Orchid Island Capital, Inc. (ORC) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S
DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF
OPERATIONS
The following discussion of our financial condition and results of operations should
be read in conjunction with the financial
statements and notes to those statements included in Item 8 of this Form 10-K.
The discussion may contain certain forward-looking
statements that involve risks and uncertainties. Forward-looking statements
are those that are not historical in nature. As a result of
many factors, such as those set forth under “Risk Factors” in this Form 10-K,
our actual results may differ materially from those
anticipated in such forward-looking statements.
Overview
We are a specialty finance company that invests in residential mortgage-backed securities
(“RMBS”) which are issued and
guaranteed by a federally chartered corporation or agency (“Agency RMBS”).
Our investment strategy focuses on, and our portfolio
consists of, two categories of Agency RMBS: (i) traditional pass-through Agency RMBS,
such as mortgage pass-through certificates
issued by Fannie Mae, Freddie Mac or Ginnie Mae (the “GSEs”) and collateralized
mortgage obligations (“CMOs”) issued by the GSEs
(“PT RMBS”) and (ii) structured Agency RMBS, such as interest-only securities (“IOs”),
inverse interest-only securities (“IIOs”) and
principal only securities (“POs”), among other types of structured Agency RMBS.
We were formed by Bimini in August 2010,
commenced operations on November 24, 2010 and completed our initial public
offering (“IPO”) on February 20, 2013.
We are
externally managed by Bimini Advisors, an investment adviser registered with the Securities
and Exchange Commission (the “SEC”).
Our business objective is to provide attractive risk-adjusted total returns over the
long term through a combination of capital
appreciation and the payment of regular monthly distributions. We intend to achieve this objective
by investing in and strategically
allocating capital between the two categories of Agency RMBS described above.
We seek to generate income from (i) the net interest
margin on our leveraged PT RMBS portfolio and the leveraged portion of our
structured Agency RMBS portfolio, and (ii) the interest
income we generate from the unleveraged portion of our structured Agency RMBS
portfolio. We intend to fund our PT RMBS and
certain of our structured Agency RMBS through short-term borrowings structured
as repurchase agreements. PT RMBS and structured
Agency RMBS typically exhibit materially different sensitivities to movements in interest
rates. Declines in the value of one portfolio
may be offset by appreciation in the other. The percentage of capital that we allocate to our two Agency RMBS asset categories will
vary and will be actively managed in an effort to maintain the level of income generated by
the combined portfolios, the stability of that
income stream and the stability of the value of the combined portfolios. We believe that this
strategy will enhance our liquidity,
earnings, book value stability and asset selection opportunities in various interest
rate environments.
We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as
amended (the “Code”).
We generally will not be subject to U.S. federal income tax to the extent that we
currently distribute all of our
REIT taxable income (as defined in the Code) to our stockholders and maintain
our REIT qualification.
The Company’s common stock trades on the New York Stock Exchange under the symbol “ORC”.
Capital Raising Activities
On August 2, 2017, we entered
into an equity distribution agreement (the “August 2017 Equity Distribution Agreement”)
with two
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
amount of $125,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated transactions. We issued a total
of 15,123,178 shares under the August 2017 Equity Distribution Agreement for
aggregate gross proceeds of $125.0 million, and net
proceeds of approximately $123.1 million, after commissions and fees,
prior to its termination in July 2019.
On July 30, 2019, we entered into an underwriting agreement (the “2019 Underwriting
Agreement”) with Morgan Stanley & Co.
LLC, Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters named therein, relating to
the offer and sale of 7,000,000 shares of the Company’s common stock at a price to the public of
$6.55 per share. The underwriters
48
purchased the shares pursuant to the 2019 Underwriting Agreement at a price of
$6.3535 per share. The closing of the offering of
7,000,000 shares of common stock occurred on August 2, 2019, with net
proceeds to us of approximately $44.2 million after deduction
of underwriting discounts and commissions and other estimated offering expenses.
On January 23, 2020, we entered into an equity distribution agreement (the “January
2020 Equity Distribution Agreement”) with
three sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate amount
of $200,000,000 of shares
of our common stock in transactions that were deemed to be “at the market”
offerings and privately negotiated transactions.
We issued
a total of 3,170,727 shares under the January 2020 Equity Distribution Agreement for aggregate
gross proceeds of $19.8 million, and
net proceeds of approximately $19.4 million, after commissions and fees, prior to
its termination in August 2020.
On August 4, 2020, we entered into an equity distribution agreement (the “August
2020 Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
amount of $150,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated transactions. We issued a total
of 27,493,650 shares under the August 2020 Equity Distribution Agreement for
aggregate gross proceeds of approximately $150.0
million, and net proceeds of approximately $147.4 million, after commissions
and fees, prior to its termination in June 2021.
On January 20, 2021, we entered into an underwriting agreement (the “January 2021
Underwriting Agreement”) with J.P. Morgan
Securities LLC (“J.P. Morgan”), relating to the offer and sale of 7,600,000 shares of our common stock. J.P.
Morgan purchased the
shares of our common stock from the Company pursuant to the January 2021
Underwriting Agreement at $5.20 per share. In addition,
we granted J.P.
Morgan a 30-day option to purchase up to an additional 1,140,000 shares
of our common stock on the same terms and
conditions, which J.P. Morgan exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our common
stock occurred on January 25, 2021, with proceeds to us of approximately $45.2
million, net of offering expenses.
On March 2, 2021, we entered into an underwriting agreement (the “March 2021 Underwriting
Agreement”) with J.P. Morgan,
relating to the offer and sale of 8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the March 2021 Underwriting Agreement at $5.45 per share.
In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,200,000 shares of our common stock
on the same terms and conditions, which J.P. Morgan
exercised in full on March 3, 2021. The closing of the offering of 9,200,000 shares of our common
stock occurred on March 5, 2021,
with proceeds to us of approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into an equity distribution agreement (the “June 2021
Equity Distribution Agreement”) with four
sales agents pursuant to which we could offer and sell, from time to time, up to an aggregate
amount of $250,000,000 of shares of our
common stock in transactions that were deemed to be “at the market” offerings and privately
negotiated transactions. We issued a total
of 49,407,336 shares under the June 2021 Equity Distribution Agreement for aggregate
gross proceeds of approximately $250.0
million, and net proceeds of approximately $246.2 million, after commissions
and fees,
prior to its termination in October 2021.
On October 29, 2021, we entered into an equity distribution agreement (the “October
2021 Equity Distribution Agreement”) with
four sales agents pursuant to which we may offer and sell, from time to time, up to an aggregate
amount of $250,000,000 of shares of
our common stock in transactions that are deemed to be “at the market” offerings and privately negotiated
transactions. Through
December 31, 2021, we issued a total of 15,835,700 shares under the October 2021 Equity
Distribution Agreement for aggregate gross
proceeds of approximately $78.3 million, and net proceeds of approximately
$77.0 million, after commissions and fees.
Stock Repurchase Program
On July 29, 2015, the Company’s Board of Directors authorized the repurchase of up to 2,000,000
shares of our common stock.
The timing, manner, price and amount of any repurchases is determined by the Company in its discretion and is subject
to economic
and market conditions, stock price, applicable legal requirements and other factors.
The authorization does not obligate the Company
to acquire any particular amount of common stock and the program may
be suspended or discontinued at the Company’s discretion
49
without prior notice.
On February 8, 2018, the Board of Directors approved an increase
in the stock repurchase program for up to an
additional 4,522,822 shares of the Company’s common stock.
Coupled with the 783,757 shares remaining from the original 2,000,000
share authorization, the increased authorization brought the total authorization
to 5,306,579 shares, representing 10% of the then
outstanding share count. On December 9, 2021, the Board of Directors approved an
increase in the number of shares of the
Company’s common stock available in the stock repurchase program for up to an additional
16,861,994 shares, bringing the remaining
authorization under the stock repurchase program to 17,699,305 shares, representing
approximately 10% of the Company’s currently
outstanding shares of common stock. This stock repurchase program has no
termination date.
From the inception of the stock repurchase program through December 31, 2021,
the Company repurchased a total of 5,685,511
shares at an aggregate cost of approximately $40.4 million, including commissions
and fees, for a weighted average price of $7.10 per
share. During the year ended December 31, 2020, the Company repurchased a
total of 19,891 shares at an aggregate cost of
approximately
$0.1 million, including commissions and fees, for a weighted average
price of $3.42 per share. There were no shares
repurchased during the year ended December 31, 2021.
Factors that Affect our Results of Operations and Financial Condition
A variety of industry and economic factors may impact our results of operations and
financial condition. These factors include:
●
interest rate trends;
●
increases in our cost of funds resulting from increases in the Federal Funds rate that
are controlled by the Fed and are likely
to occur in 2022;
●
the difference between Agency RMBS yields and our funding and hedging costs;
●
competition for, and supply of, investments in Agency RMBS;
●
actions taken by the U.S. government, including the presidential administration, the
Fed,
the Federal Housing Financing
Agency (the “FHFA”), the Federal Housing Administration (the “FHA”), the Federal Open Market Committee (the
“FOMC”) and
the U.S. Treasury;
●
prepayment rates on mortgages underlying our Agency RMBS and credit
trends insofar as they affect prepayment rates; and
●
other market developments.
In addition, a variety of factors relating to our business may also impact our results
of operations and financial condition. These
factors include:
●
our degree of leverage;
●
our access to funding and borrowing capacity;
●
our borrowing costs;
●
our hedging activities;
●
the market value of our investments; and
●
the requirements to qualify as a REIT and the requirements to qualify for
a registration exemption under the Investment
Company Act.
Results
of Operations
Described
below are
the Company’s
results of
operations
for the
years ended
December
31, 2021,
as compared
to the Company’s
results of
operations
for the years
ended December
31, 2020
and 2019.
Net (Loss)
Income Summary
Net loss
for the year
ended December
31, 2021
was $64.8
million, or
$0.54 per
share. Net
income for
the year ended
December
31,
50
2020 was
$2.1 million,
or $0.03
per share.
Net income
for the year
ended December
31, 2019
was $24.3
million, or
$0.43 per
share. The
components
of net (loss)
income for
the years
ended December
31, 2021,
2020 and
2019 are
presented
in the table
below:
(in thousands)
2021
2020
2019
Interest income
$
134,700
$
116,045
$
142,324
Interest expense
(7,090)
(25,056)
(83,666)
Net interest income
127,610
90,989
58,658
Losses on RMBS and derivative contracts
(177,119)
(78,317)
(24,008)
Net portfolio (loss) income
(49,509)
12,672
34,650
Expenses
(15,251)
(10,544)
(10,385)
Net (loss) income
$
(64,760)
$
2,128
$
24,265
GAAP and
Non-GAAP
Reconciliations
In addition
to the results
presented
in accordance
with GAAP, our results
of operations
discussed
below include
certain non-GAAP
financial
information,
including
“Net Earnings
Excluding
Realized
and Unrealized
Gains and
Losses”,
“Economic
Interest
Expense”
and
“Economic
Net Interest
Income.”
Net Earnings
Excluding
Realized
and Unrealized
Gains and
Losses
We have elected
to account
for our
Agency RMBS
under the
fair value
option. Securities
held under
the fair
value option
are
recorded
at estimated
fair value,
with changes
in the fair
value recorded
as unrealized
gains or
losses through
the statements
of
operations.
In addition,
we have not
designated
our derivative
financial
instruments
used for
hedging purposes
as hedges
for accounting
purposes,
but rather
hold them
for economic
hedging purposes.
Changes in
fair value
of these
instruments
are presented
in a separate
line item
in the Company’s
statements
of operations
and are not
included in
interest
expense.
As such,
for financial
reporting
purposes,
interest
expense and
cost of funds
are not impacted
by the fluctuation
in value of
the derivative
instruments.
Presenting
net earnings
excluding
realized and
unrealized
gains and
losses allows
management
to: (i) isolate
the net interest
income
and other
expenses of
the Company
over time,
free of all
fair value
adjustments
and (ii)
assess the
effectiveness
of our funding
and
hedging strategies
on our capital
allocation
decisions
and our
asset allocation
performance.
Our funding
and hedging
strategies,
capital
allocation
and asset
selection
are integral
to our risk
management
strategy, and therefore
critical to
the management
of our portfolio.
We
believe that
the presentation
of our net
earnings
excluding
realized
and unrealized
gains is useful
to investors
because it
provides a
means
of comparing
our results
of operations
to those
of our peers
who have not
elected the
same accounting
treatment.
Our presentation
of net
earnings
excluding
realized and
unrealized
gains and
losses may
not be comparable
to similarly-titled
measures of
other companies,
who
may use different
calculations.
As a result,
net earnings
excluding
realized and
unrealized
gains and
losses should
not be considered
as a
substitute
for our GAAP
net income
(loss) as
a measure
of our financial
performance
or any measure
of our liquidity
under GAAP.
The
table below
presents
a reconciliation
of our net
income (loss)
determined
in accordance
with GAAP
and net earnings
excluding realized
and unrealized
gains and
losses.
51
Net Earnings Excluding Realized and Unrealized Gains and Losses
(in thousands, except per share data)
Per Share
Net Earnings
Net Earnings
Excluding
Excluding
Realized and
Realized and
Realized and
Realized and
Net
Unrealized
Unrealized
Net
Unrealized
Unrealized
Income
Gains and
Gains and
Income
Gains and
Gains and
(GAAP)
Losses
(1)
Losses
(GAAP)
Losses
Losses
Three Months Ended
December 31, 2021
$
(44,564)
$
(82,597)
$
38,033
$
(0.27)
$
(0.49)
$
0.22
September 30, 2021
26,038
(2,887)
28,925
0.20
(0.02)
0.22
June 30, 2021
(16,865)
(40,844)
23,979
(0.17)
(0.41)
0.24
March 31, 2021
(29,369)
(50,791)
21,422
(0.34)
(0.60)
0.26
December 31, 2020
16,479
(4,605)
21,084
0.23
(0.07)
0.30
September 30, 2020
28,076
5,745
22,331
0.42
0.09
0.33
June 30, 2020
48,772
28,749
20,023
0.74
0.43
0.31
March 31, 2020
(91,199)
(108,206)
17,007
(1.41)
(1.68)
0.27
December 31, 2019
18,612
3,840
14,772
0.29
0.06
0.23
September 30, 2019
(8,477)
(19,431)
10,954
(0.14)
(0.32)
0.18
June 30, 2019
3,533
(7,670)
11,203
0.07
(0.15)
0.22
March 31, 2019
10,597
(747)
11,344
0.22
(0.02)
0.24
Years Ended
December 31, 2021
$
(64,760)
$
(177,119)
$
112,359
$
(0.54)
$
(1.46)
$
0.92
December 31, 2020
2,128
(78,317)
80,445
0.03
(1.17)
1.20
December 31, 2019
24,265
(24,008)
48,273
0.43
(0.43)
0.86
(1)
Includes realized
and unrealized
gains (losses)
on RMBS and derivative
financial instruments,
including net
interest income
or expense on
interest
rate swaps.
Economic
Interest
Expense and
Economic
Net Interest
Income
We use derivative
and other
hedging instruments,
specifically
Eurodollar, Fed
Funds and
T-Note futures
contracts,
short positions
in
U.S. Treasury
securities,
interest
rate swaps
and swaptions,
to hedge
a portion
of the interest
rate risk
on repurchase
agreements
in a
rising rate
environment.
We have not
elected to
designate
our derivative
holdings for
hedge accounting
treatment.
Changes in
fair value
of these
instruments
are presented
in a separate
line item
in our statements
of operations
and not included
in interest
expense. As
such, for
financial
reporting
purposes,
interest
expense and
cost of funds
are not impacted
by the fluctuation
in value of
the derivative
instruments.
For the purpose
of computing
economic net
interest
income and
ratios relating
to cost of
funds measures,
GAAP interest
expense
has been
adjusted to
reflect the
realized and
unrealized
gains or
losses on
certain derivative
instruments
the Company
uses, specifically
Eurodollar, Fed
Funds and
U.S. Treasury
futures,
and interest
rate swaps
and swaptions,
that pertain
to each period
presented.
We
believe that
adjusting
our interest
expense for
the periods
presented
by the gains
or losses
on these
derivative
instruments
would not
accurately
reflect our
economic
interest
expense for
these periods.
The reason
is that these
derivative
instruments
may cover
periods that
extend into
the future,
not just the
current period.
Any realized
or unrealized
gains or
losses on
the instruments
reflect the
change in
market value
of the instrument
caused by
changes in
underlying
interest
rates applicable
to the term
covered by
the instrument,
not just
the current
period. For
each period
presented,
we have combined
the effects
of the derivative
financial
instruments
in place for
the
respective
period with
the actual
interest
expense incurred
on borrowings
to reflect
total economic
interest
expense for
the applicable
period. Interest
expense, including
the effect
of derivative
instruments
for the period,
is referred
to as economic
interest expense.
Net
interest income,
when calculated
to include
the effect
of derivative
instruments
for the period,
is referred
to as economic
net interest
52
income. This
presentation
includes
gains or
losses on
all contracts
in effect during
the reporting
period, covering
the current
period as
well
as periods
in the future.
The Company
may invest
in TBAs,
which are
forward contracts
for the purchase
or sale of
Agency RMBS
at a predetermined
price,
face amount,
issuer, coupon
and stated
maturity on
an agreed-upon
future date.
The specific
Agency RMBS
to be delivered
into the
contract
are not known
until shortly
before the
settlement
date. We may
choose, prior
to settlement,
to move the
settlement
of these
securities
out to a
later date
by entering
into a dollar
roll transaction.
The Agency
RMBS purchased
or sold for
a forward
settlement
date
are typically
priced at
a discount
to equivalent
securities
settling
in the current
month. Consequently,
forward
purchases
of Agency
RMBS
and dollar
roll transactions
represent
a form of
off-balance
sheet financing.
These TBAs
are accounted
for as derivatives
and marked
to
market through
the income
statement.
Gains or losses
on TBAs
are included
with gains
or losses
on other
derivative
contracts
and are not
included in
interest
income for
purposes of
the discussions
below.
We believe
that economic
interest
expense and
economic
net interest
income provide
meaningful
information
to consider, in
addition
to the respective
amounts prepared
in accordance
with GAAP. The non-GAAP
measures help
management
to evaluate
its financial
position and
performance
without the
effects of
certain transactions
and GAAP
adjustments
that are
not necessarily
indicative
of our
current investment
portfolio
or operations.
The unrealized
gains or
losses on
derivative
instruments
presented
in our statements
of
operations
are not necessarily
representative
of the total
interest
rate expense
that we will
ultimately
realize. This
is because
as interest
rates move
up or down
in the future,
the gains
or losses
we ultimately
realize, and
which will
affect our
total interest
rate expense
in future
periods,
may differ
from the
unrealized
gains or
losses recognized
as of the
reporting
date.
Our presentation
of the economic
value of our
hedging strategy
has important
limitations.
First, other
market participants
may
calculate
economic
interest
expense and
economic net
interest
income differently
than the
way we calculate
them. Second,
while we
believe that
the calculation
of the economic
value of our
hedging
strategy
described
above helps
to present
our financial
position
and
performance,
it may be
of limited
usefulness
as an analytical
tool. Therefore,
the economic
value of
our investment
strategy should
not be
viewed in
isolation
and is not
a substitute
for interest
expense and
net interest
income computed
in accordance
with GAAP.
The tables
below present
a reconciliation
of the adjustments
to interest
expense shown
for each
period relative
to our derivative
instruments,
and the income
statement
line item,
gains (losses)
on derivative
instruments,
calculated
in accordance
with GAAP
for the
years ended
December
31, 2021,
2020 and
2019 and
each quarter
during 2021,
2020 and
2019.
53
Gains (Losses) on Derivative Instruments
(in thousands)
Economic Hedges
Recognized in
Attributed to
Attributed to
Income
U.S. Treasury and TBA
Current
Future
Statement
Securities Gain (Loss)
Period
Periods
(GAAP)
(Short Positions)
(Long Positions)
(Non-GAAP)
(Non-GAAP)
Three Months Ended
December 31, 2021
$
10,945
$
2,568
$
-
$
(7,949)
$
16,326
September 30, 2021
5,375
(2,306)
-
(1,248)
8,929
June 30, 2021
(34,915)
(5,963)
-
(5,104)
(23,848)
March 31, 2021
45,472
9,133
(8,559)
(4,044)
48,942
December 31, 2020
8,538
(436)
5,480
(5,790)
9,284
September 30, 2020
4,079
131
3,336
(6,900)
7,512
June 30, 2020
(8,851)
582
1,133
(5,751)
(4,815)
March 31, 2020
(82,858)
(7,090)
-
(4,900)
(70,868)
December 31, 2019
10,792
(512)
-
3,823
7,481
September 30, 2019
(8,648)
572
1,907
1,244
(12,371)
June 30, 2019
(34,288)
(1,684)
-
1,464
(34,068)
March 31, 2019
(19,032)
(4,641)
-
2,427
(16,818)
Years Ended
December 31, 2021
$
26,877
$
3,432
$
(8,559)
$
(18,345)
$
50,349
December 31, 2020
(79,092)
(6,813)
9,949
(23,341)
(58,887)
December 31, 2019
(51,176)
(6,265)
1,907
8,958
(55,776)
Economic Interest Expense and Economic Net Interest Income
(in thousands)
Interest Expense on Borrowings
Gains
(Losses) on
Derivative
Instruments
Net Interest Income
GAAP
Attributed
Economic
GAAP
Economic
Interest
Interest
to Current
Interest
Net Interest
Net Interest
Income
Expense
Period
(1)
Expense
(2)
Income
Income
(3)
Three Months Ended
December 31, 2021
$
44,421
$
2,023
$
(7,949)
$
9,972
$
42,398
$
34,449
September 30, 2021
34,169
1,570
(1,248)
2,818
32,599
31,351
June 30, 2021
29,254
1,556
(5,104)
6,660
27,698
22,594
March 31, 2021
26,856
1,941
(4,044)
5,985
24,915
20,871
December 31, 2020
25,893
2,011
(5,790)
7,801
23,882
18,092
September 30, 2020
27,223
2,043
(6,900)
8,943
25,180
18,280
June 30, 2020
27,258
4,479
(5,751)
10,230
22,779
17,028
March 31, 2020
35,671
16,523
(4,900)
21,423
19,148
14,248
December 31, 2019
37,529
20,022
3,823
16,199
17,507
21,330
September 30, 2019
35,907
22,321
1,244
21,077
13,586
14,830
June 30, 2019
36,455
22,431
1,464
20,967
14,024
15,488
March 31, 2019
32,433
18,892
2,427
16,465
13,541
15,968
Years Ended
December 31, 2021
$
134,700
$
7,090
$
(18,345)
$
25,435
$
127,610
$
109,265
December 31, 2020
116,045
25,056
(23,341)
48,397
90,989
67,648
December 31, 2019
142,324
83,666
8,958
74,708
58,658
67,616
(1)
Reflects the effect of derivative instrument hedges for only the period
presented.
(2)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP interest expense.
(3)
Calculated by adding the effect of derivative instrument hedges attributed
to the period presented to GAAP net interest income.
54
Net Interest Income
During the
year ended
December
31, 2021,
we generated
$127.6 million
of net interest
income, consisting
of $134.7
million of
interest
income from
RMBS assets
offset by $7.1
million of
interest
expense on
borrowings.
For the comparable
period ended
December
31,
2020, we
generated
$91.0 million
of net interest
income, consisting
of $116.0 million
of interest
income from
RMBS assets
offset by $25.1
million of
interest
expense on
borrowings.
The $18.7
million increase
in interest
income was
driven by
a $1,569.3
million increase
in
average RMBS
that was
partially offset
by a 72 basis
point ("bps")
decrease
in yield on
average
RMBS. The
$18.0 million
decrease
in
interest
expense for
the year
ended December
31, 2021
was driven
by a 63 bps
decrease
in the average
cost of funds,
offset by
a
$1,510.5
million increase
in average
borrowings.
For the year
ended December
31, 2019,
we generated
$58.7 million
of net interest
income, consisting
of $142.3
million of
interest
income from
RMBS assets
offset by $83.7
million of
interest
expense on
borrowings.
The $26.3
million decrease
in interest
income for
the
year ended
December
31, 2020,
compared
to the year
ended December
31, 2019,
was due to
a 69 bps
decrease in
yield on
average
RMBS,
combined with
a $71.6 million
decrease
in average
RMBS during
the period.
The $58.6
million decrease
in interest
expense for
the
year ended
December
31, 2020
was due to
a $114.7 million
decrease
in average
borrowings,
combined with
a 175 bps
decrease
in the
average cost
of funds.
On an economic
basis, our
interest
expense on
borrowings
for the years
ended December
31, 2021,
2020 and
2019 was
$25.4
million, $48.4
million and
$74.7 million,
respectively, resulting
in $109.3
million, $67.6
million and
$67.6 million
of economic
net interest
income, respectively.
The tables
below provide
information
on our portfolio
average balances,
interest
income, yield
on assets,
average borrowings,
interest
expense, cost
of funds,
net interest
income and
net interest
spread for
each quarter
in 2021, 2020
and 2019
and for the
years ended
December
31, 2021,
2020 and
2019 on both
a GAAP and
economic basis.
($ in thousands)
Average
Yield on
Interest Expense
Average Cost of Funds
RMBS
Interest
Average
Average
GAAP
Economic
GAAP
Economic
Held
(1)
Income
RMBS
Borrowings
(1)
Basis
Basis
(2)
Basis
Basis
(3)
Three Months Ended
December 31, 2021
$
6,056,259
$
44,421
2.93%
$
5,728,988
$
2,023
$
9,972
0.14%
0.70%
September 30, 2021
5,136,331
34,169
2.66%
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,504,887
29,254
2.60%
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
4,032,716
26,856
2.66%
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,633,631
25,893
2.85%
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,422,564
27,223
3.18%
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
3,126,779
27,258
3.49%
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,269,859
35,671
4.36%
3,129,178
16,523
21,423
2.11%
2.74%
December 31, 2019
3,705,920
37,529
4.05%
3,631,042
20,022
16,199
2.21%
1.78%
September 30, 2019
3,674,087
35,907
3.91%
3,571,752
22,321
21,077
2.50%
2.36%
June 30, 2019
3,307,885
36,455
4.41%
3,098,133
22,431
20,967
2.90%
2.71%
March 31, 2019
3,051,509
32,433
4.25%
2,945,895
18,892
16,465
2.57%
2.24%
Years Ended
December 31, 2021
$
4,932,548
$
134,700
2.73%
$
4,707,525
$
7,090
$
25,435
0.15%
0.54%
December 31, 2020
3,363,208
116,045
3.45%
3,197,034
25,056
48,397
0.78%
1.51%
December 31, 2019
3,434,850
142,324
4.14%
3,311,705
83,666
74,708
2.53%
2.26%
55
($ in thousands)
Net Interest Income
Net Interest Spread
GAAP
Economic
GAAP
Economic
Basis
Basis
(2)
Basis
Basis
(4)
Three Months Ended
December 31, 2021
$
42,398
$
34,449
2.79%
2.23%
September 30, 2021
32,599
31,351
2.53%
2.43%
June 30, 2021
27,698
22,594
2.46%
1.99%
March 31, 2021
24,915
20,871
2.46%
2.04%
December 31, 2020
23,882
18,093
2.62%
1.94%
September 30, 2020
25,180
18,280
2.93%
2.07%
June 30, 2020
22,779
17,028
2.89%
2.12%
March 31, 2020
19,148
14,248
2.25%
1.62%
December 31, 2019
17,507
21,330
1.84%
2.27%
September 30, 2019
13,586
14,830
1.41%
1.55%
June 30, 2019
14,024
15,488
1.51%
1.70%
March 31, 2019
13,541
15,968
1.68%
2.01%
Years Ended
December 31, 2021
$
127,610
$
109,265
2.58%
2.19%
December 31, 2020
90,989
67,649
2.67%
1.94%
December 31, 2019
58,658
67,616
1.61%
1.88%
(1)
Portfolio yields and costs of borrowings presented in the tables above and the
tables on pages 60 and 61 are calculated based on the
average balances of the underlying investment portfolio/borrowings balances
and are annualized for the periods presented. Average
balances for quarterly periods are calculated using two data points, the beginning
and ending balances.
(2)
Economic interest expense and economic net interest income
presented in the table above and the tables on page 61 includes the effect
of our derivative instrument hedges for only the periods presented.
(3)
Represents interest cost of our borrowings and the effect of derivative
instrument hedges attributed to the period divided by average
RMBS.
(4)
Economic net interest spread is calculated by subtracting average economic
cost of funds from realized yield on average RMBS.
Interest Income and Average Asset Yield
Our interest
income for
the years
ended December
31, 2021
and 2020
was $134.7
million and
$116.0 million,
respectively.
We had
average RMBS
holdings of
$4,932.5
million and
$3,363.2
million for
the years
ended December
31, 2021
and 2020,
respectively.
The
yield on our
portfolio
was 2.73%
and 3.45%
for the years
ended December
31, 2021
and 2020,
respectively. For
the year
ended
December
31, 2021
as compared
to the year
ended December
31, 2020,
there was
a $18.7 million
increase in
interest
income due
to a
$1,569.3
million increase
in average
RMBS, offset
by a 72 bps
decrease
in the yield
on average
RMBS.
For the year
ended December
31, 2019,
we had interest
income of
$142.3 million
and average
RMBS holdings
of $3,434.9
million,
resulting
in a yield
on our portfolio
of 4.14%.
For the year
ended December
31, 2020,
as compared
to the year
ended December
31, 2019,
there was
a $26.3 million
decrease
in interest
income due
to a $71.6
million decrease
in average
RMBS, combined
with a 69
bps decrease
in the yield
on average
RMBS.
The table
below presents
the average
portfolio
size, income
and yields
of our respective
sub-portfolios,
consisting
of structured
RMBS
and PT RMBS
for the years
ended December
31, 2021,
2020 and
2019 and
for each
quarter during
2021, 2020
and 2019.
56
($ in thousands)
Average RMBS Held
Interest Income
Realized Yield on Average RMBS
PT
Structured
PT
Structured
PT
Structured
RMBS
RMBS
Total
RMBS
RMBS
Total
RMBS
RMBS
Total
Three Months Ended
December 31, 2021
$
5,878,376
$
177,883
$
6,056,259
$
42,673
$
1,748
$
44,421
2.90%
3.93%
2.93%
September 30, 2021
5,016,550
119,781
5,136,331
33,111
1,058
34,169
2.64%
3.53%
2.66%
June 30, 2021
4,436,135
68,752
4,504,887
29,286
(32)
29,254
2.64%
(0.18)%
2.60%
March 31, 2021
3,997,965
34,751
4,032,716
26,869
(13)
26,856
2.69%
(0.15)%
2.66%
December 31, 2020
3,603,885
29,746
3,633,631
25,933
(40)
25,893
2.88%
(0.53)%
2.85%
September 30, 2020
3,389,037
33,527
3,422,564
27,021
202
27,223
3.19%
2.41%
3.18%
June 30, 2020
3,088,603
38,176
3,126,779
27,004
254
27,258
3.50%
2.67%
3.49%
March 31, 2020
3,207,467
62,392
3,269,859
35,286
385
35,671
4.40%
2.47%
4.36%
December 31, 2019
3,611,461
94,459
3,705,920
36,600
929
37,529
4.05%
3.93%
4.05%
September 30, 2019
3,558,075
116,012
3,674,087
36,332
(425)
35,907
4.08%
(1.47)%
3.91%
June 30, 2019
3,181,976
125,909
3,307,885
34,992
1,463
36,455
4.40%
4.65%
4.41%
March 31, 2019
2,919,415
132,094
3,051,509
30,328
2,105
32,433
4.16%
6.37%
4.25%
Years Ended
December 31, 2021
$
4,832,257
$
100,291
$
4,932,548
$
131,939
$
2,761
$
134,700
2.73%
2.75%
2.73%
December 31, 2020
3,322,248
40,960
3,363,208
115,244
801
116,045
3.47%
1.96%
3.45%
December 31, 2019
3,317,732
117,118
3,434,850
138,252
4,072
142,324
4.17%
3.48%
4.14%
Interest Expense and the Cost of Funds
We had average
outstanding
borrowings
of $4,707.5
million and
$3,197.0 million
and total
interest
expense of
$7.1 million
and $25.1
million for
the years
ended December
31, 2021
and 2020,
respectively. Our
average cost
of funds
was 0.15%
for the year
ended
December
31, 2021,
compared
to 0.78%
for the comparable
period in
2020.
There was
a $1,510.5
million increase
in average
outstanding
borrowings
during the
year ended
December
31, 2021
as compared
to the year
ended December
31, 2020.
For the year
ended December
31, 2019,
we had average
borrowings
of $3,311.7 million
and total
interest
expense of
$83.7 million,
resulting
in an average
cost of funds
of 2.53%.
There was
a 175 bps
decrease
in the average
cost of funds
and an $114.7 million
decrease
in average
outstanding
borrowings
during the
year ended
December
31, 2020
as compared
to the year
ended December
31,
2019.
Our economic
interest
expense
was $25.4
million, $48.4
million and
$74.7 million
for the years
ended December
31, 2021,
2020 and
2019, respectively.
There was
a 97 bps
decrease
in the average
economic cost
of funds to
0.54% for
the year
ended December
31, 2021
from 1.51%
for the year
ended December
31, 2020.
The reason
for the decrease
in economic
cost of funds
is primarily
due to the
lower
cost of our
borrowings
noted above,
offset by the
negative performance
of our hedging
activities
during the
period. There
was a 75 bps
decrease
in the average
economic
cost of funds
to 1.51%
for the year
ended December
31, 2020
from 2.26%
for the year
ended
December
31, 2019.
Since all
of our repurchase
agreements
are short-term,
changes in
market rates
directly affect
our interest
expense. Our
average
cost
of funds
calculated
on a GAAP
basis was
5 bps above
average
one-month
LIBOR and
9 bps below
average six-month
LIBOR for
the
quarter ended
December
31, 2021.
Our average
economic cost
of funds
was equal
to average
one-month
LIBOR and
47 bps above
average six-month
LIBOR for
the quarter
ended December
31, 2021.
The average
term to maturity
of the outstanding
repurchase
agreements
was 27 days
and 31 days
at December
31, 2021 and
2020, respectively.
The tables
below present
the average
balance of
borrowings
outstanding,
interest
expense and
average cost
of funds,
and average
one-month
and six-month
LIBOR rates
for each
quarter in
2021, 2020
and 2019
and for the
years ended
December
31, 2021,
2020 and
2019 on both
a GAAP and
economic basis.
57
($ in thousands)
Average
Interest Expense
Average Cost of Funds
Balance of
GAAP
Economic
GAAP
Economic
Borrowings
Basis
Basis
Basis
Basis
Three Months Ended
December 31, 2021
$
5,728,988
$
2,023
$
9,972
0.14%
0.70%
September 30, 2021
4,864,287
1,570
2,818
0.13%
0.23%
June 30, 2021
4,348,192
1,556
6,660
0.14%
0.61%
March 31, 2021
3,888,633
1,941
5,985
0.20%
0.62%
December 31, 2020
3,438,444
2,011
7,801
0.23%
0.91%
September 30, 2020
3,228,021
2,043
8,943
0.25%
1.11%
June 30, 2020
2,992,494
4,479
10,230
0.60%
1.37%
March 31, 2020
3,129,178
16,523
21,423
2.11%
2.74%
December 31, 2019
3,631,042
20,022
16,199
2.21%
1.78%
September 30, 2019
3,571,752
22,321
21,077
2.50%
2.36%
June 30, 2019
3,098,133
22,431
20,967
2.90%
2.71%
March 31, 2019
2,945,895
18,892
16,465
2.57%
2.24%
Years Ended
December 31, 2021
$
4,707,525
$
7,090
$
25,435
0.15%
0.54%
December 31, 2020
3,197,034
25,056
48,397
0.78%
1.51%
December 31, 2019
3,311,705
83,666
74,708
2.53%
2.26%
Average GAAP Cost of Funds
Average Economic Cost of Funds
Relative to Average
Relative to Average
Average LIBOR
One-Month
Six-Month
One-Month
Six-Month
One-Month
Six-Month
LIBOR
LIBOR
LIBOR
LIBOR
Three Months Ended
December 31, 2021
0.09%
0.23%
0.05%
(0.09)%
0.61%
0.47%
September 30, 2021
0.09%
0.16%
0.04%
(0.03)%
0.14%
0.07%
June 30, 2021
0.10%
0.18%
0.04%
(0.04)%
0.51%
0.43%
March 31, 2021
0.13%
0.23%
0.07%
(0.03)%
0.49%
0.39%
December 31, 2020
0.15%
0.27%
0.08%
(0.04)%
0.76%
0.64%
September 30, 2020
0.17%
0.35%
0.08%
(0.10)%
0.94%
0.76%
June 30, 2020
0.55%
0.70%
0.05%
(0.10)%
0.82%
0.67%
March 31, 2020
1.34%
1.43%
0.77%
0.68%
1.40%
1.31%
December 31, 2019
1.90%
1.98%
0.31%
0.23%
(0.12)%
(0.20)%
September 30, 2019
2.22%
2.18%
0.28%
0.32%
0.14%
0.18%
June 30, 2019
2.45%
2.49%
0.45%
0.41%
0.26%
0.22%
March 31, 2019
2.51%
2.77%
0.06%
(0.20)%
(0.27)%
(0.53)%
Years Ended
December 31, 2021
0.10%
0.20%
0.05%
(0.05)%
0.44%
0.34%
December 31, 2020
0.55%
0.69%
0.23%
0.09%
0.96%
0.82%
December 31, 2019
2.27%
2.35%
0.26%
0.18%
(0.01)%
(0.09)%
58
Gains or Losses
The table
below presents
our gains
or losses
for the years
ended December
31, 2021,
2020 and
2019.
(in thousands)
2021
2020
2019
Realized losses on sales of RMBS
$
(5,542)
$
(24,986)
$
(10,877)
Unrealized (losses) gains on RMBS
(198,454)
25,761
38,045
Total (losses)
gains on RMBS
(203,996)
775
27,168
Losses on interest rate futures
(856)
(13,044)
(18,858)
Gains (losses) on interest rate swaps
23,613
(66,212)
(26,582)
Gains (losses) on payer swaptions (short positions)
9,062
(3,070)
(1,379)
(Losses) gains on payer swaptions (long positions)
(2,580)
98
-
Gains on interest rate floors
2,765
-
-
Gains (losses) on TBA securities (short positions)
3,432
(6,719)
(6,264)
(Losses) gains on TBA securities (long positions)
(8,559)
9,950
1,907
Losses on U.S. Treasury securities
-
(95)
-
Total
$
(177,119)
$
(78,317)
$
(24,008)
We invest in
RMBS with
the intent
to earn net
income from
the realized
yield on those
assets over
their related
funding and
hedging
costs, and
not for the
purpose of
making short
term gains
from sales.
However, we
have sold,
and may continue
to sell,
existing
assets to
acquire new
assets, which
our management
believes might
have higher
risk-adjusted
returns in
light of current
or anticipated
interest
rates,
federal government
programs
or general
economic conditions
or to manage
our balance
sheet as part
of our asset/liability
management
strategy. During
the years
ended December
31, 2021,
2020 and
2019, the
Company received
proceeds
of $2,851.7
million, $4,200.5
million and
$3,321.2
million,
respectively, from
the sales
of RMBS.
Approximately
$1.1 billion
of the sales
during the
year ended
December
31,
2020 occurred
during the
second half
of March
2020 as we
sold assets
in order
to maintain
sufficient
cash and liquidity
and reduce
risk
associated
with the
market turmoil
brought about
by COVID-19.
Realized and
unrealized
gains and
losses on
RMBS are
driven in
part by changes
in yields
and interest
rates, which
affect the
pricing
of the securities
in our portfolio.
Gains and
losses on
interest
rate futures
contracts
are affected
by changes
in implied
forward
rates during
the reporting
period.
The table
below presents
historical
interest
rate data
for each
quarter end
during 2021,
2020 and
2019.
5 Year
10 Year
15 Year
30 Year
Three
U.S. Treasury
U.S. Treasury
Fixed-Rate
Fixed-Rate
Month
Rate
(1)
Rate
(1)
Mortgage Rate
(2)
Mortgage Rate
(2)
LIBOR
(3)
December 31, 2021
1.26%
1.51%
2.35%
3.10%
0.21%
September 30, 2021
1.00%
1.53%
2.18%
2.90%
0.12%
June 30, 2021
0.87%
1.44%
2.27%
2.98%
0.13%
March 31, 2021
0.94%
1.75%
2.39%
3.08%
0.19%
December 31, 2020
0.36%
0.92%
2.22%
2.68%
0.23%
September 30, 2020
0.27%
0.68%
2.39%
2.89%
0.24%
June 30, 2020
0.29%
0.65%
2.60%
3.16%
0.31%
March 31, 2020
0.38%
0.70%
2.89%
3.45%
1.10%
December 31, 2019
1.69%
1.92%
3.18%
3.72%
1.91%
September 30, 2019
1.55%
1.68%
3.12%
3.61%
2.13%
June 30, 2019
1.76%
2.00%
3.24%
3.80%
2.40%
March 31, 2019
2.24%
2.41%
3.72%
4.27%
2.61%
(1)
Historical 5 and 10 Year
U.S. Treasury Rates are obtained from quoted end
of day prices on the Chicago Board Options Exchange.
(2)
Historical 30 Year and
15 Year Fixed
Rate Mortgage Rates are obtained from Freddie Mac’s Primary
Mortgage Market Survey.
(3)
Historical LIBOR is obtained from the Intercontinental Exchange Benchmark
Administration Ltd.
59
Expenses
Total operating expenses
were $15.3
million, $10.5
million and
$10.4 million
for the years
ended December
31, 2021,
2020 and 2019,
respectively.
The table
below provides
a breakdown
of operating
expenses for
the years
ended December
31, 2021,
2020 and
2019.
(in thousands)
2021
2020
2019
Management fees
$
8,156
$
5,281
$
5,528
Overhead allocation
1,632
1,514
1,380
Accrued incentive compensation
1,132
38
115
Directors fees and liability insurance
1,169
998
998
Audit, legal and other professional fees
1,112
1,045
1,105
Direct REIT operating expenses
1,475
1,057
997
Other administrative
575
611
262
Total expenses
$
15,251
$
10,544
$
10,385
We are externally managed and advised by Bimini Advisors, LLC (the “Manager”) pursuant
to the terms of a management
agreement. The management agreement has been renewed through February
20, 2023 and provides for automatic one-year extension
options thereafter and is subject to certain termination rights.
Under the terms of the management agreement, the Manager is
responsible for administering the business activities and day-to-day operations of
the Company.
The Manager receives a monthly
management fee in the amount of:
●
One-twelfth of 1.5% of the first $250 million of the Company’s month end equity, as defined in the management agreement,
●
One-twelfth of 1.25% of the Company’s month end equity that is greater than $250
million and less than or equal to $500
million, and
●
One-twelfth of 1.00% of the Company’s month end equity that is greater than $500
million.
The Company is obligated to reimburse the Manager for any direct expenses
incurred on its behalf and to pay the Manager the
Company’s pro rata portion of certain overhead costs set forth in the management
agreement.
The Company has contracted with AVM, L.P.
(“AVM”) to provide repurchase agreement trading, clearing and administrative
services to the Company. Commencing in 2022, the Manager will begin performing these functions and the contracted relationship
with
AVM may be reduced or eliminated. Following the termination of the arrangements with AVM, the Company will pay the Manager
additional fees for its performance of repurchase agreement funding transaction
services and related clearing and operational services
as set forth in the management agreement, as amended.
Should the Company terminate the management agreement without cause,
it will pay the Manager a termination fee equal to three
times the average annual management fee, as defined in the management
agreement, before or on the last day of the term of the
agreement.
The following table summarizes the management fee and overhead allocation
expenses for each quarter in 2021, 2020 and 2019
and for the years ended December 31, 2021, 2020 and 2019.
60
($ in thousands)
Average
Average
Advisory Services
Orchid
Orchid
Management
Overhead
Three Months Ended
MBS
Equity
Fee
Allocation
Total
December 31, 2021
$
6,056,259
$
806,382
$
2,587
$
443
$
3,030
September 30, 2021
5,136,331
672,384
2,156
390
2,546
June 30, 2021
4,504,887
542,679
1,792
395
2,187
March 31, 2021
4,032,716
456,687
1,621
404
2,025
December 31, 2020
3,633,631
387,503
1,384
442
1,826
September 30, 2020
3,422,564
368,588
1,252
377
1,629
June 30, 2020
3,126,779
361,093
1,268
348
1,616
March 31, 2020
3,269,859
376,673
1,377
347
1,724
December 31, 2019
3,705,920
414,018
1,477
379
1,856
September 30, 2019
3,674,087
394,788
1,440
351
1,791
June 30, 2019
3,307,885
363,961
1,326
327
1,653
March 31, 2019
3,051,509
363,204
1,285
323
1,608
Years Ended
December 31, 2021
$
4,932,548
$
619,533
$
8,156
$
1,632
$
9,788
December 31, 2020
3,363,208
373,464
5,281
1,514
6,795
December 31, 2019
3,434,850
383,993
5,528
1,380
6,908
Financial
Condition:
Mortgage-Backed Securities
As of December
31, 2021,
our RMBS
portfolio
consisted
of $6,511.1 million
of Agency
RMBS at
fair value
and had a
weighted
average coupon
on assets
of 3.03%.
During the
year ended
December
31, 2021,
we received
principal
repayments
of $591.1
million
compared
to $523.7
million for
the year
ended December
31, 2020.
The average
three month
prepayment
speeds for
the quarters
ended
December
31, 2021
and 2020
were 11.4% and
20.1%, respectively.
The following
table presents
the 3-month
constant prepayment
rate (“CPR”)
experienced
on our structured
and PT RMBS
sub-
portfolios,
on an annualized
basis, for
the quarterly
periods presented.
CPR is a
method of
expressing
the prepayment
rate for
a mortgage
pool that
assumes that
a constant
fraction
of the remaining
principal
is prepaid
each month
or year. Specifically,
the CPR
in the chart
below represents
the three
month prepayment
rate of the
securities
in the respective
asset
category.
Structured
PT RMBS
RMBS
Total
Three Months Ended
Portfolio (%)
Portfolio (%)
Portfolio (%)
December 31, 2021
9.0
24.6
11.4
September 30, 2021
9.8
25.1
12.4
June 30, 2021
10.9
29.9
12.9
March 31, 2021
9.9
40.3
12.0
December 31, 2020
16.7
44.3
20.1
September 30, 2020
14.3
40.4
17.0
June 30, 2020
13.9
35.3
16.3
March 31, 2020
9.8
22.9
11.9
61
The following
tables summarize
certain characteristics
of the Company’s
PT RMBS
and structured
RMBS as of
December 31,
2021
and 2020:
($ in thousands)
Weighted
Percentage
Average
of
Weighted
Maturity
Fair
Entire
Average
in
Longest
Asset Category
Value
Portfolio
Coupon
Months
Maturity
December 31, 2021
Fixed Rate RMBS
$
6,298,189
96.7%
2.93%
342
1-Dec-51
Total Mortgage-backed Pass-through
6,298,189
96.7%
2.93%
342
1-Dec-51
Interest-Only Securities
210,382
3.2%
3.40%
263
25-Jan-52
Inverse Interest-Only Securities
2,524
0.1%
3.75%
300
15-Jun-42
Total Structured RMBS
212,906
3.3%
3.41%
264
25-Jan-52
Total Mortgage Assets
$
6,511,095
100.0%
3.03%
325
25-Jan-52
December 31, 2020
Fixed Rate RMBS
$
3,560,746
95.5%
3.09%
339
1-Jan-51
Fixed Rate CMOs
137,453
3.7%
4.00%
312
15-Dec-42
Total Mortgage-backed Pass-through
3,698,199
99.2%
3.13%
338
1-Jan-51
Interest-Only Securities
28,696
0.8%
3.98%
268
25-May-50
Total Structured RMBS
28,696
0.8%
3.98%
268
25-May-50
Total Mortgage Assets
$
3,726,895
100.0%
3.19%
333
1-Jan-51
($ in thousands)
December 31, 2021
December 31, 2020
Percentage of
Percentage of
Agency
Fair Value
Entire Portfolio
Fair Value
Entire Portfolio
Fannie Mae
$
4,719,349
72.5%
$
2,733,960
73.4%
Freddie Mac
1,791,746
27.5%
992,935
26.6%
Total Portfolio
$
6,511,095
100.0%
$
3,726,895
100.0%
December 31, 2021
December 31, 2020
Weighted Average Pass-through Purchase Price
$
107.19
$
107.43
Weighted Average Structured Purchase Price
$
15.21
$
20.06
Weighted Average Pass-through Current Price
$
105.31
$
108.94
Weighted Average Structured Current Price
$
14.08
$
10.87
Effective Duration
(1)
3.390
2.360
(1)
Effective duration is the approximate percentage change in price
for a 100 bps change in rates.
An effective duration of 3.390 indicates that an
interest rate increase of 1.0% would be expected to cause a 3.390% decrease in the value
of the RMBS in the Company’s investment portfolio
at December 31, 2021.
An effective duration of 2.360 indicates that an interest rate increase
of 1.0% would be expected to cause a 2.360%
decrease in the value of the RMBS in the Company’s investment portfolio
at December 31, 2020. These figures include the structured securities
in the portfolio, but do not include the effect of the Company’s funding
cost hedges.
Effective duration quotes for individual investments are
obtained from The Yield Book, Inc.
62
The following
table presents
a summary
of portfolio
assets acquired
during the
years ended
December
31, 2021
and 2020.
($ in thousands)
2021
2020
Total Cost
Average
Price
Weighted
Average
Yield
Total Cost
Average
Price
Weighted
Average
Yield
Pass-through RMBS
$
6,224,819
$
106.68
1.63%
$
4,858,602
$
107.71
1.38%
Structured RMBS
205,906
13.61
3.88%
832
12.96
2.80%
Borrowings
As of December
31, 2021,
we had established
borrowing
facilities
in the repurchase
agreement
market with
a number
of commercial
banks and
other financial
institutions
and had borrowings
in place with
23 of these
counterparties.
None of these
lenders are
affiliated
with
the Company. These
borrowings
are secured
by the Company’s
RMBS and
cash, and
bear interest
at prevailing
market rates.
We believe
our established
repurchase
agreement
borrowing
facilities
provide borrowing
capacity in
excess of
our needs.
As of December
31, 2021,
we had obligations
outstanding
under the
repurchase
agreements
of approximately
$6,244.1
million with
a
net weighted
average borrowing
cost of 0.15%.
The remaining
maturity of
our outstanding
repurchase
agreement
obligations
ranged from
5 to 257
days, with
a weighted
average remaining
maturity of
27 days.
Securing
the repurchase
agreement
obligations
as of December
31, 2021
are RMBS
with an estimated
fair value,
including
accrued
interest,
of approximately
$6,525.2
million and
a weighted
average
maturity of
345 months,
and cash
pledged to
counterparties
of approximately
$57.3 million.
Through
February
25, 2022,
we have been
able to maintain
our repurchase
facilities
with comparable
terms to
those that
existed at
December
31, 2021
with maturities
extending
to
various dates
through September
14, 2022.
The table below presents information about our period end,
maximum and average balances of borrowings for each quarter in
2021 and 2020.
($ in thousands)
Difference Between Ending
Ending
Maximum
Average
Borrowings and
Balance of
Balance of
Balance of
Average Borrowings
Three Months Ended
Borrowings
Borrowings
Borrowings
Amount
Percent
December 31, 2021
$
6,244,106
$
6,419,689
$
5,728,988
$
515,118
8.99%
September 30, 2021
5,213,869
5,214,254
4,864,287
349,582
7.19%
June 30, 2021
4,514,704
4,517,953
4,348,192
166,512
3.83%
March 31, 2021
4,181,680
4,204,935
3,888,633
293,047
7.54%
December 31, 2020
3,595,586
3,597,313
3,438,444
157,142
4.57%
September 30, 2020
3,281,303
3,286,454
3,228,021
53,282
1.65%
June 30, 2020
3,174,739
3,235,370
2,992,494
182,245
6.09%
March 31, 2020
2,810,250
4,297,621
3,129,178
(318,928)
(10.19)%
(1)
(1)
The lower ending balance relative to the average balance during the quarter
ended March 31, 2020 reflects the sale of RMBS pledged as
collateral in order to maintain cash and liquidity in response to the dislocations in the financial
and mortgage markets resulting from the
economic impacts of COVID-19.
During the quarter ended March 31, 2020, the Company’s investment
in RMBS decreased $642.1 million.
Liquidity and Capital Resources
Liquidity
is our ability
to turn non-cash
assets into
cash, purchase
additional
investments,
repay principal
and interest
on borrowings,
fund overhead,
fulfill margin
calls and
pay dividends.
We have both
internal
and external
sources of
liquidity. However,
our material
unused sources
of liquidity
include cash
balances,
unencumbered
assets and
our ability
to sell encumbered
assets to
raise cash.
At the
63
onset of
the COVID-19
pandemic in
the spring
of 2020,
the markets
the Company
operates
in were severely
disrupted
and the Company
was forced
to rely on
these sources
of liquidity. Our
balance sheet
also generates
liquidity
on an on-going
basis through
payments
of
principal
and interest
we receive
on our RMBS
portfolio.
Management
believes that
we currently
have sufficient
liquidity
and capital
resources
available
for (a) the
acquisition
of additional
investments
consistent
with the
size and
nature of
our existing
RMBS portfolio,
(b)
the repayments
on borrowings
and (c) the
payment of
dividends
to the extent
required
for our continued
qualification
as a REIT.
We may
also generate
liquidity
from time
to time by
selling our
equity or
debt securities
in public
offerings
or private
placements.
Internal
Sources of
Liquidity
Our internal
sources of
liquidity
include our
cash balances,
unencumbered
assets and
our ability
to liquidate
our encumbered
security
holdings.
Our balance
sheet also
generates
liquidity
on an on-going
basis through
payments
of principal
and interest
we receive
on our
RMBS portfolio.
Because our
PT RMBS portfolio
consists entirely
of government
and agency
securities,
we do not
anticipate
having
difficulty converting
our assets
to cash should
our liquidity
needs ever
exceed our
immediately
available
sources of
cash.
Our structured
RMBS portfolio
also consists
entirely of
governmental
agency securities,
although
they typically
do not trade
with comparable
bid / ask
spreads as
PT RMBS.
However, we anticipate
that we would
be able to
liquidate
such securities
readily, even in
distressed
markets,
although
we would
likely do
so at prices
below where
such securities
could be sold
in a more
stable market.
To enhance our liquidity
even
further, we may
pledge a
portion of
our structured
RMBS as
part of a
repurchase
agreement
funding,
but retain
the cash in
lieu of acquiring
additional
assets.
In this way
we can, at
a modest
cost, retain
higher levels
of cash on
hand and
decrease
the likelihood
we will
have to
sell assets
in a distressed
market in
order to
raise cash.
Our strategy
for hedging
our funding
costs typically
involves
taking short
positions
in interest
rate futures,
treasury
futures,
interest
rate
swaps, interest
rate swaptions
or other
instruments.
When the
market causes
these short
positions
to decline
in value we
are required
to
meet margin
calls with
cash.
This can
reduce our
liquidity
position
to the extent
other securities
in our portfolio
move in price
in such a
way
that we do
not receive
enough cash
via margin
calls to
offset the
derivative
related margin
calls. If
this were
to occur
in sufficient
magnitude,
the loss of
liquidity
might force
us to reduce
the size
of the levered
portfolio,
pledge additional
structured
securities
to raise
funds or
risk operating
the portfolio
with less
liquidity.
External
Sources of
Liquidity
Our primary
external
sources of
liquidity
are our ability
to (i) borrow
under master
repurchase
agreements,
(ii) use
the TBA
security
market and
(iii) sell
our equity
or debt
securities
in public
offerings
or private
placements.
Our borrowing
capacity will
vary over
time as the
market value
of our interest
earning assets
varies.
Our master
repurchase
agreements
have no
stated expiration,
but can be
terminated
at
any time at
our option
or at the
option of
the counterparty.
However, once
a definitive
repurchase
agreement
under a master
repurchase
agreement
has been
entered into,
it generally
may not be
terminated
by either
party.
A negotiated
termination
can occur, but
may involve
a fee to
be paid by
the party
seeking to
terminate
the repurchase
agreement
transaction.
Under our
repurchase
agreement
funding arrangements,
we are required
to post margin
at the initiation
of the borrowing.
The margin
posted represents
the haircut,
which is a
percentage
of the market
value of the
collateral
pledged.
To the extent the
market value
of the
asset collateralizing
the financing
transaction
declines,
the market
value of our
posted margin
will be insufficient
and we will
be required
to
post additional
collateral.
Conversely, if
the market
value of the
asset pledged
increases
in value,
we would
be over collateralized
and we
would be
entitled to
have excess
margin returned
to us by the
counterparty.
Our lenders
typically
value our
pledged securities
daily to
ensure the
adequacy of
our margin
and make margin
calls as
needed, as
do we.
Typically, but not
always, the
parties agree
to a minimum
threshold
amount for
margin calls
so as to avoid
the need
for nuisance
margin calls
on a daily
basis.
Our master
repurchase
agreements
do not specify
the haircut;
rather haircuts
are determined
on an individual
repurchase
transaction
basis. Throughout
the year
ended
December
31, 2021,
haircuts on
our pledged
collateral
remained
stable and
as of December
31, 2021,
our weighted
average haircut
was
approximately
4.9% of the
value of
our collateral.
TBAs
represent
a form of
off-balance
sheet financing
and are
accounted
for as derivative
instruments.
(See Note
4 to our
Financial
64
Statements
in this Form
10-K for
additional
details on
of our TBAs).
Under certain
market conditions,
it may be
uneconomical
for us to
roll
our TBAs
into future
months and
we may need
to take or
make physical
delivery
of the underlying
securities.
If we were
required
to take
physical delivery
to settle
a long TBA,
we would
have to fund
our total
purchase
commitment
with cash
or other
financing
sources and
our
liquidity
position could
be negatively
impacted.
Our TBAs
are also
subject to
margin requirements
governed
by the Mortgage-Backed
Securities
Division ("MBSD")
of the FICC
and
by our master
securities
forward
transaction
agreements,
which may
establish
margin levels
in excess
of the MBSD.
Such provisions
require that
we establish
an initial
margin based
on the notional
value of the
TBA, which
is subject
to increase
if the estimated
fair value
of
our TBAs
or the estimated
fair value
of our pledged
collateral
declines.
The MBSD
has the sole
discretion
to determine
the value
of our
TBAs
and of the
pledged collateral
securing such
contracts.
In the event
of a margin
call, we
must generally
provide additional
collateral
on
the same
business day.
Settlement
of our TBA
obligations
by taking
delivery of
the underlying
securities
as well as
satisfying
margin requirements
could
negatively
impact our
liquidity
position.
However, since
we do not
use TBA dollar
roll transactions
as our primary
source of
financing,
we
believe that
we will have
adequate
sources of
liquidity
to meet
such obligations.
As discussed
earlier, we invest
a portion
of our capital
in structured
Agency RMBS.
We generally
do not apply
leverage
to this portion
of our portfolio.
The leverage
inherent
in structured
securities
replaces the
leverage
obtained
by acquiring
PT securities
and funding
them
in the repurchase
market.
This structured
RMBS strategy
has been a
core element
of the Company’s
overall investment
strategy
since
inception.
However, we
have and may
continue to
pledge a
portion
of our structured
RMBS in order
to raise our
cash levels,
but generally
will not
pledge these
securities
in order
to acquire
additional
assets.
In future
periods,
we expect
to continue
to finance
our activities
in a manner
that is consistent
with our
current operations
through
repurchase
agreements.
As of December
31, 2021,
we had cash
and cash equivalents
of $385.1
million.
We generated
cash flows
of
$716.5 million
from principal
and interest
payments on
our RMBS
and had average
repurchase
agreements
outstanding
of $4,707.5
million
during the
year ended
December
31, 2021.
As described more fully below, we may also access liquidity by selling our equity or debt securities in public offerings or private
placements.
Stockholders’
Equity
On August 2, 2017, we entered into the August 2017 Equity Distribution Agreement
with two sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $125,000,000 of
shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued
a total of 15,123,178 shares under the
August 2017 Equity Distribution Agreement for aggregate gross proceeds of $125.0
million, and net proceeds of approximately $123.1
million, after commissions and fees, prior to its termination in July 2019.
On July 30, 2019, we entered into the 2019 Underwriting Agreement with Morgan
Stanley & Co. LLC, Citigroup Global Markets Inc.
and J.P.
Morgan Securities LLC, as representatives of the underwriters named
therein, relating to the offer and sale of 7,000,000
shares of the Company’s common stock at a price to the public of $6.55 per share. The underwriters
purchased the shares pursuant to
the 2019 Underwriting Agreement at a price of $6.3535 per share. The closing
of the offering of 7,000,000 shares of common stock
occurred on August 2, 2019, with net proceeds to us of approximately $44.2
million after deduction of underwriting discounts and
commissions and other estimated offering expenses.
On January 23, 2020, we entered into the January 2020 Equity Distribution
Agreement with three sales agents pursuant to which
we could offer and sell, from time to time, up to an aggregate amount of $200,000,000 of
shares of our common stock in transactions
that were deemed to be “at the market” offerings and privately negotiated transactions.
We issued a total of 3,170,727 shares under
65
the January 2020 Equity Distribution Agreement for aggregate gross proceeds
of $19.8 million, and net proceeds of approximately
$19.4 million, after commissions and fees, prior to its termination in August
2020.
On August 4, 2020, we entered into the August 2020 Equity Distribution Agreement
with four sales agents pursuant to which we
could offer and sell, from time to time, up to an aggregate amount of $150,000,000
of shares of our common stock in transactions that
were deemed to be “at the market” offerings and privately negotiated transactions. We issued a total
of 27,493,650 shares under the
August 2020 Equity Distribution Agreement for aggregate gross proceeds
of approximately $150.0 million, and net proceeds of
approximately $147.4 million, after commissions and fees,
prior to its termination in June 2021.
On January 20, 2021, we entered into the January 2021 Underwriting Agreement
with J.P. Morgan Securities LLC (“J.P.
Morgan”),
relating to the offer and sale of 7,600,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from
the Company pursuant to the January 2021 Underwriting Agreement at $5.20
per share. In addition, we granted J.P. Morgan a 30-day
option to purchase up to an additional 1,140,000 shares of our common stock
on the same terms and conditions, which J.P. Morgan
exercised in full on January 21, 2021. The closing of the offering of 8,740,000 shares of our
common stock occurred on January 25,
2021, with proceeds to us of approximately $45.2 million, net of offering expenses.
On March 2, 2021, we entered into the March 2021 Underwriting Agreement
with J.P. Morgan, relating to the offer and sale of
8,000,000 shares of our common stock. J.P. Morgan purchased the shares of our common stock from the Company pursuant to the
March 2021 Underwriting Agreement at $5.45 per share. In addition, we
granted J.P. Morgan a 30-day option to purchase up to an
additional 1,200,000 shares of our common stock on the same terms
and conditions, which J.P. Morgan exercised in full on March 3,
2021. The closing of the offering of 9,200,000 shares of our common stock occurred on
March 5, 2021, with proceeds to us of
approximately $50.0 million, net of offering expenses.
On June 22, 2021, we entered into the June 2021 Equity Distribution Agreement with four
sales agents pursuant to which we could
offer and sell, from time to time, up to an aggregate amount of $250,000,000 of shares
of our common stock in transactions that were
deemed to be “at the market” offerings and privately negotiated transactions. We issued a
total of 49,407,336 shares under the June
2021 Equity Distribution Agreement for aggregate gross proceeds of
approximately $250.0 million, and net proceeds of approximately
$246.2 million, after commissions and fees, prior to its termination in October
2021.
On October 29, 2021, we entered into the October 2021 Equity Distribution
Agreement with four sales agents pursuant to which
we may offer and sell, from time to time, up to an aggregate amount of $250,000,000 of
shares of our common stock in transactions
that are deemed to be “at the market” offerings and privately negotiated transactions. Through
December 31, 2021, we issued a total of
15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate
gross proceeds of approximately $78.3 million,
and net proceeds of approximately $77.0
million, after commissions and fees.
Outlook
Economic Summary
COVID-19 continued to impact the United States and the rest of the world during the fourth
quarter of 2021 and into the first
quarter of 2022.
The most recent variant, Omicron, spreads much more readily
than past variants, but also tends to be much less
severe.
Instances of new cases spiked rapidly, starting in December of 2021 and peaked, in the U.S., the week ended January 16,
2022 at 5.58 million.
Since then cases have declined fairly rapidly, as have hospitalizations, which have also tended to involve much
shorter stays in the hospital, especially in comparison to the Delta variant.
Despite the Omicron wave, the economy added 467,000
jobs in January 2022 and retail sales also rose well above estimates at 3.8%,
causing the markets and the Fed to meaningfully revise
expectations for the path of monetary policy in 2022 and beyond.
66
The rationale for the shift in expectations for monetary policy was found in the
economic data that was released during the fourth
quarter of 2021.
There were several economic indicators that reached milestone
levels and made it clear the economy had more than
recovered from the pandemic.
The Fed focuses on two areas of economic performance – inflation and the labor
market – tied to their
dual mandates of stable prices and maximum employment.
With respect to inflation, the year-over-year consumer price index reading
increased from the 4% increase reported in September of 2021
to 5.43% in December of 2021. Core personal consumption
expenditures – the Fed’s preferred inflation measure – increased from 3.7% year-over-year
to 4.85% between September and
December of 2021.
In the latter case, this was the highest reading since the early 1980s.
The producer price index was also increasing
rapidly – approaching 7% year over year in December of 2021.
This led the Fed to formally declare that their assessment of inflation
as “transitory” was no longer the case.
Labor market indicators
also reached new milestones. Initial claims for unemployment insurance
breached the 200,000 level
during the fourth quarter of 2021–
the first time this happened since the late 1960s.
Continuing claims for unemployment insurance
reached levels even lower than the lows reached prior to the pandemic, and the
unemployment rate reached 3.9% in December, still
0.4% above the lowest level reached prior to the pandemic but below the Fed’s long-term target
level and their proxy for full
employment.
The final piece of information was gross domestic product growth of 6.9%
for the fourth quarter, released in January of
2022.
The Fed’s outlook for monetary policy pivoted materially beginning in November
of 2021.
The economic data has strengthened further in early 2022.
In particular, measures of inflation have accelerated from the trend of
late 2021 and are very broad based, as prices for essentially every category
of goods and services are accelerating.
The employment
data has also been very strong, exhibiting little effect from the Omicron variant. The combination
of accelerating inflation well above the
Fed’s target level and a very tight labor market have led the market to anticipate the Fed will
react aggressively soon. The Fed has
signaled they are about to start an accelerated removal of the extreme monetary accommodation
necessitated by the pandemic.
In
January of 2022 the FOMC announced they would end their asset purchases
in March of 2022 and were likely to start decreasing the
reinvestment of their U.S. Treasury and RMBS assets as they matured or were repaid starting shortly
after their first rate hike.
The first
rate hike is likely to be in March as well. Current pricing in the futures
market indicates
the Fed will increase the Fed Funds rate at least
six times by January of 2023 and by approximately 75 basis points more in 2023.
There is a potentially significant geo-political development in the outlook as well.
Russia appears to be threatening to take military
action in the Ukraine.
They have moved over 100,000 troops and significant other military assets
such as tanks, combat aircraft,
missile systems, naval forces and medical personnel into areas on the
north, east and south of Ukraine. The situation has been
developing since late 2021 and diplomatic efforts to ease tensions in the area do not appear
to be working.
The United States and
several NATO allies have sent troops to the region and military supplies to Ukraine.
There is also the possibility hostilities may not be
limited to direct military confrontation.
This may have begun already as reports of cyber attacks throughout Ukraine
and other forms of
non-military intervention have occurred. Should the situation deteriorate further
and military action lead to a protracted war, there would
likely be an economic impact on Europe and therefore indirectly in the U.S., potentially
slowing economic activity at the margin and
possibly lessening the need for the Fed to remove monetary policy as
aggressively as expected otherwise.
Legislative Response and the Federal Reserve
Congress passed the CARES Act (described below) quickly in response to
the pandemic’s emergence during the spring of 2020.
As provisions of the CARES Act expired and the effects of the pandemic continued
to adversely impact the country, the federal
government passed an additional stimulus package in late December of 2020.
Further, on March 11, 2021, President Biden signed into
law an additional $1.9 trillion coronavirus aid package as part of the American
Rescue Plan Act of 2021.
This law provided for, among
other things, direct payments to most Americans with a gross income of
less than $75,000 a year, expansion of the child tax credit,
extension of expanded unemployment benefits through September 6, 2021, funding
for procurement of vaccines and health providers,
loans to qualified businesses, funding for rental and mortgage assistance and
funding for schools. The expanded federal
unemployment benefits expired on September 6, 2021.
In addition, the Fed provided as much support to the markets and the economy
as it could within the constraints of its mandate.
67
During the third quarter of 2020, the Fed unveiled a new monetary policy framework
focused on average inflation rate targeting
that allows the Fed Funds rate to remain quite low, even if inflation is expected to temporarily surpass the 2% target
level. Further, the
Fed stated they would look past the presence of very tight labor markets,
should they be present at the time.
This marks a significant
shift from their prior policy framework, which was focused on the unemployment
rate as a key indicator of impending inflation.
Adherence to this policy could steepen the U.S. Treasury curve as short-term rates could remain low for a
considerable period but
longer-term rates could rise given the Fed’s intention to let inflation potentially run above
2% in the future as the economy more fully
recovers.
As mentioned above, this policy shift will not likely have an effect on current
monetary policy as inflation is now running
considerably higher than the Fed’s 2% target level and the Fed appears likely to move
quickly to remove the extreme monetary
accommodation they provided as the pandemic emerged in the U.S. in the
spring of 2020.
Interest Rates
At the beginning of 2021,
interest rates were still close to the lowest levels ever observed
in 2020.
As the country and economy
emerged from the effects of the pandemic and the federal government and the Fed took unprecedented
actions to buttress the
economy from the effects of the pandemic, interest rates increased over the course of
the year.
Increases in interest rates were not
uniform over the year as shorter maturity rates, typically more sensitive to anticipated
increases in short term rates controlled by the
Fed, increased more than longer term rates.
As inflation accelerated in the fourth quarter of 2021, and even more so
in early 2022, this
trend intensified and currently the spread between certain intermediate rates
– such as 5-year and 7-year maturities – trade at yields
only marginally below longer-term rates such as 10-year U.S. Treasuries.
This flattening of the rates curve is typical as the economy
strengthens and the market anticipates increases in short-term rates by the Fed. As
economic and/or inflation data strengthen and the
market anticipates progressively more increases in short-term rates, this flattening
effect intensifies as well. Eventually the rates curve
could actually invert, whereby the intermediate rates mentioned above actually yield
more than longer-term rates.
This would occur
when the market anticipates the increases to short-term rates by the Fed will actually
slow the economy too much in the future and a
possible recession is on the horizon.
Given the unprecedented nature of the monetary and fiscal stimulus
needed to combat the
pandemic and the related supercharged effect on the economy, the current recovery and pending rate increase cycle will be difficult to
manage by the Fed and we expect that such an outcome is more likely to occur
than in past cycles.
The Agency RMBS Market
As was anticipated,
the Fed announced a tapering of their U.S. Treasury and Agency RMBS
asset purchases at their November
2021 meeting.
As described above, the forthcoming data was likely to necessitate an accelerated
pace of accommodation removal
and in December of 2021,
and again in January of 2022, the Fed announced revised schedules
for tapering.
This means a material
source of demand for Agency RMBS is about to leave the market.
Given Fed purchases are a source of reserves into the banking
system, this also means banks, which have also been a material source
for Agency RMBS, may also be buying fewer securities.
However, the securities that were the focus of the Fed and bank buying, namely production coupon securities, performed
relatively well
during the fourth quarter of 2021.
Total
returns for Agency RMBS for the fourth quarter and full year of 2021 were -0.4%
and -1.2%, respectively.
Agency RMBS
returns generally trailed other major domestic fixed income categories.
High yield debt returned 0.7% and 5.4% for the fourth quarter
and full year of 2021, respectively.
Investment grade returns for the same two periods were 0.2% and -1.0%.
Legacy non-Agency
RMBS returns were equal to or exceeded high yield returns.
Relative to comparable duration U.S. Treasuries Agency RMBS returns
were -1.0% and -1.6%, respectively for the same two periods.
Again, these returns trailed the same other major domestic fixed-income
categories and by comparable amounts.
Within the Agency RMBS 30-year coupons, production coupons – 2.0%
and 2.5% -
outperformed higher, liquid securities – 3.0% and 3.5%, both on an absolute and relative to comparable duration U.S.
Treasury basis
for the fourth quarter of 2021.
Recent Legislative and Regulatory Developments
68
The Fed conducted large scale overnight repo operations from late 2019 until
July 2020 to address disruptions in the U.S.
Treasury, Agency debt and Agency MBS financing markets. These operations ceased in July 2020 after the central bank successfully
tamed volatile funding costs that had threatened to cause disruption across the
financial system.
The Fed has taken a number of other actions to stabilize markets as a result
of the impacts of the COVID-19 pandemic. On
Sunday, March 15, 2020, the Fed announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and
Agency MBS markets. Specifically, the Fed announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200
billion of Agency MBS. The Fed also lowered the Fed Funds rate to a range
of 0.0% – 0.25%, after having already lowered the Fed
Funds rate by 50 bps on March 3, 2020. On June 30, 2020, Fed Chairman Powell
announced expectations to maintain interest rates at
this level until the Fed is confident that the economy has weathered recent events
and is on track to achieve maximum employment
and price stability goals. The Federal Open Market Committee (“FOMC”) continued
to reaffirm this commitment at all subsequent
meetings through December of 2021, as well as an intention to allow inflation to
climb modestly above their 2% target and maintain that
level for a period sufficient for inflation to average 2% long term.
On January 26, 2022, the FOMC reiterated its goals of maximum
employment and a 2% long-run inflation rate and stated that, with a strong labor market
and inflation well above 2%, it expected it
would soon be appropriate to raise the target federal funds rate.
In response to the deterioration in the markets for U.S. Treasuries, Agency MBS and other mortgage
and fixed income markets as
investors liquidated investments in response to the economic crisis resulting from
the actions to contain and minimize the impacts of
the COVID-19 pandemic, on the morning of Monday, March 23, 2020, the Fed announced a program to acquire U.S. Treasuries and
Agency MBS in the amounts needed to support smooth market functioning. With
these purchases, market conditions improved
substantially, and in early April, the Fed began to gradually reduce the pace of these purchases. Through November of 2021, the Fed
was committed to purchasing $80 billion of U.S. Treasuries and $40 billion of Agency MBS each month. In November
of 2021, it began
tapering its net asset purchases each month, reducing them to $70 billion,
$60 billion and $40 billion of U.S. Treasuries and $35 billion,
$30 billion and $20 billion of Agency MBS in November of 2021, December of
2021 and January of 2022, respectively.
On January 26,
2022, the FOMC announced that it would continue to increase its holdings of U.S. Treasuries by $20 billion per
month and its holdings
of Agency RMBS by $10 billion per month for February of 2022 and would end
its net asset purchases entirely by early March of 2022.
The CARES Act was passed by Congress and signed into law by President Trump on March 27, 2020.
The CARES Act provided
many forms of direct support to individuals and small businesses in order to stem the
steep decline in economic activity.
This over $2
trillion COVID-19 relief bill, among other things, provided for direct payments to each
American making up to $75,000 a year, increased
unemployment benefits for up to four months (on top of state benefits), funding
to hospitals and health providers, loans and
investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an
additional funding bill into law that provides an additional $484 billion of funding
to individuals, small businesses, hospitals, health care
providers and additional coronavirus testing efforts. Various provisions of the CARES Act began to expire in July 2020, including a
moratorium on evictions (July 25, 2020), expanded unemployment benefits (July
31, 2020), and a moratorium on foreclosures (August
31, 2020). On August 8, 2020, President Trump issued Executive Order 13945, directing the
Department of Health and Human
Services, the Centers for Disease Control and Prevention (“CDC”),
the Department of Housing and Urban Development, and
Department of the Treasury to take measures to temporarily halt residential evictions and foreclosures,
including through temporary
financial assistance.
On December 27, 2020, President Trump signed into law an additional $900 billion coronavirus aid package
as part of the
Consolidated Appropriations Act, 2021, providing for extensions of many
of the CARES Act policies and programs as well as additional
relief. The package provided for, among other things, direct payments to most Americans with a gross income of less
than $75,000 a
year, extension of unemployment benefits through March 14, 2021, funding for procurement of vaccines and health
providers, loans to
qualified businesses, funding for rental assistance and funding for schools.
On January 29, 2021, the CDC issued guidance extending
eviction moratoriums for covered persons through March 31, 2021. The FHFA subsequently extended the foreclosure
moratorium
begun under the CARES Act for loans backed by Fannie Mae and Freddie
Mac and the eviction moratorium for real estate owned by
69
Fannie Mae and Freddie Mac until July 31, 2021 and September 30, 2021, respectively. The U.S. Housing and Urban Development
Department subsequently extended the FHA foreclosure and eviction moratoria to
July 31, 2021 and September 30, 2021, respectively.
Despite the expirations of these foreclosure moratoria, a final rule adopted
by the CFPB on June 28, 2021 effectively prohibited
servicers from initiating a foreclosure before January 1, 2022 in most instances.
On March 11, 2021, President Biden signed into law an additional $1.9 trillion coronavirus aid package as part of the
American
Rescue Plan Act of 2021.
This law provided for, among other things, direct payments to most Americans with a gross income of less
than $75,000 a year, expansion of the child tax credit, extension of expanded unemployment benefits through September
6, 2021,
funding for procurement of vaccines and health providers, loans to qualified businesses,
funding for rental and mortgage assistance
and funding for schools. The expanded federal unemployment benefits expired on September
6, 2021.
In January 2019, the Trump administration made statements of its plans to work with Congress
to overhaul Fannie Mae and
Freddie Mac and expectations to announce a framework for the development of
a policy for comprehensive housing finance reform
soon. On September 30, 2019, the FHFA announced that Fannie Mae and Freddie Mac were allowed
to increase their capital buffers
to $25 billion and $20 billion, respectively, from the prior limit of $3 billion each. This step could ultimately lead to Fannie Mae and
Freddie Mac being privatized and represents the first concrete step on the road to
GSE reform.
On June 30, 2020, the FHFA released
a proposed rule on a new regulatory framework for the GSEs which seeks to implement
both a risk-based capital framework and
minimum leverage capital requirements. The final rule on the new capital framework
for the GSEs was published in the federal register
in December 2020.
On January 14, 2021, the U.S. Treasury and the FHFA executed letter agreements allowing the GSEs to continue
to retain capital up to their regulatory minimums, including buffers, as prescribed in the December
rule.
These letter agreements
provide, in part, (i) there will be no exit from conservatorship until all
material litigation is settled and the GSE has common equity Tier 1
capital of at least 3% of its assets, (ii) the GSEs will comply with
the FHFA’s
regulatory capital framework, (iii) higher-risk single-family
mortgage acquisitions will be restricted to current levels, and (iv) the U.S. Treasury and the FHFA will establish a timeline and process
for future GSE reform. However, no definitive proposals or legislation have been released or enacted with respect
to ending the
conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs
in the U.S. mortgage market.
On September 14,
2021, the U.S. Treasury and the FHFA suspended certain policy provisions in the January agreement, including limits on loans
acquired for cash consideration, multifamily loans, loans with higher risk
characteristics and second homes and investment properties.
On September 15, 2021, the FHFA announced a notice of proposed rulemaking for the purpose of amending the December
rule to,
among other things, reduce the Tier 1 capital and risk-weight floor requirements.
In 2017, policymakers announced that LIBOR will be replaced by December
31, 2021. The directive was spurred by the fact that
banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying
transactions on which to base levels and the
liability associated with submitting an unfounded level. However, the ICE Benchmark Administration, in its
capacity as administrator of
USD LIBOR, has announced that it intends to extend publication of USD LIBOR (other
than one-week and two-month tenors) by 18
months to June 2023.
Notwithstanding this possible extension, a joint statement by key regulatory
authorities calls on banks to cease
entering into new contracts that use USD LIBOR as a reference rate by no
later than December 31, 2021. The ARRC,
a steering
committee comprised of large U.S. financial institutions, has proposed replacing
USD-LIBOR with a new SOFR, a rate based on U.S.
repo trading. Many banks believe that it may take four to five years to complete
the transition to SOFR, despite the December 31, 2021
deadline. We will monitor the emergence of SOFR carefully as it appears likely to become
the new benchmark for hedges and a range
of interest rate investments. At this time, however, no consensus exists as to what rate or rates may become accepted alternatives
to
LIBOR.
On December 7, 2021, the CFPB released a final rule that amends Regulation
Z, which implemented the Truth in Lending Act,
aimed at addressing cessation of LIBOR for both closed-end (e.g., home mortgage) and
open-end (e.g., home equity line of credit)
products. The rule, which mostly becomes effective in April of 2022, establishes requirements
for the selection of replacement indices
for existing LIBOR-linked consumer loans. Although the rule does not mandate
the use of SOFR as the alternative rate, it identifies
SOFR as a comparable rate for closed-end products and states that for open-end products,
the CFPB has determined that ARRC’s
recommended spread-adjusted indices based on SOFR for consumer products
to replace the one-month, three-month, or six-month
70
USD LIBOR index “have historical fluctuations that are substantially similar to
those of the LIBOR indices that they are intended to
replace.” The CFPB reserved judgment, however, on a SOFR-based spread-adjusted replacement
index to replace the one-year USD
LIBOR until it obtained additional information.
On December 8, 2021, the House of Representatives passed the Adjustable Interest
Rate (LIBOR) Act of 2021 (H.R. 4616) (the
“LIBOR Act”), which provides for a statutory replacement benchmark rate for contracts
that use LIBOR as a benchmark and do not
contain any fallback mechanism independent of LIBOR. Pursuant to the LIBOR
Act, SOFR becomes the new benchmark rate by
operation of law for any such contract. The LIBOR Act establishes a safe harbor from
litigation for claims arising out of or related to the
use of SOFR as the recommended benchmark replacement. The LIBOR Act
makes clear that it should not be construed to disfavor the
use of any benchmark on a prospective basis.
The LIBOR Act also attempts to forestall challenges that it is impairing
contracts. It provides that the discontinuance of LIBOR and
the automatic statutory transition to a replacement rate neither impairs or
affects the rights of a party to receive payment under such
contracts, nor allows a party to discharge their performance obligations or to declare
a breach of contract. It amends the Trust
Indenture Act of 1939 to state that the “the right of any holder of any
indenture security to receive payment of the principal of and
interest on such indenture security shall not be deemed to be impaired or
affected” by application of the LIBOR Act to any indenture
security.
On December 9, 2021, the United States Senate referred the LIBOR Act to
the Committee on Banking, Housing and Urban
Affairs.
One-week and two-month U.S. dollar LIBOR rates phased out on December 31,
2021, but other U.S. dollar tenors may continue
until June 30, 2023. We will monitor the emergence of SOFR carefully as it appears likely
to become the new benchmark for hedges
and a range of interest rate investments. At this time, however, no consensus exists as to what rate or rates may
become accepted
alternatives to LIBOR.
Effective January 1, 2021, Fannie Mae, in alignment with Freddie Mac, extended the timeframe for
its delinquent loan buyout
policy for Single-Family Uniform Mortgage-Backed Securities (UMBS)
and Mortgage-Backed Securities (MBS) from four consecutively
missed monthly payments to twenty-four consecutively missed monthly payments (i.e.,
24 months past due). This new timeframe
applied to outstanding single-family pools and newly issued single-family pools and was
first reflected when January 2021 factors were
released on the fourth business day in February 2021.
For Agency RMBS investors, when a delinquent loan is bought out of a pool of
mortgage loans, the removal of the loan from the
pool is the same as a total prepayment of the loan.
The respective GSEs anticipated, however, that delinquent loans will be
repurchased in most cases before the 24-month deadline under one of the following
exceptions listed below.
•
a loan that is paid in full, or where the related lien is released and/or the
note debt is satisfied or forgiven;
•
a loan repurchased by a seller/servicer under applicable selling and servicing
requirements;
•
a loan entering a permanent modification, which generally requires it to
be removed from the MBS. During any modification
trial period, the loan will remain in the MBS until the trial period ends;
•
a loan subject to a short sale or deed-in-lieu of foreclosure; or
•
a loan referred to foreclosure.
Because of these exceptions, the GSEs believe based on prevailing assumptions
and market conditions this change will have only
a marginal impact on prepayment speeds, in aggregate. Cohort level impacts
may vary. For example, more than half of loans referred
to foreclosure are historically referred within six months of delinquency. The degree to which speeds are affected depends on
delinquency levels, borrower response, and referral to foreclosure timelines.
The scope and nature of the actions the U.S. government or the Fed will
ultimately undertake are unknown and will continue to
evolve.
71
Effect on Us
Regulatory developments, movements in interest rates and prepayment rates
affect us in many ways, including the following:
Effects on our Assets
A change in or elimination of the guarantee structure of Agency RMBS may increase
our costs (if, for example, guarantee fees
increase) or require us to change our investment strategy altogether. For example, the elimination of the guarantee
structure of Agency
RMBS may cause us to change our investment strategy to focus on
non-Agency RMBS, which in turn would require us to significantly
increase our monitoring of the credit risks of our investments in addition to interest
rate and prepayment risks.
Lower long-term interest rates can affect the value of our Agency RMBS in a number of ways.
If prepayment rates are relatively
low (due, in part, to the refinancing problems described above), lower long-term interest
rates can increase the value of higher-coupon
Agency RMBS. This is because investors typically place a premium on assets
with yields that are higher than market yields. Although
lower long-term interest rates may increase asset values in our portfolio, we
may not be able to invest new funds in similarly-yielding
assets.
If prepayment levels increase, the value of our Agency RMBS affected by such prepayments may decline.
This is because a
principal prepayment accelerates the effective term of an Agency RMBS, which would shorten
the period during which an investor
would receive above-market returns (assuming the yield on the prepaid asset
is higher than market yields). Also, prepayment proceeds
may not be able to be reinvested in similar-yielding assets. Agency RMBS
backed by mortgages with high interest rates are more
susceptible to prepayment risk because holders of those mortgages
are most likely to refinance to a lower rate. IOs and IIOs, however,
may be the types of Agency RMBS most sensitive to increased prepayment
rates. Because the holder of an IO or IIO receives no
principal payments, the values of IOs and IIOs are entirely dependent
on the existence of a principal balance on the underlying
mortgages. If the principal balance is eliminated due to prepayment, IOs
and IIOs essentially become worthless. Although increased
prepayment rates can negatively affect the value of our IOs and IIOs, they have the opposite
effect on POs. Because POs act like zero-
coupon bonds, meaning they are purchased at a discount to their par value
and have an effective interest rate based on the discount
and the term of the underlying loan, an increase in prepayment rates would reduce
the effective term of our POs and accelerate the
yields earned on those assets, which would increase our net income.
Higher long-term rates can also affect the value of our Agency RMBS.
As long-term rates rise, rates available to borrowers also
rise.
This tends to cause prepayment activity to slow and extend the expected
average life of mortgage cash flows.
As the expected
average life of the mortgage cash flows increases, coupled with higher discount
rates, the value of Agency RMBS declines.
Some of
the instruments the Company uses to hedge our Agency RMBS assets,
such as interest rate futures, swaps and swaptions, are stable
average life instruments.
This means that to the extent we use such instruments to hedge
our Agency RMBS assets, our hedges may
not adequately protect us from price declines, and therefore may negatively impact our
book value.
It is for this reason we use interest
only securities in our portfolio. As interest rates rise, the expected average
life of these securities increases, causing generally positive
price movements as the number and size of the cash flows increase the
longer the underlying mortgages remain outstanding. This
makes interest only securities desirable hedge instruments for pass-through
Agency RMBS.
As described above, the Agency RMBS market began to experience severe dislocations
in mid-March 2020 as a result of the
economic, health and market turmoil brought about by COVID-19. On March 23, 2020,
the Fed announced that it would purchase
Agency RMBS and U.S. Treasuries in the amounts needed to support smooth market functioning, which
largely stabilized the Agency
RMBS market, but announced a tapering of these purchases in November 2021.
The Fed’s reduction of these purchases could
negatively impact our investment portfolio. Further, the moratoriums on foreclosures and evictions
described above will likely delay
potential defaults on loans that would otherwise be bought out of Agency MBS pools
as described above.
Depending on the ultimate
resolution of the foreclosure or evictions, when and if it occurs, these loans
may be removed from the pool into which they were
72
securitized. If this were to occur, it would have the effect of delaying a prepayment on the Company’s securities until such time. As the
majority of the Company’s Agency RMBS assets were acquired at a premium to par, this will tend to increase the realized
yield on the
asset in question.
Because we base our investment decisions on risk management principles
rather than anticipated movements in interest rates, in
a volatile interest rate environment we may allocate more capital to structured Agency
RMBS with shorter durations. We believe these
securities have a lower sensitivity to changes in long-term interest rates than other
asset classes. We may attempt to mitigate our
exposure to changes in long-term interest rates by investing in IOs and
IIOs, which typically have different sensitivities to changes in
long-term interest rates than PT RMBS, particularly PT RMBS backed by fixed-rate
mortgages.
Effects on our borrowing costs
We leverage our PT RMBS portfolio and a portion of our structured Agency RMBS
with principal balances through the use of short-
term repurchase agreement transactions. The interest rates on our debt
are determined by the short term interest rate markets. An
increase in the Fed Funds rate or LIBOR would increase our borrowing costs,
which could affect our interest rate spread if there is no
corresponding increase in the interest we earn on our assets. This would be
most prevalent with respect to our Agency RMBS backed
by fixed rate mortgage loans because the interest rate on a fixed-rate mortgage loan
does not change even though market rates may
change.
In order to protect our net interest margin against increases in short-term interest rates, we
may enter into interest rate swaps,
which economically convert our floating-rate repurchase agreement debt to fixed-rate
debt, or utilize other hedging instruments such as
Eurodollar, Fed Funds and T-Note futures contracts or interest rate swaptions.
Summary
The country and economy currently appear to be on the verge of recovering from
the COVID-19 pandemic.
While the virus
continues to infect people and often results in hospitalizations and deaths,
the effect on economic activity has decreased materially.
Coupled with unprecedented monetary and fiscal policy, the most significant combination of the two since the Second World War, the
fading effect of the pandemic is clearly causing the economy to run at unsustainable
levels, resulting in very tight labor markets and the
highest levels of inflation in decades. The Fed has begun the rapid transformation
from accommodation to constraint and will likely
begin raising short-term rates at their meeting in March of 2022.
Currently the market anticipates the Fed will continue to raise rates
throughout the year and into 2023, possibly by as much as 200 basis points.
Further, they are rapidly winding down their asset
purchases and will likely stop asset purchases altogether – possibly by the
end of the year – as they begin the process of “normalizing”
the size of their balance sheet.
Market experts estimate the Fed may have to shrink the size of their balance
sheet by up to $4 trillion,
and over a much shorter time frame than the last time they did so over the
period from 2017 to 2019.
The effect of these developments
on the level of interest rates has been a material flattening of the U.S. Treasury curve, whereby
short and intermediate term rates rise
and more so relative to longer maturity U.S. Treasuries.
For the Company,
this means our funding costs are likely to rise materially over the course
of 2022 and possibly into 2023.
While
longer-term maturities have not risen as much as short and intermediate term rates,
they have risen and refinancing and purchase
activity in the residential housing market is likely to slow. If this occurs, it would slow premium amortization on the Company’s Agency
RMBS securities. The net effect of higher funding costs and slower premium amortization
will depend on the extent and timing of both,
but may reduce the Company’s net interest income, and perhaps meaningfully so, over this period.
To the
extent geo-political events unfold, such as the current crisis in
Ukraine, the Fed may have to alter their monetary policy
decisions over the course of 2022 and beyond.
However, given the level of inflation and strength of the economy at present, such
developments would likely have to be severe in order to meaningfully
impact the path of monetary policy over the near-term.
Critical Accounting Estimates
73
Our financial statements are prepared in accordance with GAAP. GAAP requires our management to make some complex and
subjective decisions and assessments. Our most critical accounting policies involve
decisions and assessments which could
significantly affect reported assets, liabilities, revenues and expenses. Management has
identified its most critical accounting
estimates:
Mortgage-Backed Securities
Our investments in Agency RMBS are accounted for at fair value. We acquire our Agency
RMBS for the purpose of generating
long-term returns, and not for the short-term investment of idle capital.
As discussed in Note 12 to the financial statements, our Agency RMBS are valued using
Level 2 valuations, and such valuations
currently are determined by our manager based on independent pricing sources and/or
third party broker quotes, when available.
Because the price estimates may vary, our Manager must make certain judgments and assumptions about the appropriate
price to use
to calculate the fair values. Alternatively, our Manager could opt to have the value of all of our positions in Agency RMBS
determined
by either an independent third-party or do so internally.
In managing our portfolio, Bimini Advisors employs the following four-step process at
each valuation date to determine the fair
value of our Agency RMBS:
•
First, our Manager obtains fair values from subscription-based independent pricing
sources. These prices are used by both
our Manager as well as many of our repurchase agreement counterparty on
a daily basis to establish margin requirements for our
borrowings.
•
Second, our Manager requests non-binding quotes from one to four broker-dealers
for certain Agency RMBS in order to
validate the values obtained by the pricing service. Our Manager requests these
quotes from broker-dealers that actively trade and
make markets in the respective asset class for which the quote is requested.
•
Third, our Manager reviews the values obtained by the pricing source and the broker-dealers
for consistency across similar
assets.
•
Finally, if the data from the pricing services and broker-dealers is not homogenous or if the data obtained is inconsistent with
our Manager’s market observations, our Manager makes a judgment
to determine which price appears the most consistent with
observed prices from similar assets and selects that price. To the extent our Manager believes that none of the prices are consistent
with observed prices for similar assets, which is typically the case for only an
immaterial portion of our portfolio each quarter, our
Manager may use a third price that is consistent with observed prices for
identical or similar assets. In the case of assets that have
quoted prices such as Agency RMBS backed by fixed-rate mortgages, our Manager
generally uses the quoted or observed market
price. For assets such as Agency RMBS backed by ARMs or structured Agency
RMBS, our Manager may determine the price based
on the yield or spread that is identical to an observed transaction or a similar
asset for which a dealer mark or subscription-based price
has been obtained.
Management believes its pricing methodology to be consistent with the
definition of fair value described in Financial Accounting
Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements.
Derivative Financial Instruments
We use derivative instruments to manage interest rate risk, facilitate asset/liability strategies
and manage other exposures, and we
may continue to do so in the future. The principal instruments that we have
used to date are Fed Funds, T-Note and Eurodollar futures
contracts, interest rate swaps, interest rate swaptions and TBA securities,
but we may enter into other derivatives in the future.
74
We account for TBA securities as derivative instruments. Gains and losses associated
with TBA securities transactions are
reported in gain (loss) on derivative instruments in the accompanying
statements of operations.
We have elected not to treat any of our derivative financial instruments as hedges in
order to align the accounting treatment of its
derivative instruments with the treatment of our portfolio assets under the fair
value option election. All derivative instruments are
carried at fair value, and changes in fair value are recorded in earnings for
each period.
Our futures contracts are Level 1 valuations, as
they are exchange-traded instruments and quoted market prices are readily available.
Our interest rate swaps,
interest rate swaptions
and TBA securities are Level 2 valuations. The fair value of interest rate swaps
is determined using a discounted cash flow approach
using forward market interest rates and discount rates, which are observable
inputs. The fair value of interest rate swaptions is
determined using an option pricing model. The fair value of our TBA
securities are determined by the Company based on independent
pricing sources and/or third party broker quotes, similar to how
the fair value of our Agency RMBS is derived, as discussed above.
Income Recognition
Since we commenced operations, we have elected to account for all of our Agency
RMBS under the fair value option.
All of our Agency RMBS are either pass-through securities or structured Agency
RMBS, including CMOs, IOs, IIOs or POs. Income
on pass-through securities, POs and CMOs that contain principal balances is
based on the stated interest rate of the security. As a
result of accounting for our RMBS under the fair value option, premium or
discount present at the date of purchase is not amortized.
For IOs, IIOs and CMOs that do not contain principal balances, income is accrued
based on the carrying value and the effective yield.
The difference between income accrued and the interest received on the security is
characterized as a return of investment and serves
to reduce the asset’s carrying value. At each reporting date, the effective yield is adjusted
prospectively for future reporting periods
based on the new estimate of prepayments, current interest rates and current
asset prices. The new effective yield is calculated based
on the carrying value at the end of the previous reporting period, the new prepayment
estimates and the contractual terms of the
security. Changes in fair value of all of our Agency RMBS during the period are recorded in earnings and reported as unrealized
gains
(losses) on mortgage-backed securities in the accompanying statements of operations.
For IIO securities, effective yield and income
recognition calculations also take into account the index value applicable to
the security.
Capital Expenditures
At December 31, 2021,
we had no material commitments for capital expenditures.
Dividends
In addition to other requirements that must be satisfied to continue to qualify as a REIT, we must pay annual dividends to our
stockholders of at least 90% of our REIT taxable income, determined without regard
to the deductions for dividends paid and excluding
any net capital gains. REIT taxable income (loss) is computed in accordance with
the Code, and can be greater than or less than our
financial statement net income (loss) computed in accordance with GAAP. These book to tax differences primarily relate to the
recognition of interest income on RMBS, unrealized gains and losses on
RMBS, and the amortization of losses on derivative
instruments that are treated as funding hedges for tax purposes.
We intend to pay regular monthly dividends to our stockholders and have declared the
following dividends since the completion of
our IPO.
(in thousands, except per share amounts)
Year
Per Share
Amount
Total
2013
$
1.395
$
4,662
2014
2.160
22,643
75
2015
1.920
38,748
2016
1.680
41,388
2017
1.680
70,717
2018
1.070
55,814
2019
0.960
54,421
2020
0.790
53,570
2021
0.780
97,601
2022 YTD
(1)
0.110
19,502
Totals
$
12.545
$
459,066
(1)
On January 13, 2022, the Company declared a dividend of $0.055 per
share to be paid on February 24, 2022. On February 16, 2022, the
Company declared a dividend of $0.055 per share to be paid on March 29,
2022. The dollar amount of the dividend declared in February 2022
is estimated based on the number of shares outstanding at February
25, 2022. The effects of these dividends are included in the table
above
but are not reflected in the Company’s financial statements as of December
31, 2021.