``` 11111
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact name of Registrant as specified in its charter)
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification No.) |
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(Address of Principal Executive Offices) |
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(Zip Code) |
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(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Small reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No
Number of shares outstanding of each of the registrant’s classes of common stock, as of August 10, 2023:
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Outstanding |
Class A Common Stock |
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ARLINGTON ASSET INVESTMENT CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2023
INDEX
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Page |
PART I — FINANCIAL INFORMATION |
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Item 1. |
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Consolidated Financial Statements and Notes — (unaudited) |
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1 |
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1 |
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2 |
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3 |
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4 |
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5 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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34 |
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Item 3. |
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50 |
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Item 4. |
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54 |
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PART II — OTHER INFORMATION |
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Item 1. |
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56 |
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Item 1A. |
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56 |
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Item 2. |
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58 |
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Item 3. |
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58 |
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Item 4. |
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58 |
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Item 5. |
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58 |
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Item 6. |
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58 |
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61 |
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i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
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June 30, 2023 |
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December 31, 2022 |
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ASSETS |
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Cash and cash equivalents (includes $ |
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$ |
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$ |
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Restricted cash of consolidated VIEs |
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Agency mortgage-backed securities, at fair value |
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MSR financing receivables, at fair value |
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Credit securities, at fair value |
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Mortgage loans, at fair value |
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Mortgage loans of consolidated VIEs, at fair value |
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Deposits |
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Other assets (includes $ |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities: |
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Repurchase agreements |
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$ |
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$ |
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Secured debt of consolidated VIEs, at fair value |
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Long-term unsecured debt |
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Other liabilities (includes $- |
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Total liabilities |
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Stockholders’ Equity: |
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Series B Preferred stock, $ |
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Series C Preferred stock, $ |
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Class A common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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June 30, 2023 |
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December 31, 2022 |
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Assets and liabilities of consolidated VIEs |
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Cash and restricted cash |
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$ |
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$ |
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Mortgage loans, at fair value |
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Other assets |
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Secured debt, at fair value |
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( |
) |
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( |
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Other liabilities |
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( |
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Net investment in consolidated VIEs |
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$ |
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$ |
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See notes to consolidated financial statements.
1
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2023 |
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2022 |
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2023 |
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2022 |
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Interest income |
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MSR financing receivables |
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$ |
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$ |
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$ |
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$ |
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Agency mortgage-backed securities |
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Credit securities and loans |
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Mortgage loans of consolidated VIEs |
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Other |
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Total interest and other income |
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Rent revenues from single-family properties |
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Interest expense |
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Repurchase agreements |
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Long-term debt secured by single-family properties |
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Long-term unsecured debt |
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Secured debt of consolidated VIEs |
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Total interest expense |
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Single-family property operating expenses |
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Net operating income |
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Investment and derivative gain (loss), net |
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General and administrative expenses |
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Compensation and benefits |
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Other general and administrative expenses |
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Total general and administrative expenses |
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Income before income taxes |
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Income tax provision |
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Net income (loss) |
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( |
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Dividend on preferred stock |
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( |
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( |
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( |
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( |
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Net income (loss) available (attributable) to |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Basic earnings (loss) per common share |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Diluted earnings (loss) per common share |
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$ |
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$ |
( |
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$ |
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$ |
( |
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Weighted-average common shares outstanding |
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Basic |
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Diluted |
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See notes to consolidated financial statements.
2
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Dollars in thousands)
(Unaudited)
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Series B |
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Series B |
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Series C |
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Series C |
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Class A |
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Class A |
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Additional |
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Accumulated |
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Total |
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Balances, December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Issuance of Class A common |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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Forfeiture of Class A common |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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Repurchase of Class A |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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( |
) |
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— |
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( |
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Issuance of preferred stock |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balances, March 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Repurchase of Class A |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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( |
) |
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— |
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( |
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Repurchase of preferred stock |
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— |
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— |
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( |
) |
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( |
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— |
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— |
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— |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balances, June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Series B |
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Series B |
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Series C |
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Series C |
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Class A |
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Class A |
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Additional |
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Accumulated |
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Total |
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Balances, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Issuance of Class A common |
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— |
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— |
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— |
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— |
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( |
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— |
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— |
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Repurchase of Class A |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
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— |
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( |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balances, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balances, June 30, 2023 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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See notes to consolidated financial statements.
3
ARLINGTON ASSET INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Six Months Ended June 30, |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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$ |
( |
) |
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Adjustments to reconcile net income (loss) to net cash used in operating activities |
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Investment and derivative (gain) loss, net |
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( |
) |
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Net discount accretion |
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( |
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( |
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Other |
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Changes in operating assets |
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Interest receivable |
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( |
) |
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Other assets |
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( |
) |
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( |
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Changes in operating liabilities |
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Interest payable and other liabilities |
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( |
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Accrued compensation and benefits |
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( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of agency mortgage-backed securities |
|
|
( |
) |
|
|
( |
) |
Purchases of credit securities |
|
|
|
|
|
( |
) |
|
Purchases of MSR financing receivables |
|
|
( |
) |
|
|
( |
) |
Purchases of single-family residential real estate |
|
|
|
|
|
( |
) |
|
Proceeds from sales of agency mortgage-backed securities |
|
|
|
|
|
|
||
Proceeds from sales of credit securities |
|
|
|
|
|
|
||
(Payments) proceeds from sales of single-family residential real estate |
|
|
( |
) |
|
|
|
|
Receipt of principal payments on agency mortgage-backed securities |
|
|
|
|
|
|
||
Receipt of principal payments on credit securities |
|
|
|
|
|
|
||
Receipt of principal payments on loans |
|
|
|
|
|
|
||
Receipt of principal payments on mortgage loans of consolidated VIE |
|
|
|
|
|
|
||
Receipt of distributions on MSR financing receivables |
|
|
|
|
|
|
||
Restricted cash balance of VIE upon consolidation |
|
|
|
|
|
|
||
Restricted cash balance of VIE upon deconsolidation |
|
|
( |
) |
|
|
|
|
Proceeds from derivatives and deposits, net |
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
||
Net cash provided by investing activities |
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
||
Repayments of repurchase agreements, net |
|
|
( |
) |
|
|
( |
) |
Repayments of secured debt of consolidated VIE |
|
|
( |
) |
|
|
( |
) |
Repurchase of common stock |
|
|
|
|
|
( |
) |
|
Repurchase of preferred stock |
|
|
|
|
|
( |
) |
|
Proceeds from issuance of preferred stock |
|
|
|
|
|
|
||
Proceeds from long-term debt secured by single-family properties |
|
|
|
|
|
|
||
Dividends paid |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net decrease in cash, cash equivalents and restricted cash |
|
|
( |
) |
|
|
( |
) |
Cash, cash equivalents and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash payments for interest |
|
$ |
|
|
$ |
|
||
Cash payments for income taxes |
|
$ |
|
|
$ |
|
||
Non-cash investing activity: |
|
|
|
|
|
|
||
Assets of VIE upon consolidation |
|
$ |
|
|
$ |
|
||
Assets of VIE upon deconsolidation |
|
$ |
( |
) |
|
$ |
|
|
Non-cash financing activity: |
|
|
|
|
|
|
||
Liabilities of VIE upon consolidation |
|
$ |
|
|
$ |
|
||
Liabilities of VIE upon deconsolidation |
|
$ |
( |
) |
|
$ |
|
|
See notes to consolidated financial statements.
4
ARLINGTON ASSET INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
Note 1. Organization and Basis of Presentation
Arlington Asset Investment Corp. (“Arlington Asset”) and its consolidated subsidiaries (unless the context otherwise provides, collectively, the “Company”) is an investment firm that focuses primarily on investing in mortgage related assets and residential real estate. The Company’s investment capital is currently allocated between mortgage servicing rights (“MSR”) related assets, credit investments and agency mortgage-backed securities (“MBS”).
The Company’s MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. The Company’s credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. The Company’s agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
The Company also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to its SFR investment strategy.
The Company is a Virginia corporation. The Company is internally managed and does not have an external investment advisor.
The Company has elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As a REIT, the Company is required to distribute annually
The unaudited interim consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The Company’s unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
The Company’s consolidated financial statements include the accounts of Arlington Asset and all other entities in which the Company has a controlling financial interest. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Although the Company bases these estimates and assumptions on historical experience and all other reasonably available information that the Company believes to be relevant under the circumstances, such estimates frequently require management to exercise significant subjective judgment about matters that are inherently uncertain. Actual results may differ materially from these estimates.
Certain prior period amounts in the consolidated financial statements and the accompanying notes may have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the previously reported net income, total assets or total liabilities.
Proposed Plan of Merger
On May 29, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ellington Financial Inc. (“EFC”), EF Merger Sub Inc., a wholly owned subsidiary of EFC (“Merger Sub”) and, solely for the limited purposes set forth in the Merger Agreement, Ellington Financial Management LLC (“EFC Manager”) pursuant to which the Company will merge with and into Merger Sub (the “Merger”), with Merger Sub continuing as the surviving corporation of the Merger.
5
Immediately following the Merger, the surviving corporation of the Merger will be contributed to Ellington Financial Operating Partnership LLC, EFC’s operating partnership subsidiary (the “EFC Operating Partnership”), in exchange for limited liability company interests in the EFC Operating Partnership. As a result of the contribution, the surviving corporation of the Merger will become a wholly owned subsidiary of the EFC Operating Partnership. The consummation of the Merger is subject to standard closing conditions, including approval by the Company’s common shareholders, and is expected to close in the fourth quarter of 2023.
Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of the Company’s common stock will be converted into the right to receive (i) from EFC,
Each outstanding share of the Company’s restricted common stock issued under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be considered outstanding for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
Each outstanding Performance-based Stock Award, other than the outstanding Stock Price Awards, issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at maximum performance levels and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. Each outstanding Stock Price Award issued under the Company’s long-term incentive compensation plans will become earned and fully vested with respect to the number of shares of the Company’s common stock subject to such award immediately prior to the effective time of the Merger based on the achievement of the applicable performance goals at the actual level of performance in connection with the Merger, and, as of the effective time of the Merger, will be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
Each outstanding award of deferred stock units issued to a non-employee director under the Company’s long-term incentive compensation plans will become fully vested and, as of the effective time of the Merger, be treated as a share of the Company’s common stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration. (See Note 16 – Long-Term Incentive Plan.)
As of the effective time of the Merger, it is expected that there will be
In addition, at the effective time of the Merger, (a) each share of the Company’s Series B Preferred Stock issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of newly designated
By virtue of the Merger, all debts, obligations and liabilities of the Company will become the debts, obligations and liabilities of the surviving corporation, including the Company’s outstanding trust preferred securities,
Note 2. Summary of Significant Accounting Policies
Cash Equivalents
Cash equivalents include demand deposits with banks, money market accounts and highly liquid investments with original maturities of three months or less. As of June 30, 2023 and December 31, 2022, approximately
6
Investment Security Purchases and Sales
Purchases and sales of investment securities are recorded on the settlement date of the transfer unless the trade qualifies as a “regular-way” trade and the associated commitment qualifies for an exemption from the accounting guidance applicable to derivative instruments. A regular-way trade is an investment security purchase or sale transaction that is expected to settle within the period of time following the trade date that is prevalent or traditional for that specific type of security. Any amounts payable or receivable for unsettled security trades are recorded as “sold securities receivable” or “purchased securities payable” in the consolidated balance sheets.
Interest Income Recognition for Investments in Agency MBS, Mortgage Loans of Consolidated VIEs and Credit Securities of High Credit Quality
The Company recognizes interest income for its investments in agency MBS, mortgage loans of consolidated variable interest entities (“VIEs”) and credit securities that are considered to be of high credit quality (that is, those with a Standard & Poor's rating of AA or higher or an equivalent rating from another rating agency) by applying the “interest method” permitted by GAAP, whereby purchase premiums and discounts are amortized and accreted, respectively, as an adjustment to contractual interest income accrued at each investment’s stated interest rate. The interest method is applied at the individual instrument level based upon each instrument’s effective interest rate. The Company calculates each instrument’s effective interest rate at the time of purchase or initial recognition by solving for the discount rate that equates the present value of that instrument's remaining contractual cash flows (assuming no principal prepayments) to its purchase cost. Because each instrument’s effective interest rate does not reflect an estimate of future prepayments, the Company refers to this manner of applying the interest method as the “contractual effective interest method.” When applying the contractual effective interest method, as principal prepayments occur, a proportional amount of the unamortized premium or unaccreted discount is recognized in interest income such that the contractual effective interest rate on any remaining security or loan balance is unaffected.
For mortgage loans of consolidated VIEs, the Company ceases the accrual of interest income (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded. While a loan is in non-accrual status, the Company recognizes interest income only when interest payments occur.
Interest Income Recognition for Investments in Other Credit Securities and MSR Financing Receivables
The Company recognizes interest income for its investments in credit securities (other than those considered to be of high credit quality) and MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment. The amount of periodic interest income recognized is determined by applying the investment’s effective interest rate to its amortized cost basis (or “reference amount”). At the time of acquisition, the investment’s effective interest rate is calculated by solving for the single discount rate that equates the present value of the Company’s best estimate of the amount and timing of the cash flows expected to be collected from the investment to its purchase cost. To prepare its best estimate of cash flows expected to be collected, the Company develops a number of assumptions about the future performance of the pool of loans that serve as collateral for its investment, including assumptions about the timing and amount of prepayments and credit losses. For investments in MSR financing receivables, the Company's estimate of cash flows expected to be collected reflects all components of its mortgage servicing counterparty's payment obligation, which is comprised of cash flows referenced to the monthly net cash flows of the underlying reference pool of MSRs net of (i) the counterparty's periodic interest payments and principal repayments related to advances obtained via its third-party secured financing facility collateralized by MSRs to which the Company's MSR financing receivables are referenced and (ii) fees payable to the counterparty. In each subsequent quarterly reporting period, the amount and timing of cash flows expected to be collected from the investment are re-estimated based upon current information and events. The following table provides a description of how periodic changes in the estimate of cash flows expected to be collected affect interest income recognition prospectively for investments in credit securities and MSR financing receivables:
Scenario: |
|
|
Effect on Interest Income Recognition for Investments in Credit Securities and MSR Financing Receivables: |
|
|
7
A positive change in cash flows occurs.
Actual cash flows exceed prior estimates and/or a positive change occurs in the estimate of expected remaining cash flows. |
|
|
A revised effective interest rate is calculated and applied prospectively such that the positive change in cash flows is recognized as incremental interest income over the remaining life of the investment.
|
|
|
|
The amount of periodic interest income recognized over the remaining life of the investment will be reduced accordingly. Generally, the investment’s effective interest rate is reduced accordingly and applied on a prospective basis. However, if the revised effective interest rate is negative, the investment’s existing effective interest rate is retained while the reference amount to which the existing effective interest rate will be prospectively applied is reduced to the present value of cash flows expected to be collected, discounted at the investment’s existing effective interest rate. |
An adverse change in cash flows occurs.
Actual cash flows fall short of prior estimates and/or an adverse change occurs in the estimate of expected remaining cash flows.
|
|
|
Other Significant Accounting Policies
Certain of the Company’s other significant accounting policies are summarized in the following notes:
Investments in agency MBS, subsequent measurement |
Note 3 |
Investments in credit securities, subsequent measurement Loans held for investment, subsequent measurement Investments in MSR financing receivables, subsequent measurement Investments in SFR properties |
Note 4 Note 5 Note 6 Note 7 |
Consolidation of variable interest entities Borrowings |
Note 8 Note 9 |
To-be-announced agency MBS transactions, including “dollar rolls” |
Note 10 |
Derivative instruments |
Note 10 |
Balance sheet offsetting |
Note 11 |
Fair value measurements Income taxes |
Note 12 Note 13 |
Stock-based compensation |
Note 16 |
Refer to the Company’s 2022 Annual Report on Form 10-K for a complete inventory and summary of the Company’s significant accounting policies.
Recent Accounting Pronouncements
The following table provides a brief description of recently issued accounting pronouncements and their actual or expected effect on the Company’s consolidated financial statements:
Standard |
Description |
Date of Adoption |
Effect on the Consolidated Financial Statements |
Recently Issued Accounting Guidance Not Yet Adopted |
|||
ASU Nos. 2020-04, 2021-01, and 2022-06, Reference Rate Reform (Topic 848)
|
The amendments in these updates provide optional practical expedients and exceptions for applying GAAP to the modification of receivables, debt or lease contracts as well as cash flow and fair value hedge accounting relationships that reference a rate, such as the London Interbank Offered Rate (“LIBOR”), that has been discontinued because of reference rate reform.
The practical expedients and exceptions provided by these updates are effective from March 12, 2020 through December 31, 2024. |
Not yet adopted. |
No material modifications due to reference rate reform were necessary for the Company's receivables, debt, derivative or lease contracts. The Company has not elected to apply hedge accounting for financial reporting purposes.
Accordingly, ASU Nos. 2020-04, 2021-01 and 2022-06 did not have a material effect on the Company's consolidated financial statements. |
8
Note 3. Investments in Agency MBS
All periodic changes in the fair value of agency MBS that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency MBS still held at period end |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Agency MBS sold during the period |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
The Company also invests in and finances fixed-rate agency MBS on a generic pool basis through sequential series of to-be-announced security transactions commonly referred to as “dollar rolls.” Dollar rolls are accounted for as a sequential series of derivative instruments. Refer to “Note 10. Derivative Instruments” for further information about dollar rolls.
Note 4. Investments in Credit Securities
All periodic changes in the fair value of credit securities that are not attributed to interest income are recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Net gains (losses) recognized in earnings for: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Credit securities still held at period end |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Credit securities sold during the period |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Note 5. Loans Held for Investment
As of June 30, 2023 and December 31, 2022, the Company held a position in a syndicated loan secured by a first lien position in healthcare facilities and guaranteed by the operator of the facilities. As of June 30, 2023 and December 31, 2022, the total outstanding principal balance was $
9
of
As of December 31, 2022, the Company was party to a participation agreement pursuant to which the Company had committed to fund up to $
Note 6. Investments in MSR Financing Receivables
The Company does not hold the requisite licenses to purchase or hold MSRs directly. However, the Company has entered into agreements with a licensed, GSE approved residential mortgage loan servicer that enable the Company to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction. Under the terms of the arrangement, for an MSR acquired by the mortgage servicing counterparty (i) the Company purchases the “excess servicing spread” from the mortgage servicer counterparty, entitling the Company to monthly distributions of the servicing fees collected by the mortgage servicing counterparty in excess of
Under the arrangement, the Company is obligated to provide funds to the mortgage servicing counterparty to fund the counterparty’s advances of payments on the serviced pool of mortgage loans. The mortgage servicing counterparty is required to return to the Company subsequent servicing advances collected from the underlying borrowers. The mortgage servicing counterparty is entitled to reimbursement from the GSEs of any servicing advances that are not subsequently collected from the underlying borrowers. As of June 30, 2023 and December 31, 2022, the Company had provided funds of $
As a means to increase potential returns to the Company, at the Company’s election, it can request the mortgage servicing counterparty utilize leverage on the MSRs to which the Company’s MSR financing receivables are referenced to finance the purchase of additional MSRs. As of June 30, 2023 and December 31, 2022, the Company’s counterparty had drawn $
The Company accounts for transactions executed under its arrangement with the mortgage servicing counterparty as financing transactions and reflects the associated financing receivables in the line item “MSR financing receivables” on its consolidated balance sheets. The Company has elected to account for its MSR financing receivables at fair value with changes in fair value that are not attributed to interest income recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income. As described in further detail in “Note 2. Summary of Significant Accounting
10
Policies,” the Company recognizes interest income for MSR financing receivables by applying the prospective level-yield methodology required by GAAP for financial assets that are either not of high credit quality at the time of acquisition or can be contractually prepaid or otherwise settled in such a way that the Company would not recover substantially all of its recorded investment.
As of June 30, 2023 and December 31, 2022, the fair value of the Company’s investments in MSR financing receivables was $
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Balance at period beginning |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Capital investments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital distributions |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Accretion of interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Changes in valuation inputs and assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at period end |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Note 7. Investments in SFR Properties
The Company previously allocated investment capital to a strategy of investing in SFR properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, the Company sold its portfolio of SFR properties and is currently no longer anticipating allocating capital to an SFR investment strategy. The Company conducted its SFR investment strategy through a wholly-owned subsidiary, McLean SFR Investment, LLC ("McLean SFR").
To execute its strategy of investing in SFR properties, the Company entered into an agreement with a third-party investment advisory firm to identify, acquire and manage investments in SFR properties on behalf of the Company. Under the terms of the agreement, the Company had committed to fund up to $
The Company’s investments in SFR properties were initially recognized on the settlement date of their acquisition at cost. The Company allocated the initial acquisition cost of each property to land and building on the basis of their relative fair values at the time of acquisition. To determine the relative fair value of land and building at the time of acquisition, the Company used available market data, such as property specific county tax assessment records.
Subsequent to the acquisition of a property, expenditures which improved or extended the life of the property were capitalized as a component of the property’s cost basis. Expenditures for ordinary maintenance and repairs were recognized as an expense as incurred and were reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income.
The Company subsequently recognized depreciation of each property’s buildings and capitalized improvements over the expected useful lives of those assets. The Company calculated depreciation on a straight-line basis over a useful life of
Pursuant to its SFR investment strategy, the Company leased its SFR properties to tenants who occupied the properties. The leases generally had terms of one year or more and were classified as operating leases. Rental revenue, net of any concessions, was recognized over the term of each lease on a straight-line basis. If the Company determined that collectability of lease payments was not probable, any lease receivables previously recognized were reversed and rental revenue was limited to cash received.
Costs directly associated with the origination of a lease, such as a commission paid to a property manager when a lease agreement was obtained, were deferred at the commencement of the lease and subsequently recognized ratably as an expense over the
11
lease term, consistent with the recognition of rental revenue from the lease. The ratable expense recognition of lease direct costs was reported as a component of “single-family property operating expenses” in the Company’s consolidated statements of comprehensive income. In addition to the expense items previously mentioned, “single-family property operating expenses” also included accruals for, but not limited to, third-party property management fees, local real estate tax assessments, utilities, homeowners’ association dues and property insurance.
The Company evaluated its SFR properties for impairment whenever circumstances indicated that their carrying amounts may not be recoverable. Significant indicators of potential impairment included, but were not limited to, declines in home values, adverse changes in rental or occupancy rates and relevant unfavorable changes in the broader economy. If indicators of potential impairment existed, the Company performed a recoverability test by comparing the property’s net carrying amount to its estimate of the undiscounted future net cash flows expected to be obtained from the use and eventual disposition of the property. If the property’s carrying amount exceeded the Company’s estimate of the undiscounted future net cash flows expected to be obtained from the property, the Company would have recognized an impairment loss equal to the amount that the property’s net carrying amount exceeded the property’s estimated fair value.
From time to time, the Company identified SFR properties to be sold. At the time that any such properties were identified, the Company performed an evaluation to determine whether or not such properties should be classified as held for sale. Factors considered as part of the Company's held for sale evaluation process included whether the following conditions had been met: (i) the Company had committed to a plan to sell a property; (ii) the property was immediately available for sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell a property had been initiated; (iv) the sale of a property was probable within one year (generally determined based upon listing for sale); (v) the property was being actively marketed for sale at a price that was reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicated that it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn. To the extent that these factors were all present, the Company ceased depreciating the property, measured the property at the lower of its carrying amount or its fair value less estimated costs to sell, and presented the property separately on its consolidated balance sheets.
On August 19, 2022, the Company completed a sale of
On December 1, 2022, the Company completed a sale of McLean SFR, which included all of the Company's remaining investments in SFR properties and its long-term debt facility secured by SFR properties, for a gross sale price of $
During the three and six months ended June 30, 2022, the Company recognized $
Note 8. Consolidation of Variable Interest Entities
The vehicles that issue the Company’s investments in securitized mortgage assets are considered VIEs. The Company is required to consolidate any VIE in which it holds a variable interest if it determines that it holds a controlling financial interest in the VIE and is, therefore, determined to be the primary beneficiary of the VIE. The Company is determined to be the primary beneficiary of a VIE in which it holds a variable interest if it both (i) holds the power to direct the activities that most significantly impact the VIE’s economic performance and (ii) has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The economic performance of the trusts that issue the Company’s investments in securitized mortgage assets is most significantly impacted by the performance of the mortgage loans that are held by the trusts. The party that is determined to have the most power to direct the loss mitigation actions that are taken with respect to delinquent or otherwise troubled mortgage loans held by the trust is, therefore, deemed to hold the most power to direct the activities that most significantly impact the trust’s economic performance. As a passive investor, the Company does not have the power to direct the loss mitigation activities of most of the trusts that have issued its securitized mortgage assets.
On September 30, 2020, the Company acquired for $
12
determined that it is the primary beneficiary of the trust and consolidated the trust’s assets and liabilities owed to third parties onto its consolidated balance sheets.
On February 3, 2022, the Company acquired for $
The carrying values of the assets and liabilities of the consolidated VIEs, net of elimination entries, are as follows as of the dates indicated:
|
|
June 30, 2023 |
|
|||||||||
|
|
VIE of Business Purpose Residential Mortgage Loans |
|
|
VIE of Residential Mortgage Loans |
|
|
Total |
|
|||
Cash of consolidated VIEs |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Restricted cash of consolidated VIEs (1) |
|
|
|
|
|
|
|
|
|
|||
Mortgage loans of consolidated VIEs, at fair value |
|
|
|
|
|
|
|
|
|
|||
Other assets of consolidated VIEs |
|
|
|
|
|
|
|
|
|
|||
Secured debt of consolidated VIEs, at fair value |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Other liabilities of consolidated VIEs |
|
|
|
|
|
|
|
|
|
|||
Net investment in consolidated VIEs |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
December 31, 2022 |
|
|||||||||
|
|
VIE of Business Purpose Residential Mortgage Loans |
|
|
VIE of Residential Mortgage Loans |
|
|
Total |
|
|||
Cash of consolidated VIEs |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Restricted cash of consolidated VIEs (1) |
|
|
|
|
|
|
|
|
|
|||
Mortgage loans of consolidated VIEs, at fair value |
|
|
|
|
|
|
|
|
|
|||
Other assets of consolidated VIEs |
|
|
|
|
|
|
|
|
|
|||
Secured debt of consolidated VIEs, at fair value |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other liabilities of consolidated VIEs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net investment in consolidated VIEs |
|
$ |
|
|
$ |
|
|
$ |
|
|||
The debt of the Company’s consolidated VIEs have recourse solely to the assets of the respective VIE; it has no recourse to the general credit of the Company.
Consolidated VIE of Business Purpose Residential Mortgage Loans
The pool of business purpose residential mortgage loans held by the consolidated VIE consists of fixed-rate, short-term, interest-only mortgage loans (with the full amount of principal due at maturity) made to professional real estate investors and are secured by first lien positions in non-owner occupied residential real estate. The properties that secure these mortgage loans often require construction, repair or rehabilitation. The repayment of the mortgage loans is often largely based on the ability of the borrower to sell the mortgaged property or to convert the property for rental purposes and obtain refinancing in the form of a longer-term loan.
Consolidated VIE of Residential Mortgage Loans
13
On March 7, 2023, the Company sold all of its investments in the securitized pool of residential mortgage loans and, as a result, deconsolidated the issuing securitization trust. The pool of mortgage loans of the previously consolidated VIE consisted of performing, first lien “non-qualified” residential mortgage loans. “Non-qualified” residential mortgage loans are loans that do not fully comply with the “ability-to-repay” rule and related guidelines of the Truth-in-Lending Act established by the Consumer Finance Protection Bureau pursuant to the authority granted under the Dodd-Frank Act. A “qualified” residential mortgage loan (i.e., a residential mortgage loan that fully complies with the “ability-to-repay” rule of the Truth-in-Lending Act) must meet certain debt-to-income ratio requirements and cannot have certain features, such as an interest-only period, negative amortization, balloon payments or terms longer than 30 years. Qualified mortgage loans have limited upfront fees and points and, generally, cannot have prepayment penalties except for limited circumstances. Lenders of qualified mortgage loans are afforded certain legal protections not available to non-qualified mortgage loan lenders.
Accounting for Consolidated VIEs
The Company has elected to account for the mortgage loans and debt of its consolidated VIEs at fair value with changes in fair value that are not attributed to interest income or interest expense, respectively, recognized as a component of “investment and derivative gain (loss), net” in the accompanying consolidated statements of comprehensive income.
As described in further detail in “Note 2. Summary of Significant Accounting Policies,” the Company recognizes interest income for the mortgage loans of its consolidated VIEs by applying the “interest method” permitted by GAAP, whereby the premium or discount recognized at the initial recognition of each loan is amortized or accreted as an adjustment to contractual interest income accrued at the loan’s contractual interest rate. The Company ceases the accrual of interest income for a mortgage loan (i.e., places the loan in non-accrual status) when it believes collectability of principal and interest in full is not reasonably assured, which generally occurs when a loan is three or more monthly payments past due, unless the loan is well secured and in the process of collection based upon an individual loan assessment. Upon placing a loan in non-accrual status, any previously accrued but uncollected interest is derecognized and a corresponding reduction to current period interest income is recorded.
The following table presents information about the accrual status of the loans of the Company’s consolidated VIE of business purpose residential mortgage loans as of June 30, 2023:
|
|
Aggregate Fair Value |
|
|
Aggregate Unpaid Principal Balance |
|
|
Difference |
|
|||
Less than 90 days past due and in accrual status |
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
90 days or more past due and in non-accrual status |
|
|
|
|
|
|
|
|
( |
) |
||
Total mortgage loans of consolidated VIE |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
||
Note 9. Borrowings
Repurchase Agreements
Amounts borrowed pursuant to repurchase agreements are equal in value to a specified percentage of the fair value of the pledged collateral. The Company retains beneficial ownership of the pledged collateral throughout the term of the repurchase agreement. The counterparty to the repurchase agreements may require that the Company pledge additional securities or cash as additional collateral to secure borrowings when the value of the collateral declines.
The Company’s MBS repurchase agreement arrangements generally carry a fixed rate of interest and are short-term in nature with contract durations generally ranging from
14
rate equal to
As of June 30, 2023 and December 31, 2022, the Company had no amount at risk with a single repurchase agreement counterparty or lender greater than 10% of equity.
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Agency MBS repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
|
|
$ |
|
||
Agency MBS collateral, at fair value |
|
|
|
|
|
|
||
Net amount (1) |
|
|
|
|
|
|
||
Weighted-average rate |
|
|
% |
|
|
% |
||
Weighted-average term to maturity |
|
|
|
|
||||
Non-agency MBS repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
|
|
$ |
|
||
MBS collateral, at fair value |
|
|
|
|
|
|
||
Net amount (1) |
|
|
|
|
|
|
||
Weighted-average rate |
|
|
% |
|
|
% |
||
Weighted-average term to maturity |
|
|
|
|
||||
Mortgage loans repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
|
|
$ |
|
||
Mortgage loans collateral, at fair value |
|
|
|
|
|
|
||
Net amount (1) |
|
|
|
|
|
|
||
Weighted-average rate |
|
|
% |
|
|
% |
||
Weighted-average term to maturity |
|
|
|
|
||||
Total mortgage investments repurchase financing: |
|
|
|
|
|
|
||
Repurchase agreements outstanding |
|
$ |
|
|
$ |
|
||
Mortgage investments collateral, at fair value |
|
|
|
|
|
|
||
Net amount (1) |
|
|
|
|
|
|
||
Weighted-average rate |
|
|
% |
|
|
% |
||
Weighted-average term to maturity |
|
|
|
|
||||
The following table provides information regarding the Company’s outstanding repurchase agreement borrowings during the three and six months ended June 30, 2023 and 2022:
|
|
June 30, 2023 |
|
|
June 30, 2022 |
|
||
Weighted-average outstanding balance during the three months ended |
|
$ |
|
|
$ |
|
||
Weighted-average rate during the three months ended |
|
|
% |
|
|
% |
||
Weighted-average outstanding balance during the six months ended |
|
$ |
|
|
$ |
|
||
Weighted-average rate during the six months ended |
|
|
% |
|
|
% |
||
15
Long-Term Unsecured Debt
As of June 30, 2023 and December 31, 2022, the Company had $
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Senior |
|
|
Senior |
|
|
Trust |
|
|
Senior |
|
|
Senior |
|
|
Trust |
|
||||||
Outstanding |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Annual |
|
|
% |
|
|
% |
|
|
|
|
|
% |
|
|
% |
|
|
|
||||||
Interest Payment |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
Weighted-Average |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
||||||
Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
The Senior Notes due 2025 and the Senior Notes due 2026 are publicly traded on the New York Stock Exchange under the ticker symbols “AIC” and “AAIN,” respectively. The Senior Notes due 2025 and Trust Preferred Debt may be redeemed in whole or in part at any time and from time to time at the Company’s option at a redemption price equal to the principal amount plus accrued and unpaid interest. The Senior Notes due 2026 may be redeemed in whole or in part at any time and from time to time at the Company’s option on or after August 1, 2023 at a redemption price equal to the principal amount plus accrued and unpaid interest. The indenture governing the Senior Notes contains certain covenants, including limitations on the Company’s ability to merge or consolidate with other entities or sell or otherwise dispose of all or substantially all of the Company’s assets.
Long-Term Debt Secured by Single-family Properties
On September 28, 2021, McLean SFR, a wholly-owned subsidiary of Arlington Asset, entered into a loan agreement with a third-party lender to fund McLean SFR’s purchases of SFR properties. As a result of the sale of McLean SFR on December 1, 2022, the obligations under the loan agreement were assumed by the acquiror of McLean SFR (see Note 7 "Investments in Single-Family Residential Properties").
Under the terms of the loan agreement, loan advances were available to be drawn up to
Note 10. Derivative Instruments
In the normal course of its operations, the Company is a party to financial instruments that are accounted for as derivative instruments. Derivative instruments are recorded at fair value as either “other assets” or “other liabilities” in the consolidated balance sheets, with all periodic changes in fair value reflected as a component of “investment and derivative gain (loss), net” in the consolidated statements of comprehensive income. Cash receipts or payments related to derivative instruments are classified as investing activities within the consolidated statements of cash flows.
Types and Uses of Derivative Instruments
Interest Rate Hedging Instruments
The Company is party to interest rate hedging instruments that are intended to economically hedge changes, attributable to changes in benchmark interest rates, in agency MBS and MSR financing receivable fair values and future interest cash flows on the Company’s short-term financing arrangements. Interest rate hedging instruments may include centrally cleared interest rate swaps, exchange-traded instruments, such as U.S. Treasury note futures, Eurodollar futures, interest rate swap futures and options on futures, and non-exchange-traded instruments such as options on agency MBS. While the Company uses its interest rate hedging instruments
16
to economically hedge a portion of its interest rate risk, it has not designated such contracts as hedging instruments for financial reporting purposes.
The Company exchanges cash “variation margin” with the counterparties to its interest rate hedging instruments on a daily basis based upon daily changes in fair value as measured by the Chicago Mercantile Exchange (“CME”), the central clearinghouse through which those instruments are cleared. In addition, the CME requires market participants to deposit and maintain an “initial margin” amount which is determined by the CME and is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. However, futures commission merchants may require “initial margin” in excess of the CME’s requirement. Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate hedging instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.
The daily exchange of variation margin associated with a centrally cleared or exchange-traded hedging instrument is legally characterized as the daily settlement of the instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of the derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last trading day of the reporting period.
To-Be-Announced Agency MBS Transactions, Including “Dollar Rolls”
In addition to interest rate hedging instruments that are used for interest rate risk management, the Company is a party to derivative instruments that economically serve as investments, such as forward commitments to purchase fixed-rate “pass-through” agency MBS on a non-specified pool basis, which are known as to-be-announced (“TBA”) securities. A TBA security is a forward commitment for the purchase or sale of a fixed-rate agency MBS at a predetermined price, face amount, issuer, coupon, and stated maturity for settlement on an agreed upon future date. The specific agency MBS that will be delivered to satisfy the TBA trade is not known at the inception of the trade. The specific agency MBS to be delivered is determined 48 hours prior to the settlement date. The Company accounts for TBA securities as derivative instruments because the Company cannot assert that it is probable at inception and throughout the term of an individual TBA commitment that its settlement will result in physical delivery of the underlying agency MBS, or the individual TBA commitment will not settle in the shortest time period possible.
The Company’s agency MBS investment portfolio may include net purchase (or “net long”) positions in TBA securities, which are primarily the result of executing sequential series of “dollar roll” transactions. The Company executes dollar roll transactions as a means of investing in and financing non-specified fixed-rate agency MBS. Such transactions involve effectively delaying (or “rolling”) the settlement of a forward purchase of a TBA agency MBS by entering into an offsetting sale with the same counterparty prior to the settlement date, net settling the “paired-off” positions in cash, and contemporaneously entering, with the same counterparty, another forward purchase of a TBA agency MBS of the same characteristics for a later settlement date. TBA securities purchased for a forward settlement month are generally priced at a discount relative to TBA securities sold for settlement in the current month. This discount, often referred to as the dollar roll “price drop,” reflects compensation for the net interest income (interest income less financing costs) that is foregone as a result of economically relinquishing beneficial ownership of the MBS for the duration of the dollar roll (also known as “dollar roll income”). By executing a sequential series of dollar roll transactions, the Company is able to create the economic experience of investing in an agency MBS, financed with a repurchase agreement, over a period of time. Forward purchases and sales of TBA securities are accounted for as derivative instruments in the Company’s financial statements. Accordingly, dollar roll income is recognized as a component of “investment and derivative gain (loss), net” along with all other periodic changes in the fair value of TBA commitments.
In addition to transacting in net long positions in TBA securities for investment purposes, the Company may also, from time to time, transact in net sale (or “net short”) positions in TBA securities for the purpose of economically hedging a portion of the sensitivity of the fair value of the Company’s investments in agency MBS to changes in interest rates.
In addition to TBA transactions, the Company may, from time to time, enter into commitments to purchase or sell specified agency MBS that do not qualify as regular-way security trades. Such commitments are also accounted for as derivative instruments.
Under the terms of commitments to purchase or sell TBAs or specified agency MBS, the daily exchange of variation margin may occur based on changes in the fair value of the underlying agency MBS if a party to the transaction demands it. Receivables recognized for the right to reclaim cash collateral posted by the Company in respect of agency MBS purchase or sale commitments is included in the line item “deposits” in the accompanying consolidated balance sheets. Liabilities recognized for the obligation to
17
return cash collateral received by the Company in respect of agency MBS purchase or sale commitments is included in the line item “other liabilities” in the accompanying consolidated balance sheets.
Derivative Instrument Population and Fair Value
The following table presents the fair value of the Company’s derivative instruments as of the dates indicated:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swaps |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
TBA commitments |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Interest Rate Swaps
The Company’s Secured Overnight Financing Rate (“SOFR”) based interest rate swap agreements represent agreements to make (or receive) annual interest payments based upon a fixed interest rate and receive (or make) annual variable interest payments based upon the daily SOFR over the preceding annual period.
The following table presents information about the Company’s interest rate swap agreements that were in effect as of June 30, 2023:
|
|
|
|
|
Weighted-average: |
|
|
|
|
|||||||||||||||
|
|
Notional |
|
|
Fixed Receive |
|
|
Variable (Pay) |
|
|
Net (Pay) |
|
|
Remaining |
|
|
Fair |
|
||||||
Receive-fixed |
|
$ |
|
|
|
% |
|
|
( |
)% |
|
|
( |
)% |
|
|
|
|
$ |
( |
) |
|||
Pay-fixed |
|
|
|
|
|
( |
)% |
|
|
% |
|
|
% |
|
|
|
|
|
( |
) |
||||
Total / weighted-average |
|
$ |
|
|
|
% |
|
|
( |
)% |
|
|
( |
)% |
|
|
|
|
$ |
( |
) |
|||
The following table presents information about the Company’s interest rate swap agreements that were in effect as of December 31, 2022:
|
|
|
|
|
Weighted-average: |
|
|
|
|
|||||||||||||||
|
|
Notional |
|
|
Fixed Receive |
|
|
Variable (Pay) |
|
|
Net (Pay) |
|
|
Remaining |
|
|
Fair |
|
||||||
Receive-fixed |
|
$ |
|
|
|
% |
|
|
( |
)% |
|
|
( |
)% |
|
|
|
|
$ |
|
||||
TBA Commitments
The following tables present information about the Company’s TBA commitments as of the dates indicated:
|
|
June 30, 2023 |
|
|||||||||||||
|
|
Notional Amount: |
|
|
Contractual Forward Price |
|
|
Market Price |
|
|
Fair Value |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
4.0% 30-year MBS purchase commitments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
4.0% 30-year MBS sale commitments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
4.5% 30-year MBS sale commitments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total TBA commitments, net |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
18
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Notional Amount: |
|
|
Contractual Forward Price |
|
|
Market Price |
|
|
Fair Value |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
4.0% 30-year MBS sale commitments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
4.5% 30-year MBS sale commitments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total TBA commitments, net |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
Derivative Instrument Gains and Losses
The following tables provide information about the derivative gains and losses recognized within the periods indicated:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Interest rate derivatives: |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swaps: |
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest expense (1) |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Unrealized (losses) gains, net |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Gains realized upon early termination, net |
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest rate swap (losses) gains, net |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
U.S. Treasury note futures, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Options on U.S. Treasury note futures, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total interest rate derivative (losses) gains, net |
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
TBA commitments: |
|
|
|
|
|
|
|
|
|
|
|
||||
TBA dollar roll income (2) |
|
|
|
|
|
|
|
|
|
|
|
||||
Other gains (losses) on TBA commitments, net |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total gains (losses) on TBA commitments, net |
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Total derivative gains, net |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivative Instrument Activity
The following tables summarize the volume of activity, in terms of notional amount, related to derivative instruments for the periods indicated:
|
|
For the Three Months Ended June 30, 2023 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|||||
TBA commitments, net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
|
|
For the Three Months Ended June 30, 2022 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled Settlements |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
TBA commitments, net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
19
|
|
For the Six Months Ended June 30, 2023 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
TBA commitments, net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
|
|
For the Six Months Ended June 30, 2022 |
|
|||||||||||||||||
|
|
Beginning of |
|
|
Additions |
|
|
Scheduled Settlements |
|
|
Early |
|
|
End of Period |
|
|||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
10-year U.S. Treasury note futures |
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
|||
Purchased call options on 10-year U.S. |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
TBA commitments, net |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
Cash Collateral Posted and Received for Derivative and Other Financial Instruments
The following table presents information about the cash collateral posted by the Company in respect of its derivative and other financial instruments, which is included in the line item “deposits” in the accompanying consolidated balance sheets, for the dates indicated:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Cash collateral posted for: |
|
|
|
|
|
|
||
Interest rate swaps (cash initial margin) |
|
$ |
|
|
$ |
|
||
TBA commitments, net |
|
|
|
|
|
|
||
Total cash collateral posted, net |
|
$ |
|
|
$ |
|
||
Note 11. Offsetting of Financial Assets and Liabilities
The agreements that govern certain of the Company’s derivative instruments and collateralized short-term financing arrangements provide for a right of setoff in the event of default or bankruptcy with respect to either party to such transactions. The Company presents derivative assets and liabilities as well as collateralized short-term financing arrangements on a gross basis.
Receivables recognized for the right to reclaim cash initial margin posted in respect of interest rate derivative instruments are included in the line item “deposits” in the accompanying consolidated balance sheets.
The daily exchange of variation margin associated with a centrally cleared or exchange-traded derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its interest rate swaps and futures as a direct reduction to the carrying value of derivative asset or liability, respectively. The carrying amount of interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments; because variation margin is exchanged on a one-day lag, the unsettled fair value of such instruments generally represents the change in fair value that occurred on the last day of the reporting period.
20
The following tables present information, as of the dates indicated, about the Company’s derivative instruments, short-term borrowing arrangements, and associated collateral, including those subject to master netting (or similar) arrangements:
|
|
As of June 30, 2023 |
|
|||||||||||||||||||||
|
|
Gross Amount |
|
|
Amount Offset |
|
|
Net Amount |
|
|
Gross Amount Not Offset in the |
|
|
Net |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Cash |
|
|
|
|
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
TBA commitments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Total derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Interest rate swaps |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
TBA commitments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||||
Repurchase agreements |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||||
|
|
As of December 31, 2022 |
|
|||||||||||||||||||||
|
|
Gross Amount |
|
|
Amount Offset |
|
|
Net Amount |
|
|
Gross Amount Not Offset in the |
|
|
Net |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Cash |
|
|
|
|
||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
TBA commitments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
TBA commitments |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Total derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Repurchase agreements |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Note 12. Fair Value Measurements
Fair Value of Financial Instruments
The accounting principles related to fair value measurements define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest
21
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:
|
Level 1 Inputs - |
Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company at the measurement date; |
|
Level 2 Inputs - |
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and |
|
Level 3 Inputs - |
Unobservable inputs for the asset or liability, including significant judgments made by the Company about the assumptions that a market participant would use. |
The Company measures the fair value of the following assets and liabilities:
Investments in Financial Assets
Agency MBS – The Company’s investments in agency MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company’s investments in agency MBS include price estimates obtained from third-party pricing services. In determining fair value, third-party pricing services use a market approach. The inputs used in the fair value measurements performed by the third-party pricing services are based upon readily observable transactions for securities with similar characteristics (such as issuer/guarantor, coupon rate, stated maturity, and collateral pool characteristics) occurring on the measurement date. The Company makes inquiries of the third-party pricing sources and reviews their documented valuation methodologies to understand the significant inputs and assumptions used to determine prices. The Company reviews the various third-party fair value estimates and performs procedures to validate their reasonableness, including comparison to recent trading activity for similar securities and an overall review for consistency with market conditions observed as of the measurement date.
Credit securities – The Company's investments in commercial MBS are classified within Level 2 of the fair value hierarchy. Inputs to fair value measurements of the Company's investments in commercial MBS include quoted prices for similar assets in recent market transactions and estimates obtained from third-party sources including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources are based upon observable transactions for securities with similar characteristics. The Company reviews the third-party fair value estimates and performs procedures to validate their reasonableness, including comparisons to recent trading activity observed for similar securities as well as an internally derived discounted future cash flow measurement. The Company’s investments in non-agency MBS collateralized by a pool of business purpose residential mortgage loans and ABS collateralized by residential solar panel loans are classified within Level 3 of the fair value hierarchy.
To measure the fair value of the Company’s non-agency MBS investment secured by a pool of business purpose residential mortgage loans, the Company uses an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from the security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company uses significant judgment to develop assumptions about the future performance of the pool of business purpose residential mortgage loans that serve as collateral, including loan-level probabilities of default and loss-given-default. As of June 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans serving as collateral to the Company's non-agency MBS investment represented less than
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Probability of default |
|
% |
|
|
% |
||
Loss-given-default |
|
% |
|
|
% |
||
Inputs to fair value measurements of the Company’s investments in ABS collateralized by residential solar panel loans includes either quoted prices obtained from dealers or an internally derived discounted future cash flow measurement.
Loans – The Company’s commercial mortgage loan investment is classified within Level 3 of the fair value hierarchy. To measure the fair value of its mortgage loan investment, the Company uses an income approach by preparing an estimate of the present value of the expected future cash flows of the loan over its expected remaining life, discounted at a current market rate. The
22
significant unobservable inputs to the fair value measurement of the Company’s mortgage loan investment are the estimated probability of default and the discount rate, which is based on current market yields and interest rate spreads for a similar loan. As of June 30, 2023, the estimated probability of default and discount rate for the Company’s mortgage loan investment were
Mortgage loans and secured debt of consolidated VIEs – The Company has elected to apply a fair value measurement practical expedient permitted by GAAP to measure the fair value of the mortgage loans and debt obligations of its consolidated VIEs. The fair value measurement practical expedient is permitted to be applied to consolidated “collateralized financing entities,” which are VIEs for which the financial liabilities of the VIE have contractual recourse solely to the financial assets of the VIE.
As of June 30, 2023 and December 31, 2022, pursuant to the practical expedient, the Company measured the fair value of both the mortgage loans and the debt obligations of its consolidated VIE of business purpose residential mortgage loans based upon the fair value of the mortgage loans of the VIE. As of December 31, 2022, the senior debt obligations of the consolidated VIE had been fully extinguished and only the subordinate debt obligation of the consolidated VIE remained. The business purpose residential mortgage loans and subordinate debt obligation of the consolidated VIE are classified within Level 3 of the fair value hierarchy. To measure the fair value of the business purpose residential mortgage loans of the consolidated VIE as of June 30, 2023 and December 31, 2022, the Company used significant judgment to develop assumptions about the future performance of each business purpose residential mortgage loan, which included determining loan-level probabilities of default and loss-given-default. As of June 30, 2023 and December 31, 2022, the remaining population of business purpose residential mortgage loans represented less than
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Probability of default |
|
% |
|
|
% |
||
Loss-given-default |
|
% |
|
|
% |
||
On March 7, 2023, the Company sold all of its investments in its previously consolidated VIE of residential mortgage loans and, as a result, deconsolidated the VIE. As of December 31, 2022, the Company measured the fair value of both the residential mortgage loans and the debt obligations of its consolidated VIE of residential mortgage loans based upon the fair value of the debt obligations as the fair value of the debt securities issued by the VIE were more observable to the Company than the fair value of the underlying mortgage loans.
The senior and mezzanine debt obligations of the consolidated VIE of residential mortgage loans were classified within Level 2 of the fair value hierarchy. Inputs to the fair value measurements of the senior and mezzanine debt obligations of the consolidated VIE included quoted prices for similar assets in recent market transactions and estimates obtained from third-party pricing sources, including pricing services and dealers. In determining fair value, third-party pricing sources use a market approach. The inputs used in the fair value measurements performed by third-party pricing sources were based upon observable transactions for securities with similar characteristics.
The residential mortgage loans and the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans (held by the Company as investments and eliminated against the associated debt of the VIE in consolidation) were classified within Level 3 of the fair value hierarchy. To measure the fair value of the subordinate and excess interest-only debt obligations of the consolidated VIE of residential mortgage loans, the Company used an income approach by preparing an estimate of the present value of the amount and timing of the cash flows expected to be collected from each security over its expected remaining life. To prepare the estimate of cash flows expected to be collected, the Company used significant judgment to develop assumptions about the future performance of the pool of residential mortgage loans that served as collateral, including assumptions about the timing and amount of credit losses and prepayments. The significant unobservable inputs to the fair value measurement included the estimated rate of prepayment, rate of default and loss-given-default for the underlying pool of mortgage loans as well as the discount rate, which represented a market participant’s current required rate of return for a similar instrument.
23
|
Subordinate Debt Obligation |
|
|
Excess Interest-Only Debt Obligations |
|
||
Annualized voluntary prepayment rate |
|
% |
|
|
% |
||
Annualized default rate |
|
% |
|
|
% |
||
Loss-given-default |
|
% |
|
|
% |
||
Discount rate |
|
% |
|
|
% |
||
MSR financing receivables – The Company’s MSR financing receivables are classified within Level 3 of the fair value hierarchy. The Company uses a nationally recognized, independent third-party mortgage analytics and valuation firm to estimate the fair value of the underlying MSRs from which the Company’s MSR financing receivables primarily derive their value. The third-party valuation firm estimates the fair value of the underlying MSRs using a discounted cash flow analysis using their proprietary prepayment models and market analysis. The Company corroborates the third-party valuation firm’s estimate of the fair value of the underlying MSRs and evaluates the estimate for reasonableness. The significant unobservable inputs to the fair value measurement of the underlying MSRs include the following:
The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of the periods indicated:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Discount rate |
|
|
% |
|
|
% |
||
Annualized prepayment rate |
|
|
% |
|
|
% |
||
Annual per-loan cost of servicing (current loans) |
|
$ |
|
|
$ |
|
||
Pursuant to the Company’s MSR financing receivable arrangements, upon the consummation of three-year performance periods ending December 31, 2023 and April 1, 2024, the Company’s mortgage servicing counterparty is entitled to an incentive fee payment equal to a percentage of the total return of the underlying MSRs in excess of a hurdle rate of return. Accordingly, the fair value of the Company’s MSR financing receivables reflects the present value of any expected incentive fee payment that would be owed to its counterparty. The present value of the expected incentive fee payment is estimated based upon the timing and amount of capital contributions from (and cash distributions to) the Company to (from) its mortgage servicing counterparty to date as well as the future expected cash flows from the MSR financing receivables over the remaining performance periods, which is derived from the current fair value of the underlying reference MSRs. As of June 30, 2023 and December 31, 2022, the present value of expected future incentive fee payments reflected in fair value of the Company’s MSR financing receivables was $
Derivative instruments
Exchange-traded derivative instruments – Exchange-traded derivative instruments, which include U.S. Treasury note futures, Eurodollar futures, interest rate swap futures, and options on futures, are classified within Level 1 of the fair value hierarchy as they are measured using quoted prices for identical instruments in liquid markets.
Interest rate swaps – Interest rate swaps are classified within Level 2 of the fair value hierarchy. The fair values of the Company’s centrally cleared interest rate swaps are measured using the daily valuations reported by the clearinghouse through which the instrument was cleared. In performing its end-of-day valuations, the clearinghouse constructs forward interest rate curves (for example, SOFR forward rates) from its specific observations of that day’s trading activity. The clearinghouse uses the applicable forward interest rate curve to develop a market-based forecast of future remaining contractually required cash flows for each interest rate swap. Each market-based cash flow forecast is then discounted using the SOFR curve (sourced from the Federal Reserve Bank of New York) to determine a net present value amount which represents the instrument’s fair value.
Forward-settling purchases and sales of TBA securities – Forward-settling purchases and sales of TBA securities are classified within Level 2 of the fair value hierarchy. The fair value of each forward-settling TBA contract is measured using price estimates
24
obtained from a third-party pricing service, which are based upon readily observable transaction prices occurring on the measurement date for forward-settling contracts to buy or sell TBA securities with the same guarantor, contractual maturity, and coupon rate for delivery on the same forward settlement date as the commitment under measurement.
Other
Long-term unsecured debt - As of June 30, 2023 and December 31, 2022, the carrying value of the Company’s long-term unsecured debt was $
Investments in equity securities of publicly-traded companies – As of June 30, 2023 and December 31, 2022, the Company had investments in equity securities of publicly-traded companies at fair value of $
Investments in equity securities of non-public companies and investment funds – As of June 30, 2023 and December 31, 2022, the Company had investments in equity securities of non-public companies and investment funds measured at fair value of $
Investments in equity securities of non-public companies and investment funds are classified within Level 3 of the fair value hierarchy. The fair values of the Company’s investments in equity securities of non-public companies and investment funds are not readily determinable. Accordingly, the Company estimates fair value by estimating the enterprise value of the investee which it then allocates to the investee’s securities in the order of their preference relative to one another. To estimate the enterprise value of the investee, the Company uses traditional valuation methodologies based on income and market approaches, including the consideration of recent investments in, or tender offers for, the equity securities of the investee, a discounted cash flow analysis and a comparable guideline public company valuation. The primary unobservable inputs used in estimating the fair value of an equity security of a non-public company include (i) a stock price to net asset multiple for similar public companies that is applied to the entity’s net assets, (ii) a discount factor for lack of marketability and control, and (iii) a cost of equity discount rate, used to discount to present value the equity cash flows available for distribution and the terminal value of the entity. As of June 30, 2023, the stock price to net asset multiple for similar public companies, the discount factor for lack of marketability and control, and the cost of equity discount rate used as inputs were
Financial assets and liabilities for which carrying value approximates fair value - Cash and cash equivalents, restricted cash, deposits, receivables, repurchase agreements, payables, and other assets (aside from those previously discussed) and liabilities are generally reflected in the consolidated balance sheets at their cost, which, due to the short-term nature of these instruments and their limited inherent credit risk, approximates fair value.
25
Fair Value Hierarchy
Financial Instruments Measured at Fair Value on a Recurring Basis
The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of June 30, 2023 and December 31, 2022. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
June 30, 2023 |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency MBS |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
MSR financing receivables |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Credit securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage loans of consolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Secured debt of consolidated VIEs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
December 31, 2022 |
|
|||||||||||||
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Agency MBS |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
MSR financing receivables |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Credit securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Mortgage loans of consolidated VIE |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Secured debt of consolidated VIE |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivative liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Level 3 Financial Assets and Liabilities
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the periods indicated:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Beginning balance |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net gains (loss) included in "Investment and derivative |
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
Additions from consolidation of VIEs |
|
|
|
|
|
|
|
|
|
|
|
||||
Transfers to real estate owned by consolidated VIE |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Purchases |
|
|
|
|
|
|
|
|
|
|
|
||||
Sales |
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Payments, net |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Subtractions from deconsolidation of VIEs |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Accretion of discount, net |
|
|
|
|
|
|
|
|
|
|
|
||||
Ending balance |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net unrealized gains (losses) included in earnings for the |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||
26
The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the periods indicated:
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Beginning balance |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net (gain) loss included in "Investment and derivative |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Additions from consolidation of VIEs |
|
|
|
|
|
|
|
|
|
|
|
||||
Payments, net |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Subtractions from deconsolidation of VIEs |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Amortization of premium, net |
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Ending balance |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net unrealized (gains) losses included in earnings for the |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Note 13. Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code commencing upon filing its tax return for its taxable year ended December 31, 2019. As a REIT, the Company is required to distribute annually
As of June 30, 2023, the Company had estimated federal net operating loss (“NOL”) carryforwards of $
The Company and subsidiaries have made joint elections to treat such subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business, subject to certain exceptions. As such, each of these TRSs is taxable as a C corporation and subject to federal, state and local income taxes based upon their taxable income. For the three months ended June 30, 2023 and 2022, the Company recognized a provision for income taxes of $
The Company recognizes uncertain tax positions in the financial statements only when it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more-likely-than-not be realized upon settlement. A liability is established for differences between positions taken in a tax return and the financial statements. As of June 30, 2023 and December 31, 2022, the Company assessed the need for recording a provision for any uncertain tax position and has made the determination that such provision is not necessary. If the Company were to incur income tax related interest and penalties, the Company’s policy is to classify them as a component of provision for income taxes.
The Company is subject to examination by the Internal Revenue Service (“IRS”) and state and local authorities in jurisdictions where the Company has significant business operations. The Company’s federal tax returns for 2019 and forward remain subject to examination by the IRS.
Note 14. Earnings (Loss) Per Share
27
Basic earnings (loss) per share includes no dilution and is computed by dividing net income or loss applicable to common stock by the weighted-average number of common shares outstanding for the respective period. Diluted earnings per share includes the impact of dilutive securities such as unvested shares of restricted stock, restricted stock units, and performance share units.
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(Shares in thousands) |
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Basic weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Performance share units, unvested restricted stock units, |
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted weighted-average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) available (attributable) to common stock |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Basic earnings (loss) per common share |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Diluted earnings (loss) per common share |
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
The diluted loss per share for the three and six months ended June 30, 2022 did not include the antidilutive effect of
Note 15. Stockholders’ Equity
Common Stock
The Company has authorized common share capital of
Common Equity Distribution Agreements
On August 10, 2018, the Company entered into separate common equity distribution agreements with equity sales agents JMP Securities LLC, B. Riley FBR, Inc., JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc. pursuant to which the Company may offer and sell, from time to time, up to
Pursuant to the common equity distribution agreements, shares of the Company’s common stock may be offered and sold through the equity sales agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or, subject to the terms of a written notice from the Company, in privately negotiated transactions.
During the three and six months ended June 30, 2023 and the year ended December 31, 2022, there were
As of June 30, 2023, the Company had
Common Share Repurchase Program
On July 31, 2020, the Company announced that its Board of Directors authorized a share repurchase program pursuant to which the Company may repurchase up to
28
There were
Preferred Stock
The Company has authorized preferred share capital of (i)
The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series B Preferred Stock have
The Series C Preferred Stock has no stated maturity, is not subject to any sinking fund and will remain outstanding indefinitely unless repurchased or redeemed by the Company. Holders of Series C Preferred Stock have
Preferred Equity Distribution Agreements
The Company is party to an amended and restated equity distribution agreement with JonesTrading Institutional Services LLC and Ladenburg Thalmann & Co. Inc., pursuant to which the Company may offer and sell, from time to time, up to
There were
Shareholder Rights Agreement
On June 1, 2009, the Board of Directors approved a shareholder rights agreement (“Rights Plan”) and the Company’s shareholders approved the Rights Plan at its annual meeting of shareholders on June 2, 2010. On April 9, 2018, the Board of Directors
29
approved a first amendment to the Rights Plan (“First Amendment”) to extend the term for an additional
Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of
The Board of Directors adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOL carryforwards, NCL carryforwards, and built-in losses under Sections 382 and 383 of the Internal Revenue Code. The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if it experienced an “ownership change” under Section 382 of the Internal Revenue Code. In general, an “ownership change” would occur if there is a cumulative change in the ownership of the Company’s common stock of more than 50% by one or more “5% shareholders” during a three-year period. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock, each, an Acquiring Person, without the approval of the Board of Directors and triggering an “ownership change” as defined by Section 382.
The Rights Plan, as amended by the Second Amendment, and any outstanding rights will expire at the earliest of (i) June 4, 2025, (ii) the time at which the rights are redeemed or exchanged pursuant to the Rights Plan, (iii) the repeal of Section 382 and 383 of the Internal Revenue Code or any successor statute if the Board of Directors determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, or (iv) the beginning of a taxable year to which the Board of Directors determines that no applicable tax benefits may be carried forward.
Note 16. Long-Term Incentive Plan
The Company provides its employees and its non-employee directors with long-term incentive compensation in the form of stock-based awards. On April 29, 2021, the Board of Directors adopted the Arlington Asset Investment Corp. 2021 Long-Term Incentive Plan (the “2021 Plan”), which was approved by the Company’s shareholders and became effective on July 15, 2021. The 2021 Plan replaced the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan (the “2014 Plan”). No additional grants will be made under the 2014 Plan. However, previous grants under the 2014 Plan and any long-term incentive plans prior to the 2014 Plan (collectively, the “Prior Plans”) will remain in effect subject to the terms of the Prior Plans and the applicable award agreement.
Under the 2021 Plan, a maximum number of
Under the 2021 Plan, the Compensation Committee of the Company’s Board of Directors may grant restricted stock, restricted stock units (“RSUs”), stock options, SARs and/or other stock-based awards. Under the 2021 Plan, shares issued upon the exercise of a stock option or SAR or shares subject to a restricted stock award and any shares issued in settlement of restricted stock unit award, reduced by the number of any shares withheld to satisfy withholding taxes, may not be sold or transferred before the earlier of (i) the first anniversary of the exercise of the option or SAR or vesting of the restricted stock award or the settlement of restricted stock unit award, or (ii) the date the participant is no longer employed by or providing services to the Company or an affiliate. Non-employee members of the Board of Directors may not be granted awards under the 2021 Plan during any twelve-month period with respect to the number of shares that have a fair market value on the date of grant that exceeds $
30
Stock-based compensation costs are initially measured at the estimated fair value of the awards on the grant date developed using appropriate valuation methodologies, as adjusted for estimates of future award forfeitures. Valuation methodologies used and subsequent expense recognition is dependent upon each award’s service and performance conditions.
Performance-based Stock Awards
The Company has granted performance-based RSUs and performance stock units (collectively, “Performance-based Stock Awards”) to employees of the Company that are convertible into shares of Class A common stock following the achievement of performance goals over the applicable performance periods. Compensation costs for Performance-based Stock Awards subject to nonmarket-based performance conditions (i.e., performance not predicated on changes in the Company’s stock price) are measured at the closing stock price on the dates of grant, adjusted for the probability of achieving certain benchmarks included in the performance metrics. These initial cost estimates are recognized as expense over the requisite performance periods, as adjusted for changes in estimated, and ultimately actual, performance and forfeitures. Compensation costs for components of Performance-based Stock Awards subject to market-based performance conditions (i.e., performance predicated on changes in the Company’s stock price) are measured at the dates of grant using a Monte Carlo simulation model which incorporates into the valuation the inherent uncertainty regarding the achievement of the market-based performance metrics. These initial valuation amounts are recognized as expense over the requisite performance periods, subject only to adjustments for changes in estimated, and ultimately actual, forfeitures.
The Compensation Committee has granted Performance-based Stock Awards with performance goals based on (i) the compound annualized total shareholder return (i.e., share price change plus dividends on a reinvested basis) during the applicable performance period (“Absolute TSR Awards”), (ii) the compound annualized total shareholder return relative to a peer index during the applicable performance period (“Relative TSR Awards”), (iii) the compound annualized growth in the Company’s book value per share (i.e., book value change with such adjustments as determined and approved by the Compensation Committee plus dividends on a reinvested basis) during the applicable performance period (“Book Value Awards”), and (iv) the share price of the Company's common stock during the applicable performance period ("Stock Price Awards").
The Compensation Committee of the Board of Directors of the Company approved the following Performance-based Stock Award grants for the periods indicated:
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
Absolute TSR Awards granted |
|
|
|
|
|
|
||
Absolute TSR Award grant date fair value per share |
|
$ |
|
|
$ |
|
||
Relative TSR Awards granted |
|
|
|
|
|
|
||
Relative TSR Award grant date fair value per share |
|
$ |
|
|
$ |
|
||
Book Value Awards granted |
|
|
|
|
|
|
||
Book Value Award grant date fair value per share |
|
$ |
|
|
$ |
|
||
Stock Price Awards granted |
|
|
|
|
|
|
||
Stock Price Award grant date fair value per share |
|
$ |
|
|
$ |
|
||
For the Company’s Book Value Awards, the grant date fair value per share is based on the close price on the date of grant. For the Company’s Absolute TSR Awards, Relative TSR Awards and Stock Price Awards, the grant date fair value per share is based on a Monte Carlo simulation model.
|
|
Absolute TSR Awards |
|
|
Relative TSR Awards |
|
|
Stock Price Awards |
|
|||||||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||||
Closing stock price on date of grant |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Beginning average stock price on |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
N/A |
|
||||||
Expected volatility (2) |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||
Dividend yield (3) |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||
Risk-free rate (4) |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||
Discount for illiquidity (5) |
|
|
|
|
|
% |
|
|
|
|
|
% |
|
|
|
|
|
% |
||||||
31
The vesting of the Performance-based Stock Awards is subject to both continued employment under the terms of the award agreement and the achievement of the Company performance goals established by the Compensation Committee.
For Absolute TSR Awards and Relative TSR Awards granted, the Compensation Committee established a
For Book Value Awards granted during the year ended December 31, 2022, the Compensation Committee established a one-year performance period that ended on December 31, 2022. The actual number of shares of Class A common stock that could be issued to each participant at the end of the performance period varied between
For Stock Price Awards granted, the Compensation Committee established a
Performance-based Stock Awards do not have any voting rights. No dividends are paid on outstanding Performance-based Stock Awards during the applicable performance period. Instead, dividend equivalents are accrued on outstanding Performance-based Stock Awards during the applicable performance period, deemed invested in shares of Class A common stock and are paid out in shares of Class A common stock at the end of the performance period to the extent that the underlying Performance-based Stock Awards vest.
For the six months ended June 30, 2023 and 2022, the Company recognized $
During the six months ended June 30, 2023, Relative TSR Awards that had a performance period ending in that period were earned at
32
Employee Restricted Stock Awards
Compensation costs for restricted stock awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual, forfeitures.
The Company grants restricted common shares to employees that either vest ratably over a three-year period or cliff vest at the end of a three-year period based on continued employment over these specified periods. A summary of these unvested restricted stock awards is presented below:
|
|
Number of Shares |
|
|
Weighted-average |
|
|
Weighted- |
|
|||
Share Balance as of December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
— |
|
||
Forfeitures |
|
|
( |
) |
|
|
|
|
|
— |
|
|
Vestitures |
|
|
( |
) |
|
|
|
|
|
|
||
Share Balance as of December 31, 2022 |
|
|
|
|
|
|
|
|
|
|||
Granted |
|
|
|
|
|
|
|
|
— |
|
||
Conversion of Book Value Awards |
|
|
|
|
|
|
|
|
— |
|
||
Vestitures |
|
|
( |
) |
|
|
|
|
|
— |
|
|
Share Balance as of June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|||
For the six months ended June 30, 2023 and 2022, the Company recognized $
Director Restricted Stock Units
Compensation costs for RSU awards subject only to service conditions are measured at the closing stock price on the dates of grant and are recognized as expense on a straight-line basis over the requisite service periods for the awards, as adjusted for changes in estimated, and ultimately actual, forfeitures. Compensation costs for RSUs that do not require future service conditions are expensed immediately.
The Company’s non-employee directors are compensated in both cash and RSUs. RSUs awarded to non-employee directors vest immediately on the award grant date and are convertible into shares of Class A common stock. For RSUs granted under the Company’s 2021 Plan, 2014 Plan, and certain of the Prior Plans, the RSUs are convertible into shares of Class A common stock at the later of the date the non-employee director ceases to be a member of the Company’s Board or the first anniversary of the grant date. For RSUs granted under certain Prior Plans, the RSUs are convertible into shares of Class A common stock one year after the non-employee director ceases to be a member of the Company’s Board. The non-employee director RSUs do not have any voting rights but are entitled to cash dividend equivalent payments. As of June 30, 2023 and December 31, 2022, the Company had
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
RSUs granted |
|
|
|
|
|
|
||
Grant date fair value |
|
$ |
|
|
$ |
|
||
The grant date fair value of a non-employee director RSU grant is based on the closing price of the Class A common stock on the New York Stock Exchange on the date of grant. For the six months ended June 30, 2023 and 2022, the Company recognized $
33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context otherwise requires or provides, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” refer to Arlington Asset Investment Corp. (“Arlington Asset”) and its subsidiaries. This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in Item 1 of this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.
The discussion of our consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect our future results, please see “Cautionary Statement About Forward-Looking Information” in Item 3 of Part I of this Quarterly Report on Form 10-Q and the risk factors included in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2022 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
Our Company
We are an investment firm that currently focuses primarily on investing in mortgage related assets. Our investment capital is currently allocated between the following asset classes:
Our MSR related assets represent investments for which the return is based on the economic performance of a pool of specific MSRs. Our credit investments generally include investments in mortgage loans secured by either residential or commercial real property or MBS collateralized by residential or commercial mortgage loans (“non-agency MBS”) or asset-backed securities (“ABS”) collateralized by residential solar panel loans. Our agency MBS consist of residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a U.S. government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
We also previously allocated investment capital to a strategy of investing in single-family residential ("SFR") properties that consisted of acquiring, leasing and operating single-family residential homes as rental properties. During 2022, we sold our portfolio of SFR properties and are currently no longer anticipating allocating capital to an SFR investment strategy.
We may also invest in other asset classes that our management team believes may offer attractive risk adjusted returns outside the real estate or mortgage asset classes.
We are internally managed and do not have an external investment advisor.
Factors that Affect our Results of Operations and Financial Condition
Our business is materially affected by a variety of industry and economic factors, including:
Current Market Conditions and Trends
The 10-year U.S. Treasury rate was 3.84% as of June 30, 2023, a 37 basis point increase from the prior quarter end. The interest rate curve, measured as the spread between the 2-year and 10-year U.S. Treasury, inverted further by 50 basis points to 106 basis points as of June 30, 2023. With the increase in the 10-year U.S. Treasury rate, residential mortgage rates increased during the second quarter of 2023 evidenced by the Freddie Mac average primary mortgage rate increasing by 39 basis points to 6.71% as of June 30, 2023. The spread between the current coupon agency MBS and the 10-year swap rate widened by 19 basis points during the second
34
quarter of 2023. The rate of inflation began to decline from its peak reached during 2022 with the Consumer Price Index declining to 3.0% for the twelve-month period ending June 30, 2023.
In order to address persistently high inflation, the U.S. Federal Reserve has continued to take actions with the objective of lowering inflation by significantly raising interest rates. At its scheduled May 2023 meeting, the Federal Open Market Committee (“FOMC”) raised its target range for the federal funds rate by 25 basis points to a target range of 5.00% to 5.25%. At its scheduled June 2023 meeting, the FOMC decided to keep its target range for the federal funds rate unchanged to allow the FOMC time to evaluate the impact of its monetary policy on economic activity and inflation. In addition, the FOMC announced that it will continue reducing its holdings of Treasury securities and agency debt and agency MBS.
Prepayment speeds in the fixed-rate residential mortgage market increased slightly during the second quarter of 2023 primarily due to increased refinancing activity from the fall in the primary mortgage rate during the fourth quarter of 2022 and first quarter of 2023. Pay-up premiums on agency MBS, which represent the price premium of agency MBS backed by specified pools over a TBA security, remained relatively unchanged during the second quarter of 2023. Valuation multiples of MSRs increased slightly during the second quarter of 2023 due in part to the rise in interest rates.
Housing prices declined from the prior year evidenced by Standard & Poor’s CoreLogic Case-Shiller U.S. National Home Price NSA index reporting a 0.5% annual decline in May 2023 as more expensive mortgage financing from higher interest rates has impacted the housing market.
The following table presents certain key market data as of the dates indicated:
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
Change - Second Quarter 2023 |
|
||||||
30-Year FNMA Fixed Rate MBS (1) |
|
||||||||||||||||||||||
3.0% |
$ |
93.11 |
|
|
$ |
86.81 |
|
|
$ |
87.71 |
|
|
$ |
89.59 |
|
|
$ |
87.91 |
|
|
$ |
(1.68 |
) |
3.5% |
|
96.17 |
|
|
|
89.83 |
|
|
|
90.82 |
|
|
|
92.80 |
|
|
|
91.01 |
|
|
|
(1.79 |
) |
4.0% |
|
98.62 |
|
|
|
92.68 |
|
|
|
93.77 |
|
|
|
95.56 |
|
|
|
93.73 |
|
|
|
(1.83 |
) |
4.5% |
|
100.39 |
|
|
|
95.18 |
|
|
|
96.31 |
|
|
|
97.92 |
|
|
|
96.05 |
|
|
|
(1.87 |
) |
5.0% |
|
102.07 |
|
|
|
97.34 |
|
|
|
98.52 |
|
|
|
99.69 |
|
|
|
97.92 |
|
|
|
(1.77 |
) |
Investment Spreads |
|
||||||||||||||||||||||
FNMA Current Coupon vs. |
129 bps |
|
|
180 bps |
|
|
155 bps |
|
|
158 bps |
|
|
177 bps |
|
|
19 bps |
|
||||||
30 Year Fixed Mortgage Rate |
|
||||||||||||||||||||||
Freddie Mac Average Primary |
|
5.70 |
% |
|
|
6.70 |
% |
|
|
6.42 |
% |
|
|
6.32 |
% |
|
|
6.71 |
% |
|
39 bps |
|
|
U.S. Treasury Rates ("UST") |
|
||||||||||||||||||||||
2-year UST |
|
2.95 |
% |
|
|
4.28 |
% |
|
|
4.43 |
% |
|
|
4.03 |
% |
|
|
4.90 |
% |
|
87 bps |
|
|
5-year UST |
|
3.04 |
% |
|
|
4.09 |
% |
|
|
4.00 |
% |
|
|
3.57 |
% |
|
|
4.16 |
% |
|
59 bps |
|
|
10-year UST |
|
3.01 |
% |
|
|
3.83 |
% |
|
|
3.87 |
% |
|
|
3.47 |
% |
|
|
3.84 |
% |
|
37 bps |
|
|
2-year UST to 10-year UST spread |
6 bps |
|
|
-45 bps |
|
|
-56 bps |
|
|
-56 bps |
|
|
-106 bps |
|
|
-50 bps |
|
||||||
Interest Rate Swap Rates |
|
||||||||||||||||||||||
2-year swap |
|
3.28 |
% |
|
|
4.55 |
% |
|
|
4.71 |
% |
|
|
4.36 |
% |
|
|
5.10 |
% |
|
74 bps |
|
|
5-year swap |
|
3.08 |
% |
|
|
4.14 |
% |
|
|
4.02 |
% |
|
|
3.63 |
% |
|
|
4.22 |
% |
|
59 bps |
|
|
10-year swap |
|
3.09 |
% |
|
|
3.88 |
% |
|
|
3.84 |
% |
|
|
3.46 |
% |
|
|
3.86 |
% |
|
40 bps |
|
|
2-year swap to 2-year UST spread |
33 bps |
|
|
27 bps |
|
|
28 bps |
|
|
33 bps |
|
|
20 bps |
|
|
-13 bps |
|
||||||
10-year swap to 10-year UST spread |
8 bps |
|
|
5 bps |
|
|
-3 bps |
|
|
-1 bps |
|
|
2 bps |
|
|
3 bps |
|
||||||
London Interbank Offered Rates ("LIBOR") and Secured Overnight Financing Rate ("SOFR") |
|
||||||||||||||||||||||
1-month LIBOR |
|
1.79 |
% |
|
|
3.14 |
% |
|
|
4.39 |
% |
|
|
4.86 |
% |
|
|
5.22 |
% |
|
36 bps |
|
|
3-month LIBOR |
|
2.29 |
% |
|
|
3.75 |
% |
|
|
4.77 |
% |
|
|
5.19 |
% |
|
|
5.55 |
% |
|
36 bps |
|
|
SOFR |
|
1.69 |
% |
|
|
3.04 |
% |
|
|
4.36 |
% |
|
|
4.80 |
% |
|
|
5.14 |
% |
|
34 bps |
|
|
Twelve Month Percent Change in Consumer Price Index ("CPI") |
|
||||||||||||||||||||||
1-month LIBOR |
|
9.10 |
% |
|
|
8.20 |
% |
|
|
6.50 |
% |
|
|
5.00 |
% |
|
|
3.00 |
% |
|
-200 bps |
|
|
Elimination of LIBOR
As of June 30, 2023, our LIBOR-based financial instruments had been converted to a SOFR-based or alternative interests rates.
35
Portfolio Overview
The following table summarizes our asset and capital allocation of our investment strategies as of June 30, 2023 (dollars in thousands):
|
|
June 30, 2023 |
|
|||||||||||||
|
|
Assets |
|
|
Invested Capital |
|
|
Invested Capital |
|
|
Leverage (2) |
|
||||
MSR financing receivables |
|
$ |
195,893 |
|
|
$ |
195,893 |
|
|
|
66 |
% |
|
|
— |
|
Credit investments (3) |
|
|
130,347 |
|
|
|
33,952 |
|
|
|
11 |
% |
|
|
2.8 |
|
Agency MBS (4) |
|
|
124,267 |
|
|
|
68,894 |
|
|
|
23 |
% |
|
|
0.8 |
|
Total invested capital |
|
$ |
450,507 |
|
|
|
298,739 |
|
|
|
100 |
% |
|
|
|
|
Cash and other corporate capital, net |
|
|
|
|
|
7,884 |
|
|
|
|
|
|
|
|||
Total investable capital |
|
|
|
|
$ |
306,623 |
|
|
|
|
|
0.5 |
|
|||
MSR Financing Receivables
As of June 30, 2023, we had $195.9 million of MSR financing receivable investments at fair value. We are party to agreements with a licensed, GSE approved residential mortgage loan servicer that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty. The arrangement allows us to participate in the economic benefits of investing in an MSR without holding the requisite licenses to purchase or hold MSRs directly. The transactions are accounted for as a financing receivable in our consolidated financial statements. The following tables present further information about our MSR financing receivable investments as of June 30, 2023 (dollars in thousands):
Amortized Cost Basis (1) |
|
|
Unrealized Gain |
|
|
Fair Value |
|
|||
$ |
144,480 |
|
|
$ |
51,413 |
|
|
$ |
195,893 |
|
MSR Financing Receivable Underlying Reference Amounts: |
|
|
|
|
|
|
|
|||||||||||||||||||
MSRs |
|
|
Financing |
|
|
Advances |
|
|
Cash and Other Net Receivables |
|
|
Counterparty Incentive Fee Accrual |
|
|
MSR Financing Receivables |
|
|
Implicit |
|
|||||||
$ |
182,751 |
|
|
$ |
— |
|
|
$ |
3,283 |
|
|
$ |
9,859 |
|
|
$ |
— |
|
|
$ |
195,893 |
|
|
|
— |
|
Underlying Reference MSRs: |
|
|||||||||||||||||||||||||
Holder of Loans |
|
Unpaid Principal Balance |
|
|
Weighted-Average Note Rate |
|
|
Weighted-Average Servicing Fee |
|
|
Weighted-Average Loan Age |
|
Price |
|
|
Multiple (1) |
|
|
Fair Value |
|
||||||
Fannie Mae |
|
$ |
12,093,517 |
|
|
|
3.09 |
% |
|
|
0.25 |
% |
|
32 months |
|
|
1.39 |
% |
|
|
5.57 |
|
|
$ |
168,668 |
|
Freddie Mac |
|
|
985,572 |
|
|
|
3.71 |
% |
|
|
0.25 |
% |
|
28 months |
|
|
1.43 |
% |
|
|
5.72 |
|
|
|
14,083 |
|
Total/weighted-average |
|
$ |
13,079,089 |
|
|
|
3.14 |
% |
|
|
0.25 |
% |
|
32 months |
|
|
1.40 |
% |
|
|
5.58 |
|
|
$ |
182,751 |
|
36
Credit Investment Portfolio
The following table presents information about our credit investments as of June 30, 2023 (dollars in thousands):
|
|
Market Price |
|
|
Fair Value (1) |
|
|
Financing |
|
|
Invested |
|
|
Leverage |
|
|||||
AAA rated commercial MBS |
|
$ |
99.66 |
|
|
$ |
99,657 |
|
|
$ |
79,493 |
|
|
$ |
20,355 |
|
|
|
3.9 |
|
Commercial mortgage loan |
|
|
100.00 |
|
|
|
25,992 |
|
|
|
17,247 |
|
|
|
8,899 |
|
|
|
1.9 |
|
Business purpose residential MBS (3) |
|
|
61.85 |
|
|
|
2,935 |
|
|
|
— |
|
|
|
2,935 |
|
|
|
— |
|
Solar ABS |
|
|
34.84 |
|
|
|
1,763 |
|
|
|
— |
|
|
|
1,763 |
|
|
|
— |
|
Total/weighted-average |
|
|
|
|
$ |
130,347 |
|
|
$ |
96,740 |
|
|
$ |
33,952 |
|
|
|
2.8 |
|
|
Our classes of credit investments as of June 30, 2023 are summarized as follows:
Commercial MBS - We hold two AAA rated senior position commercial MBS which are summarized as follows:
Commercial mortgage loan - Our commercial mortgage loan investment is a $26.0 million participation in an unrated $76.9 million syndicated mortgage loan secured by a first lien position in 42 midwestern health care facilities. The mortgage loan is guaranteed by the parent operating company. The loan carries a variable note rate of one-month term SOFR plus 5.61% and matures on September 23, 2023.
Business purpose residential MBS - We hold residual interests in two securitized pools of business purpose residential mortgage loans with a combined fair value of $2.9 million. As of June 30, 2023, the underlying collateral pools are comprised of 13 first lien mortgage loans or foreclosed real estate with an unpaid principal balance of $3.5 million. The underlying collateral pools as of June 30, 2023 represented less than 5% of the original collateral pools. We expect substantial realization of the remaining value to occur within the next several quarters.
Solar ABS - We hold a first loss position in a securitized pool of loans for the purchase and installation of solar panels on residential real estate with a fair value of $1.8 million and unpaid principal balance of $5.1 million. As of June 30, 2023, the underlying collateral pool was comprised of 9,388 loans with an unpaid principal balance of $339 million and a delinquency rate of 1.6%.
Agency MBS Investment Portfolio
Our agency MBS investment portfolio consisted of the following as of June 30, 2023 (dollars in thousands):
|
|
Fair Value |
|
|
Agency MBS |
|
$ |
467,503 |
|
Net short TBA Position |
|
|
(343,236 |
) |
Total agency MBS investment portfolio |
|
$ |
124,267 |
|
37
Our agency MBS consisted of the following as of June 30, 2023 (dollars in thousands):
|
|
Unpaid Principal Balance |
|
|
Net Unamortized Purchase Premiums (Discounts) |
|
|
Amortized Cost Basis |
|
|
Net Unrealized Gain (Loss) |
|
|
Fair Value |
|
|
Market Price |
|
|
Coupon |
|
|
Weighted |
|
||||||||
30-year fixed rate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
3.0% |
|
$ |
67,330 |
|
|
$ |
(2,393 |
) |
|
$ |
64,937 |
|
|
$ |
(5,480 |
) |
|
$ |
59,457 |
|
|
$ |
88.31 |
|
|
|
3.00 |
% |
|
|
10.3 |
|
4.0% |
|
|
182,192 |
|
|
|
178 |
|
|
|
182,370 |
|
|
|
(11,212 |
) |
|
|
171,158 |
|
|
|
93.94 |
|
|
|
4.00 |
% |
|
|
9.6 |
|
4.5% |
|
|
246,282 |
|
|
|
(5,491 |
) |
|
|
240,791 |
|
|
|
(3,910 |
) |
|
|
236,881 |
|
|
|
96.18 |
|
|
|
4.50 |
% |
|
|
9.8 |
|
5.5% |
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
7 |
|
|
|
102.00 |
|
|
|
5.50 |
% |
|
|
6.0 |
|
Total/weighted-average |
|
$ |
495,811 |
|
|
$ |
(7,706 |
) |
|
$ |
488,105 |
|
|
$ |
(20,602 |
) |
|
$ |
467,503 |
|
|
$ |
94.29 |
|
|
|
4.11 |
% |
|
|
9.8 |
|
|
|
Unpaid Principal Balance |
|
|
Net Unamortized Purchase Premiums (Discounts) |
|
|
Amortized Cost Basis |
|
|
Net Unrealized Gain (Loss) |
|
|
Fair Value |
|
|
Market |
|
|
Coupon |
|
|
Weighted |
|
||||||||
Fannie Mae |
|
$ |
241,390 |
|
|
$ |
(4,859 |
) |
|
$ |
236,531 |
|
|
$ |
(8,690 |
) |
|
$ |
227,841 |
|
|
$ |
94.39 |
|
|
|
4.13 |
% |
|
|
9.7 |
|
Freddie Mac |
|
|
254,421 |
|
|
|
(2,847 |
) |
|
|
251,574 |
|
|
|
(11,912 |
) |
|
|
239,662 |
|
|
|
94.20 |
|
|
|
4.09 |
% |
|
|
9.9 |
|
Total/weighted-average |
|
$ |
495,811 |
|
|
$ |
(7,706 |
) |
|
$ |
488,105 |
|
|
$ |
(20,602 |
) |
|
$ |
467,503 |
|
|
$ |
94.29 |
|
|
|
4.11 |
% |
|
|
9.8 |
|
The annualized prepayment rate for our agency MBS was 4.58% for the three months ended June 30, 2023. As of June 30, 2023, our agency MBS was comprised of securities specifically selected for their relatively lower propensity for prepayment, which includes approximately 53%, 32% and 15% in specified pools of loans originated in certain geographical areas, high loan-to-value loans and low balance loans, respectively. Weighted average pay-up premiums on our agency MBS portfolio, which represent the estimated price premium of agency MBS backed by specified pools over a TBA agency MBS, were approximately 0.19 of a percentage point as of June 30, 2023.
As of June 30, 2023, our agency MBS investment portfolio also included a net short TBA position. In accordance with GAAP, we account for our TBA positions as derivative instruments. Information about our net short TBA positions as of June 30, 2023 is as follows (dollars in thousands):
|
|
Notional Amount: |
|
|
|
|
|
|
|
|
|
|
||||
|
|
Net Long (Short) |
|
|
Implied |
|
|
Implied |
|
|
Net Carrying |
|
||||
|
|
Position (1) |
|
|
Cost Basis (2) |
|
|
Fair Value (3) |
|
|
Amount (4) |
|
||||
3.0% 30-year MBS sale commitments |
|
$ |
(67,000 |
) |
|
$ |
(59,315 |
) |
|
$ |
(58,944 |
) |
|
$ |
371 |
|
4.0% 30-year MBS purchase commitments |
|
|
40,000 |
|
|
|
37,875 |
|
|
|
37,522 |
|
|
|
(353 |
) |
4.0% 30-year MBS sale commitments |
|
|
(90,000 |
) |
|
|
(84,818 |
) |
|
|
(84,424 |
) |
|
|
394 |
|
4.5% 30-year MBS sale commitments |
|
|
(247,000 |
) |
|
|
(238,482 |
) |
|
|
(237,390 |
) |
|
|
1,092 |
|
Total net long (short) agency TBA positions |
|
$ |
(364,000 |
) |
|
$ |
(344,740 |
) |
|
$ |
(343,236 |
) |
|
$ |
1,504 |
|
Results of Operations
Net Operating Income
Net operating income primarily represents the interest and other income recognized from our investments in financial assets and rent revenues recognized from SFR properties net of the interest expense incurred from repurchase agreement financing arrangements or other short and long-term borrowing transactions and SFR property operating expenses.
Net operating income does not include TBA agency MBS dollar roll income (expense), which we believe represents the economic equivalent of net interest income (expense) earned (incurred) from our investments in non-specified fixed-rate agency MBS, nor does it include the net interest income or expense of our interest rate swap agreements, which are not designated as hedging instruments for financial reporting purposes. In our consolidated statements of comprehensive income, TBA agency MBS dollar roll
38
income (expense) and the net interest income or expense from our interest rate swap agreements are reported as a component of the overall periodic change in the fair value of derivative instruments within the line item “investment and derivative gain (loss), net.”
Investment and Derivative Gain (Loss), Net
“Investment and derivative gain (loss), net” primarily consists of periodic changes in the fair value (whether realized or unrealized) of our investments in financial assets, periodic changes in the fair value (whether realized or unrealized) of derivative instruments and realized gain (loss) on sale of SFR properties.
General and Administrative Expenses
“Compensation and benefits expense” includes base salaries, annual cash incentive compensation, and non-cash stock-based compensation. Annual cash incentive compensation is based on meeting estimated annual performance measures and discretionary components. Non-cash stock-based compensation includes expenses associated with stock-based awards granted to employees, including performance share units that are earned only upon the attainment of Company performance measures over the relevant measurement period.
“Other general and administrative expenses” primarily consists of the following:
Three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022
The following table presents the summary financial information for the three and six months ended June 30, 2023 and 2022, respectively (dollars in thousands, except per share amounts):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Interest and other income |
|
$ |
12,716 |
|
|
$ |
8,763 |
|
|
$ |
26,716 |
|
|
$ |
16,169 |
|
Rent revenues from single-family residential properties |
|
|
— |
|
|
|
2,137 |
|
|
|
— |
|
|
|
3,201 |
|
Interest expense |
|
|
(8,165 |
) |
|
|
(4,459 |
) |
|
|
(16,512 |
) |
|
|
(7,701 |
) |
Single-family residential property operating expenses |
|
|
— |
|
|
|
(1,915 |
) |
|
|
— |
|
|
|
(3,446 |
) |
Net operating income |
|
|
4,551 |
|
|
|
4,526 |
|
|
|
10,204 |
|
|
|
8,223 |
|
Investment and derivative gain (loss), net |
|
|
6,417 |
|
|
|
370 |
|
|
|
2,566 |
|
|
|
(457 |
) |
General and administrative expenses |
|
|
(4,713 |
) |
|
|
(3,787 |
) |
|
|
(8,624 |
) |
|
|
(7,071 |
) |
Income before income taxes |
|
|
6,255 |
|
|
|
1,109 |
|
|
|
4,146 |
|
|
|
695 |
|
Income tax provision |
|
|
1,387 |
|
|
|
802 |
|
|
|
1,496 |
|
|
|
3,089 |
|
Net income (loss) |
|
|
4,868 |
|
|
|
307 |
|
|
|
2,650 |
|
|
|
(2,394 |
) |
Dividend on preferred stock |
|
|
(660 |
) |
|
|
(707 |
) |
|
|
(1,320 |
) |
|
|
(1,449 |
) |
Net income (loss) available (attributable) to |
|
$ |
4,208 |
|
|
$ |
(400 |
) |
|
$ |
1,330 |
|
|
$ |
(3,843 |
) |
Diluted earnings (loss) per common share |
|
$ |
0.15 |
|
|
$ |
(0.01 |
) |
|
$ |
0.05 |
|
|
$ |
(0.13 |
) |
Weighted-average diluted common shares |
|
|
28,709 |
|
|
|
28,766 |
|
|
|
28,594 |
|
|
|
29,296 |
|
39
Interest and Other Income
Interest and other income increased $3.9 million, or 44.3%, from $8.8 million for the three months ended June 30, 2022 to $12.7 million for the three months ended June 30, 2023. Interest and other income increased $10.5 million, or 64.8%, from $16.2 million for the six months ended June 30, 2022 to $26.7 million for the six months ended June 30, 2023. The increase from the comparative periods is primarily the result of higher average investment balances in higher yielding agency MBS and credit investments and higher average investment balances in MSR financing receivables.
The components of interest and other income are summarized in the following tables for the periods indicated (dollars in thousands):
|
|
Three Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
||||||
Agency MBS |
|
$ |
472,813 |
|
|
$ |
5,040 |
|
|
|
4.26 |
% |
|
$ |
280,167 |
|
|
$ |
2,065 |
|
|
|
2.95 |
% |
Credit investments |
|
|
132,190 |
|
|
|
2,802 |
|
|
|
8.48 |
% |
|
|
62,869 |
|
|
|
991 |
|
|
|
6.31 |
% |
Mortgage loans of consolidated VIEs |
|
|
3,172 |
|
|
|
56 |
|
|
|
7.06 |
% |
|
|
262,098 |
|
|
|
1,611 |
|
|
|
2.46 |
% |
MSR financing receivables |
|
|
136,623 |
|
|
|
4,709 |
|
|
|
13.79 |
% |
|
|
104,244 |
|
|
|
3,983 |
|
|
|
15.28 |
% |
Other |
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
113 |
|
|
|
|
||||
Total |
|
$ |
744,798 |
|
|
$ |
12,716 |
|
|
|
6.83 |
% |
|
$ |
709,378 |
|
|
$ |
8,763 |
|
|
|
4.94 |
% |
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
|
Average |
|
|
Interest & |
|
|
Yield |
|
||||||
Agency MBS |
|
$ |
471,445 |
|
|
$ |
10,016 |
|
|
|
4.25 |
% |
|
$ |
336,192 |
|
|
$ |
3,557 |
|
|
|
2.12 |
% |
Credit investments |
|
|
133,517 |
|
|
|
5,564 |
|
|
|
8.33 |
% |
|
|
59,533 |
|
|
|
1,844 |
|
|
|
6.19 |
% |
Mortgage loans of consolidated VIEs |
|
|
89,671 |
|
|
|
1,454 |
|
|
|
3.24 |
% |
|
|
226,120 |
|
|
|
2,965 |
|
|
|
2.62 |
% |
MSR financing receivables |
|
|
136,319 |
|
|
|
9,394 |
|
|
|
13.78 |
% |
|
|
106,260 |
|
|
|
7,365 |
|
|
|
13.86 |
% |
Other |
|
|
|
|
|
288 |
|
|
|
|
|
|
|
|
|
438 |
|
|
|
|
||||
Total |
|
$ |
830,952 |
|
|
$ |
26,716 |
|
|
|
6.43 |
% |
|
$ |
728,105 |
|
|
$ |
16,169 |
|
|
|
4.44 |
% |
The effects of changes in the composition of our investments in financial assets on interest and other income are summarized below (dollars in thousands):
|
|
Three Months Ended June 30, 2023 |
|
|
Six Months Ended June 30, 2023 |
|
||||||||||||||||||
|
|
vs. |
|
|
vs. |
|
||||||||||||||||||
|
|
Three Months Ended June 30, 2022 |
|
|
Six Months Ended June 30, 2022 |
|
||||||||||||||||||
|
|
Rate |
|
|
Volume |
|
|
Total Change |
|
|
Rate |
|
|
Volume |
|
|
Total Change |
|
||||||
Agency MBS |
|
$ |
1,555 |
|
|
$ |
1,420 |
|
|
$ |
2,975 |
|
|
$ |
5,027 |
|
|
$ |
1,432 |
|
|
$ |
6,459 |
|
Credit investments |
|
|
734 |
|
|
|
1,077 |
|
|
|
1,811 |
|
|
|
1,355 |
|
|
|
2,365 |
|
|
|
3,720 |
|
Mortgage loans of consolidated VIEs |
|
|
37 |
|
|
|
(1,592 |
) |
|
|
(1,555 |
) |
|
|
278 |
|
|
|
(1,789 |
) |
|
|
(1,511 |
) |
MSR financing receivables |
|
|
(510 |
) |
|
|
1,236 |
|
|
|
726 |
|
|
|
(54 |
) |
|
|
2,083 |
|
|
|
2,029 |
|
Other |
|
|
— |
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(150 |
) |
|
|
(150 |
) |
Total |
|
$ |
1,816 |
|
|
$ |
2,137 |
|
|
$ |
3,953 |
|
|
$ |
6,606 |
|
|
$ |
3,941 |
|
|
$ |
10,547 |
|
Rent Revenues from SFR Properties
We began to acquire SFR properties pursuant to our SFR property rental investment strategy in September 2021. The homes we purchased may have required minor refurbishment prior to a tenant occupying the property. In addition, there was typically a lease marketing period prior to a new tenant occupying the home. In general, the time period between the date of settlement of the home purchase and the date the house was occupied by a tenant averaged between 30 to 60 days. Accordingly, the timing of the earnings benefit to us was dictated by the pace of home purchases, the level of any property level refurbishments and the length of the lease marketing period.
40
During the year ended December 31, 2022, we sold all our SFR rental properties in two separate transactions in August 2022 and December 2022. Going forward, we do not anticipate allocating capital to an SFR investment strategy.
For the three and six months ended June 30, 2022, we had rental income of $2.1 million and $3.2 million, respectively.
Interest Expense
Interest expense increased $3.7 million, or 82.2%, from $4.5 million for the three months ended June 30, 2022 to $8.2 million for the three months ended June 30, 2023. Interest expense increased $8.8 million, or 114.3%, from $7.7 million for the six months ended June 30, 2022 to $16.5 million for the six months ended June 30, 2023. The increase from the comparative periods is primarily the result of higher interest rates on repurchase agreement financings, partially offset by lower average balances and interest rates on secured debt of consolidated VIEs and the subtraction of long-term debt secured by SFR properties.
The components of interest expense are summarized in the following tables for the periods indicated (dollars in thousands):
|
|
Three Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest |
|
|
Cost |
|
|
Average |
|
|
Interest |
|
|
Cost |
|
||||||
Repurchase agreements |
|
$ |
490,524 |
|
|
$ |
6,604 |
|
|
|
5.33 |
% |
|
$ |
282,725 |
|
|
$ |
763 |
|
|
|
1.07 |
% |
Long-term debt secured by SFR properties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
100,890 |
|
|
|
718 |
|
|
|
2.82 |
% |
Long-term unsecured debt |
|
|
86,559 |
|
|
|
1,561 |
|
|
|
7.21 |
% |
|
|
86,148 |
|
|
|
1,400 |
|
|
|
6.50 |
% |
Secured debt of consolidated VIEs |
|
|
159 |
|
|
|
— |
|
|
|
0.00 |
% |
|
|
246,642 |
|
|
|
1,578 |
|
|
|
2.56 |
% |
Total |
|
$ |
577,242 |
|
|
$ |
8,165 |
|
|
|
5.61 |
% |
|
$ |
716,405 |
|
|
$ |
4,459 |
|
|
|
2.48 |
% |
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
2023 |
|
|
2022 |
|
||||||||||||||||||
|
|
Average |
|
|
Interest |
|
|
Cost |
|
|
Average |
|
|
Interest |
|
|
Cost |
|
||||||
Repurchase agreements |
|
$ |
497,947 |
|
|
$ |
12,729 |
|
|
|
5.08 |
% |
|
$ |
312,544 |
|
|
$ |
1,039 |
|
|
|
0.66 |
% |
Long-term debt secured by SFR properties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
79,012 |
|
|
|
1,126 |
|
|
|
2.83 |
% |
Long-term unsecured debt |
|
|
86,508 |
|
|
|
3,102 |
|
|
|
7.17 |
% |
|
|
86,105 |
|
|
|
2,770 |
|
|
|
6.43 |
% |
Secured debt of consolidated VIEs |
|
|
81,719 |
|
|
|
681 |
|
|
|
1.67 |
% |
|
|
210,703 |
|
|
|
2,766 |
|
|
|
2.63 |
% |
Total |
|
$ |
666,174 |
|
|
$ |
16,512 |
|
|
|
4.93 |
% |
|
$ |
688,364 |
|
|
$ |
7,701 |
|
|
|
2.23 |
% |
The effects of changes in the composition of our debt obligations on interest expense are summarized below (dollars in thousands):
|
|
Three Months Ended June 30, 2023 |
|
|
Six Months Ended June 30, 2023 |
|
||||||||||||||||||
|
|
vs. |
|
|
vs. |
|
||||||||||||||||||
|
|
Three Months Ended June 30, 2022 |
| |||||||||||||||||||||