ELLINGTON FINANCIAL INC. Except where the context suggests otherwise, references in this Quarterly Report on Form 10-Q to "EFC," "we," "us," and "our" refer toEllington Financial Inc. and its consolidated subsidiaries, includingEllington Financial Operating Partnership LLC , our operating partnership subsidiary, which we refer to as our "Operating Partnership." We conduct all of our operations and business activities through ourOperating Partnership . Our "Manager" refers toEllington Financial Management LLC , our external manager, "Ellington" refers toEllington Management Group, L.L.C. and its affiliated investment advisory firms, including our Manager, and "Manager Group " refers collectively to officers and directors of EFC, and partners and affiliates of Ellington (including families and family trusts of the foregoing). In certain instances, references to our Manager and services to be provided to us by our Manager may also include services provided by Ellington and its other affiliates from time to time. Special Note Regarding Forward-Looking Statements When used in this Quarterly Report on Form 10-Q, in future filings with theSecurities and Exchange Commission , or the "SEC ," or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and, as such, may involve known and unknown risks, uncertainties, and assumptions. Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our investments; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities owned by us for which the principal and interest payments are guaranteed by aU.S. government agency or aU.S. government-sponsored entity; increased rates of default and/or decreased recovery rates on our assets; our ability to borrow to finance our assets; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; our ability to maintain our qualification as a real estate investment trust, or "REIT"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy, such as those resulting from the economic effects related to the COVID-19 pandemic, and associated responses to the pandemic. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible 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. Executive Summary We invest in a diverse array of real-estate-related and other financial assets, including residential and commercial mortgage loans, residential mortgage-backed securities, or "RMBS," commercial mortgage-backed securities, or "CMBS," consumer loans and asset-backed securities, or "ABS," including ABS backed by consumer loans, collateralized loan obligations, or "CLOs," non-mortgage- and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments. We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 26-year history of investing in the Agency and credit markets. We conduct all of our operations and business activities through theOperating Partnership . As ofJune 30, 2021 , we have an ownership interest of approximately 98.7% in theOperating Partnership . The remaining ownership interest of approximately 1.3% in theOperating Partnership represents the interests in theOperating Partnership that are owned by an affiliate of our Manager, our directors, and certain current and former Ellington employees and their related parties, and is reflected in our financial statements as a non-controlling interest. Our primary objective is to generate attractive, risk-adjusted total returns for our stockholders. We seek to attain this objective by utilizing an opportunistic strategy to make investments, without restriction as to ratings, structure, or position in the capital structure, that we believe compensate us appropriately for the risks associated with them rather than targeting a specific yield. Our evaluation of the potential risk-adjusted return of any potential investment typically involves weighing the potential returns of such investment under a variety of economic scenarios against the perceived likelihood of the various 75 -------------------------------------------------------------------------------- Table of Contents scenarios. Potential investments subject to greater risk (such as those with lower credit ratings and/or those with a lower position in the capital structure) will generally require a higher potential return to be attractive in comparison to investment alternatives with lower potential return and a lower degree of risk. However, at any particular point in time, depending on how we perceive the market's pricing of risk both generally and across sectors, we may favor higher-risk assets or we may favor lower-risk assets, or a combination of the two, in the interests of portfolio diversification or other considerations. ThroughJune 30, 2021 , our credit portfolio, which includes all of our investments other than RMBS for which the principal and interest payments are guaranteed by aU.S. government agency or aU.S. government-sponsored entity, or "Agency RMBS," has been the primary driver of our risk and return, and we expect that this will continue in the near- to medium-term. For more information on our targeted assets, see "-Our Targeted Asset Classes" below. We believe that Ellington's capabilities allow our Manager to identify attractive assets in these classes, value these assets, monitor and forecast the performance of these assets, and opportunistically hedge our risk with respect to these assets. We continue to maintain a highly leveraged portfolio of Agency RMBS to take advantage of opportunities in that market sector, to help maintain our exclusion from registration as an investment company under the Investment Company Act, and to help maintain our qualification as a REIT. Unless we acquire very substantial amounts of whole mortgage loans or there are changes to the rules and regulations applicable to us under the Investment Company Act and/or to our qualification as a REIT, we expect that we will continue to maintain some amount of Agency RMBS. The strategies that we employ are intended to capitalize on opportunities in the current market environment. Subject to maintaining our qualification as a REIT, we intend to adjust our strategies to changing market conditions by shifting our asset allocations across various asset classes as credit and liquidity trends evolve over time. We believe that this flexibility, combined with Ellington's experience, will help us generate more consistent returns on our capital throughout changing market cycles. Subject to maintaining our qualification as a REIT, we opportunistically hedge our credit risk, interest rate risk, and foreign currency risk; however, at any point in time we may choose not to hedge all or a portion of these risks, and we will generally not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge. We also use leverage in our credit strategy, albeit significantly less leverage than that used in our Agency RMBS strategy. ThroughJune 30, 2021 , we financed the vast majority of our Agency RMBS assets, and a portion of our credit assets, through repurchase agreements, which we sometimes refer to as "repos," which we account for as collateralized borrowings. We expect to continue to finance the vast majority of our Agency RMBS through the use of repos. In addition to financing assets through repos, we also enter into other secured borrowing transactions, which are accounted for as collateralized borrowings, to finance certain of our loan assets. We have also obtained, through the securitization markets, term financing for certain of our non-qualified mortgage, or "non-QM," loans, certain of our consumer loans, and certain of our leveraged corporate loans. Additionally, we have issued unsecured long-term debt. As ofJune 30, 2021 , outstanding borrowings under repos and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Condensed Consolidated Balance Sheet) were$3.0 billion , of which approximately 48%, or$1.4 billion , relates to our Agency RMBS holdings. The remaining outstanding borrowings relate to our credit portfolio. As ofJune 30, 2021 , we also had$86.0 million outstanding of unsecured long-term debt, maturing in September of 2022, or the "Senior Notes." The Senior Notes bear interest at a rate of 5.50%, subject to adjustment based on changes, if any, in the ratings of the Senior Notes. The indenture governing the Senior Notes contains a number of covenants, including several financial covenants. The Senior Notes are rated A by Egan-Jones Rating Company1. See Note 11 of the notes to our condensed consolidated financial statements for further detail on the Senior Notes. 1A rating is not a recommendation to buy, sell or hold securities. Ratings may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. 76 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2021 , our book value per share of common stock, calculated using Total Stockholders' Equity less the aggregate liquidation preference of outstanding preferred stock, was$18.47 . Our debt-to-equity ratio was 3.2:1 as ofJune 30, 2021 . Our debt-to-equity ratio does not account for liabilities other than debt financings and does not include debt associated with securitization transactions accounted for as sales. Our recourse debt-to-equity ratio was 1.9:1 as ofJune 30, 2021 . Adjusted for unsettled purchases and sales, our debt-to-equity ratio and total recourse debt-to-equity ratio were essentially unchanged as ofJune 30, 2021 . OnJuly 9, 2021 , we completed a follow-on offering of 6,000,000 shares of our common stock. OnJuly 29, 2021 , we issued an additional 303,000 shares of common stock pursuant to the exercise of the underwriters' option. The issuance and sale of 6,303,000 shares of common stock generated net proceeds, after underwriters' discounts and offering costs of$113.1 million . We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," commencing with our taxable year endedDecember 31, 2019 . Provided that we maintain our qualification as a REIT, we generally will not be subject toU.S. federal, state, and local income tax on our REIT taxable income that is currently distributed to our stockholders. Any taxes paid by a domestic taxable REIT subsidiary, or "TRS," will reduce the cash available for distribution to our stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their annual REIT taxable income excluding net capital gains. Our Targeted Asset Classes Our targeted asset classes currently include investments in theU.S. andEurope (as applicable) in the categories listed below. Subject to maintaining our qualification as a REIT, we expect to continue to invest in these targeted asset classes. Also, we expect to continue to hold certain of our targeted assets through one or more TRSs. As a result, a portion of the income from such assets will be subject toU.S. federal and certain state corporate income taxes, as applicable. 77 --------------------------------------------------------------------------------
Table of Contents
Asset Class Principal Assets
Agency RMBS . Whole pool pass-through certificates;
. Partial pool pass-through certificates;
. Agency collateralized mortgageobligations, or "CMOs," including
interest only securities, or "IOs," principal only securities, or
"POs," inverse interest only securities, or "IIOs"; and
CLOs . Retained tranches from CLO securitizations, including
participating in theaccumulation of the underlying assets for
such securitization by providing capital to the vehicle
accumulating assets; and
. Other CLO debt and equity tranches.
CMBS and Commercial Mortgage Loans . CMBS; and
. Commercial mortgage loans and other commercial real estate debt.
Consumer Loans and ABS . Consumer loans;
. ABS, including ABS backed by consumer loans; and
. Retained tranches from securitizations to which we have
contributed assets.
Mortgage-Related Derivatives . To-Be-Announced mortgage pass-through certificates, or "TBAs";
. Credit default swaps, or "CDS," on individual RMBS, on the ABX,
CMBX and PrimeX indices and on other mortgage-related indices; and
. Other mortgage-related derivatives.
Non-Agency RMBS . RMBS backed by prime jumbo,
Alt-A, non-QM, manufactured housing,
and subprime mortgages;
. RMBS backed by fixed rate mortgages, Adjustable rate mortgages, or
"ARMs," Option-ARMs, and Hybrid ARMs;
. RMBS backed by mortgages on single-family-rental properties;
. RMBS backed by first lien and second lien mortgages;
. Investment grade and non-investment grade securities;
. Senior and subordinated securities;
. IOs, POs, IIOs, and inverse floaters;
. Collateralized debt obligations, or "CDOs";
. RMBS backed by Europeanresidential mortgages, or "European RMBS";
and
. Retained tranches from securitizations in which we have
participated.
Residential Mortgage Loans . Residential non-performing mortgage loans, or "NPLs";
. Re-performing loans, or "RPLs,"which generally are loans that
were modified and/or formerly NPLs where the borrower has resumed
making payments in some form or amount;
. Residential "transition loans," such as residential bridge loans
and residential "fix-and-flip" loans;
. Non-QM loans; and
. Retained tranches from securitizations to which we have
contributed assets.
Other . Real estate, including commercial and residential real property;
. Strategic debt and/or equity investments in loan originators and
mortgage-related entities;
. Corporate debt and equity securities and corporate loans;
. Mortgage servicing rights, or "MSRs";
. Credit risk transfer securities, or "CRTs"; and
. Other non-mortgage-related derivatives.
78-------------------------------------------------------------------------------- Table of Contents Agency RMBS Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent, partial pool) pass-through certificates, the principal and interest of which are guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage Corporation, or "Freddie Mac," or theGovernment National Mortgage Association , within theU.S. Department of Housing and Urban Development , or "Ginnie Mae ," and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition to investing in pass-through certificates which are backed by traditional mortgages, we have also invested in Agency RMBS backed by reverse mortgages. Reverse mortgages are mortgage loans for which neither principal nor interest is due until the borrower dies, the home is sold, or other trigger events occur. Mortgage pass-through certificates are securities representing undivided interests in pools of mortgage loans secured by real property where payments of both interest and principal, plus prepaid principal, on the securities are made monthly to holders of the security, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Whole pool pass-through certificates are mortgage pass-through certificates that represent the entire ownership of (as opposed to merely a partial undivided interest in) a pool of mortgage loans. Our Agency RMBS assets are typically concentrated in specified pools. Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics. Our Agency strategy also includes RMBS that are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs. CLOs CLOs are a form of asset-backed security collateralized by syndicated corporate loans. We have retained, and may retain in the future, tranches from CLO securitizations for which we have participated in the accumulation of the underlying assets, typically by providing capital to a vehicle accumulating assets for such CLO securitization. Such vehicles may enter into warehouse financing facilities in order to facilitate such accumulation. Securitizations can effectively provide us with long-term, locked-in financing on the related collateral pool, with an effective cost of funds well below the expected yield on the collateral pool. Our CLO holdings may include both debt and equity interests. CMBS We acquire CMBS, which are securities collateralized by mortgage loans on commercial properties. The majority of CMBS issued are fixed rate securities backed by fixed rate loans made to multiple borrowers on a variety of property types, though single-borrower CMBS and floating rate CMBS have also been issued. The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or moreAAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. Much of our focus within the CMBS sector has been on B-pieces, but we also acquire other CMBS with more senior credit priority. Commercial Mortgage Loans and Other Commercial Real Estate Debt We acquire commercial mortgage loans, which are loans secured by liens on commercial properties, including hotel, industrial, multi-family, office and retail properties. Loans may be fixed or floating rate and will generally have maturities ranging from one to ten years. We typically acquire first lien loans but may also acquire subordinated loans. As ofJune 30, 2021 , all of our commercial mortgage loans were first lien loans. Commercial real estate debt typically limits the borrower's right to freely prepay for a period of time through provisions such as prepayment fees, lockout, yield maintenance, or defeasance provisions. Some of the commercial mortgage loans that we acquire may be non-performing, underperforming, or otherwise distressed; these loans are typically acquired at a discount both to their unpaid principal balances and to the value of the underlying real estate. We also participate in the origination of "bridge" loans, which have shorter terms and higher interest rates than more traditional commercial mortgage loans. Bridge loans are typically secured by properties in transition, where the borrower is in the process of either re-developing or stabilizing operations at the property. Properties securing these loans may include multi-family, retail, office, industrial, and other commercial property types. Within both our loan acquisition and loan origination strategies, we generally focus on smaller balance loans and/or loan packages that are less-competitively-bid. These loans typically have balances that are less than$20 million , and are secured by 79 -------------------------------------------------------------------------------- Table of Contents real estate and, in some cases, a personal guarantee from the borrower. Consumer Loans and ABS We acquireU.S. consumer whole loans and ABS, including ABS backed byU.S. consumer loans. OurU.S. consumer loan portfolio consists of unsecured loans and secured auto loans. We are currently purchasing newly originated consumer loans under flow agreements with originators, as well as seasoned consumer loans in the secondary market, and we continue to evaluate new opportunities. TBAs and Other Mortgage-Related Derivatives In addition to investing in specified pools of Agency RMBS, we utilize TBA transactions, whereby we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid and have quoted market prices and represent the most actively traded class of mortgage-backed securities, or "MBS." TBA trading is based on the assumption that mortgage pools that are eligible to be delivered at TBA settlement are fungible and thus the specific mortgage pools to be delivered do not need to be explicitly identified at the time a trade is initiated. We generally engage in TBA transactions for purposes of managing certain risks associated with our investment strategies. Other than with respect to TBA transactions entered into by our TRSs, most of our TBA transactions are treated for tax purposes as hedging transactions used to hedge indebtedness incurred to acquire or carry real estate assets, or "qualifying liability hedges." The principal risks that we use TBAs to mitigate are interest rate and yield spread risks. For example, we may hedge the interest rate and/or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. Alternatively, we may opportunistically engage in TBA transactions because we find them attractive in their own right, from a relative value perspective or otherwise. For accounting purposes, in accordance with generally accepted accounting principles inthe United States of America , or "U.S. GAAP," we classify TBA transactions as derivatives. We also take long and short positions in various other mortgage-related derivative instruments, including mortgage-related credit default swaps. A credit default swap is a credit derivative contract in which one party (the protection buyer) pays an ongoing periodic premium (and often an upfront payment as well) to another party (the protection seller) in return for compensation for default (or similar credit event) by a reference entity. In this case, the reference entity can be an individual MBS or an index of several MBS, such as an ABX, PrimeX, or CMBX index. Payments from the protection seller to the protection buyer typically occur if a credit event takes place. A credit event can be triggered by, among other things, the reference entity's failure to pay its principal obligations or a severe ratings downgrade of the reference entity. Non-Agency RMBS We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, subprime residential, and single-family-rental mortgage loans. Our non-Agency RMBS holdings can include investment-grade and non-investment grade classes, including non-rated classes. Non-Agency RMBS are generally debt obligations issued by private originators of, or investors in, residential mortgage loans. Non-Agency RMBS generally are issued as CMOs and are backed by pools of whole mortgage loans or by mortgage pass-through certificates. Non-Agency RMBS generally are securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. In senior/subordinated structures, the subordinated tranches generally absorb all losses on the underlying mortgage loans before any losses are borne by the senior tranches. In excess spread/over-collateralization structures, losses are first absorbed by any existing over-collateralization, then borne by subordinated tranches and excess spread, which represents the difference between the interest payments received on the mortgage loans backing the RMBS and the interest due on the RMBS debt tranches, and finally by senior tranches and any remaining excess spread. We also have acquired, and may acquire in the future, European RMBS, including retained tranches from European RMBS securitizations in which we have participated. Residential Mortgage Loans Our residential mortgage loans include newly originated non-QM loans, residential transition loans, as well as legacy residential NPLs and RPLs. A non-QM loan is not necessarily high-risk, or subprime, but is instead a loan that does not conform to the complex Qualified Mortgage, or "QM," rules of theConsumer Financial Protection Bureau . For example, many non-QM loans are made to creditworthy borrowers who cannot provide traditional documentation for income, such as borrowers who are self-employed. There is also demand from certain creditworthy borrowers for loans above the QM 43% debt-to-income ratio limit that still meet all ability-to-repay standards. We hold an equity investment in a non-QM originator, 80 -------------------------------------------------------------------------------- Table of Contents and to date we have purchased the vast majority of our non-QM loans from this originator, although we could potentially purchase a greater share of non-QM loans from other sources in the future. The residential transition loans that we originate or purchase include: (i) "fix and flip" loans, which are made to real estate investors for the purpose of acquiring residential homes, making value-add improvements to such homes, and reselling the newly rehabilitated homes for a potential profit, and (ii) loans made to real estate investors for a "business purpose," such as purchasing a rental investment property, financing or refinancing a fully rehabilitated home awaiting sale, or securing short-term financing pending qualification for longer-term lower-rate financing. Our residential transition loans are secured by non-owner occupied properties, and are typically structured as fixed-rate, interest-only loans with terms to maturity between 6 and 24 months. Our underwriting guidelines focus on both the "as is" and "as repaired" property values, borrower experience as a real estate investor, and asset verification. We remain active in the market for residential NPLs and RPLs. The market for large residential NPL and RPL pools has remained highly concentrated, with the great majority having traded to only a handful of large players who typically securitize the residential NPLs and RPLs that they purchase. As a result, we have continued to focus our acquisitions on less-competitively-bid, and more attractively-priced mixed legacy pools sourced from motivated sellers. Other Investment Assets Our other investment assets include real estate, including residential and commercial real property, strategic debt and/or equity investments in loan originators, corporate debt and equity securities, corporate loans, which can include litigation finance loans, CRTs, and other non-mortgage-related derivatives. We do not typically purchase real property directly; rather, our real estate ownership usually results from foreclosure activity with respect to our acquired residential and commercial loans. We have made, and in the future may make additional, investments in loan originators and other related entities in the form of debt and/or equity and, to date, our investments have represented non-controlling interests. We have also entered into flow agreements with certain of the loan originators in which we have invested. We have not yet acquired mortgage servicing rights directly, but we may do so in the future. Hedging Instruments Interest Rate Hedging We opportunistically hedge our interest rate risk by using various hedging strategies, subject to maintaining our qualification as a REIT. The interest rate hedging instruments that we use and may use in the future include, without limitation: •TBAs; •interest rate swaps (including floating-to-fixed, fixed-to-floating, floating-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable); •CMOs; •U.S.Treasury securities; •swaptions, caps, floors, and other derivatives on interest rates; •futures and forward contracts; and •options on any of the foregoing. Because fluctuations in short-term interest rates may expose us to fluctuations in the spread between the interest we earn on our investments and the interest we pay on our borrowings, we may seek to manage such exposure by entering into short positions in interest rate swaps. An interest rate swap is an agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified payment dates during the life of the agreement. Typically, one party pays a fixed interest rate and receives a floating interest rate and the other party pays a floating interest rate and receives a fixed interest rate. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is generally not exchanged. Credit Risk Hedging We enter into credit-hedging positions in order to protect against adverse credit events with respect to our credit investments, subject to maintaining our qualification as a REIT. Our credit hedging portfolio can vary significantly from period to period, and can encompass a wide variety of financial instruments, including corporate debt or equity-related instruments, RMBS- or CMBS-related instruments, or instruments involving other markets. Our hedging instruments can include both "single-name" instruments (i.e., instruments referencing one underlying entity or security) and hedging instruments referencing indices. 81 -------------------------------------------------------------------------------- Table of Contents Currently, our credit hedges consist primarily of financial instruments tied to corporate credit, such as CDS on corporate bond indices, short positions in and CDS on corporate bonds; and positions involving exchange traded funds, or "ETFs," of corporate bonds. Our credit hedges also currently include CDS tied to individual MBS or an index of several MBS, such as CDS on CMBS indices, or "CMBX." Foreign Currency Hedging To the extent that we hold instruments denominated in currencies other thanU.S. dollars, we may enter into transactions to offset the potential adverse effects of changes in currency exchange rates, subject to maintaining our qualification as a REIT. In particular, we may use currency forward contracts and other currency-related derivatives to mitigate this risk. Trends and Recent Market Developments Market Overview •TheU.S. Federal Reserve , or the "Federal Reserve ," continued its accommodative monetary policy in the second quarter of 2021. At its April and June meetings, theFederal Reserve maintained its target range of 0.00%-0.25% for the federal funds rate, but noted in June that "indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement." Additionally, at both meetings, theFederal Reserve maintained its directions to the Open Market Desk to increase its holdings ofU.S. Treasury securities by$80 billion per month, and of Agency RMBS by$40 billion per month, to "help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses." In the press conference following the June meeting,Federal Reserve ChairmanJerome Powell stated that "we will taper when we feel that the economy has achieved substantial further progress, and we will communicate very carefully in advance of that." •After rising significantly during the first quarter of 2021, long-term interest rates reversed course during the second quarter of 2021, with the 10-yearU.S. Treasury yield falling 27 basis points to 1.47%. The 2-yearU.S. Treasury yield increased 9 basis points during the quarter to 0.25%, and the yield spread between the 2-year and 10-yearU.S. Treasury decreased to 122 basis points atJune 30 , down from 158 basis points atMarch 31 , but still meaningfully higher than the 79 basis point spread at year-end 2020. Interest rate volatility decreased for most of the quarter, although the MOVE index increased modestly during the second half of June. •After increasing during the first quarter of 2021, mortgage rates declined in the second quarter of 2021 as long-term interest rates fell. The Freddie Mac survey 30-year mortgage rate decreased to 2.98% as ofJune 30, 2021 , as compared to 3.17% at the end of the prior quarter. Refinancing applications declined for the second-consecutive quarter, with theMortgage Bankers Association's Refinance Index decreasing 9%between April 2 and July 2 ; in total, the index declined 28.7% year-to-date throughJuly 2, 2021 . Overall Fannie Mae 30-year MBS prepayments declined from a CPR of 35.4 in March to 27.8 in April and 23.4 in May, before increasing moderately to 24.6 in June. •LIBOR rates, which drive many of our financing costs, remained very low in the second quarter of 2021. One-month LIBOR decreased 1 basis point to end the quarter at 0.10%, and three-month LIBOR fell 5 basis points to 0.15%. •Real GDP grew for the fourth-consecutive quarter, increasing at an estimated annualized rate of 6.5% in the second quarter of 2021. Meanwhile, the unemployment rate declined slightly to 5.9% as ofJune 30 , from 6.0% at the end of the previous quarter. The increase in COVID cases heading into quarter end challenged the outlook going forward, however. •Forbearance rates on residential mortgages continued to decline in the second quarter of 2021. According to theMortgage Bankers Association , the total forbearance rate decreased to 3.9% atJune 27 , from 4.9% atMarch 28 . •For the second quarter of 2021, the Bloomberg BarclaysU.S. MBS Index generated a positive return of 0.33%, driven by falling long-term interest rates, but a negative excess return (on a duration adjusted basis) of (0.60%) relative to the Bloomberg BarclaysU.S. Treasury Index. The Bloomberg BarclaysU.S. Corporate Bond Index generated a positive return of 3.38%, and an excess return of 1.09%, while the Bloomberg BarclaysU.S. Corporate High Yield Bond Index generated a positive return of 2.77%, and an excess return of 2.05%. •The strong performance ofU.S. equities continued into the second quarter of 2021, driven by the ongoing economic recovery and despite concerns about the quickening pace of inflation. The S&P 500 hit new record highs in each month of the quarter, rising 8.2% overall, while the Dow Jones Industrial Average increased 4.6% and the NASDAQ rose 9.5% quarter over quarter. Apart from a spike in mid-May, the VIX volatility index remained low throughout the quarter. Meanwhile,London's FTSE 100 index increased 4.8% and theMSCI World global equity index rose 7.3% quarter over quarter. 82 -------------------------------------------------------------------------------- Table of Contents Portfolio Overview and Outlook The following tables summarize the Company's investment portfolio as ofJune 30, 2021 andMarch 31, 2021 . Credit Portfolio(1) June 30, 2021 March 31, 2021 % of Total Long % of Total Long ($ in thousands) Fair Value Credit Portfolio Fair Value Credit Portfolio Dollar Denominated: CLOs(2)$ 69,053 2.9 %$ 104,201 4.8 % CMBS 45,872 2.0 % 45,073 2.1 % Commercial mortgage loans and REO(3)(4) 316,010 13.5 % 308,368 14.1 % Consumer loans and ABS backed by consumer loans(2) 138,471 5.9 % 134,441 6.1 % Corporate debt and equity and corporate loans 27,939 1.2 % 22,840 1.0 % Debt and equity investments in loan origination entities 106,159 4.5 % 82,482 3.8 % Non-Agency RMBS 158,798 6.8 % 175,213 8.0 % Residential mortgage loans and REO(3) 1,447,202 61.8 % 1,282,450 58.6 % Non-Dollar Denominated: CLOs(2) 3,804 0.2 % 4,313 0.2 % Consumer loans and ABS backed by consumer loans 166 - % 224 - % Corporate debt and equity 26 - % 27 - % RMBS(5) 28,717 1.2 % 27,470 1.3 % Total Long Credit Portfolio$ 2,342,217 100.0 %$ 2,187,102 100.0 % Less: Non-retained tranches of consolidated securitization trusts 982,984 888,509 Total Long Credit Portfolio excluding non-retained tranches of consolidated securitization trusts$ 1,359,233 $ 1,298,593 (1)This information does not includeU.S. Treasury securities, interest rate swaps, TBA positions, or other hedge positions. (2)Includes equity investments in securitization-related vehicles. (3)REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to condensed consolidated financial statements. (4)Includes investments in unconsolidated entities holding small balance commercial mortgage loans and REO. (5)Includes an investment in an unconsolidated entity holding European RMBS. Agency RMBS Portfolio June 30, 2021 March 31, 2021 % of Long Agency % of Long Agency ($ in thousands) Fair Value Portfolio Fair Value Portfolio Long Agency RMBS: Fixed Rate$ 1,333,676 90.4 %$ 1,340,448 90.1 % Floating Rate 27,093 1.8 % 5,807 0.4 % Reverse Mortgages 75,934 5.1 % 92,476 6.2 % IOs 39,045 2.7 % 49,051 3.3 % Total Long Agency RMBS$ 1,475,748 100.0 %$ 1,487,782 100.0 % Our total long credit portfolio increased by 5% in the second quarter, to$1.359 billion as ofJune 30, 2021 , from$1.299 billion as ofMarch 31, 2021 . The quarter-over-quarter increase was driven by an increase in non-QM, small-balance commercial mortgage, and residential transition loan acquisitions, as well as by a new equity investment in a loan originator and appreciation of our existing loan originator equity investments. These increases more than offset the collective impact of the non-QM loan securitization completed in June, loan payoffs and resolutions, and opportunistic sales of CLOs and non-Agency RMBS during the quarter. 83 -------------------------------------------------------------------------------- Table of Contents Over the same period our total long Agency RMBS portfolio decreased slightly to$1.476 billion as ofJune 30, 2021 from$1.488 billion as ofMarch 31, 2021 . As ofJune 30, 2021 , we had cash and cash equivalents of$134.7 million , along with unencumbered assets of approximately$511.0 million . Credit Portfolio Performance Summary We benefited from strong performance in all of our primary credit strategies during the second quarter. Similar to the prior quarter, higher sequential net interest income and substantial net realized and unrealized gains drove results. The increase in net interest income was primarily driven by larger small balance commercial mortgage, residential transition, and non-QM loan portfolios, as well as by lower financing costs. Net interest income also increased due to several small balance commercial asset resolutions that included the payment of past-due interest. The substantial net realized and unrealized gains occurred mainly in our CMBS, CLO, non-Agency RMBS, and non-QM strategies, as well from our equity investments in loan originators. Finally, our credit hedges detracted from results as credit yield spreads continued to tighten during the quarter. Supplemental Credit Portfolio Information The table below details certain information regarding the Company's investments in commercial mortgage loans as ofJune 30, 2021 : Gross Unrealized Weighted Average Unpaid Principal Premium Amortized ($ in thousands) Balance (Discount) Cost Gains Losses Fair Value Coupon Yield(2) Life (Years)(3) Commercial mortgage loans, held-for-investment(1)$ 336,450 $ 2,387 $ 338,837 $ 488 $ (2,713) $ 336,612 7.58 % 7.79 % 1.01 (1)Includes our allocable portion of small-balance commercial loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Condensed Consolidated Balance Sheet. (2)Excludes commercial mortgage loans, in non-accrual status, with a fair value of$58.8 million . (3)Expected average lives of loans are generally shorter than stated contractual maturities. Average lives are affected by scheduled periodic payments of principal and unscheduled prepayments of principal. The table below summarizes our interests in commercial mortgage loans by property type of the underlying real estate collateral, as a percentage of total outstanding unpaid principal balance, as ofJune 30, 2021 : Property Type June 30, 2021 Multifamily 36.6 % Industrial(1) 20.0 % Hotel(1) 15.5 % Mixed Use 12.1 % Retail 7.9 % Other(1) 7.9 % 100.0 % (1)Includes our allocable portion of small-balance commercial loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet. 84 -------------------------------------------------------------------------------- Table of Contents The table below summarizes our interests in residential mortgage loans by loan type and REO resulting from the foreclosure of residential mortgage loans as ofJune 30, 2021 : June 30, 2021 Unpaid Principal Property Type Balance Fair Value In thousands Non-QM loans$ 1,231,624 $ 1,285,246 Residential transition loans 136,164 135,899 Other residential loans 26,646 24,506 Total residential mortgage loans$ 1,394,434 $ 1,445,651 Residential REO(1) 1,552 Total residential mortgage loans and residential REO(1)$ 1,447,203 (1)REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to condensed consolidated financial statements. In early 2020, there was a significant nationwide increase in loan delinquencies, forbearances, deferments, and modifications, as a result of the economic impacts of COVID-19. While we saw the effects of this in some of our portfolios, the effects moderated considerably during the second half of 2020. As ofJune 30, 2021 , there were no material incremental effects from COVID-related forbearance or deferment activity in our non-QM, residential transition, consumer, or small balance commercial mortgage loan portfolios. The following table provides additional details about the Company's investments in unconsolidated entities as ofJune 30, 2021 : Investment in Unconsolidated Entity Description Fair Value Loan Originators: Entity Type Longbridge Financial, LLC Reverse Mortgage Loan Originator$ 71,916 Residential Mortgage Loan LendSure Mortgage Corp. Originator 21,176 Residential Mortgage Loan and Other Consumer Loan Originators 10,067 103,159 Other Unconsolidated Entities: Underlying Product Type Co-investment with Ellington affiliate(s) Commercial Mortgage Loans 53,817 Equity investment in securitization-related risk retention vehicles Consumer Loans 17,366 Other Various 4,637 75,820$ 178,979 Agency RMBS Portfolio Performance Summary Our Agency strategy generated a small net loss in the second quarter of 2021. In a reversal from the prior quarter, interest rates declined and the yield curve flattened. Faced with declining interest rates and continued elevated prepayment rates, along with concerns that theFederal Reserve will commence tapering its asset purchases in the coming months, Agency RMBS yield spreads widened, and most Agency RMBS significantly underperformed comparableU.S. Treasury securities and interest rate swaps on a total return basis.Higher-coupon Agency RMBS particularly underperformed. We had a small net loss in the strategy as net realized and unrealized losses on specified pools and interest rates swaps,U.S. Treasury securities, and futures exceeded net interest income on RMBS and net gains on TBA positions. Average pay-ups on our specified pools increased to 1.10% as ofJune 30, 2021 , from 1.02% as ofMarch 31, 2021 , driven by increases in projected prepayments as a result of declining mortgage rates. Pay-ups are price premiums for specified pools relative to their TBA counterparts. During the second quarter, we continued to hedge interest rate risk, primarily through the use of interest rate swaps, and short positions in TBAs,U.S. Treasury securities, and futures. During the quarter, the size of our short TBA position declined relative to our other hedging instruments, as measured by 10-year equivalents, as the duration of the TBA short positions declined more significantly than the duration of our other hedging instruments, and as we covered a portion of our TBA short 85 -------------------------------------------------------------------------------- Table of Contents positions. In addition, we increased the size of our long TBA portfolio during the quarter. This long portfolio continued to be concentrated in lower coupons, and performed well during the quarter. As ofJune 30, 2021 andMarch 31, 2021 , the weighted average net pass-through rate on our fixed-rate specified pools was 3.1% and 3.2%, respectively. Portfolio turnover for our Agency strategy, as measured by sales and excluding paydowns, was approximately 28% for the three-month period endedJune 30, 2021 . We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS andU.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy. The following table summarizes the prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods endedJune 30, 2021 ,March 31, 2021 ,December 31, 2020 ,September 30, 2020 , andJune 30, 2020 . Three-Month Period Ended June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 Three-Month Constant Prepayment Rates(1) 21.7% 23.4% 24.4% 22.0% 21.1%
(1)
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The following table provides details about the composition of our portfolio of
fixed-rate specified pools (excluding those backed by reverse mortgages) as of
June 30, 2021 and December 31, 2020 :
June 30, 2021 March 31, 2021
Weighted Weighted
Current Average Loan Current Average Loan
Coupon (%) Principal Fair Value Age (Months) Principal Fair Value Age (Months)
(In thousands) (In thousands)
Fixed-rate Agency
RMBS:
15-year fixed-rate
mortgages:
1.50-1.99 $ 5,387 $ 5,514 5 $ 5,540 $ 5,677 2
2.00-2.49 48,818 50,747 6 55,235 56,739 3
2.50-2.99 58,335 61,225 19 52,161 54,601 20
3.00-3.49 72,871 76,963 9 32,681 34,692 10
3.50-3.99 19,530 20,981 63 21,706 23,358 60
4.00-4.49 5,494 5,877 59 6,302 6,762 55
4.50-4.99 3,332 3,520 130 3,759 3,985 127
Total 15-year
fixed-rate mortgages 213,767 224,827 19 177,384 185,814 21
20-year fixed-rate
mortgages:
2.00-2.49 2,953 3,032 7 2,989 3,028 4
2.50-2.99 46,551 48,634 8 48,036 49,909 5
4.00-4.49 414 442 91 1,063 1,144 34
4.50-4.99 - - - 566 633 88
Total 20-year
fixed-rate mortgages 49,918 52,108 9 52,654 54,714 7
30-year fixed-rate
mortgages:
2.00-2.49 6,116 6,198 5 2,449 2,446 5
2.50-2.99 360,496 374,603 4 446,921 459,816 4
3.00-3.49 208,395 219,847 17 127,994 134,468 20
3.50-3.99 128,704 138,094 47 140,070 150,575 45
4.00-4.49 147,797 159,995 51 156,027 170,198 50
4.50-4.99 90,879 99,529 52 103,281 114,199 48
5.00-5.49 47,974 53,023 54 55,404 61,845 50
5.50-5.99 3,419 3,942 61 4,204 4,870 62
6.00-6.49 1,301 1,510 95 1,309 1,503 92
Total 30-year
fixed-rate mortgages 995,081 1,056,741 26 1,037,659 1,099,920 26
Total fixed-rate
Agency RMBS $ 1,258,766 $ 1,333,676 24 $ 1,267,697 $ 1,340,448 24
Our net Agency premium as a percentage of the fair value of our specified pool
holdings is one metric that we use to measure the overall prepayment risk of our
specified pool portfolio. Net Agency premium represents the total premium
(excess of market value over outstanding principal balance) on our specified
pool holdings less the total premium on related net short TBA positions. The
lower our net Agency premium, the less we believe that our specified pool
portfolio is exposed to market-wide increases in Agency RMBS prepayments. Our
net Agency premium as a percentage of fair value of our specified pool holdings
was approximately 3.0% and 2.3% as of June 30, 2021 and March 31, 2021 ,
respectively. These figures take into account the net short TBA positions that
we use to hedge our specified pool holdings, which had a notional value of
$601.1 million and a fair value of $640.1 million as of June 30, 2021 , as
compared to a notional value of $769.9 million and a fair value of $817.0
million as of March 31, 2021 . Excluding these TBA hedging positions, our Agency
premium as a percentage of fair value was approximately 5.7% and 5.6% as of
June 30, 2021 and March 31, 2021 , respectively. Our Agency premium percentage
and net Agency premium percentage may fluctuate from period to period based on a
variety of factors, including market factors such as interest rates and mortgage
rates, and, in the case of our net Agency premium percentage, based on the
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degree to which we hedge prepayment risk with short TBA positions. We believe
that our focus on purchasing pools with specific prepayment characteristics
provides a measure of protection against prepayments.
Financing
The following table details our borrowings outstanding and debt-to-equity ratios
as of June 30, 2021 and March 31, 2021 :
As of
($ in thousands) June 30, 2021 March 31, 2021
Recourse(1) Borrowings:
Repurchase Agreements $ 1,696,285 $ 1,745,716
Other Secured Borrowings 52,237 42,419
Senior Notes, at par 86,000 86,000
Total Recourse Borrowings $ 1,834,522 $ 1,874,135
Debt-to-Equity Ratio Based on Total Recourse
Borrowings(1) 1.9:1 2.0:1
Debt-to-Equity Ratio Based on
1.9:1 2.0:1
Non-Recourse(2) Borrowings:
Repurchase Agreements $ 220,464 $ 163,795
Other Secured Borrowings 34,137 22,087
Other Secured Borrowings, at fair value(3) 1,003,037 911,256
Total Recourse and Non-Recourse Borrowings $ 3,092,160 $ 2,971,273
Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings 3.2:1 3.1:1
Debt-to-Equity Ratio Based on Total Recourse and
Non-Recourse Borrowings Excluding U.S. Treasury
Securities 3.2:1 3.1:1
(1)As of June 30, 2021 and March 31, 2021 , excludes borrowings at certain
unconsolidated entities that are recourse to us. Including such borrowings, our
debt-to-equity ratio based on total recourse borrowings was 2.0:1 as of both
June 30, 2021 and March 31, 2021 .
(2)All of our non-recourse borrowings are secured by collateral. In the event of
default under a non-recourse borrowing, the lender has a claim against the
collateral but not any of the Operating Partnership's other assets. In the event
of default under a recourse borrowing, the lender's claim is not limited to the
collateral (if any).
(3)Relates to our non-QM loan securitizations, where we have elected the fair
value option on the related debt.
Our debt-to-equity ratio including repos, Total other secured borrowings, and
our Senior Notes, but excluding repos on U.S. Treasury securities, was 3.2:1 and
3.1:1 as of June 30, 2021 and March 31, 2021 , respectively. Our debt-to-equity
ratio, adjusting for unsettled purchases and sales, was unchanged at 3.2:1 as of
June 30, 2021 as compared to March 31, 2021 , as total borrowings and total
equity increased proportionately during the quarter. Excluding repos on U.S.
Treasury securities, our recourse debt-to-equity ratio decreased to 1.9:1 as of
June 30, 2021 , from 2.0:1 as of March 31, 2021 . A larger portion of our total
borrowings were non-recourse as of June 30, 2021 , as compared to March 31, 2021 ,
primarily as a result of the non-QM securitization that was completed during the
quarter.
Our debt-to-equity ratio may fluctuate period over period based on portfolio
management decisions, market conditions, capital markets activities, and the
timing of security purchase and sale transactions.
Our financing costs include interest expense related to our repo borrowings,
Total other secured borrowings, and Senior Notes. The interest rates on our repo
borrowings and Other secured borrowings are generally based on, or correlated
with, LIBOR. For the three-month period ended June 30, 2021 , our average cost of
funds decreased to 1.33%, as compared to 1.52% for the three-month period ended
March 31, 2021 . The period-over-period decline in our average cost of funds was
due to narrower financing spreads on our both our Agency and credit borrowings.
Critical Accounting Estimates
Our interim unaudited condensed consolidated financial statements include the
accounts of Ellington Financial Inc. , its Operating Partnership , its
subsidiaries, and variable interest entities, or "VIEs," for which the Company
is deemed to be the primary beneficiary. All intercompany balances and
transactions have been eliminated. Certain of our critical accounting policies
require us to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. We believe that all of the
decisions and assessments upon which our consolidated financial statements are
based were reasonable at the time made based upon information available to us at
that time. We rely on the
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experience of our Manager and Ellington and analysis of historical and current
market data in order to arrive at what we believe to be reasonable estimates.
See Note 2 of the notes to our condensed consolidated financial statements for a
complete discussion of our significant accounting policies. We have identified
our most critical accounting policies to be the following:
Valuation: We have elected the fair value option for the vast majority of our
assets and liabilities for which such election is permitted, as provided for
under ASC 825, Financial Instruments ("ASC 825"). For financial instruments that
are traded in an "active market," the best measure of fair value is the quoted
market price. However, many of our financial instruments are not traded in an
active market. Therefore, management generally uses third-party valuations when
available. If third-party valuations are not available, management uses other
valuation techniques, such as the discounted cash flow methodology. Summary
descriptions, for various categories of financial instruments, of the valuation
methodologies management uses in determining fair value of our financial
instruments are detailed in Note 2 of the notes to our condensed consolidated
financial statements. Management utilizes such methodologies to assign a good
faith fair value (the estimated price that, in an orderly transaction at the
valuation date, would be received to sell an asset, or paid to transfer a
liability, as the case may be) to each such financial instrument.
See the notes to our condensed consolidated financial statements for more
information on valuation techniques used by management in the valuation of our
assets and liabilities.
Purchases and Sales of Investments and Investment Income: Purchase and sales
transactions are generally recorded on trade date. Realized and unrealized gains
and losses are calculated based on identified cost. We generally amortize
premiums and accrete discounts on our fixed-income investments using the
effective interest method.
See the notes to our condensed consolidated financial statements for more
information on the assumptions and methods that we use to amortize purchase
premiums and accrete purchase discounts.
Income Taxes: We made an election to be taxed as a REIT for U.S. federal income
tax purposes commencing with our taxable year ended December 31, 2019 . As a
REIT, we generally are not subject to corporate-level federal and state income
tax on net income we distribute to our stockholders within the prescribed
timeframes. To qualify as a REIT, we must meet a number of organizational and
operational requirements, including distributing at least 90% of our taxable
income to our stockholders. Even if we qualify as a REIT, we may be subject to
certain federal, state, local and foreign taxes on our income and property, and
to federal income and excise taxes on our undistributed taxable income. If we
fail to qualify as a REIT, and do not qualify for certain statutory relief
provisions, we will be subject to U.S. federal, state, and local income taxes
and may be precluded from qualifying as a REIT for the four taxable years
following the year in which we fail to qualify as a REIT.
We elected to treat certain domestic and foreign subsidiaries as TRSs, and may
in the future elect to treat other current or future subsidiaries as TRSs. In
general, a TRS may hold assets and engage in activities that we cannot hold or
engage in directly and generally may engage in any real estate or non-real
estate-related business. A domestic TRS may, but is not required to, declare
dividends to us; such dividends will be included in our taxable income/(loss)
and may necessitate a distribution to our stockholders. Conversely, if we retain
earnings at the level of a domestic TRS, such earnings will increase the book
equity of the consolidated entity. A domestic TRS is subject to U.S. federal,
state, and local corporate income taxes. We have elected and may elect in the
future to treat certain of our foreign corporate subsidiaries as TRSs and,
accordingly, taxable income generated by these TRSs may not be subject to U.S.
federal, state, and local corporate income taxation, but generally will be
included in our income on a current basis as Subpart F income, whether or not
distributed. However, certain of our foreign subsidiaries may be subject to
income taxes in the relevant foreign jurisdictions. Our financial results are
generally not expected to reflect provisions for current or deferred income
taxes, except for any activities conducted through one or more TRSs that are
subject to corporate income taxation.
We follow the authoritative guidance on accounting for and disclosure of
uncertainty on tax positions, which requires management to determine whether a
tax position is more likely than not to be sustained upon examination by the
applicable taxing authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the position. For
uncertain tax positions, the tax benefit to be recognized is measured as the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement. We did not have any unrecognized tax benefits resulting
from tax positions related to the current period or our open tax years. In the
normal course of business, we may be subject to examination by federal, state,
local, and foreign jurisdictions, where applicable, for the current period and
our open tax years. We may take positions with respect to certain tax issues
which depend on legal interpretation of facts or applicable tax regulations.
Should the relevant tax regulators successfully challenge any such positions, we
might be found to have a tax liability that has not been recorded in the
accompanying consolidated financial statements. Also, management's conclusions
regarding the authoritative guidance may be subject to review and adjustment at
a later date based on changing tax laws, regulations, and interpretations
thereof.
See the notes to our condensed consolidated financial statements for additional
details on income taxes.
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Recent Accounting Pronouncements
Refer to the notes to our condensed consolidated financial statements for a
description of relevant recent accounting pronouncements.
Financial Condition
The following table summarizes the fair value our investment portfolio(1) as of
June 30, 2021 and December 31, 2020 .
(In thousands) June 30, 2021 December 31, 2020
Long:
Credit:
Dollar Denominated:
CLO(2) $ 69,053 $ 181,229
CMBS 45,872 117,652
Commercial Mortgage Loans and REO(3)(5) 316,010 269,287
Consumer Loans and ABS backed by Consumer Loans(2) 138,471 112,077
Corporate Debt and Equity and Corporate Loans 27,939 12,606
Debt and Equity Investments in Loan Origination
Entities(4) 106,159 79,536
Non-Agency RMBS 158,798 154,492
Residential Mortgage Loans and REO(3) 1,447,202 1,188,731
Non-Dollar Denominated:
CLO(2) 3,804 6,108
Consumer Loans and ABS backed by Consumer Loans 166 306
Corporate Debt and Equity 26 28
RMBS(6) 28,717 51,388
Agency:
Fixed-Rate Specified Pools 1,333,676 807,704
Floating-Rate Specified Pools 27,093 6,454
IOs 39,045 47,656
Reverse Mortgage Pools 75,934 97,629
Total Long $ 3,817,965 $ 3,132,883
Short:
Credit:
Dollar Denominated:
Corporate Debt and Equity $ (222) $ (218)
Government Debt:
Dollar Denominated (103,839) -
Non-Dollar Denominated (41,313) (38,424)
Total Short $ (145,374) $ (38,642)
(1)For more detailed information about the investments in our portfolio, please
see the notes to the condensed consolidated financial statements.
(2)Includes equity investments in securitization-related vehicles.
(3)REO is not eligible to elect the fair value option as described in Note 2 of
the notes to the condensed consolidated financial statements and, as a result,
is included at the lower of cost or fair value.
(4)Includes corporate loan to a loan origination entity in which we hold an
equity investment.
(5)Includes investments in unconsolidated entities holding small balance
commercial mortgage loans and REO.
(6)Includes an investment in an unconsolidated entity holding European RMBS.
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The following table summarizes our financial derivatives portfolio(1)(2) as of
June 30, 2021 .
Notional Net
(In thousands) Long Short Net Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices $ 705 $ (8,335) $ (7,630) $ 1,569
Total Net Mortgage-Related Derivatives 1,569
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond
Indices 2,256 (32,559) (30,303) (2,800)
Total Return Swaps on Corporate Bond Indices
and Corporate Debt(3) 4,201 - 4,201 464
Options 30,000 - 30,000 294
Warrants(4) 1,897 - 1,897 2
Total Net Corporate-Related Derivatives (2,040)
Interest Rate-Related Derivatives:
TBAs 217,773 (785,621) (567,848) 1,699
Interest Rate Swaps 255,258 (985,130) (729,872) (3,320)
U.S. Treasury Futures(5) 1,900 (178,500) (176,600) 504
Total Interest Rate-Related Derivatives (1,117)
Other Derivatives:
Foreign Currency Forwards(6) - (16,922) (16,922) 445
Total Net Other Derivatives 445
Net Total $ (1,143)
(1)For more detailed information about the financial derivatives in our
portfolio, please refer to Note 8 of the notes to the condensed consolidated
financial statements.
(2)In the table above, fair value of certain derivative transactions are shown
on a net basis. The accompanying financial statements separate derivative
transactions as either assets or liabilities. As of June 30, 2021 , derivative
assets and derivative liabilities were $13.0 million and $(14.2) million ,
respectively, for a net fair value of $(1.1) million , as reflected in "Net
Total" above.
(3)Notional value represents the face amount of the underlying asset.
(4)Notional represents the maximum number of shares available to be purchased
upon exercise.
(5)Notional value represents the total face amount of U.S. Treasury securities
underlying all contracts held. As of June 30, 2021 , a total of 19 long and 1,558
short U.S. Treasury futures contracts were held.
(6)Short notional value represents U.S. Dollars to be received by us at the
maturity of the forward contract.
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The following table summarizes our financial derivatives portfolio(1)(2) as of
December 31, 2020 .
December 31, 2020
Notional Net
(In thousands) Long Short Net Fair Value
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices $ 874 $ (13,846) $ (12,972) $ 2,401
Total Net Mortgage-Related Derivatives 2,401
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond
Indices 67,779 (121,197) (53,418) (3,765)
Total Return Swaps on Corporate Bond Indices
and Corporate Debt(3) 4,161 - 4,161 (475)
Warrants(4) 1,897 - 1,897 36
Total Net Corporate-Related Derivatives (4,204)
Interest Rate-Related Derivatives:
TBAs 149,990 (504,067) (354,077) 37
Interest Rate Swaps 253,423 (408,295) (154,872) (6,655)
U.S. Treasury Futures(5) 1,900 (178,500) (176,600) (374)
Total Interest Rate-Related Derivatives (6,992)
Other Derivatives:
Foreign Currency Forwards(6) - (22,330) (22,330) (279)
Total Net Other Derivatives (279)
Net Total $ (9,074)
(1)For more detailed information about the financial derivatives in our
portfolio, please refer to Note 8 of the notes to condensed consolidated
financial statements.
(2)In the table above, fair value of certain derivative transactions are shown
on a net basis. The accompanying financial statements separate derivative
transactions as either assets or liabilities. As of December 31, 2020 ,
derivative assets and derivative liabilities were $15.5 million and $(24.6)
million , respectively, for a net fair value of $(9.1) million , as reflected in
"Net Total" above.
(3)Notional value represents the face amount of the underlying asset.
(4)Notional represents the maximum number of shares available to be purchased
upon exercise.
(5)Notional value represents the total face amount of U.S. Treasury securities
underlying all contracts held. As of December 31, 2020 , a total of 19 long and
1,558 short U.S. Treasury futures contracts were held.
(6)Short notional value represents U.S. Dollars to be received by us at the
maturity of the forward contract
As of June 30, 2021 , our Condensed Consolidated Balance Sheet reflected total
assets of $4.3 billion and total liabilities of $3.3 billion . As of December 31,
2020 , our Condensed Consolidated Balance Sheet reflected total assets of $3.4
billion and total liabilities of $2.5 billion . Our investments in securities,
loans, and unconsolidated entities, financial derivatives, and real estate owned
included in total assets were $3.8 billion and $3.1 billion as of June 30, 2021
and December 31, 2020 , respectively. Our investments in securities sold short
and financial derivatives included in total liabilities were $159.5 million and
$63.2 million as of June 30, 2021 and December 31, 2020 , respectively. As of
both June 30, 2021 and December 31, 2020 , investments in securities sold short
consisted principally of short positions in sovereign bonds. We primarily use
short positions in sovereign bonds and U.S. Treasury securities to hedge the
risk of rising interest rates and foreign currency risk.
Typically, we hold a net short position in TBAs. The amounts of net short TBAs,
as well as of other hedging instruments, may fluctuate according to the size of
our investment portfolio as well as according to how we view market dynamics as
favoring the use of one hedging instrument or another. As of June 30, 2021 and
December 31, 2020 , we had a net short notional TBA position of $567.8 million
and $354.1 million , respectively. The size of the net short notional TBA
position increased in conjunction with the increased size of our Agency RMBS
portfolio. In addition, we increased the notional amount of long TBAs held for
investment as of June 30, 2021 as compared to December 31, 2020 .
For a more detailed discussion of our investment portfolio, see "-Trends and
Recent Market Developments-Portfolio Overview and Outlook" above.
We use mortgage-related credit derivatives primarily to hedge credit risk in
certain credit strategies, although we also take net long positions in certain
CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name"
positions whereby we have synthetically purchased credit protection on specific
non-Agency RMBS bonds. As there is no longer an active market for CDS on
individual RMBS, our portfolio in this sector continues to run off. We also use
CDS on
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corporate bond indices, options thereon, and various other instruments as a
means to hedge credit risk. As market conditions change, especially as the
pricing of various credit hedging instruments changes in relation to our outlook
on future credit performance, we continuously re-evaluate both the extent to
which we hedge credit risk and the particular mix of instruments that we use to
hedge credit risk.
We may hold long and/or short positions in corporate bonds or equities. Our long
and short positions in corporate bonds or equities may serve as outright
investments or portfolio hedges.
We use a variety of instruments to hedge interest rate risk in our portfolio,
including non-derivative instruments such as U.S. Treasury securities and
sovereign debt instruments, and derivative instruments such as interest rate
swaps, TBAs, Eurodollar and U.S. Treasury futures, and options on the foregoing.
The mix of instruments that we use to hedge interest rate risk may change
materially from one period to the next.
We have also entered into foreign currency forward and futures contracts in
order to hedge risks associated with foreign currency fluctuations.
We have entered into repos to finance many of our assets. We account for our
repos as collateralized borrowings. As of June 30, 2021 indebtedness outstanding
on our repos was approximately $1.9 billion . As of June 30, 2021 , our assets
financed with repos consisted of Agency RMBS of $1.5 billion and credit assets
of $716.4 million . As of June 30, 2021 , outstanding indebtedness under repos was
$1.4 billion for Agency RMBS and $488.2 million for credit assets. As of
December 31, 2020 indebtedness outstanding on our repos was approximately $1.5
billion . As of December 31, 2020 , our assets financed with repos consisted of
Agency RMBS of $947.0 million and credit assets of $884.2 million . As of
December 31, 2020 , outstanding indebtedness under repos was $921.9 million for
Agency RMBS and $575.1 million for credit assets. Our repos bear interest at
rates that have historically moved in close relationship to LIBOR.
In addition to our repos, as of June 30, 2021 we had Total other secured
borrowings of $1.09 billion , used to finance $1.18 billion of non-QM loans,
consumer loans and ABS backed by consumer loans, and small balance commercial
mortgage loans. This compares to Total other secured borrowings of $806.0
million as of December 31, 2020 , used to finance $906.4 million of non-QM loans,
consumer loans and ABS backed by consumer loans, and small balance commercial
mortgage loans. In addition to our secured borrowings, we had $86.0 million of
Senior Notes outstanding as of both June 30, 2021 and December 31, 2020 .
As of June 30, 2021 and December 31, 2020 our debt-to-equity ratio was 3.2:1 and
2.6:1, respectively. Excluding repos on U.S. Treasury securities, our recourse
debt-to-equity ratio was 1.9:1 as of June 30, 2021 as compared to 1.6:1 as of
December 31, 2020 . See the discussion in "-Liquidity and Capital Resources"
below for further information on our borrowings.
Equity
As of June 30, 2021 , our equity increased by approximately $33.5 million to
$955.1 million from $921.6 million as of December 31, 2020 . The increase
principally consisted of net income of $77.7 million and contributions from our
non-controlling interests of $7.4 million . These increases were partially offset
by common and preferred dividends of $36.8 million , and distributions to
non-controlling interests of $15.3 million . Stockholders' equity, which excludes
the non-controlling interests related to the minority interest in the Operating
Partnership as well as the minority interests of our joint venture partners, was
$923.5 million as of June 30, 2021 .
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Results of Operations for the Three- and Six-Month Periods Ended June 30, 2021
and 2020
The following table summarizes our results of operations for the three- and
six-month periods ended June 30, 2021 and 2020:
Three-Month Period Ended Six-Month Period Ended
(In thousands except per share amounts) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Interest Income (Expense)
Interest income $ 45,890 $ 39,281 $ 85,970 $ 91,389
Interest expense (11,166) (14,686) (22,508) (36,776)
Net interest income 34,724 24,595 63,462 54,613
Other Income (Loss)
Realized and unrealized gains (losses) on
securities and loans, net 7,991 28,072 10,486 (93,406)
Realized and unrealized gains (losses) on
financial derivatives, net (5,258) (3,503) 11,248 (25,893)
Realized and unrealized gains (losses) on
real estate owned, net (1,388) (439) (2,120) (445)
Other, net 4,363 (435) 6,323 1,243
Total other income (loss) 5,708 23,695 25,937 (118,501)
Expenses
Base management fee to affiliate (Net of
fee rebates of $195 , $145 , $389 , and $652 ,
respectively)(1) 3,355 2,906 6,633 5,349
Incentive fee to affiliate 7,157 - 7,157 -
Other investment related expenses 4,831 5,275 9,686 9,229
Other operating expenses 4,082 3,771 8,278 7,588
Total expenses 19,425 11,952 31,754 22,166
Net Income (Loss) before Income Tax Expense
(Benefit) and Earnings (Losses) from
Investments in Unconsolidated Entities 21,007 36,338 57,645 (86,054)
Income tax expense (benefit) 3,140 1,542 5,157 995
Earnings (losses) from investments in
unconsolidated entities 18,602 5,643 25,237 (854)
Net Income (Loss) 36,469 40,439 77,725 (87,903)
Net income (loss) attributable to
non-controlling interests 1,874 1,220 3,333 335
Dividends on preferred stock 1,940 1,941 3,881 3,882
Net Income (Loss) Attributable to Common
Stockholders $ 32,655 $ 37,278 $ 70,511 $ (92,120)
Net Income (Loss) Per Common Share $ 0.75 $ 0.85 $ 1.61 $ (2.13)
(1)See Note 13 of the notes to the condensed consolidated financial statements
for further details on management fee rebates.
Core Earnings
We calculate Core Earnings as U.S. GAAP net income (loss) as adjusted for: (i)
realized and unrealized gain (loss) on securities and loans, REO, financial
derivatives (excluding periodic settlements on interest rate swaps), other
secured borrowings, at fair value, and foreign currency transactions; (ii)
incentive fee to affiliate; (iii) Catch-up Premium Amortization Adjustment (as
defined below); (iv) non-cash equity compensation expense; (v) provision for
income taxes; and (vi) certain other income or loss items that are of a
non-recurring nature. For certain investments in unconsolidated entities, we
include the relevant components of net operating income in Core Earnings. The
Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium
amortization triggered by changes in actual and projected prepayments on our
Agency RMBS (accompanied by a corresponding offsetting adjustment to realized
and unrealized gains and losses). The adjustment is calculated as of the
beginning of each quarter based on our then-current assumptions about cashflows
and prepayments, and can vary significantly from quarter to quarter.
Core Earnings is a supplemental non-GAAP financial measure. We believe that the
presentation of Core Earnings provides a consistent measure of operating
performance by excluding the impact of gains and losses and other adjustments
listed above from operating results. We believe that Core Earnings provides
information useful to investors because it is a
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metric that we use to assess our performance and to evaluate the effective net
yield provided by our portfolio. In addition, we believe that presenting Core
Earnings enables our investors to measure, evaluate, and compare our operating
performance to that of our peers. However, because Core Earnings is an
incomplete measure of our financial results and differs from net income (loss)
computed in accordance with U.S. GAAP, it should be considered as supplementary
to, and not as a substitute for, net income (loss) computed in accordance with
U.S. GAAP.
The following table reconciles, for the three- and six-month periods ended
June 30, 2021 and 2020, Core Earnings to the line on the our Condensed
Consolidated Statement of Operations entitled Net Income (Loss), which we
believe is the most directly comparable U.S. GAAP measure.
Three-Month Period Ended Six-Month Period Ended
(In thousands, except per share amounts) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Net income (loss) $ 36,469 $ 40,439 $ 77,725 $ (87,903)
Income tax expense (benefit) 3,140 1,542 5,157 995
Net income (loss) before income tax expense
(benefit) 39,609 41,981 82,882 (86,908)
Adjustments:
Realized (gains) losses on securities and loans, net 2,009 16,040 (2,268) 3,780 Realized (gains) losses on financial derivatives, net (425) 11,676 (6,220) 24,082 Realized (gains) losses on real estate owned, net 74 211 13 (139) Unrealized (gains) losses on securities and loans, net (10,000) (44,112) (8,218) 89,626 Unrealized (gains) losses on financial derivatives, net 5,683 (8,173) (5,028) 1,811 Unrealized (gains) losses on real estate owned, net 1,314 228 2,107 584 Other realized and unrealized (gains) losses, net(1) (2,166) 1,302 (2,768) 1,632 Net realized gains (losses) on periodic settlements of interest rate swaps 77 (892) (739) (750) Net unrealized gains (losses) on accrued periodic settlements of interest rate swaps (709) 136 (299) 25 Incentive fee to affiliate 7,157 - 7,157 - Non-cash equity compensation expense 244 182 473 346 Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment (3,041) 3,648 (2,954) 4,759 Debt issuance costs related to Other secured borrowings, at fair value 2,039 2,075 3,704 2,075 Non-recurring expenses 248 - 248 - (Earnings) losses from investments in unconsolidated entities(2) (16,313) (4,227) (20,491) 2,408 Total Core Earnings 25,800 20,075 47,599 43,331 Dividends on preferred stock 1,940 1,941 3,881 3,882 Core Earnings attributable to non-controlling interests 1,609 1,012 2,655 2,534 Core Earnings Attributable to Common Stockholders$ 22,251 $ 17,122 $ 41,063 $ 36,915 Core Earnings Attributable to Common Stockholders, per share$ 0.51 $ 0.39$ 0.94 $ 0.85 (1)Includes realized and unrealized gains (losses) on foreign currency and unrealized gain (loss) on other secured borrowings, at fair value, included in Other, net, on the Condensed Consolidated Statement of Operations. (2)Adjustment represents, for certain investments in unconsolidated entities, the net realized and unrealized gains and losses of the underlying investments of such entities. Results of Operations for the Three-Month Periods EndedJune 30, 2021 and 2020 Net Income (Loss) Attributable to Common Stockholders For the three-month period endedJune 30, 2021 we had net income (loss) attributable to common stockholders of$32.7 million compared to$37.3 million for the three-month period endedJune 30, 2020 . The period-over-period decrease in our results of operations was primarily due to a decrease in realized and unrealized gains on securities and loans, net, as well as an increase in incentive fees incurred, partially offset by an increase in net interest income and earnings from investments in unconsolidated entities. 95 -------------------------------------------------------------------------------- Table of Contents Interest Income Interest income was$45.9 million for the three-month period endedJune 30, 2021 , as compared to$39.3 million for the three-month period endedJune 30, 2020 . Interest income for both periods included coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings, and interest on our cash balances, including those balances held by our counterparties as collateral. For the three-month period endedJune 30, 2021 , interest income from our credit portfolio was$34.1 million , as compared to$35.9 million for the three-month period endedJune 30, 2020 . This period-over-period decrease was primarily due to lower average asset yields, partially offset by a larger credit portfolio for the three-month period endedJune 30, 2021 . For the three-month period endedJune 30, 2021 , interest income from our Agency RMBS was$11.3 million , as compared to$3.4 million for the three-month period endedJune 30, 2020 . This period-over-period increase was due to higher average asset yields as well as the larger size of the Agency portfolio for the three-month period endedJune 30, 2021 . The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the three-month periods endedJune 30, 2021 and 2020: Credit(1) Agency(1) Total(1) Interest Interest Interest (In thousands) IncomeAverage Holdings Yield IncomeAverage Holdings Yield IncomeAverage Holdings Yield Three-month period endedJune 30, 2021 $ 34,140 $ 2,027,466 6.74 %$ 11,328 $ 1,372,575 3.30 %$ 45,468 $ 3,400,041 5.35 % Three-month period endedJune 30, 2020 $ 35,878 $ 1,995,595 7.19 %$ 3,385 $ 922,957 1.47 %$ 39,263 $ 2,918,552 5.38 % (1)Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions inU.S. Treasury securities. Also excludes long holdings of corporate securities that represent components of certain relative value trading strategies. Some of the variability in our interest income and portfolio yields is due to the Catch-up Premium Amortization Adjustment. For the three-month period endedJune 30, 2021 we had a positive Catch-up Premium Amortization Adjustment of$3.0 million , which increased our interest income. Comparatively, for the three-month period endedJune 30, 2020 we had a negative Catch-up Premium Amortization Adjustment of$(3.6) million , which decreased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.42% and 4.99%, respectively, for the three-month period endedJune 30, 2021 . Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 3.05% and 5.88%, respectively, for the three-month period endedJune 30, 2020 . Interest Expense Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense decreased to$11.2 million for the three-month period endedJune 30, 2021 , as compared to$14.7 million for the three-month period endedJune 30, 2020 . The decline in interest expense was the result of a significant decrease in borrowing rates on both our Agency and credit assets. The table below summarizes the components of interest expense for the three-month periods endedJune 30, 2021 and 2020. Three-Month
Period Ended
(In thousands)June 30, 2021
Repos and Total other secured borrowings$ 9,502 $ 13,365 Senior Notes 1,249 1,249 Securities sold short (1) 231 15 Other (2) 184 57 Total$ 11,166 $ 14,686 (1)Amount includes the related net accretion and amortization of purchase discounts and premiums. (2)Primarily includes interest expense on our counterparties' cash collateral held by us and reverse repurchase agreements with negative interest rates. 96 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our aggregate secured borrowings, which, other than Other secured borrowings, at fair value, carry interest rates that are based on, or correlated with, LIBOR, including repos and Total other secured borrowings, for the three-month periods endedJune 30, 2021 and 2020. Three-Month Period Ended June 30, 2021 June 30, 2020 Average Average Collateral for Secured Average Interest Cost of Average Interest Cost of Borrowing Borrowings Expense Funds Borrowings Expense Funds (In thousands) Credit(1)$ 1,426,056 $ 8,797 2.47 %$ 1,377,059 $ 11,060 3.23 % Agency RMBS 1,439,063 705 0.20 % 907,444 2,305 1.02 % Subtotal(1) 2,865,119 9,502 1.33 % 2,284,503 13,365 2.35 % U.S. Treasury Securities 330 - 0.01 % 37 - - % Total$ 2,865,449 $ 9,502 1.33 %$ 2,284,540 $ 13,365 2.35 % Average One-Month LIBOR 0.10 % 0.36 % Average Six-Month LIBOR 0.19 % 0.71 % (1)Excludes U.S. Treasury Securities . Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would increase to 1.50% and 2.49% for the three-month periods endedJune 30, 2021 and 2020, respectively. Excluding the Catch-up Premium Amortization Adjustment, our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets less our cost of funds (including amortization of upfront payments and actual and accrued periodic payments on interest rate swaps as described above), was 3.49% and 3.39% for the three-month periods endedJune 30, 2021 and 2020, respectively. These metrics do not include costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures. Base Management Fees For the three-month period endedJune 30, 2021 , the gross base management fee, which is based on total equity at the end of each quarter, was$3.6 million , and our Manager credited us with rebates on our base management fee of$0.2 million , resulting in a net base management fee of$3.4 million . For the three-month period endedJune 30, 2020 , the gross base management fee was$3.0 million , and our Manager credited us with rebates on our base management fee of$0.1 million , resulting in a net base management fee of$2.9 million . For each period, the base management fee rebates related to those of our CLO investments for which Ellington or one of its affiliates earned CLO management fees. The increase in the net base management fee period over period was due to a larger capital base atJune 30, 2021 . Incentive Fees In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. For the three-month period endedJune 30, 2021 , the Company incurred an incentive fee of$7.2 million . No incentive fee was incurred for the three-month period endedJune 30, 2020 , since on a rolling four quarter basis, our income did not exceed the prescribed hurdle amount. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable. Other Investment Related Expenses Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the three-month periods endedJune 30, 2021 and 2020 other investment related expenses were$4.8 million and$5.3 million , respectively. The decrease in other investment related expenses was primarily due to a decrease in servicing expenses on our consumer loan portfolios, partially offset by an increase in various other expenses related to our residential mortgage loan portfolio. Other Operating Expenses Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses were$4.1 97 -------------------------------------------------------------------------------- Table of Contents million for the three-month period endedJune 30, 2021 as compared to$3.8 million for the three-month period endedJune 30, 2020 . The increase in other operating expenses for the three-month period endedJune 30, 2021 was primarily due to an increase in compensation expense. Other Income (Loss) Other income (loss) consists of net realized and unrealized gains (losses) on securities and loans, financial derivatives, and real estate owned. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as realized gains (losses) on foreign currency transactions and unrealized gains (losses) on foreign currency remeasurement and Other Secured Borrowings, at fair value. For the three-month period endedJune 30, 2021 , other income (loss) was$5.7 million , consisting primarily of net realized and unrealized gains on our securities and loans of$8.0 million and$4.4 million of other, net, which primarily comprises other non-interest income related to our loan portfolios, partially offset by net realized and unrealized losses on our financial derivatives of$(5.3) million , and net realized and unrealized losses on real estate owned, net, of$(1.4) million . Net realized and unrealized gains of$8.0 million on our securities and loans primarily resulted from net realized and unrealized gains on CLOs, non-Agency RMBS, and CMBS, partially offset by net realized and unrealized losses on Agency RMBS andU.S. Treasury securities. The net realized and unrealized gains in the credit portfolio were driven by tighter credit yield spreads, while the net losses on Agency RMBS were related to wider Agency RMBS yield spreads, particularly on higher coupons. Net realized and unrealized losses on our financial derivatives of$(5.3) million were primarily related to net realized and unrealized losses on interest rate swaps and futures, partially offset by net realized and unrealized gains on TBAs. For the three-month period endedJune 30, 2020 , other income (loss) was$23.7 million , consisting primarily of net realized and unrealized gains of$28.1 million on our securities and loans, partially offset by net realized and unrealized losses on our financial derivatives of$(3.5) million . Net realized and unrealized gains of$28.1 million on our securities and loans primarily resulted from net realized and unrealized gains on non-QM loans, Agency RMBS, non-Agency RMBS, and CMBS, partially offset by net realized and unrealized losses on CLOs. These gains were primarily due to a sharp rebound in credit prices and liquidity in the second quarter following substantial distressed selling in the first quarter, as well as a significant rally in pay-ups on specified pools. Net realized and unrealized losses of$(3.5) million on our financial derivatives was primarily related to net realized and unrealized losses on options, CDS on asset-backed indices, interest rate swaps, futures and warrants, partially offset by net realized and unrealized gains on TBAs and total return swaps. Income Tax Expense (Benefit) Income tax expense (benefit) was$3.1 million for the three-month period endedJune 30, 2021 , as compared to$1.5 million for the three-month period endedJune 30, 2020 . The increase in income tax expense for the three-month period endedJune 30, 2021 was primarily due to an increase in current and deferred tax liabilities related to related to net realized and unrealized gains on investments held in a domestic TRS. Earnings (Losses) from Investments in Unconsolidated Entities We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was$18.6 million for the three-month period endedJune 30, 2021 , as compared to$5.6 million for the three-month period endedJune 30, 2020 . Earnings from investments in unconsolidated entities for the three-month period endedJune 30, 2021 were primarily due to increases in unrealized gains on our investments in loan originators. Results of Operations for the Six-Month Periods EndedJune 30, 2021 and 2020 Net Income (Loss) Attributable to Common Stockholders For the six-month period endedJune 30, 2021 we had net income (loss) attributable to common stockholders of$70.5 million compared to$(92.1) million for the six-month period endedJune 30, 2020 . The period-over-period reversal in our results of operations was primarily due to net realized and unrealized gains on securities and loans, net realized and unrealized gains on financial derivatives, and earnings from investments in unconsolidated entities in the current period, as compared to losses in the prior period which were primarily the result of the market and economic disruptions caused by the COVID-19 pandemic. Interest Income Interest income was$86.0 million for the six-month period endedJune 30, 2021 , as compared to$91.4 million for the six-month period endedJune 30, 2020 . Interest income for both periods included coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on those holdings, and interest on our cash balances, including those balances held by our counterparties as collateral. 98 -------------------------------------------------------------------------------- Table of Contents For the six-month period endedJune 30, 2021 , interest income from our credit portfolio was$67.3 million , as compared to$75.0 million for the six-month period endedJune 30, 2020 . This period-over-period decrease was primarily due to lower average asset yields, partially offset by the larger size of the credit portfolio for the six-month period endedJune 30, 2021 . For the six-month period endedJune 30, 2021 , interest income from our Agency RMBS was$18.1 million , as compared to$15.5 million for the six-month period endedJune 30, 2020 . This period-over-period increase was due to higher average asset yields, partially offset by the smaller size of the Agency portfolio, for the six-month period endedJune 30, 2021 . The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the six-month periods endedJune 30, 2021 and 2020: Credit(1) Agency(1) Total(1) Interest Interest Interest (In thousands) IncomeAverage Holdings Yield IncomeAverage Holdings Yield IncomeAverage Holdings Yield Six-month period endedJune 30, 2021 $ 67,349 $ 1,991,190 6.76 %$ 18,080 $ 1,287,354 2.81 %$ 85,429 $ 3,278,544 5.21 % Six-month period endedJune 30, 2020 $ 75,023 $ 1,924,792 7.80 %$ 15,453 $ 1,377,148 2.24 %$ 90,476 $ 3,301,940 5.48 % (1)Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions inU.S. Treasury securities. Also excludes long holdings of corporate securities that represent components of certain relative value trading strategies. Some of the variability in our interest income and portfolio yields is due to the Catch-up Premium Amortization Adjustment. For the six-month period endedJune 30, 2021 we had a positive Catch-up Premium Amortization Adjustment of$3.0 million , which increased our interest income. In contrast, for the six-month period endedJune 30, 2020 we had a negative Catch-up Premium Amortization Adjustment of$(4.8) million , which decreased our interest income. Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.35% and 5.03%, respectively, for the six-month period endedJune 30, 2021 . Excluding the Catch-up Premium Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 2.94% and 5.77%, respectively, for the six-month period endedJune 30, 2020 . Interest Expense Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our Senior Notes, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. Our total interest expense decreased to$22.5 million for the six-month period endedJune 30, 2021 , as compared to$36.8 million for the six-month period endedJune 30, 2020 . The decline in interest expense was the result of a significant decrease in borrowing rates on both our Agency and credit assets. The table below summarizes the components of interest expense for the six-month periods endedJune 30, 2021 and 2020. Six-Month
Period Ended
(In thousands)June 30, 2021
Repos and Total other secured borrowings$ 19,206 $ 33,759 Senior Notes 2,497 2,497 Securities sold short (1) 319 430 Other (2) 486 90 Total$ 22,508 $ 36,776 (1)Amount includes the related net accretion and amortization of purchase discounts and premiums. (2)Primarily includes interest expense on our counterparties' cash collateral held by us and reverse repurchase agreements with negative interest rates. 99 -------------------------------------------------------------------------------- Table of Contents The following table summarizes our aggregate secured borrowings, which, other than Other secured borrowings, at fair value, carry interest rates that are based on, or correlated with, LIBOR, including repos and Total other secured borrowings, for the six-month periods endedJune 30, 2021 and 2020. Six-Month Period Ended June 30, 2021 June 30, 2020 Average Average Collateral for Secured Average Interest Cost of Average Interest Cost of Borrowing Borrowings Expense Funds Borrowings Expense Funds (In thousands) Credit(1)$ 1,418,604 $ 17,796 2.53 %$ 1,403,418 $ 23,282 3.34 % Agency RMBS 1,311,688 1,410 0.22 % 1,327,434 10,473 1.59 % Subtotal(1) 2,730,292 19,206 1.42 % 2,730,852 33,755 2.49 % U.S. Treasury Securities 166 - 0.01 % 759 4 0.98 % Total$ 2,730,458 $ 19,206 1.42 %$ 2,731,611 $ 33,759 2.49 % Average One-Month LIBOR 0.11 % 0.90 % Average Six-Month LIBOR 0.20 % 1.11 % (1)Excludes U.S. Treasury Securities . Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would increase to 1.57% and 2.53% for the six-month periods endedJune 30, 2021 and 2020, respectively. Excluding the Catch-up Premium Amortization Adjustment, our net interest margin, defined as the yield on our portfolio of yield-bearing targeted assets less our cost of funds (including amortization of upfront payments and actual and accrued periodic payments on interest rate swaps as described above), was 3.46% and 3.24% for the six-month periods endedJune 30, 2021 and 2020, respectively. These metrics do not include costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures. Base Management Fees For the six-month period endedJune 30, 2021 , the gross base management fee, which is based on total equity at the end of each quarter, was$7.0 million , and our Manager credited us with rebates on our base management fee of$0.4 million , resulting in a net base management fee of$6.6 million . For the six-month period endedJune 30, 2020 , the gross base management fee was$6.0 million , and our Manager credited us with rebates on our base management fee of$0.7 million , resulting in a net base management fee of$5.3 million . For each period, the base management fee rebates related to those of our CLO investments for which Ellington or one of its affiliates earned CLO management fees. The increase in the net base management fee period over period was due to a larger capital base at each quarter end in 2021, as compared to the respective quarter ends in 2020. Incentive Fees In addition to the base management fee, our Manager is also entitled to a quarterly incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. For the six-month period endedJune 30, 2021 , the Company incurred an incentive fee of$7.2 million . No incentive fee was incurred for the six-month period endedJune 30, 2020 , since on a rolling four quarter basis, our income did not exceed the prescribed hurdle amount. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable. Other Investment Related Expenses Other investment related expenses consist of servicing fees on our mortgage and consumer loans, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the six-month periods endedJune 30, 2021 and 2020 other investment related expenses were$9.7 million and$9.2 million , respectively. The increase in other investment related expenses was primarily due to an increase in debt issuance costs related to our non-QM loan securitizations, as well as an increase in various other expenses related to our residential mortgage loan portfolio, partially offset by a decrease in servicing expenses on our consumer loan portfolios. 100 -------------------------------------------------------------------------------- Table of Contents Other Operating Expenses Other operating expenses consist of professional fees, compensation expense related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and other investment related expenses. Other operating expenses were$8.3 million for the six-month period endedJune 30, 2021 as compared to$7.6 million for the six-month period endedJune 30, 2020 . The increase in other operating expenses for the six-month period endedJune 30, 2021 was primarily due to an increase in compensation expense. Other Income (Loss) Other income (loss) consists of net realized and unrealized gains (losses) on securities and loans, financial derivatives, and real estate owned. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as realized gains (losses) on foreign currency transactions and unrealized gains (losses) on foreign currency remeasurement and Other Secured Borrowings, at fair value. For the six-month period endedJune 30, 2021 , other income (loss) was$25.9 million , consisting primarily of net realized and unrealized gains on our financial derivatives of$11.2 million , net realized and unrealized gains on our securities and loans of$10.5 million , and$6.3 million of Other, net, which primarily comprises other non-interest income related to our loan portfolios. Net realized and unrealized gains of$11.2 million on our financial derivatives were primarily related to net realized and unrealized gains on interest rate swaps, TBAs, futures, and forwards, as long-term interest rates increased during the period, partially offset by net realized and unrealized losses on CDS on corporate bond indices and total return swaps. Net realized and unrealized gains of$10.5 million on our securities and loans primarily resulted from net realized and unrealized gains on CMBS, CLOs, non-QM loans, and non-Agency RMBS, partially offset by net realized and unrealized losses on Agency RMBS. The net realized and unrealized gains in the credit portfolio were driven by tighter yield spreads, while the net realized and unrealized losses in the Agency portfolio were due to wider yield spreads. For the six-month period endedJune 30, 2020 , other income (loss) was$(118.5) million , consisting primarily of net realized and unrealized losses of$(93.4) million on our securities and loans and net realized and unrealized losses on our financial derivatives of$(25.9) million . Net realized and unrealized losses of$(93.4) million on our securities and loans primarily resulted from net unrealized losses on CLOs, non-Agency RMBS, CMBS, non-QM loans, and consumer loans and ABS backed by consumer loans, partially offset by net unrealized gains on Agency RMBS. These unrealized losses were primarily due to the market and economic disruptions caused by the COVID-19 pandemic. Net realized and unrealized losses of$(25.9) million on our financial derivatives was primarily related to net realized and unrealized losses on interest rate swaps, TBAs, futures, and total return swaps, partially offset by net realized and unrealized gains on CDS on asset-backed indices, CDS on corporate bond indices, and CDS on corporate bonds. Income Tax Expense (Benefit) Income tax expense (benefit) was$5.2 million for the six-month period endedJune 30, 2021 , as compared to$1.0 million for the six-month period endedJune 30, 2020 . The increase in income tax expense was primarily due to an increase in current and deferred tax liabilities related to related to net realized and unrealized gains on investments held in a domestic TRS. Earnings (Losses) from Investments in Unconsolidated Entities We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was$25.2 million for the six-month period endedJune 30, 2021 , as compared to$(0.9) million for the six-month period endedJune 30, 2020 . The earnings in the later period primarily consisted of unrealized gains on our investments in loan originators and an equity interest in a consumer loan securitization, whereas the losses in the earlier period primarily consisted of unrealized losses on our investments in CLO-related warehouse facilities. Liquidity and Capital Resources Liquidity refers to our ability to meet our cash needs, including repaying our borrowings, funding and maintaining positions in our targeted assets, making distributions in the form of dividends, and other general business needs. Our short-term (one year or less) and long-term liquidity requirements include acquisition costs for assets we acquire, payment of our base management fee and incentive fee, compliance with margin requirements under our repos, reverse repos, and financial derivative contracts, repayment of repo borrowings and other secured borrowings to the extent we are unable or unwilling to extend such borrowings, payment of our general operating expenses, payment of interest payments on our Senior Notes, and payment of our dividends. Our capital resources primarily include cash on hand, cash flow from our investments (including principal and interest payments received on our investments and proceeds from the sale of investments), borrowings under repos and other secured borrowings, and proceeds from equity and debt offerings. We expect that these sources of funds will be 101
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Table of Contents sufficient to meet our short-term and long-term liquidity needs. The following summarizes our borrowings under repos by remaining maturity:
(In thousands) June 30, 2021 December 31, 2020
Outstanding Outstanding
Remaining Days to Maturity Borrowings % of Total Borrowings % of Total
30 Days or Less $ 272,111 14.2 % $ 303,351 20.3 %
31 - 60 Days 434,952 22.7 % 469,695 31.4 %
61 - 90 Days 337,352 17.6 % 327,012 21.8 %
91 - 120 Days 38,865 2.0 % 89,931 6.0 %
121 - 150 Days 124,626 6.5 % 69,104 4.6 %
151 - 180 Days 108,784 5.7 % 70,920 4.7 %
181 - 360 Days 575,059 30.0 % 72,670 4.9 %
> 360 Days 25,000 1.3 % 94,248 6.3 %
$ 1,916,749 100.0 % $ 1,496,931 100.0 %
Repos involving underlying investments that were sold prior to June 30, 2021 for
settlement following June 30, 2021 , are shown using their contractual maturity
dates even though such repos may be expected to be terminated early upon
settlement of the sale of the underlying investment.
The amounts borrowed under our repo agreements are generally subject to the
application of "haircuts." A haircut is the percentage discount that a repo
lender applies to the market value of an asset serving as collateral for a repo
borrowing, for the purpose of determining whether such repo borrowing is
adequately collateralized. As of June 30, 2021 , the weighted average contractual
haircut applicable to the assets that serve as collateral for our outstanding
repo borrowings (excluding repo borrowings related to U.S. Treasury securities)
was 31.6% with respect to credit assets, 5.5% with respect to Agency RMBS
assets, and 14.1% overall. As of December 31, 2020 these respective weighted
average contractual haircuts were 33.0%, 6.0%, and 19.1%. The decrease in the
weighted average contractual haircut on our overall portfolio is primarily due
to the higher share of our outstanding borrowings on Agency assets at June 30,
2021 as compared to December 31, 2020 .
We expect to continue to borrow funds in the form of repos as well as other
similar types of financings. The terms of our repo borrowings are predominantly
governed by master repurchase agreements, which generally conform to the terms
in the standard master repurchase agreement as published by the Securities
Industry and Financial Markets Association as to repayment and margin
requirements. In addition, each lender may require that we include supplemental
terms and conditions to the standard master repurchase agreement. Typical
supplemental terms and conditions include the addition of or changes to
provisions relating to margin calls, net asset value requirements, cross default
provisions, certain key person events, changes in corporate structure, and
requirements that all controversies related to the repurchase agreement be
litigated in a particular jurisdiction. These provisions may differ for each of
our repo lenders.
As of June 30, 2021 and December 31, 2020 , we had $1.9 billion and $1.5 billion ,
respectively, of borrowings outstanding under our repos. As of June 30, 2021 ,
the remaining terms on our repos ranged from 1 day to 730 days, with a weighted
average remaining term of 137 days. Our repo borrowings were with a total of 24
counterparties as of June 30, 2021 . As of June 30, 2021 , our repos had a
weighted average borrowing rate of 0.69%. As of June 30, 2021 , our repos had
interest rates ranging from 0.10% to 3.75%. As of December 31, 2020 , the
remaining terms on our repos ranged from 4 days to 516 days, with a weighted
average remaining term of 94 days. Our repo borrowings were with a total of 24
counterparties as of December 31, 2020 . As of December 31, 2020 , our repos had a
weighted average borrowing rate of 1.20%. As of December 31, 2020 , our repos had
interest rates ranging from 0.20% to 5.00%. Investments transferred as
collateral under repos had an aggregate fair value of $2.2 billion and $1.8
billion as of June 30, 2021 and December 31, 2020 , respectively.
The interest rates of our repos have historically moved in close relationship to
short-term LIBOR rates, and in some cases are explicitly indexed to short-term
LIBOR rates and reset accordingly. It is expected that amounts due upon maturity
of our repos will be funded primarily through the roll/re-initiation of repos
and, if we are unable or unwilling to roll/re-initiate our repos, through free
cash and proceeds from the sale of securities.
We have continued to extend and improve our sources of financing and leverage.
In addition to adding a new loan financing facility and extending the terms of
other financing facilities, we completed a non-QM loan securitization during the
quarter.
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The following table details total outstanding borrowings, average outstanding
borrowings, and the maximum outstanding borrowings at any month end for each
quarter under repos for the past twelve quarters:
Borrowings Average Maximum Borrowings
Outstanding at Borrowings Outstanding at Any
Quarter Ended Quarter End Outstanding Month End
(In thousands)
June 30, 2021 $ 1,916,749 $ 1,971,441 $ 2,062,580
March 31, 2021 1,909,511 1,736,912 1,909,511
December 31, 2020 1,496,931 1,408,935 1,496,931
September 30, 2020 1,439,984 1,368,191 1,551,147
June 30, 2020(1) 1,294,549 1,520,985 1,542,577
March 31, 2020(2) 2,034,225 2,440,982 2,485,496
December 31, 2019(3) 2,445,300 2,119,394 2,445,300
September 30, 2019 2,056,422 1,796,310 2,056,422
June 30, 2019 1,715,506 1,769,909 1,962,866
March 31, 2019 1,550,016 1,471,592 1,550,016
December 31, 2018 1,498,849 1,509,819 1,595,118
September 30, 2018 1,636,039 1,534,490 1,672,077
(1)During this quarter, we continued to lower leverage and improve our liquidity
given the uncertainty as a result of the COVID-19 pandemic.
(2)In March 2020 , in response to significant volatility and heightened risks in
the financial markets as a result of the spread of COVID-19, we significantly
reduced our outstanding borrowings to lower leverage and increase our liquidity.
(3)At the end of 2019 we increased the size of both our credit and Agency
portfolios which we subsequently financed through repos.
In addition to our borrowings under repos, we have entered into various other
types of transactions to finance certain of our investments, including non-QM
loans and REO, commercial mortgage loans, and consumer loans and ABS backed by
consumer loans; such transactions are accounted for as collateralized
borrowings. As of June 30, 2021 and December 31, 2020 , we had outstanding
borrowings related to such transactions in the amount of $1.089 billion and
$806.0 million , respectively, which is reflected under the captions "Other
secured borrowings" and "Other secured borrowings, at fair value" on the
Condensed Consolidated Balance Sheet. As of June 30, 2021 and December 31, 2020 ,
the fair value of non-QM loans, consumer loans and ABS backed by consumer loans,
and small balance commercial mortgage loans collateralizing our Total other
secured borrowings was $1.184 billion and $906.4 million , respectively. See Note
11 in the notes to our condensed consolidated financial statements for further
information on our other secured borrowings.
As of both June 30, 2021 and December 31, 2020 , we had $86.0 million outstanding
of Senior Notes, maturing in September 2022 and bearing interest at a rate of
5.50%, subject to adjustment based on changes, if any, in the ratings of the
Senior Notes. See Note 11 in the notes to our condensed consolidated financial
statements for further detail on the Senior Notes.
As of June 30, 2021 , we had an aggregate amount at risk under our repos with 24
counterparties of approximately $308.0 million , and as of December 31, 2020 , we
had an aggregate amount at risk under our repos with 24 counterparties of
approximately $363.1 million . Amounts at risk represent the excess, if any, for
each counterparty of the fair value of collateral held by such counterparty over
the amounts outstanding under repos. If the amounts outstanding under repos with
a particular counterparty are greater than the collateral held by the
counterparty, there is no amount at risk for the particular counterparty. Amount
at risk as of June 30, 2021 and December 31, 2020 does not include approximately
$4.5 million and $4.2 million , respectively, of net accrued interest receivable,
which is defined as accrued interest on securities held as collateral less
interest payable on cash borrowed.
Our derivatives are predominantly subject to bilateral collateral arrangements
or clearing in accordance with the Dodd-Frank Act. We may be required to deliver
or receive cash or securities as collateral upon entering into derivative
transactions. Changes in the relative value of derivative transactions may
require us or the counterparty to post or receive additional collateral.
Entering into derivative contracts involves market risk in excess of amounts
recorded on our balance sheet. In the case of cleared derivatives, the
clearinghouse becomes our counterparty and the future commission merchant acts
as an intermediary between us and the clearinghouse with respect to all facets
of the related transaction, including the posting and receipt of required
collateral.
As of June 30, 2021 , we had an aggregate amount at risk under our derivative
contracts, excluding TBAs, with eight counterparties of approximately $16.6
million . We also had $13.2 million of initial margin for cleared
over-the-counter, or "OTC," derivatives posted to central clearinghouses as of
that date. As of December 31, 2020 , we had an aggregate amount at
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risk under our derivatives contracts, excluding TBAs, with eight counterparties
of approximately $11.2 million . We also had $7.2 million of initial margin for
cleared OTC derivatives posted to central clearinghouses as of that date.
Amounts at risk under our derivatives contracts represent the excess, if any,
for each counterparty of the fair value of our derivative contracts plus our
collateral held directly by the counterparty less the counterparty's collateral
held by us. If a particular counterparty's collateral held by us is greater than
the aggregate fair value of the financial derivatives plus our collateral held
directly by the counterparty, there is no amount at risk for the particular
counterparty.
We purchase and sell TBAs and Agency pass-through certificates on a when-issued
or delayed delivery basis. The delayed delivery for these securities means that
these transactions are more prone to market fluctuations between the trade date
and the ultimate settlement date, and therefore are more vulnerable, especially
in the absence of margining arrangements with respect to these transactions, to
increasing amounts at risk with the applicable counterparties. As of June 30,
2021 , in connection with our forward settling TBA and Agency pass-through
certificates, we had an aggregate amount at risk with ten counterparties of
approximately $5.9 million . As of December 31, 2020 , in connection with our
forward settling TBA and Agency pass-through certificates, we had an aggregate
amount at risk with six counterparties of approximately $4.1 million . Amounts at
risk in connection with our forward settling TBA and Agency pass-through
certificates represent the excess, if any, for each counterparty of the net fair
value of the forward settling transactions plus our collateral held directly by
the counterparty less the counterparty's collateral held by us. If a particular
counterparty's collateral held by us is greater than the aggregate fair value of
the forward settling transactions plus our collateral held directly by the
counterparty, there is no amount at risk for the particular counterparty.
We held cash and cash equivalents of approximately $134.7 million and $111.6
million as of June 30, 2021 and December 31, 2020 , respectively.
On June 13, 2018 , our Board of Directors approved the adoption of a share
repurchase program under which we are authorized to repurchase up to 1.55
million shares of common stock. The program, which is open-ended in duration,
allows us to make repurchases from time to time on the open market or in
negotiated transactions, including under 10b5-1 plans. Repurchases are at our
discretion, subject to applicable law, share availability, price and our
financial performance, among other considerations. In addition to making
discretionary repurchases, we from time to time use 10b5-1 plans to increase the
number of trading days available to implement these repurchases. From inception
of the current repurchase plan through August 6, 2021 , we repurchased 701,965
shares at an average price per share of $13.36 and a total cost of $9.4 million ,
and have authorization to repurchase an additional 848,035 common shares. We did
not purchase any shares during the six-month period ended June 30, 2021 .
We may declare dividends based on, among other things, our earnings, our
financial condition, the REIT qualification requirements of the Internal Revenue
Code of 1986, as amended, our working capital needs and new opportunities. The
declaration of dividends to our stockholders and the amount of such dividends
are at the discretion of our Board of Directors.
The following table sets forth the dividend distributions authorized by the
Board of Directors payable to common stockholders and holders of Convertible
Non-controlling Interest Units (as defined in Note 2 of the condensed
consolidated financial statements) for the periods indicated below:
Six-Month Period Ended June 30, 2021
Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date
(In thousands)
June 7, 2021 $ 0.15 $ 6,669 June 30, 2021 July 26, 2021
May 6, 2021 0.15 6,669 May 28, 2021 June 25, 2021
April 4, 2021 0.14 6,224 April 30, 2021 May 25, 2021
March 5, 2021 0.10 4,446 March 31, 2021 April 26, 2021
February 5, 2021 0.10 4,444 February 26, 2021 March 25, 2021
January 8, 2021 0.10 4,444 January 29, 2021 February 25, 2021
104-------------------------------------------------------------------------------- Table of Contents Six-Month Period EndedJune 30, 2020 Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date (In thousands) June 5, 2020 $ 0.09 $ 3,995 June 30, 2020 July 27, 2020 May 7, 2020 0.08 3,551 May 29, 2020 June 25, 2020 April 7, 2020 0.08 3,551 April 30, 2020 May 26, 2020 March 6, 2020 0.15 6,658 March 31, 2020 April 27, 2020 February 7, 2020 0.15 6,699 February 28, 2020 March 25, 2020 January 8, 2020 0.15 6,699 January 31, 2020 February 25, 2020 OnJuly 8, 2021 , the Board of Directors approved a dividend in the amount of$0.15 per share of common stock payable onAugust 25, 2021 to stockholders of record as ofJuly 30, 2021 . OnAugust 4, 2021 , the Board of Directors approved a dividend in the amount of$0.15 per share of common stock payable onSeptember 27, 2021 to stockholders of record as ofAugust 31, 2021 . The following table sets forth the dividend distributions authorized by the Board of Directors during the six-month periods endedJune 30, 2021 and 2020 and payable to holders of our Series A Preferred Stock: Declaration Date Dividend Per Share Dividend Amount Record Date Payment Date (In thousands) April 4, 2021 0.421875 1,940 April 19, 2021 April 30, 2021 January 8, 2021 0.421875 1,941 January 19, 2021 February 1, 2021 April 7, 2020 0.421875 1,941 April 17, 2020 April 30, 2020 OnJuly 8, 2021 , the Board of Directors approved a dividend in the amount of$0.421875 per share of Series A Preferred Stock payable onJuly 30, 2021 to stockholders of record as ofJuly 19, 2021 . OnJuly 9, 2021 , we completed a follow-on offering of 6,000,000 shares of our common stock. OnJuly 29, 2021 , we issued an additional 303,000 shares of common stock pursuant to the exercise of the underwriters' option. The issuance and sale of 6,303,000 shares of common stock generated net proceeds, after underwriters' discounts and offering costs of$113.1 million . For the six-month period endedJune 30, 2021 , our operating activities provided net cash in the amount of$44.2 million and our investing activities used net cash in the amount of$879.1 million . Our repo activity used to finance many of our investments (including repayments of amounts borrowed under our repos) provided net cash of$443.9 million . We received$581.8 million in proceeds from the issuance of Total other secured borrowings and we used$124.4 million for principal payments on our Total other secured borrowings. Thus our operating and investing activities, when combined with our repo financings and Other secured borrowings (net of repayments), provided net cash of$66.4 million for the six-month period endedJune 30, 2021 . We received contributions from non-controlling interests which provided cash of$6.5 million and we used$34.6 million to pay dividends and$15.3 million for distributions to non-controlling interests (our joint venture partners). As a result there was an increase in our cash holdings of$23.0 million , from$111.8 million as ofDecember 31, 2020 to$134.9 million as ofJune 30, 2021 . For the six-month period endedJune 30, 2020 , our operating activities provided net cash in the amount of$66.5 million and our investing activities provided net cash in the amount of$848.2 million . Our repo activity used to finance many of our investments (including repayments of amounts borrowed under our repos) used net cash of$1.1 billion . We received$242.2 million in proceeds from the issuance of Total other secured borrowings and we used$37.4 million for principal payments on Other secured borrowings. Thus our operating and investing activities, when combined with our repo financings and Other secured borrowings (net of repayments), provided net cash of$16.0 million for the six-month period endedJune 30, 2020 . We received proceeds from the issuance of common stock, net of offering costs paid, of$95.3 million and contributions from non-controlling interests provided cash of$8.2 million . We used$36.7 million to pay dividends,$5.4 million for distributions to non-controlling interests (our joint venture partners), and$3.0 million to repurchase common stock. As a result there was an increase in our cash holdings of$74.2 million , from$72.5 million as ofDecember 31, 2019 to$146.7 million as ofJune 30, 2020 . Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio, and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. However, the unexpected inability to finance our Agency RMBS portfolio would create a serious short- 105 -------------------------------------------------------------------------------- Table of Contents term strain on our liquidity and would require us to liquidate much of that portfolio, which in turn would require us to restructure our portfolio to maintain our exclusion from registration as an investment company under the Investment Company Act and to maintain our qualification as a REIT. Steep declines in the values of our credit assets financed using repos, or in the values of our derivative contracts, would result in margin calls that would significantly reduce our free cash position. Furthermore, a substantial increase in prepayment rates on our assets financed by repos could cause a temporary liquidity shortfall, because we are generally required to post margin on such assets in proportion to the amount of the announced principal paydowns before the actual receipt of the cash from such principal paydowns. If our cash resources are at any time insufficient to satisfy our liquidity requirements, we may have to sell assets or issue additional debt or equity securities. Although we may from time to time enter into financing arrangements that limit our leverage, our investment guidelines do not limit the amount of leverage that we may use, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets. Contractual Obligations and Commitments We are a party to a management agreement with our Manager. Pursuant to that agreement, our Manager is entitled to receive a base management fee, an incentive fee, reimbursement of certain expenses and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see Note 13 to our condensed consolidated financial statements. We have numerous contractual obligations and commitments related to our outstanding borrowings (see Note 11 of the notes to our condensed consolidated financial statements) and related to our financial derivatives (see Note 8 of the notes to our condensed consolidated financial statements). See Note 21 of the notes to our condensed consolidated financial statements for further detail on our other contractual obligations and commitments. Off-Balance Sheet Arrangements As ofJune 30, 2021 , we did not have any material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment to provide funding to any such entities that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or resources that would be material to an investor in our securities. As such, we are not materially exposed to any market, credit, liquidity, or financing risk that could arise if we had engaged in such relationships. AtJune 30, 2021 we have not entered into any repurchase agreements for which delivery of the borrowed funds is not scheduled until after period end. 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 so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. Item 3. Quantitative and Qualitative Disclosures about Market Risk The primary components of our market risk atJune 30, 2021 are related to credit risk, prepayment risk, and interest rate risk. We seek to actively manage these and other risks and to acquire and hold assets that we believe justify bearing those risks, and to maintain capital levels consistent with those risks. Credit Risk We are subject to credit risk in connection with many of our assets, especially non-Agency RMBS, CMBS, residential and commercial mortgage loans, corporate debt investments including CLOs and investments in securitization warehouses, and consumer loans. Credit losses on real estate loans can occur for many reasons, including, but not limited to, poor origination practices, fraud, faulty appraisals, documentation errors, poor underwriting, legal errors, poor servicing practices, weak economic 106 -------------------------------------------------------------------------------- Table of Contents conditions, decline in the value of homes, businesses or commercial properties, special hazards, earthquakes and other natural events, such as the COVID-19 pandemic, or an outbreak of another highly infectious or contagious disease, over-leveraging of the borrower on a property, reduction in market rents and occupancy rates and poor property management services, changes in legal protections for lenders, reduction in personal income, job loss, and personal events such as divorce or health problems. Property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional, and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing), changes or continued weakness in specific industry segments, construction quality, age and design, demographic factors, and retroactive changes to building or similar codes. The ability of borrowers to repay consumer loans may be adversely affected by numerous borrower-specific factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic downturn, high energy costs or acts of God or terrorism, pandemics such as the COVID-19 pandemic or another highly infectious or contagious disease, may also affect the financial stability of borrowers and impair their ability or willingness to repay their loans. Whenever any of our consumer loans defaults, we are at risk of loss to the extent of any deficiency between the liquidation value of the collateral, if any, securing the loan, and the principal and accrued interest of the loan. Many of our consumer loans are unsecured, or are secured by collateral (such as an automobile) that depreciates rapidly; as a result, these loans may be at greater risk of loss than residential real estate loans. Our corporate investments, especially our lower-rated or unrated CLO investments, corporate equity, and our investments in loan originators, have significant risk of loss, and our efforts to protect these investments may involve substantial costs and may not be successful. The risk of loss with respect to these investments has been, and will likely continue to be, exacerbated by the COVID-19 pandemic. We also will be subject to significant uncertainty as to when and in what manner and for what value the corporate debt in which we directly or indirectly invest will eventually be satisfied (e.g., through liquidation of the obligor's assets, an exchange offer or plan of reorganization involving the debt securities or a payment of some amount in satisfaction of the obligation). In addition, these investments could involve loans to companies that are more likely to experience bankruptcy or similar financial distress, such as companies that are thinly capitalized, employ a high degree of financial leverage, are in highly competitive or risky businesses, are in a start-up phase, or are experiencing losses. Similarly, we are exposed to the risk of potential credit losses on the other assets in our credit portfolio. For many of our investments, the two primary components of credit risk are default risk and severity risk. Default Risk Default risk is the risk that a borrower fails to make scheduled principal and interest payments on a mortgage loan or other debt obligation. We may attempt to mitigate our default risk by, among other things, opportunistically entering into credit default swaps and total return swaps. These instruments can reference various MBS indices, corporate bond indices, or corporate entities. We often rely on third-party servicers to mitigate our default risk, but such third-party servicers may have little or no economic incentive to mitigate loan default rates. Severity Risk Severity risk is the risk of loss upon a borrower default on a mortgage loan or other secured or unsecured debt obligation. Severity risk includes the risk of loss of value of the property or other asset, if any, securing the mortgage loan or debt obligation, as well as the risk of loss associated with taking over the property or other asset, if any, including foreclosure costs. We often rely on third-party servicers to mitigate our severity risk, but such third-party servicers may have little or no economic incentive to mitigate loan loss severities. In the case of mortgage loans, such mitigation efforts may include loan modification programs and prompt foreclosure and property liquidation following a default. Many of our consumer loans are unsecured, or are secured by collateral (such as an automobile) that depreciates rapidly; as a result, these loans may be at greater risk of loss than residential real estate loans. Pursuing any remaining deficiency following a default on a consumer loan is often difficult or impractical, especially when the borrower has a low credit score, making further substantial collection efforts unwarranted. In addition, repossessing personal property securing a consumer loan can present additional challenges, including locating and taking physical possession of the collateral. We rely on servicers who service these consumer loans, to, among other things, collect principal and interest payments on the loans and perform loss mitigation services, and these servicers may not perform in a manner that promotes our interests. In the case of corporate debt, if a company declares bankruptcy, the bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversarial proceedings and are beyond the control of the creditors. A bankruptcy filing by a company whose debt we have purchased may adversely and permanently affect such company. If the proceeding results in liquidation, the liquidation value of the company may have deteriorated significantly from what we believed to be the case at the time of our initial investment. The duration of a bankruptcy proceeding is also difficult to predict, and our return on investment can be adversely affected by delays until a plan of reorganization or liquidation ultimately becomes effective. A bankruptcy court may also re-characterize 107 -------------------------------------------------------------------------------- Table of Contents our debt investment as equity, and subordinate all or a portion of our claim to that of other creditors. This could occur even if our investment had initially been structured as senior debt. Prepayment Risk Prepayment risk is the risk of change, whether an increase or a decrease, in the rate at which principal is returned in respect of fixed-income assets in our portfolio, including both through voluntary prepayments and through liquidations due to defaults and foreclosures. Most significantly, our portfolio is exposed to the risk of changes in prepayment rates of mortgage loans, including the mortgage loans underlying our RMBS, and changes in prepayment rates of certain of our consumer loan holdings. This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Changes in prepayment rates will have varying effects on the different types of securities in our portfolio, and we attempt to take these effects into account in making asset management decisions. Additionally, increases in prepayment rates may cause us to experience losses on our interest only securities and inverse interest only securities, as those securities are extremely sensitive to prepayment rates. Prepayment rates, besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation. For example, the government sponsored HARP program, which was designed to encourage mortgage refinancings, was a steady contributor to Agency RMBS prepayment speeds from its inception in 2009 until its expiration at the end of 2018. Mortgage rates declined significantly during 2020, and remain very low by historical standards. As a result, prepayments continue to represent a meaningful risk, especially with respect to our Agency RMBS. Interest Rate Risk Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with most of our assets and liabilities. For some securities in our portfolio, the coupon interest rates on, and therefore also the values of, such securities are highly sensitive to interest rate movements, such as inverse floating rate RMBS, which benefit from falling interest rates. Our repurchase agreements generally carry interest rates that are determined by reference to LIBOR or similar short-term benchmark rates for those same periods. Whenever one of our fixed-rate repo borrowings matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates prevailing at such time. Subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we opportunistically hedge our interest rate risk by entering into interest rate swaps, TBAs,U.S. Treasury securities, Eurodollar futures,U.S. Treasury futures, and other instruments. In general, such hedging instruments are used to mitigate the interest rate risk arising from the mismatch between the duration of our financed assets and the duration of the liabilities used to finance such assets. The majority of this mismatch currently relates to our Agency RMBS. 108 -------------------------------------------------------------------------------- Table of Contents The following sensitivity analysis table shows the estimated impact on the value of our portfolio segregated by certain identified categories as ofJune 30, 2021 , assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below. (In thousands) Estimated Change for a Decrease in Interest Rates by Estimated Change for an Increase in Interest Rates by 50 Basis Points 100 Basis Points 50 Basis Points 100 Basis Points % of % of % of % of Category of Total Market Total Total Total Instruments Market Value Equity Value Equity Market Value Equity Market Value Equity Agency RMBS-Fixed Pools and IOs excluding TBAs$ 15,965 1.67 %$ 23,211 2.43 %$ (24,685) (2.58) %$ (58,089) (6.08) % Non-Agency RMBS, CMBS, ABS and Loans 7,363 0.77 % 12,607 1.32 % (9,483) (0.99) % (21,085) (2.21) % U.S. Treasury Securities, and Interest Rate Swaps, Options, and Futures (19,956) (2.08) % (40,539) (4.24) % 19,332 2.02 % 38,038 3.98 % TBAs and Other Mortgage-Related Derivatives (2,565) (0.27) % (2,583) (0.27) % 5,113 0.54 % 12,773 1.34 % Corporate Securities and Derivatives on Corporate Securities 2 - % 5 - % (3) - % (5) - % Repurchase Agreements, Reverse Repurchase Agreements, and Senior Notes (1,140) (0.12) % (1,015) (0.11) % 3,103 0.32 % 6,650 0.70 % Total$ (331) (0.03) %$ (8,314) (0.87) %$ (6,623) (0.69) %$ (21,718) (2.27) % The preceding analysis does not show sensitivity to changes in interest rates for instruments for which we believe that the effect of a change in interest rates is not material to the value of the overall portfolio and/or cannot be accurately estimated. In particular, this analysis excludes certain of our holdings of corporate securities and derivatives on corporate securities, and reflects only sensitivity toU.S. interest rates. Our analysis of interest rate risk is derived from Ellington's proprietary models as well as third-party information and analytics. Many assumptions have been made in connection with the calculations set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. For example, for each hypothetical immediate shift in interest rates, assumptions have been made as to the response of mortgage prepayment rates, the shape of the yield curve, and market volatilities of interest rates; each of the foregoing factors can significantly and adversely affect the fair value of our interest rate-sensitive instruments. The above analysis utilizes assumptions and estimates based on management's judgment and experience, and relies on financial models, which are inherently imperfect; in fact, different models can produce different results for the same securities. While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we actively trade many of the instruments in our portfolio, and therefore our current or future portfolios may have risks that differ significantly from those of ourJune 30, 2021 portfolio estimated above. Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above. Furthermore, our portfolio is subject to many risks other than interest rate risks, and these additional risks may or may not be correlated with changes in interest rates. For all of the foregoing reasons and others, the table above is for illustrative purposes only and actual changes in interest rates would likely cause changes in the actual fair value of our portfolio that would differ from those presented above, and such differences might be significant and adverse. See "-Special Note Regarding Forward-Looking Statements." Item 4. Controls and Procedures Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSEC , and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as ofJune 30, 2021 . Based upon that evaluation, our Chief 109 -------------------------------------------------------------------------------- Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as ofJune 30, 2021 . Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during the quarter endedJune 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 110
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