NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements of MTGE Investment Corp. (referred to throughout this report as the “Company”, “we”, “us” and “our”) are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Our unaudited interim consolidated financial statements include the accounts of all of our subsidiaries. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
Note 2. Organization
We were incorporated in Maryland and commenced operations in 2011 following the completion of our initial public offering (“IPO”). We are externally managed by MTGE Management, LLC (our “Manager”), an affiliate of AGNC Investment Corp. (“AGNC”). Our common stock is traded on the Nasdaq Global Select Market under the symbol “MTGE.”
We invest in, finance and manage a leveraged portfolio of real estate-related investments, which include agency residential mortgage-backed securities (“agency RMBS”), non-agency securities, other mortgage-related investments and other real estate investments. Agency RMBS include residential mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”) structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored enterprise (“GSE”), such as Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as Government National Mortgage Association (“Ginnie Mae”). Non-agency securities include securities backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency and credit risk transfer securities (“CRT”). Other mortgage-related investments may include mortgage servicing rights (“MSR”), commercial mortgage-backed securities (“CMBS”), prime and non-prime residential mortgage loans, commercial mortgage loans and mortgage-related derivatives. Other real estate investments include equity investments in healthcare and senior living facilities that are leased to or operated by third parties who conduct all business operations of the facilities.
Our objective is to provide attractive risk-adjusted returns to our stockholders through a combination of dividends and net asset value appreciation. In pursuing this objective, we rely on our Manager’s expertise to construct and manage a diversified investment portfolio by selecting assets that, when properly financed and hedged, are expected to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, we are required to distribute annually at least 90% of our taxable income. As a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable income to the extent that we distribute all of our annual taxable income to our stockholders. It is our intention to distribute 100% of our taxable income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
Note 3. Summary of Significant Accounting Policies
Fair Value of Financial Assets
We have elected the option to account for all of our financial assets, including all mortgage-related investments, at estimated fair value, with changes in fair value reflected in income during the period in which they occur. In management's view, this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of hedging instruments. See Note 10 - Fair Value Measurements.
Interest Income
Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums or discounts associated with the purchase of agency RMBS and non-agency securities of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method.
We estimate long-term prepayment speeds using a third-party service and market data. Actual and anticipated prepayment experience is reviewed at least quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts received plus currently anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.
At the time we purchase non-agency securities that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on inputs and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.
Real Property Owned
Tangible assets primarily consist of land, buildings and furniture, fixtures and equipment. Depreciable tangible assets are depreciated on a straight-line basis over their estimated useful lives, which can range from 3 years for furniture, fixtures and equipment to 40 years for buildings.
On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which provides a framework to determine whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the transaction should not be considered a business combination. The ASU also clarifies the requirements for a set of activities to be considered a business and narrows the definition of outputs that would lead to business combination accounting treatment. As a result of these changes, the Company expects that a majority of its future real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. For asset acquisitions subsequent to January 1, 2017, the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis, with no goodwill recognized and third-party transaction costs capitalized.
The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that depreciable lives may need to be changed. We consider external factors relating to each asset and the existence of a master lease that may link the cash flows of an individual asset to a larger portfolio of assets leased to the same tenant. If these factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value is reduced to the estimated fair market value. In addition, we are exposed to the risks inherent in investments in real estate and, in particular, the senior housing and healthcare industries. A downturn in these industries or in the real estate markets in which our properties are located could adversely affect the value of our properties and our ability to sell properties for a price or terms acceptable to us.
Intangible Assets
Intangible assets can include goodwill and identifiable intangible assets such as above or below market component of in-place leases and the value associated with the presence of in-place tenants or residents. Goodwill is calculated as the excess of consideration transferred over the estimated fair value of net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill and intangible assets are included in other assets on the consolidated balance sheets and tested for impairment annually or more frequently if events and circumstances indicate that the asset might be impaired.
Healthcare Real Estate Income
Healthcare real estate income consists primarily of lease and rental income. For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight line basis over the lease term when collectability is reasonably assured. Recognizing lease income on a straight line basis results in a difference in the timing of revenue amounts from what is contractually due. If the Company determines that collectability of straight line lease income is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established.
Resident rental income is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care-related services is recognized as the services are provided.
Noncontrolling Interests
Arrangements with noncontrolling interest holders are reported as a component of equity separate from the Company’s stockholders' equity, recorded at the initial carrying amount, and increased or decreased for the noncontrolling interest’s share of net income or loss. Net income attributable to a noncontrolling interest is included in net income on the consolidated statements of operations.
Deferred Loan Expenses
We amortize deferred financing costs, which are reported within notes payable, net of deferred financing costs on our consolidated balance sheets, as a component of interest expense of the debt over the terms of the related borrowings using a method that approximates a level yield.
Repurchase Agreements
We finance the acquisition of agency RMBS and non-agency securities through repurchase transactions under master repurchase agreements. We account for repurchase transactions as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. The contractual amounts approximate fair value due to their short-term maturities or floating rate coupons.
Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements
We borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see
Derivatives
below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. The fair value of our reverse repurchase agreements is assumed to equal cost as they generally mature daily or have interest rates that are reset daily.
Derivatives
We utilize a risk management strategy, under which we may use a variety of derivative instruments to mitigate our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. The objective of our risk management strategy is to reduce fluctuations in net asset value over a range of market conditions. The principal instruments that we currently use are interest rate swaps and options to enter into interest rate swaps (“interest rate swaptions”). We also utilize forward contracts for the purchase or sale of agency RMBS, or to-be-announced forward (“TBA”) contracts, and short sales of U.S. Treasury securities and U.S. Treasury futures contracts. We may also purchase or sell options on TBA securities and utilize other types of derivative instruments.
We also enter into TBA contracts as a means of investing in and financing agency RMBS (thereby increasing our “at
risk” leverage) or as a means of disposing of or reducing our exposure to agency RMBS (thereby reducing our “at risk” leverage). Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, agency RMBS with certain principal and interest terms and certain types of collateral, but the particular agency RMBS to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a “dollar roll.” The agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to agency RMBS for settlement in the current month. This difference (or discount) is referred to as the “price drop.” The price drop is the economic equivalent of net interest carry income on the underlying agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as “dollar roll income (loss).” Consequently, forward purchases of agency RMBS and dollar roll transactions represent a form of off-balance sheet financing.
We present all derivative instruments as either assets or liabilities at fair value on our consolidated balance sheets and report all changes in fair value in earnings in our consolidated statements of operations in unrealized gain (loss) on other derivatives and securities, net during the period in which they occur. Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with each counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets.
The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized in the event counterparties to these instruments fail to perform their obligations under the contracts. Our derivative agreements require that we post or receive collateral based on daily market value changes. We also attempt to minimize our risk of loss by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.
Interest rate swap agreements
We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement and other financing facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR (“payer swaps”) with terms up to 15 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over-the-counter (“OTC”) market. Swap agreements entered into subsequent to May 2013 are centrally cleared through the Chicago Mercantile Exchange (“CME”), a registered commodities exchange.
We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references observable market inputs, including LIBOR, swap rates and the forward yield curve, to produce the daily settlement price.
Our centrally cleared swaps require that we post an “initial margin” to our counterparties for an amount determined by the CME, which is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. We also exchange cash “variation margin” with our counterparties on our centrally cleared swaps based upon daily changes in the fair value as measured by the CME. Beginning in the first quarter of 2017, as a result of a CME amendment to its rule book governing central clearing activities, the daily exchange of variation margin associated with a CME centrally cleared derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, beginning in 2017, we account for the daily receipt or payment of variation margin associated with our centrally cleared interest rate swaps as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. Beginning in 2017, the carrying amount of centrally cleared interest rate swaps reflected in our consolidated balance sheets is equal to the unsettled fair value of such instruments.
We estimate the fair value of our “non-centrally cleared” interest rate swaps based on valuations obtained from third-party pricing services and the swap counterparty (collectively, “third-party valuations”). The third-party valuations are model-driven using observable inputs, including LIBOR, swap rates and the forward yield curve. We also consider the creditworthiness of both us and our counterparties and the impact of netting and credit enhancement provisions contained in each derivative
agreement, such as collateral postings. All of our “non-centrally cleared” interest rate swaps are subject to bilateral collateral arrangements. Consequently, no credit valuation adjustment was made in determining the fair value of such instruments.
The payment of periodic settlements of net interest on interest rate swaps is reported in realized loss on periodic settlements of interest rate swaps, net in our consolidated statements of operations. Cash payments received or paid for the early termination of an interest rate swap agreement are recorded as realized loss on other derivatives and securities, net in our consolidated statements of operations. Changes in fair value of our interest rate swap agreements are reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
Interest rate swaptions
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates
on the performance of our investment portfolio. The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay or receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. The difference between the premium and the fair value of the swaption is reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid and reported in realized loss on other derivatives and securities, net in our consolidated statements of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
Interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of our interest rate swaption agreements based on model-driven valuations obtained from third-party
pricing services and the swaption counterparty. These estimates incorporate observable inputs and include the fair value of the future interest rate swaps that we have the option to enter into, as well as the remaining length of time that we have to exercise the options, adjusted for non-performance risk, if any.
TBA securities
TBA securities are forward contracts for the purchase (“long position”) or sale (“short position”) of agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency RMBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA dollar roll transactions to finance agency RMBS purchases.
We account for all TBA contracts as derivatives since we cannot assert that it is probable at the inception and throughout the term of the contract that it will not settle net and will result in physical delivery of an agency security when it is issued. A TBA dollar roll transaction is a series of derivative transactions. The net settlement of a TBA contract is reported as realized gain (loss) on other derivatives and securities, net and changes in the fair value of our TBA contracts are reported as unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
We estimate the fair value of TBA securities based on similar methods used to value our agency RMBS.
U.S. Treasury securities
We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. Realized gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in realized gain (loss) on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.
Adoption of Accounting Standard Updates
As of January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers (Topic 606),
and ASU 2016-18
, Statement of Cash Flows (Topic 230) - Restricted Cash.
Net income was not impacted. The adoption of ASU 2016-18 resulted in the presentation of restricted cash with cash and cash equivalents on the consolidated statements of cash flows when reconciling the total beginning and ending amounts. Our prior period results have been revised to conform to the current presentation.
Note 4. Agency Securities
The following tables summarize our investments in agency RMBS as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Agency RMBS:
|
|
|
|
|
|
Par value
|
$
|
2,285,555
|
|
|
$
|
1,189,667
|
|
|
$
|
3,475,222
|
|
Unamortized premium
|
113,789
|
|
|
62,678
|
|
|
176,467
|
|
Amortized cost
|
2,399,344
|
|
|
1,252,345
|
|
|
3,651,689
|
|
Gross unrealized gains
|
139
|
|
|
60
|
|
|
199
|
|
Gross unrealized losses
|
(87,953
|
)
|
|
(44,655
|
)
|
|
(132,608
|
)
|
Agency RMBS, at fair value
|
$
|
2,311,530
|
|
|
$
|
1,207,750
|
|
|
$
|
3,519,280
|
|
|
|
|
|
|
|
Weighted average coupon as of June 30, 2018
|
3.61
|
%
|
|
3.73
|
%
|
|
3.66
|
%
|
Weighted average yield as of June 30, 2018
|
2.84
|
%
|
|
2.99
|
%
|
|
2.89
|
%
|
Weighted average yield for the three months ended June 30, 2018
|
2.87
|
%
|
|
2.99
|
%
|
|
2.91
|
%
|
Weighted average yield for the six months ended June 30, 2018
|
2.91
|
%
|
|
3.06
|
%
|
|
2.96
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Agency RMBS:
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
3,581,562
|
|
|
$
|
38
|
|
|
$
|
(132,483
|
)
|
|
$
|
3,449,117
|
|
Adjustable rate
|
|
70,127
|
|
|
161
|
|
|
(125
|
)
|
|
70,163
|
|
Total Agency RMBS
|
|
$
|
3,651,689
|
|
|
$
|
199
|
|
|
$
|
(132,608
|
)
|
|
$
|
3,519,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Agency RMBS:
|
|
|
|
|
|
Par value
|
$
|
2,485,055
|
|
|
$
|
1,117,551
|
|
|
$
|
3,602,606
|
|
Unamortized premium
|
127,008
|
|
|
63,466
|
|
|
190,474
|
|
Amortized cost
|
2,612,063
|
|
|
1,181,017
|
|
|
3,793,080
|
|
Gross unrealized gains
|
3,876
|
|
|
1,149
|
|
|
5,025
|
|
Gross unrealized losses
|
(28,364
|
)
|
|
(11,560
|
)
|
|
(39,924
|
)
|
Agency RMBS, at fair value
|
$
|
2,587,575
|
|
|
$
|
1,170,606
|
|
|
$
|
3,758,181
|
|
|
|
|
|
|
|
|
Weighted average coupon as of December 31, 2017
|
3.63
|
%
|
|
3.75
|
%
|
|
3.67
|
%
|
Weighted average yield as of December 31, 2017
|
2.78
|
%
|
|
2.89
|
%
|
|
2.82
|
%
|
Weighted average yield for the year ended December 31, 2017
|
2.67
|
%
|
|
2.69
|
%
|
|
2.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Agency RMBS:
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
3,717,285
|
|
|
$
|
3,707
|
|
|
$
|
(39,924
|
)
|
|
$
|
3,681,068
|
|
Adjustable rate
|
|
75,795
|
|
|
1,318
|
|
|
—
|
|
|
77,113
|
|
Total Agency RMBS
|
|
$
|
3,793,080
|
|
|
$
|
5,025
|
|
|
$
|
(39,924
|
)
|
|
$
|
3,758,181
|
|
Actual maturities of agency RMBS are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments.
The following table summarizes our agency RMBS as of
June 30, 2018 and December 31, 2017
according to their estimated weighted average life classification (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
Estimated Weighted
Average Life
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Yield
|
|
Coupon
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Yield
|
|
Coupon
|
Less than or equal to three years
|
|
$
|
55,745
|
|
|
$
|
57,037
|
|
|
2.16
|
%
|
|
3.93
|
%
|
|
$
|
40,404
|
|
|
$
|
40,815
|
|
|
2.06
|
%
|
|
3.92
|
%
|
Greater than three years and less than or equal to five years
|
|
417,277
|
|
|
426,694
|
|
|
2.39
|
%
|
|
3.10
|
%
|
|
534,299
|
|
|
535,608
|
|
|
2.38
|
%
|
|
3.19
|
%
|
Greater than five years and less than or equal to 10 years
|
|
2,577,463
|
|
|
2,683,748
|
|
|
2.93
|
%
|
|
3.74
|
%
|
|
3,149,565
|
|
|
3,182,468
|
|
|
2.90
|
%
|
|
3.75
|
%
|
Greater than 10 years
|
|
468,795
|
|
|
484,210
|
|
|
3.19
|
%
|
|
3.69
|
%
|
|
33,913
|
|
|
34,189
|
|
|
2.98
|
%
|
|
3.50
|
%
|
Total
|
|
$
|
3,519,280
|
|
|
$
|
3,651,689
|
|
|
2.89
|
%
|
|
3.66
|
%
|
|
$
|
3,758,181
|
|
|
$
|
3,793,080
|
|
|
2.82
|
%
|
|
3.67
|
%
|
As of
June 30, 2018 and December 31, 2017
, the estimated weighted average life of our agency security portfolio was
8.2 years
and
7.5 years
, respectively, which incorporates anticipated future prepayment assumptions. As of
June 30, 2018 and December 31, 2017
, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was
7.2%
and
8.4%
, respectively.
Realized Gains and Losses
The following table summarizes our net realized losses from the sale of agency RMBS during
the three and six months ended June 30, 2018 and 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Proceeds from agency securities sold
|
|
$
|
31,206
|
|
|
$
|
101,270
|
|
|
$
|
251,641
|
|
|
$
|
309,727
|
|
Less agency securities sold, at cost
|
|
(31,672
|
)
|
|
(101,759
|
)
|
|
(254,047
|
)
|
|
(310,428
|
)
|
Realized loss on agency securities, net
|
|
$
|
(466
|
)
|
|
$
|
(489
|
)
|
|
$
|
(2,406
|
)
|
|
$
|
(701
|
)
|
|
|
|
|
|
|
|
|
|
Gross realized gains on sale of agency securities
|
|
$
|
—
|
|
|
$
|
494
|
|
|
$
|
14
|
|
|
$
|
1,764
|
|
Gross realized losses on sale of agency securities
|
|
(466
|
)
|
|
(983
|
)
|
|
(2,420
|
)
|
|
(2,465
|
)
|
Realized loss on agency securities, net
|
|
$
|
(466
|
)
|
|
$
|
(489
|
)
|
|
$
|
(2,406
|
)
|
|
$
|
(701
|
)
|
Pledged Assets
The following tables summarize our agency RMBS pledged as collateral under financing and derivative agreements by type as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Fair Value of Agency Securities Pledged Under:
|
|
|
|
|
|
|
Financing agreements
|
|
$
|
2,197,052
|
|
|
$
|
1,116,237
|
|
|
$
|
3,313,289
|
|
Derivative agreements
|
|
77
|
|
|
452
|
|
|
529
|
|
Total fair value
|
|
2,197,129
|
|
|
1,116,689
|
|
|
3,313,818
|
|
Accrued interest on pledged agency RMBS
|
|
6,570
|
|
|
3,422
|
|
|
9,992
|
|
Total Fair Value of Agency RMBS Pledged and Accrued Interest
|
|
$
|
2,203,699
|
|
|
$
|
1,120,111
|
|
|
$
|
3,323,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Fair Value of Agency Securities Pledged Under:
|
|
|
|
|
|
|
Financing agreements
|
|
$
|
2,443,591
|
|
|
$
|
1,137,587
|
|
|
$
|
3,581,178
|
|
Derivative agreements
|
|
84
|
|
|
606
|
|
|
690
|
|
Total fair value
|
|
2,443,675
|
|
|
1,138,193
|
|
|
3,581,868
|
|
Accrued interest on pledged agency RMBS
|
|
7,132
|
|
|
3,399
|
|
|
10,531
|
|
Total Fair Value of Agency RMBS Pledged and Accrued Interest
|
|
$
|
2,450,807
|
|
|
$
|
1,141,592
|
|
|
$
|
3,592,399
|
|
The following table summarizes our agency RMBS pledged as collateral under financings agreements, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Remaining Maturity
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
30 days or less
|
|
$
|
1,059,318
|
|
|
$
|
1,096,281
|
|
|
$
|
3,203
|
|
|
$
|
940,788
|
|
|
$
|
949,282
|
|
|
$
|
2,765
|
|
31 - 59 days
|
|
981,288
|
|
|
1,021,998
|
|
|
2,958
|
|
|
1,298,331
|
|
|
1,311,882
|
|
|
3,818
|
|
60 - 90 days
|
|
814,914
|
|
|
844,346
|
|
|
2,473
|
|
|
261,823
|
|
|
262,908
|
|
|
785
|
|
Greater than 90 days
|
|
457,769
|
|
|
476,444
|
|
|
1,358
|
|
|
1,080,236
|
|
|
1,091,195
|
|
|
3,161
|
|
Total
|
|
$
|
3,313,289
|
|
|
$
|
3,439,069
|
|
|
$
|
9,992
|
|
|
$
|
3,581,178
|
|
|
$
|
3,615,267
|
|
|
$
|
10,529
|
|
As of
June 30, 2018 and December 31, 2017
, none of our repurchase agreement borrowings backed by agency RMBS had original overnight maturities.
Note 5. Non-Agency Securities
The following tables summarize our non-agency securities as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Fair
Value
|
|
Gross Unrealized
|
|
Amortized Cost
|
|
Premium (Discount)
|
|
Par/ Current Face
|
|
Weighted Average
|
Category
|
|
|
Gains
|
|
Losses
|
|
|
|
|
Coupon
(1)
|
|
Yield
|
Prime
|
|
$
|
117,059
|
|
|
$
|
8,487
|
|
|
$
|
(169
|
)
|
|
$
|
108,741
|
|
|
$
|
(11,683
|
)
|
|
$
|
120,424
|
|
|
3.94
|
%
|
|
6.07
|
%
|
CRT
|
|
267,402
|
|
|
15,137
|
|
|
(225
|
)
|
|
252,490
|
|
|
10,614
|
|
|
241,876
|
|
|
5.66
|
%
|
|
5.90
|
%
|
Alt-A
|
|
243,683
|
|
|
46,950
|
|
|
(578
|
)
|
|
197,311
|
|
|
(103,153
|
)
|
|
300,464
|
|
|
3.20
|
%
|
|
9.71
|
%
|
Option-ARM
|
|
82,061
|
|
|
12,810
|
|
|
—
|
|
|
69,251
|
|
|
(19,613
|
)
|
|
88,864
|
|
|
2.34
|
%
|
|
6.98
|
%
|
Subprime
|
|
13,309
|
|
|
826
|
|
|
—
|
|
|
12,483
|
|
|
(645
|
)
|
|
13,128
|
|
|
5.20
|
%
|
|
5.93
|
%
|
CMBS
|
|
16,446
|
|
|
141
|
|
|
(41
|
)
|
|
16,346
|
|
|
(139
|
)
|
|
16,485
|
|
|
5.68
|
%
|
|
6.09
|
%
|
Total
|
|
$
|
739,960
|
|
|
$
|
84,351
|
|
|
$
|
(1,013
|
)
|
|
$
|
656,622
|
|
|
$
|
(124,619
|
)
|
|
$
|
781,241
|
|
|
4.09
|
%
|
|
7.19
|
%
|
————————
|
|
(1)
|
Coupon rates are floating, except for
$11.0 million
,
$5.6 million
,
$11.8 million
,
$13.3 million
and
$16.4 million
fair value of fixed-rate prime, CRT, Alt-A, subprime and CMBS non-agency securities, respectively, as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Fair
Value
|
|
Gross Unrealized
|
|
Amortized Cost
|
|
Premium (Discount)
|
|
Par/ Current Face
|
|
Weighted Average
|
Category
|
|
|
Gains
|
|
Losses
|
|
|
|
|
Coupon
(1)
|
|
Yield
|
Prime
|
|
$
|
143,329
|
|
|
$
|
9,342
|
|
|
$
|
(12
|
)
|
|
$
|
133,999
|
|
|
$
|
(13,893
|
)
|
|
$
|
147,892
|
|
|
3.77
|
%
|
|
5.66
|
%
|
CRT
|
|
322,819
|
|
|
18,346
|
|
|
—
|
|
|
304,473
|
|
|
16,011
|
|
|
288,462
|
|
|
5.34
|
%
|
|
5.23
|
%
|
Alt-A
|
|
286,953
|
|
|
51,123
|
|
|
(774
|
)
|
|
236,604
|
|
|
(112,305
|
)
|
|
348,909
|
|
|
2.69
|
%
|
|
8.93
|
%
|
Option-ARM
|
|
86,886
|
|
|
13,114
|
|
|
—
|
|
|
73,772
|
|
|
(21,044
|
)
|
|
94,816
|
|
|
1.79
|
%
|
|
6.58
|
%
|
Subprime
|
|
13,374
|
|
|
929
|
|
|
—
|
|
|
12,445
|
|
|
(683
|
)
|
|
13,128
|
|
|
5.20
|
%
|
|
5.97
|
%
|
CMBS
|
|
18,723
|
|
|
387
|
|
|
—
|
|
|
18,336
|
|
|
(164
|
)
|
|
18,500
|
|
|
5.68
|
%
|
|
6.03
|
%
|
Total
|
|
$
|
872,084
|
|
|
$
|
93,241
|
|
|
$
|
(786
|
)
|
|
$
|
779,629
|
|
|
$
|
(132,078
|
)
|
|
$
|
911,707
|
|
|
3.73
|
%
|
|
6.59
|
%
|
————————
|
|
(1)
|
Coupon rates are floating, except for
$11.8 million
,
$0.9 million
,
$12.2 million
,
$13.4 million
and
$18.7 million
fair value of fixed-rate prime, CRT, Alt-A, subprime and CMBS non-agency securities, respectively, as of
December 31, 2017
.
|
The following table summarizes our non-agency securities at fair value, by their estimated weighted average life classifications as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
Estimated Weighted
Average Life
|
|
Fair Value
|
|
Amortized
Cost
|
|
Coupon
|
|
Yield
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Coupon
|
|
Yield
|
≤ 5 years
|
|
$
|
224,275
|
|
|
$
|
189,555
|
|
|
3.68
|
%
|
|
9.01
|
%
|
|
$
|
302,797
|
|
|
$
|
258,501
|
|
|
3.11
|
%
|
|
8.31
|
%
|
> 5 to ≤ 7 years
|
|
304,848
|
|
|
266,186
|
|
|
4.35
|
%
|
|
7.28
|
%
|
|
398,712
|
|
|
361,649
|
|
|
4.33
|
%
|
|
5.97
|
%
|
> 7 years
|
|
210,837
|
|
|
200,881
|
|
|
4.21
|
%
|
|
5.37
|
%
|
|
170,575
|
|
|
159,479
|
|
|
3.61
|
%
|
|
5.18
|
%
|
Total
|
|
$
|
739,960
|
|
|
$
|
656,622
|
|
|
4.09
|
%
|
|
7.19
|
%
|
|
$
|
872,084
|
|
|
$
|
779,629
|
|
|
3.73
|
%
|
|
6.59
|
%
|
Our Prime non-agency securities include investments in securitization trusts collateralized by prime mortgage loans, which were originated between 2002 and 2006, a period of generally weaker underwriting standards and elevated housing prices. As a result, there is still material credit risk embedded in these loan origination vintages. As of
June 30, 2018
, Prime non-agency securities also include
$16.7
million in fair value of securities with underlying mortgage loans that were originated with more stringent underwriting standards beginning in 2010. As of
June 30, 2018
, our Prime securities have both fixed and floating rate coupons ranging from
2.7%
to
6.5%
, with weighted average coupons of underlying collateral ranging from
3.5%
to
5.0%
.
Our CRT reference the performance of loans underlying agency RMBS issued by Fannie Mae or Freddie Mac, which were subject to their underwriting standards. As of
June 30, 2018
, our CRT securities had fixed and floating rate coupons ranging from
1.3%
to
9.0%
, with weighted average coupons of underlying collateral ranging from
3.7%
to
4.3%
. The loans underlying our CRT securities were originated between 2012 and 2018.
Our Alt-A non-agency RMBS are collateralized by Alt-A mortgage loans that were originated from 2002 to 2007. Alt-A, or alternative A-paper, mortgage loans are considered to have more credit risk than prime mortgage loans and less credit risk than sub-prime mortgage loans. Alt-A loans are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. As of
June 30, 2018
, our Alt-A securities had both fixed and floating rate coupons ranging from
2.2%
to
6.5%
with weighted average coupons of underlying collateral ranging from
3.7%
to
5.7%
.
Our Option-ARM non-agency RMBS include senior tranches in securitization trusts that are collateralized by residential mortgages that have origination and underwriting characteristics similar to Alt-A mortgage loans, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. As of
June 30, 2018
, our Option-ARM securities had coupons ranging from
2.2%
to
2.8%
and have underlying collateral with weighted average coupons between
3.6%
and
4.6%
. The loans underlying our Option-ARM securities were originated between 2001 and 2007.
Our Subprime non-agency RMBS include investments in securitization trusts collateralized by residential mortgages originated during or before 2005 that were originally considered to be of lower credit quality. As of
June 30, 2018
, our Subprime securities had a fair value of
$13.3 million
with fixed and floating rate coupons ranging from
5.0%
to
5.5%
and have underlying collateral with weighted-average coupons ranging from
5.5%
to
5.7%
.
Our CMBS are collateralized by a commercial mortgage loan originated in 2016 that is secured by first priority liens on 64 skilled nursing facilities. As of
June 30, 2018
, our CMBS securities had a fair market value of
$16.4 million
with fixed rate coupons ranging from
5.2%
to
6.6%
and underlying collateral with a weighted average coupon of
4.5%
.
More than
85%
of our non-agency RMBS are rated below investment grade or have not been rated by credit agencies as of
June 30, 2018
.
Realized Gains and Losses
The following table summarizes our net realized gains from the sale of non-agency securities during
the three and six months ended June 30, 2018 and 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Proceeds from non-agency securities sold
|
|
$
|
85,594
|
|
|
$
|
180,394
|
|
|
$
|
175,495
|
|
|
$
|
440,867
|
|
Increase in receivable for securities sold
|
|
—
|
|
|
(629
|
)
|
|
—
|
|
|
5,119
|
|
Less: non-agency securities sold, at cost
|
|
(80,051
|
)
|
|
(165,284
|
)
|
|
(165,798
|
)
|
|
(418,791
|
)
|
Realized gain on non-agency securities, net
|
|
$
|
5,543
|
|
|
$
|
14,481
|
|
|
$
|
9,697
|
|
|
$
|
27,195
|
|
|
|
|
|
|
|
|
|
|
Gross realized gain on sale of non-agency securities
|
|
$
|
5,543
|
|
|
$
|
14,489
|
|
|
$
|
9,698
|
|
|
$
|
27,353
|
|
Gross realized loss on sale of non-agency securities
|
|
—
|
|
|
(8
|
)
|
|
(1
|
)
|
|
(158
|
)
|
Realized gain on non-agency securities, net
|
|
$
|
5,543
|
|
|
$
|
14,481
|
|
|
$
|
9,697
|
|
|
$
|
27,195
|
|
Pledged Assets
Non-agency securities with a fair value of
$0.7 billion
were pledged as collateral under financing arrangements as of both
June 30, 2018 and December 31, 2017
, none of which had original overnight maturities.
The following table summarizes our non-agency securities pledged as collateral under repurchase agreements, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Remaining Maturity
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
30 days or less
|
|
$
|
609,141
|
|
|
$
|
541,589
|
|
|
$
|
1,031
|
|
|
$
|
585,943
|
|
|
$
|
517,750
|
|
|
$
|
815
|
|
31 - 59 days
|
|
38,581
|
|
|
30,038
|
|
|
59
|
|
|
97,537
|
|
|
82,105
|
|
|
145
|
|
60 - 90 days
|
|
12,232
|
|
|
9,493
|
|
|
15
|
|
|
59,798
|
|
|
58,651
|
|
|
135
|
|
Total
|
|
$
|
659,954
|
|
|
$
|
581,120
|
|
|
$
|
1,105
|
|
|
$
|
743,278
|
|
|
$
|
658,506
|
|
|
$
|
1,095
|
|
Note 6. Investments in Real Property
Investment Activity
The following table summarizes our real estate investments net of accumulated depreciation as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Buildings and improvements
|
|
$
|
258,065
|
|
|
$
|
233,407
|
|
Furniture, fixtures and equipment
|
|
16,284
|
|
|
14,537
|
|
Less: accumulated depreciation
|
|
(11,750
|
)
|
|
(7,592
|
)
|
Buildings, furniture, fixtures and equipment, net of accumulated depreciation
|
|
262,599
|
|
|
240,352
|
|
Land
|
|
17,538
|
|
|
16,641
|
|
Goodwill
|
|
5,840
|
|
|
5,840
|
|
Notes Payable
Our wholly-owned subsidiary, Capital Healthcare Investments, LLC (“CHI”) finances its real estate investments primarily through secured debt. As of
June 30, 2018
, CHI had fixed rate debt with a principal amount of
$179.9 million
, a weighted average maturity of
27.4 years
and an interest rate of
3.91%
and floating rate debt with a principal amount of
$25.8 million
, a weighted average maturity of
1.3 years
and a weighted average interest rate of
5.13%
. As of
December 31, 2017
, CHI had floating rate debt with a principal amount of
$50.3 million
, a weighted average maturity of
0.8 years
and a weighted average interest rate of
4.34%
and fixed rate debt with a principal amount of
$138.8 million
, a weighted average maturity of
25.6 years
and an interest rate of
3.80%
.
The following is a summary of our notes payable activity for
the six months ended June 30, 2018 and 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
186,500
|
|
|
$
|
66,527
|
|
Debt issued and assumed, net of deferred financing costs
|
|
56,874
|
|
|
120,277
|
|
Amortization of deferred financing costs
|
|
113
|
|
|
440
|
|
Principal repayments
|
|
(41,675
|
)
|
|
(320
|
)
|
Ending balance
|
|
$
|
201,812
|
|
|
$
|
186,924
|
|
Our notes payable of
$205.7 million
, excluding
$3.9 million
of deferred financing costs, had a fair value of approximately
$196 million
as of
June 30, 2018
. Our notes payable of
$189.0 million
, excluding
$2.5 million
of deferred financing costs, had a fair value of approximately
$190 million
as of
December 31, 2017
.
Income from Healthcare Real Estate Investments
The following table presents the components of net income from our real property investments during
the three and six months ended June 30, 2018 and 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Lease income
|
|
$
|
5,707
|
|
|
$
|
4,615
|
|
|
$
|
11,413
|
|
|
$
|
6,868
|
|
Rental income
|
|
2,704
|
|
|
1,139
|
|
|
4,758
|
|
|
2,201
|
|
Healthcare real estate income
|
|
8,411
|
|
|
5,754
|
|
|
16,171
|
|
|
9,069
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
2,261
|
|
|
1,887
|
|
|
4,350
|
|
|
3,060
|
|
Depreciation
|
|
2,157
|
|
|
1,526
|
|
|
4,158
|
|
|
2,297
|
|
Tenant expenses
|
|
1,718
|
|
|
848
|
|
|
3,143
|
|
|
1,557
|
|
Other
|
|
435
|
|
|
112
|
|
|
715
|
|
|
112
|
|
Healthcare real estate expense
|
|
6,571
|
|
|
4,373
|
|
|
12,366
|
|
|
7,026
|
|
Net healthcare investment income
|
|
$
|
1,840
|
|
|
$
|
1,381
|
|
|
$
|
3,805
|
|
|
$
|
2,043
|
|
Healthcare lease income is derived from our real property investments subject to triple net lease arrangements, and rental income relates to investments made through RIDEA joint ventures. Under RIDEA, a REIT may lease “qualified healthcare properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” Resident level rents and related operating expenses are subject to federal and state income taxes as the operations of such facilities are included in a TRS.
At
June 30, 2018
, future minimum lease payments receivable related to our healthcare facilities are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
June 30, 2018
|
2018
|
|
$
|
10,215
|
|
2019
|
|
20,764
|
|
2020
|
|
21,191
|
|
2021
|
|
21,627
|
|
2022
|
|
22,073
|
|
Thereafter
|
|
193,233
|
|
Total
|
|
$
|
289,103
|
|
Note 7. Repurchase Agreements
We pledge certain of our securities as collateral under repurchase and other financing arrangements with financial institutions and the terms and conditions are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of
June 30, 2018 and December 31, 2017
, we have met all margin call requirements and had no agency or non-agency repurchase agreements with original overnight maturities. Repurchase agreements are carried at cost, which approximates fair value due to their short-term maturities or floating rate coupons.
As of
June 30, 2018 and December 31, 2017
, our borrowings under repurchase agreements had the following collateral characteristics (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
Collateral Type
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
Agency securities
|
|
$
|
3,053,483
|
|
|
2.10
|
%
|
|
85
|
|
$
|
3,307,662
|
|
|
1.54
|
%
|
|
114
|
Non-agency securities
|
|
504,420
|
|
|
3.15
|
%
|
|
18
|
|
556,057
|
|
|
2.72
|
%
|
|
24
|
U.S. Treasury securities
|
|
2,370
|
|
|
2.10
|
%
|
|
2
|
|
—
|
|
|
N/A
|
|
|
N/A
|
Total repurchase agreements
|
|
$
|
3,560,273
|
|
|
2.25
|
%
|
|
75
|
|
$
|
3,863,719
|
|
|
1.71
|
%
|
|
101
|
The following table summarizes our borrowings under repurchase arrangements as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
≤ 1 month
|
|
$
|
1,470,714
|
|
|
2.43
|
%
|
|
17
|
|
$
|
1,341,712
|
|
|
1.91
|
%
|
|
17
|
> 1 to ≤ 2 months
|
|
953,784
|
|
|
2.10
|
%
|
|
40
|
|
1,334,493
|
|
|
1.55
|
%
|
|
40
|
> 2 to ≤ 3 months
|
|
784,686
|
|
|
1.95
|
%
|
|
76
|
|
295,204
|
|
|
1.76
|
%
|
|
76
|
> 3 to ≤ 6 months
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
334,372
|
|
|
1.51
|
%
|
|
123
|
> 6 to ≤ 12 months
|
|
86,089
|
|
|
2.04
|
%
|
|
210
|
|
292,938
|
|
|
1.57
|
%
|
|
256
|
> 12 months
|
|
265,000
|
|
|
2.79
|
%
|
|
477
|
|
265,000
|
|
|
1.80
|
%
|
|
658
|
Total repurchase agreements
|
|
$
|
3,560,273
|
|
|
2.25
|
%
|
|
75
|
|
$
|
3,863,719
|
|
|
1.71
|
%
|
|
101
|
We had repurchase agreements with
36
financial institutions as of
June 30, 2018
. Less than
4%
of stockholders' equity was at risk due to collateral pledged in excess of borrowings under repurchase agreements with any one counterparty, with the top five counterparties representing approximately
16%
of our stockholders' equity at risk as of
June 30, 2018
.
We had agency RMBS with fair values of
$3.3 billion
and
$3.6 billion
pledged as collateral against repurchase agreements as of
June 30, 2018 and December 31, 2017
, respectively. We had non-agency securities with fair values of
$0.7 billion
pledged as collateral against repurchase agreements as of both
June 30, 2018 and December 31, 2017
.
Note 8. Derivatives and Other Securities
In connection with our risk management strategy, we mitigate our exposure to market risks, including interest rate risk, prepayment risk and credit risk, by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or sell options on TBA securities or we may invest in other types of derivative securities, including synthetic total return swaps and credit default swaps. Our risk management strategy attempts to manage the overall risk of the portfolio and reduce fluctuations in net asset value. Derivatives have not been designated as hedging instruments. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 3.
The table below presents the balance sheet location and fair value information for our derivatives outstanding as of
June 30, 2018 and December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Derivative assets:
|
|
|
|
|
Interest rate swaps
|
|
$
|
8,854
|
|
|
$
|
4,894
|
|
Interest rate swaptions
|
|
14,039
|
|
|
6,728
|
|
TBA securities
|
|
9,823
|
|
|
3,090
|
|
Derivative assets, at fair value
|
|
$
|
32,716
|
|
|
$
|
14,712
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
Interest rate swaps
|
|
23
|
|
|
—
|
|
TBA securities
|
|
—
|
|
|
1,339
|
|
Credit default swaps
|
|
—
|
|
|
3,115
|
|
Derivative liabilities, at fair value
|
|
$
|
23
|
|
|
$
|
4,454
|
|
The following tables summarize the effect of our outstanding derivatives and other securities on our consolidated statements of operations during
the three and six months ended June 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
2018
|
|
2017
|
|
Realized Gain on Periodic Settlements of Interest Rate Swaps, net
|
Realized Gain
on Other Derivatives and Securities, net
|
Unrealized Gain
(Loss) on Other Derivatives and Securities, net
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Gain
on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
Interest rate swaps
|
$
|
4,175
|
|
$
|
11,303
|
|
$
|
1,407
|
|
|
$
|
(2,281
|
)
|
$
|
(11,570
|
)
|
$
|
2,081
|
|
Interest rate swaptions
|
—
|
|
—
|
|
1,219
|
|
|
—
|
|
—
|
|
(135
|
)
|
TBA securities
|
—
|
|
(4,109
|
)
|
113
|
|
|
—
|
|
31,177
|
|
(12,077
|
)
|
Short sales of U.S. Treasuries
|
—
|
|
(370
|
)
|
3,869
|
|
|
—
|
|
(14,425
|
)
|
(1,861
|
)
|
Credit default swaps
|
—
|
|
—
|
|
—
|
|
|
—
|
|
(470
|
)
|
274
|
|
Other
|
—
|
|
20
|
|
(25
|
)
|
|
—
|
|
33
|
|
—
|
|
Total
|
$
|
4,175
|
|
$
|
6,844
|
|
$
|
6,583
|
|
|
$
|
(2,281
|
)
|
$
|
4,745
|
|
$
|
(11,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
Realized Gain on Periodic Settlements of Interest Rate Swaps, net
|
Realized Gain
on Other Derivatives and Securities, net
|
Unrealized Gain
(Loss) on Other Derivatives and Securities, net
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Gain
on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
Interest rate swaps
|
$
|
4,533
|
|
$
|
59,232
|
|
$
|
3,527
|
|
|
$
|
(4,941
|
)
|
$
|
14,451
|
|
$
|
(19,749
|
)
|
Interest rate swaptions
|
—
|
|
—
|
|
6,541
|
|
|
—
|
|
—
|
|
(563
|
)
|
TBA securities
|
—
|
|
(47,254
|
)
|
8,072
|
|
|
—
|
|
6,887
|
|
17,433
|
|
Short sales of U.S. Treasuries
|
—
|
|
(759
|
)
|
20,372
|
|
|
—
|
|
(14,174
|
)
|
(11,502
|
)
|
Credit default swaps
|
—
|
|
(1,648
|
)
|
1,528
|
|
|
—
|
|
(513
|
)
|
(183
|
)
|
Other
|
—
|
|
9
|
|
—
|
|
|
—
|
|
261
|
|
7
|
|
Total
|
$
|
4,533
|
|
$
|
9,580
|
|
$
|
40,040
|
|
|
$
|
(4,941
|
)
|
$
|
6,912
|
|
$
|
(14,557
|
)
|
The following tables summarize changes in notional amounts for our outstanding derivatives and other securities during
the three and six months ended June 30, 2018 and 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
Notional
Amount
|
|
Additions/ Long Positions
|
|
Expirations/
Terminations/ Short Positions
|
|
June 30, 2018
Notional
Amount
|
Interest rate swaps
|
$
|
3,530,000
|
|
|
200,000
|
|
|
(200,000
|
)
|
|
$
|
3,530,000
|
|
Interest rate swaptions
|
$
|
425,000
|
|
|
75,000
|
|
|
—
|
|
|
$
|
500,000
|
|
TBA securities
|
$
|
1,704,386
|
|
|
10,721,305
|
|
|
(10,709,077
|
)
|
|
$
|
1,716,614
|
|
U.S. Treasuries
|
$
|
—
|
|
|
129,500
|
|
|
(129,500
|
)
|
|
$
|
—
|
|
Short sales of U.S. Treasuries
|
$
|
(846,700
|
)
|
|
82,000
|
|
|
(151,500
|
)
|
|
$
|
(916,200
|
)
|
Credit default swaps
|
$
|
48,000
|
|
|
—
|
|
|
(48,000
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
Notional
Amount
|
|
Additions/ Long Positions
|
|
Expirations/
Terminations/ Short Positions
|
|
June 30, 2017
Notional
Amount
|
Interest rate swaps
|
$
|
2,975,000
|
|
|
595,000
|
|
|
(265,000
|
)
|
|
$
|
3,305,000
|
|
Interest rate swaptions
|
$
|
150,000
|
|
|
125,000
|
|
|
—
|
|
|
$
|
275,000
|
|
TBA securities
|
$
|
886,042
|
|
|
13,678,610
|
|
|
(12,953,692
|
)
|
|
$
|
1,610,960
|
|
U.S. Treasuries
|
$
|
21,000
|
|
|
22,500
|
|
|
(43,500
|
)
|
|
$
|
—
|
|
Short sales of U.S. Treasuries
|
$
|
(511,000
|
)
|
|
1,090,500
|
|
|
(1,434,500
|
)
|
|
$
|
(855,000
|
)
|
Credit default swaps
|
$
|
49,000
|
|
|
—
|
|
|
(500
|
)
|
|
$
|
48,500
|
|
Interest Rate Swap Agreements
Our derivative portfolio includes interest rate swaps, which are used to manage our exposure to interest rate risk. Under our interest rate swaps, we typically pay a fixed rate and receive a floating rate based on LIBOR with terms usually ranging up to 15 years. As of
June 30, 2018 and December 31, 2017
, we had interest rate swap agreements summarized in the table below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
Notional
Amount
|
|
Weighted Average
|
|
Notional
Amount
|
|
Weighted Average
|
Current Maturity Date
|
|
|
Fixed
Pay Rate
|
|
Receive
Rate
|
|
Maturity
(Years)
|
|
|
Fixed
Pay Rate
|
|
Receive
Rate
|
|
Maturity
(Years)
|
≤ 3 years
|
|
$
|
1,475,000
|
|
|
1.37
|
%
|
|
2.34
|
%
|
|
1.2
|
|
$
|
1,500,000
|
|
|
1.26
|
%
|
|
1.46
|
%
|
|
1.3
|
> 3 to ≤ 5 years
|
|
1,010,000
|
|
|
1.90
|
%
|
|
2.33
|
%
|
|
3.9
|
|
985,000
|
|
|
1.79
|
%
|
|
1.47
|
%
|
|
4.0
|
> 5 to ≤ 7 years
|
|
250,000
|
|
|
1.71
|
%
|
|
2.35
|
%
|
|
5.4
|
|
350,000
|
|
|
1.78
|
%
|
|
1.40
|
%
|
|
5.7
|
> 7 years
|
|
795,000
|
|
|
2.35
|
%
|
|
2.34
|
%
|
|
9.1
|
|
695,000
|
|
|
2.26
|
%
|
|
1.47
|
%
|
|
9.9
|
Total
|
|
$
|
3,530,000
|
|
|
1.77
|
%
|
|
2.34
|
%
|
|
4.0
|
|
$
|
3,530,000
|
|
|
1.65
|
%
|
|
1.46
|
%
|
|
4.2
|
Interest Rate Swaption Agreements
Our interest rate swaption agreements provide us the option to enter into interest rate swap agreements in the future where we would pay a fixed rate and receive LIBOR. The following tables present certain information about our interest rate swaption agreements as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Option
|
|
Underlying Swap
|
Current Option Expiration Date
|
|
Cost
|
|
Fair Value
|
|
Weighted Average Years to Expiration
|
|
Notional Amount
|
|
Pay Rate
|
|
Weighted Average Term (Years)
|
|
|
|
|
|
|
≤ 12 months
|
|
$
|
3,302
|
|
|
$
|
5,935
|
|
|
0.5
|
|
$
|
250,000
|
|
|
2.75
|
%
|
|
8.4
|
>12 to ≤ 24 months
|
|
2,562
|
|
|
3,120
|
|
|
1.3
|
|
100,000
|
|
|
2.85
|
%
|
|
8.8
|
> 24 months
|
|
7,051
|
|
|
4,984
|
|
|
3.1
|
|
150,000
|
|
|
2.90
|
%
|
|
8.5
|
Total / weighted average
|
|
$
|
12,915
|
|
|
$
|
14,039
|
|
|
1.4
|
|
$
|
500,000
|
|
|
2.81
|
%
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Option
|
|
Underlying Swap
|
Current Option Expiration Date
|
|
Cost
|
|
Fair Value
|
|
Weighted Average Years to Expiration
|
|
Notional Amount
|
|
Pay Rate
|
|
Weighted Average Term (Years)
|
|
|
|
|
|
|
< 12 months
|
|
$
|
2,111
|
|
|
$
|
1,621
|
|
|
0.9
|
|
$
|
175,000
|
|
|
2.71
|
%
|
|
8.6
|
>12 to ≤ 24 months
|
|
2,083
|
|
|
1,400
|
|
|
1.5
|
|
75,000
|
|
|
2.73
|
%
|
|
10.0
|
> 24 months
|
|
7,951
|
|
|
3,707
|
|
|
3.4
|
|
175,000
|
|
|
2.87
|
%
|
|
8.9
|
Total / weighted average
|
|
$
|
12,145
|
|
|
$
|
6,728
|
|
|
2.0
|
|
$
|
425,000
|
|
|
2.78
|
%
|
|
8.9
|
TBA Securities
As of
June 30, 2018 and December 31, 2017
, we had contracts to purchase (“long position”) and sell (“short position”) TBA securities on a forward basis, presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Purchase and Sale Contracts for TBA Securities
|
|
Notional
Amount
(1)
|
|
Fair
Value
(2)
|
|
Notional
Amount
(1)
|
|
Fair
Value
(2)
|
TBA assets:
|
|
|
|
|
|
|
|
|
Purchase of TBA securities
|
|
$
|
1,716,614
|
|
|
$
|
9,823
|
|
|
$
|
1,386,416
|
|
|
$
|
3,089
|
|
Sale of TBA securities
|
|
—
|
|
|
—
|
|
|
(1,200
|
)
|
|
1
|
|
Total TBA assets
|
|
1,716,614
|
|
|
9,823
|
|
|
1,385,216
|
|
|
3,090
|
|
|
|
|
|
|
|
|
|
|
TBA liabilities:
|
|
|
|
|
|
|
|
|
Purchase of TBA securities
|
|
—
|
|
|
—
|
|
|
319,170
|
|
|
(1,339
|
)
|
Sale of TBA securities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total TBA liabilities
|
|
—
|
|
|
—
|
|
|
319,170
|
|
|
(1,339
|
)
|
Total net TBA
|
|
$
|
1,716,614
|
|
|
$
|
9,823
|
|
|
$
|
1,704,386
|
|
|
$
|
1,751
|
|
————————
|
|
(1)
|
Notional amount represents the par value or principal balance of the underlying agency security.
|
|
|
(2)
|
Fair value represents the current market value of the agency RMBS underlying the TBA contract as of period end, less the forward price to be paid for the underlying agency RMBS.
|
U.S. Treasury Securities and Futures
We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to mitigate our exposure to changes in interest rates.
We had obligations to return U.S. Treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions with a fair value of
$0.9 billion
and
$0.8 billion
as of
June 30, 2018 and December 31, 2017
, respectively. The borrowed securities were collateralized by cash payments of
$0.9 billion
and
$0.8 billion
as of
June 30, 2018 and December 31, 2017
, which are presented as receivable under reverse repurchase agreements on the consolidated balance sheets. All changes in fair value of long and short U.S. Treasury securities and futures are recorded in realized and unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
Credit Risk-Related Contingent Features
The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, both we and our counterparties may be required to pledge collateral for our derivatives, based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments is included in restricted cash and cash equivalents on our consolidated balance sheets.
Each of our ISDA Master Agreements contains provisions pursuant to which we are required to fully collateralize our obligations under our interest rate swap agreements if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within our ISDA Master Agreements. We are also required to post initial collateral upon execution of certain of our swap transactions. If we breach any of these provisions, we will be required to settle our obligations under the agreements at their termination values, which approximates fair value.
Further, each of our ISDA Master Agreements contain cross default provisions under which a default under certain of our other indebtedness in excess of a certain threshold causes an event of default under the agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the
agreements at their termination values if we fail to maintain either our REIT status or certain minimum equity thresholds, or comply with limits on our leverage above certain specified levels. As of
June 30, 2018
, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to our consolidated financial statements.
We did not have counterparty credit risk with any single counterparty in excess of
1%
of our equity, as of
June 30, 2018
under our non-centrally cleared interest rate swap and swaption agreements.
In the case of centrally cleared interest rate swap contracts, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract. The risk is considered minimal, however, due to initial and daily exchange of mark to market margin requirements, the clearinghouse guarantee fund and other resources that are available in the event of a clearing member default.
Note 9. 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), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets. The following tables present information about our assets and liabilities that are subject to such agreements and can potentially be offset on our consolidated balance sheets as of
June 30, 2018 and December 31, 2017
(in thousands):
Offsetting of Financial Assets and Derivative Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Received
(1)
|
|
Net Amount
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions
(2)
|
|
$
|
22,893
|
|
|
$
|
—
|
|
|
$
|
22,893
|
|
|
$
|
(23
|
)
|
|
$
|
(17,912
|
)
|
|
$
|
4,958
|
|
TBA
|
|
9,823
|
|
|
—
|
|
|
9,823
|
|
|
—
|
|
|
—
|
|
|
9,823
|
|
Receivable under reverse repurchase agreements
|
|
890,059
|
|
|
—
|
|
|
890,059
|
|
|
(680,057
|
)
|
|
(210,002
|
)
|
|
—
|
|
Total
|
|
$
|
922,775
|
|
|
$
|
—
|
|
|
$
|
922,775
|
|
|
$
|
(680,080
|
)
|
|
$
|
(227,914
|
)
|
|
$
|
14,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions
(2)
|
|
$
|
11,622
|
|
|
$
|
—
|
|
|
$
|
11,622
|
|
|
$
|
—
|
|
|
$
|
(5,642
|
)
|
|
$
|
5,980
|
|
TBA
|
|
3,090
|
|
|
—
|
|
|
3,090
|
|
|
(1,339
|
)
|
|
—
|
|
|
1,751
|
|
Receivable under reverse repurchase agreements
|
|
843,130
|
|
|
—
|
|
|
843,130
|
|
|
(725,319
|
)
|
|
(117,811
|
)
|
|
—
|
|
Total
|
|
$
|
857,842
|
|
|
$
|
—
|
|
|
$
|
857,842
|
|
|
$
|
(726,658
|
)
|
|
$
|
(123,453
|
)
|
|
$
|
7,731
|
|
Offsetting of Financial Liabilities and Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Pledged
(1)
|
|
Net Amount
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
3,560,273
|
|
|
$
|
—
|
|
|
$
|
3,560,273
|
|
|
$
|
(680,057
|
)
|
|
$
|
(2,880,216
|
)
|
|
$
|
—
|
|
Interest rate swaps
(2)
|
|
23
|
|
|
—
|
|
|
23
|
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
3,560,296
|
|
|
$
|
—
|
|
|
$
|
3,560,296
|
|
|
$
|
(680,080
|
)
|
|
$
|
(2,880,216
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
TBA
|
|
$
|
1,339
|
|
|
$
|
—
|
|
|
$
|
1,339
|
|
|
$
|
(1,339
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Repurchase agreements
|
|
3,863,719
|
|
|
—
|
|
|
3,863,719
|
|
|
(725,319
|
)
|
|
(3,138,400
|
)
|
|
—
|
|
Total
|
|
$
|
3,865,058
|
|
|
$
|
—
|
|
|
$
|
3,865,058
|
|
|
$
|
(726,658
|
)
|
|
$
|
(3,138,400
|
)
|
|
$
|
—
|
|
————————
|
|
(1)
|
Includes cash and securities received / pledged as collateral, at fair value. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero on a counterparty by counterparty basis, as applicable. Refer to Notes 4 and 5 for additional information regarding assets pledged.
|
|
|
(2)
|
Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 8 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.
|
Note 10. Fair Value Measurements
We have elected the option to account for all of our financial assets at fair value, with changes in fair value reflected in income during the period in which they occur. We have determined that this presentation most appropriately represents our financial results and position. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the assumptions market participants would use when pricing an asset or liability.
We determine the fair value of our agency and non-agency securities, including securities held as collateral, based upon fair value estimates obtained from multiple third-party pricing services and dealers. In determining fair value, third-party pricing sources use various valuation approaches, including market and income approaches. Factors used by third-party sources in estimating the fair value of an instrument may include observable inputs such as recent trading activity, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third-party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, default and loss severity, especially when estimating fair values for securities with lower levels of recent trading activity. When possible, we make inquiries of third-party pricing sources to understand their use of significant inputs and assumptions.
We review the various third-party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third-party estimates for each position, comparison to recent trade activity for similar securities, and our Manager's review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third-party pricing sources, we will exclude third-party prices for securities from our determination of fair value if we determine (based on our validation procedures and our Manager's market knowledge and expertise) that the price is significantly different than observable market data would indicate and we cannot obtain a satisfactory understanding from the third party source as to the significant inputs used to determine the price.
We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. We use the results of the validation procedures described above as part of our determination of the appropriate fair value measurement hierarchy classification. The three levels of valuation hierarchy are defined as follows:
|
|
•
|
Level 1 Inputs - Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.
|
|
|
•
|
Level 2 Inputs - Quoted prices for similar assets and liabilities 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 - Significant unobservable market inputs that are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities.
|
The following tables present our financial instruments carried at fair value as of
June 30, 2018 and December 31, 2017
, on the consolidated balance sheets by the valuation hierarchy, as described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Agency securities
|
|
$
|
—
|
|
|
$
|
3,519,280
|
|
|
$
|
—
|
|
|
$
|
3,519,280
|
|
Non-agency securities
|
|
—
|
|
|
739,960
|
|
|
—
|
|
|
739,960
|
|
Derivative assets
|
|
—
|
|
|
32,716
|
|
|
—
|
|
|
32,716
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,291,956
|
|
|
$
|
—
|
|
|
$
|
4,291,956
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
Obligation to return securities borrowed under reverse repurchase agreements
|
|
878,933
|
|
|
—
|
|
|
—
|
|
|
878,933
|
|
Total
|
|
$
|
878,933
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
878,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Agency securities
|
|
$
|
—
|
|
|
$
|
3,758,181
|
|
|
$
|
—
|
|
|
$
|
3,758,181
|
|
Non-agency securities
|
|
—
|
|
|
872,084
|
|
|
—
|
|
|
872,084
|
|
Derivative assets
|
|
—
|
|
|
14,712
|
|
|
—
|
|
|
14,712
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,644,977
|
|
|
$
|
—
|
|
|
$
|
4,644,977
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
4,454
|
|
|
$
|
—
|
|
|
$
|
4,454
|
|
Obligation to return securities borrowed under reverse repurchase agreements
|
|
830,776
|
|
|
—
|
|
|
—
|
|
|
830,776
|
|
Total
|
|
$
|
830,776
|
|
|
$
|
4,454
|
|
|
$
|
—
|
|
|
$
|
835,230
|
|
Our agency and non-agency securities are valued using the various market data described above, which include inputs determined to be observable or whose significant value drivers are observable. Accordingly, our agency and non-agency securities are classified as Level 2 in the fair value hierarchy as of
June 30, 2018
.
For information regarding valuation of our derivative instruments, please refer to the discussion of derivative and other hedging instruments in Note 2. Our interest rate swaps and other derivatives are classified as Level 2 in the fair value hierarchy.
The fair value of our obligation to return securities borrowed under reverse repurchase agreements is based upon the value of the underlying borrowed U.S. Treasury securities as of the reporting date. Both U.S. Treasury securities and our
obligation to return borrowed U.S. Treasury securities are classified as Level 1 in the fair value hierarchy.
Excluded from the table above are financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, receivables, payables, borrowings under repurchase agreements, and debt secured by healthcare real estate investments, which are presented in our consolidated financial statements at cost. The cost basis of financial instruments with initial terms of less than one year are determined to approximate fair value, primarily due to the short duration of these
instruments. The cost basis of floating rate borrowings with initial terms of greater than one year is determined to approximate fair value, primarily as such agreements have floating interest rates based on an index plus or minus a fixed spread and the fixed spread is generally consistent with those demanded in the market. The fair value of fixed rate secured debt is estimated by discounting the estimated future cash flows using the current rates at which similar loans would be made with similar credit ratings and for the same remaining maturities. We estimate the fair value of these instruments using Level 2 inputs.
In addition to items that are measured at fair value on a recurring basis, we also have assets and liabilities in our balance sheet that are measured at fair value on a nonrecurring basis, including those acquired in business combinations. We have determined that the fair value measurements included in each of these assets and liabilities rely primarily on company-specific inputs and our assumptions about the use of the assets and settlement of liabilities, and that each of these fair value measurements generally incorporate Level 3 inputs. We estimate the fair value of real estate and related intangibles using the income approach and unobservable data such as net operating income and estimated capitalization and discount rates. We also consider local and national industry market data including comparable sales, and commonly engage an external real estate appraiser to assist us in our estimation of fair value. We estimate the fair value of secured debt assumed in business combinations using current interest rates at which similar borrowings could be obtained on the transaction date.
Note 11. Other Assets
The following table summarizes our other assets as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Servicing advances
|
|
$
|
—
|
|
|
$
|
324
|
|
Prepaid expenses
|
|
1,779
|
|
|
1,993
|
|
Accounts receivable
|
|
1,072
|
|
|
5,682
|
|
Goodwill
|
|
5,840
|
|
|
5,840
|
|
Other
|
|
7,206
|
|
|
9,403
|
|
Total other assets
|
|
$
|
15,897
|
|
|
$
|
23,242
|
|
Note 12. Accounts Payable and Other Accrued Liabilities
The following table summarizes our accounts payable and other accrued liabilities as of
June 30, 2018 and December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Cash collateral held
|
|
$
|
17,912
|
|
|
$
|
5,642
|
|
Due to manager
|
|
1,567
|
|
|
1,451
|
|
Accrued interest
|
|
17,548
|
|
|
12,547
|
|
Other accounts payable and accrued expenses
|
|
12,453
|
|
|
13,952
|
|
Total accounts payable and other accrued liabilities
|
|
$
|
49,480
|
|
|
$
|
33,592
|
|
Risk Mitigation Activities
The Company’s previous investment in MSR exposes us to certain risks, including representation and warranty risk. Representation and warranty risk refers to the representations and warranties we made (or are deemed to have made) to the applicable investor (including, without limitation, the GSEs) regarding, among other things, the origination and servicing of mortgage loans with respect to which we had acquired MSR. We mitigated representation and warranty risk through our due diligence in connection with MSR acquisitions, including counterparty reviews and loan file reviews, as well as negotiated contractual protections from our MSR transaction counterparties with respect to prior origination and servicing. In connection with the sale of its servicing assets and remaining MSR in 2016 and 2017, Residential Credit Solutions, Inc. (“RCS”), the Company’s subsidiary that was previously engaged in mortgage servicing operations, retained certain risk exposure existing prior to the time of such sales, including representation and warranty risk.
Note 13. Stockholders’ Equity
Redeemable Preferred Stock
Pursuant to our charter, we are authorized to designate and issue up to
50.0 million
shares of preferred stock in one or more classes or series. Our Board of Directors has designated
2.3 million
shares as
8.125%
Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”). As of
June 30, 2018
, we had
47.8 million
of authorized but unissued shares of preferred stock. Shares of our Series A Preferred Stock are redeemable at
$25.00
per share plus accumulated and unpaid dividends (whether or not declared) exclusively at our option commencing on May 22, 2019, or earlier under certain circumstances intended to preserve our qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October. As of
June 30, 2018
, we had declared all required quarterly dividends on the Series A Preferred Stock.
Our Board of Directors may designate additional series of authorized preferred stock ranking junior to or in parity with the Series A Preferred Stock or designate additional shares of the Series A Preferred Stock and authorize the issuance of such shares. Our Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption.
Common Stock Repurchase Program
Our Board of Directors adopted a stock repurchase plan pursuant to which the Company is authorized to repurchase up to
$100 million
of its outstanding shares of common stock through
December 31, 2018
. The Company may repurchase shares in the open market or privately negotiated transactions or pursuant to a trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934, as amended. The total amount of
$100 million
remains authorized and available for common stock repurchases as of
June 30, 2018
.
Shares of our common stock may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason.
Long-Term Incentive Plan
The Company sponsors the American Capital Mortgage Investment Corp. Amended and Restated Equity Incentive Plan (“Incentive Plan” or “plan”), as amended March 4, 2016, to provide for the issuance of equity-based awards, including stock options, restricted stock, restricted stock units (“RSU”) and unrestricted stock to our independent directors. We did not issue any shares of common stock related to the vesting of RSU awards during
the three and six months ended June 30, 2018
, as any awards vested during the period were deferred to future periods. We have made no awards under the plan to our officers or the officers or employees of our Manager, and we no longer intend to issue RSUs to RCS employees.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. Any shares subject to performance conditions that would not be issuable at period end, if that were the end of the contingency period, have been excluded from diluted net income per common share.
Net income used in the numerator to calculate both basic and diluted EPS is the same. The number of shares used in the denominator of the calculation for basic and diluted EPS is different by an amount equal to the dilutive effect of stock awards issued to employees and directors.
At-the-Market Offering Program
During August 2017, we entered into agreements with sales agents to publicly offer and sell shares of our common stock in privately negotiated and/or at-the-market transactions from time-to-time up to an aggregate amount of
$125 million
of shares of our common stock. As of
June 30, 2018
, we have not issued any shares under this program.
Note 14. Annaly Merger Agreement
On May 2, 2018, the Company, Annaly Capital Management, Inc., a Maryland corporation (“Annaly”), and Mountain Merger Sub Corporation, a Maryland corporation and a wholly owned subsidiary of Annaly (“Purchaser”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and upon the terms and conditions thereof, Purchaser will commence an exchange offer (the “Offer”) to purchase all of the Company’s issued and outstanding shares of common stock, par value $0.01 per share (the “Company Common Stock”). In the Offer, holders of Company Common Stock will have the option to elect from among three forms of consideration for each share of Company Common Stock (subject to proration as described below):
|
|
•
|
$9.82 in cash and 0.9519 shares of Annaly common stock (the “Mixed Consideration Option”);
|
|
|
•
|
$19.65 in cash (the “Cash Consideration Option”); or
|
|
|
•
|
1.9037 shares of Annaly common stock (the “Stock Consideration Option”).
|
Holders of Company Common Stock who do not make a valid election will receive the Mixed Consideration Option for their shares of Company Common Stock. Holders who elect to receive the Cash Consideration Option or Stock Consideration Option will be subject to proration to ensure that approximately 50% of the aggregate consideration paid to holders of Company Common Stock in the Offer will be paid in the form of Annaly common stock and approximately 50% of the aggregate consideration paid to holders of Company Common Stock in the Offer will be paid in cash.
Closing of the Offer is subject to the condition that a minimum number of shares be validly tendered and not validly withdrawn. Completion of the Offer is also subject to satisfaction or waiver of a number of other customary closing conditions, including the registration of shares of Annaly common stock to be issued in the transactions and the receipt of certain regulatory approvals. The Company cannot provide any assurance that the proposed transaction will close in a timely manner or at all.
Immediately following the closing of the Offer, the Company will be merged with and into the Purchaser, with the Purchaser surviving the merger. In the merger, holders of Company Common Stock will have the right to receive, at their election, the Mixed Consideration Option, the Cash Consideration Option or the Stock Consideration Option, subject to proration as described above, and each share of the Company’s 8.125% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (“Company Preferred Stock”), that is outstanding immediately prior to the merger will be converted into one share of a newly designated series of Annaly preferred stock, par value $0.01 per share, which will have rights, preferences and privileges and voting powers substantially the same as shares of the Company Preferred Stock.
In connection with the execution of the Merger Agreement, the Company and our Manager entered into an amendment (the “Management Agreement Amendment”) to the management agreement, dated July 1, 2016 (the “Management Agreement”). The Management Agreement Amendment provides that one month following the completion of the transactions contemplated by the Merger Agreement, the Management Agreement will terminate, and as a result of the completion of the transactions contemplated by the Merger Agreement and the subsequent termination of the Management Agreement, the Company will reimburse the Manager for certain unpaid expenses, pay all accrued management fees then owed and pay the Manager a termination fee of approximately $41.7 million as and when specified in the Management Agreement Amendment.