold but have not settled with the buyer and accrued interest and principal paydowns on mortgage-backed and credit risk transfer securities. Investment related payable consists of liabilities for mortgage-backed and credit risk transfer securities that we have purchased but have not settled with the seller.
Investments in Unconsolidated Ventures
Our non-controlling investments in unconsolidated ventures are included in other assets in our consolidated balance sheets and are accounted for under the equity method. Capital contributions, distributions, profits and losses of the entities are allocated in accordance with the terms of the entities’ operating agreements. Such allocations may differ from the stated percentage interests, if any, as a result of preferred returns and allocation formulas as described in the entities' operating agreements.
Repurchase Agreements
We financehave financed our purchases of mortgage-backed and credit risk transfer securities primarily through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.
We record the mortgage-backed and credit risk transfer securities and the related repurchase agreement financing on a gross basis in our consolidated balance sheets, and the corresponding interest income and interest expense on a gross basis in our consolidated statements of operations.
Secured Loans
Our wholly-owned subsidiary, IAS Services LLC, iswas a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"(“FHLBI”). As a member of the FHLBI, IAS Services LLC has borrowed funds from the FHLBI in the form of secured advances. FHLBI advances arewere treated as secured financing transactions and are carried at their contractual amounts. During the year ended December 31, 2020, we fully repaid our outstanding secured loans from the FHLBI and terminated our membership. IAS Services LLC was dissolved in December 2020.
Dividends and Distributions Payable
Dividends and distributions payable represent dividends declared at the balance sheet date whichthat are payable to common stockholders and preferred stockholders, and an Invesco wholly-owned subsidiary, the non-controlling interest common unit holder of the Operating Partnership.stockholders.
Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders for the period by the weighted-average number of shares of our common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as units of limited partnership interest in the Operating Partnership ("OP Units"), exchangeable debt, and unvested restricted stock awards, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Share-Based Compensation
We adopted an equity incentive plan under whichUnder the terms of our amended and restated 2009 Equity Incentive Plan (the “Incentive Plan”), our independent directors are eligible to receive stock awards as part of their compensation for serving as directors, are eligible to receive quarterly stock awards. In addition, we may compensate the officers and employees of our Manager and its affiliates under this equity incentive planthe Incentive Plan under the terms of our management agreement.
Share-based compensation arrangements may include share options, restricted and non-restricted share awards, performance-based awards and share appreciation rights. Compensation related to stock awards to our independent directors is recognized in the consolidated financial statements based on the fair value of the equity or liability instruments issued on the date of grant. Compensation related to stock awards to employees of our Manager and its affiliates is recorded at the estimated fair value of the award over the vesting period of the award. We make an upward or downward adjustment to compensation expense for the difference in the fair value at the date of grant and the date the award is earned.
Underwriting Commissions and Offering Costs
Underwriting commissions and direct costs incurred in connection with our common and preferred stock offerings are reflectedrecorded as a reduction of additional paid-in-capitalpaid in capital and preferred stock, respectively.
Comprehensive Income
Our comprehensive income consists of net income, as presented in the consolidated statements of operations, adjusted for unrealized gains and losses on MBS purchased prior tobefore September 1, 2016 and the debt host contract associated with GSE CRTs purchased prior tobefore August 24, 2015; reclassification of unrealized losses on available-for-sale securities to (increase) decrease in provision for credit losses; reclassification of amortization of net deferred gains and losses on de-designated interest rate swaps to repurchase agreements interest expense and currency translation adjustments on an investment in an unconsolidated venture. Unrealized gains and losses on our MBS purchased prior tobefore September 1, 2016 and the debt host contract associated with GSE CRTs purchased prior tobefore August 24, 2015 are reclassified into net income upon their sale.
Accounting for Derivative Financial Instruments
We record all derivatives on our consolidated balance sheets at fair value. At the inception of a derivative contract, we determine whether the instrument will be part of a qualifying hedge accounting relationship or whether we will account for the contract as a trading instrument. We have elected not to apply hedge accounting to all new derivative contracts entered into after January 1, 2014. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in
our consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations.
Prior toBefore 2014, we applied hedge accounting to our interest rate swap agreements. Effective December 31, 2013, we voluntarily discontinued hedge accounting for our interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges. As long as we expect the forecasted transactions that were being hedged (i.e., rollovers of our repurchase agreement borrowings) to still occur, the balance recorded in accumulated other comprehensive income (loss) (“AOCI”) from the interest rate swap activity up through December 31, 2013 will remain in AOCI and be recognized in our consolidated statements of operations as interest expense over the remaining term of the interest rate swaps.
We may enter into derivative contracts, such as credit default swaps, that are intended
Prior to economically hedge certain of its risks, even though hedge accounting does not apply orDecember 31, 2020, we elect not to apply hedge accounting under U.S. GAAP.
We arewere a party to hybrid financial instruments that containcontained embedded derivative instruments. For securities thatinstruments and for which we did not elect the fair value option, we assessoption. We assessed at inception whether the economic characteristics of the embedded derivative instruments arewere clearly and closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the debt host contract), whether the financial instrument iswas remeasured to fair value through earnings and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it iswas determined that (1) the embedded instrument possessespossessed economic characteristics that arewere not clearly and closely related to the economic characteristics of the debt host contract, (2) the financial instrument iswas not remeasured to fair value through earnings and (3) a separate instrument with the same terms would qualify as a derivative instrument, the embedded instrument qualifiesqualified as an embedded derivative that iswas separated from the debt host contract. The embedded derivative iswas recorded at fair value, and changes in fair value arewere recorded in realized and unrealized credit derivative income (loss), net in our consolidated statements of operations.
We evaluate the terms and conditions of our holdings of swaptions, futures contracts, currency forward contracts and to-be-announced ("TBA") securitiesTBAs to determine if an instrument has the characteristics of an investment or should be considered a derivative under U.S. GAAP. Accordingly, swaptions, futures contracts, currency forward contracts and TBAs having the characteristics of derivatives are accounted for at fair value with such changes recognized in gain (loss) on derivative instruments, net in the consolidated statements of operations. The fair value of these swaptions, futures contracts, currency forward contracts and TBAs is included in derivative assets or derivative liabilities on the consolidated balance sheets.
Income Taxes
We elected to be taxed as a REIT commencing with our taxable year ended December 31, 2009. Accordingly, we will generally not be subject to U.S. federal and applicable state and local corporate income tax to the extent that we make qualifying distributions to our stockholders, and provided we satisfy on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to stockholders.
Our dividends paid deduction for qualifying dividends to our stockholders is computed using our REIT taxable income as opposed to net income reported on the consolidated financial statements. REIT taxable income will generally differ from net income because the determination of REIT taxable income is based on tax regulations and not financial accounting principles.
We have elected to treat one of our subsidiaries as a taxable REIT subsidiarysubsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that we cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. Our TRS did not generate material taxable income for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
We do not have any accruals for uncertain tax positions. We would recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which would be included in general and administrative expenses.
Reclassifications
Certain prior period reported amounts have been reclassified to be consistent with the current presentation. Such reclassifications had no impact on total assets, net income or equity attributable to common stockholders.
Accounting Pronouncements Recently Adopted and Pending Accounting Pronouncements
In January 2016, the FASB issued guidance to improve certain aspects of classification and measurement of financial instruments, including significant revisions in accounting related to the classification and measurement of investments in equity
securities and presentation of certain fair value changes for financial liabilities when the fair value option is elected. The guidance also amends certain disclosure requirements associated with the fair value of financial instruments. We are required to adopt the new guidance in the first quarter of 2018. Early adoption is permitted. We have determined that this new accounting standard will not have an impact on our financial condition or results of operations but will simplify financial statement disclosures.
In June 2016, the FASB issued an amendment to the guidance on reporting credit losses for assets measured at amortized cost and available-for-sale securities. We are required to adopt the new guidance in the first quarter of 2020. Early adoption is permitted. We are currently evaluating the potential impacts of the new guidance on our consolidated financial statements, as well as available transition methods.
In August 2016, the FASB issued new guidance that is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Additionally, in November 2016, the FASB issued new guidance on classification and presentation of changes in restricted cash on the statement of cash flows. We are required to adopt the new accounting standards in the first quarter of 2018 using a retrospective transition method for each period presented. Early adoption is permitted. We have determined that this new guidance will impact the presentation of certain cash payments and receipts among the operating, investing and financing sections of our consolidated statements of cash flows primarily related to distributions from investments in unconsolidated ventures and basis recovered on certain investment securities.
In August 2017, the FASB issued guidance to improve accounting for hedging activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. We are required to adopt the new guidance in the first quarter of 2019. We have determined that this new guidance is not expected to have an impact on our consolidated financial statements because we have elected not to apply hedge accounting to all new derivative contracts entered into after January 1, 2014.
Note 3 – Variable Interest Entities (“VIEs”)
Our maximum risk of loss in VIEs in which we are not the primary beneficiary at December 31, 20172022 is presented in the table below.
| | | $ in thousands | Carrying Amount | | Company's Maximum Risk of Loss | $ in thousands | Carrying
Amount | | Company's Maximum Risk of Loss |
| CMBS | 3,216,417 |
| | 3,216,417 |
| |
| Non-Agency CMBS | | Non-Agency CMBS | 36,787 | | | 36,787 | |
| Non-Agency RMBS | 1,257,608 |
| | 1,257,608 |
| Non-Agency RMBS | 8,413 | | | 8,413 | |
| Investments in unconsolidated ventures | 25,972 |
| | 25,972 |
| Investments in unconsolidated ventures | 552 | | | 552 | |
| Total | 4,499,997 |
| | 4,499,997 |
| Total | 45,752 | | | 45,752 | |
Refer to Note 4 - "Mortgage-Backed“Mortgage-Backed and Credit Risk Transfer Securities"Securities” and Note 65 - "Other Assets"“Other Assets” for additional details regarding these investments.
On December 9, 2015, we completed the sale of certain beneficial interests (the "Securities") in the Residential Securitizations for $69.0 million (the "Transaction"). The Securities sold included the most subordinated classes of asset-backed securities issued by the Residential Securitizations. As a result of the Transaction, we no longer have the power to direct the activities of the Residential Securitizations through default oversight rights and therefore are no longer the primary beneficiary of the Residential Securitizations. We do not manage the Residential Securitizations or serve as or appoint the loan servicer for the Residential Securitizations. Our risk with respect to each investment in a Residential Securitization was limited to our direct ownership in the Residential Securitization. The residential loans owned by the Residential Securitizations were held solely to satisfy the liabilities of the Residential Securitizations, and the investors in the asset-backed securities issued by the Residential Securitizations had no recourse to the Company.
We deconsolidated the assets and liabilities of the Residential Securitizations as of the date of the Transaction. The deconsolidation of the Residential Securitizations did not qualify for presentation and disclosure as discontinued operations. We recorded a loss of $19.6 million on deconsolidation of the Residential Securitizations in our consolidated statement of operations as a component of gain (loss) on investments, net. The following table presents the components of the net loss on deconsolidation of VIEs.
|
| | |
$ in thousands | As of December 9, 2015 |
Gain (loss) related to derecognition of Residential Securitizations, net | (13,260 | ) |
Gain (loss) related to remeasurement of retained interest, net | 3,068 |
|
Gain (loss) on sale of the securities, net | (9,431 | ) |
Total gain (loss) on deconsolidation of VIEs, net | (19,623 | ) |
The following table summarizes the net income (loss) of the Residential Securitizations excluding the loss on deconsolidation: |
| | |
$ in thousands | Year ended
December 31, 2015
|
Interest income - Residential loans | 110,908 |
|
Interest expense - Asset-backed securities | 82,041 |
|
Net interest income | 28,867 |
|
Reduction in provision for loan losses | (213 | ) |
Net interest income after reduction in provision for loan losses | 29,080 |
|
Expenses - Consolidated securitization trusts | 8,219 |
|
Net income | 20,861 |
|
Note 4 – Mortgage-Backed and Credit Risk Transfer Securities
During the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic and sold a substantial portion of our MBS and GSE CRT portfolio to generate liquidity and reduce leverage. We resumed investing in Agency RMBS in July 2020.
The following tables summarize our MBS and GSE CRT portfolio by asset type at December 31, 20172022 and 2016.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | | |
| $ in thousands | Principal/ Notional
Balance | | Unamortized
Premium
(Discount) | | Amortized
Cost | | | | Unrealized
Gain/
(Loss), net | | Fair
Value | | Period-
end
Weighted
Average
Yield (1) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 30 year fixed-rate Agency RMBS | 4,722,768 | | | (115,365) | | | 4,607,403 | | | | | 54,334 | | | 4,661,737 | | | 5.26 | % |
Agency-CMO (2) | 619,069 | | | (536,376) | | | 82,693 | | | | | 2,263 | | | 84,956 | | | 9.09 | % |
| | | | | | | | | | | | | |
| Non-Agency CMBS | 38,652 | | | (1,472) | | | 37,180 | | | | | (393) | | | 36,787 | | | 8.35 | % |
Non-Agency RMBS (3)(4)(5) | 307,016 | | | (299,012) | | | 8,004 | | | | | 409 | | | 8,413 | | | 8.33 | % |
| | | | | | | | | | | | | |
| Total | 5,687,505 | | | (952,225) | | | 4,735,280 | | | | | 56,613 | | | 4,791,893 | | | 5.35 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | | | | | | | | | | | | |
| $ in thousands | Principal/ Notional
Balance | | Unamortized Premium (Discount) | | Amortized Cost | | Unrealized Gain/ (Loss), net | | Fair Value | | Net Weighted Average Coupon (1) | | Period- end Weighted Average Yield (2) | | Quarterly Weighted Average Yield (3) |
| Agency RMBS: | | | | | | | | | | | | | | | |
| 15 year fixed-rate | 2,917,307 |
| | 119,120 |
| | 3,036,427 |
| | (61,645 | ) | | 2,974,782 |
| | 3.08 | % | | 2.17 | % | | 1.98 | % |
| 30 year fixed-rate | 7,354,211 |
| | 295,977 |
| | 7,650,188 |
| | (9,648 | ) | | 7,640,540 |
| | 3.72 | % | | 3.09 | % | | 2.90 | % |
| ARM* | 238,486 |
| | 1,609 |
| | 240,095 |
| | 1,105 |
| | 241,200 |
| | 2.67 | % | | 2.60 | % | | 2.36 | % |
| Hybrid ARM | 1,696,148 |
| | 26,066 |
| | 1,722,214 |
| | (2,829 | ) | | 1,719,385 |
| | 2.70 | % | | 2.54 | % | | 2.25 | % |
Total Agency pass-through (4) | 12,206,152 |
| | 442,772 |
| | 12,648,924 |
| | (73,017 | ) | | 12,575,907 |
| | 3.40 | % | | 2.79 | % | | 2.58 | % |
Agency-CMO (5) | 1,226,539 |
| | (942,290 | ) | | 284,249 |
| | (10,306 | ) | | 273,943 |
| | 2.05 | % | | 2.91 | % | | 2.74 | % |
CMBS (6)(7) | 3,879,775 |
| | (704,097 | ) | | 3,175,678 |
| | 40,739 |
| | 3,216,417 |
| | 3.85 | % | | 4.92 | % | | 4.77 | % |
Non-Agency RMBS (8)(9)(10) | 2,785,704 |
| | (1,661,683 | ) | | 1,124,021 |
| | 133,587 |
| | 1,257,608 |
| | 2.08 | % | | 7.19 | % | | 7.18 | % |
GSE CRT (11)(12) | 757,183 |
| | 24,306 |
| | 781,489 |
| | 85,390 |
| | 866,879 |
| | 3.41 | % | | 2.45 | % | | 2.79 | % |
| Total | 20,855,353 |
| | (2,840,992 | ) | | 18,014,361 |
| | 176,393 |
| | 18,190,754 |
| | 3.23 | % | | 3.42 | % | | 3.27 | % |
*Adjustable-rate(2)All Agency collateralized mortgage ("ARM"obligations (“Agency-CMO”) are interest-only securities (“Agency IO”).
| |
(1) | Net weighted average coupon as of December 31, 2017 is based on principal/notional balance and is presented net of servicing and other fees. |
| |
(2) | Period-end weighted average yield is based on amortized cost as of December 31, 2017 and incorporates future prepayment and loss assumptions. |
| |
(3) | Quarterly weighted average yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of the amortized cost of our investments. All yields are annualized. |
| |
(4) | We have elected the fair value option for Agency(3)Non-Agency RMBS is 68.6% fixed rate, 30.6% variable rate and 0.8% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4)Of the total discount in non-Agency RMBS, $2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5)Non-Agency RMBS purchased on or after September 1, 2016 which represent 42.3% of principal/notional balance, 42.0% of amortized cost and 42.2% of fair value. |
| |
(5) | Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities (“non-Agency IO”) which represent 97.1% of principal/notional balance, 41.6% of amortized cost and 35.3% of fair value. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2021 | | | | | | | | | | | | | | | $ in thousands | Principal/ Notional
Balance | | Unamortized
Premium
(Discount) | | Amortized
Cost | | | | Unrealized
Gain/
(Loss), net | | Fair Value | | Period- end Weighted Average Yield (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 30 year fixed-rate Agency RMBS | 7,514,229 | | | 246,183 | | | 7,760,412 | | | | | (58,889) | | | 7,701,523 | | | 2.07 | % | Agency-CMO (2) | 235,216 | | | (203,180) | | | 32,036 | | | | | (1,279) | | | 30,757 | | | 6.47 | % | | | | | | | | | | | | | | | | Non-Agency CMBS | 61,427 | | | (3,096) | | | 58,331 | | | | | 4,578 | | | 62,909 | | | 8.63 | % | Non-Agency RMBS (3)(4)(5) | 392,543 | | | (383,591) | | | 8,952 | | | | | 118 | | | 9,070 | | | 5.26 | % | | | | | | | | | | | | | | | | Total | 8,203,415 | | | (343,684) | | | 7,859,731 | | | | | (55,472) | | | 7,804,259 | | | 2.14 | % |
(1) Period-end weighted average yield is based on amortized cost as of December 31, 2021 and incorporates future prepayment and loss assumptions. (2) All Agency-CMO are Agency IO. (3) Non-Agency RMBS is 63.5% fixed rate, 35.6% variable rate and 0.9% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes non-Agency IO which represent 97.7% of principal/notional balance, 44.8% of amortized cost and 19.9% of fair value. The following table presents the fair value of our available-for-sale securities and securities ("Agency IO"), which represent 81.8% of principal/notional balance, 20.9% of amortized cost and 18.7% of fair value. |
| |
(6) | CMBS includes interest-only securities which represent 15.8% of principal/ notional balance, 0.5% of amortized cost and 0.6% of fair value. |
| |
(7) | We have elected the fair value option for CMBS purchased on or after September 1, 2016 which represent 25.4% of principal/notional balance, 26.7% of amortized cost and 26.1% of fair value. |
| |
(8) | Non-Agency RMBS held by us is 52.2% variable rate, 37.8% fixed rate and 10.0% floating rate based on fair value. |
| |
(9) | Of the total discount in non-Agency RMBS, $195.3 million is non-accretable based on estimated future cash flows of the securities. |
| |
(10) | Non-Agency RMBS includes interest-only securities, which represent 51.5% of the principal/notional balance, 2.0% of amortized cost and 1.8% of fair value. |
| |
(11) | We have elected the fair value option for GSE CRTs purchased on or after August 24, 2015, which represent 26.7% of the balance based on fair value. As a result, GSE CRTs accounted for under the fair value option are not bifurcated between the debt host contract and the embedded derivative. |
| |
(12) | GSE CRT weighted average coupon and weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | | |
| $ in thousands | Principal/ Notional Balance | | Unamortized Premium (Discount) | | Amortized Cost | | Unrealized Gain/(Loss), net | | Fair Value | | Net Weighted Average Coupon (1) | | Period- end Weighted Average Yield (2) | | Quarterly Weighted Average Yield (3) |
| Agency RMBS: | | | | | | | | | | | | | | | |
| 15 year fixed-rate | 3,460,625 |
| | 151,526 |
| | 3,612,151 |
| | (54,223 | ) | | 3,557,928 |
| | 3.11 | % | | 2.19 | % | | 1.99 | % |
| 30 year fixed-rate | 2,780,806 |
| | 185,521 |
| | 2,966,327 |
| | 15,390 |
| | 2,981,717 |
| | 4.37 | % | | 2.61 | % | | 2.57 | % |
| ARM* | 301,900 |
| | 2,520 |
| | 304,420 |
| | 3,453 |
| | 307,873 |
| | 2.69 | % | | 2.59 | % | | 2.16 | % |
| Hybrid ARM | 2,423,152 |
| | 42,360 |
| | 2,465,512 |
| | 8,789 |
| | 2,474,301 |
| | 2.70 | % | | 2.52 | % | | 2.02 | % |
Total Agency pass-through (4) | 8,966,483 |
| | 381,927 |
| | 9,348,410 |
| | (26,591 | ) | | 9,321,819 |
| | 3.37 | % | | 2.42 | % | | 2.20 | % |
Agency-CMO (5) | 1,712,120 |
| | (1,368,916 | ) | | 343,204 |
| | 837 |
| | 344,041 |
| | 2.16 | % | | 3.08 | % | | 2.07 | % |
CMBS (6)(7) | 3,050,747 |
| | (559,857 | ) | | 2,490,890 |
| | 60,830 |
| | 2,551,720 |
| | 3.80 | % | | 4.21 | % | | 4.17 | % |
Non-Agency RMBS (8)(9)(10) | 3,838,314 |
| | (1,934,269 | ) | | 1,904,045 |
| | 91,506 |
| | 1,995,551 |
| | 2.21 | % | | 5.22 | % | | 5.22 | % |
GSE CRT (11)(12) | 707,899 |
| | 24,320 |
| | 732,219 |
| | 35,981 |
| | 768,200 |
| | 2.38 | % | | 1.51 | % | | 1.24 | % |
| Total | 18,275,563 |
| | (3,456,795 | ) | | 14,818,768 |
| | 162,563 |
| | 14,981,331 |
| | 3.05 | % | | 3.05 | % | | 2.87 | % |
| |
(1) | Net weighted average coupon as of December 31, 2016 is based on principal/notional balance and is presented net of servicing and other fees. |
| |
(2) | Period-end weighted average yield is based on amortized cost as of December 31, 2016 and incorporates future prepayment and loss assumptions. |
| |
(3) | Quarterly weighted average yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of the amortized cost of our investments. All yields are annualized. |
| |
(4) | We have elected the fair value option for Agency RMBS purchased on or after September 1, 2016 which represent 4.3% of principal/notional balance, 4.3% of amortized cost and 4.2% of fair value. |
| |
(5) | Agency collateralized mortgage obligation ("Agency CMO") includes interest-only securities ("Agency IO"), which represent 85.5% of principal/ notional balance, 26.8% of amortized cost and 27.1% of fair value. |
| |
(6) | CMBS includes interest-only securities which represent 20.3% of principal/notional balance, 0.8% of amortized cost and 0.9% of fair value.
|
| |
(7) | We have elected the fair value option for CMBS purchased on or after September 1, 2016 which represent 0.4% of principal/notional balance, 0.6% of amortized cost and 0.5% of fair value. |
| |
(8) | Non-Agency RMBS held by us is 45.5% variable rate, 47.2% fixed rate, and 7.3% floating rate based on fair value. |
| |
(9) | Of the total discount in non-Agency RMBS, $252.5 million is non-accretable based on estimated future cash flows of the securities. |
| |
(10) | Non-Agency RMBS includes interest-only securities, which represent 43.5% of principal/notional balance, 1.5% of amortized cost and 1.3% of fair value. |
| |
(11) | We have elected the fair value option for GSE CRTs purchased on or after August 24, 2015, which represent 19.2% of the balance based on fair value. As a result, GSE CRTs accounted for under the fair value option are not bifurcated between the debt host contract and the embedded derivative. |
| |
(12) | GSE CRT weighted average coupon and weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net. |
The following table summarizes our non-Agency RMBS portfolio by asset type as of December 31, 20172022 and December 31, 2021. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, 2016. As of December 31, 2022 and December 31, 2021, approximately 99% of our MBS are accounted for under the fair value option.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| $ in thousands | Available-for-sale Securities | | Securities under Fair Value Option | | Total
Fair Value | | Available-for-sale Securities | | Securities under Fair Value Option | | Total
Fair Value |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| 30 year fixed-rate Agency RMBS | — | | | 4,661,737 | | | 4,661,737 | | | — | | | 7,701,523 | | | 7,701,523 | |
| Agency-CMO | — | | | 84,956 | | | 84,956 | | | — | | | 30,757 | | | 30,757 | |
| | | | | | | | | | | |
| Non-Agency CMBS | 36,787 | | | — | | | 36,787 | | | 62,909 | | | — | | | 62,909 | |
| Non-Agency RMBS | 5,667 | | | 2,746 | | | 8,413 | | | 7,288 | | | 1,782 | | | 9,070 | |
| | | | | | | | | | | |
| Total | 42,454 | | | 4,749,439 | | | 4,791,893 | | | 70,197 | | | 7,734,062 | | | 7,804,259 | |
|
| | | | | | | | | | | |
| $ in thousands | December 31, 2017 | | % of Non-Agency | | December 31, 2016 | | % of Non-Agency |
| Prime | 649,671 |
| | 51.6 | % | | 889,658 |
| | 44.6 | % |
| Alt-A | 393,899 |
| | 31.3 | % | | 447,213 |
| | 22.4 | % |
| Re-REMIC | 173,110 |
| | 13.7 | % | | 364,301 |
| | 18.2 | % |
| Subprime/reperforming | 40,928 |
| | 3.4 | % | | 294,379 |
| | 14.8 | % |
| Total Non-Agency | 1,257,608 |
| | 100.0 | % | | 1,995,551 |
| | 100.0 | % |
The following table summarizes the credit enhancement provided to our re-securitization of real estate mortgage investment conduit ("Re-REMIC") holdings as of December 31, 2017 and 2016.
|
| | | | | |
| Percentage of Re-REMIC Holdings at Fair Value |
Re-REMIC Subordination(1) | December 31, 2017 | | December 31, 2016 |
| 0% - 10% | 34.5 | % | | 17.6 | % |
| 10% - 20% | 3.7 | % | | 7.4 | % |
| 20% - 30% | 12.3 | % | | 13.5 | % |
| 30% - 40% | 18.4 | % | | 15.7 | % |
| 40% - 50% | 9.6 | % | | 27.0 | % |
| 50% - 60% | 19.7 | % | | 16.1 | % |
| 60% - 70% | 1.8 | % | | 2.7 | % |
| Total | 100.0 | % | | 100.0 | % |
| |
(1) | Subordination refers to the credit enhancement provided to the Re-REMIC tranche held by us by any junior Re-REMIC tranche or tranches in a resecuritization. This figure reflects the percentage of the balance of the underlying securities represented by any junior tranche or tranches at the time of resecuritization. Generally, principal losses on the underlying securities in excess of the subordination amount would result in principal losses on the Re-REMIC tranche held by us. Approximately 57.5% of our Re-REMIC holdings are not senior tranches. |
The components of the carrying value of our MBS and GSE CRT portfolio at December 31, 20172022 and 20162021 are presented below. Accrued interest receivable on our MBS portfolio, which is recorded within investment related receivable on our consolidated balance sheets, was $21.3 million at December 31, 2022 (December 31, 2021: $16.6 million).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| $ in thousands | MBS | | Interest-Only Securities | | Total | | MBS | | Interest-Only Securities | | Total |
| Principal/notional balance | 4,770,175 | | | 917,330 | | | 5,687,505 | | | 7,584,812 | | | 618,603 | | | 8,203,415 | |
| Unamortized premium | 5,195 | | | — | | | 5,195 | | | 250,771 | | | — | | | 250,771 | |
| Unamortized discount | (126,112) | | | (831,308) | | | (957,420) | | | (11,902) | | | (582,553) | | | (594,455) | |
| | | | | | | | | | | |
Gross unrealized gains (1) | 62,245 | | | 4,605 | | | 66,850 | | | 8,754 | | | 109 | | | 8,863 | |
Gross unrealized losses (1) | (7,535) | | | (2,702) | | | (10,237) | | | (60,741) | | | (3,594) | | | (64,335) | |
| Fair value | 4,703,968 | | | 87,925 | | | 4,791,893 | | | 7,771,694 | | | 32,565 | | | 7,804,259 | |
|
| | | | | |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| Principal/ notional balance | 20,855,353 |
| | 18,275,563 |
|
| Unamortized premium | 521,626 |
| | 476,314 |
|
| Unamortized discount | (3,362,618 | ) | | (3,933,109 | ) |
| Gross unrealized gains | 341,656 |
| | 302,099 |
|
| Gross unrealized losses | (165,263 | ) | | (139,536 | ) |
| Fair value | 18,190,754 |
| | 14,981,331 |
|
The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of December 31, 20172022 and 2016.2021.
|
| | | | | |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| Less than one year | 135,559 |
| | 121,076 |
|
| Greater than one year and less than five years | 7,934,836 |
| | 6,719,923 |
|
| Greater than or equal to five years | 10,120,359 |
| | 8,140,332 |
|
| Total | 18,190,754 |
| | 14,981,331 |
|
| | | | | | | | | | | |
| $ in thousands | December 31, 2022 | | December 31, 2021 |
| Less than one year | 26,593 | | | 23,150 | |
| Greater than one year and less than five years | 10,194 | | | 891,510 | |
| Greater than or equal to five years | 4,755,106 | | | 6,889,599 | |
| Total | 4,791,893 | | | 7,804,259 | |
The following tables present the estimated fair value and gross unrealized losses of our MBS and GSE CRTs by length of time that such securities have been in a continuous unrealized loss position at December 31, 20172022 and 2016.2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | Less than 12 Months | | 12 Months or More | | Total |
| $ in thousands | Fair
Value | | Unrealized
Losses | | Number of Securities | | Fair
Value | | Unrealized
Losses | | Number of Securities | | Fair
Value | | Unrealized
Losses | | Number of Securities |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
30 year fixed-rate Agency RMBS (1) | 929,292 | | | (7,060) | | | 7 | | | — | | | — | | | — | | | 929,292 | | | (7,060) | | | 7 | |
Agency-CMO (1) | 25,417 | | | (1,645) | | | 6 | | | 2,934 | | | (496) | | | 1 | | | 28,351 | | | (2,141) | | | 7 | |
| | | | | | | | | | | | | | | | | |
Non-Agency CMBS (2) | 26,592 | | | (439) | | | 2 | | | — | | | — | | | — | | | 26,592 | | | (439) | | | 2 | |
Non-Agency RMBS (3) | 349 | | | (36) | | | 2 | | | 1,411 | | | (561) | | | 9 | | | 1,760 | | | (597) | | | 11 | |
| | | | | | | | | | | | | | | | | |
| Total | 981,650 | | | (9,180) | | | 17 | | | 4,345 | | | (1,057) | | | 10 | | | 985,995 | | | (10,237) | | | 27 | |
(1)Fair value option has been elected for all Agency securities in an unrealized loss position.
(2)Unrealized losses on non-Agency CMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to current amortized cost basis.
(3)Includes non-Agency IO with fair value of $1.4 million for which the fair value option has been elected. Such securities have unrealized losses of $561,000.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | Less than 12 Months | | 12 Months or More | | Total |
| $ in thousands | Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities |
| Agency RMBS: | | | | | | | | | | | | | | | | | |
| 15 year fixed-rate | 111,020 |
| | (321 | ) | | 26 |
| | 2,406,021 |
| | (67,285 | ) | | 133 |
| | 2,517,041 |
| | (67,606 | ) | | 159 |
|
| 30 year fixed-rate | 3,677,576 |
| | (20,730 | ) | | 107 |
| | 963,547 |
| | (27,158 | ) | | 56 |
| | 4,641,123 |
| | (47,888 | ) | | 163 |
|
| ARM | 101,173 |
| | (902 | ) | | 12 |
| | — |
| | — |
| | — |
| | 101,173 |
| | (902 | ) | | 12 |
|
| Hybrid ARM | 614,321 |
| | (4,189 | ) | | 73 |
| | 517,642 |
| | (8,091 | ) | | 47 |
| | 1,131,963 |
| | (12,280 | ) | | 120 |
|
Total Agency pass through (1) | 4,504,090 |
| | (26,142 | ) | | 218 |
| | 3,887,210 |
| | (102,534 | ) | | 236 |
| | 8,391,300 |
| | (128,676 | ) | | 454 |
|
Agency-CMO (2) | 75,299 |
| | (10,433 | ) | | 44 |
| | 81,988 |
| | (2,309 | ) | | 5 |
| | 157,287 |
| | (12,742 | ) | | 49 |
|
CMBS (3) | 892,553 |
| | (17,612 | ) | | 81 |
| | 135,139 |
| | (3,792 | ) | | 12 |
| | 1,027,692 |
| | (21,404 | ) | | 93 |
|
| Non-Agency RMBS | 84,439 |
| | (709 | ) | | 15 |
| | 96,263 |
| | (1,732 | ) | | 11 |
| | 180,702 |
| | (2,441 | ) | | 26 |
|
| Total | 5,556,381 |
| | (54,896 | ) | | 358 |
| | 4,200,600 |
| | (110,367 | ) | | 264 |
| | 9,756,981 |
| | (165,263 | ) | | 622 |
|
| |
(1) | Amounts disclosed include Agency RMBS with a fair value of $3.4 billion for which the fair value option has been elected. Such securities have unrealized losses of $22.8 million. |
| |
(2) | Fair value includes unrealized losses on Agency IO of $10.1 million and unrealized losses on CMO of $2.7 million. |
| |
(3) | Amounts disclosed include CMBS with a fair value of $596.0 million for which the fair value option has been elected. Such securities have unrealized losses of $8.9 million. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | Less than 12 Months | | 12 Months or More | | Total |
| $ in thousands | Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities |
| Agency RMBS: | | | | | | | | | | | | | | | | | |
| 15 year fixed-rate | 2,781,777 |
| | (66,506 | ) | | 127 |
| | 65,964 |
| | (1,556 | ) | | 17 |
| | 2,847,741 |
| | (68,062 | ) | | 144 |
|
| 30 year fixed-rate | 747,719 |
| | (15,409 | ) | | 45 |
| | 547,763 |
| | (18,004 | ) | | 27 |
| | 1,295,482 |
| | (33,413 | ) | | 72 |
|
| ARM | 120,540 |
| | (326 | ) | | 9 |
| | 1,091 |
| | (7 | ) | | 1 |
| | 121,631 |
| | (333 | ) | | 10 |
|
| Hybrid ARM | 1,356,687 |
| | (9,922 | ) | | 99 |
| | 252 |
| | (4 | ) | | 2 |
| | 1,356,939 |
| | (9,926 | ) | | 101 |
|
Total Agency pass through (1) | 5,006,723 |
| | (92,163 | ) | | 280 |
| | 615,070 |
| | (19,571 | ) | | 47 |
| | 5,621,793 |
| | (111,734 | ) | | 327 |
|
Agency-CMO (2) | 163,114 |
| | (3,812 | ) | | 28 |
| | 22,792 |
| | (952 | ) | | 3 |
| | 185,906 |
| | (4,764 | ) | | 31 |
|
CMBS (3) | 401,016 |
| | (6,733 | ) | | 36 |
| | 47,219 |
| | (804 | ) | | 6 |
| | 448,235 |
| | (7,537 | ) | | 42 |
|
| Non-Agency RMBS | 287,647 |
| | (7,861 | ) | | 42 |
| | 497,863 |
| | (6,671 | ) | | 36 |
| | 785,510 |
| | (14,532 | ) | | 78 |
|
GSE CRT (4) | — |
| | — |
| | — |
| | 35,935 |
| | (969 | ) | | 3 |
| | 35,935 |
| | (969 | ) | | 3 |
|
| Total | 5,858,500 |
| | (110,569 | ) | | 386 |
| | 1,218,879 |
| | (28,967 | ) | | 95 |
| | 7,077,379 |
| | (139,536 | ) | | 481 |
|
| |
(1) | Amounts disclosed include Agency RMBS with a fair value of $149.7 million for which the fair value option has been elected. Such securities have unrealized losses of $4.0 million. |
| |
(2) | Fair value includes unrealized losses on Agency IO of $3.0 million and unrealized losses on CMO of $1.7 million. |
| |
(3) | Amounts disclosed includes CMBS with a fair value of $13.9 million for which the fair value option has been elected. Such securities have unrealized losses of $613,000. |
| |
(4) | Fair value includes unrealized losses on both the debt host contract and the embedded derivative. |
Gross unrealized losses on our Agency RMBS and CMO were $128.7 million and $2.7 million, respectively, at December 31, 2017. Due to the inherent credit quality of Agency RMBS and CMO, we determined that at December 31, 2017, any unrealized losses on our Agency RMBS and CMO portfolio are not other than temporary.
Gross unrealized losses on our Agency IO, CMBS and non-Agency RMBS were $33.9 million at December 31, 2017. We do not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as interest rate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | Less than 12 Months | | 12 Months or More | | Total |
| $ in thousands | Fair
Value | | Unrealized
Losses | | Number of Securities | | Fair
Value | | Unrealized
Losses | | Number of Securities | | Fair
Value | | Unrealized
Losses | | Number of Securities |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
30 year fixed-rate Agency RMBS (1) | 6,838,999 | | | (60,741) | | | 54 | | | — | | | — | | | — | | | 6,838,999 | | | (60,741) | | | 54 | |
Agency-CMO (1) | 21,810 | | | (1,389) | | | 5 | | | — | | | — | | | — | | | 21,810 | | | (1,389) | | | 5 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Non-Agency RMBS (2) | 767 | | | (1,132) | | | 5 | | | 1,042 | | | (1,073) | | | 9 | | | 1,809 | | | (2,205) | | | 14 | |
| | | | | | | | | | | | | | | | | |
| Total | 6,861,576 | | | (63,262) | | | 64 | | | 1,042 | | | (1,073) | | | 9 | | | 6,862,618 | | | (64,335) | | | 73 | |
spreads, prepayment speeds and market fluctuations. These investment(1)Fair value option has been elected for all Agency securities in an unrealized loss position.
(2)Includes non-Agency IO with a fair value of $1.7 million for which the fair value option has been elected. Such securities have unrealized losses of $2.1 million. The remaining $136,000 of unrealized losses on non-Agency RMBS are included in our assessmentaccumulated other comprehensive income. These losses are not reflected in an allowance for other-than-temporary-impairmentcredit losses based on a quarterly basis.
We assess our investment securities for other-than-temporary impairment ("OTTI") on a quarterly basis. When the fair valuecomparison of an investment is less than itsdiscounted expected cash flows to current amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary." This analysis includes a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. Underlying loan characteristics reviewed include, but are not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.basis.
The following table represents OTTI included in earnings for the years ended December 31, 2017 and 2016. We did not record any OTTI for the year ended December 31, 2015.
|
| | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 |
| RMBS interest-only securities | 11,208 |
| | 8,334 |
|
Non-Agency RMBS (1) | 754 |
| | 575 |
|
| Total | 11,962 |
| | 8,909 |
|
| |
(1) | Amounts disclosed relate to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income. |
OTTI on RMBS interest-only securities was recorded as a reclassification from an unrealized to realized loss within gain (loss) on investments, net on the consolidated statement of operations because we account for these securities under the fair value option. As of December 31, 2017,2022 and 2021, we did not intend to sell the securities and determined that it was not more likely than not that we will be required to sell the securities.have an allowance for credit losses recorded on our consolidated balance sheet. The following table presents a roll-forward of our allowance for credit losses.
| | | | | | | | | | | | | | | | |
| $ in thousands | | | | Years Ended December 31, |
| | | | 2021 | | 2020 |
| Beginning allowance for credit losses | | | | (1,768) | | | — | |
| Additions to the allowance for credit losses on securities for which credit losses were not previously recorded | | | | — | | | (1,768) | |
| Decreases in the allowance for credit losses on securities that had an allowance recorded in a previous period | | | | 1,768 | | | — | |
| Ending allowance for credit losses | | | | — | | | (1,768) | |
The following table summarizes the components of our total gain (loss) on investments, net for the years ended December 31, 2017, 20162022, 2021 and 2015. As of December 31, 2017, $6.5 billion (December 31, 2016: $427.5 million) or 35.6% (December 31, 2016: 2.9%) of our MBS and GSE CRT are accounted for under the fair value option. Under the fair value option, changes in fair value are recognized as a component of gain (loss) on investments, net in our consolidated statements of operations.2020.
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2022 | | 2021 | | 2020 |
| Gross realized gains on sale of MBS and GSE CRT | 5,348 | | | 3,297 | | | 656,915 | |
| Gross realized losses on sale of MBS and GSE CRT | (1,169,258) | | | (284,521) | | | (1,020,696) | |
| Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments | — | | | — | | | (101,138) | |
| | | | | |
| Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option | 118,365 | | | (85,702) | | | (492,047) | |
| Net unrealized gains (losses) on commercial loan | 404 | | | 417 | | | (1,164) | |
| Net realized gains (losses) on U.S. Treasury securities | (34,198) | | | — | | | — | |
| Realized loss on loan participation interest | — | | | — | | | (3,808) | |
| | | | | |
| Total gain (loss) on investments, net | (1,079,339) | | | (366,509) | | | (961,938) | |
|
| | | | | | | | |
| | Years Ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Gross realized gains on sale of investments | 2,208 |
| | 14,196 |
| | 13,346 |
|
| Gross realized losses on sale of investments | (3,873 | ) | | (21,635 | ) | | (11,114 | ) |
| Other-than-temporary impairment losses | (11,962 | ) | | (8,909 | ) | | — |
|
| Net unrealized gains and losses on MBS accounted for under the fair value option | (21,368 | ) | | (5,791 | ) | | (558 | ) |
| Net unrealized gains and losses on GSE CRT accounted for under the fair value option | 15,269 |
| | 4,598 |
| | (56 | ) |
| Net unrealized gains and losses on trading securities | 22 |
| | (1 | ) | | — |
|
Total gain (loss) on investments, net (1) | (19,704 | ) | | (17,542 | ) | | 1,618 |
|
(1) Balance as of December 31, 2015 excludes the loss on deconsolidation of VIEs of $19.6 million. Refer to Note 3 - "Variable Interest Entities" for further discussion.
The following tables present components of interest income recognized on our MBSmortgage-backed and GSE CRTother securities portfolio for the years ended December 31, 2017, 20162022, 2021 and 2015.2020. GSE CRT interest income excludes coupon interest associated with embedded derivatives not accounted for under the fair value option of $6.3 million for the years ended December 31, 2020 that iswas recorded as realized and unrealized credit derivative income (loss), net.
|
| | | | | | | | |
| For the Year ended December 31, 2017 | | | | | |
| $ in thousands | Coupon Interest | | Net (Premium Amortization)/ Discount Accretion | | Interest Income |
| Agency | 392,248 |
| | (107,702 | ) | | 284,546 |
|
| CMBS | 131,005 |
| | (4,268 | ) | | 126,737 |
|
| Non-Agency | 70,849 |
| | 18,769 |
| | 89,618 |
|
| GSE CRT | 22,164 |
| | (1,949 | ) | | 20,215 |
|
| Other | 431 |
| | — |
| | 431 |
|
| Total | 616,697 |
| | (95,150 | ) | | 521,547 |
|
| | | | | | | | | | | | | | | | | |
| For the Year ended December 31, 2022 | | | | | |
| $ in thousands | Coupon
Interest | | Net (Premium
Amortization)/ Discount Accretion | | Interest
Income |
| Agency RMBS | 191,898 | | | (6,755) | | | 185,143 | |
| | | | | |
| Non-Agency CMBS | 2,366 | | | 1,624 | | | 3,990 | |
| Non-Agency RMBS | 1,223 | | | (552) | | | 671 | |
| | | | | |
| U.S. Treasury Securities | 1,773 | | | (41) | | | 1,732 | |
| Other | 1,030 | | | — | | | 1,030 | |
| Total | 198,290 | | | (5,724) | | | 192,566 | |
|
| | | | | | | | |
| For the Year ended December 31, 2016 | | | | | |
| $ in thousands | Coupon Interest | | Net (Premium Amortization)/Discount Accretion | | Interest Income |
| Agency | 346,783 |
| | (116,991 | ) | | 229,792 |
|
| CMBS | 122,636 |
| | (11,536 | ) | | 111,100 |
|
| Non-Agency | 94,206 |
| | 13,529 |
| | 107,735 |
|
| GSE CRT | 9,575 |
| | (3,192 | ) | | 6,383 |
|
| Other | 1,492 |
| | (58 | ) | | 1,434 |
|
| Total | 574,692 |
| | (118,248 | ) | | 456,444 |
|
| | | | | | | | | | | | | | | | | |
| For the Year ended December 31, 2021 | | | | | |
| $ in thousands | Coupon
Interest | | Net (Premium Amortization)/Discount Accretion | | Interest
Income |
| Agency RMBS | 201,694 | | | (41,881) | | | 159,813 | |
| | | | | |
| Non-Agency CMBS | 3,841 | | | 2,695 | | | 6,536 | |
| Non-Agency RMBS | 1,950 | | | (1,264) | | | 686 | |
| | | | | |
| Other | 21 | | | — | | | 21 | |
| Total | 207,506 | | | (40,450) | | | 167,056 | |
| | | | | | | | | | | | | | | | | |
| For the Year ended December 31, 2020 | | | | | |
| $ in thousands | Coupon
Interest | | Net (Premium Amortization)/Discount Accretion | | Interest
Income |
| Agency RMBS | 161,845 | | | (32,737) | | | 129,108 | |
| Agency CMBS | 35,822 | | | (1,744) | | | 34,078 | |
| Non-Agency CMBS | 76,068 | | | 14,721 | | | 90,789 | |
| Non-Agency RMBS | 13,895 | | | 1,107 | | | 15,002 | |
| GSE CRT | 10,232 | | | (2,560) | | | 7,672 | |
| Other | 751 | | | — | | | 751 | |
| Total | 298,613 | | | (21,213) | | | 277,400 | |
|
| | | | | | | | |
| For the Year ended December 31, 2015 | | | | | |
| $ in thousands | Coupon Interest | | Net (Premium Amortization)/Discount Accretion | | Interest Income |
| Agency | 372,610 |
| | (121,170 | ) | | 251,440 |
|
| CMBS | 149,977 |
| | (11,322 | ) | | 138,655 |
|
| Non-Agency | 110,885 |
| | 18,287 |
| | 129,172 |
|
| GSE CRT | 6,681 |
| | (3,088 | ) | | 3,593 |
|
| Other | 1,028 |
| | 5 |
| | 1,033 |
|
| Total | 641,181 |
| | (117,288 | ) | | 523,893 |
|
Note 5 – Commercial Loans Held-for-Investment
The following tables summarize commercial loans held-for-investment as of December 31, 2017 and 2016 that we purchased or originated.
December 31, 2017
|
| | | | | | | | | | | | | | | | |
| $ in thousands | Number of loans | | Principal Balance | | Unamortized (fees)/ costs, net | | Carrying value | | Weighted Average Coupon | | Weighted Average Years to Maturity(1) |
| Mezzanine loans | 8 |
| | 191,894 |
| | (86 | ) | | 191,808 |
| | 8.52 | % | | 1.2 |
December 31, 2016
|
| | | | | | | | | | | | | | | | |
| $ in thousands | Number of loans | | Principal Balance | | Unamortized (fees)/ costs, net | | Carrying value | | Weighted Average
Coupon | | Weighted Average Years to Maturity(1) |
| Mezzanine loans | 10 |
| | 273,666 |
| | (311 | ) | | 273,355 |
| | 8.14 | % | | 1.6 |
| |
(1) | Weighted average years to maturity is based on the contractual maturity date. Certain loans may contain either an option to prepay or an option to extend beyond their contractual maturity dates as specified in the respective loan agreements. |
These loans were not impaired, and no provision for loan loss has been recorded as of December 31, 2017 and 2016 based on our analysis of credit quality factors as discussed in Note 2 - "Summary of Significant Accounting Policies".
Note 6 – Other Assets
The following table summarizes our other assets as of December 31, 20172022 and 2016:2021:
| | | | | | | | | | | |
| $ in thousands | December 31, 2022 | | December 31, 2021 |
| Commercial loan, held-for-investment | — | | | 23,515 | |
| Investments in unconsolidated ventures | 552 | | | 12,476 | |
| Prepaid expenses and other assets | 1,179 | | | 1,518 | |
| Total | 1,731 | | | 37,509 | |
|
| | | | | |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| FHLBI stock | 74,250 |
| | 74,250 |
|
| Investments in unconsolidated ventures | 25,972 |
| | 33,301 |
|
| Investment in exchange-traded fund | 3,979 |
| | 500 |
|
| Prepaid expenses and other assets | 1,379 |
| | 1,246 |
|
| Total | 105,580 |
| | 109,297 |
|
IAS Services LLC,Our commercial loan was fully repaid in October 2022. The loan had a principal balance of $23.9 million and a weighted average coupon rate of 8.60% as of December 31, 2021. During the year ended December 31, 2022 we recorded unrealized gains of $404,000 on our wholly-owned subsidiary, is required to purchase and hold FHLBI stock as a conditioncommercial loan (2021: unrealized gains of membership in FHLBI. The stock is recorded at cost.$417,000, 2020: unrealized losses of $1.2 million).
We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 1614 - "Commitments“Commitments and Contingencies"Contingencies” for additional details regarding our commitments to these unconsolidated ventures.
We have invested in an exchange-traded fund that is managed by an affiliate of our Manager. The exchange-traded fund invests in our target assets.
Note 76 – Borrowings
We finance the majority of our investment portfolio through repurchase agreements, secured loans and exchangeable senior notes. The following tables summarize certain characteristics of our borrowings at December 31, 2017 and 2016. Refer to Note 8 - "Collateral Positions" for collateral pledged under our repurchase agreements and secured loans.
|
| | | | | | | | |
| $ in thousands | December 31, 2017 |
| | Amount Outstanding | | Weighted Average Interest Rate | | Weighted Average Remaining Maturity (Days) |
| Repurchase Agreements: | | | | | |
| Agency RMBS | 11,111,755 |
| | 1.58 | % | | 25 |
|
| CMBS | 1,396,330 |
| | 2.61 | % | | 9 |
|
| Non-Agency RMBS | 915,225 |
| | 2.77 | % | | 31 |
|
| GSE CRT | 657,491 |
| | 2.78 | % | | 24 |
|
| Total Repurchase Agreements | 14,080,801 |
| | 1.82 | % | | 25 |
|
| Secured Loans | 1,650,000 |
| | 1.52 | % | | 2,317 |
|
Exchangeable Senior Notes(1) | 143,410 |
| | 5.00 | % | | 74 |
|
| Total Borrowings | 15,874,211 |
| | 1.82 | % | | 263 |
|
|
| | | | | | | | |
| $ in thousands | December 31, 2016 |
| | Amount
Outstanding | | Weighted
Average
Interest
Rate | | Weighted
Average
Remaining
Maturity
(Days) |
| Repurchase Agreements: | | | | | |
| Agency RMBS | 8,148,220 |
| | 0.93 | % | | 32 |
|
| CMBS | 944,718 |
| | 1.86 | % | | 16 |
|
| Non-Agency RMBS | 1,519,859 |
| | 2.06 | % | | 28 |
|
| GSE CRT | 547,872 |
| | 2.25 | % | | 16 |
|
| Total Repurchase Agreements | 11,160,669 |
| | 1.23 | % | | 30 |
|
| Secured Loans | 1,650,000 |
| | 0.74 | % | | 2,682 |
|
Exchangeable Senior Notes(1) | 400,000 |
| | 5.00 | % | | 439 |
|
| Total Borrowings | 13,210,669 |
| | 1.28 | % | | 373 |
|
| |
(1) | The carrying value of exchangeable senior notes is $143.2 million and $397.0 millionas of December 31, 2017 and 2016, respectively. The carrying value is net of unamortized debt issuance costs of $179,000 and $3.0 million as of December 31, 2017 and 2016, respectively.
|
The following table shows the aggregate amount of maturities of our outstanding borrowings:
|
| | |
| $ in thousands | As of December 31, |
| 2018 | 14,224,211 |
|
| 2019 | — |
|
| 2020 | 300,000 |
|
| 2021 | 100,000 |
|
| 2022 | — |
|
| Thereafter | 1,250,000 |
|
| Total | 15,874,211 |
|
agreements. The following tables summarize certain characteristics of our repurchase agreements and secured loans at December 31, 20172022 and 2016.2021. Refer to Note 7 - “Collateral Positions” for collateral pledged and held under our repurchase agreements.
|
| | | | | | | | |
| December 31, 2017 | | | | |
|
| $ in thousands | Amount Outstanding | | Percent of Total Amount Outstanding | | MBS and GSE CRT Pledged as Collateral(1) |
| Repurchase Agreement Counterparties: | | | | | |
| HSBC | 1,745,684 |
| | 11.2 | % | | 1,839,411 |
|
| ING Financial Markets | 1,482,603 |
| | 9.4 | % | | 1,571,061 |
|
| RBC | 1,144,856 |
| | 7.3 | % | | 1,375,285 |
|
| Industrial and Commercial Bank of China | 1,038,844 |
| | 6.6 | % | | 1,102,543 |
|
| E D & F Man Capital Markets | 1,028,437 |
| | 6.5 | % | | 1,085,429 |
|
| Mirae Asset Securities | 958,756 |
| | 6.1 | % | | 1,018,664 |
|
| MUFG Securities | 865,201 |
| | 5.5 | % | | 936,071 |
|
| Citigroup | 724,094 |
| | 4.6 | % | | 841,977 |
|
| Amherst Pierpont Securities | 722,080 |
| | 4.6 | % | | 764,713 |
|
| KGS-Alpha Capital Markets | 461,098 |
| | 2.9 | % | | 491,313 |
|
| JP Morgan | 451,941 |
| | 2.9 | % | | 523,590 |
|
| Societe Generale | 386,737 |
| | 2.5 | % | | 495,093 |
|
| BNP Paribas Securities | 348,340 |
| | 2.2 | % | | 388,091 |
|
| South Street Securities | 332,623 |
| | 2.1 | % | | 354,689 |
|
| Goldman Sachs | 324,152 |
| | 2.1 | % | | 419,713 |
|
| Mizuho Securities | 310,835 |
| | 2.0 | % | | 330,555 |
|
| Guggenheim Liquidity Services | 306,081 |
| | 1.9 | % | | 322,452 |
|
| Bank of Nova Scotia | 289,705 |
| | 1.8 | % | | 301,715 |
|
| Natixis Securities | 275,764 |
| | 1.8 | % | | 302,291 |
|
All other repurchase agreement counterparties (2) | 882,970 |
| | 5.5 | % | | 1,058,759 |
|
| Total Repurchase Agreement Counterparties | 14,080,801 |
| | 89.5 | % | | 15,523,415 |
|
| Secured Loans Counterparty: | | | | | |
| FHLBI | 1,650,000 |
| | 10.5 | % | | 1,927,496 |
|
| Total | 15,730,801 |
| | 100.0 | % | | 17,450,911 |
|
| |
(1) | Amounted pledged as collateral is measured at fair value as described in Note 2 - "Summary of Significant Accounting Policies." |
| |
(2) | Represents amounts outstanding with seven counterparties. |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| $ in thousands | Amount
Outstanding | | Weighted
Average
Interest
Rate | | Weighted
Average
Remaining
Maturity
(days) |
| Repurchase Agreements - Agency RMBS | 4,234,823 | | | 4.24 | % | | 28 |
| Total Borrowings | 4,234,823 | | | 4.24 | % | | 28 |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| $ in thousands | Amount
Outstanding | | Weighted
Average
Interest
Rate | | Weighted
Average
Remaining
Maturity
(days) |
| Repurchase Agreements - Agency RMBS | 6,987,834 | | | 0.14 | % | | 29 |
| Total Borrowings | 6,987,834 | | | 0.14 | % | | 29 |
|
| | | | | | | | |
| December 31, 2016 | | | | | |
| $ in thousands | Amount Outstanding | | Percent of Total Amount Outstanding | | MBS and GSE CRT Pledged as Collateral(1) |
| Repurchase Agreement Counterparties: | | | | | |
| HSBC | 1,401,966 |
| | 11.2 | % | | 1,468,793 |
|
| ING Financial Markets | 1,142,200 |
| | 8.9 | % | | 1,216,492 |
|
| RBC | 1,098,631 |
| | 8.6 | % | | 1,293,336 |
|
| Industrial and Commercial Bank of China | 707,616 |
| | 5.5 | % | | 748,503 |
|
| MUFG Securities | 703,382 |
| | 5.5 | % | | 740,404 |
|
| Amherst Pierpont Securities | 681,853 |
| | 5.3 | % | | 717,663 |
|
| South Street Securities | 675,660 |
| | 5.3 | % | | 713,330 |
|
| Goldman Sachs | 486,430 |
| | 3.8 | % | | 623,400 |
|
| Bank of Nova Scotia | 479,105 |
| | 3.7 | % | | 500,578 |
|
| JP Morgan | 477,947 |
| | 3.7 | % | | 554,494 |
|
| KGS-Alpha Capital Markets | 441,541 |
| | 3.4 | % | | 475,858 |
|
| Citigroup | 427,185 |
| | 3.3 | % | | 534,875 |
|
| E D & F Man Capital Markets | 405,615 |
| | 3.2 | % | | 430,896 |
|
| Guggenheim Liquidity Services | 356,149 |
| | 2.8 | % | | 377,030 |
|
| Natixis Securities | 336,202 |
| | 2.6 | % | | 362,432 |
|
| Societe Generale | 325,393 |
| | 2.5 | % | | 427,200 |
|
| BNP Paribas Securities | 307,641 |
| | 2.4 | % | | 346,484 |
|
All other repurchase agreement counterparties (2) | 706,153 |
| | 5.4 | % | | 912,536 |
|
| Total Repurchase Agreement Counterparties: | 11,160,669 |
| | 87.1 | % | | 12,444,304 |
|
| Secured Loans Counterparty: | | | | | |
| FHLBI | 1,650,000 |
| | 12.9 | % | | 1,931,582 |
|
| Total | 12,810,669 |
| | 100.0 | % | | 14,375,886 |
|
| |
(1) | Amounted pledged as collateral is measured at fair value as described in Note 2 - "Summary of Significant Accounting Policies." |
| |
(2) | Represents amount outstanding with six counterparties. |
Repurchase Agreements
RepurchaseOur repurchase agreements bear interest at a contractually agreed upon rate andrate. Agency RMBS repurchase agreements generally have maturities ranging from one month to twelvesix months. Repurchase agreements are being accounted for as secured borrowings since we maintain effective control of the financed assets. RepurchaseThe repurchase agreements are subject to certain financial covenants. We were in compliance with all of these covenants at December 31, 2017.
Our repurchase agreement collateral ratio (MBS and GSE CRT pledged as collateral/Amount Outstanding) was 110% as of December 31, 2017 (December 31, 2016: 112%).2022.
Secured Loans
Our wholly-owned captive insurance subsidiary, IAS Services LLC, isIn the first half of 2020, we experienced unprecedented market conditions as a memberresult of the FHLBI.COVID-19 pandemic. We received an unusually high number of margin calls from our repurchase agreement counterparties during March 2020 following significant spread widening in both Agency and non-Agency securities. As a memberresult, we were unable to meet margin calls and were not in compliance with all of the FHLBI, IAS Services LLC has borrowed funds from the FHLBI in the form of secured loans.
As of December 31, 2017, IAS Services LLC, had $1.65 billion in outstanding secured loans from the FHLBI. These secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread. For the year ended December 31, 2017, IAS Services LLC had weighed average borrowings of $1.65 billion with a weighted average borrowing rate of 1.17% and a weighted average maturity of 6.3 years.
The Federal Housing Finance Agency’s ("FHFA") final rule governing Federal Home Loan Bank membership (the “FHFA Rule”) was effective on February 19, 2016. The FHFA Rule permits existing captive insurance companies, such as IAS Services LLC, to remain members until February 2021. New advances or renewals that mature beyond February 2021 are prohibited. The FHLBI has indicated it will honor the contractual maturity dates of existing advances to IAS Services LLC that
were made prior to February 19, 2016 and extend beyond February 2021. We do not expect there to be any impact to our existing FHLBI borrowings under the FHFA rule. The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with FHLBI and FHFA rules.
As discussed in Note 6 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI.
Exchangeable Senior Notes
In 2013, our wholly-owned subsidiary, IAS Operating Partnership LP, issued $400.0 million in aggregate principal amount of Exchangeable Senior Notes (the “Notes”) due March 15, 2018. As of December 31, 2017, we had $143.4 million in Notes outstanding. The Notes bear interest at 5.00% per annum, payable semi-annually in arrears on March 15 and September 15 of each year. The Notes may be exchanged for sharesfinancial covenants of our common stock at the applicable exchange rate defined in the indenture governing the Notes between the Company and the Bankrepurchase agreements as of New York Mellon Trust as Trustee at any time prior to the closeMarch 31, 2020. While certain of business on March 13, 2018. We have sufficient liquidity through available cash and cash equivalents and additional borrowing capacity throughour repurchase agreement counterparties permitted our repurchase agreements to retireremain outstanding while we were not in compliance, other counterparties seized and sold securities that we had posted as collateral for our repurchase agreements. As of May 7, 2020, we repaid all of our repurchase agreements that may have been in default. Gains and losses associated with the Notes when they mature on March 15, 2018.
The Notes are reported on our consolidated balance sheets nettermination of unamortized debt issuance costs. Debt issuance costs are amortized as an adjustment to interest expense using the effective interest method over the stated legal maturity of the Notes.
The following table summarizes retirements of the Notesthese repurchase agreements during the year ended December 31, 2017.2020 are reported as net gain (loss) on extinguishment of debt in our consolidated statement of operations.
|
| | | | | | | |
$ in thousands | Year Ended December 31, 2017 |
Reacquisition price91 | 262,069 |
|
Par value of Notes retired | (256,590 | ) |
Write off of unamortized debt issuance cost associated with Notes retired | 1,335 |
|
Net loss on extinguishment of debt | 6,814 |
|
Accrued interest payable on the Notes was approximately $2.1 million as of December 31, 2017 (2016: $5.9 million).
Note 87 – Collateral Positions
The following table summarizes the fair value of collateral that we have pledged and held under our repurchase agreements, secured loans, interest rate swaps, and currency forward contracts, and TBAs as of December 31, 20172022 and 2016.2021. Refer to Note 2 - "Summary“Summary of Significant Accounting Policies - Fair Value Measurements"Measurements” for a description of how we determine fair value. Agency RMBS CMBS and GSE CRT collateral pledged is included in mortgage-backed and credit risk transfer securities on our consolidated balance sheets. Cash collateral pledged on bilateralcentrally cleared interest rate swaps and currency forwardsforward contracts is classified as restricted cash on our consolidated balance sheets. Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is classified as due from counterparties on our consolidated balance sheets.
Cash collateral held on bilateral swaps that is not restricted for use is included in cash and cash equivalents on our consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of December 31, 20172022 and 2016,2021, we did not recognize any non-cash collateral held.held on our consolidated balance sheets.
| | | | | | | | | | | |
| $ in thousands | As of |
| Collateral Pledged | December 31, 2022 | | December 31, 2021 |
| Repurchase agreements: | | | |
| Agency RMBS | 4,439,583 | | | 7,326,175 | |
| Cash | — | | | 3,527 | |
| Total repurchase agreements collateral pledged | 4,439,583 | | | 7,329,702 | |
| Derivative instruments: | | | |
| | | |
| Cash | 1,584 | | | 4,458 | |
| Restricted cash | 103,246 | | | 219,918 | |
| Total derivative instruments collateral pledged | 104,830 | | | 224,376 | |
| Total collateral pledged: | | | |
| Agency RMBS | 4,439,583 | | | 7,326,175 | |
| Cash | 1,584 | | | 7,985 | |
| Restricted cash | 103,246 | | | 219,918 | |
| Total collateral pledged | 4,544,413 | | | 7,554,078 | |
| | | | | | | | | | | |
| Collateral Held | December 31, 2022 | | December 31, 2021 |
| Repurchase agreements: | | | |
| Cash | 4,892 | | | — | |
| Non-cash collateral | 7,216 | | | 248 | |
| Total repurchase agreements collateral held | 12,108 | | | 248 | |
| Derivative instruments: | | | |
| Cash | — | | | 280 | |
| | | |
| Total derivative instruments collateral held | — | | | 280 | |
| | | |
| Total collateral held: | | | |
| Cash | 4,892 | | | 280 | |
| Non-cash collateral | 7,216 | | | 248 | |
| Total collateral held | 12,108 | | | 528 | |
|
| | | | | |
| $ in thousands | As of |
| Collateral Pledged | December 31, 2017 | | December 31, 2016 |
| Repurchase Agreements: | | | |
| Agency RMBS | 11,788,765 |
| | 8,654,233 |
|
| CMBS | 1,737,831 |
| | 1,168,309 |
|
| Non-Agency RMBS | 1,143,373 |
| | 1,887,550 |
|
| GSE CRT | 853,446 |
| | 734,212 |
|
| Total repurchase agreement collateral pledged | 15,523,415 |
| | 12,444,304 |
|
| Secured Loans: | | | |
| Agency RMBS | 623,181 |
| | 585,504 |
|
| CMBS | 1,304,315 |
| | 1,346,078 |
|
| Total secured loans collateral pledged | 1,927,496 |
| | 1,931,582 |
|
| Interest Rate Swaps and Currency Forward Contracts: | | | |
| Agency RMBS | 23,705 |
| | 46,312 |
|
Cash (1) | 620 |
| | 86,450 |
|
| Total interest rate swaps and currency forward contracts collateral pledged | 24,325 |
| | 132,762 |
|
| Total: | | | |
| Mortgage-backed and GSE CRT securities | 17,474,616 |
| | 14,422,198 |
|
| Cash | 620 |
| | 86,450 |
|
| Total collateral pledged | 17,475,236 |
| | 14,508,648 |
|
|
| | | | | |
| Collateral Held | December 31, 2017 | | December 31, 2016 |
| Interest Rate Swaps: | | | |
| Cash | 7,327 |
| | 1,700 |
|
| Non-cash collateral | — |
| | 536 |
|
| Total collateral held | 7,327 |
| | 2,236 |
|
| | | | | | | | |
(1) | Cash collateral pledged on our currency forward contracts was $620,000 as of December 31, 2017. We did not pledge any collateral on our currency forward contracts as of December 31, 2016.92 | |
Repurchase Agreements
Collateral postedpledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value as determined by a pricing service agreed to by the respective lender and us.value. We would be required to provide additional collateral orto fund margin calls if the value of pledged assets declines.declined. We intend to maintain a level of liquidity that will enable us to meet margin calls.
As of December 31, 2022 and 2021, our repurchase agreement collateral ratio (MBS pledged as collateral/ repurchase agreement amount outstanding) was 105%.
Secured Loans
The abilityDecember 31, 2022 and 2021, all of our interest rate swaps were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange (“CME”) and LCH Limited (“LCH”) through a Futures Commission Merchant (“FCM”). We are required to borrow frompledge initial margin and daily variation margin for our centrally cleared interest rate swaps that is based on the FHLBIfair value of our contracts as determined by our FCM. Collateral pledged with our FCM is subject tosegregated in our continued creditworthiness, pledgingbooks and records and can be in the form of sufficient eligible collateral to secure advances, and compliance with certain agreements with FHLBI and FHFA rules. Collateral posted with the FHLBIcash or securities. Daily variation margin for centrally cleared interest rate swaps is held in trust for the benefitcharacterized as settlement of the FHLBIderivative itself rather than collateral and is not commingled withrecorded as gain (loss) on derivative instruments, net in our other assets. The FHLBI does not have the right to resell or repledgeconsolidated statements of operations. Certain of our FCM agreements include cross default provisions.
TBAs and Currency Forward Contracts
Our TBAs and currency forward contracts provide for bilateral collateral posted unless an event of default occurs. The FHLBI retains the right to mark the underlying collateral for FHLBI advances to fairpledging based on market value as determined by the FHLBI in its sole discretion. IAS Services LLC would be required to provide additional collateral or fund margin calls if the value of pledged assets declines.
Interest Rate Swaps
our counterparties. Collateral pledged with our interest rate swapTBA and currency forward counterparties is segregated in our books and records. We have two typesrecords and can be in the form of interest rate swap agreements: bilateral interest rate swaps that are governed by an International Swaps and Derivatives Association ("ISDA") agreement and interest rate swaps that are centrally cleared by a registered clearing organization through a Futures Commission Merchant ("FCM"). Interest rate swaps that are governed by an ISDA agreement provide for bilateral collateral pledging based on the counterparties' market value. Thecash or securities. Our counterparties have the right to repledge the collateral posted butand have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the interest rate swaps change.contracts changes.
We are required to pledge initial margin and daily variation margin for our interest rate swaps that are centrally cleared. FCM determines the fair value of our centrally cleared swaps, including daily variation margin. As a result of rulebook changes governing central clearing activities effective January 3, 2017, the daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. As a result of this change, cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps.
Currency Forward Contracts
Collateral pledged with our currency forward counterparty is segregated in our books and records. Eligible collateral to be pledged can be in the form of cash or securities. Our currency forward contract provides for bilateral collateral pledging based on the counterparties' market value. The counterparties have the right to repledge the collateral posted, but have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the currency forward contracts change.
Note 98 – Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, credit and foreign exchange rate risk primarily by managing the amount, sources, and duration of our investments, debt funding,borrowings, and the use of derivative financial instruments. Specifically, we enter intouse derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates or foreign exchange rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
The following table summarizes changes in the notional amount of our derivative instruments during 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Notional Amount as of December 31, 2021 | | Additions | | Settlement,
Termination,
Expiration
or Exercise | | Notional Amount as
of December 31, 2022 | | |
Interest Rate Swaps (1)(2) | 8,050,000 | | | 10,075,000 | | | (9,975,000) | | | 8,150,000 | | | |
| | | | | | | | | |
| Currency Forward Contracts | 13,596 | | | 23,485 | | | (37,081) | | | — | | | |
| TBA Purchase Contracts | 1,600,000 | | | 20,072,000 | | | (21,272,000) | | | 400,000 | | | |
| TBA Sale Contracts | — | | | (21,672,000) | | | 21,272,000 | | | (400,000) | | | |
| Total | 9,663,596 | | | 8,498,485 | | | (10,012,081) | | | 8,150,000 | | | |
(1)Does not include interest rate swaps with forward start dates. See below for additional details on our interest rate swaps with forward start dates.
(2)Notional amount as of December 31, 2022 includes $5.8 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $2.4 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate. Notional amount as of December 31, 2021 includes $6.3 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $1.8 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate.
Refer to Note 7 - “Collateral Positions” for further information regarding our collateral pledged to and received from our derivative counterparties.
|
| | | | | | | | | | | |
| $ in thousands | Notional Amount as of January 1, 2017 | | Additions | | Settlement,
Termination,
Expiration
or Exercise | | Notional Amount as
of December 31, 2017 |
| Interest Rate Swaps | 6,500,000 |
| | 2,620,000 |
| | — |
| | 9,120,000 |
|
| Currency Forward Contracts | 62,308 |
| | 284,328 |
| | (269,777 | ) | | 76,859 |
|
| Credit Derivatives | 569,966 |
| | — |
| | (16,473 | ) | | 553,493 |
|
| Total | 7,132,274 |
| | 2,904,328 |
| | (286,250 | ) | | 9,750,352 |
|
Interest Rate Swaps
Our repurchase agreements are usually settled on a short-term basis ranging from one month to twelvesix months. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. In addition, our
secured loans have floating interest rates. As such, we are exposed to changing interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objective,objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. InterestUnder the terms of the majority of our interest rate swaps involve the receipt of variable-rate amounts fromswap contracts, we make fixed-rate payments to a counterparty in exchange for making fixed-rate paymentsthe receipt of floating-rate amounts over the life of the agreements without exchange of the underlying notional amount.
Effective December 31, 2013, To a lesser extent, we voluntarily discontinued cash flow hedge accounting for ouralso enter into interest rate swapsswap contracts whereby we make floating-rate payments to gain greater flexibilitya counterparty in managing interest rate exposures. exchange for the receipt of fixed-rate amounts as part of our overall risk management strategy.
Amounts recorded in AOCIaccumulated other comprehensive income (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We reclassified $25.5$19.7 million as a decrease (2016: $5.2 million as an increase) to interest expense for the year ended December 31, 2017. During the next 12 months, we estimate that $25.82022 (2021: $22.0 million will be reclassified as a decrease to interest expense, repurchase agreements.decrease; 2020: $23.8 million as a decrease). As of December 31, 2017, $123.92022, $10.4 million (December 31, 2016: $149.1(2021: $30.1 million) of net unrealized gains on discontinued cash flow hedges are still included in accumulated other comprehensive income. We expect to reclassify the remaining amount of net unrealized gains recorded in AOCI as a decrease to interest expense on repurchase agreements on the consolidated statements of operations in 2023.
As of December 31, 2017,2022 and 2021, we had interest rate swaps whereby we pay interest at a fixed rate and receive floating interest based on the secured overnight financing rate (“SOFR”) with the following maturities outstanding, excluding interest rate derivatives outstanding:swaps with forward start dates.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2022 |
| Maturities | | Notional Amount | | Weighted Average Fixed Pay Rate | | Weighted Average Floating Receive Rate | | Weighted Average Years to Maturity |
| Less than 3 years | | 1,550,000 | | | 0.09 | % | | 4.30 | % | | 2.2 |
| 3 to 5 years | | 1,475,000 | | | 0.27 | % | | 4.30 | % | | 4.7 |
| 5 to 7 years | | 850,000 | | | 0.38 | % | | 4.30 | % | | 6.2 |
| 7 to 10 years | | 1,425,000 | | | 0.55 | % | | 4.30 | % | | 7.8 |
| Greater than 10 years | | 500,000 | | | 1.92 | % | | 4.30 | % | | 19.2 |
| Total | | 5,800,000 | | | 0.45 | % | | 4.30 | % | | 6.3 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2021 |
| Maturities | | Notional Amount | | Weighted Average Fixed Pay Rate | | Weighted Average Floating Receive Rate | | Weighted Average Years to Maturity |
| Less than 3 years | | 1,000,000 | | | 0.06 | % | | 0.05 | % | | 2.6 |
| 3 to 5 years | | 1,250,000 | | | 0.12 | % | | 0.05 | % | | 3.6 |
| 5 to 7 years | | 2,225,000 | | | 0.32 | % | | 0.05 | % | | 5.9 |
| 7 to 10 years | | 1,825,000 | | | 0.52 | % | | 0.05 | % | | 8.6 |
| | | | | | | | |
| Total | | 6,300,000 | | | 0.30 | % | | 0.05 | % | | 5.7 |
As of December 31, 2022, we held $975.0 million notional amount of interest rate swaps with forward start dates that will receive floating interest based on SOFR (December 31, 2021: $1.3 billion). As of December 31, 2022, these interest rate swaps had a weighted average maturity of 16.5 years (December 31, 2021: 20.8 years) and a weighted average fixed pay rate of 0.89% (December 31, 2021: 0.99%).
As of December 31, 2022 and December 31, 2021, we had interest rate swaps whereby we pay floating interest based on SOFR and receive interest at a fixed rate with the following maturities outstanding, excluding interest rate swaps with forward start dates.
|
| | | | | | | | |
$ in thousands Counterparty | | Notional | | Maturity Date | | Fixed Interest Rate in Contract |
| ING Capital Markets LLC | | 350,000 |
| | 2/24/2018 | | 0.95 | % |
| UBS AG | | 500,000 |
| | 5/24/2018 | | 1.10 | % |
| ING Capital Markets LLC | | 400,000 |
| | 6/5/2018 | | 0.87 | % |
| CME Central Clearing | | 300,000 |
| | 2/5/2021 | | 2.50 | % |
| CME Central Clearing | | 300,000 |
| | 2/5/2021 | | 2.69 | % |
| Wells Fargo Bank, N.A. | | 200,000 |
| | 3/15/2021 | | 3.14 | % |
| CME Central Clearing | | 500,000 |
| | 5/24/2021 | | 2.25 | % |
| Citibank, N.A. | | 200,000 |
| | 5/25/2021 | | 2.83 | % |
| CME Central Clearing | | 500,000 |
| | 6/24/2021 | | 2.44 | % |
| HSBC Bank USA, National Association | | 550,000 |
| | 2/24/2022 | | 2.45 | % |
| CME Central Clearing | | 1,000,000 |
| | 6/9/2022 | | 2.21 | % |
| CME Central Clearing | | 1,000,000 |
| | 8/14/2022 | | 1.87 | % |
| The Royal Bank of Scotland Plc | | 500,000 |
| | 8/15/2023 | | 1.98 | % |
| CME Central Clearing | | 600,000 |
| | 8/24/2023 | | 2.88 | % |
| HSBC Bank USA, National Association | | 500,000 |
| | 12/15/2023 | | 2.20 | % |
| CME Central Clearing | | 450,000 |
| | 1/12/2024 | | 2.10 | % |
| CME Central Clearing | | 450,000 |
| | 1/25/2024 | | 2.15 | % |
| CME Central Clearing | | 100,000 |
| | 4/2/2025 | | 2.04 | % |
| LCH Central Clearing | | 220,000 |
| | 8/29/2027 | | 2.12 | % |
| CME Central Clearing | (1) | 250,000 |
| | 5/24/2028 | | 2.78 | % |
| CME Central Clearing | (1) | 250,000 |
| | 5/24/2028 | | 2.39 | % |
| Total | | 9,120,000 |
| | | | 2.13 | % |
| |
(1) | Forward start date of 5/24/2018
|
Refer to Note 8 - "Collateral Positions" for further information regarding our collateral pledged to and received from our interest rate swap counterparties.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2022 | |
| Maturities | | Notional Amounts | | Weighted Average Floating Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Years to Maturity | |
| Less than 3 years | | 100,000 | | | 4.30 | % | | 4.90 | % | | 0.9 | |
| 3 to 5 years | | 550,000 | | | 4.30 | % | | 2.74 | % | | 4.0 | |
| 5 to 7 years | | 1,125,000 | | | 4.30 | % | | 2.66 | % | | 6.0 | |
| 7 to 10 years | | 200,000 | | | 4.30 | % | | 2.66 | % | | 8.4 | |
| Greater than 10 years | | 375,000 | | | 4.30 | % | | 2.67 | % | | 29.5 | |
| Total | | 2,350,000 | | | 4.30 | % | | 2.78 | % | | 9.3 | |
Interest Rate | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2021 | |
| Maturities | | Notional Amounts | | Weighted Average Floating Pay Rate | | Weighted Average Fixed Receive Rate | | Weighted Average Years to Maturity | |
| Less than 3 years | | 1,000,000 | | | 0.05 | % | | 0.77 | % | | 2.6 | |
| | | | | | | | | |
| 5 to 7 years | | 500,000 | | | 0.05 | % | | 1.26 | % | | 6.9 | |
| 7 to 10 years | | 250,000 | | | 0.05 | % | | 1.27 | % | | 10.0 | |
| | | | | | | | | |
| Total | | 1,750,000 | | | 0.05 | % | | 0.98 | % | | 4.9 | |
As of December 31, 2022, we held $275.0 million notional amount of interest rate swaps with forward start dates that will pay floating interest based on SOFR. As of December 31, 2022, these interest rate swaps had a weighted average maturity of 16.0 years and a weighted average fixed receive rate of 2.63%. We did not hold any such interest rate swaps as of December 31, 2021.
Swaptions and Currency Forward Contracts
We periodically purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of a portion of our investmentAgency RMBS portfolio (referred to as “convexity risk”). The interest rate swaptions provide us the option to enter into interest rate swap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments, net in our consolidated statements of operations. If an interest rate swaption expires unexercised, the loss on the interest rate swaption would be equal to the premium paid. If we sell or exercise an interest rate swaption, the realized gain or loss on the interest rate swaption would be equal to the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid.
As of December 31, 2017 and December 31, 2016, we have no outstanding interest rate swaptions.
Currency Forward Contracts
We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. RealizedWe recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts are recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations. We did not have any currency forward contracts outstanding as of December 31, 2022. As of December 31, 2017,2021 we have $49.7had $13.6 million (December 31, 2016: $49.0 million) of notional amount of currency forward contracts related to aninvestment in an unconsolidated venture denominated in Pound Sterling and $27.2 million (December 31, 2016: $13.3 million) of notional amount of forward contracts denominated in Euro.euro.
Credit Derivatives
Our GSE CRTs purchased prior tobefore August 24, 2015 arewere accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. Embedded derivatives associated with GSE CRTs arewere recorded within mortgage-backed and credit risk transfer securities, at fair value, on our consolidated balance sheets. AsWe sold all of our GSE CRT investments that were accounted for as hybrid financial instruments in 2020.
TBAs
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of December 31, 20172022 and 2016, terms2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2022 |
| | Notional Amount | | Implied Cost Basis | | Implied Market Value | | Net Carrying Value |
TBA purchase contracts (1) | | 400,000 | | | 404,144 | | | 402,237 | | | (1,907) | |
TBA sales contracts (2) | | (400,000) | | | (402,707) | | | (402,237) | | | 470 | |
| Net TBA derivatives | | — | | | 1,437 | | | — | | | (1,437) | |
(1)Net carrying value of the GSE CRT embedded derivatives are:TBA purchase contracts includes $1.9 million of derivative liabilities.
(2)Net carrying value of TBA sales contract includes $642,000 of derivative assets and $172,000 of derivative liabilities. |
| | | | | |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| Fair value amount | 45,400 |
| | 17,095 |
|
| Notional amount | 553,493 |
| | 569,966 |
|
| Maximum potential amount of future undiscounted payments | 553,493 |
| | 569,966 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | As of December 31, 2021 |
| | Notional Amount | | Implied Cost Basis | | Implied Market Value | | Net Carrying Value |
| TBA purchase contracts | | 1,600,000 | | | 1,636,906 | | | 1,633,955 | | | (2,951) | |
| | | | | | | | |
| | | | | | | | |
Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet
The table below presents the fair value of our derivative financial instruments, as well as their classification on our consolidated balance sheets as of December 31, 20172022 and 2016.2021.
|
| | | | | | | | | | | | | | |
| $ in thousands | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| | | As of December 31, 2017 | | As of December 31, 2016 | | | | As of December 31, 2017 | | As of December 31, 2016 |
| Balance Sheet | | Fair Value | | Fair Value | | Balance Sheet | | Fair Value | | Fair Value |
| Interest Rate Swaps Asset | | 6,896 |
| | 3,085 |
| | Interest Rate Swaps Liability | | 31,548 |
| | 133,833 |
|
| Currency Forward Contracts | | — |
| | 101 |
| | Currency Forward Contracts | | 1,217 |
| | 395 |
|
As a result of rulebook changes governing central clearing activities effective January 3, 2017, the daily variation margin payment for a centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. As a result of the rule change, cash collateral pledged on our centrally cleared interest rate swaps is settled against fair value of these swaps.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
| | As of December 31, 2022 | | As of December 31, 2021 | | | | As of December 31, 2022 | | As of December 31, 2021 |
Balance
Sheet | | Fair Value | | Fair Value | | Balance
Sheet | | Fair Value | | Fair Value |
| Interest Rate Swaps Asset | | 20 | | | — | | | Interest Rate Swaps Liability | | — | | | 11,405 | |
| Currency Forward Contracts | | — | | | 270 | | | Currency Forward Contracts | | — | | | — | |
| TBAs | | 642 | | | — | | | TBAs | | 2,079 | | | 2,951 | |
| Total Derivative Assets | | 662 | | | 270 | | | Total Derivative Liabilities | | 2,079 | | | 14,356 | |
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of our credit derivatives on our consolidated statements of operations for the yearsyear ended December 31, 2017, 2016 and 2015.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year Ended December 31, 2020 |
Derivative
not designated as
hedging instrument | Realized gain (loss), net | | GSE CRT embedded derivative coupon interest | | Unrealized
gain (loss), net | | Realized and unrealized credit derivative income (loss), net |
| GSE CRT Embedded Derivatives | (31,354) | | | 6,323 | | | (10,281) | | | (35,312) | |
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2017 |
Derivative not designated as hedging instrument | Realized gain (loss), net | | GSE CRT embedded derivative coupon interest | | Unrealized gain (loss), net | | Realized and unrealized credit derivative income (loss), net |
| GSE CRT Embedded Derivatives | — |
| | 23,343 |
| | 28,305 |
| | 51,648 |
|
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2016 |
Derivative not designated as hedging instrument | Realized gain (loss), net | | GSE CRT embedded derivative coupon interest | | Unrealized gain (loss), net | | Realized and unrealized credit derivative income (loss), net |
| GSE CRT Embedded Derivatives | (6,017 | ) | | 24,343 |
| | 42,817 |
| | 61,143 |
|
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2015 |
Derivative not designated as hedging instrument | Realized gain (loss), net | | GSE CRT embedded derivative coupon interest | | Unrealized gain (loss), net | | Realized and unrealized credit derivative income (loss), net |
| GSE CRT Embedded Derivatives | (2,184 | ) | | 24,822 |
| | (4,227 | ) | | 18,411 |
|
| Credit Default Swap Contract | 1,044 |
| | 723 |
| | (396 | ) | | 1,371 |
|
| Total | (1,140 | ) | | 25,545 |
| | (4,623 | ) | | 19,782 |
|
The following tables summarize the effect of interest rate swaps, interest rate swaptions, TBAs, futurescurrency forward contracts and currency forward contractsTBAs reported in gain (loss) on derivative instruments, net on the consolidated statements of operations for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2022 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 593,035 | | | 86,872 | | | 11,426 | | | 691,333 | |
| | | | | | | |
| Currency Forward Contracts | 919 | | | — | | | (271) | | | 648 | |
| TBAs | (134,488) | | | — | | | 1,514 | | | (132,974) | |
| Total | 459,466 | | | 86,872 | | | 12,669 | | | 559,007 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2021 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 185,232 | | | (15,803) | | | (5,869) | | | 163,560 | |
| Interest Rate Swaptions | (553) | | | — | | | — | | | (553) | |
| Currency Forward Contracts | 209 | | | — | | | 970 | | | 1,179 | |
| TBAs | (28,731) | | | — | | | (12,844) | | | (41,575) | |
| Total | 156,157 | | | (15,803) | | | (17,743) | | | 122,611 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2020 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net
interest income (expense) | | Unrealized
gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (857,753) | | | 8,047 | | | (24,068) | | | (873,774) | |
| | | | | | | |
| Currency Forward Contracts | (1,301) | | | — | | | (345) | | | (1,646) | |
| TBAs | 14,477 | | | — | | | 9,893 | | | 24,370 | |
| Total | (844,577) | | | 8,047 | | | (14,520) | | | (851,050) | |
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2017 |
Derivative not designated as hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | 72,894 |
| | (77,076 | ) | | 28,316 |
| | 24,134 |
|
| Currency Forward Contracts | (5,056 | ) | | — |
| | (923 | ) | | (5,979 | ) |
| Total | 67,838 |
| | (77,076 | ) | | 27,393 |
| | 18,155 |
|
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2016 |
Derivative not designated as hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (69,090 | ) | | (104,804 | ) | | 100,503 |
| | (73,391 | ) |
| Interest Rate Swaptions | (1,485 | ) | | — |
| | 1,485 |
| | — |
|
| Currency Forward Contracts | 12,632 |
| | — |
| | (2,056 | ) | | 10,576 |
|
| Total | (57,943 | ) | | (104,804 | ) | | 99,932 |
| | (62,815 | ) |
|
| | | | | | | | | | | |
| $ in thousands | Year ended December 31, 2015 |
Derivative
not designated as
hedging instrument | Realized gain (loss) on derivative instruments, net | | Contractual net interest expense | | Unrealized gain (loss), net | | Gain (loss) on derivative instruments, net |
| Interest Rate Swaps | (31,881 | ) | | (184,373 | ) | | (554 | ) | | (216,808 | ) |
| Interest Rate Swaptions | (10,328 | ) | | — |
| | 8,521 |
| | (1,807 | ) |
| TBAs | (2,292 | ) | | — |
| | 558 |
| | (1,734 | ) |
| Futures Contracts | (943 | ) | | — |
| | (90 | ) | | (1,033 | ) |
| Currency Forward Contracts | 1,172 |
| | — |
| | 1,162 |
| | 2,334 |
|
| Total | (44,272 | ) | | (184,373 | ) | | 9,597 |
| | (219,048 | ) |
Credit-risk-related Contingent Features
We have agreements with each of our bilateral derivative counterparties. Some of those agreements contain a provision whereby if we default on any of our indebtedness, including default whereby repayment of the indebtedness has not been accelerated by the lender, we could also be declared in default on our derivative obligations.
At December 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to bilateral interest rate swap agreements, was $21.7 million. We have minimum collateral posting thresholds with certain of our derivative counterparties and have posted $23.7 million of Agency RMBS as of December 31, 2017. If we had breached any of these provisions at December 31, 2017, we could have been required to settle our obligations under the agreements at their termination value.
We also have an agreement with a clearing counterparty for our interest rate swaps that includes cross default provisions. The fair value of our centrally cleared interest rate derivative contracts, which includes accrued interest and variation margin but excludes any adjustment for non-performance risk, was a net liability of $10.3 million as of December 31, 2017.
We were in compliance with all of the financial provisions of these counterparty agreements as of December 31, 2017.
Note 109 – Offsetting Assets and Liabilities
Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements), in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the consolidated balance sheets.
The following tables present information about the assets and liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset on our consolidated balance sheets at December 31, 20172022 and December 31, 2016. As a result of rulebook changes governing central clearing activities effective January 3, 2017, the2021. The daily variation margin payment for a centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Our derivative liabilityasset of $10.3 million$20,000 at December 31, 20172022 (December 31, 2021: liability of $11.4 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this change.
Offsettingcharacterization of Derivative Assets
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
$ in thousands Description | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
Derivatives (1)(3) | 6,896 |
| | — |
| | 6,896 |
| | — |
| | (6,896 | ) | | — |
|
daily variation margin.
Offsetting of Derivative Liabilities, Repurchase Agreements and Secured Loans
As of December 31, 20172022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Gross Amounts Not Offset in the
Consolidated Balance Sheets | | |
| $ in thousands | Gross
Amounts of
Recognized
Assets (Liabilities) | | Gross
Amounts
Offset in the
Consolidated
Balance
Sheets | | Net Amounts
of Assets (Liabilities)
presented
in the
Consolidated
Balance Sheets | | Financial
Instruments | |
Cash Collateral
(Received) Pledged | | Net Amount |
| Assets | | | | | | | | | | | |
Derivatives (1) (2) | 642 | | | — | | | 642 | | | (642) | | | — | | | — | |
| Total Assets | 642 | | | — | | | 642 | | | (642) | | | — | | | — | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
Derivatives (1) (2) | (2,079) | | | — | | | (2,079) | | | 642 | | | 1,297 | | | (140) | |
Repurchase Agreements (3) | (4,234,823) | | | — | | | (4,234,823) | | | 4,234,823 | | | — | | | — | |
| Total Liabilities | (4,236,902) | | | — | | | (4,236,902) | | | 4,235,465 | | | 1,297 | | | (140) | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
$ in thousands Description | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Liabilities presented in the Consolidated Balance Sheets | | Financial Instruments (2) | |
Cash Collateral Pledged | | Net Amount |
Derivatives (3) | 22,445 |
| | — |
| | 22,445 |
| | (21,169 | ) | | (620 | ) | | 656 |
|
Repurchase Agreements (4) | 14,080,801 |
| | — |
| | 14,080,801 |
| | (14,080,801 | ) | | — |
| | — |
|
Secured Loans (5) | 1,650,000 |
| | — |
| | 1,650,000 |
| | (1,650,000 | ) | | — |
| | — |
|
| Total | 15,753,246 |
| | — |
| | 15,753,246 |
| | (15,751,970 | ) | | (620 | ) | | 656 |
|
Offsetting of Derivative Assets
As of December 31, 20162021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Gross Amounts Not Offset in the
Consolidated Balance Sheets | | |
| $ in thousands | Gross
Amounts of
Recognized
Assets (Liabilities) | | Gross
Amounts
Offset in the
Consolidated
Balance
Sheets | | Net Amounts
of Assets (Liabilities)
presented
in the
Consolidated
Balance Sheets | | Financial
Instruments | | Cash Collateral
(Received) Pledged | | Net Amount |
| Assets | | | | | | | | | | | |
Derivatives (1) (2) | 270 | | | — | | | 270 | | | — | | | (270) | | | — | |
| Total Assets | 270 | | | — | | | 270 | | | — | | | (270) | | | — | |
| | | | | | | | | | | |
| Liabilities | | | | | | | | | | | |
Derivatives (1) (2) | (2,951) | | | — | | | (2,951) | | | — | | | 2,951 | | | — | |
Repurchase Agreements (3) | (6,987,834) | | | — | | | (6,987,834) | | | 6,987,834 | | | — | | | — | |
| Total Liabilities | (6,990,785) | | | — | | | (6,990,785) | | | 6,987,834 | | | 2,951 | | | — | |
(1)Amounts represent derivative assets and derivative liabilities which could potentially be offset against other derivative assets, derivative liabilities and cash collateral pledged or received. |
| | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
$ in thousands Description | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount |
Derivatives (1)(3) | 3,186 |
| | — |
| | 3,186 |
| | (1,640 | ) | | (1,546 | ) | | — |
|
Offsetting(2)Cash collateral pledged by us on our currency forward contracts, TBAs and centrally cleared interest rate swaps was $104.8 million and $224.4 million at December 31, 2022 and December 31, 2021, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of Derivative Liabilitiesthese swaps and Repurchase Agreements
Asis therefore excluded from the tables above. We held no cash collateral on our derivatives as of December 31, 20162022 and $280,000 as of December 31, 2021.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | |
$ in thousands Description | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Liabilities presented in the Consolidated Balance Sheets | | Financial Instruments (2) | | Cash Collateral Pledged | | Net Amount |
Derivatives (3) | 134,228 |
| | — |
| | 134,228 |
| | (45,738 | ) | | (85,787 | ) | | 2,703 |
|
Repurchase Agreements (4) | 11,160,669 |
| | — |
| | 11,160,669 |
| | (11,160,669 | ) | | — |
| | — |
|
Secured Loans (5) | 1,650,000 |
| | — |
| | 1,650,000 |
| | (1,650,000 | ) | | — |
| | — |
|
| | 12,944,897 |
| | — |
| | 12,944,897 |
| | (12,856,407 | ) | | (85,787 | ) | | 2,703 |
|
| |
(1) | Amounts represent derivatives in an asset position which could potentially be offset against derivatives in a liability position at December 31, 2017 and December 31, 2016, subject to a netting arrangement. |
| |
(2) | Amounts represent collateral pledged that is available to be offset against liability balances associated with repurchase agreements, secured loans and derivatives. |
| |
(3) | The fair value of securities pledged against our derivatives was $23.7 million and $46.3 million at December 31, 2017 and December 31, 2016, respectively. Cash collateral received on our derivatives was $7.3 million and $1.7 million at December 31, 2017 and December 31, 2016, respectively. Cash collateral pledged by us on our derivatives was $620,000 and $86.5 million at December 31, 2017 and December 31, 2016, respectively. As a result of rulebook changes governing central clearing activities effective January 3, 2017, cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and therefore excluded from the tables above at December 31, 2017. |
| |
(4) | The fair value of securities pledged against our borrowing under repurchase agreements was $15.5 billion and $12.4 billion at December 31, 2017 and December 31, 2016, respectively. |
| |
(5) | The fair value of securities pledged against IAS Services LLC's borrowing under secured loans was $1.9 billion and $1.9 billion at December 31, 2017 and December 31, 2016, respectively.
|
Note 1110 – Fair Value of Financial Instruments
A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows:
•Level 1 Inputs – Quoted prices for identical instruments in active markets.
•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level 3 Inputs – Instruments with primarily unobservable value drivers.
The following tables present our assets and liabilities measured at fair value on a recurring basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | |
| | Fair Value Measurements Using: | | |
| $ in thousands | Level 1 | | Level 2 | | Level 3 | | NAV as a practical expedient (2) | | Total at
Fair Value |
| Assets: | | | | | | | | | |
Mortgage-backed securities (1) | — | | | 4,791,893 | | | — | | | — | | | 4,791,893 | |
| Derivative assets | — | | | 662 | | | — | | | — | | | 662 | |
| Other assets | — | | | — | | | — | | | 552 | | | 552 | |
| Total assets | — | | | 4,792,555 | | | — | | | 552 | | | 4,793,107 | |
| Liabilities: | | | | | | | | | |
| Derivative liabilities | — | | | 2,079 | | | — | | | — | | | 2,079 | |
| Total liabilities | — | | | 2,079 | | | — | | | — | | | 2,079 | |
|
| | | | | | | | | | | | | | |
| | December 31, 2017 | | |
| | Fair Value Measurements Using: | | |
| $ in thousands | Level 1 | | Level 2 | | Level 3 | | NAV as a practical expedient (3) | | Total at Fair Value |
| Assets: | | | | | | | | | |
Mortgage-backed and credit risk transfer securities(1) (2) | — |
| | 18,145,354 |
| | 45,400 |
| | — |
| | 18,190,754 |
|
| Derivative assets | — |
| | 6,896 |
| | — |
| | — |
| | 6,896 |
|
Other assets (4) | 3,979 |
| | — |
| | — |
| | 25,972 |
| | 29,951 |
|
| Total assets | 3,979 |
| | 18,152,250 |
| | 45,400 |
| | 25,972 |
| | 18,227,601 |
|
| Liabilities: | | | | | | | | | |
| Derivative liabilities | — |
| | 32,765 |
| | — |
| | — |
| | 32,765 |
|
| Total liabilities | — |
| | 32,765 |
| | — |
| | — |
| | 32,765 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | |
| | | | | |
| | Fair Value Measurements Using: | | |
| $ in thousands | Level 1 | | Level 2 | | Level 3 (3) | | NAV as a practical expedient (2) | | Total at
Fair Value |
| Assets: | | | | | | | | | |
Mortgage-backed securities (1) | — | | | 7,804,259 | | | — | | | — | | | 7,804,259 | |
| Derivative assets | — | | | 270 | | | — | | | — | | | 270 | |
| Other assets | — | | | — | | | 23,515 | | | 12,476 | | | 35,991 | |
| Total assets | — | | | 7,804,529 | | | 23,515 | | | 12,476 | | | 7,840,520 | |
| Liabilities: | | | | | | | | | |
| Derivative liabilities | — | | | 14,356 | | | — | | | — | | | 14,356 | |
| Total liabilities | — | | | 14,356 | | | — | | | — | | | 14,356 | |
|
| | | | | | | | | | | | | | |
| | December 31, 2016 | | |
| | Fair Value Measurements Using: | | |
| $ in thousands | Level 1 | | Level 2 | | Level 3 | | NAV as a practical expedient (3) | | Total at Fair Value |
| Assets: | | | | | | | | | |
Mortgage-backed and credit risk transfer securities(1) (2) | — |
| | 14,964,236 |
| | 17,095 |
| | — |
| | 14,981,331 |
|
| Derivative assets | — |
| | 3,186 |
| | — |
| | | | 3,186 |
|
Other assets (4) | 500 |
| | — |
| | — |
| | 33,301 |
| | 33,801 |
|
| Total assets | 500 |
| | 14,967,422 |
| | 17,095 |
| | 33,301 |
| | 15,018,318 |
|
| Liabilities: | | | | | | | | | |
| Derivative liabilities | — |
| | 134,228 |
| | — |
| | — |
| | 134,228 |
|
| Total liabilities | — |
| | 134,228 |
| | — |
| | — |
| | 134,228 |
|
(2)Investments in unconsolidated ventures are valued using the net asset value (“NAV”) as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of December 31, 2022, our unconsolidated ventures were in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.
(3)We used an independent third party appraisal to value our commercial loan investment.
| |
(1) | For more detail about the fair value of our MBS and GSE CRTs, refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities." |
| |
(2) | Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments with an embedded derivative. The hybrid instruments consist of debt host contracts classified as Level 2 and embedded derivatives classified as Level 3. As of December 31, 2017, the net embedded derivative asset position of $45.4 million includes $46.5 million of embedded derivatives in an asset position and $1.1 million of embedded derivatives in a liability position. As of December 31, 2016, the net embedded derivative asset position of $17.1 million includes $21.0 million of embedded derivatives in an asset position and $3.9 million of embedded derivatives in a liability position. |
| |
(3) | Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of December 31, 2017 and December 31, 2016, the weighed average remaining term of investments in unconsolidated ventures is 1.9 years and 1.3 years, respectively. |
| |
(4) | Includes $4.0 million and $500,000 of investments in an exchange-traded fund as of December 31, 2017 and December 31, 2016, respectively. |
The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives,commercial loan investment, which we have valued utilizing Level 3 inputs:inputs. |
| | | | | |
| | Years Ended |
| $ in thousands | December 31, 2017 | | December 31, 2016 |
| Beginning balance | 17,095 |
| | (25,722 | ) |
| Sales and settlements | — |
| | 6,017 |
|
| Total net gains / (losses) included in net income: | | | |
| Realized gains/(losses), net | — |
| | (6,017 | ) |
Unrealized gains/(losses), net (1) | 28,305 |
| | 42,817 |
|
| Ending balance | 45,400 |
| | 17,095 |
|
| | | | | | | | | | | |
| Years Ended |
| $ in thousands | December 31, 2022 | | December 31, 2021 |
| Beginning balance | 23,515 | | | 23,098 | |
| | | |
| Repayments | (23,919) | | | — | |
| Total net unrealized gains (losses) included in net income: | | | |
| Unrealized gain (loss) | 404 | | | 417 | |
| Ending balance | — | | | 23,515 | |
| |
(1) | Included in realized and unrealized credit derivative income (loss), net in the consolidated statements of operations are $28.3 million in net unrealized gains and $36.2 million in net unrealized gains attributable to assets still held as of December 31, 2017 and December 31, 2016, respectively. During the year ended December 31, 2016, we reversed $6.6 million in net unrealized gains on securities sold during the period. |
Unrealized gains and losses on our commercial loan investment are included in gain (loss) on investments, net in our consolidated statements of operations.
The following tables summarizetable summarizes the significant unobservable inputsinput used in the fair value measurement of our GSE CRT embedded derivatives:commercial loan investment:
|
| | | | | | | | | | |
| Fair Value at | | | | | | | | |
$ in thousands | December 31, 2017 | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
GSE CRT Embedded Derivatives | 45,400 |
| | Market Comparables, Vendor Pricing | | Weighted average life | | 2.6 - 6.8 years | | 4.8 years |
|
| | | | | | | | | | |
| Fair Value at | | | | | | | | |
$ in thousands | December 31, 2016 | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
GSE CRT Embedded Derivatives | 17,095 |
| | Market Comparables, Vendor Pricing | | Weighted average life | | 2.5 - 7.7 years | | 5.3 years |
These significant unobservable inputs change according to market conditions and security performance. We estimate the weighted average life of GSE CRTs in order to identify GSE corporate debt with a similar maturity. We obtain our weighted average life estimates from a third party provider. Although weighted average life is a significant input, changes in weighted average life may not have an explicit directional impact on the fair value measurement. | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value at | | Valuation | | Unobservable | | |
| $ in thousands | December 31, 2021 | | Technique | | Input | | Rate |
| Commercial Loan | 23,515 | | | Discounted Cash Flow | | Discount rate | | 18.8 | % |
The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the consolidated balance sheets at December 31, 20172022 and December 31, 2016:2021:
|
| | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| $ in thousands | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| Financial Assets: | | | | | | | |
| Commercial loans, held-for-investment | 191,808 |
| | 191,930 |
| | 273,355 |
| | 275,319 |
|
| Other assets | 74,250 |
| | 74,250 |
| | 74,250 |
| | 74,250 |
|
| Total | 266,058 |
| | 266,180 |
| | 347,605 |
| | 349,569 |
|
| Financial Liabilities: | | | | | | | |
| Repurchase agreements | 14,080,801 |
| | 14,080,460 |
| | 11,160,669 |
| | 11,161,034 |
|
| Secured loans | 1,650,000 |
| | 1,650,000 |
| | 1,650,000 |
| | 1,650,000 |
|
| Exchangeable senior notes | 143,231 |
| | 143,948 |
| | 397,041 |
| | 400,000 |
|
| Total | 15,874,032 |
| | 15,874,408 |
| | 13,207,710 |
| | 13,211,034 |
|
The following describes our methods for estimating the fair value for financial instruments.
The estimated fair value of commercial loans held-for-investment is a Level 3 fair value measurement. Subsequent to the origination or purchase, commercial loan investments are valued on monthly basis by an independent third party valuation agent using a discounted cash flow technique.
The estimated fair value of FHLBI stock, included in "Other assets," is a Level 3 fair value measurement. FHLBI stock may only be sold back to the FHLBI at its discretion at cost. As a result, the cost of the FHLBI stock approximates its fair value. | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| $ in thousands | Carrying
Value | | Estimated
Fair Value | | Carrying
Value | | Estimated
Fair Value |
| Financial Liabilities: | | | | | | | |
| Repurchase agreements | 4,234,823 | | | 4,233,627 | | | 6,987,834 | | | 6,987,806 | |
| Total | 4,234,823 | | | 4,233,627 | | | 6,987,834 | | | 6,987,806 | |
The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality.
The estimated fair value of secured loans is a Level 3 fair value measurement. The secured loans have floating rates based on an index plus a spread and the spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these secured loans are at market, and thus the carrying amount approximates fair value.
The estimated fair value of exchangeable senior notes is a Level 2 fair value measurement based on a valuation obtained from a third-party pricing service.
Note 1211 – Related Party Transactions
We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a wholly-owned subsidiary of Invesco Ltd. Our Manager is at all times subject to the supervision and oversight of our Boardboard of Directorsdirectors and has only such functions and authority as we delegate to it.
Our Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. During the year ended December 31, 2017,2022, we reimbursed our Manager $801,000 (2016: $695,000; 2015: $544,000)$1.5 million (2021: $1.1 million; 2020: $1.1 million) for costs of support personnel that are fully dedicated to our business.
We have invested $74.4 million as of December 31, 2017 (2016: $149.9 million) in money market or mutual funds managed by affiliates of our Manager. The investments are reported as cash and cash equivalents on our consolidated balance sheets.
We also pay our Manager a portion of the origination and commitment fees received from borrowers in connection with purchasing and originating commercial real estate loans. For the year ended December 31, 2017, we did not receive any fees or pay our Manager any fees related to such transactions. For the year ended December 31, 2016, we paid our Manager $690,000 (2015: $1.3 million) related to such transactions.personnel.
Management Fee
We pay our Manager a management fee equal to 1.50% of our stockholders’stockholders' equity per annum. The fee is calculated and payable quarterly in arrears. For purposes of calculating the management fee, stockholders’stockholders' equity is equal tocalculated as average month-end stockholders' equity for the sum of the net proceeds from all issuances of equity securities since inception including proceeds from the issuance of operating partnership units to an affiliate of our Manager, plus retained earnings at the end of the most recently completedprior calendar quarter (without taking into account any non-cashas determined in accordance with U.S. GAAP. Stockholders' equity compensation expense incurred in current or prior periods), less any amount paid to repurchase common stock since inception. Stockholder's equity excludes (i) any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income); (ii) cumulative net realized losses that are not attributable to permanently impaired investments and that relate to the investments for which market movement is accounted for in other comprehensive income; provided, however, that such adjustment shall not exceed cumulative unrealized net gains in other comprehensive income; (iii)may exclude one-time events pursuantdue to changes in U.S. GAAP;GAAP and (iv) certain non-cash items after discussions between our Manager and our independent directors andupon approval by a majority of our independent directors.
We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager.
In 2016, we recorded a cumulative one-time adjustment of $2.3 million related to a prior adjustment for the accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality.
Expense Reimbursement
We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, legal services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation.
The following table summarizes the costs incurred on our behalf by our Manager for the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
| | | | Years ended December 31, | | Years ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 | $ in thousands | 2022 | | 2021 | | 2020 |
| Incurred costs, prepaid or expensed | 5,997 |
| | 6,986 |
| | 6,463 |
| Incurred costs, prepaid or expensed | 8,085 | | | 7,108 | | | 10,845 | |
| Incurred costs, charged against equity as a cost of raising capital | 299 |
| | — |
| | 22 |
| Incurred costs, charged against equity as a cost of raising capital | 223 | | | 692 | | | 239 | |
| Incurred costs, capitalized to other assets | — |
| | 50 |
| | — |
| |
| Total incurred costs, originally paid by our Manager | 6,296 |
| | 7,036 |
| | 6,485 |
| Total incurred costs, originally paid by our Manager | 8,308 | | | 7,800 | | | 11,084 | |
Termination Fee
If we terminate our management agreement, we owe our Manager a termination fee equal to three times the sum of our average annual management fee during the 24-month period before termination, calculated as of the end of the most recently completed fiscal quarter.
Note 1312 – Stockholders’ Equity
Preferred Stock
HoldersIn June 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 7.75%for $140.0 million plus accrued and unpaid dividends. The excess of the liquidation preferenceconsideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $25.00 per$4.7 million in net income (loss) attributable to common stockholders during the year ended December 31, 2021.
In May 2022, our board of directors approved a share or $1.9375 perrepurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock and recorded a gain on repurchase and retirement of preferred stock of $14.2 million. As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share per annum. These dividends are cumulative and payable quarterly in arrears.repurchase program.
Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75% of the liquidation preference of $25.00 per share or $1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBORLondon Interbank Offered Rate ("LIBOR") plus a spread of 5.18% of the $25.00 liquidation preference per annum. These dividendsDividends are cumulative and payable quarterly in arrears.
In August 2017, we completed a public offering of 11,500,000 shares of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") at the price of $25.00 per share. Total proceeds were $287.5 million before issuance costs of $9.4 million. Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50% of the liquidation preference of $25.00 per share or $1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289% of the $25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears, commencing witharrears.
The United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it will cease to publish three-month USD LIBOR settings on July 1, 2023. We do not currently intend to amend our Series B or Series C Preferred Stock to change the first dividend payment date on December 27, 2017.existing USD LIBOR cessation fallback language.
As of July 27, 2017, weWe have the option to redeem shares of our Series A Preferred Stock for $25.00 per share, plus any accumulated and unpaid dividends through the date of redemption. We have the option to redeem shares of Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company prior tobefore those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control.
Common Stock
PriorIn May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock. The reverse stock split was effected following the close of business on June 3, 2022 (the "Effective Time"). At the Effective Time, every ten issued and outstanding shares of our common stock were converted into one share of our common stock. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares received cash, in lieu of such fractional shares, in an amount determined based on the closing price of our common stock at the
Effective Time. The reverse stock split applied to April 1, 2016, we had a dividend reinvestment and stock purchase plan (the “DRSPP”) that allowed participating stockholders to purchaseall of our outstanding shares of common stock directlyand did not affect any stockholder’s ownership percentage of our common stock, except for changes resulting from us. DRSPP participants also had the ability to automatically reinvest all or a portionpayment of their dividends in exchangecash for additional shares of common stock.fractional shares.
During the year ended December 31, 2016,2022, we issued 3,201 (2015: 12,945)sold 5,686,598 shares (2021: 5,574,402 shares) of common stock at an average price of $11.08 (2015: $14.75)in at-the-market transactions under the DRSPP. We received totalour equity distribution agreements for proceeds of $81.6 million (2021: $180.5 million) net of approximately $35,000 (2015: $191,000). Effective April 1, 2016,$1.3 million (2021: $2.6 million) in commissions and fees. We did not have any remaining shares authorized under our at-the-market program as of December 31, 2022.
During the years ended December 31, 2022 and December 31, 2021, we terminated our DRSPP and replaced the DSRPP program with a direct stock purchase plan and dividend reinvestment program administered by an affiliate of our transfer agent.
In December 2017, we entered into an equity distribution agreement with a placement agent under which we may sell up to 17,000,000did not repurchase any shares of our common stock from time to time in at-the-market or privately negotiated transactions. These shares will be registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented).stock. As of December 31, 2017, we have not sold any shares of common stock under the equity distribution agreement.
Securities Convertible into Shares of Common Stock
The non-controlling interest holder of our Operating Partnership, a wholly-owned Invesco subsidiary, has the right to cause the Operating Partnership to redeem their operating partnership units ("OP Units") for cash equal to the market value of an equivalent number of shares of common stock, or at our option, we may purchase their OP Units by issuing one share of common stock for each OP Unit redeemed.
Upon completion of our initial public offering, we entered into a registration rights agreement with Invesco. Under the registration rights agreement, we have granted Invesco (i) unlimited demand registration rights to have the common stock and OP Units owned by Invesco and any shares of common stock granted to our Manager registered for resale and (ii) in certain circumstances, the right to “piggy-back” these shares in registration statements we might file in connection with any future public offering so long as we retain our Manager under the management agreement.
Our Exchangeable Senior Notes are also convertible into shares of common stock. On March 12, 2013, we entered into a registration rights agreement with the initial purchasers of our Exchangeable Senior Notes. Under the registration rights agreement, we agreed to file a prospectus supplement to our automatic shelf registration statement if requested by noteholders to add such noteholders as selling securityholders. If our automatic shelf registration ceases to be effective, additional interest will accrue on the Notes, subject to certain exceptions. Refer to Note 7 - "Borrowings" for further discussion of the Exchangeable Senior Notes.
We have adopted an equity incentive plan which allows us to grant securities convertible into our common stock to our independent directors and employees of our Manager and its affiliates. Refer to "Share Based Compensation" below for further discussion of our equity incentive plan.
Share Repurchase Program
In December 2011, our board of directors approved a share repurchase program with no stated expiration date.
We did not purchase any shares during the year ended December 31, 2017. During the year ended December 31, 2016, we repurchased and concurrently retired 2,063,451 shares of our common stock at a weighted average repurchase price of $12.12 per share for a net cost of $25.0 million, including acquisition expenses. As of December 31, 2017,2022, we had authority to purchase 18,239,082 additional1,816,398 shares of our common stock through theour share repurchase program.
Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the “Incentive Plan”). Under the Incentive Plan, a total of 1,000,000In May 2022, we granted 32,571 restricted shares of common stock are authorized for issuance. Unless terminated earlier, the Incentive Plan will terminate in 2019, but will continue to govern the unexpired awards. As of December 31, 2017, 792,520 shares of common stock remain available for future issuance under the Incentive Plan.
We recognized compensation expense of approximately $453,000 (2016: $340,000; 2015: $340,000) related to awards to our independent directors for the year ended December 31, 2017. During the year ended December 31, 2017, we issued 25,006 shares (2016: 25,068 shares; 2015: 23,776 shares) of common stock under the Incentive Plan to our independent directors. The fair market valuerestricted shares will become unrestricted shares of common stock on the first anniversary of the shares granted was determined by the closing stock market price on thegrant date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $138,000 (2016: $100,000; 2015: $219,000) for the year ended December 31, 2017 relatedunless forfeited, subject to restricted stock units awarded to employees of our Manager and its affiliates which is reimbursed by our Manager under the management agreement. At December 31, 2017, there was approximately $239,000 of total unrecognized compensation cost related to restricted stock unit awardscertain conditions that is expected to be recognized over a period of up to 39 months, with a weighted-average remaining vesting period of 15 months.accelerate vesting.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the year ended December 31, 2017.
|
| | | | | | |
| | Year Ended December 31, |
| | 2017 |
| | Restricted Stock Units | | Weighted Average Grant Date Fair Value (1) |
| Unvested at the beginning of the year | 18,807 |
| | $ | 14.37 |
|
| Shares granted during the year | 8,115 |
| | 15.55 |
|
| Shares vested during the year | (7,095 | ) | | 15.78 |
|
| Unvested at the end of the year | 19,827 |
| | $ | 14.35 |
|
| |
(1) | The grant date fair value of restricted stock unit awards is based on the closing market price of our common stock at the grant date. |
Accumulated Other Comprehensive Income
The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI"(“AOCI”) at December 31, 20172022 and December 31, 2016,2021, respectively. The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| $ in thousands | Equity method investments | | Available-for-sale securities | | Derivatives and hedging | | Total |
| Total other comprehensive income (loss) | | | | | | | |
| Unrealized gain (loss) on mortgage-backed securities, net | — | | | (6,280) | | | — | | | (6,280) | |
| | | | | | | |
| | | | | | | |
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | — | | | — | | | (19,708) | | | (19,708) | |
| Currency translation adjustments on investment in unconsolidated venture | (537) | | | — | | | — | | | (537) | |
| Total other comprehensive income (loss) | (537) | | | (6,280) | | | (19,708) | | | (26,525) | |
| | | | | | | |
| AOCI balance at beginning of period | 424 | | | 6,749 | | | 30,113 | | | 37,286 | |
| Total other comprehensive income (loss) | (537) | | | (6,280) | | | (19,708) | | | (26,525) | |
| AOCI balance at end of period | (113) | | | 469 | | | 10,405 | | | 10,761 | |
|
| | | | | | | | | | | |
| | December 31, 2017 |
| $ in thousands | Equity method investments | | Available-for-sale securities | | Derivatives and hedging | | Total |
| Total other comprehensive income (loss), net: | | | | | | | |
| Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net | — |
| | (9,885 | ) | | — |
| | (9,885 | ) |
| Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net | — |
| | 1,508 |
| | — |
| | 1,508 |
|
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | — |
| | — |
| | (25,544 | ) | | (25,544 | ) |
| Currency translation adjustments on investment in unconsolidated venture | 863 |
| | — |
| | — |
| | 863 |
|
| Total other comprehensive income (loss), net | 863 |
| | (8,377 | ) | | (25,544 | ) | | (33,058 | ) |
| | | | | | | | |
| AOCI balance at beginning of period | 95 |
| | 144,458 |
| | 149,115 |
| | 293,668 |
|
| Other comprehensive income/(loss), net | 863 |
| | (8,377 | ) | | (25,544 | ) | | (33,058 | ) |
| Other comprehensive income/(loss) attributable to non-controlling interest | (11 | ) | | 106 |
| | 323 |
| | 418 |
|
| Rebalancing of ownership percentage of non-controlling interest | — |
| | 1 |
| | — |
| | 1 |
|
| AOCI balance at end of period | 947 |
| | 136,188 |
| | 123,894 |
| | 261,029 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| $ in thousands | Equity method investments | | Available-for-sale securities | | Derivatives and hedging | | Total |
| Total other comprehensive income (loss) | | | | | | | |
| Unrealized gain (loss) on mortgage-backed securities, net | — | | | 756 | | | — | | | 756 | |
| | | | | | | |
| | | | | | | |
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | — | | | — | | | (22,000) | | | (22,000) | |
| Currency translation adjustments on investment in unconsolidated venture | (75) | | | — | | | — | | | (75) | |
| Total other comprehensive income (loss) | (75) | | | 756 | | | (22,000) | | | (21,319) | |
| | | | | | | |
| AOCI balance at beginning of period | 499 | | | 5,993 | | | 52,113 | | | 58,605 | |
| Total other comprehensive income (loss) | (75) | | | 756 | | | (22,000) | | | (21,319) | |
| AOCI balance at end of period | 424 | | | 6,749 | | | 30,113 | | | 37,286 | |
|
| | | | | | | | | | | |
| | December 31, 2016 |
| $ in thousands | Equity method investments | | Available-for-sale securities | | Derivatives and hedging | | Total |
| Total other comprehensive income (loss), net: | | | | | | | |
| Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net | — |
| | (37,632 | ) | | — |
| | (37,632 | ) |
| Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net | — |
| | 6,134 |
| | — |
| | 6,134 |
|
| Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense | — |
| | — |
| | 5,154 |
| | 5,154 |
|
| Currency translation adjustments on investment in unconsolidated venture | 128 |
| | — |
| | — |
| | 128 |
|
| Total other comprehensive income (loss), net | 128 |
| | (31,498 | ) | | 5,154 |
| | (26,216 | ) |
| | | | | | | | |
| AOCI balance at beginning of period | (32 | ) | | 170,383 |
| | 148,273 |
| | 318,624 |
|
| Other comprehensive income/(loss), net | 128 |
| | (31,498 | ) | | 5,154 |
| | (26,216 | ) |
| Other comprehensive income/(loss) attributable to non-controlling interest | (1 | ) | | 412 |
| | (63 | ) | | 348 |
|
| Rebalancing of ownership percentage of non-controlling interest | — |
| | 5,161 |
| | (4,249 | ) | | 912 |
|
| AOCI balance at end of period | 95 |
| | 144,458 |
| | 149,115 |
| | 293,668 |
|
Effective December 31, 2013, we voluntarily discontinued cash flow hedge accounting for our interest rate swaps to gain greater flexibility in managing interest rate exposures. Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified
to interest expense on repurchase agreements on the consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements.
Dividends
The following table sets forth the dividendsDividends declared per share ofon our common stock.stock have been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022. We declared the following dividends during 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| $ in thousands, except per share amounts | Dividends Declared |
| Series A Preferred Stock | Per Share | | In Aggregate | | Date of Payment |
2021 (1) | | | | | |
| | | | | |
| February 19, 2021 | 0.4844 | | | 2,713 | | | April 26, 2021 |
|
| | | | | |
| Date Declared | Dividends Declared Per Share |
| | Amount | | Date of Payment |
| 2017 | | | |
| December 14, 2017 | $ | 0.42 |
| | January 26, 2018 |
| September 14, 2017 | $ | 0.41 |
| | October 26, 2017 |
| June 15, 2017 | $ | 0.40 |
| | July 26, 2017 |
| March 15, 2017 | $ | 0.40 |
| | April 26, 2017 |
| 2016 | | | |
| December 15, 2016 | $ | 0.40 |
| | January 26, 2017 |
| September 14, 2016 | $ | 0.40 |
| | October 26, 2016 |
| June 15, 2016 | $ | 0.40 |
| | July 26, 2016 |
| March 15, 2016 | $ | 0.40 |
| | April 26, 2016 |
The following table sets forth the dividends declared$0.2691 per share ($1.5 million in aggregate) in connection with the redemption of our Series A Preferred Stock. The final dividend was treated as a component of the redemption price for tax purposes.
| | | | | | | | | | | | | | | | | |
| $ in thousands, except per share amounts | Dividends Declared |
| Series B Preferred Stock | Per Share | | In Aggregate | | Date of Payment |
| 2022 | | | | | |
| November 1, 2022 | 0.4844 | | | 2,198 | | | December 27, 2022 |
| August 2, 2022 | 0.4844 | | | 2,198 | | | September 27, 2022 |
| May 3, 2022 | 0.4844 | | | 2,991 | | | June 27, 2022 |
| February 16, 2022 | 0.4844 | | | 3,003 | | | March 28, 2022 |
| 2021 | | | | | |
| November 2, 2021 | 0.4844 | | | 3,003 | | | December 27, 2021 |
| August 3, 2021 | 0.4844 | | | 3,003 | | | September 27, 2021 |
| May 4, 2021 | 0.4844 | | | 3,004 | | | June 28, 2021 |
| February 19, 2021 | 0.4844 | | | 3,003 | | | March 29, 2021 |
| | | | | | | | | | | | | | | | | |
| $ in thousands, except per share amounts | Dividends Declared |
| Series C Preferred Stock | Per Share | | In Aggregate | | Date of Payment |
| 2022 | | | | | |
| November 1, 2022 | 0.46875 | | | 3,664 | | | December 27, 2022 |
| August 2, 2022 | 0.46875 | | | 3,664 | | | September 27, 2022 |
| May 3, 2022 | 0.46875 | | | 5,109 | | | June 27, 2022 |
| February 16, 2022 | 0.46875 | | | 5,391 | | | March 28, 2022 |
| 2021 | | | | | |
| November 2, 2021 | 0.46875 | | | 5,391 | | | December 27, 2021 |
| August 3, 2021 | 0.46875 | | | 5,391 | | | September 27, 2021 |
| May 4, 2021 | 0.46875 | | | 5,390 | | | June 28, 2021 |
| February 19, 2021 | 0.46875 | | | 5,391 | | | March 29, 2021 |
|
| | | | | |
| Date Declared | Dividends Declared Per Share |
| | Amount | | Date of Payment |
| 2017 | | | |
| December 14, 2017 | $ | 0.4844 |
| | January 25, 2018 |
| September 14, 2017 | $ | 0.4844 |
| | October 25, 2017 |
| June 15, 2017 | $ | 0.4844 |
| | July 25, 2017 |
| March 15, 2017 | $ | 0.4844 |
| | April 25, 2017 |
| 2016 | | | |
| December 15, 2016 | $ | 0.4844 |
| | January 25, 2017 |
| September 14, 2016 | $ | 0.4844 |
| | October 25, 2016 |
| June 15, 2016 | $ | 0.4844 |
| | July 25, 2016 |
| March 15, 2016 | $ | 0.4844 |
| | April 25, 2016 |
The following table sets forth the dividends declared per share of our Series B Preferred Stock.
|
| | | | | |
| Date Declared | Dividends Declared Per Share |
| | Amount | | Date of Payment |
| 2017 | | | |
| September 14, 2017 | $ | 0.4844 |
| | December 27, 2017 |
| June 15, 2017 | $ | 0.4844 |
| | September 27, 2017 |
| March 15, 2017 | $ | 0.4844 |
| | June 27, 2017 |
| 2016 | | | |
| December 15, 2016 | $ | 0.4844 |
| | March 27, 2017 |
| September 14, 2016 | $ | 0.4844 |
| | December 27, 2016 |
| June 15, 2016 | $ | 0.4844 |
| | September 27, 2016 |
| March 15, 2016 | $ | 0.4844 |
| | June 27, 2016 |
On September 14, 2017, we declared a dividend on Series C Preferred Stock of $0.68229 per share that was paid on December 27, 2017 for the period from the date of issuance, August 16, 2017, to but not including the dividend payment date, December 27, 2017. For the year ended December 31, 2017, we reduced net income attributable to common stockholders by approximately $373,000 to account for accumulated but unpaid dividends for the period from December 27, 2017 to December 31, 2017 on our Series B and Series C Preferred Stock.
| | | | | | | | | | | | | | | | | |
| $ in thousands, except per share amounts | Dividends Declared |
| Common Stock | Per Share | | In Aggregate | | Date of Payment |
| 2022 | | | | | |
| December 19, 2022 | 0.65 | | | 25,162 | | | January 27, 2023 |
| September 26, 2022 | 0.65 | | | 22,979 | | | October 27, 2022 |
| June 27, 2022 | 0.90 | | | 29,721 | | | July 27, 2022 |
| March 28, 2022 | 0.90 | | | 29,693 | | | April 27, 2022 |
| 2021 | | | | | |
| December 27, 2021 | 0.90 | | | 29,689 | | | January 27, 2022 |
| September 28, 2021 | 0.90 | | | 28,057 | | | October 26, 2021 |
| June 23, 2021 | 0.90 | | | 26,071 | | | July 27, 2021 |
| March 26, 2021 | 0.90 | | | 22,176 | | | April 27, 2021 |
The following table sets forth the dividends declared per share of our preferred and common stock and their related tax characterization for the fiscal tax years ended December 31, 20172022 and 2016.2021. Common stock dividends on CUSIP 46131B100, which were declared and paid prior to our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022, have not been retroactively adjusted in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Tax Characterization of Dividends |
| Fiscal Tax Year | Dividends Declared in Prior Year and Taxable in Current Year | | Dividends Declared and Taxable in Current Year | | Ordinary Dividends | | Return of Capital | | Capital Gain Distribution | | |
| Series A Preferred Stock Dividends | | | | | | | | | | | |
| | | | | | | | | | | |
| Fiscal tax year 2021 | 0.484400 | | | 0.484400 | | | 0.968800 | | | — | | | — | | | |
| | | | | | | | | | | |
| Series B Preferred Stock Dividends | | | | | | | | | | | |
| Fiscal tax year 2022 | — | | | 1.963700 | | | 1.936700 | | | — | | | — | | | |
| Fiscal tax year 2021 | — | | | 1.936700 | | | 1.936700 | | | — | | | — | | | |
| | | | | | | | | | | |
| Series C Preferred Stock Dividends | | | | | | | | | | | |
| Fiscal tax year 2022 | — | | | 1.875000 | | | 1.875000 | | | — | | | — | | | |
| Fiscal tax year 2021 | — | | | 1.875000 | | | 0.590720 | | | 1.284280 | | | — | | | |
| | | | | | | | | | | |
| Common Stock Dividends | | | | | | | | | | | |
Fiscal tax year 2022 (CUSIP 46131B704)(1) | — | | | 1.550000 | | | 0.873081 | | | 0.676919 | | | — | | | |
| Fiscal tax year 2022 (CUSIP 46131B100) | 0.090000 | | | 0.090000 | | | 0.101390 | | | 0.078610 | | | — | | | |
Fiscal tax year 2021 (CUSIP 46131B100)(2) | 0.080000 | | | 0.270000 | | | — | | | 0.350000 | | | — | | | |
(1)Excludes common stock dividend of $0.65 per share declared on December 19, 2022 that had a record date of January 9, 2023. This dividend is a 2023 dividend for federal income tax purposes.
(2)Excludes common stock dividend of $0.09 per share declared on December 27, 2021 that had a record date of January 11, 2022. This dividend is a 2022 dividend for federal income tax purposes.
|
| | | | | | | | | | | |
| | | | Tax Characterization of Dividends |
| Fiscal Tax Year | Dividends Declared | | Ordinary Dividends | | Capital Gain Distribution | | Carry Forward |
| Series A Preferred Stock Dividends | | | | | | | |
Fiscal tax year 2017 (1) | 1.937600 |
| | 1.937600 |
| | — |
| | — |
|
Fiscal tax year 2016 (2) | 1.937600 |
| | 1.937600 |
| | — |
| | — |
|
| | | | | | | | |
| Series B Preferred Stock Dividends | | | | | | | |
| Fiscal tax year 2017 | 1.937600 |
| | 1.937600 |
| | — |
| | — |
|
Fiscal tax year 2016 (3) | 1.937600 |
| | 1.937600 |
| | — |
| | — |
|
| | | | | | | | |
| Series C Preferred Stock Dividends | | | | | | | |
| Fiscal tax year 2017 | 0.682290 |
| | 0.682290 |
| | — |
| | — |
|
| | | | | | | | |
| Common Stock Dividends | | | | | | | |
| Fiscal tax year 2017 | 1.630000 |
| | 1.480040 |
| | — |
| | 0.149960 |
|
Fiscal tax year 2016 (4) | 1.600000 |
| | 1.857840 |
| | — |
| | — |
|
| |
(1) | Excludes preferred stock dividend of $0.4844 per share declared on December 14, 2017 having a record date of January 1, 2018, which for federal income tax purposes is a fiscal tax year 2018 dividend. |
| |
(2) | Excludes preferred stock dividend of $0.4844 per share declared on December 15, 2016 having a record date of January 1, 2017, which for federal income tax purposes is a fiscal tax year 2017 dividend. |
| |
(3) | Excludes preferred stock dividend of $0.4844 per share declared on December 15, 2016 having a record date of March 5, 2017, which for federal income tax purposes is a fiscal tax year 2017 dividend. |
| |
(4) | Ordinary dividends include $0.257840 of spillover dividend carried-forward from fiscal tax year 2015. |
Note 1413 – Earnings (Loss) per Common Share
Common share amounts and earnings (loss) per share have been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022. Earnings per share for the years ended December 31, 2017, 20162022, 2021 and 20152020 is computed as follows:
| | | | | | | | | | | | | | | | | |
| In thousands except per share amounts | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Numerator (Income) | | | | | |
| Basic Earnings: | | | | | |
| Net income (loss) available to common stockholders | (416,963) | | | (132,477) | | | (1,718,778) | |
| | | | | |
| Denominator (Weighted Average Shares) | | | | | |
| Basic Earnings: | | | | | |
| Shares available to common stockholders | 34,160 | | | 27,513 | | | 17,373 | |
| | | | | |
| | | | | |
| Dilutive Shares | 34,160 | | | 27,513 | | | 17,373 | |
| Earnings (loss) per share: | | | | | |
| Net income (loss) attributable to common stockholders | | | | | |
| Basic | (12.21) | | | (4.82) | | | (98.93) | |
| Diluted | (12.21) | | | (4.82) | | | (98.93) | |
|
| | | | | | | | |
| $ and share amounts in thousands | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator (Income) | | | | | |
| Basic Earnings: | | | | | |
| Net income (loss) available to common stockholders | 320,527 |
| | 231,547 |
| | 89,847 |
|
| Effect of dilutive securities: | | | | | |
| Income allocated to exchangeable senior notes | 13,340 |
| | 22,467 |
| | — |
|
| Income (loss) allocated to non-controlling interest | 4,450 |
| | 3,287 |
| | 1,344 |
|
| Dilutive net income (loss) available to stockholders | 338,317 |
| | 257,301 |
| | 91,191 |
|
| Denominator (Weighted Average Shares) | | | | | |
| Basic Earnings: | | | | | |
| Shares available to common stockholders | 111,610 |
| | 111,973 |
| | 121,378 |
|
| Effect of dilutive securities: | | | | | |
| Restricted stock awards | 20 |
| | 20 |
| | 41 |
|
| Non-controlling interest OP Units | 1,425 |
| | 1,425 |
| | 1,425 |
|
| Exchangeable senior notes | 9,986 |
| | 16,836 |
| | — |
|
| Dilutive Shares | 123,041 |
| | 130,254 |
| | 122,844 |
|
| Earnings (loss) per share: | | | | | |
| Net income (loss) attributable to common stockholders | | | | | |
| Basic | 2.87 |
| | 2.07 |
| | 0.74 |
|
| Diluted | 2.75 |
| | 1.98 |
| | 0.74 |
|
The following potential weighted average common shares were excluded from diluted earnings per common share foras the effect would be anti-dilutive. For the year ended December 31, 2015 as the effect would be anti-dilutive: 16,835,7202022, 1,216 shares for the exchangeable senior notes.
Note 15 – Non-controlling Interest – Operating Partnership
Non-controlling interest represents the aggregate ownership interest of a wholly-owned Invesco subsidiary in our Operating Partnership. The ownership percentage is determined by dividing the number of OP Units held by the Unit Holders by the total number of dilutive shares of common stock. The issuance or repurchase of commonrestricted stock (“Share” or “Shares”) or OP Units changes the percentage ownership of both the Unit Holders and the common stockholders. Since an OP unit is generally redeemableawards. (December 31, 2021: 1,606 for cash or Shares at our option, it is deemed to be a Share equivalent. Therefore, such transactions are treated as capital transactions and result in a reallocation between stockholders’ equity and non-controlling interest in the accompanying consolidated balance sheets. As ofrestricted stock awards, December 31, 2017 and December 31, 2016, non-controlling interest related to the outstanding 1,425,000 OP Units represented a 1.3% interest in the Operating Partnership. During the third quarter of 2017, we recorded a cumulative out-of-period adjustment to rebalance equity in our Operating Partnership. The effect of the entry was to increase additional paid-in capital by $3.6 million and decrease non-controlling interest by $3.6 million. The adjustment did not have any impact on our consolidated statement of operations.2020: 1,102 for restricted stock awards).
Income allocated to the non-controlling interest is based on the Unit Holders’ ownership percentage of the Operating Partnership. The following table presents the net income (loss) allocated and distributions paid to the Operating Partnership non-controlling interest for the years ended December 31, 2017, 2016 and 2015.
|
| | | | | | | | |
| | Years ended December 31, |
| $ in thousands | 2017 | | 2016 | | 2015 |
| Net income (loss) allocated | 4,450 |
| | 3,287 |
| | 1,344 |
|
| Distributions paid | 2,294 |
| | 2,280 |
| | 2,494 |
|
As of December 31, 2017, distributions payable to the non-controlling interest were approximately $598,500 (2016: $570,000).
Note 1614 – Commitments and Contingencies
Commitments and contingencies may arise in the ordinary course of business. Our material off balance sheet commitments and contingencies as of December 31, 20172022 are discussed below.
As discussed in Note 65 - "Other Assets"“Other Assets”, we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we investinvested in the partnerships as a limited partner. The entities are structured such that capital commitments are to be drawn down over the lifeBoth of the partnershipunconsolidated ventures are in liquidation and plan to sell or settle their remaining investments as investment opportunitiesexpeditiously as possible. Until the ventures complete their liquidation, we are identified. At December 31, 2017, our undrawncommitted to fund $6.3 million in additional capital and purchase commitments were $10.2 million (2016: $15.5 million).to cover future expenses should they occur.
As discussed in Note 5 - “Commercial Loans Held-for-Investment”, we purchase and originate commercial loans. As of December 31, 2017, we have unfunded commitments on commercial loans held-for-investment of $4.8 million (2016: $9.7 million).
We have entered into agreements with financial institutions to guarantee certain obligations of our subsidiaries. We would be required to perform under these guarantees in the event of certain defaults. We have not had prior claims or losses under these contracts and expect the risk of loss to be remote.
Note 17 – Summarized Quarterly Results of Operations (Unaudited)
The following is a presentation of selected unaudited results of operations for the quarters ended.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands except share amounts | Q4 17 | | Q3 17 | | Q2 17 | | Q1 17 | | Q4 16 | | Q3 16 | | Q2 16 | | Q1 16 |
| Interest Income | | | | | | | | | | | | | | | |
| Mortgage-backed and credit risk transfer securities | 147,509 |
| | 134,138 |
| | 121,027 |
| | 118,873 |
| | 108,871 |
| | 112,467 |
| | 112,860 |
| | 122,246 |
|
| Commercial loans | 5,472 |
| | 6,251 |
| | 6,021 |
| | 5,764 |
| | 5,718 |
| | 5,680 |
| | 5,947 |
| | 4,893 |
|
| Total interest income | 152,981 |
| | 140,389 |
| | 127,048 |
| | 124,637 |
| | 114,589 |
| | 118,147 |
| | 118,807 |
| | 127,139 |
|
| Interest Expense | | | | | | | | | | | | | | | |
| Repurchase agreements | 51,955 |
| | 45,907 |
| | 36,072 |
| | 29,947 |
| | 26,048 |
| | 24,892 |
| | 31,260 |
| | 41,800 |
|
| Secured loans | 5,878 |
| | 5,544 |
| | 4,535 |
| | 3,413 |
| | 2,738 |
| | 2,746 |
| | 2,688 |
| | 2,715 |
|
| Exchangeable senior notes | 2,104 |
| | 2,724 |
| | 3,504 |
| | 5,008 |
| | 5,620 |
| | 5,620 |
| | 5,614 |
| | 5,613 |
|
| Total interest expense | 59,937 |
| | 54,175 |
| | 44,111 |
| | 38,368 |
| | 34,406 |
| | 33,258 |
| | 39,562 |
| | 50,128 |
|
| Net interest income | 93,044 |
| | 86,214 |
| | 82,937 |
| | 86,269 |
| | 80,183 |
| | 84,889 |
| | 79,245 |
| | 77,011 |
|
| Other income (loss) | | | | | | | | | | | | | | | |
| Gain (loss) on investments, net | (17,153 | ) | | (11,873 | ) | | 11,175 |
| | (1,853 | ) | | (23,402 | ) | | (7,155 | ) | | 1,414 |
| | 11,601 |
|
| Equity in earnings of unconsolidated ventures | (47 | ) | | 408 |
| | (154 | ) | | (1,534 | ) | | 400 |
| | 729 |
| | 202 |
| | 1,061 |
|
| Gain (loss) on derivative instruments, net | 64,251 |
| | 1,955 |
| | (53,513 | ) | | 5,462 |
| | 230,713 |
| | 35,378 |
| | (90,363 | ) | | (238,543 | ) |
| Realized and unrealized credit derivative income (loss), net | 13,220 |
| | (2,930 | ) | | 21,403 |
| | 19,955 |
| | 3,579 |
| | 31,926 |
| | 17,228 |
| | 8,410 |
|
| Net loss on extinguishment of debt | (233 | ) | | (1,344 | ) | | (526 | ) | | (4,711 | ) | | — |
| | — |
| | — |
| | — |
|
| Other investment income (loss), net | 1,206 |
| | 2,313 |
| | 2,533 |
| | 1,329 |
| | (1,385 | ) | | (554 | ) | | (2,745 | ) | | (318 | ) |
| Total other income (loss) | 61,244 |
| | (11,471 | ) | | (19,082 | ) | | 18,648 |
| | 209,905 |
| | 60,324 |
| | (74,264 | ) | | (217,789 | ) |
| Expenses | 11,972 |
| | 11,254 |
| | 10,635 |
| | 10,885 |
| | 10,745 |
| | 8,555 |
| | 10,957 |
| | 11,549 |
|
| Net income (loss) | 142,316 |
| | 63,489 |
| | 53,220 |
| | 94,032 |
| | 279,343 |
| | 136,658 |
| | (5,976 | ) | | (152,327 | ) |
| Net income (loss) attributable to non-controlling interest | 1,794 |
| | 800 |
| | 670 |
| | 1,186 |
| | 3,522 |
| | 1,723 |
| | (75 | ) | | (1,883 | ) |
| Net income (loss) attributable to Invesco Mortgage Capital Inc. | 140,522 |
| | 62,689 |
| | 52,550 |
| | 92,846 |
| | 275,821 |
| | 134,935 |
| | (5,901 | ) | | (150,444 | ) |
| Dividends to preferred stockholders | 3,086 |
| | 13,562 |
| | 5,716 |
| | 5,716 |
| | 5,716 |
| | 5,716 |
| | 5,716 |
| | 5,716 |
|
| Net income (loss) attributable to common stockholders | 137,436 |
| | 49,127 |
| | 46,834 |
| | 87,130 |
| | 270,105 |
| | 129,219 |
| | (11,617 | ) | | (156,160 | ) |
| Earnings (loss) per share: | | | | | | | | | | | | | | | |
| Net income (loss) attributable to common stockholders | | | | | | | | | | | | | | | |
| Basic | 1.23 |
| | 0.44 |
| | 0.42 |
| | 0.78 |
| | 2.42 |
| | 1.16 |
| | (0.10 | ) | | (1.38 | ) |
| Diluted | 1.18 |
| | 0.43 |
| | 0.41 |
| | 0.73 |
| | 2.15 |
| | 1.05 |
| | (0.10 | ) | | (1.38 | ) |
Note 1815 – Subsequent Events
Dividends
We have reviewed subsequent events occurring throughdeclared the date that these consolidated financial statements were issued,following dividends on February17, 2023: a Series B Preferred Stock dividend of $0.4844 per share payable on March 27, 2023 to our stockholders of record as of March 5, 2023, and determined that no subsequent events occurred that would require accrual or additional disclosure.a Series C Preferred Stock dividend of $0.46875 per share payable on March 27, 2023 to our stockholders of record on March 5, 2023.
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
Schedule IV
Mortgage Loans on Real Estate
As of December 31, 20172022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Reconciliation of Carrying Value of Mortgage Loans on Real Estate: | | | | | | | | | | |
| | | | | | | | | | | | | | 2022 | | 2021 | | 2020 |
| Beginning balance | | | | | | | | | | | | 23,515 | | | 23,098 | | | 24,055 | |
| Additions: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Unrealized gain | | | | | | | | | | | | 404 | | | 417 | | | — | |
| | | | | | | | |
| Deductions: | | | | | | | | | | | | | | | | | | |
| Collection of principal | | | | | | | | | | | | 23,919 | | | — | | | 136 | |
| | | | | | | | | | | | | | |
| Unrealized loss | | | | | | | | | | | | — | | | — | | | 821 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Ending balance | | | | | | | | | | | | | | — | | | 23,515 | | | 23,098 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| $ in thousands | | | | | | | | | | | | | | | | | | |
| Asset Type | | Property Type | | Location | | Interest Rate | | Maturity Date (1) | | Periodic Payment Terms(2) | | Prior Liens | | Face Amount of Mortgages | | Carrying Amount of Mortgages | | Principal Amount of Loans Subject to Delinquent Principal or Interest |
| Mezzanine Loan | | Hotel | | FL | | L+7.23% |
| | 7/1/2018 | | I | | — |
| | 21,000 |
| | 20,990 |
| | — |
|
| Mezzanine Loan | | Office | | AZ | | L+6.96% |
| | 8/1/2018 | | I | | — |
| | 33,647 |
| | 33,628 |
| | — |
|
| Mezzanine Loan | | Hotel | | International | | 7.50 | % | | 12/1/2018 | | I | | — |
| | 46,668 |
| | 46,621 |
| | — |
|
| Mezzanine Loan | | Retail/Mixed Use | | FL | | L+7.25% |
| | 2/1/2020 | | I | | — |
| | 28,000 |
| | 28,000 |
| | — |
|
| Mezzanine Loan | | Hotel | | TX | | L+8.50% |
| | 2/28/2021 | | I | | — |
| | 25,000 |
| | 25,000 |
| | — |
|
| Mezzanine Loan | | Multifamily | | FL | | L+7.50% |
| | 2/7/2018 | | I | | — |
| | 10,000 |
| | 9,994 |
| | — |
|
| Mezzanine Loan | | Multifamily | | TX | | L+7.50% |
| | 2/7/2018 | | I | | — |
| | 7,000 |
| | 6,996 |
| | — |
|
| Mezzanine Loan | | Office | | CA | | L+7.65% |
| | 3/31/2019 | | I | | — |
| | 20,579 |
| | 20,579 |
| | — |
|
| | | | | | | | | | | | | | | 191,894 |
| | 191,808 |
| (3) | — |
|
| | | | | | | | | | | | | | | | | | | |
| (1) Based on the contractual maturity date. Certain loans may contain either an option to repay or an option to extend beyond their contractual maturity dates as specified in the respective loan agreements. |
| (2) Interest ("I") only until stated maturity of the loan. |
| (3) The aggregate cost for federal income tax purposes is $191.8 million. | | | | | | | | | | |
| | | | | | | | | | | |
| Reconciliation of Carrying Value of Mortgage Loans on Real Estate: | | | | | | | | | | |
| | | | | | | | | | | | | | | 2017 | | 2016 | | 2015 |
| Beginning balance | | | | | | | | | | | | 273,355 |
| | 209,062 |
| | 3,510,759 |
|
| Additions: | | | | | | | | | | | | | | | | | | |
| Originations and purchases of new loans | | | | | | | | 4,799 |
| | 87,474 |
| | 530,399 |
|
| Premium (discount) on new loans | | | | | | | | | | — |
| | (272 | ) | | (131 | ) |
| Amortization of commercial loan origination fees and premium (discount) | | | | 337 |
| | 302 |
| | (6,204 | ) |
| Deductions: | | | | | | | | | | | | | | | | | | |
| Collection of principal | | | | | | | | | | | | 90,713 |
| | 15,000 |
| | 642,361 |
|
| Reduction in provision for loan losses | | | | | | | | | | — |
| | — |
| | (213 | ) |
| Loss on foreign currency revaluation | | | | | | | | | | (4,030 | ) | | 8,211 |
| | 1,951 |
|
| Deconsolidation of VIEs | | | | | | | | | | | | — |
| | — |
| | 3,181,662 |
|
| Ending balance | | | | | | | | | | | | | | 191,808 |
| | 273,355 |
| | 209,062 |
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| | Invesco Mortgage Capital Inc. |
| | |
| By: | Invesco Mortgage Capital Inc. |
| | |
| By: | /s/ John M. Anzalone |
| | John M. Anzalone
Chief Executive Officer
|
| Date: | February 20, 201821, 2023 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this reportReport has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | | | | |
| Signatures | | Title | | Date |
| | | | | |
| By: | /s/ John M. Anzalone | | Chief Executive Officer | | February 21, 2023 |
| John M. Anzalone | | (principal executive officer) | | |
| | | | | |
| By: | Signatures | | Title | | Date |
| | | | | |
By: | /s/ John M. Anzalone | | Chief Executive Officer | | February 20, 2018 |
| John M. Anzalone | | (principal executive officer) | | |
| | | | | |
By: | /s/ R. Lee Phegley, Jr. | | Chief Financial Officer | | February 20, 201821, 2023 |
| R. Lee Phegley, Jr. | | (principal financial andofficer) | | |
| | | | | |
| By: | /s/ Roseann M. Perlis | | Chief Accounting Officer | | February 21, 2023 |
| Roseann M. Perlis | | (principal accounting officer) | | |
| | | | | |
| By: | /s/ John S. Day | | Director | | February 20, 201821, 2023 |
| John S. Day | | | | |
| | | | | |
| By: | /s/ Carolyn B. Handlon | | Director | | February 20, 201821, 2023 |
| Carolyn B. Handlon | | | | |
| | | | | |
| By: | /s/ Edward J. Hardin | | Director | | February 20, 201821, 2023 |
| Edward J. Hardin | | | | |
| | | | | |
| By: | /s/ James R. Lientz, Jr. | | Director | | February 20, 201821, 2023 |
| James R. Lientz, Jr. | | | | |
| | | | | |
By: | /s/ Dennis P. Lockhart | | Director | | February 20, 2018 |
| Dennis P. Lockhart | | | | |
| | | | | |
By: | /s/ Gregory G. McGreevey | | Director | | February 20, 2018 |
| Gregory G. McGreevey | | | | |
| | | | | |
By: | /s/ Colin D. Meadows | | Director | | February 20, 2018 |
| Colin D. Meadows | | | | |
|
| | | | | |
| By: | 124/s/ Don H. Liu | | Director | | February 21, 2023 |
| Don H. Liu | | | | |
| | | | | |
| By: | /s/ Dennis P. Lockhart | | Director | | February 21, 2023 |
| Dennis P. Lockhart | | | | |
| | | | | |
| By: | /s/ Gregory G. McGreevey | | Director | | February 21, 2023 |
| Gregory G. McGreevey | | | | |
| | | | | |
| By: | /s/ Beth A. Zayicek | | Director | | February 21, 2023 |
| Beth A. Zayicek | | | | |
