CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in future filings with theSEC or in press releases or other written or oral communications issued or made by us, statements which are not historical in nature, including those containing words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "could," "would," "should," "may", "expect" or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking statements are based on estimates, projections, beliefs and assumptions of management of the Company at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties in predicting future results and conditions. Actual results and outcomes could differ materially from those projected in these forward-looking statements due to a variety of factors, including, without limitation: •changes in our business and investment strategy; •changes in interest rates and the fair market value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; •changes in credit spreads; •changes in the long-term credit ratings of theU.S. , Fannie Mae, Freddie Mac, andGinnie Mae ; •general volatility of the markets in which we invest; •changes in prepayment rates on the loans we own or that underlie our investment securities; •increased rates of default or delinquency and/or decreased recovery rates on our assets; •our ability to identify and acquire our targeted assets, including assets in our investment pipeline; •changes in our relationships with our financing counterparties and our ability to borrow to finance our assets and the terms thereof; •our ability to predict and control costs; •changes in governmental laws, regulations or policies affecting our business, including actions that may be taken to contain or address the impact of the COVID-19 pandemic; •our ability to make distributions to our stockholders in the future; •our ability to maintain our qualification as a REIT for federal tax purposes; •our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; •risks associated with investing in real estate assets, including changes in business conditions and the general economy, the availability of investment opportunities and the conditions in the market for Agency RMBS, non-Agency RMBS, ABS and CMBS securities, residential loans, structured multi-family investments and other mortgage-, residential housing- and credit-related assets, including changes resulting from the ongoing spread and economic effects of COVID-19; and •the impact of COVID-19 on us, our operations and our personnel. These and other risks, uncertainties and factors, including the risk factors described herein and in Part I, Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and Part II, Item 1A. "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , as updated by those risks described in our subsequent filings with theSEC under the Exchange Act, could cause our actual results to differ materially from those projected 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. 70
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Special Note Regarding COVID-19 Pandemic Because there have been no comparable recent global pandemics that resulted in similar impact, we do not yet know the full extent of the effects of the COVID-19 pandemic on our business, operations, personnel, or theU.S. economy as a whole. Any future developments in this regard will be highly uncertain and cannot be predicted with any certainty, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third-party providers' ability to support our operations, any actions taken by governmental authorities and other third parties in response to the pandemic, and the other factors discussed above and throughout this Quarterly Report on Form 10-Q. The uncertain future development of this crisis could materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels. Defined Terms In this Quarterly Report on Form 10-Q we refer toNew York Mortgage Trust, Inc. , together with its consolidated subsidiaries, as "we," "us," "Company," or "our," unless we specifically state otherwise or the context indicates otherwise, and refer to our wholly-owned taxable REIT subsidiaries as "TRSs" and our wholly-owned qualified REIT subsidiaries as "QRSs." In addition, the following defines certain of the commonly used terms in this report:
•"ABS" refers to debt and/or equity tranches of securitizations backed by various asset classes including, but not limited to, automobiles, aircraft, credit cards, equipment, franchises, recreational vehicles and student loans;
•"Agency ARMs" refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;
•"Agency CMBS" refers to CMBS representing interests in or obligations backed by pools of multi-family mortgage loans guaranteed by a government sponsored enterprise ("GSE"), such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac");
•"Agency fixed-rate RMBS" refers to Agency RMBS comprised of fixed-rate RMBS;
•"Agency RMBS" refers to RMBS representing interests in or obligations backed by pools of residential loans guaranteed by Fannie Mae or Freddie Mac, or an agency of theU.S. government, such as theGovernment National Mortgage Association ("Ginnie Mae");
•"ARMs" refers to adjustable-rate residential loans;
•"CDO" refers to collateralized debt obligation;
•"CMBS" refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities issued by a GSE, as well as PO, IO or mezzanine securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans; •"Consolidated K-Series" refers to Freddie Mac-sponsored multi-family loan K-Series securitizations, of which we, or one of our "special purpose entities," or "SPEs," owned the first loss POs and certain IOs and certain senior or mezzanine securities, that we consolidated in our financial statements in accordance with GAAP;
•"Consolidated SLST" refers to a Freddie Mac-sponsored residential loan securitization, comprised of seasoned re-performing and non-performing residential loans, of which we own or owned the first loss subordinated securities and certain IOs and senior securities, that we consolidate in our financial statements in accordance with GAAP;
•"Consolidated VIEs" refers to VIEs where the Company is the primary beneficiary, as it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE and that we consolidate in our financial statements in accordance with GAAP;
•"distressed residential loans" refers to pools of seasoned re-performing, non-performing and other delinquent loans secured by first liens on one- to four-family properties;
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•"excess mortgage servicing spread" refers to the difference between the contractual servicing fee with Fannie Mae, Freddie Mac orGinnie Mae and the base servicing fee that is retained as compensation for servicing or subservicing the related mortgage loans pursuant to the applicable servicing contract;
•"GAAP" refers to generally accepted accounting principles within
•"IOs" refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans;
•"MBS" refers to mortgage-backed securities;
•"Multi-family CDOs" refers to the debt that permanently finances the multi-family mortgage loans held by the Consolidated K-Series that we consolidated in our financial statements in accordance with GAAP;
•"multi-family CMBS" refers to CMBS backed by commercial mortgage loans on multi-family properties;
•"non-Agency RMBS" refers to RMBS that are not guaranteed by any agency of the
•"non-QM loans" refers to residential loans that are not deemed "qualified mortgage," or "QM," loans under the rules of theConsumer Financial Protection Bureau ;
•"POs" refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;
•"residential bridge loans" refers to short-term business purpose loans collateralized by residential properties made to investors who intend to rehabilitate and sell the residential property for a profit;
•"Residential CDOs" refers to the debt that permanently finances the residential loans held in the Company's residential loan securitization trusts and that we consolidate in our financial statements in accordance with GAAP;
•"RMBS" refers to residential mortgage-backed securities backed by adjustable-rate, hybrid adjustable-rate or fixed-rate residential loans;
•"second mortgages" refers to liens on residential properties that are subordinate to more senior mortgages or loans;
•"SLST CDOs" refers to the debt that permanently finances the residential loans held in Consolidated SLST that we consolidate in our financial statements in accordance with GAAP; and •"Variable Interest Entity" or "VIE" refers to an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
General
We are a real estate investment trust ("REIT") forU.S. federal income tax purposes, in the business of acquiring, investing in, financing and managing primarily mortgage-related single-family and multi-family residential assets. Our objective is to deliver long-term stable distributions to our stockholders over changing economic conditions through a combination of net interest margin and capital gains from a diversified investment portfolio. Our investment portfolio includes credit sensitive residential and multi-family assets, including investments that may have been sourced from distressed markets. 72
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Executive Summary
The global pandemic associated with novel coronavirus ("COVID-19") and its related economic conditions have caused, and continue to cause, a significant disruption in theU.S. and world economies. To slow the spread of COVID-19, since mid-March, many countries, including in theU.S. , implemented public heath responses that involved social distancing measures that substantially prohibited large gatherings, including at sporting events, religious services and schools, shelter-in-place and stay-at-home orders or other measures designed to limit capacity or services on a number of businesses. Many businesses have moved to a remote working environment, temporarily suspended operations, laid off a significant percentage of their workforce and/or shut down completely. The economic fallout caused by the pandemic and certain of the actions taken to reduce its spread have been startling, resulting in lost business revenue, rapid and significant increases in unemployment, changes in consumer behavior and significant reductions in liquidity and the fair value of many assets. These conditions, or some level thereof, are expected to continue over the near term and are likely to prevail throughout 2020. Although economic data and markets generally, including those in which we invest, showed signs of improvement beginning in the second quarter and continuing through the third quarter, these markets and the economy continue to face significant challenges from the impact of the ongoing pandemic. The exact timing and pace of the economic recovery are uncertain with a large swath of theU.S. and many countries now experiencing a surge or resurgence of COVID-19 cases, some of which are halting or re-instituting various restrictions on economic and social activity. Moreover, the lack of additional economic stimulus measures from theU.S. government and other authorities is expected to put even more pressure on the ability of borrowers and renters, including borrowers and renters that own or rent properties that back directly, or indirectly, the assets we finance or invest in, to meet their financial obligations. The global pandemic associated with COVID-19 and related economic conditions caused financial and mortgage-related asset markets to come under extreme duress beginning in mid-March, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. These events, in turn, resulted in falling prices of our assets and increased margin calls from our repurchase agreement counterparties in March, particularly with respect to our investment securities portfolio. In an effort to manage our portfolio through this unprecedented turmoil in the financial markets and improve liquidity, in March, we paused funding of margin calls to our repurchase agreement financing counterparties, sold approximately$2.0 billion of assets, terminated interest rate swap positions with an aggregate notional value of$495.5 million and reduced our outstanding repurchase agreements that finance our investment securities and residential loan portfolios, which had exposed our investment portfolio and the financing thereof to unprecedented volatility in mark-to-market collateral repricing determinations by financing counterparties, reducing our overall leverage to less than one times as ofMarch 31, 2020 . Since the market disruption and through the date hereof, we have continued our deliberate and patient approach to enhancing liquidity and strengthening our balance sheet by completing two non-mark-to-market securitizations of residential mortgage loans, a non-mark-to-market re-securitization of non-Agency RMBS, a non-mark-to-market repurchase agreement financing for residential loans and opportunistically selling non-Agency RMBS and CMBS in our portfolio. The proceeds from these transactions were used to reduce our outstanding repurchase agreements and invest in new single-family residential and multi-family investments. As ofSeptember 30, 2020 , we have reduced our portfolio leverage, which is the portion that is exposed to fluctuations in mark-to-market pricing, to 0.3 times and reduced to zero our outstanding repurchase agreements that finance investment securities. We transitioned in March to a fully remote work force, ensuring the safety and well-being of our employees. Our prior investments in technology, business continuity planning and cyber-security protocols have enabled us to continue working with limited operational impact and we expect to continue our remote work arrangement for the foreseeable future. Our targeted investments include the following (i) residential loans, including distressed residential loans, second mortgages, residential bridge loans and other residential loans, (ii) structured multi-family property investments such as preferred equity in, and mezzanine loans to, owners of multi-family properties, (iii) non-Agency RMBS, (iv) Agency RMBS (v) CMBS and (vi) certain other mortgage-, residential housing- and credit-related assets. Subject to maintaining our qualification as a REIT and the maintenance of our exclusion from registration as an investment company under the Investment Company Act, we also may opportunistically acquire and manage various other types of mortgage-, residential housing- and other credit-related assets that we believe will compensate us appropriately for the risks associated with them, including, without limitation, collateralized mortgage obligations, mortgage servicing rights, excess mortgage servicing spreads and securities issued by newly originated securitizations, including credit sensitive securities from these securitizations. 73
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We intend to continue to focus on our core portfolio strengths of single-family residential and multi-family credit assets, which we believe will deliver better risk adjusted returns over time. In periods where we have working capital in excess of our short-term liquidity needs, we may invest the excess in more liquid assets until such time as we are able to re-invest that capital in credit assets that meet our underwriting requirements. Our investment and capital allocation decisions depend on prevailing market conditions, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. We expect to maintain a defensive posture as it relates to new investments due to the uncertainty relating to the duration and ongoing economic impact associated with the COVID-19 pandemic and to currently focus on assets that may benefit from active management in a prolonged, low rate environment, although we do expect that volatility surrounding theU.S. elections and the COVID-19 pandemic will present better entry points for investment during the balance of 2020 and early 2021. We also expect to continue to selectively monetize gains from the price recovery experienced by our non-Agency RMBS and Freddie-K mezzanine securities. Prior to the recent turmoil in the financial markets, we sought to achieve a balanced and diverse funding mix to finance our assets and operations, which included a combination of short-term borrowings, such as repurchase agreements with terms typically of 30-90 days, longer-term repurchase agreement borrowings with terms between one year and 24 months and longer term financings, such as securitizations and convertible notes, with terms longer than one year. As a result of the severe market dislocations related to the COVID-19 pandemic and, more specifically, the unprecedented illiquidity in our repurchase agreement financing and MBS markets, looking forward, we expect to place a greater emphasis on procuring stable, longer-termed financing, such as securitizations and term financings, that provide less or no exposure to fluctuations in the collateral repricing determinations of financing counterparties or rapid liquidity reductions in repurchase agreement financing markets. While longer-termed financings may involve greater expense relative to repurchase agreement funding, we believe, over time, this approach may better allow us to manage our liquidity risk and reduce exposures to events like those caused by the COVID-19 pandemic. Consistent with this emphasis on procuring financings that provide limited or no mark-to-market repricing exposure and more committed lines of financing and as discussed above, we have completed four non-mark-to-market financings sinceJune 2020 . We intend to continue in the near term to explore additional financing arrangements to further strengthen our balance sheet and position ourselves for future investment opportunities, including, without limitation, additional issuances of our equity and debt securities and longer-termed financing arrangements; however, no assurance can be given that we will be able to access any such financing or the size, timing or terms thereof. 74
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Portfolio Update
In the third quarter of 2020, we pursued new single-family residential and multi-family investments while we opportunistically sold investment securities. The following table presents the activity for our investment portfolio for the three months endedSeptember 30, 2020 (dollar amounts in thousands): Fair Value Changes and September 30, June 30, 2020 Acquisitions Repayments (1) Sales Other (2) 2020 Investment securities Non-Agency RMBS$ 630,196 $ -$ (16,684) $ (259,493) $ 21,746 $ 375,765 CMBS 288,112 - (359) (110,680) 5,852 182,925 ABS 42,500 - - - 2,507 45,007 Total investment securities available for sale 960,808 - (17,043) (370,173) 30,105 603,697 Consolidated SLST (3) 185,310 - - - 25,592 210,902 Total investment securities 1,146,118 - (17,043) (370,173) 55,697 814,599 Residential loans 1,483,378 92,673 (80,653) - 37,386 1,532,784 Preferred equity investments, mezzanine loans and investments in unconsolidated entities 395,139 19,117 (20,943) - 8,547 401,860 Other investments (4) 10,550 327 - (7,292) - 3,585 Totals$ 3,035,185 $ 112,117 $ (118,639) $ (377,465) $ 101,630 $ 2,752,828 (1)Primarily includes principal repayments. (2)Primarily includes net realized gains or losses, changes in net unrealized gains or losses (including reversals of previously recognized net unrealized gains or losses on sales), net amortization/accretion and transfers within investment categories. (3)Consolidated SLST is presented on our condensed consolidated balance sheets as ofJune 30, 2020 andSeptember 30, 2020 , respectively, as residential loans, at fair value and residential collateralized debt obligations, at fair value. A reconciliation to our condensed consolidated financial statements follows (dollar amounts in thousands): June 30, 2020 September 30, 2020 Residential loans, at fair value$ 1,274,850 $ 1,290,005 Deferred interest (a) (1,307) (1,123)
Less: Residential collateralized debt obligations, at fair value
(1,088,233) (1,077,980)
Consolidated SLST investment securities owned by NYMT
$ 210,902
(a)Included in accrued expenses and other liabilities on our condensed
consolidated balance sheets at
(4)Includes real estate under development in Consolidated VIEs in the amounts of
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Current Market Conditions and Commentary
The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets, which is driven by numerous factors including the supply and demand for mortgage, housing and credit assets in the marketplace, the ability of our operating partners and borrowers of our loans and those that underlie our investment securities to meet their payment obligations, the terms and availability of adequate financing and capital, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate, mortgage, credit and financial markets, and the credit performance of our credit sensitive assets. Financial and mortgage-related asset markets experienced improving conditions during the third quarter of 2020 with theU.S. economy in recovery.U.S. stocks continued to show signs of recovery during the third quarter of 2020 following the sharp sell-off during the back half of the first quarter. Reflective of abundant liquidity and sustained progress on the re-opening of state and the global economies, asset prices continued to experience improvements during the third quarter. Overall, global economic activity and consumer sentiment showed signs of advancement as well during the third quarter of 2020. However, in some sectors activity levels remain well below normal levels and economic progress is generally likely to be impacted going forward by the evolution of the COVID-19 pandemic and further stimulus initiatives. Similar to assets in the larger economy, pricing for our investment portfolio during the third quarter rebounded with credit spreads tightening across a large swath of the portfolio. Liquidity to MBS and mortgage financing markets was stable during the third quarter, as evidenced by the Company completing multiple longer-term, securitization financing transactions during the quarter and subsequent to end of the quarter. Due to the possibility that a number of states or theU.S. federal government may again impose greater restrictions on economic and social activity in light of rising COVID-19 daily case counts this fall and heightened uncertainty relating to theU.S. elections, stimulus negotiations and other policy matters, we expect market volatility generally to remain elevated throughout the balance of 2020.
The market conditions discussed below significantly influence our investment strategy and results, many of which have been significantly impacted since mid-March by the ongoing COVID-19 pandemic:
General.U.S. economic data released over the past quarter shows that theU.S. economy has begun its recovery from the short but steep recession, withU.S. gross domestic product ("GDP") having advanced by 33.1% (advance estimate) in the third quarter of 2020, up from GDP contraction of 31.4% (revised) in the second quarter of 2020. TheU.S. labor market continued to show improvements throughout the third quarter. TheU.S. Department of Labor attributed these improvements to the resumption of economic activity that had been curtailed due to the COVID-19 pandemic. According to theU.S. Department of Labor , theU.S. unemployment rate continued to decrease in the third quarter from 10.2% in July to 7.9% in September, as the number of unemployed persons decreased from 16.3 million in July to 12.6 million in September. Total nonfarm payroll employment rose by 661,000 in September. While the unemployment rate and number of unemployed persons have decreased for five consecutive months, each of these measures remains higher than February.Single-Family Homes and Residential Mortgage Market. The residential real estate market displayed signals of continued modest growth in the third quarter. Data released by the S&P Dow Jones Indices for their S&P CoreLogic Case-Shiller National Home Price NSA Indices forJuly 2020 showed that, on average, home prices increased 3.9% for the 20-City Composite overJuly 2019 , up from 3.5% the previous month. In addition, according to data provided by theU.S. Department of Commerce , privately-owned housing starts for single-family homes averaged a seasonally adjusted annual rate of 1,040,000 and 925,000 for the three and nine months endedSeptember 30, 2020 , respectively, compared to 766,000 for the second quarter of 2020 and an annual rate of 894,000 for the year endedDecember 31, 2019 . Declining single-family housing fundamentals may adversely impact the borrowers of our residential mortgage loans and those that underlie our RMBS, and thus the overall credit profile of our existing portfolio of single-family residential credit investments, as well as the availability of certain of our targeted assets. As ofSeptember 30, 2020 , approximately 2% of borrowers in our residential loan portfolio remained in an active COVID-19 plan. 76
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Multi-family Housing . According to data provided by theU.S. Department of Commerce , starts on multi-family homes containing five units or more averaged a seasonally adjusted annual rate of 375,000 and 394,000 for the three and nine months endedSeptember 30, 2020 , respectively, compared to 391,000 for the year endedDecember 31, 2019 . While starts on multi-family homes containing five units or more experienced a slight increase from second quarter levels in the beginning of the third quarter, these rates saw a decrease towards the end of the third quarter, eventually reaching 295,000 in September. Moreover, as many workers remain unemployed or under-employed, the financial ability of households to meet their rental payment obligations is an ongoing concern. Data released by theNational Multifamily Housing Council ("NMHC") shows that 86.8% of professionally-managed apartment households made a full or partial October rent payment byOctober 13, 2020 in its survey of 11.5 million professionally-managed apartment units across the country. This represents a 2.4-percentage point decrease in the share who paid rent throughOctober 13, 2019 and compares to 86.2% that had paid bySeptember 13, 2020 . These data encompass a wide variety of market-rate rental properties, which can vary by size, type and average rental price. As ofSeptember 30, 2020 , the Company had one operating partner, representing approximately 1.0% of our total preferred equity and mezzanine loan investment portfolio, that was delinquent in making distributions to us. Weakness in the multi-family housing sector, including, among other things, widening capitalization rates, reduced demand, increased vacancy rates, increased tenant lease defaults and reduced liquidity for owners of multi-family properties, may cause our operating partners to fail to meet their obligations to us and/or contribute to valuation declines for multi-family properties, and in turn, many of the structured multi-family investments that we own. Credit Spreads. Credit spreads tightened further during the third quarter as economic activity accelerated. Tightening credit spreads generally increase the value of many of our credit sensitive assets, while widening credit spreads tend to have a negative impact on the value of many of our credit sensitive assets. Financing markets. During the third quarter, the bond market was largely stable with the closing yield of the 10-yearU.S. Treasury Note trading between 0.52% and 0.74% during the quarter, closing the quarter at 0.69%. Overall interest rate volatility tends to increase the costs of hedging and may place downward pressure on some of our strategies. During the third quarter of 2020, theTreasury curve increased with the spread between the 2-YearU.S. Treasury yield and the 10-YearU.S. Treasury yield at 56 basis points, up 22 basis points fromDecember 31, 2019 . This spread is important as it is indicative of opportunities for investing in levered assets. Increases in interest rates raise the costs of many of our liabilities, while overall interest rate volatility generally increases the costs of hedging. Monetary Policy and Recent Regulatory Developments. TheFederal Reserve has taken a number of actions to stabilize markets as a result of the impact of the COVID-19 pandemic. To address funding disruptions resulting from the economic crisis and market dislocations resulting from the COVID-19 pandemic, theFederal Reserve has been conducting large scale overnight repo operations to address disruptions in theU.S. Treasury , Agency debt and Agency RMBS financing markets and has substantially increased these operations. OnMarch 15, 2020 , theFederal Reserve announced a$700 billion asset purchase program to provide liquidity to theU.S. Treasury and Agency RMBS markets. Specifically, theFederal Reserve announced that it would purchase at least$500 billion ofU.S. Treasuries and at least$200 billion of Agency RMBS. TheFederal Reserve also lowered the federal funds rate by 100 basis points to a range of 0.0% - 0.25%, after having already lowered the federal funds rate by 50 basis points onMarch 3, 2020 . By mid-August, theFederal Reserve had increased its holdings ofU.S. Treasuries and Agency MBS by approximately$2.36 trillion , since mid-March. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law to provide many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity resulting from the COVID-19 pandemic. The over$2 trillion relief bill, among other things, provided for direct payments to each American making up to$75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health care providers, loans and investments to businesses, states and municipalities and grants to the airline industry. OnApril 24, 2020 ,President Trump signed an additional funding bill into law that provided an additional$484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts. In addition, in response to the economic impact of the COVID-19 pandemic, governors of several states issued executive orders prohibiting evictions and foreclosures for specified periods of time, and many courts enacted emergency rules delaying hearings related to evictions or foreclosures. While some of these state protections have expired, theCenters for Disease Control and Prevention issued an order to temporarily halt residential evictions under certain circumstances in an effort to prevent the spread of the COVID-19 pandemic, which became effective onSeptember 4, 2020 and expires onDecember 31, 2020 . 77
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The markets forU.S. Treasuries, MBS and other mortgage and fixed income markets experienced severe dislocations in March as a result of the COVID-19 pandemic. To address these issues in the fixed income and funding markets, onMarch 23, 2020 , theFederal Reserve announced a program to acquireU.S. Treasuries and Agency RMBS in the amounts needed to support smooth market functioning. Since that date, theFederal Reserve and theFederal Housing Finance Agency ("FHFA") have taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the CARES Act. The FHFA instructed the GSEs on how to handle servicer advances for loans that back Agency RMBS that enter into forbearance, which limits prepayments during the forbearance period that could have resulted otherwise. Further, the FHFA announced a loan payment deferment plan for Agency multi-family borrowers facing hardship from revenue losses caused by COVID-19, with the condition that these borrowers suspend all evictions for renters unable to pay rent due to the impact of COVID-19. OnOctober 19, 2020 , the FHFA announced the extension of certain COVID-19 related loan origination flexibilities untilNovember 30, 2020 , including alternative appraisals on purchase and rate term refinance loans and alternative methods for documenting income and verifying employment before loan closing. The increased unemployment benefits under the CARES Act expired in July and negotiations inCongress to provide additional relief are ongoing. Without additional government support or related measures, we anticipate that the number of our operating partners and borrowers of our residential loans and those that underlie our investment securities that become delinquent or default on their financial obligations may increase significantly. Such increased levels could materially adversely affect our business, financial condition, results of operations and our ability to make distributions to our stockholders. According to theBoard of Governors of theFederal Reserve , trading conditions inU.S. Treasuries and MBS markets have improved gradually since the announcement ofFederal Reserve policies and the functioning and liquidity of the MBS market have mostly returned to pre-February standards, though strains continue in less liquid parts of the market. However, bid-ask spreads for longer-maturity and off-the-run Treasuries remain wider than in mid-February. In 2017, policymakers announced that LIBOR will be replaced by 2021. The directive was spurred by the fact that banks are uncomfortable contributing to the LIBOR panel given the shortage of underlying transactions on which to base levels and the liability associated with submitting an unfounded level. LIBOR will be replaced with a new Secured Overnight Funding Rate ("SOFR"), a rate based onU.S. repo trading. The new benchmark rate will be based on overnightTreasury General Collateral repo rates. The rate-setting process will be managed and published by theFederal Reserve and theTreasury's Office of Financial Research . Many banks believe that it may take four to five years to complete the transition to SOFR, despite the 2021 deadline. We will monitor the emergence of this new rate carefully as it will likely become the new benchmark for hedges and a range of interest rate investments. The scope and nature of the actions theFederal Reserve and other governmental authorities will ultimately undertake are unknown and will continue to evolve. There can be no assurance as to how, in the long term, these and other actions, as well as the negative impacts from the ongoing COVID-19 pandemic, will affect the efficiency, liquidity and stability of the financial, credit and mortgage markets, and thus, our business. Greater uncertainty frequently leads to wider asset spreads or lower prices and higher hedging costs. 78
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Table of Contents Third Quarter 2020 Summary Earnings and Return Metrics The following table presents key earnings and return metrics for the three and nine months endedSeptember 30, 2020 (dollar amounts in thousands, except per share data): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Net interest income $ 25,529 $ 101,134
Net income (loss) attributable to Company's common stockholders
$ 91,344$ (399,819)
Net income (loss) attributable to Company's common stockholders per share (basic)
$ 0.24 $ (1.08)
Comprehensive income (loss) attributable to Company's common stockholders
$ 113,834$ (436,889)
Comprehensive income (loss) attributable to Company's common stockholders per share (basic)
$ 0.30 $ (1.18) Book value per common share $ 4.58 $ 4.58 Economic return on book value (1) 7.0 % (18.6) % (1)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share, if any, during the respective periods. Developments •Completed a securitization of residential loans, resulting in approximately$241.1 million of net proceeds to the Company. A portion of the net proceeds were utilized to repay approximately$230.6 million on an outstanding repurchase agreement related to residential loans.
•Obtained non-mark-to-market financing for residential loans through a
repurchase agreement with a new counterparty, receiving net proceeds of
approximately
•Sold non-Agency RMBS for approximately
•Purchased residential loans for approximately
•Repaid last remaining repurchase agreement to finance investment securities in
the amount of approximately
Subsequent Developments
InOctober 2020 , we completed a securitization of residential loans, resulting in approximately$299.4 million in net proceeds to the Company after deducting estimated expenses associated with the transaction. We utilized the net proceeds to repay approximately$236.0 million on outstanding repurchase agreements related to residential loans. 79
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Significant Estimates and Critical Accounting Policies
We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as ofSeptember 30, 2020 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. Moreover, the uncertainty over the ultimate impact that the COVID-19 pandemic will have on the global economy generally, and on our business in particular, makes any estimates and assumptions inherently less certain than they would be absent the current and potential impacts of the COVID-19 pandemic. Accounting policies and estimates related to specific components of our consolidated financial statements are disclosed in the notes to our consolidated financial statements. A discussion of the critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and under "Note 2 - Summary of Significant Accounting Policies" to the consolidated financial statements included therein.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements and the possible effects on our consolidated financial statements is included in "Note 2 - Summary of Significant Accounting Policies" included in Part I, Item 1 of this Quarterly Report on Form 10-Q. 80
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Capital Allocation
The following provides an overview of the allocation of our total equity as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. We fund our investing and operating activities with a combination of cash flow from operations, proceeds from common and preferred equity and debt securities offerings, including convertible notes, short-term and longer-term repurchase agreements, CDOs, securitized debt and trust preferred debentures. A detailed discussion of our liquidity and capital resources is provided in "Liquidity and Capital Resources" elsewhere in this section. The following tables set forth our allocated capital by investment category atSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands). As previously discussed, in an effort to manage our portfolio through the unprecedented turmoil in the financial markets and improve liquidity, we sold our entire Agency CMBS and Agency RMBS portfolio duringMarch 2020 . AtSeptember 30, 2020 : Single-Family Multi- Credit Family Credit Other Total Investment securities available for sale, at fair value$ 375,765
2,822,789 - - 2,822,789
Residential collateralized debt obligations, at fair value
(1,077,980) - - (1,077,980) Investments in unconsolidated entities 73,456 145,250 - 218,706 Preferred equity and mezzanine loan investments - 183,154 - 183,154 Other investments (1) - 3,585 - 3,585 Carrying value 2,194,030 514,914 45,007 2,753,951 Liabilities: Repurchase agreements (672,519) - - (672,519) Securitized debt (88,791) - - (88,791) Residential collateralized debt obligations (268,820) - - (268,820) Subordinated debentures - - (45,000) (45,000) Convertible notes - - (134,720) (134,720) Cash, cash equivalents and restricted cash (2) 119,578 47,952 537,094 704,624 Other 50,362 (4,356) (41,348) 4,658 Net capital allocated$ 1,333,840
Total Leverage Ratio (3) 0.4 Portfolio Leverage Ratio (4) 0.3 (1)Includes real estate under development presented in the Company's accompanying condensed consolidated balance sheets in receivables and other assets. (2)Restricted cash is included in the Company's accompanying condensed consolidated balance sheets in receivables and other assets. (3)Represents total outstanding repurchase agreement financing, subordinated debentures and Convertible Notes divided by the Company's total stockholders' equity. Does not include SLST CDOs amounting to$1.1 billion , Residential CDOs amounting to$268.8 million and securitized debt amounting to$88.8 million as they are non-recourse debt to the Company. (4)Represents outstanding repurchase agreement financing divided by the Company's total stockholders' equity. 81
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Table of Contents AtDecember 31, 2019 : Single-Family Multi- Agency Credit Family Credit Other Total Investment securities available for sale, at fair value$ 973,835 $ 715,314
26,239 2,732,401 - - 2,758,640 Residential collateralized debt obligations, at fair value - (1,052,829) - - (1,052,829) Residential loans, net - 202,756 - - 202,756 Investments in unconsolidated entities - 65,573 124,392 - 189,965 Preferred equity and mezzanine loan investments - - 180,045 - 180,045 Multi-family loans held in securitization trusts, at fair value 88,359 - 17,728,387 - 17,816,746 Multi-family collateralized debt obligations, at fair value - - (16,724,451) - (16,724,451) Other investments (1) - 3,119 14,464 - 17,583 Carrying value 1,088,433 2,666,334 1,590,614 49,214 5,394,595 Liabilities: Repurchase agreements (945,926) (1,347,600) (811,890) - (3,105,416) Residential collateralized debt obligations - (40,429) - - (40,429) Subordinated debentures - - - (45,000) (45,000) Convertible notes - - - (132,955) (132,955) Hedges (net) (2) 15,878 - - - 15,878 Cash, cash equivalents and restricted cash (3) 9,738 44,604 4,152 63,118 121,612 Goodwill - - - 25,222 25,222 Other (1,449) 54,895 (10,123) (71,801) (28,478) Net capital allocated$ 166,674 $ 1,377,804
Total Leverage Ratio (4) 1.5 Portfolio Leverage Ratio (5) 1.4 (1)Includes real estate under development in the amount of$14.5 million , other loan investments in the amount of$2.4 million and deferred interest related to residential loans, at fair value held in Consolidated SLST of$0.7 million , all of which are included in the Company's accompanying condensed consolidated balance sheets in receivables and other assets. (2)Includes derivative liabilities of$29.0 million netted against a$44.8 million variation margin. (3)Restricted cash is included in the Company's accompanying condensed consolidated balance sheets in receivables and other assets. (4)Represents total outstanding repurchase agreement financing, subordinated debentures and Convertible Notes divided by the Company's total stockholders' equity. Does not include Multi-family CDOs amounting to$16.7 billion , SLST CDOs amounting to$1.1 billion and Residential CDOs amounting to$40.4 million as they are non-recourse debt to the Company. (5)Represents outstanding repurchase agreement financing divided by the Company's total stockholders' equity. 82
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Analysis of Changes in Book Value Per Share
The following table analyzes the changes in book value of our common stock for the three and nine months endedSeptember 30, 2020 (amounts in thousands, except per share data): Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Amount Shares Per Share (1) Amount Shares Per Share (1) Beginning Balance$ 1,642,883 377,465 $ 4.35$ 1,683,911 291,371 $ 5.78 Cumulative-effect adjustment for implementation of fair value option (2) - 12,284 Common stock issuance, net (3) 3,175 279 519,473 86,373 Balance after cumulative-effect adjustment and share issuance activity 1,646,058 377,744 4.36 2,215,668 377,744 5.87 Dividends declared (28,331) (0.08) (47,218) (0.13) Net change in accumulated other comprehensive income (loss): Investment securities available for sale (4) 22,490 0.06 (37,070)
(0.10)
Net income (loss) attributable to Company's common stockholders 91,344 0.24 (399,819) (1.06) Ending Balance$ 1,731,561 377,744 $ 4.58$ 1,731,561 377,744 $ 4.58 (1)Outstanding shares used to calculate book value per common share for the three and nine months endedSeptember 30, 2020 are 377,744,476. (2)OnJanuary 1, 2020 , the Company adopted Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and elected to apply the fair value option provided by ASU 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief to our residential loans, net, preferred equity and mezzanine loan investments that are accounted for as loans and preferred equity investments that are accounted for under the equity method, resulting in a cumulative-effect adjustment to beginning book value of our common stock and book value per common share. (3)Includes amortization of stock based compensation. (4)The changes primarily relate to unrealized gains (losses) in our investment securities due to increases or reductions in pricing. 83
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Results of Operations
Beginning in mid-March and continuing into the second quarter, the global pandemic associated with COVID-19 and related economic conditions caused financial and mortgage-related asset markets to experience significant volatility. The significant dislocation in the financial markets in March and part of April caused, among other things, credit spread widening, a sharp decrease in interest rates, higher unemployment levels and unprecedented illiquidity in repurchase agreement financing and MBS markets, which in turn materially negatively impacted liquidity and pricing of our assets. While market conditions improved and volatility subsided to an extent in the latter part of the second quarter and into the third quarter as parts of the global andU.S. economy "re-opened", leading to partial pricing recovery for a number of assets in our portfolio, we expect volatility and markets to continue to fluctuate and that these conditions may continue to negatively affect our business through the balance of 2020 and into 2021 due to the uncertain duration and ongoing impact of the pandemic. The factors described above and throughout this Quarterly Report on Form 10-Q (particularly as related to the COVID-19 pandemic) have driven the majority of our results of operations for the three and nine months endedSeptember 30, 2020 , and are expected to continue to impact our results of operations in future periods. Thus, our results of operations should be read and viewed in the context of these unprecedented conditions. The following discussion provides information regarding our results of operations for the three and nine months endedSeptember 30, 2020 and 2019, including a comparison of year-over-year results and related commentary. A number of the tables contain a "change" column that indicates the amount by which results from 2020 are greater or less than the results from the respective period in 2019. Unless otherwise specified, references in this section to increases or decreases in the "three-month periods" refer to the change in results for the three months endedSeptember 30, 2020 when compared to the three months endedSeptember 30, 2019 and increases or decreases in the "nine-month periods" refer to the change in results for the nine months endedSeptember 30, 2020 when compared to the nine months endedSeptember 30, 2019 .
The following table presents the main components of our net income (loss) for
the three and nine months ended
Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Net interest income$ 25,529 $ 31,971
21,396 69,132 (427,060) 60,822 (487,882) Total general, administrative and operating expenses 13,424 12,288 1,136 41,382 37,326 4,056 Income (loss) from operations before income taxes 102,633 41,079 61,554 (367,308) 107,362 (474,670) Income tax (benefit) expense (772) (187) (585) 917 (247) 1,164 Net income (loss) attributable to Company 101,641 41,379 60,262 (368,929) 108,254 (477,183) Preferred stock dividends 10,297 6,544 3,753 30,890 18,726 12,164 Net income (loss) attributable to Company's common stockholders 91,344 34,835 56,509 (399,819) 89,528 (489,347)
Basic earnings (loss) per common share
$ 0.23 $ 0.15 $ 0.08 $ (1.08) $ 0.43 $ (1.51) Net Interest Income Our results of operations for our investment portfolio during a given period typically reflect, in large part, the net interest income earned on our investment portfolio of RMBS, CMBS, residential loans and preferred equity investments and mezzanine loans, where the risks and payment characteristics are equivalent to and accounted for as loans (collectively, our "Interest Earning Assets"). The net interest spread is impacted by factors such as our cost of financing, the interest rate that our investments bear and our interest rate hedging strategies. Furthermore, the amount of premium or discount paid on purchased portfolio investments and the prepayment rates on portfolio investments will impact the net interest spread as such factors will be amortized over the expected term of such investments. The decrease in net interest income for the three-month periods was primarily driven by a decrease in average interest earning assets due to asset sales in response to the impacts of the COVID-19 pandemic. In particular, we sold our entire portfolio of higher yielding first loss POs within the Consolidated K-Series inMarch 2020 . 84
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The increase in net interest income for the nine-month periods was primarily driven by a decrease in interest expense due to the repayment of all of our outstanding repurchase agreements that finance our investment securities and an increase in assets in our single-family credit portfolio resulting from purchase activity sinceSeptember 30, 2019 , which was funded by a combination of equity capital raised in 2019 and in the first quarter of 2020 and repurchase agreement financing. This increase during the nine-month period was partially offset by a decrease in net interest income related to the sale of higher yielding first loss POs within the Consolidated K-Series inMarch 2020 .
Portfolio Net Interest Margin
The following tables set forth certain information about our portfolio by investment category and their related interest income, interest expense, average yield on interest earning assets, average portfolio financing cost and portfolio net interest margin for our average interest earning assets (by investment category) for the three and nine months endedSeptember 30, 2020 and 2019, respectively (dollar amounts in thousands):
Three Months Ended
Multi- Single-Family Family Credit Credit (1) (3) (2) Other (7) Total Interest Income (4)$ 28,747 $ 7,846 $ 1,203 $ 37,796 Interest Expense (9,025) - (3,242) (12,267) Net Interest Income (Expense)$ 19,722
Average Interest Earning Assets (3) (5)$ 2,279,813
5.03 % 7.52 % 11.58 % 5.51 % Average Portfolio Financing Cost (7) (3.33) % - - (3.33) % Portfolio Net Interest Margin (8) 1.70 % 7.52 % 11.58 % 2.18 %
Three Months Ended
Multi- Single-Family Family Credit Agency (9) Credit (2) (3) Other (7) Total Interest Income (4)$ 6,512 $ 23,668 $ 28,413 $ 681 $ 59,274 Interest Expense (4,980) (10,499) (8,400) (3,424) (27,303)
Net Interest Income (Expense)
Average Interest Earning Assets (3) (5)$ 1,001,567 $ 1,772,485
2.60 % 5.34 % 10.29 % 10.38 % 6.07 % Average Portfolio Financing Cost (7) (2.38) % (4.27) % (4.29) % - (3.67) % Portfolio Net Interest Margin (8) 0.22 % 1.07 % 6.00 % 10.38 % 2.40 % 85
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Nine Months Ended
Multi- Single-Family Family Credit Agency (9) Credit (1) (3) (2) (3) Other (7) Total Interest Income (4)$ 6,401 $ 92,676 $ 46,914 $ 3,933 $ 149,924 Interest Expense (4,930) (27,138) (6,774) (9,948) (48,790)
Net Interest Income (Expense)
Average Interest Earning Assets (3) (5)$ 337,084 $ 2,444,464
2.46 % 5.05 % 8.98 % 11.27 % 5.66 % Average Portfolio Financing Cost (7) (2.25) % (3.12) % (3.41) % - (3.02) % Portfolio Net Interest Margin (8) 0.21 % 1.93 % 5.57 % 11.27 % 2.64 %
Nine Months Ended
Multi- Single-Family Family Credit Agency (9) Credit (2) (3) Other (7) Total Interest Income (4)$ 20,768 $ 61,842 $ 79,479 $ 710 $ 162,799 Interest Expense (17,225) (29,423) (22,003) (10,282) (78,933)
Net Interest Income (Expense)
Average Interest Earning Assets (3) (5)$ 1,046,265 $ 1,541,787
2.65 % 5.35 % 10.30 % 10.39 % 5.99 % Average Portfolio Financing Cost (7) (2.58) % (4.47) % (4.27) % - (3.73) % Portfolio Net Interest Margin (8) 0.07 % 0.88 % 6.03 % 10.39 % 2.26 % (1)The Company, through its ownership of certain securities purchased in the fourth quarter of 2019, has determined it is the primary beneficiary of Consolidated SLST and has consolidated Consolidated SLST into the Company's condensed consolidated financial statements. Interest income amounts represent interest income earned by securities that are owned by the Company. A reconciliation of net interest income generated by our single-family credit portfolio to our condensed consolidated financial statements for the three and nine months endedSeptember 30, 2020 , respectively, is set forth below (dollar amounts in thousands): Three Months Ended Nine Months Ended September 30, 2020 September 30, 2020 Interest income, residential loans $ 30,704 $ 94,424
Interest income, investment securities available for sale (a)
5,605 22,507 Interest expense, SLST CDOs (b) (7,562) (24,255) Interest income, Single-Family Credit, net 28,747 92,676 Interest expense, repurchase agreements (5,341) (22,617) Interest expense, Residential CDOs (b) (2,160) (2,527) Interest expense, securitized debt (1,524) (1,994) Net interest income, Single-Family Credit $ 19,722 $ 65,538 (a)Included in the Company's accompanying condensed consolidated statements of operations in interest income, investment securities and other interest earning assets. (b)Included in the Company's accompanying condensed consolidated statements of operations in interest expense, residential collateralized debt obligations. 86
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(2)Prior to the sale of first loss POs inMarch 2020 , the Company had determined it was the primary beneficiary of the Consolidated K-Series and had consolidated the Consolidated K-Series into the Company's condensed consolidated financial statements. Interest income amounts represent interest income earned by securities that were owned by the Company. A reconciliation of net interest income generated by our multi-family credit portfolio to our condensed consolidated financial statements for the three and nine months endedSeptember 30, 2020 and 2019, respectively, is set forth below (dollar amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Interest income, multi-family loans held in securitization trusts $ - $
139,818
2,546 3,419 8,960 11,117
Interest income, preferred equity and mezzanine loan investments
5,300 5,505 15,875 15,660
Interest expense, multi-family collateralized debt obligations
- (120,329) (129,762) (332,041) Interest income, Multi-Family Credit, net 7,846 28,413 46,914 79,479 Interest expense, repurchase agreements - (8,400) (6,774) (21,509) Interest expense, securitized debt - - - (494) Net interest income, Multi-Family Credit$ 7,846 $
20,013
(a)Included in the Company's accompanying condensed consolidated statements of operations in interest income, investment securities and other interest earning assets. (3)Average Interest Earning Assets for the periods indicated exclude cash and cash equivalents, all Consolidated SLST assets (for the three and nine months endedSeptember 30, 2020 ) and all Consolidated K-Series assets (for the nine months endedSeptember 30, 2020 and the three and nine months endedSeptember 30, 2019 ) other than, in each case, those securities owned by the Company. (4)Includes interest income earned on cash accounts held by the Company. (5)Average Interest Earning Assets is calculated each quarter based on daily average amortized cost for the respective periods. (6)Average Yield on Interest Earning Assets was calculated by dividing our annualized interest income relating to our interest earning assets by our Average Interest Earning Assets for the respective periods. (7)Average Portfolio Financing Cost was calculated by dividing our annualized interest expense relating to our interest earning assets by our average interest bearing liabilities, excluding our subordinated debentures and convertible notes, for the respective periods. For the three and nine months endedSeptember 30, 2020 and 2019, respectively, interest expense generated by our subordinated debentures and convertible notes is set forth below (dollar amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Subordinated debentures$ 483 $ 711 $ 1,714 $ 2,185 Convertible notes 2,759 2,713 8,234 8,097 Total$ 3,242 $ 3,424 $ 9,948 $ 10,282 (8)Portfolio Net Interest Margin is the difference between our Average Yield on Interest Earning Assets and our Average Portfolio Financing Cost, excluding the weighted average cost of subordinated debentures and convertible notes. (9)Includes Agency RMBS and Agency CMBS. 87
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Table of Contents Non-interest Income (Loss) Realized (Losses) Gains, Net The Company sold approximately$377.5 million and$2.5 billion of assets during the three and nine months endedSeptember 30, 2020 , respectively in response to the disruption of the financial markets caused by the COVID-19 pandemic. The following table presents the components of realized (losses) gains, net recognized for the three and nine months endedSeptember 30, 2020 and 2019, respectively (dollar amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Investment securities and related hedges$ (2,575) $ 5,013 $
(7,588)
1,508 1,089 419 (15,467) 10,741 (26,208)
Total realized (losses) gains, net
During the three months endedSeptember 30, 2020 , the Company recognized net realized losses of$2.6 million on the sale of non-Agency RMBS and CMBS while the Company recognized net realized gains of$5.0 million , primarily on sales of CMBS, during the three months endedSeptember 30, 2019 . Realized gain activity on residential loans in both three-month periods is primarily a result of loan prepayment activity. During the nine months endedSeptember 30, 2020 , the Company recognized net realized losses of$61.4 million on the sale of Agency RMBS, Agency CMBS, non-Agency RMBS and CMBS and realized losses of$73.1 million on the termination of interest rate swaps. The Company also recognized net realized losses on residential loans in 2020, primarily as a result of the sale of performing and re-performing loans. The Company sold residential loans with an aggregate unpaid principal balance of$116.4 million that resulted in net realized losses of$18.2 million during the nine months endedSeptember 30, 2020 , which was mostly incurred in the first quarter of 2020. During the nine months endedSeptember 30, 2019 , the Company recognized$21.8 million of net realized gains primarily on sales of certain Freddie Mac-sponsored multi-family loan K-Series first loss POs and IOs and CMBS. The Company also recognized net realized gains on residential loans during the nine months endedSeptember 30, 2019 , primarily as a result of sale activity and loan prepayments.
Realized Loss on De-consolidation of Multi-family Loans Held in Securitization Trusts and Multi-family Collateralized Debt Obligations, Net
InMarch 2020 , the Company sold its entire portfolio of first loss POs and certain mezzanine securities issued by the Consolidated K-Series. These sales, for total proceeds of approximately$555.2 million , resulted in the de-consolidation of each Consolidated K-Series as of the sale date of each first loss PO and a realized net loss on de-consolidation of multi-family loans held in securitization trusts and multi-family collateralized debt obligations of$54.1 million for the nine months endedSeptember 30, 2020 . The sales also resulted in the de-consolidation of$17.4 billion in multi-family loans held in securitization trusts and$16.6 billion in multi-family collateralized debt obligations.
Unrealized Gains (Losses), Net
The disruptions of the financial markets due to the COVID-19 pandemic caused credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets during the first quarter of 2020. These conditions put significant downward pressure on the fair value of our assets and resulted in unrealized losses for the first quarter. Pricing for our investment portfolio during the second and third quarters of 2020 rebounded with credit spreads tightening on a majority of our assets, which resulted in a partial reversal of unrealized losses recognized in the first quarter of 2020. The following table presents the components of unrealized gains (losses), net recognized for the three and nine months endedSeptember 30, 2020 and 2019, respectively (dollar amounts in thousands): 88
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Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Investment securities and related hedges$ 19,193 $ (13,336) $ 32,529 $ 9,303 $ (42,929) $ 52,232 Residential loans 35,726 16,818 18,908 (9,481) 34,580 (44,061) Consolidated SLST 27,145 - 27,145 (34,893) - (34,893) Consolidated K-Series - 7,630 (7,630) (171,011) 22,247 (193,258) Preferred equity and mezzanine loan investments (866) - (866) (6,629) - (6,629)
Total unrealized gains (losses), net
For the three months endedSeptember 30, 2020 , the Company recognized$81.2 million in net unrealized gains. The credit markets continued to improve in the third quarter, which translated to improved pricing across most of our asset classes.
For the nine months ended
Impairment of
InMarch 2020 , the Company sold its entire portfolio of first loss POs issued by the Consolidated K-Series, certain senior and mezzanine securities issued by the Consolidated K-Series, Agency CMBS and CMBS that were held by its multi-family investment reporting unit. As a result of the sales, the Company re-evaluated its goodwill balance associated with the multi-family investment reporting unit for impairment. This analysis yielded an impairment of the entire goodwill balance of$25.2 million for the nine months endedSeptember 30, 2020 .
Other Income
The following table presents the components of other income for the three and nine months endedSeptember 30, 2020 and 2019, respectively (dollar amounts in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Income from preferred equity investments accounted for as equity (1)$ 4,302 $ 2,458 $ 1,844 $ 7,364 $ 5,557 $ 1,807 Income from joint venture equity investments in multi-family properties 122 985 (863) (949) 6,331 (7,280) Income from entities that invest in residential properties and loans 5,542 431 5,111 8,158 826 7,332 Preferred equity and mezzanine loan premiums resulting from early redemption (2) 463 - 463 518 3,364 (2,846) Losses in Consolidated VIEs (3) (159) (185) 26 (2,280) (2,158) (122) Income from real estate held for sale in consolidated variable interest entities - - - - 215 (215) Miscellaneous income 127 249 (122) 2,099 485 1,614 Total other income$ 10,397 $ 3,938 $ 6,459 $ 14,910 $ 14,620 $ 290 (1)Includes income earned from preferred equity ownership interests in entities that invest in multi-family properties accounted for under the equity method of accounting. (2)Includes premiums resulting from early redemptions of preferred equity and mezzanine loan investments accounted for as loans. 89
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(3)Losses in Consolidated VIEs exclude income or loss from the Consolidated K-Series and Consolidated SLST and are offset by allocations of losses or increased by allocations of income to non-controlling interests in the respective Consolidated VIEs, resulting in net losses to the Company of$0.1 million for the three months endedSeptember 30, 2020 and 2019 and$1.1 million and$1.5 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The increase in other income during both the three- and nine-month periods is primarily due to an increase in the income generated by the Company's investment in entities that invest in residential properties and loans resulting from realized gains on sale and unrealized gains recognized by these entities as well as an increase in income from preferred equity investments accounted for as equity due to additional investments made sinceSeptember 30, 2019 . The increase during both the three- and nine-month periods was partially offset by a decrease in income from joint venture equity investments in multi-family properties due to the redemption of these investments. The increase in other income during the nine-month periods was also partially offset by a decrease in income related to the redemptions of preferred equity and mezzanine loan investments as a result of fewer redemptions in 2020. Expenses
The following tables present the components of general, administrative and
operating expenses for the three and nine months ended
Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change General and Administrative Expenses Salaries, benefits and directors' compensation$ 7,247 $ 5,780 $ 1,467 $ 23,018 $ 17,943 $ 5,075 Professional fees 1,176 983 193 4,113 3,263 850 Other 2,106 1,551 555 6,026 5,833 193 Total general and administrative expenses$ 10,529 $ 8,314 $ 2,215 $ 33,157 $ 27,039 $ 6,118 The increase in compensation in the three- and nine-month periods is primarily due to an increase in employee headcount as part of the expansion of our investment platforms. Professional fees also increased in the nine-month periods as a result of additional legal expenses incurred inMarch 2020 in connection with the disruptions in the financial markets. Other expenses increased in the three-month periods due mainly to increased technology costs related to overall asset growth and tools to enhance efficiencies for working remotely. Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change Operating Expenses Expenses related to residential loans$ 2,895 $ 3,974 $ (1,079) $ 8,225 $ 9,805 $ (1,580) Expenses related to real estate held for sale in Consolidated VIEs - - - - 482 (482) Total$ 2,895 $ 3,974 $ (1,079) $ 8,225 $ 10,287 $ (2,062)
The decrease in expenses related to residential loans for the three- and nine-month periods can be attributed primarily to a reduction in investment activity related to residential loans in 2020.
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Comprehensive Income (Loss)
The main components of comprehensive income (loss) for the three and nine months endedSeptember 30, 2020 and 2019, respectively, are detailed in the following table (dollar amounts in thousands): Nine Months Ended Three Months Ended September 30, September 30, 2020 2019 $ Change 2020 2019 $ Change NET INCOME (LOSS) ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS$ 91,344 $ 34,835 $ 56,509 $ (399,819) $ 89,528 $ (489,347) OTHER COMPREHENSIVE INCOME (LOSS) Increase (decrease) in fair value of available for sale securities Agency RMBS - 5,405 (5,405) - 35,173 (35,173) Non-Agency RMBS 11,161 6,972 4,189 (34,946) 12,640 (47,586) CMBS 1,484 2,979 (1,495) (9,462) 14,347 (23,809) Total 12,645 15,356 (2,711) (44,408) 62,160 (106,568) Reclassification adjustment for net loss (gain) included in net income (loss) 9,845 (4,444) 14,289 7,338 (18,109) 25,447 TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 22,490 10,912 11,578 (37,070) 44,051 (81,121) COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS$ 113,834 $ 45,747 $ 68,087 $ (436,889) $ 133,579 $ (570,468) The changes in other comprehensive income ("OCI") for the three-month periods can be attributed primarily to the reversal of previously recognized net unrealized losses reported in OCI that were reclassified to net realized loss as a result of the sale of certain investment securities during the third quarter of 2020. The changes in OCI for the nine-month periods can be attributed primarily to a decrease in the fair value of our investment securities where fair value option was not elected as a result of significant spread widening during the first quarter of 2020 due to the market turmoil caused by the COVID-19 pandemic. These losses were partially offset by fair value increases during the second and third quarters of 2020 as well as the reversal of previously recognized net unrealized losses reported in OCI that were reclassified to net realized loss as a result of the sale of certain investment securities in 2020. Beginning in the fourth quarter of 2019, the Company's newly purchased investment securities are presented at fair value as a result of a fair value election made at the time of acquisition pursuant to ASC 825, Financial Instruments ("ASC 825"). The fair value option was elected for these investment securities to provide stockholders and others who rely on our financial statements with a more complete and accurate understanding of our economic performance. Changes in the market values of investment securities where the Company elected the fair value option are reflected in earnings instead of in OCI. 91
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Balance Sheet Analysis
As of
As ofDecember 31, 2019 , we had approximately$23.5 billion of total assets,$17.9 billion of which represented assets comprising the Consolidated K-Series that we consolidated in accordance with GAAP. The Company subsequently sold its first loss POs and certain mezzanine securities issued by the Consolidated K-Series resulting in the de-consolidation of$17.4 billion in multi-family loan assets. The Company had no claims to the assets or obligations for the liabilities of the Consolidated K-Series (other than those securities that were owned by the Company). As ofDecember 31, 2019 , Consolidated SLST assets amounted to approximately$1.3 billion .
For a reconciliation of our actual interests in Consolidated SLST and the Consolidated K-Series to our financial statements, see "Capital Allocation" and "Portfolio Net Interest Margin" above.
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AtSeptember 30, 2020 , our investment securities portfolio included non-Agency RMBS, CMBS and ABS, which are classified as investment securities available for sale. Our securities investments also included first loss subordinated securities and certain IOs issued by Consolidated SLST. AtSeptember 30, 2020 , we had no investment securities in a single issuer or entity that had an aggregate book value in excess of 5% of our total assets. The decrease in the carrying value of our investment securities as ofSeptember 30, 2020 as compared toDecember 31, 2019 is due to our$2.4 billion in asset sales related, in part, to our response to the significant disruption in the financial markets caused by the COVID-19 pandemic and opportunistic dispositions, including$1.1 billion of our entire portfolio of Agency securities (including Agency RMBS issued by Consolidated SLST),$555.2 million of first loss POs and certain mezzanine securities issued by the Consolidated K-Series,$428.3 million of non-Agency RMBS and$248.7 million of CMBS. The decrease in carrying value was also due to a decline in the fair value of a number of our investment securities sinceDecember 31, 2019 as a result of the ongoing pandemic. 93
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The following tables summarize our investment securities portfolio as ofSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands): September 30, 2020 Unrealized Weighted Average Outstanding Repurchase Investment Securities Current Par Value Amortized Cost Gains Losses Fair Value Coupon (1) Yield (2) Agreements Available for Sale ("AFS") Non-Agency RMBS Senior $ 112,947$ 113,238 $ -$ (6,457) $ 106,781 4.00 % 4.16 % $ - Mezzanine 215,089 212,055 425 (8,884) 203,596 4.04 % 4.60 % - Subordinated 78,183 67,876 - (6,950) 60,926 4.28 % 5.32 % - IO 545,549 6,890 153 (2,581) 4,462 0.44 % 5.91 % - Total Non-Agency RMBS 951,768 400,059 578 (24,872) 375,765 1.83 % 4.55 % - CMBS Mezzanine 106,153 101,146 4,098 (3,493) 101,751 4.32 % 4.81 % - Subordinated 6,000 6,000 - (960) 5,040 7.97 % 7.97 % - IO 12,268,487 77,549 387 (1,802) 76,134 0.10 % 4.71 % - Total CMBS 12,380,640 184,695 4,485 (6,255) 182,925 0.14 % 4.84 % - ABS Residuals 113 39,519 5,488 - 45,007 - 11.27 % - Total ABS 113 39,519 5,488 - 45,007 - 11.27 % - Total - AFS$ 13,332,521 $ 624,273 $ 10,551 $ (31,127) $ 603,697 0.50 % 5.11 % $ - Consolidated SLST Non-Agency RMBS Subordinated $ 256,807$ 214,012 $ -$ (31,901) $ 182,111 4.67 % 4.96 % $ - IO 214,548 31,866 - (3,075) 28,791 3.50 % 8.25 % - Total Non-Agency RMBS 471,355 245,878 - (34,976) 210,902 4.13 % 5.40 % -
Total - Consolidated SLST $ 471,355
$ -$ (34,976) $ 210,902 4.13 % 5.40 % $ -
$ 10,551 $ (66,103) $ 814,599 0.54 % 5.19 % $ - (1)Our weighted average coupon was calculated by dividing our annualized coupon income by our weighted average current par value for the respective periods. (2)Our weighted average yield was calculated by dividing our annualized interest income by our weighted average amortized cost for the respective periods. 94
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Table of Contents December 31, 2019 Unrealized Weighted Average Outstanding Repurchase Investment Securities Current Par Value Amortized Cost
Gains Losses Fair Value Coupon (1) Yield (2) Agreements Available for Sale ("AFS") Agency RMBS Agency Fixed-Rate $ 836,223$ 867,236 $ 7,397 $ (6,162) $ 868,471 3.38 % 2.61 %$ 746,834 Agency ARMs 53,038 55,740 13 (1,347) 54,406 3.21 % 1.68 % 41,765 Total Agency RMBS 889,261 922,976 7,410 (7,509) 922,877 3.37 % 2.55 % 788,599 Agency CMBS Senior 51,184 51,334 19 (395) 50,958 2.45 % 2.41 % 48,640 Total Agency CMBS 51,184 51,334 19 (395) 50,958 2.45 % 2.41 % 48,640Total Agency 940,445 974,310 7,429 (7,904) 973,835 3.36 % 2.55 % 837,239 Non-Agency RMBS Senior 260,604 260,741 1,971 (13) 262,699 4.65 % 4.66 % 194,024 Mezzanine 285,760 281,743 8,713 - 290,456 5.24 % 5.59 % 179,424 Subordinated 150,961 150,888 2,518 (2) 153,404 5.64 % 5.66 % 70,390 IO 842,577 8,211 1,790 (1,246) 8,755 0.42 % 5.93 % - Total Non-Agency RMBS 1,539,902 701,583 14,992 (1,261) 715,314 2.68 % 5.26 % 443,838 CMBS Mezzanine 261,287 254,620 13,300 (143) 267,777 5.00 % 5.37 % 142,230 Total CMBS 261,287 254,620 13,300 (143) 267,777 5.00 % 5.37 % 142,230 ABS Residuals 113 49,902 - (688) 49,214 - 10.70 % - Total ABS 113 49,902 - (688) 49,214 - 10.70 % - Total - AFS$ 2,741,747 $ 1,980,415 $ 35,721 $ (9,996) $ 2,006,140 3.25 % 3.71 %$ 1,423,307 Consolidated K-Series Agency CMBS Senior $ 86,355$ 88,784 $ -$ (425) $ 88,359 2.74 % 2.34 %$ 84,544 Total Agency CMBS 86,355 88,784 - (425) 88,359 2.74 % 2.34 % 84,544 CMBS Mezzanine 92,926 83,264 12,271 - 95,535 4.21 % 5.70 % 59,579 PO 1,375,874 654,849 169,678 - 824,527 - 13.98 % 571,403 IO 12,364,412 83,960 138 (224) 83,874 0.10 % 4.66 % 38,678 Total CMBS 13,833,212 822,073 182,087 (224) 1,003,936 0.13 % 12.10 % 669,660 Total - Consolidated K-Series$ 13,919,567 $ 910,857 $ 182,087 $ (649) $ 1,092,295 0.13 % 11.92 %$ 754,204 Consolidated SLST Agency RMBS Senior $ 25,902$ 26,227 $ 11 $ -$ 26,238 2.83 % 2.53 %$ 24,143 95
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Table of Contents Total Agency RMBS 25,902 26,227 11 - 26,238 2.83 % 2.53 % 24,143 Non-Agency RMBS Subordinated 256,093 215,034 - (275) 214,759 5.62 % 7.23 % 150,448 IO 228,437 35,592 181 - 35,773 3.60 % 8.58 % - Total Non-Agency RMBS 484,530 250,626 181 (275) 250,532 4.67 % 7.42 % 150,448
Total - Consolidated SLST
4.58 %
6.96 %
0.69 % 6.02 %$ 2,352,102 (1)Our weighted average coupon was calculated by dividing our annualized coupon income by our weighted average current par value for the respective periods. (2)Our weighted average yield was calculated by dividing our annualized interest income by our weighted average amortized cost for the respective periods. 96
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Consolidated SLST and Consolidated K-Series
Consolidated SLST
The Company owns first loss subordinated securities and certain IOs issued by a Freddie Mac-sponsored residential loan securitization. In accordance with GAAP, the Company has consolidated the underlying seasoned re-performing and non-performing residential loans of the securitization and the SLST CDOs issued to permanently finance these residential loans, representing Consolidated SLST. We do not have any claims to the assets or obligations for the liabilities of Consolidated SLST (other than those securities owned by the Company). Our investment in Consolidated SLST as ofSeptember 30, 2020 was limited to the RMBS comprised of first loss subordinated securities and IOs issued by the securitization with an aggregate net carrying value of$210.9 million . InMarch 2020 , we sold our entire investment in the senior securities issued by Consolidated SLST. As ofDecember 31, 2019 , our investment in Consolidated SLST was limited to the RMBS comprised of first loss subordinated securities, IOs and senior securities with an aggregate carrying value of$276.8 million .
The following table details the loan characteristics of the underlying
residential loans that back our first loss subordinated securities of
Consolidated SLST as of
September 30, 2020 December 31, 2019 Current balance of loans$ 1,259,063 $ 1,322,131 Number of loans 7,797 8,103 Current average loan size $ 161,480 $ 162,804 Weighted average original loan term (in months) 351 351 Weighted average LTV at purchase 67.0 % 66.2 % Weighted average credit score at purchase 710 711 Current Coupon: 3.00% or less 3.2 % 3.8 % 3.01% - 4.00% 36.3 % 35.2 % 4.01% - 5.00% 40.0 % 40.2 % 5.01% - 6.00% 12.3 % 12.4 % 6.01% and over 8.2 % 8.4 % Delinquency Status: Current 64.0 % 47.6 % 31 - 60 13.6 % 35.5 % 61 - 90 8.6 % 13.1 % 90+ 13.8 % 3.8 % Origination Year: 2005 or earlier 31.0 % 30.9 % 2006 15.3 % 15.4 % 2007 20.9 % 20.7 % 2008 or later 32.8 % 33.0 % Geographic state concentration (greater than 5.0%): California 10.9 % 11.0 % Florida 10.5 % 10.6 % New York 9.2 % 9.1 % New Jersey 7.0 % 6.9 % Illinois 6.7 % 6.6 % 97
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Consolidated K-Series
InMarch 2020 , in response to the market turmoil related to the COVID-19 pandemic, the Company elected to sell its entire portfolio of first loss POs and certain mezzanine securities issued by the Consolidated K-Series. The Consolidated K-Series were comprised of multi-family mortgage loans held in, and related debt issued by, Freddie Mac-sponsored multi-family loan K-Series securitizations of which we, or one of our SPEs, owned the first loss POs and, in certain cases, IOs and/or senior or mezzanine securities issued by these securitizations. We determined that the securitizations comprising the Consolidated K-Series were VIEs and that we were the primary beneficiary of these securitizations. Accordingly, we were required to consolidate the Consolidated K-Series' underlying multi-family loans and related debt, income and expense in our condensed consolidated financial statements. The sales of the first loss POs and certain mezzanine securities issued by the Consolidated K-Series, for total proceeds of approximately$555.2 million , resulted in the de-consolidation of each Consolidated K-Series as of the sale date of each first loss PO, a realized net loss on de-consolidation of multi-family loans held in securitization trusts and multi-family collateralized debt obligations of$54.1 million and reversal of previously recognized net unrealized gains of$168.5 million . The sales also resulted in the de-consolidation of$17.4 billion in multi-family loans held in securitization trusts and$16.6 billion in multi-family collateralized debt obligations. Also inMarch 2020 , the Company transferred its remaining IOs and mezzanine and senior securities owned in the Consolidated K-Series with a fair value of approximately$237.3 million to investment securities available for sale. As ofDecember 31, 2019 , we owned 100% of the first loss POs of the Consolidated K-Series. We did not have any claims to the assets (other than those securities owned by the Company) or obligations for the liabilities of the Consolidated K-Series. Our investment in the Consolidated K-Series was limited to the multi-family CMBS comprised of first loss POs, and, in certain cases, IOs, senior or mezzanine securities, issued by these K-Series securitizations with an aggregate net carrying value of$1.1 billion as ofDecember 31, 2019 .
Multi-family CMBS - Consolidated K-Series Loan Characteristics:
The following table details the loan characteristics of the underlying
multi-family mortgage loans that backed our multi-family CMBS first loss POs as
of
December 31, 2019 Current balance of loans$ 16,759,382 Number of loans 828 Weighted average original LTV 68.2 % Weighted average underwritten debt service coverage ratio
1.48x
Current average loan size $
20,241
Weighted average original loan term (in months)
125
Weighted average current remaining term (in months) 84 Weighted average loan rate 4.12 % First mortgages 100 % Geographic state concentration (greater than 5.0%):California 15.9 %Texas 12.4 %Florida 6.2 %Maryland 5.8 % 98
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Investment Securities Financing
Repurchase Agreements
InMarch 2020 , in reaction to the market turmoil related to the COVID-19 pandemic, our repurchase agreement providers dramatically changed their risk tolerances, including reducing or eliminating availability to add or roll maturing repurchase agreements, increased haircuts and reduced security valuations. In turn, this led to significant disruptions in our financing markets, negatively impacting the Company as well as the entire mortgage REIT industry. In response, the Company has completely eliminated its securities repurchase agreement exposure since mid-March. The Company will continue to evaluate the securities repurchase agreement market before increasing its exposure in the future. The Company has historically financed its investment securities primarily through repurchase agreements with third-party financial institutions. These repurchase agreements are short-term financings that bear interest rates typically based on a spread to LIBOR and are secured by the investment securities which they finance. Upon entering into a financing transaction, our counterparties negotiate a "haircut", which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will advance to us. The size of the haircut represents the counterparty's perceived risk associated with holding the investment securities as collateral. The haircut provides counterparties with a cushion for daily market value movements that reduce the need for margin calls or margins to be returned as normal daily changes in investment security market values occur. The following table details the quarterly average balance, ending balance and maximum balance at any month-end during each quarter in 2020, 2019 and 2018 for our repurchase agreements secured by investment securities (dollar amounts in thousands): Quarterly Average End of Quarter Maximum Balance Quarter Ended Balance Balance at any Month-End September 30, 2020 $ 29,190 $ - $ 87,571 June 30, 2020 108,529 87,571 150,445 March 31, 2020 1,694,933 713,364 2,237,399 December 31, 2019 2,212,335 2,352,102 2,352,102 September 30, 2019 1,776,741 1,823,910 1,823,910 June 30, 2019 1,749,293 1,843,815 1,843,815 March 31, 2019 1,604,421 1,654,439 1,654,439 December 31, 2018 1,372,459 1,543,577 1,543,577 September 30, 2018 1,144,080 1,130,659 1,163,683 June 30, 2018 1,230,648 1,179,961 1,279,121 March 31, 2018 1,287,939 1,287,314 1,297,949 Securitized Debt InJune 2020 , the Company completed a re-securitization of certain non-Agency RMBS primarily for the purpose of obtaining non-recourse, longer-term financing on a portion of its non-Agency RMBS portfolio. The Company received net cash proceeds of approximately$109.0 million after deducting expenses associated with the re-securitization transaction. The Company had a net investment in the re-securitization of$93.3 million as ofSeptember 30, 2020 .
The following table summarizes the Company's securitized debt collateralized by
non-Agency RMBS as of
Pass-through Rate of Principal Amount Carrying Value (1) Notes Issued (2) One-month LIBOR plus Non-Agency RMBS re-securitization $ 89,916 $ 88,791 5.25% 99
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(1)Classified as securitized debt in the liability section of the Company's accompanying condensed consolidated balance sheets. The securitized debt is non-recourse debt for which the Company has no obligation. (2)Represents the pass-through rate through the payment date inDecember 2021 . Pass-through rate increases to one-month LIBOR plus 7.75% for payment dates in or afterJanuary 2022 . 100
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Residential Loans
As ofSeptember 30, 2020 , all of Company's acquired residential loans, including distressed residential loans, non-QM loans, second mortgages and residential bridge loans, are presented at fair value on its condensed consolidated balance sheets. Subsequent changes in fair value are reported in current period earnings and presented in unrealized gains (losses), net on the Company's condensed consolidated statements of operations. The following table details our distressed residential and other residential loans atSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands): September 30, 2020 December 31, 2019 Unpaid Number of Loans Principal Carrying Value Number of Loans Unpaid Principal Carrying Value Distressed Residential Loans (1) 6,632$ 981,025 $ 954,725 7,713$ 1,131,855 $ 1,098,867 Other Residential Loans (2) 2,873$ 598,192 $ 578,059 2,700 $ 547,379$ 533,643 (1)As ofDecember 31, 2019 , the Company had 5,696 distressed residential loans with aggregate unpaid principal of$964.8 million and an aggregate carrying value of$940.1 million accounted for at fair value. The Company also had 2,017 distressed residential loans with aggregate unpaid principal of$167.0 million and an aggregate carrying value of$158.7 million accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality as ofDecember 31, 2019 . (2)As ofDecember 31, 2019 , the Company had 2,534 other residential loans with an aggregate unpaid principal balance of$500.1 million and an aggregate carrying value of$489.6 million accounted for at fair value. The Company also had 166 residential loans held in securitization trusts with an aggregate unpaid principal balance of$47.2 million and an aggregate carrying value of$44.0 million accounted for at amortized cost as ofDecember 31, 2019 . Characteristics of Our Residential Loans: Loan to Value at Purchase (1) September 30, 2020 December 31, 2019 50.00% or less 14.7 % 15.4 % 50.01% - 60.00% 12.0 % 12.6 % 60.01% - 70.00% 19.9 % 17.9 % 70.01% - 80.00% 19.9 % 18.5 % 80.01% - 90.00% 13.6 % 14.5 % 90.01% - 100.00% 9.8 % 10.0 % 100.01% and over 10.1 % 11.1 % Total 100.0 % 100.0 % (1)For second mortgages, the Company calculates the combined loan to value. For residential bridge loans, the Company calculates as the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated "after repaired" value of the collateral securing the related loan. FICO Scores at Purchase September 30, 2020 December 31, 2019 550 or less 21.9 % 22.1 % 551 to 600 19.5 % 20.4 % 601 to 650 16.9 % 17.1 % 651 to 700 14.8 % 14.2 % 701 to 750 12.1 % 12.1 % 751 to 800 10.9 % 10.4 % 801 and over 3.9 % 3.7 % Total 100.0 % 100.0 % 101
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Current Coupon September 30, 2020 December 31, 2019 3.00% or less 5.5 % 5.1 % 3.01% - 4.00% 21.4 % 17.1 % 4.01% - 5.00% 35.4 % 38.4 % 5.01% - 6.00% 14.0 % 18.1 % 6.01% and over 23.7 % 21.3 % Total 100.0 % 100.0 % Delinquency Status September 30, 2020 December 31, 2019 Current 83.6 % 80.8 % 31 - 60 days 4.3 % 6.4 % 61 - 90 days 2.2 % 2.6 % 90+ days 9.9 % 10.2 % Total 100.0 % 100.0 % Origination Year September 30, 2020 December 31, 2019 2007 or earlier 55.5 % 59.3 % 2008 - 2016 10.8 % 13.8 % 2017 4.8 % 6.1 % 2018 9.8 % 11.0 % 2019 15.1 % 9.8 % 2020 4.0 % - Total 100.0 % 100.0 % 102
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Table of Contents Residential Loan Financing Repurchase Agreements As ofSeptember 30, 2020 , the Company has repurchase agreements with three third-party financial institutions to fund the purchase of residential loans, including both first and second mortgages. The following table presents detailed information about these repurchase agreements and associated assets pledged as collateral atSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands): Maximum Aggregate Outstanding Carrying Value Weighted Average Uncommitted Repurchase of Loans Pledged Weighted Average Months to Maturity Principal Amount Agreements (1) Rate (2) September 30, 2020$ 1,247,483 $ 673,787 $ 938,572 2.46 % 2.96 December 31, 2019$ 1,200,000 $ 754,132 $ 961,749 3.67 % 11.20
(1)Includes residential loans, at fair value of
The following table details the quarterly average balance, ending balance and maximum balance at any month-end during each quarter in 2020, 2019 and 2018 for our repurchase agreements secured by residential loans, including both first and second mortgages (dollar amounts in thousands): Quarterly Average End of Quarter Maximum Balance Quarter Ended Balance Balance at any Month-End September 30, 2020 $ 651,384$ 673,787 $ 673,787 June 30, 2020 892,422 876,923 905,776 March 31, 2020 731,245 715,436 744,522 December 31, 2019 764,511 754,132 774,666 September 30, 2019 745,972 736,348 755,299 June 30, 2019 705,817 761,361 761,361 March 31, 2019 595,897 619,605 619,605 December 31, 2018 301,956 589,148 589,148 September 30, 2018 179,241 177,378 181,574 June 30, 2018 176,951 192,553 197,263 March 31, 2018 150,537 149,535 153,236
Residential Collateralized Debt Obligations
Included in our portfolio are residential loans held in securitization trusts that are pledged as collateral for the Residential CDOs issued by the Company. As ofSeptember 30, 2020 andDecember 31, 2019 , we had Residential CDOs outstanding of$268.8 million and$40.4 million , respectively. The Company's net investment in the residential securitization trusts, which is the maximum amount of the Company's investment that is at risk to loss and represents the difference between (i) the carrying amount of the residential loans, real estate owned and receivables held in residential securitization trusts and (ii) the amount of Residential CDOs outstanding, was$98.0 million and$4.9 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , the weighted average interest rate of these Residential CDOs was 3.57% and 2.41%, respectively. 103
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Multi-Family Preferred Equity and Mezzanine Loan InvestmentsThe Company invests in preferred equity in, and mezzanine loans to, entities that have significant multi-family real estate assets (referred to in this section as "Preferred Equity and Mezzanine Loans"). A preferred equity investment is an equity investment in the entity that owns the underlying property and mezzanine loans are secured by a pledge of the borrower's equity ownership in the property. We evaluate our Preferred Equity and Mezzanine Loans for accounting treatment as loans versus equity investments. Preferred Equity and Mezzanine Loans, for which the characteristics, facts and circumstances indicate that loan accounting treatment is appropriate are included in preferred equity and mezzanine loan investments on our condensed consolidated balance sheets. Preferred Equity and Mezzanine Loans where the risks and payment characteristics are equivalent to an equity investment are accounted for using the equity method of accounting and are included in investments in unconsolidated entities on our condensed consolidated balance sheets. As ofSeptember 30, 2020 , one preferred equity investment representing 1% of the total fair value of our Preferred Equity and Mezzanine Loans was greater than 90 days delinquent. As ofJanuary 1, 2020 , the Company has elected to account for its Preferred Equity and Mezzanine Loans using the fair value option. Accordingly, balances presented below as ofSeptember 30, 2020 are stated at fair value. The following tables summarize our Preferred Equity and Mezzanine Loans as ofSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands):
Weighted Average Interest or Weighted Average Fair Value (1) Investment Preferred Return Remaining Life Count (2) Amount (2) Rate (3) (Years) Preferred equity investments 47$ 323,536 $ 332,556 11.45 % 6.8 Mezzanine loans 2 4,868 5,176 11.58 % 30.4 Total 49$ 328,404 $ 337,732 11.45 % 7.1 December 31, 2019 Weighted Average Interest or Weighted Average Carrying Amount Investment Preferred Return Remaining Life Count (1) (2) Amount (2) Rate (3) (Years)
Preferred equity investments 42$ 279,908 $ 282,064 11.39 % 7.8 Mezzanine loans 3 6,220 6,235 11.95 % 25.8 Total 45$ 286,128 $ 288,299 11.40 % 8.2 (1)Preferred equity and mezzanine loan investments in the amounts of$183.2 million and$180.0 million are included in preferred equity and mezzanine loan investments on the accompanying condensed consolidated balance sheets as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. Preferred equity investments in the amounts of$145.3 million and$106.1 million are included in investments in unconsolidated entities on the accompanying condensed consolidated balance sheets as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. (2)The difference between the fair value and investment amount as ofSeptember 30, 2020 consists of any unamortized premium or discount, deferred fees or deferred expenses, and any unrealized gain or loss. The difference between the carrying amount and the investment amount as ofDecember 31, 2019 consists of any unamortized premium or discount, deferred fees or deferred expenses. (3)Based upon investment amount and contractual interest or preferred return rate. 104
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Preferred Equity and Mezzanine Loans Characteristics:
Combined Loan to Value at Investment September 30, 2020 December 31, 2019 60.01% - 70.00% 9.6 % - 70.01% - 80.00% 19.6 % 23.4 % 80.01% - 90.00% 69.1 % 76.6 % 90.01% - 100.00% 1.7 % - Total 100.0 % 100.0 % 105
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Equity Investments in Multi-Family and Residential Entities
Multi-Family Joint Venture Equity Investments
The Company's joint venture equity investment in an entity that owned a multi-family real estate asset was redeemed during the three months endedSeptember 30, 2020 . We received variable distributions from this investment on a pari passu basis based upon property performance and recorded our position at fair value. The following table summarizes our multi-family joint venture equity investment as ofDecember 31, 2019 (dollar amounts in thousands): December 31, 2019 Property Location Ownership Interest Fair Value The Preserve at Port Royal Venture, LLC (1) Port Royal, SC 77%$ 18,310
(1)The Company's joint venture equity investment was redeemed during the three
months ended
Equity Investments in Entities that Invest in
The Company has ownership interests in entities that invest in residential properties and loans. We may receive variable distributions from these investments based upon underlying asset performance and record our positions at fair value. The following table summarizes our ownership interests in entities that invest in residential properties and loans as ofSeptember 30, 2020 andDecember 31, 2019 , respectively (dollar amounts in thousands): September 30, 2020 December 31, 2019 Ownership Strategy Ownership Interest Fair Value Interest Fair Value Morrocroft Neighborhood Single-Family Rental Stabilization Fund II, LP Properties 11%$ 12,602 11%$ 11,796 Headlands Asset Management Fund Residential LoansIII (Cayman), LP (Headlands Flagship Opportunity Fund Series I) 49% 60,854 49% 53,776 Total$ 73,456 $ 65,572 106
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Derivative Assets and Liabilities
The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, swaptions, futures, options on futures and mortgage derivatives such as forward-settling purchases and sales of Agency RMBS where the underlying pools of mortgage loans are "To-Be-Announced," or TBAs. Our derivative instruments were comprised of interest rate swaps that we used to hedge variable cash flows associated with our variable rate borrowings. We typically paid a fixed rate and received a floating rate based on one- or three- month LIBOR, on the notional amount of the interest rate swaps. The floating rate we received under our swap agreements had the effect of offsetting the repricing characteristics and cash flows of our financing arrangements. InMarch 2020 , in response to the turmoil in the financial markets, we terminated our interest rate swaps, recognizing a realized loss of$73.1 million which was partially offset by a reversal of$29.0 million in unrealized losses, resulting in a total net loss of$44.1 million for the nine months endedSeptember 30, 2020 . We did not recognize any realized gains or losses and unrealized gains and losses during the three months endedSeptember 30, 2020 . We did not recognize any realized gains or losses during the three and nine months endedSeptember 30, 2019 . We recognized unrealized losses of$12.6 million and$42.2 million on our interest rate swaps for the three and nine months endedSeptember 30, 2019 , respectively. Unrealized gains and losses include the change in market value, period over period, generally as a result of changes in interest rates and reversals of previously recognized unrealized gains or losses upon termination. Derivative financial instruments may contain credit risk to the extent that the institutional counterparties may be unable to meet the terms of the agreements. All of the Company's interest rate swaps were cleared through CME Group Inc. ("CME Clearing") which is the parent company of theChicago Mercantile Exchange Inc. CME Clearing serves as the counterparty to every cleared transaction, becoming the buyer to each seller and the seller to each buyer, limiting the credit risk by guaranteeing the financial performance of both parties and netting down exposures. 107
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Debt
The Company's debt as of
Convertible Notes
As ofSeptember 30, 2020 , the Company had$138.0 million aggregate principal amount of its 6.25% Senior Convertible Notes due 2022 (the "Convertible Notes") outstanding. The Convertible Notes were issued at a discount with a total cost to the Company of approximately 8.24%.
Subordinated Debentures
As ofSeptember 30, 2020 , certain of our wholly-owned subsidiaries had trust preferred securities outstanding of$45.0 million with a weighted average interest rate of 4.08% which are due in 2035. The securities are fully guaranteed by us with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of our condensed consolidated balance sheets. 108
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Balance Sheet Analysis - Company's Stockholders' Equity
The Company's stockholders' equity atSeptember 30, 2020 was$2.3 billion and included$11.9 million of accumulated other comprehensive loss. The accumulated other comprehensive loss atSeptember 30, 2020 consisted primarily of$12.6 million in net unrealized losses related to our non-Agency RMBS and$0.6 million in net unrealized gains related to our CMBS. The Company's stockholders' equity atDecember 31, 2019 was$2.2 billion and included$25.1 million of accumulated other comprehensive income. The accumulated other comprehensive income atDecember 31, 2019 consisted primarily of$12.6 million in net unrealized gains related to our CMBS and$12.5 million in net unrealized gains related to our non-Agency RMBS. 109
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Liquidity and Capital Resources
General
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, comply with margin requirements, fund our operations, pay dividends to our stockholders and other general business needs. Generally, our investments and assets generate liquidity on an ongoing basis through principal and interest payments, prepayments, net earnings retained prior to payment of dividends and distributions from unconsolidated investments. In addition, we may generate liquidity through the sale of assets from our investment portfolio. As discussed throughout this Quarterly Report on Form 10-Q, the COVID-19 pandemic driven disruptions in the real estate, mortgage and financial markets have negatively affected and may negatively affect our liquidity in the future. InMarch 2020 , we observed a mark-down of a portion of our assets by the counterparties to our repurchase agreements, resulting in us having to pay cash or additional securities to counterparties to satisfy margin calls that were well beyond historical norms. To conserve capital, protect assets and to pause the escalating negative impacts caused by the market dislocation and allow the markets for many of our assets to stabilize, onMarch 23, 2020 , we notified our repurchase agreement counterparties that we did not expect to fund the existing and anticipated future margin calls under our repurchase agreements and commenced discussions with our counterparties with regard to entering into forbearance agreements. In response to these conditions, we have focused on improving liquidity and long-term capital preservation by taking the actions described below. StartingMarch 23, 2020 and through the period endedJune 30, 2020 , we sold a total of$2.1 billion in assets, including the sale of 100% of our Agency securities portfolio, all of our first loss multi-family POs and a portion of our non-Agency RMBS, CMBS and residential loan portfolios for proceeds of$1.1 billion ,$555.2 million ,$168.8 million ,$138.1 million and$93.8 million , respectively. ByApril 7, 2020 , we were again current with our repurchase payment obligations and no longer in a position to need forbearance agreements from our repurchase agreement counterparties. During the third quarter of 2020, we selectively disposed of non-Agency RMBS and CMBS for proceeds of$370.2 million . Moreover, during the second and third quarters of 2020, we completed two securitization transactions generating proceeds to us of$350.1 million . We used the proceeds from these sales and securitization transactions to pay down our repurchase agreement financing, reducing our portfolio leverage to 0.3 times as ofSeptember 30, 2020 . AtSeptember 30, 2020 , we had$649.8 million of cash and cash equivalents,$682.8 million of unencumbered securities (including Consolidated SLST),$238.7 million of unencumbered residential loans and$328.4 million of unencumbered preferred equity investments in and mezzanine loans to owners of multi-family properties. Both of our residential and multi-family asset management teams have been active in responding to the government assistance programs instituted in response to the impacts of the COVID-19 pandemic providing relief to residential and multi-family loan borrowers. At this time, we are endeavoring to work with any of our borrowers or operating partners that require relief because of the pandemic. As ofSeptember 30, 2020 , approximately 2% of our residential loan portfolio has an active COVID-19 assistance plan. We have a long history of dealing with distressed borrowers and currently do not expect these levels of forbearance to have a material impact on our liquidity. In our multi-family portfolio, only one operating partner, representing 1% of our total preferred equity and mezzanine loan investment portfolio, is delinquent in making its distribution to us. Although we did not see an increase in forbearance and delinquency rates in our portfolio during the quarter endedSeptember 30, 2020 , we expect delinquencies, defaults and requests for forbearance arrangements to rise as savings, incomes and revenues of borrowers, operating partners and other businesses become increasingly constrained from the slow-down in economic activity caused by the COVID-19 pandemic and/or the reduction or elimination of current unemployment benefits or other policies intended to help keep borrowers and renters in their residence. We cannot assure you that any increase in or prolonged period of payment deferrals, forbearance, delinquencies, defaults, foreclosures or losses will not adversely affect our net interest income, the fair value of our assets or our liquidity. 110
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We historically have endeavored to fund our investments and operations through a balanced and diverse funding mix, including proceeds from the issuance of common and preferred equity and debt securities, short-term and longer-term repurchase agreements, CDOs, securitized debt and trust preferred debentures. The type and terms of financing used by us depends on the asset being financed and the financing available at the time of the financing. As discussed above, as a result of the severe market dislocations related to the COVID-19 pandemic and, more specifically, the unprecedented illiquidity in our repurchase agreement financing and MBS markets, looking forward, we expect to place a greater emphasis on procuring stable, longer-termed financing, such as securitizations and other term financings, that provide less or no exposure to fluctuations in the collateral repricing determinations of financing counterparties or rapid liquidity reductions in repurchase agreement financing markets. Consistent with our stated intent to procure this type of stable longer-term financing, and as noted above, we completed a non-mark-to-market re-securitization backed by non-Agency RMBS that has an expected redemption date ofJune 3, 2022 . Moreover, inJuly 2020 and subsequent toSeptember 30, 2020 , we closed on two non-mark-to-market securitizations backed by residential loans that are expected to be redeemed inJune 2023 andOctober 2023 , respectively. Based on current market conditions, our current investment portfolio, new investment initiatives, leverage ratio and available and future possible financing arrangements, we believe our existing cash balances, funds available under our various financing arrangements and cash flows from operations will meet our liquidity requirements for at least the next 12 months. We have explored and will continue in the near term to explore additional financing arrangements to further strengthen our balance sheet and position ourselves for future investment opportunities, including, without limitation, additional issuances of our equity and debt securities and longer-termed financing arrangements; however, no assurance can be given that we will be able to access any such financing, or the size, timing or terms thereof.
Cash Flows and Liquidity for the Nine Months Ended
During the nine months ended
Cash Flows from Operating Activities
We generated net cash flows from operating activities of$76.6 million during the nine months endedSeptember 30, 2020 . Our cash flow provided by operating activities differs from our net income due to these primary factors: (i) differences between (a) accretion, amortization and recognition of income and losses recorded with respect to our investments and (b) the cash received therefrom and (ii) unrealized gains and losses on our investments and derivatives.
Cash Flows from Investing Activities
During the nine months endedSeptember 30, 2020 , our net cash flows provided by investing activities was$2.4 billion , primarily as a result of sales of Agency RMBS and Agency CMBS, including securities issued by Consolidated SLST and the Consolidated K-Series, sales of non-Agency RMBS and CMBS, sales of first loss POs and certain mezzanine securities issued by the Consolidated K-Series and sales of residential loans compounded by principal repayments and refinancing of residential loans and principal paydowns or repayments of investment securities and preferred equity and mezzanine loan investments. These sales and repayments were partially offset by purchases of residential loans, RMBS, CMBS, and funding of preferred equity investments during the period, reflecting our continued focus on single-family residential and multi-family investment strategies.
Although we generally intend to hold our assets as long-term investments, we may
sell certain of these assets in order to manage our interest rate risk and
liquidity needs, to meet other operating objectives or to adapt to market
conditions, as was the case in
Because a portion of our assets are financed through repurchase agreements, CDOs or securitized debt, a portion of the proceeds from any sales of or principal repayments on our assets may be used to repay balances under these financing sources. Accordingly, all or a significant portion of cash flows from principal repayments received on multi-family loans held in securitization trusts, principal repayments received from residential loans and proceeds from sales or principal paydowns received from investment securities available for sale were used to repay CDOs or securitized debt issued by the respective Consolidated VIEs or repurchase agreements (included as cash used in financing activities). As presented in the "Supplemental Disclosure - Non-Cash Investment Activities" subsection of our condensed consolidated statements of cash flows, during the nine months endedSeptember 30, 2020 , we de-consolidated certain multi-family securitization trusts which represent significant non-cash transactions that were not included in cash flows provided by investing activities. 111
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Cash Flows from Financing Activities
During the nine months ended
Liquidity - Financing Arrangements
As ofSeptember 30, 2020 , we have no amounts outstanding under short-term repurchase agreements on our investment securities. These repurchase agreements are typically secured by certain of our investment securities and bear interest rates that have historically moved in close relationship to LIBOR. Any financings under these repurchase agreements are based on the fair value of the assets that serve as collateral under these agreements. Interest rate changes and increased prepayment activity can have a negative impact on the valuation of these securities, reducing the amount we can borrow under these agreements. Moreover, our repurchase agreements allow the counterparties to determine a new market value of the collateral to reflect current market conditions and because these lines of financing are not committed, the counterparty can effectively call the loan at any time. Market value of the collateral represents the price of such collateral obtained from generally recognized sources or most recent closing bid quotation from such source plus accrued income. If a counterparty determines that the value of the collateral has decreased, the counterparty may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding amount financed in cash, on minimal notice, and repurchase may be accelerated upon an event of default under the repurchase agreements. Moreover, in the event an existing counterparty elected to not renew the outstanding balance at its maturity into a new repurchase agreement, we would be required to repay the outstanding balance with cash or proceeds received from a new counterparty or to surrender the securities that serve as collateral for the outstanding balance, or any combination thereof. If we are unable to secure financing from a new counterparty and had to surrender the collateral, we would expect to incur a loss. In addition, in the event one of our repurchase agreement counterparties defaults on its obligation to "re-sell" or return to us the assets that are securing the financing at the end of the term of the repurchase agreement, we would incur a loss on the transaction equal to the amount of "haircut" associated with the short-term repurchase agreement, which we sometimes refer to as the "amount at risk." AtSeptember 30, 2020 , we had longer-term repurchase agreements with terms of up to one year with three third-party financial institutions that are secured by certain of our residential loans and that function similar to our short-term repurchase agreements. The financings under two of these repurchase agreements are subject to margin calls to the extent the market value of the residential loans falls below specified levels and repurchase may be accelerated upon an event of default under the repurchase agreements. InSeptember 2020 , we entered into a repurchase agreement with a new counterparty with a term of one year that is secured by certain of our residential loans and is not subject to margin calls in the event the market value of the collateral declines. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Balance Sheet Analysis-Residential Loan Financing-Repurchase Agreements" for further information. During the terms of the repurchase agreements secured by residential loans, proceeds from the residential loans will be applied to pay any price differential, if applicable, and to reduce the aggregate repurchase price of the collateral. The repurchase agreements secured by residential loans contain various covenants, including among other things, the maintenance of certain amounts of liquidity and total stockholders' equity. As ofSeptember 30, 2020 , we had an aggregate amount at risk under our residential loan repurchase agreements of approximately$264.8 million , which represents the difference between the carrying value of the loans pledged and the outstanding balance of our repurchase agreements. Significant margin calls have had, and could in the future have, a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributions to our stockholders. See "Liquidity and Capital Resources - General" above. AtSeptember 30, 2020 , the Company had$138.0 million aggregate principal amount of Convertible Notes outstanding. The Convertible Notes were issued at 96% of the principal amount, bear interest at a rate equal to 6.25% per year, payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, and are expected to mature onJanuary 15, 2022 , unless earlier converted or repurchased. The Company does not have the right to redeem the Convertible Notes prior to maturity and no sinking fund is provided for the Convertible Notes. Holders of the Convertible Notes are permitted to convert their Convertible Notes into shares of the Company's common stock at any time prior to the close of business on the business day immediately precedingJanuary 15, 2022 . The conversion rate for the Convertible Notes, which is subject to adjustment upon the occurrence of certain specified events, initially equals 142.7144 shares of the Company's common stock per$1,000 principal amount of Convertible Notes, which is equivalent to a conversion price of approximately$7.01 per share of the Company's common stock, based on a$1,000 principal amount of the Convertible Notes. 112
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AtSeptember 30, 2020 , we also had other consolidated longer-term debt, including SLST CDOs outstanding of$1.1 billion (which represent obligations of Consolidated SLST), securitized debt outstanding of$88.8 million , Residential CDOs outstanding of$268.8 million and subordinated debt outstanding of$45.0 million . The CDOs are collateralized by residential loans held in securitization trusts and the securitized debt is collateralized by non-Agency RMBS. As ofSeptember 30, 2020 , our overall leverage ratio, which represents our total outstanding repurchase agreement financing, subordinated debentures and Convertible Notes divided by our total stockholders' equity, was approximately 0.4 to 1. Our overall leverage ratio does not include debt associated with SLST CDOs, securitized debt, the Residential CDOs or other non-recourse debt to the Company. As ofSeptember 30, 2020 , our leverage ratio on our shorter-term financings, which represents our outstanding repurchase agreement financing divided by our total stockholders' equity, was approximately 0.3 to 1. We monitor all at risk or shorter-term financings to enable us to respond to market disruptions as they arise.
Liquidity - Hedging and Other Factors
Certain of our hedging instruments may also impact our liquidity. We may use interest rate swaps, swaptions, TBAs or other futures contracts to hedge interest rate and market value risk associated with our investments in Agency RMBS. With respect to interest rate swaps, futures contracts and TBAs, initial margin deposits, which can be comprised of either cash or securities, will be made upon entering into these contracts. During the period these contracts are open, changes in the value of the contract are recognized as unrealized gains or losses by marking to market on a daily basis to reflect the market value of these contracts at the end of each day's trading. We may be required to satisfy variable margin payments periodically, depending upon whether unrealized gains or losses are incurred. In addition, because delivery of TBAs extend beyond the typical settlement dates for most non-derivative investments, these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and thereby are more vulnerable to increasing amounts at risk with the applicable counterparties. InMarch 2020 , in response to the turmoil in the financial markets, we terminated our interest rate swaps and currently do not have any hedges in place. For additional information regarding the Company's derivative instruments and hedging activities for the periods covered by this report, including the fair values and notional amounts of these instruments and realized and unrealized gains and losses relating to these instruments, please see Note 10 to our condensed consolidated financial statements included in this report. Also, please see Item 3. Quantitative and Qualitative Disclosures about Market Risk, under the caption, "Fair Value Risk", for a tabular presentation of the sensitivity of the fair value and net duration changes of the Company's portfolio across various changes in interest rates, which takes into account the Company's hedging activities.
Liquidity - Securities Offerings
In addition to the financing arrangements described above under the caption "Liquidity-Financing Arrangements," we also rely on follow-on equity offerings of common and preferred stock, and may utilize from time to time debt securities offerings, as a source of both short-term and long-term liquidity. We also may generate liquidity through the sale of shares of our common stock or preferred stock in "at-the-market" equity offering programs pursuant to equity distribution agreements, as well as through the sale of shares of our common stock pursuant to our Dividend Reinvestment Plan ("DRIP"). Our DRIP provides for the issuance of up to$20,000,000 of shares of our common stock.
The following table details the Company's public offerings of common stock
during the nine months ended
Offering Type Shares Issued Net Proceeds
(1)
Public offerings of common stock 85,100,000 $
511,924
(1)Proceeds are net of underwriting discounts and commissions and offering expenses, as applicable.
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Dividends
OnSeptember 14, 2020 , our Board of Directors declared the following quarterly cash dividends: Dividend Amount Per Class of Stock Share Record Date Payment Date Common Stock$ 0.075 September 24, 2020 October 26, 2020 Fixed Rate Preferred Stock 7.75% Series B Cumulative Redeemable Preferred Stock$ 0.484 October 1, 2020 October 15, 2020 7.875% Series C Cumulative Redeemable Preferred Stock$ 0.492 October 1, 2020 October 15, 2020
Fixed-to-Floating Rate Preferred Stock 8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock
$ 0.500 October 1, 2020 October 15, 2020 7.875% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock$ 0.492 October 1, 2020 October 15, 2020 Our Board of Directors will continue to evaluate our dividend policy each quarter and will make adjustments as necessary, based on a variety of factors, including, among other things, the need to maintain our REIT status, our financial condition, liquidity, earnings projections, business prospects and current and anticipated future market conditions. Our dividend policy does not constitute an obligation to pay dividends. We intend to make distributions to our stockholders to comply with the various requirements to maintain our REIT status and to minimize or avoid corporate income tax and the nondeductible excise tax. However, differences in timing between the recognition of REIT taxable income and the actual receipt of cash could require us to sell assets or to borrow funds on a short-term basis to meet the REIT distribution requirements and to minimize or avoid corporate income tax and the nondeductible excise tax. 114
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Inflation
Substantially all our assets and liabilities are financial in nature and are sensitive to interest rate and other related factors to a greater degree than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our condensed consolidated financial statements and corresponding notes thereto have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering inflation.
Off-Balance Sheet Arrangements
We did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, 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 or intent to provide funding to any such entities. 115
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