AG MORTGAGE INVESTMENT TRUST, INC. In this quarterly report on Form 10-Q, or this "report," we refer toAG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager,AG REIT Management, LLC , as our "Manager," and we refer to the direct parent company of our Manager,Angelo, Gordon & Co., L.P. , as "Angelo Gordon ." The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , and any subsequent filings.
Forward-Looking Statements
We make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including theFederal Reserve , and the potential effects of actual and proposed legislation on us, and our views on certain macroeconomic trends, and the impact of the novel coronavirus ("COVID-19"). When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation: •the uncertainty and economic impact of the COVID-19 pandemic (including the impact of of any significant variants) and of responsive measures implemented by various governmental authorities, businesses and other third parties, and the potential impact of COVID-19 on our personnel; •changes in our business and investment strategy; •our ability to predict and control costs; •changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; •changes in the yield curve; •changes in prepayment rates on the loans we own or that underlie our investment securities; •regulatory and structural changes in the residential loan market and its impact on non-agency mortgage markets; •increased rates of default or delinquencies and/or decreased recovery rates on our assets; •our ability to obtain and maintain financing arrangements on terms favorable to us or at all; •whether the Company's legacy commercial loans will be resolved on the terms and within the timeframes anticipated; •changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets; •conditions in the market for Residential Investments, Agency RMBS, and Commercial Investments; •legislative and regulatory actions by theU.S. Congress ,U.S. Department of the Treasury , theFederal Reserve and other agencies and instrumentalities in response to the economic effects of the COVID-19 pandemic; •the forbearance program included in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"); •our ability to make distributions to our stockholders in the future; •our ability to maintain our qualification as a REIT for federal tax purposes; and •our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended. We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. 47 --------------------------------------------------------------------------------
Special Note Regarding COVID-19 Pandemic
The novel coronavirus ("COVID-19") pandemic has and may continue to cause
significant disruption in the U.S. and world economies resulting in lost
business revenues, significant increases in unemployment, changes in consumer
behavior and significant reductions in liquidity and the fair value of many
assets, including those in which we invest in. Beginning in mid-March 2020 , the
global pandemic associated with COVID-19 and the related economic conditions
caused financial and mortgage-related asset markets to come under extreme
duress, resulting in credit spread widening, a sharp decrease in interest rates
and unprecedented illiquidity in repurchase agreement financing and MBS markets.
The illiquidity was exacerbated by inadequate demand for MBS among primary
dealers due to balance sheet constraints. Refer to the "Financing
activities-Forbearance and Reinstatement Agreements" section below for further
details related to the impact these economic conditions had on us.
Although market conditions have improved in quarters subsequent to March 2020 ,
the full impact of COVID-19 (including the impact of any significant variants)
on the mortgage REIT industry, credit markets, and, consequently, on our
financial condition and results of operations for future periods remains
uncertain. Future developments with respect to the COVID-19 pandemic, including
among others, the emergence of new variants, the effectiveness and durability of
current vaccines and government stimulus measures, could materially and
adversely affect our business, operations, operating results, financial
condition, liquidity, or capital levels.
Executive Summary
During the second quarter of 2021, we continued to focus our efforts on growing our portfolio of Residential Credit Investments, investing in residential mortgage loans with the intent to securitize these assets as market conditions permit. We completed two rated Non-QM securitizations and continued to purchase Non-QM Loans from both third-party originators as well as Arc Home. During the quarter, we sold Agency RMBS, Non-Agency RMBS, and Commercial Investments to continue reallocating capital to our Non-QM Loan portfolio. The information presented below provides a summary of investment and capital activity during the current quarter: Investment Activity •Purchased$446.2 million of Non-QM Loans,$197.5 million of which were purchased from Arc Home, a licensed mortgage originator we invest in alongside otherAngelo Gordon funds; •During the quarter we entered into or amended certain financing arrangements to increase the maximum uncommitted borrowing capacity to$800 million to finance the acquisition of Non-QM Loans; •Subsequent to quarter end, we purchased an additional$86.1 million of Non-QM Loans, inclusive of$58.5 million which were purchased from Arc Home, while also increasing our maximum uncommitted borrowing capacity under certain financing arrangements to support our continued growth within the Non-QM Loan market; •Net sold 30 Year Fixed Rate Agency RMBS, Non-Agency RMBS, and CMBS positions for total net proceeds of$244.2 million , of which$104.6 million is unsettled as ofJune 30, 2021 ; •Subsequent to quarter end, we sold our remaining CMBS portfolio for proceeds of$33.7 million ; •Participated in a rated securitization in which Non-QM Loans with a fair value of$223.9 million were securitized, converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; and •Alongside private funds under the management ofAngelo Gordon , participated through our unconsolidated ownership interest in MATT, in a rated Non-QM Loan securitization in which Non-QM Loans with a fair value of$171.4 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches, which had a fair value of$25.7 million as ofJune 30, 2021 . We have a 44.6% interest in the retained subordinate tranches. Subsequent to this transaction, MATT had securitized a majority of Non-QM Loans previously acquired and its remaining portfolio consisted primarily of the subordinate tranches retained from this securitization and past securitizations. 48 --------------------------------------------------------------------------------
Capital Activity
•Utilized our ATM program to issue 0.2 million shares of common stock, raising net proceeds of approximately$3.1 million ; •Entered into a privately negotiated exchange offer with existing holders of the preferred stock, issuing 0.4 million shares of common stock in exchange for 0.2 million shares of preferred stock; and •Implemented a reverse stock split primarily to decrease volatility in trading for our common stock. The reverse stock split was effective following the close of business onJuly 22, 2021 (the "Effective Time"). At the Effective Time, every three issued and outstanding shares of our common stock was converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of our common stock on the date of the Effective Time. Our company We are a mortgage REIT that opportunistically invests in a diversified risk adjusted portfolio of Credit Investments and Agency RMBS. Our Credit Investments include Residential Investments and Commercial Investments. We are aMaryland corporation and are externally managed by our Manager, a wholly-owned subsidiary ofAngelo Gordon , pursuant to a management agreement. Our Manager, pursuant to a delegation agreement dated as ofJune 29, 2011 , has delegated toAngelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust ("REIT"), forU.S. federal income tax purposes. Accordingly, we generally will not be subject toU.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT, with the exception of our domestic taxable REIT subsidiaries ("TRS"). We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act.
Our investment portfolio
Our investment portfolio is comprised of our Credit Investments and Agency RMBS. Our Credit Investments include Residential Investments and Commercial Investments. These investments are described in more detail below.
Credit Investments
Residential Investments
Our Residential Investments include:
•Non-QM Loans, which include: •Residential mortgage loans that do not qualify for theConsumer Finance Protection Bureau's (the "CFPB") safe harbor provision for "qualifying mortgages," or "QM." When held directly, these investments are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. •Non-QM Loans held alongside other private funds under the management ofAngelo Gordon are held in one of our unconsolidated subsidiaries,Mortgage Acquisition Trust I LLC ("MATT") (see the "Contractual obligations" section below for more detail). These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. •Non-QM Loans in securitized form that are issued by MATT. The securitizations typically take the form of various classes of notes. These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. •Re/Non-Performing Loans, which include: •RPLs or NPLs in securitized form issued by an entity in which we own an equity interest and that we hold alongside other private funds under the management ofAngelo Gordon . The securitizations typically take the form of equity and various classes of notes. These investments are included in the "RMBS" and "Investments in debt and equity of affiliates" line items on our consolidated balance sheets. •RPLs or NPLs we hold through interests in certain consolidated trusts. These investments are secured by residential real property, including prime, Alt-A, and subprime mortgage loans, and are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. 49 -------------------------------------------------------------------------------- •Land Related Financing includes first mortgage loans we originate to third-party land developers and home builders for purposes of the acquisition and horizontal development of land. These loans may be held through our unconsolidated subsidiaries. These loans are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. The Residential Investments that we own also include residential mortgage-backed securities ("RMBS") that are not issued or guaranteed byGinnie Mae or a GSE. We collectively refer to these investments as our Non-Agency RMBS. The mortgage loan collateral for residential Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued byU.S. government agencies orU.S. government-sponsored entities. Our Non-Agency RMBS include investment grade and non-investment grade fixed and floating-rate securities.
Commercial Investments
Our Commercial Investments include:
•Fixed and floating rate commercial mortgage-backed securities ("CMBS") secured
by commercial mortgage loans to multiple borrowers ("Conduit") or secured by a
single commercial mortgage loan which is backed by a single asset (usually a
large commercial property) or by a pool of cross collateralized mortgage
obligations to a single borrower or related borrowers
("Single-Asset/Single-Borrower");
•Interest Only securities (CMBS backed by interest-only strips);
•Commercial real estate loans secured by commercial real property, including
first mortgages and mezzanine loans for construction or redevelopment of a
property; and
•CMBS, Interest-Only securities and CMBS principal-only securities which are
regularly-issued by Freddie Mac as structured pass-through securities backed by
multifamily mortgage loans ("Freddie Mac K-Series" or "K-Series").
Agency RMBS
Our investment portfolio includes RMBS. Certain of the assets in our RMBS portfolio have a guarantee of principal and interest by aU.S. government agency such as theGovernment National Mortgage Association , orGinnie Mae , or by a government-sponsored entity such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac (each, a "GSE"). We refer to these securities as Agency RMBS ("Agency RMBS"). Our Agency RMBS includes fixed rate securities held as mortgage pass-through securities, as well as excess mortgage servicing rights ("Excess MSRs"). Excess MSRs are interests in mortgage servicing rights ("MSR"), representing a portion of the interest payment collected from a pool of mortgage loans, net of a basic servicing fee paid to the mortgage servicer. An MSR provides a mortgage servicer with the right to service a mortgage loan or a pool of mortgages in exchange for a portion of the interest payments made on the mortgage or the underlying mortgages.
Investment classification
Throughout this report, (1) we use the terms "credit portfolio" and "credit
investments" to refer to our Residential Investments and Commercial Investments,
inclusive of investments held within affiliated entities but exclusive of AG Arc
(discussed below); (2) we refer to our Re/Non-Performing Loans (exclusive of our
RPLs or NPLs in securitized form), Non-QM Loans (exclusive of those in
securitized form), Land Related Financing, and commercial real estate loans,
collectively, as our "loans"; (3) we use the term "credit securities" to refer
to our credit portfolio, excluding loans; and (4) we use the term "real estate
securities" or "securities" to refer to our Agency RMBS portfolio, exclusive of
Excess MSRs, and our credit securities. Our "investment portfolio" refers to our
combined Agency RMBS portfolio and credit portfolio and encompasses all of the
investments described above.
We also use the term "GAAP investment portfolio" which consists of (i) our
Agency RMBS, exclusive of (x) to-be-announced securities ("TBAs"), if any, and
(y) any investment classified as "Other assets" on our consolidated balance
sheets (our "GAAP Agency RMBS portfolio"), and (ii) our credit portfolio,
exclusive of (x) all investments held within affiliated entities and (y) any
investments classified as "Other assets" on our consolidated balance sheets (our
"GAAP credit portfolio"). See Note 2 to the "Notes to Consolidated Financial
Statements" for a discussion of our investments held within affiliated entities.
For a reconciliation of our investment portfolio to our GAAP investment
portfolio, see the GAAP Investment Portfolio Reconciliation Table below.
This presentation of our investment portfolio is consistent with how our management evaluates our business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition.
50
--------------------------------------------------------------------------------We, alongside private funds under the management ofAngelo Gordon , throughAG Arc LLC , one of our indirect subsidiaries ("AG Arc"), formedArc Home LLC ("Arc Home"). Arc Home originates conforming, Government, Jumbo, Non-QM, and other non-conforming residential mortgage loans and retains the mortgage servicing rights associated with the loans that it originates. From time to time, Arc Home may sell originated loans to us or other private funds under the management ofAngelo Gordon . See Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding transactions with affiliates. Market conditions During the second quarter of 2021, the financial markets generally continued their recovery from the unprecedented dislocation caused by the COVID-19 pandemic and the resulting economic shutdown across much of theU.S. economy. We believe several factors have contributed to the momentum of the ongoing rise in risk asset prices, including, most recently, vaccination rates, reopening of businesses, demand for fixed income assets, and improving economic data. TheFederal Reserve has also consistently signaled that it intends to maintain low interest rates for the foreseeable future. Home price indices continued to point to double-digit growth for national home prices, and in itsApril 2021 reading, the Case-Shiller index rose almost 15% year-over-year. We expect that the mortgage and consumer sectors will continue to benefit from the unemployment support, which some states are phasing out, and stimulus disbursements, which were included in the Bipartisan-Bicameral Omnibus COVID Relief Deal bill, which was passed byCongress inDecember 2020 . Non-QM Whole Loans and Securitizations: In the second quarter of 2021, loan originators shifted their monetization strategies away from broadly syndicated sales in favor of negotiated flow agreements and loan sales targeted towards much smaller audiences. In the securitization space, we observed over$5 billion of Non-QM transactions price, almost twice the volume observed in the first quarter. We expect volumes to continue at this pace throughout the year as rates in the Non-QM space have noticeably decreased over the course of this year. In general, the price of residential whole loans continued to remain high as aggregators accounted for the decreased cost of funds in securitization, new government stimulus packages, and the demand for Non-QM assets remains outsized compared to originators ability to reach pre-COVID volumes. Agency RMBS: Nominal spreads on generic Agency RMBS versus benchmark rates continued to experience volatility in the second quarter 2021. Although there was continued positive momentum inApril 2021 , spreads began widening during the following two months. Continued strong bank demand and steady buying by theFederal Reserve remain broadly supportive of the sector, but theFederal Reserve has signaled that it is beginning to prepare for a reduction of its asset purchases in the future. Payups on specified pools also saw significant volatility during the second quarter 2021, initially falling sharply in response to market participants selling higher coupon pools and a slowing of collateralized mortgage obligation activity, then partially recovering late in the quarter as lower yields forced accounts to refocus on prepayment protection. Non-Agency RMBS: Spread tightening for most securitized residential debt sectors extended through the second quarter supported by strong collateral fundamentals, sharply higher home prices, demand for yield, and the ongoing employment recovery. Spreads for most mortgage sub-asset classes narrowed to levels belowFebruary 2020 levels, includingAAA tranches of re-performing and non-qualified mortgage securitizations and mezzanine Credit Risk Transfer ("CRT") tranches. Issuance of new RMBS rose 35% from the first quarter to over$40 billion , largely due to prime and agency-eligible issuance, which nearly doubled to$16.5 billion . Issuance of non-QM loans and CRT rose 36% to$6 billion and 20% to$6.7 billion , respectively. RMBS volume in the first half of 2021 totaled$70 billion and was around 11% higher than the same period in 2019 (comparison provided to 2019 as volumes in 2020 were impacted as a result of the COVID-19 pandemic). In light of various market uncertainties, in particular the pervasive uncertainties of the COVID-19 pandemic for theU.S. and global economy, there can be no assurance that the trends and conditions described above will not change in a manner materially adverse to the mortgage REIT industry and/or our Company. Results of Operations Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our investments in residential mortgages in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income or loss available to common stockholders is our net interest income, less our cost of hedging, which represents the difference between the interest 51 --------------------------------------------------------------------------------
earned on our investment portfolio and the costs of financing and economic hedges in place on our investment portfolio, as well as any income or losses from our equity investments in affiliates.
Three Months Ended
The table below presents certain information from our consolidated statements of operations for the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, 2021 June 30, 2020 Increase/(Decrease)
Statement of Operations Data: Net Interest Income Interest income$ 14,228 $ 13,369 $ 859 Interest expense 5,294 8,613 (3,319) Total Net Interest Income 8,934 4,756 4,178 Other Income/(Loss) Net realized gain/(loss) 4,374 (91,609) 95,983 Net interest component of interest rate swaps (1,573) - (1,573) Unrealized gain/(loss), net 9,685 100,179 (90,494) Other income/(loss), net - (155) 155 Total Other Income/(Loss) 12,486 8,415 4,071 Expenses Management fee to affiliate 1,667 1,678 (11) Other operating expenses 4,866 4,557 309 Restructuring related expenses - 7,104 (7,104) Servicing fees 672 566 106 Total Expenses 7,205 13,905 (6,700) Income/(loss) before equity in earnings/(loss) from affiliates 14,215 (734) 14,949 Equity in earnings/(loss) from affiliates 1,278 3,434 (2,156) Net Income/(Loss) from Continuing Operations 15,493 2,700 12,793 Net Income/(Loss) from Discontinued Operations - 361 (361) Net Income/(Loss) 15,493 3,061 12,432 Gain on Exchange Offers, net 114 - 114 Dividends on preferred stock (4,689) (5,667) 978 Net Income/(Loss) Available to Common Stockholders$ 10,918 $ (2,606) $ 13,524 Interest income
Interest income is calculated using the effective interest method for our GAAP investment portfolio and calculated based on the actual coupon rate.
Interest income increased fromJune 30, 2020 toJune 30, 2021 primarily due to an increase in the size of our portfolio. The weighted average amortized cost of our GAAP investment portfolio increased by$0.7 billion from$1.0 billion for the three months endedJune 30, 2020 to$1.7 billion for the three months endedJune 30, 2021 . The increase was primarily driven by purchases of Non-QM Loans and Agency RMBS during the period. This increase was offset by a decrease in the weighted average yield of our GAAP investment portfolio by 1.82% from 5.14% for the three months endedJune 30, 2020 to 3.32% for the three months endedJune 30, 2021 . 52 --------------------------------------------------------------------------------
Interest expense
Interest expense is calculated based on the actual financing rate and the outstanding financing balance of our GAAP investment portfolio.
Interest expense decreased fromJune 30, 2020 toJune 30, 2021 primarily due to a decrease in the weighted average financing rate on our GAAP investment portfolio during the period. The weighted average financing rate on our GAAP investment portfolio decreased by 4.44% from 6.25% for the three months endedJune 30, 2020 to 1.81% for the three months endedJune 30, 2021 . This was offset by an increase in the weighted average financing balance on our GAAP investment portfolio during the period of$0.6 billion from$0.6 billion for the three months endedJune 30, 2020 to$1.2 billion for the three months endedJune 30, 2021 . Additionally, Net realized gain/(loss)
The following table presents a summary of Net realized gain/(loss) for the three
months ended
Three Months Ended
June 30, 2021 June 30, 2020 Sales/Seizures of real estate securities $
(4,382)
7,859 (55,798)
Settlement of derivatives and other instruments 897 477
Total Net realized gain/(loss) $
4,374
Net interest component of interest rate swaps
Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps.
Net interest component of interest rate swaps decreased fromJune 30, 2020 toJune 30, 2021 . As of theJune 30, 2021 , we held an interest rate swap portfolio of$806.0 million of notional with a weighted average receive-variable rate of 0.17% and a weighted average pay-fix rate of 0.74%. We did not hold any interest rate swaps during the three months endedJune 30, 2020 .
Unrealized gain/(loss), net
The following table presents a summary of Unrealized gain/(loss), net for the
three months ended
Three Months Ended
June 30, 2021 June 30, 2020
Real estate securities $ 19,693 $ 48,924
Loans 6,823 60,708
Excess mortgage servicing rights (176) (888)
Derivatives (15,798) (186)
Securitized debt (857) (8,379)
Total Unrealized gain/(loss), net
Other income/(loss), net
Other income/(loss), net includes gains or losses on foreign currency pertaining to the effects of remeasuring the monetary assets and liabilities of our foreign investments intoU.S. dollars using foreign currency exchange rates at the end of the reporting period. During the three months endedJune 30, 2021 , we did not hold any positions denominated in foreign currencies. 53 --------------------------------------------------------------------------------
Management fee to affiliate
Our management fee is based upon a percentage of our Stockholders' Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders' Equity. Management fees remained relatively flat fromJune 30, 2020 toJune 30, 2021 . Other operating expenses This amount is primarily comprised of professional fees, directors' and officers' ("D&O") insurance and directors' fees, as well as certain expenses reimbursable to the Manager. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence, and other services. Refer to the "Contractual obligations" section below for more detail on certain expenses reimbursable to the Manager. The following table presents a summary of expenses within Other operating expenses broken out between non-investment related expenses and investment related expenses for the three months endedJune 30, 2021 and 2020 (in thousands): Three Months Ended June 30, 2021 June 30, 2020 Non Investment Related Expenses Affiliate expense reimbursement - Operating expenses (1)$ 1,000 $ 1,697 Professional fees 480 648 D&O insurance 394 174 Directors' compensation 167 173 Equity based compensation to affiliate - 75 Other 258 198 Total Non Investment Related Expenses 2,299 2,965 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 48 162
Affiliate expense reimbursement - Transaction related expenses
80 -
Residential mortgage loan related expenses 642 887
Transaction related expenses and deal related performance
fees (2) 1,805 373
Other (8) 170
Total Investment Expenses 2,567 1,592
Total Other operating expenses $ 4,866 $ 4,557
(1)For the year ended December 31, 2021 , the Manager agreed to waive its right
to receive expense reimbursements of $0.8 million . For the three months ended
June 30, 2021 , $0.2 million of the reduction in reimbursable expenses is
included within the "Affiliated expense reimbursement - Operating expenses" line
item above.
(2)The increase in Transaction related expenses and deal related performance
fees from the three months ended June 30, 2020 to the three months ended June
30, 2021 is primarily a result of expenses incurred in relation to the
settlement of the June 2021 securitization of Non-QM Loans.
Restructuring related expenses
Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement and subsequent Reinstatement Agreement in 2020. Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement and the Reinstatement Agreement.
Servicing fees
We incur servicing fee expenses in connection with the servicing of our Residential mortgage loans. As ofJune 30, 2021 andJune 30, 2020 , we owned Residential mortgage loans with a fair value of$1.0 billion and$379.8 million , respectively. This increase in the fair value of the Residential mortgage loans was a result of net purchases of Non-QM Loans in 2021. For the three months endedJune 30, 2021 and 2020, our servicing fees increased as a result of these net purchases. 54
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Equity in earnings/(loss) from affiliates
Equity in earnings/(loss) from affiliates represents our share of earnings and
profits of investments held within affiliated entities. Substantially all of
these investments are comprised of real estate securities, loans, and our
investment in AG Arc. The below table reconciles the net income/(loss) to the
"Equity in earnings/(loss) from affiliates" line item on our consolidated
statements of operations (in thousands).
Three Months Ended
June 30, 2021 June 30, 2020
Non-QM Loans (1) $ 1,275 $ (8,115)
AG Arc (2) (2,706) 9,510
Land Related Financing 540 473
Other 2,169 1,566
Equity in earnings/(loss) from affiliates
3,434
(1)The increase in earnings within MATT for the three months endedJune 30, 2020 to the three months endedJune 30, 2021 was the primarily the result of mark-to-market gains on the Non-QM Loan portfolio. (2)The loss at AG Arc during the three months endedJune 30, 2021 was primarily the result of losses on the fair value of the MSR portfolio held by Arc Home. The loss recognized by AG Arc also does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the three months endedJune 30, 2021 , we eliminated$1.4 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. Gain on Exchange Offers, net We completed a privately negotiated exchange offer during the three months endedJune 30, 2021 . As a result of the exchange offer, we exchanged 86,478 shares of our 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") and 154,383 shares of our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") for a total of 429,802 shares of common stock. We recognized a gain of$0.1 million in connection with the offer. Refer to the "Liquidity and capital resources" section below for more information on the exchange offer. 55 --------------------------------------------------------------------------------
Six Months Ended
The table below presents certain information from our consolidated statements of
operations for the six months ended
Six Months Ended
June 30, 2021 June 30, 2020 Increase/(Decrease)
Statement of Operations Data:
Net Interest Income
Interest income $ 26,347 $ 53,637 $ (27,290)
Interest expense 9,355 28,584 (19,229)
Total Net Interest Income 16,992 25,053 (8,061)
Other Income/(Loss)
Net realized gain/(loss) 336 (242,752) 243,088
Net interest component of interest rate
swaps (2,314) 923 (3,237)
Unrealized gain/(loss), net 29,534 (208,032) 237,566
Other income/(loss), net 37 1,497 (1,460)
Total Other Income/(Loss) 27,593 (448,364) 475,957
Expenses
Management fee to affiliate 3,321 3,827 (506)
Other operating expenses 8,849 5,487 3,362
Restructuring related expenses - 8,604 (8,604)
Excise tax - (815) 815
Servicing fees 1,287 1,145 142
Total Expenses 13,457 18,248 (4,791)
Income/(loss) before equity in
earnings/(loss) from affiliates 31,128 (441,559) 472,687
Equity in earnings/(loss) from affiliates 27,614 (40,758) 68,372
Net Income/(Loss) from Continuing Operations 58,742 (482,317) 541,059
Net Income/(Loss) from Discontinued
Operations - 361 (361)
Net Income/(Loss) 58,742 (481,956) 540,698
Gain on Exchange Offers, net 472 - 472
Dividends on preferred stock (9,613) (11,334) 1,721
Net Income/(Loss) Available to Common
Stockholders $ 49,601 $ (493,290) $ 542,891
Interest income
Interest income decreased from June 30, 2020 to June 30, 2021 primarily due to a
decrease in the size of our portfolio. The weighted average amortized cost of
our GAAP investment portfolio decreased by $0.7 billion from $2.3 billion for
the six months ended June 30, 2020 to $1.6 billion for the six months ended June
30, 2021 . The decrease was driven by sales and seizures which occurred primarily
during the first and second quarters of 2020 due to market volatility caused by
the COVID-19 pandemic.
Interest expense
Interest expense decreased from June 30, 2020 to June 30, 2021 primarily due to
a decrease in the amount of financing on our GAAP investment portfolio during
the period. The weighted average financing balance on our GAAP investment
portfolio during the period decreased by $0.8 billion from $1.8 billion for the
six months ended June 30, 2020 to $1.0 billion for the six
56
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months ended June 30, 2021 . The decrease was driven by financing removed on
sales and seizures which occurred primarily during the first and second quarters
of 2020 due to market volatility caused by the COVID-19 pandemic. This was
offset by a decrease in the weighted average financing rate on our GAAP
investment portfolio of 1.34% from 3.20% for the six months ended June 30, 2020
to 1.86% for the six months ended June 30, 2021 .
Net realized gain/(loss)
The following table presents a summary of Net realized gain/(loss) for the six
months ended
Six Months Ended
June 30, 2021 June 30, 2020 Sales/Seizures of real estate securities $
(4,882)
4,486 (58,765)
Settlement of derivatives and other instruments 732 (61,394)
Total Net realized gain/(loss) $
336
Net interest component of interest rate swaps
We recognized losses on net interest component of interest rate swaps for the six months endedJune 30, 2021 compared with gains for the six monthsJune 30, 2020 primarily due to the difference in terms on the outstanding interest rate swaps during the periods coupled with our exiting our interest rate swap portfolio in the first quarter of 2020. As of theJune 30, 2021 , we held an interest rate swap portfolio of$806.0 million of notional with a weighted average receive-variable rate of 0.17% and a weighted average pay-fix rate of 0.74%.
Unrealized gain/(loss), net
The following table presents a summary of Unrealized gain/(loss), net for the
six months ended
Six Months Ended
June 30, 2021 June 30, 2020
Real estate securities $ (4,266) $ (154,427)
Loans 24,124 (49,838)
Excess mortgage servicing rights (108) (3,524)
Derivatives 12,686 (12,079)
Securitized debt (2,902) 11,836
Total Unrealized gain/(loss), net
Other income/(loss), net
During the six months ended
Management fee to affiliate
Management fees decreased fromJune 30, 2020 toJune 30, 2021 primarily due to a decrease in our Stockholders' Equity as calculated pursuant to our Management Agreement. 57
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Other operating expenses
The following table presents a summary of expenses within Other operating
expenses broken out between non-investment related expenses and investment
related expenses for the six months ended
Six Months Ended
June 30, 2021 June 30, 2020
Non Investment Related Expenses
Affiliate expense reimbursement - Operating expenses (1) $ 2,250 $ 3,576
Professional fees 1,705 1,193
D&O insurance 788 348
Directors' compensation 335 391
Equity based compensation to affiliate - 163
Other 414 427
Total Non Investment Related Expenses 5,492 6,098
Investment Related Expenses
Affiliate expense reimbursement - Deal related expenses $ 329 $ 324 Affiliate expense reimbursement - Transaction related expenses
80 -
Residential mortgage loan related expenses 1,250 1,579
Transaction related expenses and deal related performance fees (2)
1,638 (2,846)
Other 60 332
Total Investment Expenses 3,357 (611)
Total Other operating expenses $
8,849
(1)For the year endedDecember 31, 2021 , the Manager agreed to waive its right to receive expense reimbursements of$0.8 million . For the six months endedJune 30, 2021 ,$0.4 million of the reduction in reimbursable expenses is included within the "Affiliated expense reimbursement - Operating expenses" line item above. (2)The increase in Transaction related expenses and deal related performance fees from the six months endedJune 30, 2020 to the six months endedJune 30, 2021 is the result of accrued deal related performance fees being reversed in the period endedMarch 31, 2020 due to a decline in the price of the related assets, as well as the seizure of such assets by financing counterparties, coupled with expenses incurred in relation to the settlement of theJune 2021 securitization of Non-QM Loans in Q2 2021.
Restructuring related expenses
Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement and subsequent Reinstatement Agreement in 2020. Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement and the Reinstatement Agreement.
Excise tax
During the six months ended
Servicing fees
For the six months ended
Equity in earnings/(loss) from affiliates
The below table reconciles the net income/(loss) to the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands).
58
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Six Months Ended
June 30, 2021 June 30, 2020
Non-QM Loans (1) $ 15,921 $ (34,844)
AG Arc (2) 3,634 (516)
Land Related Financing 1,250 1,137
Other 6,809 (6,535)
Equity in earnings/(loss) from affiliates
(1)The increase in earnings within MATT for the six months endedJune 30, 2020 to the six months endedJune 30, 2021 was the primarily the result of mark-to-market gains on the Non-QM Loan portfolio and related financing. (2)The earnings at AG Arc during the six months endedJune 30, 2021 were primarily the result of$4.4 million net income related to Arc Home's lending and servicing operations, offset by$(1.2) million related to changes in the fair value of the MSR portfolio held by Arc Home. The loss recognized by AG Arc also does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the six months endedJune 30, 2021 , we eliminated$1.9 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy.
Gain on Exchange Offers, net
We completed two privately negotiated exchange offers during the six months endedJune 30, 2021 . As a result of the exchange offers, we exchanged 153,325 shares of our 8.25% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), 437,087 shares of our Series B Preferred Stock, and 154,383 shares of our Series C Preferred Stock for a total of 1,367,264 shares of common stock. We recognized a gain of$0.5 million in connection with the offers. Refer to the "Liquidity and capital resources" section below for more information on the exchange offers.
Book value and Adjusted book value per share
On
Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP, including all vested shares issued to our Manager, and our independent directors under our equity incentive plans as of quarter-end. As ofJune 30, 2021 , the net proceeds for the Series A Preferred Stock, Series B Preferred Stock, and our Series C Preferred Stock were$40.1 million ,$90.2 million , and$90.2 million , respectively. As ofJune 30, 2021 , the liquidation preference for the issued and outstanding Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock was$41.6 million ,$93.2 million , and$93.2 million , respectively. As ofJune 30, 2021 andDecember 31, 2020 , our book value per common share calculated using stockholders' equity less net proceeds on our preferred stock as the numerator was$15.18 and$12.40 , respectively. As ofJune 30, 2021 andDecember 31, 2020 , our adjusted book value per common share calculated using stockholders' equity less the liquidation preference of our preferred stock as the numerator was$14.72 and$11.81 , respectively
Presentation of investment, financing and hedging activities
In the "Investment activities," "Financing activities," "Hedging activities," and "Liquidity and capital resources" sections of this Item 2, where we disclose our investment portfolio and the related financing arrangements, we have presented this information inclusive of (i) unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method and (ii) TBAs, which are accounted for as derivatives under GAAP. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates.
Net interest margin and leverage ratio
GAAP net interest margin and non-GAAP net interest margin, a non-GAAP financial measure, are calculated by subtracting the
59
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weighted average cost of funds from the weighted average yield for our GAAP
investment portfolio or our investment portfolio, respectively, both of which
exclude cash held by us and any net TBA position. The weighted average yield on
our credit portfolio and our Agency RMBS portfolio represents an effective
interest rate, which utilizes all estimates of future cash flows and adjusts for
actual prepayment and cash flow activity as of quarter-end. The calculation of
weighted average yield is weighted on fair value at quarter-end. The weighted
average cost of funds is the sum of the weighted average funding costs on total
financing arrangements outstanding at quarter-end, including all non-recourse
financing arrangements, and our weighted average hedging cost, which is the
weighted average of the net pay rate on our interest rate swaps. Both elements
of cost of funds are weighted by the outstanding financing arrangements on our
GAAP investment portfolio or our investment portfolio and securitized debt at
quarter-end.
As our capital allocation shifts, our weighted average yields and weighted
average cost of funds will also shift. Our Agency Investments, given their
liquidity and high credit quality, are eligible for higher levels of leverage,
while our Credit Investments, with less liquidity and/or more exposure to credit
risk and prepayment, utilize lower levels of leverage. As a result, our leverage
ratio is determined by our portfolio mix as well as many additional factors,
including the liquidity of our portfolio, the availability and price of our
financing, the diversification of our counterparties and their available
capacity to finance our assets, and anticipated regulatory developments. Our
debt-to-equity ratio is directly correlated to the composition of our portfolio;
specifically, the higher percentage of Agency Investments we hold, the higher
our leverage ratio is, while the higher percentage of Credit Investments we
hold, the lower our leverage ratio is.
Net interest margin and leverage ratio are metrics that management believes should be considered when evaluating the performance of our investment portfolio. See the "Financing activities" section below for more detail on our leverage ratio.
The chart below sets forth the net interest margin and leverage ratio from our investment portfolio as ofJune 30, 2021 andJune 30, 2020 and a reconciliation to our GAAP investment portfolio:June 30, 2021 Investments in Debt Weighted Average GAAP Investment Portfolio and Equity of Affiliates Investment Portfolio (a) Yield 3.43 % 16.55 % 4.36 % Cost of Funds (b) 1.66 % 3.11 % 1.70 % Net Interest Margin 1.77 % 13.44 % 2.66 % Leverage Ratio (c) 3.4x (d) 2.2x June 30, 2020 Investments in Debt Weighted Average GAAP Investment Portfolio and Equity of Affiliates Investment Portfolio (a) Yield 5.55 % 8.00 % 6.52 % Cost of Funds (b) 3.34 % 4.94 % 3.86 % Net Interest Margin 2.21 % 3.06 % 2.66 % Leverage Ratio (c) 1.3x (d) 0.8x (a)Excludes net TBA position, if any. (b)Includes cost of non-recourse financing arrangements. (c)The leverage ratio on our GAAP investment portfolio represents GAAP leverage. The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section. (d)Refer to the "Financing activities" section below for an aggregate breakout of leverage. Core Earnings We define Core Earnings, a non-GAAP financial measure, as Net Income/(loss) available to common stockholders excluding (i) (a) unrealized gains/(losses) on real estate securities, loans, derivatives and other investments, inclusive of our investment in AG Arc, and (b) net realized gains/(losses) on the sale or termination of such instruments, (ii) any transaction related expenses incurred in connection with the acquisition or disposition of our investments, (iii) accrued deal-related performance fees payable to Arc Home and third party operators to the extent the primary component of the accrual relates to items that are excluded from Core Earnings, such as unrealized and realized gains/(losses), (iv) realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and the derivatives intended to offset changes in the fair value of those net mortgage servicing rights, (v) deferred taxes recognized at our taxable REIT subsidiaries, if any, (vi) any foreign currency gain/(loss) relating to monetary assets and liabilities, (vii) income from discontinued operations, and (viii) any gains/(losses) 60 -------------------------------------------------------------------------------- associated with exchange transactions on our common and preferred stock. Items (i) through (viii) above include any amount related to those items held in affiliated entities. Management considers the transaction related expenses referenced in (ii) above to be similar to realized losses incurred at the acquisition or disposition of an asset and does not view them as being part of its core operations. Management views the exclusion described in (iv) above to be consistent with how it calculates Core Earnings on the remainder of its portfolio. Management excludes all deferred taxes because it believes deferred taxes are not representative of current operations. As defined, Core Earnings include the net interest income and other income earned on our investments on a yield adjusted basis, including TBA dollar roll income or any other investment activity that may earn or pay net interest or its economic equivalent. One of our objectives is to generate net income from net interest margin on the portfolio, and management uses Core Earnings, as one of several metrics, to help measure our performance against this objective. Management believes that this non-GAAP measure, when considered with our GAAP financial statements, provides supplemental information useful for investors to help evaluate our financial performance. This metric, in conjunction with related GAAP measures, provides greater transparency into the information used by our management team in its financial and operational decision-making. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. This non-GAAP measure should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated. Refer to the "Results of Operations" section above for a detailed discussion of our GAAP financial results. A reconciliation of "Net Income/(loss) available to common stockholders" to Core Earnings for the three and six months endedJune 30, 2021 and 2020 is set forth below (in thousands, except per share data): Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net Income/(loss) available to common stockholders$ 10,918 $
(2,606)
(4,374) 91,609 (336) 242,752
Unrealized (gain)/loss, net (9,685) (100,179) (29,534) 208,032
Transaction related expenses and deal
related performance fees (1) 2,024 572 2,012 (2,840)
Equity in (earnings)/loss from
affiliates (1,278) (3,434) (27,614) 40,758
Net interest income and expenses from
equity method investments (2)(3) 2,539 11,233 9,861 12,466
Net (income)/loss from discontinued
operations - (361) - (361)
Other (income)/loss, net - 156 (14) (1,493)
(Gains) from Exchange Offers, net (114) - (472) -
Drop income - - - 322
Core Earnings $ 30 $ (3,010) $ 3,504 $ 6,346
Core Earnings, per Diluted Share (4) $ - $ (0.27) $ 0.24 $ 0.58
(1)For the three months endedJune 30, 2021 and 2020, total transaction related expenses and deal related performance fees included$1.9 million and$0.4 million , respectively, recorded within the "Other operating expenses" line item and$0.1 million and$0.2 million , respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. For the six months endedJune 30, 2021 and 2020, total transaction related expenses and deal related performance fees included$1.7 million and$(2.8) million , respectively, recorded within the "Other operating expenses" line item and$0.3 million and a de minimis amount, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2)For the three months endedJune 30, 2021 and 2020,$(1.5) million or$(0.10) per share and$(0.4) million or$(0.04) per share, respectively; and for the six months endedJune 30, 2021 and 2020,$1.1 million or$0.07 per share and$(5.0) million or$(0.46) per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives net of taxes were excluded from Core Earnings per diluted share. (3)Core income or loss recognized by AG Arc does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the three and six months endedJune 30, 2021 , we eliminated$1.4 million and$1.9 million of intra-entity profits recognized by Arc Home, respectively, and also decreased the cost basis of the underlying loans we purchased by the same amount. We did not eliminate any intra-entity profits for the three and six months endedJune 30, 2020 . Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" 61 -------------------------------------------------------------------------------- for more information on this accounting policy. (4)All per share amounts for all periods presented have been adjusted to reflect the one-for-three reverse stock split. For the first three quarters of 2020, we determined that Core Earnings, as we have historically calculated it, did not appropriately capture our business, liquidity, results of operations, financial condition, or our ability to make distributions to our stockholders due to the impact of COVID-19 on our business.
Investment activities
Overall, our intention is to allocate capital to investment opportunities with attractive risk/return profiles in our target asset classes. Historically, our investment portfolio has consisted of Residential Investments, Agency RMBS, and Commercial Investments however, we have focused our efforts more recently on growing our portfolio of Residential Credit Investments, investing in residential mortgage loans with the intent to securitize these assets as market conditions permit. Our capital allocation to each of these investments is set forth in more detail below. Our investment and capital allocation decisions depend on prevailing market conditions and compliance with Investment Company Act and REIT tests, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. The risk-reward profile of our investment opportunities changes continuously with the market, with labor, housing and economic fundamentals, and withU.S. monetary policy, among others. As a result, in reacting to market conditions and taking into account a variety of other factors, including liquidity, duration, interest rate expectations and hedging, the mix of our assets changes over time as we opportunistically deploy capital. Our credit investments are subject to risk of loss with regard to principal and interest payments. We evaluate each investment in our credit portfolio based on the characteristics of the underlying collateral, the securitization structure, expected return, geography, collateral type, and the cost and availability of financing, among others. We maintain a comprehensive portfolio management process that generally includes day-to-day oversight by the portfolio management team and a quarterly credit review process for each investment that examines the need for a potential reduction in accretable yield, missed or late contractual payments, significant declines in collateral performance, prepayments, projected defaults, loss severities and other data that may indicate a potential issue in our ability to recover our capital from the investment. These processes are designed to enable our Manager to evaluate and proactively to manage asset-specific credit issues and identify credit trends on a portfolio-wide basis. Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets. Therefore, potential future losses may also stem from issues with our investments that are not identified by our credit reviews. We evaluate investments in Agency RMBS using factors including, among others, expected future prepayment trends, supply of and demand for Agency RMBS, costs of financing, costs of hedging, liquidity, expected future interest rate volatility and the overall shape of theU.S. Treasury and interest rate swap yield curves. Prepayment speeds, as reflected by the CPR, and interest rates vary according to the type of investment, conditions in financial markets, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment speeds on our Agency RMBS portfolio increase, the related purchase premium amortization increases, thereby reducing the net yield on such assets. 62 --------------------------------------------------------------------------------
The following table presents a detailed break-down of our investment portfolio
as of
Percent of Investment Portfolio
Fair Value Fair Value Leverage Ratio (a)
December 31,
June 30, 2021 2020 June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Residential Investments $ 1,172,851 $ 691,478 59.6 % 49.5 % 0.9x 0.2x
Commercial Investments 93,893 182,296 4.8 % 13.1 % 0.8x 0.9x
Agency RMBS 699,568 521,843 35.6 % 37.4 % 6.6x 6.1x
Total: Investment Portfolio $ 1,966,312 $ 1,395,617 100.0 % 100.0 % 2.2x 1.5x
Investments in Debt and
Equity of Affiliates (b) $ 139,985 $ 217,964 N/A N/A (c) (c)
Total: GAAP Investment
Portfolio $ 1,826,327 $ 1,177,653 N/A N/A 3.4x 2.4x
(a)The leverage ratio on our investment portfolio represents Economic Leverage
as defined below in the "Financing Activities" section and is calculated by
dividing each investment type's total recourse financing arrangements by its
allocated equity (described in the chart below). Cash posted as collateral has
been allocated pro-rata by each respective asset class's Economic Leverage
amount. The Economic Leverage Ratio excludes any fully non-recourse financing
arrangements and includes any net receivables or payables on TBA. The leverage
ratio on our GAAP Investment Portfolio represents GAAP leverage.
(b)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
(c)Refer to the "Financing activities" section below for an aggregate breakout
of leverage.
We allocate our equity by investment using the fair value of our investment
portfolio, less any associated leverage, inclusive of any long TBA position (at
cost). We allocate all non-investment portfolio related assets and liabilities
to our investment portfolio based on the characteristics of such assets and
liabilities in order to sum to stockholders' equity per the consolidated balance
sheets. Our equity allocation method is a non-GAAP methodology and may not be
comparable to the similarly titled measure or concepts of other companies, who
may use different calculations and allocation methodologies.
The following table presents a summary of the allocated equity of our investment
portfolio as of
Allocated Equity Percent of Equity
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Residential Investments $ 313,133 $ 229,183 67.2 % 56.0 %
Commercial Investments 53,269 99,668 11.4 % 24.3 %
Agency RMBS 99,475 80,854 21.4 % 19.7 %
Total $ 465,877 $ 409,705 100.0 % 100.0 %
63
-------------------------------------------------------------------------------- The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as ofJune 30, 2021 andDecember 31, 2020 ($ in thousands):December 31 ,June 30, 2021 2020 Unrealized Mark- Weighted Average Weighted Weighted Average Instrument Current Face Amortized Cost to-Market Fair Value (1) Coupon (2) Average Yield Life (Years) (3) Fair Value (1) Credit Investments: Residential Investments Non-QM Loans (4)$ 621,095 $ 647,651 $ 7,501$ 655,152 4.86 % 3.61 % 3.85 $ - MATT Non-QM Loans (5) 1,082,974 75,316 2,367 77,683 0.68 % 14.49 % 0.82 153,200 Re/Non-Performing Loans 490,424 400,663 18,713 419,376 3.74 % 7.63 % 6.21 478,565 Land Related Financing 17,857 17,857 - 17,857 14.50 % 14.50 % 0.86 22,824 Prime 6,874 2,228 467 2,695 3.50 % 15.21 % 10.48 8,665 Alt-A/Subprime - - - - - % - % - 11,496 Credit Risk Transfer - - - - - % - % - 13,308 Non-U.S. RMBS - - - - - % - % - 3,100 Interest Only and Excess MSR 28,711 188 (100) 88 N/A 8.71 % 3.78 320 Total Residential Investments 2,247,935 1,143,903 28,948 1,172,851 3.23 % 5.96 % 2.90 691,478 Commercial Investments Commercial Real Estate Loans (6) 69,809 69,472 (7,193) 62,279 2.69 % 3.77 % 2.29 125,508 Conduit - - - - - % - % - 3,295 Single-Asset/Single-Borrower 35,500 35,452 (3,838) 31,614 4.03 % 4.39 % 0.67 40,190 Freddie Mac K-Series - - - - - % - % - 9,000 CMBS Interest Only (7) - - - - - % - % - 4,303 Total Commercial Investments 105,309 104,924 (11,031) 93,893 3.15 % 3.98 % 1.74 182,296 Total Credit Investments 2,353,244 1,248,827 17,917 1,266,744 3.22 % 4.13 % 2.85 873,774 Agency RMBS: 30 Year Fixed Rate 677,514 701,843 (5,139) 696,704 2.26 % 1.73 % 7.81 518,352 Excess MSR 489,643 4,491 (1,627) 2,864 N/A 0.58 % 5.62 3,491 Total Agency RMBS 1,167,157 706,334 (6,766) 699,568 2.26 % 1.72 % 6.89 521,843 Total: Investment Portfolio$ 3,520,401 $ 1,955,161 $ 11,151$ 1,966,312 2.96 % 4.36 % 4.19
Investments in Debt and Equity of Affiliates$ 1,245,802 $ 129,858 $ 10,127$ 139,985 1.38 % 16.55 % 1.16$ 217,964 Total: GAAP Investment Portfolio$ 2,274,599 $ 1,825,303 $ 1,024$ 1,826,327 3.51 % 3.43 % 5.85$ 1,177,653 (1)Refer to Note 2 to the "Notes of the Consolidated Financial Statements (unaudited)" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. Our assets held through Investments in debt and equity of affiliates are included in the "MATT Non-QM Loans," "Re/Non-Performing Loans," "Land Related Financing," and "Excess MSR" line items above. (2)Equity residuals, principal only securities and Excess MSRs with a zero coupon rate are excluded from this calculation. (3)Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. (4)Prior to 2021, we acquired Non-QM Loans through our equity method investment in MATT. This line item represents direct purchases of Non-QM Loans, which began in Q1 2021. (5)As ofJune 30, 2021 , this line item primarily includes retained tranches from securitizations. (6)Yield on Commercial Real Estate Loans includes any exit fees. (7)Comprised of Freddie Mac K-Series interest-only bonds. 64 --------------------------------------------------------------------------------
Credit Investments
The following table presents the fair value of the securities and loans in our credit portfolio, and a reconciliation to our GAAP credit portfolio (in thousands):
Fair Value
June 30, 2021 December 31, 2020
Residential loans (1) $ 1,061,732 $ 563,263
Commercial real estate loans 62,279 125,508
Total loans 1,124,011 688,771
Non-Agency RMBS (2) $ 111,119 $ 128,215
CMBS (3) 31,614 56,788
Total Credit securities 142,733 185,003
Total Credit Investments $ 1,266,744 $ 873,774
Less: Investments in Debt and Equity of Affiliates $ 139,641 $ 217,547
Total GAAP Credit Portfolio $ 1,127,103 $ 656,227
(1)Includes Re/Non-Performing Loans, Non-QM Loans, and Land Related Financing
not held in securitized form.
(2)Includes Prime, Alt-A/Subprime, Credit Risk Transfer, Non-U.S RMBS,
Interest-Only and Excess MSR, Re/Non-Performing Loans, and Non-QM Loans held in
securitized form.
(3)Includes Conduit, Single-Asset/Single-Borrower, Freddie Mac K-Series, and
Interest-Only investments.
Residential loans
The following tables present certain information regarding credit quality for certain categories within our Residential loan portfolio ($ in thousands):
June 30, 2021 December 31 , Weighted Average (1)(2) Aging by Unpaid Principal Balance (1)(2) 2020 Unpaid Principal Current LTV Balance Fair Value Ratio Current FICO (3) Current 30-59 Days 60-89 Days 90+ Days Fair Value Non-QM Loans$ 621,095 $ 655,152 68.60 % 734$ 612,436 $ 8,659 $ - $ - $ - MATT Non-QM Loans 12,005 12,327 58.36 % 690 2,980 874 1,338 6,813 100,264 Re/Non-Performing Loans 418,829 376,396 80.41 % 634 269,914 36,398 11,993 92,403 440,175 Land Related Financing 17,857 17,857 N/A N/A N/A N/A N/A N/A 22,824 Total Residential loans$ 1,069,786 $ 1,061,732 73.13 % 694$ 885,330
32,749 32,488 63.27 % 671 3,582 1,048 1,500 8,762 127,822
Total GAAP Residential Loans
73.27 % 694$ 881,748
(1)Weighted average and aging data excludes residual positions where we consolidate a securitization and the positions are recorded on our balance sheet as Re/Non-Performing Loans. There may be limited data available regarding the underlying collateral of the residual positions. (2)Weighted average and aging data excludes Land Related Financing. (3)Weighted average current FICO excludes borrowers where FICO scores were not available. See Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for a breakout of geographic concentration of credit risk within loans we include in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. Commercial loans
Refer to Note 3 to the "Notes of the Consolidated Financial Statements (unaudited)" section for more detail on what is included in our "Commercial Loans" line item on our consolidated balance sheets.
65
--------------------------------------------------------------------------------Credit securities
The following table presents the fair value of our credit securities portfolio
by credit rating as of
December 31, 2020
Credit Rating - Credit Securities (1) June 30, 2021 (2)(3) (2)(3)
AAA $ - $ 630
BB 5,728 9,037
B 18,422 25,318
Below B 16,035 17,046
Not Rated 102,548 132,972
Total: Credit Securities $ 142,733 $ 185,003
Less: Investments in Debt and Equity of
Affiliates $ 107,153 $ 89,725
Total: GAAP Basis $ 35,580 $ 95,278
(1)Represents the minimum rating for rated assets of S&P, Moody and Fitch credit
ratings, stated in terms of the S&P equivalent.
(2)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
(3)As of June 30, 2021 and December 31, 2020 , includes $0.1 million of credit
Excess MSRs.
The following tables present the geographic concentration of the underlying
collateral for our Non-Agency RMBS portfolio ($ in thousands).
June 30, 2021 December 31, 2020
State Fair Value (1) Percentage (1) State Fair Value (2) Percentage (2)
California $ 40,538 32.8 % California $ 40,593 32.5 %
New York 19,544 17.9 % New York 17,742 14.2 %
Florida 8,971 8.5 % Florida 10,982 8.8 %
New Jersey 3,438 3.3 % Texas 4,216 3.4 %
Maryland 3,310 3.3 % New Jersey 4,028 3.2 %
Other 35,318 34.2 % Other 50,654 37.9 %
Total $ 111,119 100.0 % Total $ 128,215 100.0 %
(1)As of June 30, 2021 , Non-Agency RMBS fair value includes $0.1 million of
credit Excess MSRs where there was no data regarding the underlying collateral.
These positions were excluded from the percent calculation.
(2)As of December 31, 2020 , Non-Agency RMBS fair value includes $3.2 million of
investments where there was no data regarding the underlying collateral,
including $0.1 million of credit Excess MSRs. These positions were excluded from
the percent calculation.
Agency RMBS
The following table presents the fair value ($ in thousands) and the Constant
Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the
periods presented.
Fair Value CPR (1)(2)
Agency RMBS June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
30 Year Fixed Rate $ 696,704 $ 518,352 4.4 % 2.7 %
(1)Represents the weighted average monthly CPRs published during the period for
our in-place portfolio.
(2)Source: Bloomberg.
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Investments in debt and equity of affiliates
The below table details our investments in debt and equity of affiliates as of
June 30, 2021 December 31, 2020
Assets Liabilities Equity Assets Liabilities Equity
MATT Non-QM Loans (2) $ 77,683 $ (48,813)
44,101 (11,351) 32,750 41,523 (5,588) 35,935
Land Related Financing 17,857 - 17,857 22,824 - 22,824
Total Residential Investments 139,641 (60,164) 79,477 217,547 (116,723) 100,824
Excess MSR 344 - 344 417 - 417
Total Investments excluding AG
Arc 139,985 (60,164) 79,821 217,964 (116,723) 101,241
AG Arc, at fair value 50,862 - 50,862 45,341 - 45,341
Cash and Other
assets/(liabilities) (3) 8,177 (2,992) 5,185 5,279 (1,194) 4,085
Investments in debt and equity of
affiliates $ 199,024 $ (63,156) (1)Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (2)As ofJune 30, 2021 andDecember 31, 2020 , Non-QM Loans excluded loans with an unpaid principal balance of$11.2 million and$17.3 million , respectively, whereby an affiliate of MATT has the right, but not the obligation, to repurchase loans from a trust that are 90 days or more delinquent at its discretion. These loans, which are eligible to be repurchased, would be recorded on the balance sheet of MATT, an unconsolidated equity method investee of the Company, with a corresponding and offsetting liability. (3)Includes financing arrangements of$(9.4) thousand on real estate owned as ofDecember 31, 2020 . Financing activities We use leverage to finance the purchase of our investment portfolio. In 2021 and 2020, our leverage has primarily been in the form of repurchase agreements, revolving facilities, and securitized debt. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The size of the haircut reflects the perceived risk associated with the pledged asset. Haircuts may change as our financing arrangements mature or roll and are sensitive to governmental regulations. We experienced fluctuations in our haircuts that caused us to alter our business and financing strategies for the year endedDecember 31, 2020 . As previously described, this resulted in us raising liquidity and reducing the risk within our portfolio. We had outstanding financing arrangements with 5 counterparties as ofJune 30, 2021 andDecember 31, 2020 . Our repurchase agreements are accounted for as financings and require the repurchase of the transferred securities or loans or repayment of the advance at the end of each agreement's term, typically 30 to 90 days. If we maintain the beneficial interest in the specific assets pledged during the term of the borrowing, we receive the related principal and interest payments. If we do not maintain the beneficial interest in the specific assets pledged during the term of the borrowing, the lender will remit to us the related principal and interest payments. Interest rates on borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at which time we may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. We have also entered into revolving facilities to purchase certain loans in our investment portfolio. These facilities typically have longer stated maturities than repurchase agreements. Interest rates on these facilities are based on prevailing rates corresponding to the terms of the borrowings, and interest is paid on a monthly basis. Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity and liquidity, leverage ratios, and performance triggers. In addition, some of the 67 -------------------------------------------------------------------------------- financing arrangements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that we fail to comply with the covenants contained in these financing arrangements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the associated agreement. Financings pursuant to repurchase agreements and revolving facilities are generally recourse to us. As ofJune 30, 2021 , we are in compliance with all of our financial covenants. In response to declines in fair value of pledged assets due to changes in market conditions, lenders typically require us to post additional assets as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Refer to "Liquidity and capital resources" section below for more information. The balance on our financing arrangements can reasonably be expected to (i) increase as the size of our investment portfolio increases primarily through equity capital raises and as we increase our investment allocation to Non-QM Loans not held in securitized form and Agency RMBS and (ii) decrease as the size of our portfolio decreases through asset sales, principal paydowns, and as we increase our investment allocation to credit investments, excluding Non-QM Loans not held in securitized form. Due to their risk profile, credit investments generally have lower leverage ratios than Agency RMBS, which restricts our financing counterparties from providing as much financing to us and lowers the balance of our total financing.
Forbearance and Reinstatement Agreements
In connection with the market disruption created by the COVID-19 pandemic, inMarch 2020 , we received notifications of alleged events of default and deficiency notices from several of our financing counterparties. We engaged in discussions with our financing counterparties and, as a result, entered into a series of forbearance agreements (collectively, the "Forbearance Agreement") with certain of our financing counterparties (the "Participating Counterparties") pursuant to which each Participating Counterparty agreed to forbear from exercising its rights and remedies with respect to events of default and any and all other defaults under the applicable financing arrangement (each, a "Bilateral Agreement") for the period endingJune 15, 2020 . OnJune 10, 2020 , we and the Participating Counterparties entered into a reinstatement agreement (the "Reinstatement Agreement"), pursuant to which the Forbearance Agreement was terminated and each Participating Counterparty permanently waived all existing and prior events of default under the applicable Bilateral Agreements. Pursuant to the Reinstatement Agreement, the Bilateral Agreements were reinstated with certain amendments to reflect current market terms (i.e., increased haircuts and higher coupons), updated financial covenants, and various reporting requirements from us to the Participating Counterparties, releases, certain netting obligations and cross-default provisions. As a result of the Reinstatement Agreement, default interest on our outstanding borrowings under the Bilateral Agreements ceased to accrue as ofJune 10, 2020 , all cash margin was applied to outstanding balances owed by us, and principal and interest payments on the underlying collateral were permitted to flow to and be used by us, just as it was prior to the Forbearance Agreements. In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the Forbearance Agreement have been terminated and released. We also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent.
Concurrently, on
Refer to Note 12 in the "Notes to Consolidated Financial Statements (unaudited)" for more information on deficiencies that are now settled.
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We utilize both recourse and non-recourse debt to finance our portfolio. Non-recourse financing includes securitized debt and other non-recourse financing. Recourse financing includes the secured debt from our Manager, as further described in the "Contractual obligations-Secured debt" section below, and other recourse financing. The below table provides detail on the breakout between recourse and non-recourse financing as ofJune 30, 2021 andDecember 31, 2020 (in thousands): June 30, 2021 December 31, 2020 Recourse financing$ 1,241,114 $ 580,037 Non-recourse financing 509,051 466,294 Total (1) 1,750,165 1,046,331
Recourse financing - Investments in Debt and Equity of Affiliates
33,646 5,597
Non-recourse financing - Investments in Debt and
Equity of Affiliates (2) 26,518 111,135
Total Investments in Debt and Equity of Affiliates 60,164 116,732
Total: GAAP Basis $ 1,690,001 $ 929,599
(1)As of June 30, 2021 , total financing includes $1.3 billion of financing
arrangements, collateralized by various asset types in our investment portfolio,
and $482.5 million of securitized debt, collateralized by Non-QM and
Re/Non-Performing Loans. As of December 31, 2020 , total financing includes
$680.8 million of financing arrangements, collateralized by various asset types
in our investment portfolio; $355.2 million of securitized debt, collateralized
by Re/Non-Performing Loans; and $10.4 million of secured debt.
(2)On January 29, 2021 , we and private funds under the management of Angelo
Gordon entered into an amendment with respect to our Restructured Financing
Arrangement in MATT. The amendment serves to convert the existing financing to a
mark-to-market facility with respect to margin calls that is recourse to us and
the private funds managed by Angelo Gordon that invest in MATT up to our and
each funds' allocation of the $50.0 million commitment to MATH, which is further
described in the "Contractual Obligations-MATT Financing Arrangement
Restructuring" section below and Note 12 to the "Notes of the Consolidated
Financial Statements (unaudited)".
See Note 6 to the "Notes to Consolidated Financial Statements (unaudited)" for a
breakout of the "Financing arrangements" line item on our consolidated balance
sheets.
Other financing transactions
In addition to our financing arrangements, we also finance our Re/Non-performing
loans and certain Non-QM Loans with securitized debt. From time to time, we
enter into securitization transactions of certain Re/Non-performing loans and
certain Non-QM Loans where special purpose entities ("SPEs") are created to
facilitate the transactions. These SPEs are considered variable interest
entities ("VIEs"), which should be consolidated under ASC 810-10. As of June 30,
2021 and December 31, 2020 , we have recorded secured financing in connection
with these VIEs of $482.5 million and $355.2 million , respectively, on the
consolidated balance sheets in the "Securitized debt, at fair value" line item.
See Note 2 and Note 3 to the "Notes to Consolidated Financial Statements
(unaudited)" for more detail on securitized debt and our consolidated VIEs.
Leverage
We define GAAP leverage as the sum of (1) our GAAP financing arrangements, net
of any restricted cash posted on such financing arrangements, (2) the amount
payable on purchases that have not yet settled less the financing remaining on
sales that have not yet settled, and (3) securitized debt, at fair value. We
define Economic Leverage, a non-GAAP metric, as the sum of: (i) our GAAP
leverage, exclusive of any fully non-recourse financing arrangements, (ii)
financing arrangements held through affiliated entities, net of any restricted
cash posted on such financing arrangements, exclusive of any financing utilized
through AG Arc, any adjustment related to unsettled trades as described in (2)
in the previous sentence, and any non-recourse financing arrangements and (iii)
our net TBA position (at cost), if any.
The calculations in the tables below divide GAAP leverage and Economic Leverage
by our GAAP stockholders' equity to derive our leverage ratios. The following
tables present a reconciliation of our Economic Leverage ratio back to GAAP ($
in thousands).
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Stockholders'
June 30, 2021 Leverage Equity Leverage Ratio
GAAP Leverage $ 1,590,715 $ 465,877 3.4x
Financing arrangements through affiliated
entities 60,038
Non-recourse financing arrangements (509,051)
Net TBA (receivable)/payable adjustment (134,239)
Economic Leverage $ 1,007,463 $ 465,877 2.2x
(1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT.
Stockholders'
December 31, 2020 Leverage Equity Leverage Ratio
GAAP Leverage $ 979,303 $ 409,705 2.4x
Financing arrangements through affiliated
entities 116,688
Non-recourse financing arrangements (466,294)
Economic Leverage $ 629,697 $ 409,705 1.5x
(1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT.
Hedging activities
Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions inU.S. Treasury securities. In addition, we may utilize Eurodollar Futures,U.S. Treasury Futures, British Pound Futures, and Euro Futures (collectively, "Futures"). In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements (unaudited)" for more information.
Dividends
Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes and (vi) methods of depreciation. Undistributed taxable income is based on current estimates and is not finalized until we file our annual tax return for that tax year, typically in October of the following year. We did not have any undistributed taxable income as ofJune 30, 2021 . Refer to the "Results of operations" section above for more detail. OnMarch 27, 2020 , we announced that our Board of Directors approved a suspension of our quarterly dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, beginning with the preferred dividend that would have been declared inMay 2020 , as well as a suspension of the quarterly dividend on the common stock, beginning with the dividend that normally would have been declared inMarch 2020 , in order to conserve capital and improve its liquidity position during the market volatility due to the COVID-19 pandemic. Under the terms of the Articles Supplementary governing our series of preferred stock, we cannot pay cash dividends with respect to our common stock if dividends on our preferred stock are in arrears. 70 -------------------------------------------------------------------------------- OnDecember 17, 2020 , we paid our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock dividends that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of$1.54689 ,$1.50 and$1.50 per share, respectively. OnDecember 22, 2020 , our Board of Directors declared a dividend of$0.09 per common share for the fourth quarter 2020 which was paid onJanuary 29, 2021 to shareholders of record at the close of business onDecember 31, 2020 . During the first quarter of 2021, we declared its preferred and common dividends in the ordinary course of business.
On
The following table details our common stock dividends declared during the six
months ended
2021
Declaration Date Record Date Payment Date Cash Dividend Per Share
3/22/2021 4/1/2021 4/30/2021 $ 0.18
6/15/2021 6/30/2021 7/30/2021 0.21
Total $ 0.39
We did not declare any common stock dividends during the three months ended
The following tables detail our preferred stock dividends declared and paid during the six months endedJune 30, 2021 and 2020: 2021 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/16/2021 2/26/2021 3/17/2021$ 0.51563 $ 0.50 $ 0.50 5/17/2021 5/28/2021 6/17/2021 0.51563 0.50 0.50 Total$ 1.03126 $ 1.00 $ 1.00 2020 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/14/2020 2/28/2020 3/17/2020$ 0.51563 $ 0.50 $ 0.50
Liquidity and capital resources
Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs.
Our principal sources of cash as ofJune 30, 2021 consisted of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase real estate securities, loans and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations. AtJune 30, 2021 , we had$70.8 million of liquidity, which consisted of$64.0 million of cash and$6.8 million of unencumbered assets available to support our liquidity needs. Refer to the "Contractual obligations" section of this Item 2 for additional obligations that could impact our liquidity.
Margin requirements
The fair value of our real estate securities and loans fluctuate according to
market conditions. When the fair value of the assets pledged as collateral to
secure a financing arrangement decreases to the point where the difference
between the collateral fair value and the financing arrangement amount is less
than the haircut, our lenders may issue a "margin call," which requires us to
post additional collateral to the lender in the form of additional assets or
cash. Under our repurchase facilities, our lenders have full discretion to
determine the fair value of the securities we pledge to them. Our lenders
typically value assets based on recent transactions in the market. Lenders also
issue margin calls as the published current principal balance factors change on
the pool of mortgages underlying the securities pledged as collateral when
scheduled and unscheduled paydowns are announced monthly. We experience margin
calls in the ordinary course of our business. In seeking to manage effectively
the margin requirements established by our lenders, we maintain a position of
cash and, when owned, unpledged Agency RMBS. We refer
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to this position as our "liquidity." The level of liquidity we have available to
meet margin calls is directly affected by our leverage levels, our haircuts and
the price changes on our securities. Typically, if interest rates increase or if
credit spreads widen, then the prices of our collateral (and our unpledged
assets that constitute our liquidity) will decline, we will experience margin
calls, and we will need to use our liquidity to meet the margin calls. There can
be no assurance that we will maintain sufficient levels of liquidity to meet any
margin calls. If our haircuts increase, our liquidity will proportionately
decrease. In addition, if we increase our borrowings, our liquidity will
decrease by the amount of additional haircut on the increased level of
indebtedness. We intend to maintain a level of liquidity in relation to our
assets that enables us to meet reasonably anticipated margin calls but that also
allows us to be substantially invested in the residential mortgage market. We
may misjudge the appropriate amount of our liquidity by maintaining excessive
liquidity, which would lower our investment returns, or by maintaining
insufficient liquidity, which may force us to liquidate assets into potentially
unfavorable market conditions and harm our results of operations and financial
condition. Further, an unexpected rise in interest rates and a corresponding
fall in the fair value of our securities may also force us to liquidate assets
under difficult market conditions, thereby harming our results of operations and
financial condition, in an effort to maintain sufficient liquidity to meet
increased margin calls.
Similar to the margin calls that we receive on our borrowing agreements, we may
also receive margin calls on our derivative instruments when their fair value
declines. This typically occurs when prevailing market rates change adversely,
with the severity of the change also dependent on the terms of the derivatives
involved. We may also receive margin calls on our derivatives based on the
implied volatility of interest rates. Our posting of collateral with our
counterparties can be done in cash or securities, and is generally bilateral,
which means that if the fair value of our interest rate hedges increases, our
counterparty will be required to post collateral with us. Refer to the
"Liquidity risk - derivatives" section of Item 3 below for a further discussion
on margin.
Refer to the "Financing activities-Forbearance and Reinstatement Agreements" section above for information on the impact of COVID-19 on margin calls in 2020.
Cash Flows
The below details changes to our cash, cash equivalents, and restricted cash for
the six months ended
Six Months Ended
June 30, 2021 June 30, 2020 Change
Cash and cash equivalents and restricted
cash, Beginning of Period $ 62,318 $
125,369
Net cash provided by (used in) operating activities (1) 9,876 841 9,035 Net cash provided by (used in) investing activities (2) (742,636) 2,628,424 (3,371,060) Net cash provided by (used in) financing activities (3) 758,147 (2,685,150) 3,443,297 Net change in cash and cash equivalents and restricted cash 25,387 (55,885) 81,272 Effect of exchange rate changes on cash 10 (250) 260 Cash and cash equivalents and restricted cash, End of Period$ 87,715 $
69,234
(1)Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the six months endedJune 30, 2021 and 2020, respectively. (2)Cash used in investing activities for the six months endedJune 30, 2021 was primarily attributable to purchases of investments less sales of investments and principal repayments of investments. Cash provided by investing activities for the six months endedJune 30, 2020 was primarily attributable to sales of investments and principal repayments of investments, offset by purchases of investments. The difference period over period is primarily due to significant sales in 2020 as a result of the global COVID-19 pandemic. (3)Cash provided by financing activities for the six months endedJune 30, 2021 was primarily attributable to borrowings under financing arrangements offset by repayments of financing arrangements and dividend payments. Cash used in financing activities for the six months endedJune 30, 2020 was primarily attributable to repayments of financing arrangements offset by borrowings under financing arrangements. The difference period over period is primarily due to a reduction in financing arrangements as a result of significant sales in 2020 due to the global COVID-19 pandemic.
Equity distribution agreements
On
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Securities LLC (collectively, the "Sales Agents"), which we refer to as the
"Equity Distribution Agreements," pursuant to which we may sell up to $100.0
million aggregate offering price of shares of our common stock from time to time
through the Sales Agents, under the Securities Act of 1933. For the three months
ended June 30, 2021 , we issued 0.2 million shares of common stock under the
Equity Distribution Agreements for net proceeds of approximately $3.1 million .
For the six months ended June 30, 2021 , we issued 1.0 million shares of common
stock under the Equity Distribution Agreements for net proceeds of approximately
$13.1 million . For the three and six months ended June 30, 2020 , we issued 0.3
million shares of common stock under the Equity Distribution Agreements for net
proceeds of approximately $3.5 million . Since inception of the program, we have
issued approximately 2.2 million shares of common stock under the Equity
Distribution Agreements for gross proceeds of $48.3 million .
Exchange Offers
OnMarch 17, 2021 , we agreed to issue an aggregate of 937,462 shares of our common stock in exchange for 153,325 shares of Series A Preferred Stock and 350,609 shares of Series B Preferred Stock, pursuant to a privately negotiated exchange agreement with existing holders of the preferred stock. After the transaction closed, the Series A Preferred Stock and Series B Preferred Stock exchanged pursuant to the exchange agreement were reclassified as authorized but unissued shares of preferred stock without designation as to class or series. OnJune 14, 2021 , we agreed to issue an aggregate of 429,802 shares of our common stock in exchange for 86,478 shares of Series B Preferred Stock and 154,383 shares of Series C Preferred Stock, pursuant to privately negotiated exchange agreements with certain existing holders of the preferred stock. After the transaction closed, the Series B Preferred Stock and Series C Preferred Stock exchanged pursuant to the exchange agreements were reclassified as authorized but unissued shares of preferred stock without designation as to class or series. As ofJune 30, 2021 , we had outstanding 1,663,193 shares of Series A Preferred Stock, 3,727,641 shares of Series B Preferred Stock, and 3,728,795 shares of Series C Preferred Stock outstanding.
Common stock issuance to the Manager
Refer to "Contractual obligations-Management agreement" below for more detail related to the Second Management Agreement Amendment.
Forward-looking statements regarding liquidity
Based upon our current portfolio, leverage and available borrowing arrangements, we believe the net proceeds of our common equity offerings, preferred equity offerings, and private placements, combined with cash flow from operations and our available borrowing capacity will be sufficient to enable us to meet our anticipated liquidity requirements, including funding our investment activities, paying fees under our management agreement, funding our distributions to stockholders and paying general corporate expenses.
Contractual obligations
Management agreement
OnJune 29, 2011 , we entered into a management agreement with our Manager, pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders' Equity, per annum. For purposes of calculating the management fee, "Stockholders' Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders' equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders' Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders' equity shown on our financial statements. For the three and six months endedJune 30, 2021 , we 73 -------------------------------------------------------------------------------- incurred management fees of approximately$1.7 million and$3.3 million , respectively. For the three and six months endedJune 30, 2020 , we incurred management fees of approximately$1.7 million and$3.8 million , respectively. As ofJune 30, 2021 andDecember 31, 2020 , we have recorded management fees payable of$1.7 million and$1.7 million , respectively. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager. Of the$4.9 million and$8.8 million of Other operating expenses for the three and six months endedJune 30, 2021 , respectively, we have incurred$1.1 million and$2.7 million , respectively, representing a reimbursement of expenses. Of the$4.6 million and$5.5 million of Other operating expenses for the three and six months endedJune 30, 2020 , respectively, we incurred$1.9 million and$3.9 million , respectively, representing a reimbursement of expenses.
As of
OnApril 6, 2020 , we executed an amendment to the management agreement, pursuant to which the Manager agreed to defer our payment of the management fee and reimbursement of expenses, effective the first quarter of 2020 throughSeptember 30, 2020 . All deferred expense reimbursements were paid as ofSeptember 30, 2020 . OnSeptember 24, 2020 , we executed an amendment (the "Second Management Agreement Amendment") to the management agreement, pursuant to which the Manager agreed to receive a portion of the deferred base management fee in shares of common stock. Pursuant to the Second Management Agreement Amendment, the Manager agreed to purchase (i) 405,123 shares of common stock in full satisfaction of the deferred base management fee of$3.8 million payable by us in respect to the first and second quarters of 2020 and (ii) 51,500 shares of common stock in satisfaction of$0.5 million of the base management fee payable by us in respect to the third quarter of 2020. The shares of common stock issued to the Manager were valued at$9.45 per share based on the midpoint of the estimated range of our book value per share as ofAugust 31, 2020 . The remaining third quarter 2020 management fee was paid in the normal course of business.
Secured debt
OnApril 10, 2020 , in connection with the first Forbearance Agreement, we issued a secured promissory note (the "Note") to the Manager evidencing a$10 million loan made by the Manager to us. Additionally, onApril 27, 2020 , in connection with the second Forbearance Agreement, we entered into an amendment to the Note to reflect an additional$10 million loan by the Manager to us. The$10 million loan made by the Manager onApril 10, 2020 was repaid in full with interest when it matured onMarch 31, 2021 , and the$10 million loan made onApril 27, 2020 was repaid in full with interest when it matured onJuly 27, 2020 . The unpaid balance of the Note accrued interest at a rate of 6.0% per annum. Interest on the Note was payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note. The Note and accrued interest on the Note, when outstanding, were included within the due to affiliates amount, which is included within the "Other Liabilities" line item in the consolidated balance sheets.
Share-based compensation
Effective onApril 15, 2020 upon the approval of our stockholders at our 2020 annual meeting of stockholders, the 2020 Equity Incentive Plan provides for 666,666 shares of common stock to be issued. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during any fiscal year, shall not exceed$300,000 in total value (calculating the value of any such awards based on the grant date fair value). As ofJune 30, 2021 , 612,676 shares of common stock were available to be awarded under the Equity Incentive Plan.
Since our IPO, we have granted an aggregate of 35,264 and 53,990 shares of
restricted common stock to our independent directors under our equity incentive
plans, dated
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Following approval of our stockholders at our 2021 annual meeting of
stockholders, the AG Mortgage Investment Trust, Inc. 2021 Manager Equity
Incentive Plan (the "2021 Manager Plan") became effective on April 7, 2021 and
provides for a maximum of 573,425 shares of common stock to be issued to our
Manager. As of June 30, 2021 , there were no shares or awards issued under the
2021 Manager Plan.
Further, since our IPO, we have issued 13,416 shares of restricted common stock
and 40,000 restricted stock units to our Manager under our 2011 Equity Incentive
Plans. As of July 1, 2020 , all shares of restricted common stock and restricted
stock units granted to our Manager have fully vested.
Unfunded commitments
See Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for
detail on our commitments as of
MATT Financing Arrangement Restructuring
See Note 10 and Note 12 of the "Notes to Consolidated Financial Statements
(unaudited)" for detail on the MATT Restructured Financing Arrangement and our
commitments as of
Off-balance sheet arrangements
Our investments in debt and equity of affiliates primarily consist of real estate securities, loans, and our interest in AG Arc. Investments in debt and equity of affiliates are accounted for using the equity method of accounting. MATT performs securitizations of Non-QM Loans and retains tranches from these securitizations which are included in the MATT Non-QM Loans line item of our investment portfolio. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. In addition to our investments in debt and equity of affiliates described above, we also have commitments outstanding on certain loans. For additional information on our commitments as ofJune 30, 2021 , refer to Note 12 of the "Notes to Consolidated Financial Statements (unaudited)." Exclusive of our investments in debt and equity of affiliates described above, we do not expect these commitments, taken as a whole, to be significant to, or to have a material impact on, our overall liquidity or capital resources or our operations.
Critical accounting policies
We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as ofJune 30, 2021 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in arriving at those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates that involve the exercise of judgment and the use of assumptions as to future uncertainties. A discussion of the critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Note 2 to the "Notes to Consolidated Financial Statements (unaudited)." Our most critical accounting policies are believed to include (i) Valuation of financial instruments, (ii) Accounting for real estate securities, (iii) Accounting for loans, (iv) Interest income recognition, and (v) Financing arrangements. 75 -------------------------------------------------------------------------------- See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more detail on these critical accounting policies. These policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements are based are reasonable at the time made and based upon information available to us at that time. We rely upon third-party pricing of our assets at each-quarter end to arrive at what we believe to be reasonable estimates of fair value, whenever available. For more information on our fair value measurements, see Note 5 to the "Notes to Consolidated Financial Statements (unaudited)". For a review of our significant accounting policies and the recent accounting pronouncements that may impact our results of operations, see Note 2 to the "Notes to Consolidated Financial Statements (unaudited)."
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Compliance with Investment Company Act and REIT tests
We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes, of the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive ofU.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things,U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). As ofDecember 31, 2020 and for the three months endedJune 30, 2021 , we determined that we maintained compliance with the 40% test requirements. If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this Report. Accordingly, in order to maintain our exempt status, we monitor our subsidiaries' compliance with Section 3(c)(5)(C) of the Investment Company Act, which exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The staff of theSecurities and Exchange Commission , or theSEC , generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). As ofDecember 31, 2020 and for the three months endedJune 30, 2021 , we determined that our subsidiaries maintained compliance with both the 55% Test and the 80% Test requirements. We calculate that at least 75% of our assets were real estate assets, cash and cash items and government securities for the year endedDecember 31, 2020 . We also calculate that a sufficient portion of our revenue qualifies for the 75% gross income test and for the 95% gross income test rules for the year endedDecember 31, 2020 . Overall, we believe that we met the REIT income and asset tests. We also believe that we met all other REIT requirements, including the ownership of our stock and the distribution of our taxable income. Therefore, for the year endedDecember 31, 2020 , we believe that we qualified as a REIT under the Code. 76
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