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• Our operating results are dependent upon our Manager’s ability to source a large volume of desirable non‑QM loans and other target assets for our investment on attractive terms.
−Removed: • Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns may adversely affect the value of residential mortgage loans, including non‑QM loans, and other target assets in which we invest.
−Removed: • Non-QM loans that are underwritten pursuant to less stringent underwriting guidelines could experience substantially higher rates of delinquencies, defaults and foreclosures than those experienced by loans underwritten to more stringent underwriting guidelines.
+Added: • Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns, including macroeconomic events, may adversely affect the value of residential mortgage loans, including non‑QM loans, and other target assets in which we invest.
+Added: • Non-QM loans that are underwritten pursuant to less stringent underwriting guidelines could experience higher rates of delinquencies, defaults and foreclosures than those experienced by loans underwritten to more stringent underwriting guidelines.
• Angel Oak Mortgage Lending is subject to extensive licensing requirements and regulation, which could materially and adversely affect us if Angel Oak Mortgage Lending does not comply with these requirements.
−Removed: • Currently, we are focused on acquiring and investing in non‑QM loans, which may subject us to legal, regulatory, and other risks, which could materially and adversely affect us.
+Added: • Currently, we are focused on acquiring and investing in non‑QM loans, which may subject us to legal, administrative, regulatory, and other risks, which could materially and adversely affect us.
• Prepayment rates may adversely affect the value of our portfolio.
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Additionally, the principal and interest payments on non‑Agency RMBS are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.
−Removed: • The COVID‑19 pandemic disrupted, and new variants and additional outbreaks may cause additional disruptions in, U.S.
−Removed: and global economic activity and financial markets, including increased market volatility, which could materially and adversely affect us.
• Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our target assets, which could materially and adversely affect us.
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• Maintenance of our exclusion from regulation as an investment company under the Investment Company Act imposes significant limitations on our operations.
−Removed: • We may incur significant debt, which will subject us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.
+Added: • Our significant debt subjects us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.
• Our access to financing sources, which may not be available on favorable terms, or at all, may be limited, and this may materially and adversely affect us.
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federal income tax and potentially increased state and local taxes, which would reduce the amount of our income available for distribution to our stockholders.
−Removed: • Complying with REIT requirements and avoiding a prohibited transaction tax may force us to hold a significant portion of our assets and conduct a significant portion of our activities through a TRS, and a significant portion of our income may be earned through a TRS.
+Added: • Complying with REIT requirements and avoiding a prohibited transaction tax may force us to hold a significant portion of our assets and conduct a significant portion of our activities through a taxable REIT subsidiary (“TRS”), and a significant portion of our income may be earned through a TRS.
The above list is not exhaustive, and we face additional challenges and risks.
−Removed: Please carefully consider all of the information in this Annual Report on Form 10-K, including the matters set forth below in this Item 1A.
−Removed: In addition to the other information set forth in this Annual Report on Form 10-K, you should carefully consider the following risks, which could materially and adversely affect our business, financial condition, liquidity, results of operations and prospects, and our ability to make distributions to our stockholders (which we refer to collectively as “materially and adversely affecting us” or having “a material adverse effect on us,” and comparable phrases).
−Removed: The risks described below are not the only risks that we face.
−Removed: Additional risks not presently known to us or that we currently deem immaterial may also have a material adverse effect on us.
+Added: Please carefully consider all of the information in this Annual Report on Form 10-K, including the matters set forth below in this “Item 1A, Risk Factors.”
Risks Related to Our Relationship with Our Manager and its Affiliates
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We can offer no assurance that our Manager will remain our manager or that we will continue to have access to Angel Oak’s, including our Manager’s, senior management.
−Removed: We are subject to the risk that our Manager will terminate the Aanagement
−Removed: Agreement or that we may deem it necessary to terminate the Management Agreement or prevent certain individuals from performing services for us and that no suitable replacement will be found to manage us.
+Added: We are subject to the risk that our Manager will terminate the Management Agreement or that we may deem it necessary to terminate the Management Agreement or prevent certain individuals from performing services for us and that no suitable replacement will be found to manage us.
The Angel Oak personnel provided to us by our Manager pursuant to the Management Agreement are not required to dedicate a specific portion of their time to the management of our business.
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Key personnel provided to us by our Manager may become unavailable to us as a result of their departure from our Manager or for any other reason.
−Removed: As a result, we cannot provide any assurances regarding the amount of time our Manager will dedicate to the management of our business, and Angel Oak, including our Manager, may have conflicts in allocating employees’ time, resources, and services among our business and any other entities they manage, and such conflicts may not be resolved in our favor.
+Added: As a result, we cannot provide any assurances regarding the amount of time our Manager will dedicate to the management of our business, and Angel Oak, including our
+Added: Manager, may have conflicts in allocating employees’ time, resources, and services among our business and any other entities they manage, and such conflicts may not be resolved in our favor.
Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed.
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We are dependent on our Manager, whose senior management team has limited experience operating a REIT and a public company.
−Removed: Our Manager was formed in February 2018.
Although Angel Oak has been active in the mortgage credit market since 2008, our Manager’s senior management team has limited experience operating a REIT and operating a business in compliance with the numerous technical restrictions and limitations set forth in the Code and the Investment Company Act.
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We may be harmed by reputational issues and adverse publicity relating to us, our Manager, or Angel Oak.
−Removed: Reputational risk issues could include, but are not limited to, real or perceived legal or regulatory violations, or could be the result of a failure in performance, risk-management, governance, technology, or operations, or claims related to employee misconduct, allegations of employee wrongful termination, conflict of interests, ethical issues, or failure to protect private information, among others.
−Removed: Similarly, market rumors and actual or perceived association with counterparties whose own reputations may become under question could harm our business.
−Removed: Such reputational issues may depress the market price of our common stock, have a negative effect on our ability to conduct business with our counterparties, hinder our abilities to attract and / or retain personnel, including key personnel, or otherwise materially adversely affect us.
+Added: Reputational risk issues
+Added: could include, but are not limited to, real or perceived legal, administrative or regulatory violations, or could be the result of a failure in
+Added: performance, risk-management, governance, technology, or operations, or claims related to employee misconduct, allegations of employee
+Added: wrongful termination, conflict of interests, ethical issues, cybersecurity events, the failure to protect private information or environmental,
+Added: social and governance practices, among others.
+Added: Similarly, market rumors and actual or perceived association with counterparties whose own
+Added: reputations may become under question could harm our business.
+Added: Such reputational issues may depress the market price of our common
+Added: stock, have a negative effect on our ability to conduct business with our counterparties, hinder our abilities to attract and / or retain
+Added: personnel, including key personnel, or otherwise materially adversely affect us.
There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.
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In addition, our acquisition of non-QM loans or other target assets from Angel Oak Mortgage Lending allows Angel Oak Mortgage Lending to sell such non-QM loans or other target assets and obtain liquidity to make more loans, even where Angel Oak Mortgage Lending would be unable to sell the non-QM loans or other target assets on favorable terms to unaffiliated third parties in the market due to unfavorable market conditions or other reasons.
−Removed: Our Manager could acquire non-QM loans or other target assets on our behalf from Angel Oak Mortgage Lending even if such non-QM loans or other target assets were unsuitable for us, or we could identify better quality non-QM loans or other target assets, or obtain better pricing, from unaffiliated third parties.
+Added: Our Manager could acquire non-QM loans or other target assets on our behalf from Angel Oak Mortgage Lending even if such non-QM loans or other target assets were unsuitable for us, or we could identify better quality non-QM loans or other target assets, or obtain better pricing,
+Added: from unaffiliated third parties.
Although we utilize third-party pricing vendors to evaluate the fairness of the price for non-QM loans or other target assets we acquire from Angel Oak Mortgage Lending, there can be no assurance that we will purchase such non-QM loans or other target assets from Angel Oak Mortgage Lending at a fair price.
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When allocating investment opportunities among us and one or more other managed entities, Angel Oak Capital allocates such opportunities pursuant to its written investment allocation policy.
−Removed: Angel Oak Capital’s written investment allocation policy allocates investment opportunities based on each managed entity’s guidelines, the strategy and available cash of Angel Oak managed entities, market supply and other factors.
−Removed: Target allocations for each managed entity are established by Angel Oak Capital’s portfolio management team prior to the execution of any aggregated trade.
−Removed: In the event an aggregated trade is partially filled, Angel Oak’s managed entities will generally receive a pro rata share of the executed trade based upon the target allocation set by Angel Oak Capital’s portfolio management team.
−Removed: For loans acquired from Angel Oak Mortgage Lending, Angel Oak Capital receives a loan tape from Angel Oak Mortgage Lending on a weekly basis.
−Removed: The loan tape is reviewed to ensure compliance with our and other Angel Oak managed entities’ investment
−Removed: If any exceptions are found, the loan is further reviewed to ensure there are accompanying compensating factors.
−Removed: Following review of the loan tape, a custodial review is performed to ensure necessary documentation exists or is provided.
−Removed: Concurrently with the custodial review, loans are priced based on the current rate sheet and an allocation among Angel Oak managed entities is determined.
−Removed: Angel Oak’s portfolio management team establishes a monthly target allocation first by loan type and then by loan size.
−Removed: Loans from Angel Oak Mortgage Lending that fit the investment guidelines of Angel Oak’s managed entities, including us, are allocated to such managed entities.
−Removed: Each round of loan purchases is allocated to each participating managed entity based on the target allocation (or as closely as possible given available loan sizes) in order to avoid one managed entity from being fully allocated ahead of any other managed entity.
−Removed: Loans are allocated on an alternating basis to each eligible managed entity.
−Removed: Angel Oak Capital’s compliance team approves each loan allocation and our affiliated transactions committee, which is comprised of three of our independent directors, must approve, among other matters, our acquisition of any non-QM loans and any other target assets we acquire from Angel Oak Mortgage Lending or other affiliate of our Manager.
Accordingly, not all investments which are consistent with our investment objective and strategies may be presented to us.
There is no assurance that any such conflicts arising out of the foregoing will be resolved in our favor.
−Removed: Angel Oak Capital is entitled to amend its investment allocation policy at any time without prior notice to us or our consent.
+Added: Angel Oak Capital is entitled to amend its investment allocation policy at any time without our consent although it must provide notice to our Affiliated Transactions and Risk Committee.
• Service Providers.
−Removed: Our Manager may engage affiliated service providers, including affiliates, that act as the servicer for the loans in our portfolio.
+Added: Our Manager may engage affiliated service providers, that act as the servicer for the loans in our portfolio.
Such relationships may influence our Manager in deciding whether to select such service providers.
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• Securitizations.
−Removed: There can be no assurance that the valuation of any of the assets that we have contributed or may contribute to any securitization vehicles were not or will not be understated or, that the assets contributed by other Angel Oak-managed entities have not been or will not be overstated, resulting in less cash proceeds or securities issued by the securitization vehicle to us or more cash proceeds or securities issued by the securitization vehicle to such managed entities than would otherwise be the case.
−Removed: AOMT’s securitizations are typically structured with a two- or three-year non-call period for the securities issued in the securitization.
+Added: There can be no assurance that the valuation of any of the assets that we have contributed or may contribute to any securitization vehicles were not or will not be understated or, that the assets contributed by other Angel Oak-managed entities have
+Added: not been or will not be overstated, resulting in less cash proceeds or securities issued by the securitization vehicle to us or more cash proceeds or securities issued by the securitization vehicle to such managed entities than would otherwise be the case.
+Added: AOMT’s securitizations are typically structured with a two- to four-year non-call period for the securities issued in the securitization.
After such period has ended, the XS tranche holders, as the controlling tranche, have the option to call the securitization at any point.
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In this regard, mortgage originators are subject to significant regulation and oversight and failure by Angel Oak Mortgage Lending to comply with its obligations under law may result in an inability to originate non-QM loans or other target assets in certain jurisdictions or at all.
−Removed: Similarly, if Angel Oak
−Removed: Mortgage Lending otherwise separates from its affiliation with our Manager, it may determine to sell the non-QM loans or other target assets that it originates to other parties.
+Added: Similarly, if Angel Oak Mortgage Lending otherwise separates from its affiliation with our Manager, it may determine to sell the non-QM loans or other target assets that it originates to other parties.
Angel Oak Mortgage Lending could also enter into commitments with third parties to sell them non-QM loans or other assets, and reduce the quantity of loans that would otherwise be available for purchase by us.
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We do not own the Angel Oak brand or trademark, but may use the brand and trademark pursuant to the terms of a trademark license agreement with Angel Oak.
−Removed: We do not own the brand, trademark, or logo that we will use in our business and may be unable to protect this intellectual property against infringement from third parties.
−Removed: In connection with our IPO, we entered into a trademark license agreement (the “trademark license agreement”) with an affiliate of our Manager (the “licensor”) pursuant to which has granted us a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use the name “Angel Oak Mortgage, Inc.” Under this agreement, we have a right to use this name for so long as our Manager (or another Angel Oak affiliate that serves as our manager) remains an affiliate of the licensor under the trademark license agreement.
+Added: We do not own the brand, trademark, or logo that we may use in our business and may be unable to protect this intellectual property against infringement from third parties.
+Added: We are party to a trademark license agreement (the “trademark license agreement”) with an affiliate of our Manager (the “licensor”) pursuant to which the licensor granted us a non-exclusive, non-transferable, non-sublicensable, royalty-free license to use the name “Angel Oak Mortgage REIT, Inc.” for so long as our Manager (or another Angel Oak affiliate that serves as our manager) remains an affiliate of the licensor.
The trademark license agreement is subject to automatic termination if our Manager or another affiliate of Angel Oak is no longer acting as our manager under the Management Agreement.
−Removed: The trademark license agreement may be terminated by the licensor without cause and in its sole judgment after thirty days’ written notice to us or immediately if the licensor believes that we are using the licensed marks improperly.
−Removed: The licensor will retain the right to continue using the “Angel Oak” name.
−Removed: The trademark license agreement does not permit us to preclude the licensor from licensing or transferring the ownership of the “Angel Oak” name to third parties, some of whom may compete against us.
+Added: The trademark license agreement may be terminated by the licensor without cause and in its sole judgment after 30 days’ written notice to us or immediately if the licensor believes that we are using the licensed marks improperly.
+Added: Pursuant to the trademark license agreement, the licensor retains the right to continue using the “Angel Oak” name and the licensor is not precluded from licensing or transferring the ownership of the “Angel Oak” name to third parties, some of whom may compete against us.
Consequently, we may be unable to prevent any damage to goodwill that may occur as a result of the activities of the licensor, Angel Oak or others.
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Under the Management Agreement, our Manager maintains a contractual as opposed to a fiduciary relationship with us which limits our Manager’s obligations to us to those specifically set forth in the Management Agreement.
−Removed: The right of our Manager or its personnel and its officers to engage in other business activities may reduce the time our Manager spends managing us.
+Added: The right of our Manager or its personnel and
+Added: its officers to engage in other business activities may reduce the time our Manager spends managing us.
In addition, unlike for directors, there is no statutory standard of conduct under the Maryland General Corporation Law (“MGCL”) for officers of a Maryland corporation.
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In addition, in conducting periodic reviews, our Board of Directors relies primarily on information provided to them by our Manager.
−Removed: Furthermore, our Manager may arrange for us to use complex strategies or to enter into complex transactions that may be difficult or impossible to unwind by the time they are reviewed by our Board of Directors.
+Added: Furthermore, our Manager may arrange for us to use complex strategies or to enter into complex transactions before they are reviewed by our Board of Directors.
Our Manager has great latitude within our broad investment guidelines to determine the types of assets it may decide are proper for purchase by us, which could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect us.
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Our operating results are dependent upon our Manager’s ability to source a large volume of desirable non-QM loans and other target assets for our investment on attractive terms, and our Manager may be unable to do so for many reasons.
−Removed: Angel Oak Mortgage Lending has no obligation to sell non-QM loans and other target assets to us, and our Manager may be unable to locate other originators that are able or willing to originate non-QM loans and other target assets that meet our standards on favorable terms or at all.
−Removed: General economic factors, such as recession, declining home values, unemployment, and high interest rates, may limit the supply of available non-QM loans and other
−Removed: target assets.
+Added: Angel Oak Mortgage Lending has no obligation to sell non-QM loans and other target assets to us, and our Manager may be unable to identify other originators that are able or willing to originate non-QM loans and other target assets that meet our standards on favorable terms or at all.
+Added: General economic factors, such as recession, declining home values, unemployment, and high interest rates, may limit the supply of available non-QM loans and other target assets.
Moreover, competition for non-QM loans and other target assets may drive down supply or drive up prices, making it uneconomical to purchase such loans or other target assets.
−Removed: For instance, in acquiring non-QM loans and other target assets from unaffiliated parties, we compete with a broad spectrum of institutional investors, many of which have greater financial resources than us.
+Added: For instance, in acquiring non-QM loans and other target assets from unaffiliated parties, we compete with a broad spectrum of institutional investors.
Increased competition for, or a reduction in the available supply of, qualifying investments could result in higher prices for (and thus lower yields on) such investments, which could narrow the yield spread over borrowing costs.
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If we cannot source an adequate volume of desirable non-QM loans and other target assets on attractive terms or at all, we may be materially and adversely affected.
−Removed: Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns may adversely affect the value of residential mortgage loans, including non-QM loans, and other target assets in which we invest.
−Removed: Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy, including increasing inflation, the long-term impact of the COVID-19 pandemic, energy costs, unemployment, geopolitical issues, concerns over the creditworthiness of governments worldwide and the stability of the global banking system.
+Added: Difficult conditions in the residential mortgage and residential real estate markets as well as general market concerns, including macroeconomic events, may adversely affect the value of residential mortgage loans, including non-QM loans, and other target assets in which we invest.
+Added: Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy, including increasing inflation, energy costs, unemployment, geopolitical issues, pandemics, concerns over the creditworthiness of governments worldwide and the stability of the global banking system.
In particular, the residential mortgage market in the United States has experienced, in the past, a variety of difficulties and challenging economic conditions, including defaults, credit losses, and liquidity concerns.
Certain commercial banks, investment banks, insurance companies, and mortgage-related investment vehicles (including publicly traded mortgage REITs) incurred extensive losses from exposure to the residential mortgage market as a result of these difficulties and conditions.
−Removed: These factors may continue to impact investor perception of the risks associated with the residential real estate market, residential mortgage loans and various other target assets in which we may invest.
−Removed: As a result, values for residential mortgage loans, including non-QM loans, and various other target assets in which we invest have experienced, and may in the future experience, significant volatility.
+Added: Continuing concerns over these factors have contributed to increased volatility and unclear expectations for the economy and markets going forward and continue to impact investor perception of the risks associated with the residential real estate market, residential mortgage loans and various other target assets in which we may invest.
+Added: As a result, values for residential mortgage loans, including non-QM loans, and various other target assets in which we invest have also experienced, and may continue to experience, significant volatility.
Any deterioration of the residential mortgage market and investor perception of the risks associated with residential mortgage loans, including non-QM loans, and various other of our target assets could have a material adverse effect on us.
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If Angel Oak Mortgage Lending is unable to originate the volume of loans anticipated, we may also be unable to identify other sources of non-QM loans for acquisition to satisfy our strategy and we may need to alter such strategy to seek other investments.
−Removed: Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, regulatory, and other risks, which could materially and adversely affect us.
−Removed: Currently, we are focused on acquiring and investing in non-QM loans that will not have the benefit of enhanced legal protections otherwise available in connection with the origination of QM loans, as further described below.
−Removed: The ownership of non-QM loans could
−Removed: subject us to legal, regulatory, and other risks, including those arising under U.S.
+Added: Currently, we are focused on acquiring and investing in non-QM loans, which may subject us to legal, administrative, regulatory, and other risks, which could materially and adversely affect us.
+Added: Currently, we are focused on acquiring and investing in non-QM loans that will not have the benefit of enhanced legal protections otherwise available in connection with the origination of QM loans.
+Added: The ownership of non-QM loans could subject us to legal, administrative, regulatory, and other risks, including those arising under U.S.
federal consumer protection laws and regulations designed to regulate residential mortgage loan underwriting and originators’ lending processes, standards and disclosures to borrowers.
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federal, state, and local laws and regulations intended to discourage predatory lending practices by residential mortgage loan originators.
−Removed: The ATR rules specify the characteristics of a QM loan and two levels of presumption of compliance with the ATR rules:
−Removed: a safe harbor and a rebuttable presumption for higher priced loans.
−Removed: The “safe harbor” under the ATR rules applies to a covered transaction that meets the definition of a QM loan and is not a “higher-priced covered transaction.” For any covered transaction that meets the definition of a QM loan and is not a “higher-priced covered transaction,” the creditor or assignee will be deemed to have complied with the ability-to-repay requirement and, accordingly, will be conclusively presumed to have made a good faith and reasonable determination of the consumer’s ability to repay.
−Removed: Creditors or assignees will have the benefit of a rebuttable presumption of compliance with the applicable ATR rules if they have complied with the QM loan characteristics of the ATR rules other than the residential mortgage loan being higher-priced in excess of certain thresholds.
−Removed: Non-QM loans, such as residential mortgage loans with a DTI exceeding 43%, do not have the benefit of either a safe harbor from liability under the ATR rules or a rebuttable presumption of compliance with the ATR rules.
Application of certain standards set forth in the ATR rules is highly subjective and subject to interpretive uncertainties.
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The non-QM loans and other residential mortgage loans in which we invest are subject to a risk of default, among other risks.
−Removed: Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily made to non-QM loan borrowers and primarily sourced from Angel Oak’s proprietary mortgage lending platform, Angel Oak Mortgage Lending.
+Added: Our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans, which include investment property loans, primarily sourced from Angel Oak Mortgage Lending.
We also may invest in other target assets.
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• declines in the value of residential or commercial real estate;
−Removed: • risks related to benchmark rates such as the Secured Overnight Financing Rate (“SOFR”) as reference rates for loans and securities;
+Added: • risks related to benchmark rates such as the Secured Overnight Financing Rate (“SOFR”) as reference rates for loans, borrowings and securities;
• risks related to general and local economic conditions, including unemployment rates;
• lack of available mortgage funding for borrowers to refinance or sell their homes or other properties;
−Removed: • overbuilding;
+Added: • overbuilding and/or housing availability;
• increases in property taxes;
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• fluctuations in interest rates;
−Removed: • undetected or unknown fraudulent activity by borrowers, originators, and/or sellers of mortgage loans;
+Added: • undetected or unknown fraudulent activity by borrowers, originators, sellers of mortgage loans and/or other third party service providers;
• undetected deficiencies and/or inaccuracies in underlying mortgage loan documentation and calculations;
−Removed: • failure of the borrower to adequately maintain the property, particularly during times of financial difficulty.
+Added: • failure of the borrower to adequately maintain the property.
To the extent that assets underlying our investments are concentrated geographically, by property type or in certain other respects, we may be subject to certain of the foregoing risks to a greater extent.
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(4) programs that require specific procedures to be followed to explore the refinancing of a residential mortgage loan prior to the commencement of a foreclosure proceeding;
−Removed: and (5) declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems.
+Added: and (5) declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the judicial and administrative systems.
In periods following home price declines, “strategic defaults” (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent.
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Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.
−Removed: Inflation in the U.S.
−Removed: has recently accelerated and is currently expected to continue at an elevated level in the near-term.
−Removed: In 2022, the U.S.
−Removed: Federal Reserve Bank began raising the federal funds rate in an effort to curb inflation, and rates may continue to rise, and such increases, coupled with other macroeconomic factors, may trigger a recession in the U.S., globally, or both.
−Removed: Interest rate fluctuations present a variety of risks, including the risk that our borrowing costs will approach, or even exceed, the yields on our assets, and the risk of adverse fluctuations in prepayment rates.
+Added: For example, recently, there has been a significant rise in inflation and the U.S.
+Added: Federal Reserve Board has raised, and may continue to raise, interest rates in an effort to curb inflation.
+Added: These increases in interest rates and inflation have led, and may continue to lead, to economic volatility, increased borrowing costs, price increases and risks of recession.
Fixed income assets typically decline in value if interest rates increase.
−Removed: If long-term interest rates were to increase significantly, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because borrowers would be less likely to prepay their mortgages.
+Added: If long-term interest rates were to increase significantly, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because, for example, borrowers would be less likely to prepay their mortgages.
Further, an increase in short-term interest rates would increase the rate of interest payable on any short-term borrowings used to finance these assets.
−Removed: Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to continue to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, but there can be no assurances that our hedges will be successful, or that we will be able to enter into or maintain such hedges.
+Added: Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we expect to continue to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, but there can be no assurances that our hedges will be successful, or
+Added: that we will be able to enter into or maintain such hedges.
As a result, interest rate fluctuations can cause significant losses, reductions in income, and could materially and adversely affect us.
In addition, rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing.
−Removed: A reduction in the volume of mortgage loans originated may affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives.
+Added: A reduction in the volume of mortgage loans originated may affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that may satisfy our investment objectives.
If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, it could materially and adversely affect us.
An increase in interest rates could also cause financial strain on borrowers with adjustable rate mortgages, who might then be more likely to default.
−Removed: In addition, we cannot assure you that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.
+Added: In addition, we cannot ensure that our access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings.
Such future constraints could increase our borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments, which could slow or deter future growth.
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Fair values can change rapidly and significantly, and changes can result from changes in interest rates, perceived risk, supply, demand, and actual and projected cash flows, prepayments, and credit performance.
−Removed: A decrease in fair value may not necessarily be the result of deterioration in future cash flows.
+Added: A decrease in fair value may not necessarily be the result of or an expectation for deterioration in future cash flows.
Fair values for illiquid assets can be difficult to estimate, which may lead to volatility and uncertainty of earnings and book value.
For example, real estate-related investments in our target asset portfolio may be subject to changes in credit spreads.
−Removed: Credit spreads measure the yield demanded on securities by the market based on their credit relative to a specific benchmark and is a measure of the perceived risk of the investment.
+Added: Credit spreads measure the yield demanded on securities by the market based on their credit relative to a specific benchmark and are a measure of the perceived risk of the investment.
Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate swaps or fixed rate U.S.
−Removed: Treasuries of like maturity.
+Added: Treasuries of similar maturities.
Floating rate securities are typically valued based on a market credit spread over a floating rate index such as SOFR and are affected similarly by changes in index spreads.
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Conversely, if the spread used to value such securities were to decrease, or “tighten,” the value of our real estate and other securities portfolio would tend to increase.
−Removed: Such changes in the market value of our real estate-related securities portfolio may affect our net equity, net income, comprehensive income, or cash flow directly through their impact on unrealized gains or losses or other comprehensive income (loss), and therefore our ability to realize
−Removed: gains on such assets, or indirectly through their impact on our ability to borrow and access capital.
+Added: Such changes in the market value of our real estate-related securities portfolio may affect our net equity, net income, comprehensive income, or cash flow directly through their impact on unrealized gains or losses or other comprehensive income (loss), and therefore our ability to realize gains on such assets, or indirectly through their impact on our ability to borrow and access capital.
Widening credit spreads could cause net unrealized gains to decrease or net unrealized losses to increase, and result in overall net losses and / or comprehensive net losses.
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Assets that are funded with certain liabilities and hedges may have differing mark-to-market treatment than the liability or hedge.
−Removed: If we sell an asset that has not been marked to market through our consolidated statement of income at a reduced market price relative to its cost basis, our reported earnings will be reduced.
+Added: If we sell an asset at a lower price than has been reflected in that asset’s most recent mark to market value, our reported earnings will be reduced.
SOFR has generally replaced U.S.
dollar LIBOR as a reference rate of interest, which subjects us to various risks.
−Removed: LIBOR (the London Inter-Bank Offered Rate) was formerly the principal floating rate benchmark in the financial markets.
−Removed: Publication of LIBOR for certain currencies and tenors (including 1-week and 2-month U.S.
−Removed: dollar LIBOR) permanently ceased with effect from December 31, 2021.
−Removed: The remaining tenors of U.S.
−Removed: dollar LIBOR will continue to be published on the basis of panel-bank rate submissions only until June 30, 2023.
−Removed: Thereafter, publication of overnight and 12-month U.S.
−Removed: dollar LIBOR will permanently cease;
−Removed: while it is proposed that 1-month, 3-month and 6-month U.S.
−Removed: dollar LIBOR will continue to be published (on a “synthetic” basis only) until September 30, 2024, at which time their publication also will permanently cease.
−Removed: In the United States, there have been efforts to identify alternative reference interest rates for U.S.
−Removed: dollar LIBOR.
−Removed: The cash markets have generally coalesced around recommendations from the Alternative Reference Rates Committee (the “ARRC”), which was convened by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York.
−Removed: The ARRC has recommended that U.S.
−Removed: dollar LIBOR be replaced by rates based on SOFR plus, in the case of existing LIBOR contracts and obligations, a spread adjustment.
−Removed: The derivatives markets are also expected to use SOFR-based rates to replace U.S.
−Removed: dollar LIBOR.
−Removed: During 2021, and by January 1, 2022, our warehouse lenders transitioned to base their interest rates from U.S.
−Removed: dollar LIBOR to varying terms of SOFR plus a spread.
+Added: dollar LIBOR (London Interbank Offered Rate) has been replaced by rates based on SOFR.
SOFR has a limited history, having been first published in April 2018.
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Future levels of SOFR may bear little or no relation to historical levels of SOFR, LIBOR or other rates.
−Removed: SOFR-based rates will differ from U.S.
−Removed: dollar LIBOR, and the differences may be material.
−Removed: SOFR is intended to be a broad measure of the cost of borrowing funds overnight in transactions that are collateralized by U.S.
−Removed: Treasury Securities.
Because SOFR is a financing rate based on overnight secured funding transactions, it differs fundamentally from LIBOR.
−Removed: LIBOR (except where published only on a “synthetic” basis) is intended to be an unsecured rate that represents interbank funding costs for different short-term tenors;
−Removed: and is a forward-looking rate reflecting expectations regarding interest rates for those tenors.
−Removed: Thus, LIBOR (except where published only on a “synthetic basis”) is intended to be sensitive to bank credit risk and to short-term interest rate risk.
+Added: LIBOR was intended to be an unsecured rate that represented interbank funding costs for different short-term tenors;
+Added: and was a forward-looking rate reflecting expectations regarding interest rates for those tenors.
+Added: Thus, LIBOR was intended to be sensitive to bank credit risk and to short-term interest rate risk.
In contrast, SOFR is a secured overnight rate reflecting the credit of U.S.
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Thus, it is intended to be insensitive to credit risk and to risks related to interest rates other than overnight rates.
−Removed: SOFR has been more volatile than other benchmark or market rates, such as three-month U.S.
−Removed: dollar LIBOR, during certain periods.
−Removed: It is expected that more than one SOFR-based rate will be used in the financial markets.
−Removed: Like LIBOR, some SOFR-based rates will be forward-looking term rates;
−Removed: other SOFR-based rates will be intended to resemble rates for term structures through their use of averaging mechanisms applied to rates from overnight transactions, as in the case of “simple average” or “compounded average” SOFR.
−Removed: Different kinds of SOFR-based rates will result in different interest rates.
+Added: SOFR has been more volatile than other benchmark or market rates during certain periods.
+Added: Like LIBOR, some SOFR-based rates are forward-looking term rates;
+Added: other SOFR-based rates are intended to resemble rates for term structures through their use of averaging mechanisms applied to rates from overnight transactions, as in the case of “simple average” or “compounded average” SOFR.
+Added: Different kinds of SOFR-based rates result in different interest rates.
Mismatches between SOFR-based rates, and between SOFR-based rates and other rates, may cause economic inefficiencies, particularly if market participants seek to hedge one kind of SOFR-based rate by entering into hedge transactions based on another SOFR-based rate or another rate.
For these reasons, among others, there is no assurance that SOFR, or rates derived from SOFR, will perform in the same or a similar way as U.S.
−Removed: dollar LIBOR would have performed at any time, and there is no assurance that SOFR-based rates will be a suitable substitute for U.S.
+Added: dollar LIBOR would have performed at any time, and there is no assurance that SOFR-based rates are suitable substitutes for U.S.
dollar LIBOR.
−Removed: Non-LIBOR floating rate obligations, including SOFR-based obligations, may have returns and values that fluctuate more than those of floating rate obligations that are based on LIBOR or other rates.
+Added: Non-LIBOR floating rate obligations, including SOFR-based obligations, may have returns and values that fluctuate more than those of floating rate obligations that were based on LIBOR or other rates.
Also, because SOFR and some alternative floating rates are relatively new market indexes, markets for certain non-LIBOR obligations may never develop or may not be liquid.
Market terms for non-LIBOR floating rate obligations, such as the spread over the index reflected in interest rate provisions, may evolve over time, and prices of non-LIBOR floating rate obligations may be different depending on when they are issued and changing views about correct spread levels.
−Removed: These matters may adversely affect financial markets generally and may also adversely affect our operations specifically, particularly as financial markets continue to transition away from LIBOR.
−Removed: Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.
−Removed: Some of our investments, including the bonds that may be issued in our future securitization transactions for which we would be required to retain a portion of the credit risk, may be rated by rating agencies.
+Added: Credit ratings assigned to our investments are or will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.
+Added: Some of our investments, including bonds issued in our existing or future securitization transactions for which we would be required to retain a portion of the credit risk, are or may be rated by rating agencies.
Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings would not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant.
−Removed: If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate
−Removed: that they may reduce or withdraw, their ratings of our investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.
+Added: If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our portfolio and could result in losses.
Prepayment rates may adversely affect the value of our portfolio.
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Consequently, prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from increases in such rates.
−Removed: The constant prepayment rate (“CPR”) is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.
+Added: The conditional prepayment rate (“CPR”) is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year.
An increase in prepayment rates, as measured by the CPR, will typically accelerate the amortization of our securitized portfolio of loans, thereby reducing the yield or interest income earned on such assets.
−Removed: In periods of declining interest rates, prepayments on investments generally increase and the proceeds of prepayments received during these periods may generally be reinvested by us in comparable assets at reduced yields.
+Added: In periods of declining interest rates, prepayments on investments generally increase and the proceeds of prepayments received during these periods may be reinvested by us in comparable assets at reduced yields.
In addition, the market value of investments subject to prepayment may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates.
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Our investments in Agency RMBS and non-Agency RMBS may result in losses stemming from prepayments on the underlying asset and changes in interest rates.
−Removed: We intend to invest (or continue to invest) in Agency RMBS and non-Agency RMBS.
+Added: We invest in Agency RMBS and non-Agency RMBS.
RMBS in general are subject to particular risks because they have yield and maturity characteristics corresponding to their underlying assets.
2 unchanged sentences
As a result of these unscheduled payments of principal, or prepayments on the underlying assets, the price and yield of RMBS can be adversely affected.
−Removed: For example, during periods of declining interest rates, prepayments can be expected to accelerate, and we would be required to reinvest proceeds at the lower interest rates then available.
+Added: For example, during periods of declining interest rates, prepayments can be expected to accelerate, and we may reinvest proceeds at the lower interest rates then available.
Prepayments of mortgages that underlie securities purchased at a premium could result in capital losses because the premium may not have been fully amortized at the time the obligation is prepaid.
−Removed: In addition, like other interest-bearing securities, the values of RMBS generally fall when interest rates rise, but when interest rates fall, their potential for capital appreciation is limited due to the existence of the prepayment feature.
+Added: In addition, like other interest-bearing securities, the values of RMBS generally fall when interest rates rise, but when interest rates fall, their potential for capital appreciation may be limited due to the existence of the prepayment feature.
The performance of any RMBS, and the results of hedging arrangements entered into with respect thereto, will be affected by:
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Even in the case of assets with an adjustable-rate component, as prevailing market interest rates decline, and without regard to whether the mortgage rates on such assets decline in a manner consistent therewith, the related borrowers may have an increased incentive to refinance for purposes of either:
−Removed: (1) converting to a fixed rate security and thereby “locking in” such rate;
+Added: (1) converting to a fixed rate security;
or (2) taking advantage of a different index, margin, or rate cap or floor on another adjustable-rate note.
1 unchanged sentence
Increases in monthly payments on adjustable-rate mortgages due to higher interest rates may result in greater future delinquency rates.
−Removed: Borrowers with adjustable payments may be exposed to increased monthly payments when the related mortgage interest rate adjusts
−Removed: upward from the initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin.
+Added: Borrowers with adjustable payments may be exposed to increased monthly payments when the related mortgage interest rate adjusts upward from the initial fixed rate or a low introductory rate, as applicable, to the rate computed in accordance with the applicable index and margin.
This increase in borrowers’ monthly payments, together with any increase in prevailing market interest rates, may result in significantly increased monthly payments for borrowers subject to adjustable-rates.
7 unchanged sentences
Within a securitization of residential mortgage loans, various securities are created, each of which has varying degrees of credit risk.
−Removed: We anticipate that our investments in non-Agency RMBS will be concentrated in lower-rated and unrated securities in which we are exposed to the first loss on the residential mortgage loans held by the securitization vehicle, which will subject to us to the most concentrated credit risk associated with the underlying residential mortgage loans.
+Added: Our investments in non-Agency RMBS generally are concentrated in lower-rated and unrated securities in which we are exposed to the first loss on the residential mortgage loans held by the securitization vehicle, which subjects us to the most concentrated credit risk associated with the underlying residential mortgage loans
Additionally, the principal and interest on non-Agency RMBS, unlike those on Agency RMBS, are not guaranteed by GSEs such as Fannie Mae and Freddie Mac or, in the case of Ginnie Mae, the U.S.
8 unchanged sentences
If borrowers default on the residential mortgage loans backing our non-Agency RMBS and we are unable to recover any resulting loss through the foreclosure process, we could be materially and adversely affected.
−Removed: We may invest in investment property loans, which would expose us to an increased risk of loss.
−Removed: We may invest in investment property loans, which are mortgage loans made on portfolios of residential rental properties.
+Added: We invest in investment property loans, which may expose us to an increased risk of loss.
+Added: We invest in investment property loans, which are mortgage loans made on portfolios of residential rental properties.
The repayment of such a loan by the property owner (i.e., the borrower) often depends primarily on its tenant’s continuing ability to pay rent to the property owner.
1 unchanged sentence
In addition, the physical condition of non-owner-occupied properties can be below that of owner-occupied properties due to lax property maintenance standards, which can have a negative impact on the value of the collateral properties.
−Removed: Moreover, loans on non-owner-occupied residential properties generally involve larger principal amounts and a greater degree of risk than owner-occupied residential mortgage loans, resulting in a higher likelihood that we will be subject to losses on such investment property loans.
−Removed: We have invested in, and may continue to invest in, jumbo prime mortgage loans, which will expose us to additional credit risk.
−Removed: We have invested in, and may continue to invest in jumbo prime mortgage loans, which generally do not conform to GSE underwriting guidelines primarily because the mortgage balance exceeds the maximum amount permitted by GSE underwriting guidelines.
+Added: Moreover, loans on non-owner-occupied residential properties may involve larger principal amounts and a greater degree of risk than owner-occupied residential mortgage loans, resulting in a higher likelihood that we will be subject to losses on such investment property loans.
+Added: We have invested in, and may continue to invest in, jumbo prime mortgage loans, which may expose us to an increased risk of loss.
+Added: We have invested in, and may continue to invest in jumbo prime mortgage loans, which generally may not conform to GSE underwriting guidelines for a variety of reasons, such as exceeding GSE loan limits.
Jumbo prime mortgage loans are subject to the risks described above relating to investments in residential mortgage loans, but may expose us to increased risks because of their larger balances and because they cannot be immediately sold to GSEs.
3 unchanged sentences
The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property, which is outside our control.
−Removed: If the operating income of the property decreases due to a variety of factors affecting the property’s commercial operations, the borrower’s ability to repay the loan may be impaired.
−Removed: Special risks associated with commercial real mortgage investments include changes in the general economic climate or local conditions (such as an oversupply of space or a reduction in demand for space), competition based on rental rates, attractiveness and location of the properties, changes in the financial condition of tenants, and changes in operating costs.
+Added: If the operating income of the property decreases, the borrower’s ability to repay the loan may be impaired.
+Added: Additional risks associated with commercial real mortgage investments include, but are not limited to, changes in the general economic climate or local conditions (such as an oversupply of space or a reduction in demand for space), competition based on rental rates, attractiveness and location of the properties, changes in the financial condition of tenants, increases in work-from-home policies, and changes in operating costs.
+Added: For example, recently the office sector has been adversely affected by a decrease in demand as a result of, among other factors, an increase in remote and hybrid working arrangements, and a continuation of this trend could over time erode the overall demand for office space and, in turn, place downward pressure on occupancy rates, rental rates and property values.
Real estate values are also affected by such factors as governmental regulations (including those governing usage, improvements, zoning, and taxes), interest rate levels, the availability of financing, and potential liability under changing environmental and other laws.
Of particular concern may be those mortgaged properties which are, or have been, the site of manufacturing, industrial, or disposal activities.
−Removed: Such environmental risks may give rise to a diminution in the value of property (including real property securing our investment) or liability for cleanup costs or other remedial actions, which liability could exceed the value of such property or the principal balance of the related investment.
−Removed: In certain circumstances, a lender may choose not to foreclose on contaminated property rather than risk incurring liability for remedial actions.
+Added: Such environmental risks may cause a diminution in the value of property (including real property securing our investment) or a liability for cleanup costs or other remedial actions, which could exceed the value of such property or the principal balance of the related investment.
+Added: In certain circumstances, a lender may choose not to foreclose on contaminated property rather than risk incurring a liability for remedial actions.
In the event of any default under a commercial mortgage loan held by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could materially and adversely affect us.
2 unchanged sentences
A second lien mortgage loan is a residential mortgage loan that is subordinate to the primary or first lien mortgage loan on a residential property.
−Removed: In the event of a default or a bankruptcy of the borrower, the second lien mortgage loan will not be paid off until the first lien mortgage loan is paid off, resulting in a higher likelihood that we will be subject to losses on such second lien mortgage loan.
−Removed: As a result, we may not recover all or even a significant part of our investment, which could result in losses and have a material adverse effect on us.
+Added: In the event of a default or a bankruptcy of the borrower, the second lien mortgage loan will not receive payment until the first lien mortgage loan is fully paid, resulting in a higher likelihood that we will be subject to losses on such second lien mortgage loan.
+Added: As a result, we may not recover all or a significant part of our investment, which could result in losses and have a material adverse effect on us.
We may invest in commercial bridge loans, mezzanine loans, construction loans, and B-Notes, which would subject us to an increased risk of loss.
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The rights and remedies afforded a senior lender may limit or preclude the exercise of rights and remedies by us, with resultant loss to us.
−Removed: Further, the equity owners of properties or entities in which we invest may raise defenses (including protection under bankruptcy laws) to enforcement of rights or imposition of remedies by us.
+Added: Further, the equity owners of properties or
+Added: entities in which we invest may raise defenses (including protection under bankruptcy laws) to enforcement of rights or imposition of remedies by us.
In the event such defenses were successful, or resulted in delay, we could incur losses, which could materially and adversely affect us.
3 unchanged sentences
(2) a borrower claim against us for failure to perform under the loan documents;
−Removed: (3) increased costs to the borrower that the borrower is
−Removed: unable to pay;
+Added: (3) increased costs to the borrower that the borrower is unable to pay;
(4) a bankruptcy filing by the borrower;
3 unchanged sentences
We may acquire B-Notes that are subordinated in right of payment to an A-Note, which is a senior interest in such loan.
−Removed: The B-Notes in which we may invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses.
+Added: The B-Notes may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses.
If a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders.
4 unchanged sentences
The higher risks associated with our subordinate position in such investment could subject us to increased risk of losses, which could materially and adversely affect us.
−Removed: We may invest in residential bridge (“fix and flip”) loans, which would expose us to the risk that the borrower of such loan may not be able to sell the property on attractive terms or at all once the property has been re-developed, which may materially and adversely affect us.
−Removed: We may invest in residential bridge (“fix and flip”) loans, which are particularly illiquid investments due to their short life and the greater difficulty of recoupment in the event of a borrower’s default.
+Added: We may invest in residential bridge loans, which would expose us to the risk that the borrower of such loan may not be able to sell the property on attractive terms or at all once the property has been re-developed, which may materially and adversely affect us.
+Added: We may invest in residential bridge loans, which are particularly illiquid investments due to their short life and the greater difficulty of recoupment in the event of a borrower’s default.
As these loans provide borrowers with short-term capital typically in connection with the acquisition and re-development of a single family or multi-family residence, with a view to the borrower selling the property, there is a risk that a borrower may not be able to sell the property on attractive terms or at all once the property has been re-developed.
16 unchanged sentences
Additionally, certain CMBS lack regular amortization of principal, resulting in a single “balloon” principal payment due at maturity.
−Removed: If the underlying mortgage borrower experiences business problems, or other factors limit refinancing
−Removed: alternatives, such balloon principal payment mortgages are likely to experience payment delays or even default.
+Added: If the underlying mortgage borrower experiences business problems, or other factors limit refinancing alternatives, such balloon principal payment mortgages are likely to experience payment delays or even default.
All of these factors increase the risk involved with investments in CMBS.
34 unchanged sentences
Movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain types of ABS.
−Removed: Borrower loan loss rates may be significantly affected by delinquencies, defaults, economic downturns, or general economic conditions beyond the control of individual borrowers.
+Added: loan loss rates may be significantly affected by delinquencies, defaults, economic downturns, or general economic conditions beyond the control of individual borrowers.
Increases in borrower loan loss rates reduce the income generated by, and the value of, ABS.
The value of ABS may be affected by other factors, such as the availability of information concerning the pool and its structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets or the entities providing credit enhancements and the ability of the servicer to service the underlying collateral.
−Removed: In addition, issuers of ABS may have limited ability to enforce the security interest in the underlying
−Removed: assets, collateral securing the payment of loans may not be sufficient to ensure repayment, and credit enhancements (if any) may be inadequate in the event of default.
+Added: In addition, issuers of ABS may have limited ability to enforce the security interest in the underlying assets, collateral securing the payment of loans may not be sufficient to ensure repayment, and credit enhancements (if any) may be inadequate in the event of default.
The ability of borrowers to repay consumer loans may be adversely affected by numerous borrower-specific factors, including unemployment, divorce, major medical expenses, or personal bankruptcy.
32 unchanged sentences
In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks.
−Removed: For example, by relying on incorrect models and data, especially valuation or cash flow models, we may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low, to overestimate or underestimate the timing or amount of cash flows expected to be
−Removed: collected, or to miss favorable opportunities altogether.
+Added: For example, by relying on incorrect models and data, especially valuation or cash flow models, we may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low, to overestimate or underestimate the timing or amount of cash flows expected to be collected, or to miss favorable opportunities altogether.
Similarly, any hedging activities based on faulty models and data may prove to be unsuccessful.
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It may be difficult or impossible to obtain third-party pricing on the assets that we acquire.
−Removed: If third-party pricing is obtained, validating such pricing may be more subjective than it would be for more liquid assets due to the uncertainties inherent in valuing assets for which reliable market quotations are not available.
+Added: If third-party pricing is obtained, validating such pricing may be more subjective than it would be for more liquid assets due to the
+Added: uncertainties inherent in valuing assets for which reliable market quotations are not available.
Any illiquidity of our assets may make it difficult for us to sell such assets on favorable terms or at all.
15 unchanged sentences
Risk Retention Rules.
−Removed: Accordingly, some of our securitizations will require us to hold Risk Retention Securities for an extended period and contribute to the lack of liquidity in our assets, which may have a material adverse effect on us.
+Added: Accordingly, some of our securitizations require, or in the case of certain future securitizations, will require us to hold Risk Retention Securities for an extended period and contribute to the lack of liquidity in our assets, which may have a material adverse effect on us.
In addition, in certain cases, we have also covenanted to retain an interest, and to take certain other action, with respect to such securitizations for purposes of the EU/UK Securitization Rules, and we may covenant to retain an interest, and to take certain other action, with respect to certain future securitizations for purposes of the EU/UK Securitization Rules;
14 unchanged sentences
We have a limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make or sustain distributions to our stockholders.
−Removed: We commenced operations in September 2018 and are organized as a Maryland corporation.
−Removed: In October 2018, we began investing in non-QM loans and other target assets.
+Added: We commenced operations, and began investing in non-QM loans and other target assets, in 2018.
As a result, we have a limited operating history.
2 unchanged sentences
Our results of operations depend on several factors, including the availability of opportunities to acquire non-QM loans and other target assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the financial markets and general economic conditions.
−Removed: Additionally, our results of operations depend on executing our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, but there can be no assurance that we will be able to acquire such loans from Angel Oak Mortgage Lending on favorable terms or at all.
−Removed: The COVID‑19 pandemic disrupted, and new variants and additional outbreaks may cause additional disruptions in, U.S.
−Removed: and global economic activity and financial markets, including increased market volatility, which could materially and adversely affect us.
−Removed: The COVID-19 pandemic caused severe and unprecedented disruptions to the U.S.
−Removed: and global economies and contributed to volatility and negative pressure in financial markets.
−Removed: During the earlier stages of the COVID-19 pandemic, governments and other authorities around the world imposed measures intended to control its spread, including quarantines, restrictions on travel, limits on the operations of non-essential businesses and other workforce pressures.
−Removed: We are not able to predict the ongoing or future impact of the COVID-19 pandemic, or another pandemic, on us that may result from future outbreaks, surges in cases of COVID-19 or related variants, or other infectious agents.
−Removed: Future outbreaks or surges in cases of COVID-19 or related variants, or other pandemic diseases, may result in a material adverse effect on us in the future.
−Removed: While many or all areas of our business could be adversely affected by future or ongoing outbreaks of COVID-19, including related variants, or another pandemic, we currently believe the following would be among the most material to us:
−Removed: • Residential and commercial real estate values could experience further volatility, which could have a material adverse effect on the value of our investments.
−Removed: • We could fail to meet or satisfy one or more of the covenants in our loan financing lines or other financing arrangements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral or enforce their respective interests against existing collateral.
−Removed: • Difficulty accessing capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions could adversely affect our ability to execute our strategy, fund our operations or address maturing liabilities on a timely basis, as well as the ability of the mortgage loan borrowers underlying the loans and securities that we own to meet their obligations to us.
−Removed: • A decline in the housing market and a resulting decline in demand for mortgage financing resulting from the economic effects of the COVID-19 pandemic could adversely affect our ability to make new investments.
−Removed: • Disruptions to the normal operation of mortgage finance markets could cause our investment activities to cease to function efficiently because of, among other factors, an inability to access short-term or long-term financing, a disruption to the securitization market, or our inability to access these markets or execute securitization transactions.
−Removed: In addition to the foregoing, we have experienced and may in the future experience other negative impacts to our business as a result of the COVID-19 pandemic, any of which could also have the effect of heightening other risks described in this Item 1A.
−Removed: We may change our strategy, investment guidelines, hedging strategy, and asset allocation, operational, and management policies without notice or stockholder consent, which could materially and adversely affect us.
−Removed: Our Board of Directors has the authority to change our strategy, investment guidelines, hedging strategy, and asset allocation, operational, and management policies at any time without notice to or consent from our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier than, the investments described in this Annual Report on Form 10-K.
+Added: Additionally, our results of operations depend on executing our strategy of making credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced
+Added: from Angel Oak Mortgage Lending, but there can be no assurance that we will be able to acquire such loans from Angel Oak Mortgage Lending on favorable terms or at all.
+Added: We are subject to risks associated with pandemics or other public health crises, which could materially and adversely affect us.
+Added: We are subject to risks associated with pandemics or other public health crises, including the COVID-19 pandemic.
+Added: While many countries around the world have removed the restrictions taken in response to the COVID-19 pandemic and the negative impacts of COVID-19 have significantly improved, the emergence of new variants of COVID-19 or another pandemic or other public health crisis may result in new preventive measures taken by governmental authorities or others to alleviate the crisis, such as mandatory business closures, quarantines and restrictions on travel.
+Added: Any such measures could adversely impact the economy globally or locally, including by leading to further economic slowdowns and additional volatility and disruption of financial markets.
+Added: Our operations and financial performance could be materially and adversely impacted as the result of the future emergence of new variants of COVID-19, or another pandemic or other public health crisis, and any related shutdowns or other significant business disruptions.
+Added: The scope and duration of any future pandemic or other public health crisis, the pace at which government and other restrictions are imposed and lifted, the scope of additional actions taken to mitigate the spread of disease, global vaccination and booster rates, the speed and extent to which global or local markets recover from any such disruptions caused by such a public health crisis, and the impact of these factors on us would depend on future developments that would be highly uncertain and unpredictable.
+Added: To the extent any future pandemic or other public health crisis adversely affects economic conditions and our operations, it could also have the effect of heightening other risks described in this “Item 1A.
+Added: Risk Factors.”
+Added: We may change our strategy, investment guidelines, hedging strategy, asset allocation, operational, and management policies without notice or stockholder consent, which could materially and adversely affect us.
+Added: Our Board of Directors has the authority to change our strategy, investment guidelines, hedging strategy, asset allocation, operational, and management policies at any time without notice to or consent from our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier or less accretive than, the investments described in this Annual Report on Form 10-K.
A change in our investment or hedging strategy may increase our exposure to real estate values, interest rates, and other factors.
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We rely on external third-party servicers to service our investments, including the collection of all interest and principal payments on the loans in our portfolio and to perform loss mitigation services.
−Removed: If our third-party servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default.
+Added: If our third-party servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be less likely to make these payments, which could result in a higher frequency of default.
The failure of our third-party servicers to effectively service our mortgage loan investments could negatively impact the value of such investments and our performance, which would materially and adversely affect us.
In addition, legislation that has been enacted or that may be enacted in order to reduce or prevent foreclosures through, among other things, loan modifications may reduce the value of our mortgage loans or loans underlying our investments.
−Removed: Mortgage servicers may be incentivized by the U.S.
+Added: Mortgage servicers may be
+Added: incentivized by the U.S.
Government to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the owners of the mortgage loans.
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As a result of these legislative actions, the mortgage servicers on which we rely may not perform in our best interests or up to our expectations.
−Removed: If our third-party servicers, including mortgage servicers, do not perform as expected, it would materially and adversely affect us.
+Added: If our third-party servicers, including mortgage servicers, do not perform as expected, it may materially and adversely affect us.
We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.
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Congress and various state and local legislatures may pass mortgage-related legislation that would affect our business, including legislation that would permit limited assignee liability for certain violations in the mortgage loan origination process, and legislation that would allow judicial modification of loan principal in the event of personal bankruptcy.
−Removed: We cannot predict whether or in what form Congress or the various state and local legislatures may enact legislation affecting our business or whether any such legislation will require us
−Removed: to change our practices or make changes in our portfolio in the future.
+Added: We cannot predict whether or in what form Congress or the various state and local legislatures may enact legislation affecting our business or whether any such legislation will require us to change our practices or make changes in our portfolio in the future.
These changes, if required, could materially and adversely affect us, particularly if we make such changes in response to new or amended laws, regulations, or ordinances in any state where we hold a significant portion of our investments, or if such changes result in us being held responsible for any violations in the mortgage loan origination process.
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Although our strategy is to make credit-sensitive investments primarily in newly-originated first lien non-QM loans that are primarily sourced from Angel Oak Mortgage Lending, Angel Oak Mortgage Lending has no obligation to sell non-QM loans and other target assets to us and, as a result, we may need to acquire non-QM loans and other target assets from unaffiliated third parties, including through the secondary market when market conditions and asset prices are conducive to making attractive purchases.
−Removed: In acquiring non-QM loans and other target assets from unaffiliated third parties, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities.
+Added: In acquiring non-QM loans and other target assets from unaffiliated third
+Added: parties, we compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities.
Additionally, we may also compete with the U.S.
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Treasury to the extent they purchase assets meeting our objectives pursuant to various purchase programs.
−Removed: Many of our competitors are significantly larger than us, have greater access to capital and other resources and may have other advantages over us.
+Added: Many of our competitors are larger than us, have greater access to capital and other resources and may have other advantages over us.
Our competitors may include other entities managed by Angel Oak, including with respect to loans originated by Angel Oak Mortgage Lending.
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Government, could materially and adversely affect us.
−Removed: There is significant uncertainty surrounding the futures of Fannie Mae and Freddie Mac.
−Removed: The continued flow of MBS from these GSEs, supported by their guarantees against borrower defaults, is essential to the operation of the mortgage markets in their current form, and important to our strategies.
−Removed: Congress has announced its intention to consider the elimination or restructuring of these GSEs.
−Removed: In addition, in September 2019, the U.S.
−Removed: Department of Treasury released its Housing Reform Plan, which outlines potential changes to the U.S.
−Removed: Government’s role in the mortgage market, such as recommendations to end the conservatorships of the GSEs and restructure and privatize Fannie Mae and Freddie Mac.
−Removed: However, no legislation has been enacted with respect to any of the foregoing, and it is not possible at this time to predict the timing of the enactment of the Housing Reform Plan, or whether the Housing Reform Plan will be enacted as proposed or at all, or the scope and nature of any other actions that the U.S.
−Removed: Government will ultimately take with respect to these GSEs.
−Removed: As a result, there can be no assurance of the continuation of Fannie Mae and Freddie Mac as currently constituted and operated.
−Removed: Any significant changes to the structure of these GSEs or any failure by the GSEs to honor their guarantees and other obligations could materially and adversely affect us.
+Added: Since 2008, Fannie Mae and Freddie Mac have been in conservatorship, with their primary regulator, the Federal Housing Finance Agency, acting as conservator.
+Added: While Fannie Mae and Freddie Mac currently act as the primary sources of liquidity in the residential mortgage markets, both by purchasing mortgage loans for their own portfolios and by guaranteeing mortgage-backed securities, the U.S.
+Added: Government may enact structural changes to one or more of the GSEs, including privatization, consolidation and/or a reduction in the ability of GSEs to purchase mortgage loans or guarantee mortgage obligations.
+Added: We cannot predict if, when or how the conservatorships will end, or what associated changes (if any) may be made to the structure, mandate or overall business practices of either of the GSEs.
+Added: Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form and whether they will continue to meet their guarantees and other obligations.
+Added: A substantial reduction in mortgage purchasing activity by the GSEs could result in increased volatility in the residential housing market.
Certain actions by the U.S.
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Federal Reserve regarding monetary policy and the actions it takes to set or adjust monetary policy may affect the expectations and outlooks of market participants in ways that adversely affect our investments.
−Removed: Over the past few years, statements made by the Chair and other members of the Board of Governors of the U.S.
−Removed: Federal Reserve and by other U.S.
+Added: Over the past few years, statements made by the Chair and other members of the U.S.
+Added: Federal Reserve Board and by other U.S.
Federal Reserve officials regarding the U.S.
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Federal Reserve’s future open market activity and monetary policy had a significant impact on, among other things, benchmark interest rates, the value of residential mortgage loans and, more generally, the fixed-income markets.
−Removed: These statements, the actions of the U.S.
+Added: In addition, recently the U.S.
+Added: Federal Reserve Board has raised, and may continue to raise, certain benchmark interest rates in an effort to curb inflation.
+Added: These statements and actions of the U.S.
Federal Reserve, and other factors also significantly impacted many market participants’ expectations and outlooks regarding future levels of benchmark interest rates and the expected yields these market participants would require to invest in fixed-income instruments.
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Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparties breach a representation or warranty given to us.
−Removed: However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparties will remain solvent or otherwise be able to honor their obligations under these mortgage loan purchase agreements.
+Added: However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparties will remain solvent or otherwise be able to honor their obligations under these mortgage loan purchase
Our inability to obtain indemnity or require repurchase of a significant number of loans could have a material adverse effect on us.
+Added: Maintaining cybersecurity and data security is important to our business and a breach of our cybersecurity or data security could result in serious harm to our reputation and have a material adverse impact on our business and financial results
+Added: When we acquire or originate real estate mortgage loans, we come into possession of borrower non-public personal information that an identity thief could utilize in engaging in fraudulent activity or theft.
+Added: We and our Manager may share this information with third parties, such as loan sub-servicers, outside vendors, third parties interested in acquiring such loans from us, or lenders extending credit to us collateralized by such loans.
+Added: We have acquired more than 8,000 residential mortgage loans since 2018.
+Added: While our Manager has security measures in place to protect this information and prevent security breaches, these security measures may be compromised as a result of third-party action, including intentional misconduct by computer hackers, cyber-attacks, “phishing” attacks, service provider or vendor error, or malfeasance or other intentional or unintentional acts by third parties and bad actors, including third-party service providers.
+Added: Furthermore, borrower data, including personally identifiable information, may be lost, exposed, or subject to unauthorized access or use as a result of accidents, errors, or malfeasance by our Manager and its employees, independent contractors, or others working with us or on our behalf.
+Added: Our and our Manager’s servers and systems, and those of our service providers, may be vulnerable to computer malware, break-ins, denial-of-service attacks, and similar disruptions from unauthorized tampering with our or our Manager’s computer systems, which could result in someone obtaining unauthorized access to borrowers’ data or our or our Manager’s data, including other confidential business information.
+Added: We and our Manager have developed our cybersecurity systems and processes that are intended to protect this type of data and information;
+Added: however, they may not be effective in preventing unauthorized access in the future.
+Added: While past unauthorized access has been immaterial to our business and financial results, there can be no assurance of a similar result in the future.
+Added: Furthermore, because the techniques used to obtain unauthorized access to, or to sabotage, systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.
+Added: We may also experience security breaches that may remain undetected for an extended period.
+Added: We may be liable for losses suffered by individuals whose identities are stolen as a result of a breach of the security of the systems that we, our Manager or third-parties and service providers of ours store this information on, and any such liability could be material.
+Added: Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals and providing credit monitoring services to them, as well as regulatory fines or penalties.
+Added: In addition, any breach of these systems could disrupt our normal business operations and expose us to reputational damage and lost business, revenues, and profits.
+Added: Any insurance we maintain against the risk of this type of loss may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular breach.
+Added: Security breaches could also significantly damage our reputation with existing and prospective loan sellers, borrowers, and third parties with whom we do business.
+Added: Any publicized security problems affecting our businesses and/or those of such third parties may negatively impact the market perception of our products and discourage market participants from doing business with us.
+Added: These risks may increase in the future as we continue to increase our reliance on the internet and our or our Affiliates use of web-based product offerings and on the use of cybersecurity.
We are highly dependent on information systems, and system failures could significantly disrupt our business, which may, in turn, have a material adverse effect on us.
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For example, the Dodd-Frank Act alters the regulation of commodity interests, imposes regulation on the over-the-counter (“OTC”) derivatives market, places restrictions on residential mortgage loan originations, and reforms the asset-backed securitization markets most notably by imposing credit requirements.
−Removed: While there continues to be uncertainty about the exact impact of all of these changes, we do know that we and our Manager are subject to a more complex regulatory framework, and are incurring and will in the future incur costs to comply with new or recent requirements as well as to monitor compliance in the future.
+Added: While there continues to be uncertainty about the exact impact of certain of these changes, we and our Manager are subject to a complex regulatory framework, and are incurring and will in the future incur costs to comply with new or existing requirements as well as to monitor compliance.
We cannot predict when or if any new law, regulation, or administrative interpretation, including those related to the Dodd-Frank Act, or any amendment to or repeal of any existing law, regulation, or administrative interpretation, will be adopted or promulgated or will become effective.
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This requirement limits our ability to make certain investments and could require us to restructure our operations, sell certain of our assets or abstain from the purchase of certain assets, which could materially and adversely affect us.
−Removed: Most of our investments are, and we expect the will continue to be, held by our operating partnership's wholly-owned or majority-owned subsidiaries and that most of these subsidiaries will rely on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in [the business of] .
+Added: Most of our investments are, and we expect they will continue to be, held by our operating partnership's wholly-owned or majority-owned subsidiaries and that most of these subsidiaries will rely on the exclusion from the definition of an investment company under Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in [the business of] .
purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion, as interpreted by the SEC staff, generally requires that at least 55% of a subsidiary's portfolio must be comprised of qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).
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These requirements limit the assets those subsidiaries can own and the timing of sales and purchases of those assets, which could materially and adversely affect us.
−Removed: On August 31, 2011, the SEC published a concept release entitled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments” (Investment Company Act Rel.
−Removed: This release notes that the SEC is reviewing the Section 3(c)(5)(C) exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities.
+Added: The SEC has periodically solicited public comment on a wide range of issues relating to the Section 3(c)(5)(C) exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities, including the nature of the assets that qualify
+Added: for purposes of the exemption and whether mortgage REITs should be regulated in a manner similar to investment companies.
There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the SEC or its staff regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations as a result of this review.
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These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders.
−Removed: Changes in accounting interpretations or
−Removed: assumptions could impact our consolidated financial statements and our ability to timely prepare our consolidated financial statements.
+Added: Changes in accounting interpretations or assumptions could impact our consolidated financial statements and our ability to timely prepare our consolidated financial statements.
Our inability to timely prepare our consolidated financial statements in the future would likely materially and adversely affect us.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity, and disputes between us and our joint venture partners.
−Removed: We may in the future make investments through joint ventures.
+Added: In the future, we may make investments through joint ventures.
Such joint venture investments may involve risks not otherwise present when we make investments without partners, including the following:
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Risks Related to Our Financing and Hedging
−Removed: We may incur significant debt, which will subject us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.
−Removed: As of December 31, 2022, we had approximately $692.4 million of debt outstanding, including approximately $639.9 million outstanding under various uncommitted loan financing lines and static loan pool financing arrangements with a combination of multinational
−Removed: and global money center banks, institutional investors, and large regional banks, which permitted borrowings in an aggregate amount of up to $1.21 billion as of December 31, 2022;
+Added: Our significant debt subjects us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur.
+Added: As of December 31, 2023, we had approximately $484.3 million of debt outstanding, including approximately $290.6 million outstanding under various uncommitted loan financing lines with a combination of multinational and global money center banks, which permitted borrowings in an aggregate amount of up to $1.1 billion as of December 31, 2023;
and approximately $193.7 million outstanding under short-term repurchase facilities.
−Removed: We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization.
−Removed: We may use static loan pool financing arrangements to hold loans already acquired for eventual securitization or other disposition.
−Removed: Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements.
−Removed: We may also issue additional equity, equity-related, and debt securities to fund our strategy.
−Removed: Our charter, bylaws and investment guidelines require no minimum or maximum leverage and our Manager will have the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes.
−Removed: Because our strategy is flexible, dynamic, and opportunistic, our overall leverage and the leverage used for individual asset classes will vary over time.
−Removed: Our leverage ratio may increase as we continue to purchase additional loans, if those loans are financed.
−Removed: Depending on market conditions, we expect that our primary sources of financing going forward will include securitizations, loan financing lines and repurchase facilities.
−Removed: In the future, we may also utilize other types of borrowings, including bank credit facilities and warehouse lines of credit, among others.
−Removed: Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that:
−Removed: • our cash flow from operations may be insufficient to make required payments of principal of and interest on our debt, which is likely to result in (1) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision), which we then may be unable to repay from internal funds or to refinance on favorable terms, or at all, (2) our inability to borrow undrawn amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, which would result in a decrease in our liquidity, and/or (3) the loss of some or all of our collateral assets to foreclosure or sale;
+Added: Our charter, bylaws and investment guidelines contain no limitation on the amount of debt we may incur, and our Manager has the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes.
+Added: Our substantial indebtedness and any future indebtedness we incur subjects us to many risks that, if realized, would materially and adversely affect us, including the risk that:
+Added: • our cash flow from operations may be insufficient to make required payments of principal and interest on our debt, which is likely to result in (1) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision), which we then may be unable to repay from internal funds or to refinance on favorable terms, or at all, (2) our inability to borrow undrawn amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, which would result in a decrease in our liquidity, and/or (3) the loss of some or all of our collateral assets to foreclosure or sale;
• our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase in an amount sufficient to offset the higher financing costs;
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• we may not be able to refinance any debt that matures prior to the maturity (or realization) of an underlying investment it was used to finance on favorable terms or at all.
+Added: In addition, our substantial indebtedness could limit our ability to obtain additional financing on acceptable terms, or at all, for working capital and general corporate purposes.
+Added: Our liquidity needs vary significantly from time to time and may be affected by general economic conditions, industry trends, performance and many other factors outside our control.
There can be no assurance that our leverage strategy will be successful, and our leverage strategy may cause us to incur significant losses, which could materially and adversely affect us.
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Leverage will magnify both the gains and the losses on an investment.
−Removed: Leverage will increase our returns as long as we earn a greater return on investments purchased with borrowed
−Removed: funds than our cost of borrowing such funds although there can be no assurance that would be able to earn such a greater return.
+Added: Leverage will increase our returns as long as we earn a greater return on investments purchased with borrowed funds than our cost of borrowing such funds although there can be no assurance that would be able to earn such a greater return.
Moreover, if we use leverage to acquire an asset and the value of the asset decreases, the leverage will increase our losses.
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Market conditions and other factors may affect our ability to securitize assets, which could increase our financing costs and materially and adversely affect us.
−Removed: We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization.
−Removed: Upon accumulating an appropriate amount of assets, we expect to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements, but also exposes us to the risk of first loss.
+Added: We expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization.
+Added: Upon accumulating an appropriate amount of assets, we expect to continue to finance a substantial portion of our mortgage loans utilizing fixed rate term securitization funding that provides long-term financing for our mortgage loans and locks in our cost of funding, regardless of future interest rate movements, but also exposes us to the risk of first loss.
Our ability to continue to obtain permanent non-recourse financing through securitizations is affected by a number of factors, including:
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Risk Retention Rules by a group of U.S.
−Removed: federal regulators, which require that the sponsors of securitizations retain a minimum of 5% of the credit risk of the assets collateralizing any securitization transaction they bring to market.
+Added: federal regulators, which require that the sponsors of securitizations (or their “majority-owned affiliates,” as defined under Regulation RR) retain a minimum of 5% of the credit risk of the assets collateralizing any securitization transaction they bring to market, subject to certain exemptions and exclusions.
While many of the rule-makings required by the Dodd-Frank Act have been finalized and are either effective or pending effectiveness, others remain to be finalized or even proposed.
−Removed: Further, many of the rules that have been finalized have been subject to modification or interpretation since their effective date, oftentimes in order to clear up ambiguities present in the final rules.
+Added: Further, many of the rules that have been finalized have been subject to modification or interpretation since their effective date, oftentimes in order to clarify ambiguities present in the final
Accordingly, it is difficult to predict with certainty how the Dodd-Frank Act and the other regulations that have been proposed, finalized or recently implemented will affect our ability to execute securitizations.
In addition to the Dodd-Frank Act, its related rules and Regulation AB II, other U.S.
−Removed: federal or state laws and regulations that could affect our ability to execute securitization transactions may be proposed, enacted, or implemented.
−Removed: These laws and regulations could
−Removed: effectively preclude us from executing securitization transactions, could delay our execution of these types of transactions, or could reduce the returns we would otherwise expect to earn from executing securitization transactions.
+Added: federal or state laws and regulations that could affect our ability to execute securitization transactions may be proposed, enacted, modified or implemented.
+Added: In addition, the securitization industry continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines.
+Added: These laws and regulations and changes to securitization practices could alter the structure of securitizations in the future, could pose additional risks to our participation in future securitizations or effectively preclude us from executing securitization transactions, could delay our execution of these types of transactions, or could reduce the returns we would otherwise expect to earn from executing securitization transactions.
Additionally, capital and leverage requirements applicable to banks and other regulated financial institutions that traditionally purchase and hold asset-backed securities, could result in less investor demand for securities issued through securitization transactions or increased competition from other institutions that execute securitization transactions.
−Removed: The securitization process is subject to an evolving regulatory environment that may affect certain aspects of our current business.
−Removed: As a result of the dislocation of the credit markets during the 2008 recession, and in anticipation of more extensive regulation, including regulations promulgated pursuant to the Dodd-Frank Act, the securitization industry has crafted and continues to craft changes to securitization practices, including changes to representations and warranties in securitization transaction documents, new underwriting guidelines and disclosure guidelines.
−Removed: Pursuant to the Dodd-Frank Act, various U.S.
−Removed: federal agencies, including the SEC, have promulgated regulations with respect to issues that affect securitizations.
−Removed: Risk Retention Rules generally require the sponsor of a securitization to retain not less than 5% of the credit risk of the assets collateralizing the issuer’s securities.
−Removed: When applicable, the U.S.
−Removed: Risk Retention Rules generally require the “securitizer” of a “securitization transaction” to retain at least 5% of the “credit risk” of “securitized assets,” as such terms are defined for purposes of that statute, and generally prohibit a securitizer from directly or indirectly eliminating or reducing its credit exposure by hedging or otherwise transferring the credit risk that the securitizer is required to retain.
−Removed: The regulatory environment in the United States may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act.
−Removed: On February 3, 2017, an executive order was signed calling for the administration to review U.S.
−Removed: financial laws and regulations in order to determine their consistency with a set of core principles identified in the order.
−Removed: Future changes may include certain de-regulatory measures for the U.S.
−Removed: financial services industry, including changes to Financial Stability Oversight Council, the Volcker Rule and credit risk retention requirements, among other areas.
−Removed: These developments, and other proposed regulations affecting securitizations, could alter the structure of securitizations in the future, pose additional risks to our participation in future securitizations or reduce or eliminate the economic incentives for participating in future securitizations, increase the costs associated with our acquisition or securitization activities, or otherwise increase the risks or costs of our doing business.
We may be unable to profitably execute securitization transactions, which could materially and adversely affect us.
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Additionally, in effecting securitization transactions, we may incur transaction costs or may incur or be required to make reserves for any liability in connection with executing a transaction, and such costs can also reduce the profitability of a transaction.
−Removed: Furthermore, in the securitization transactions we participate in, we will make certain representations and warranties about the underlying mortgage loans that we intend to securitize and we will assume the obligation to repurchase or replace those mortgage loans in certain circumstances if those representations or warranties are untrue.
+Added: Furthermore, in the securitization transactions we participate in, we make certain representations and warranties about the underlying mortgage loans that we intend to securitize and we assume the obligation to repurchase or replace those mortgage loans in certain circumstances if those representations or warranties are untrue.
If we are required to repurchase or replace such mortgage loans, it may impact our ability to profitably execute securitizations of mortgage loans.
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Our securitization transactions may be on significantly less advantageous terms than we had anticipated and we may be materially and adversely affected.
−Removed: A substantial portion of our portfolio is expected to consist of non-QM loans originated by Angel Oak Mortgage Lending and other target assets acquired from Angel Oak Mortgage Lending and RMBS and CMBS acquired from AOMT securitization vehicles affiliated with us, which creates certain conflicts of interest.
−Removed: See “— Risks Related to Our Relationship with Our Manager — There are conflicts of interest in our relationship with Angel Oak, including our Manager, and we may compete with existing and future managed entities of Angel Oak, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.”
−Removed: In connection with our securitizations of mortgage loans into “real estate mortgage investment conduit” (“REMIC”) securities backed by mortgage loans or other assets (“REMIC Certificates”), (1) our taxable REIT subsidiary (“TRS”) will sell a substantial portion of the loans it purchases from Angel Oak Mortgage Lending or unaffiliated third parties to an AOMT securitization vehicle;
+Added: In connection with our securitizations of mortgage loans into “real estate mortgage investment conduit” (“REMIC”) securities backed by mortgage loans or other assets (“REMIC Certificates”), (1) our TRS will sell a substantial portion of the loans it purchases from Angel Oak Mortgage Lending or unaffiliated third parties to an AOMT securitization vehicle;
(2) we or another affiliate will be expected to purchase one or more tranches of the REMIC Certificates issued by such AOMT securitization vehicle, including any securities required to be retained pursuant to the U.S.
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(3) our TRS will make certain representations and warranties about the underlying assets and assume the obligation to repurchase or replace those assets in certain circumstances if those representations or warranties are untrue;
−Removed: and/or (4) our TRS and/or we will guarantee the obligations of certain of the entities included in Angel Oak Mortgage Lending to repurchase or replace those assets in certain cases if the representations or warranties made by Angel Oak Mortgage Lending about those assets are untrue or if certain covenants made regarding the servicing of those assets by Angel Oak Mortgage Lending are breached and, in any case, the related Angel Oak Mortgage Lending entity does not repurchase or replace the assets itself.
−Removed: In such event, we will be contractually obligated to repurchase loans at a price that exceeds their market value at the time that they are subject to our repurchase obligation.
+Added: and/or (4) in circumstances where Angel Oak Mortgage Lending has made certain representations and warranties about the underlying assets, our TRS and/or we will guarantee the obligations of certain of the entities included in Angel Oak Mortgage Lending to repurchase or replace those assets in certain cases if the representations or warranties made by Angel Oak Mortgage Lending about those assets are untrue or if certain covenants made regarding the servicing of those assets by Angel Oak Mortgage Lending are breached and, in any case, the related Angel Oak Mortgage Lending entity does not repurchase or replace the assets itself.
+Added: In such event, we will be contractually obligated to repurchase loans at a price that may exceed their market value at the time that they are subject to our repurchase obligation.
Additionally, a guarantee of the obligations of ours or any of our subsidiaries under any agreements we enter into in connection with a securitization may be required from us.
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Our loan financing lines subject us to additional risks, which could materially and adversely affect us.
−Removed: We expect to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization.
+Added: We expect to continue to use loan financing lines to finance the acquisition and accumulation of mortgage loans or other mortgage-related assets pending their eventual securitization.
Loan financing lines involve either the sale of a loan by us and our agreement to repurchase the loan at a specified time and price (thereby financing our acquisition of such loan) or the purchase by us of a loan with an agreement to resell it to the seller at a specified time and price.
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If the counterparty to a loan financing line to whom a loan is sold should default, as a result of bankruptcy or otherwise, we could experience delays in liquidating the underlying loan, resulting in a lack of access to income on the underlying loan during this period and expenses in our enforcement of our rights.
−Removed: Ultimately, we may not be able to recover the loans sold, which could result in a loss to us if the
−Removed: value of such loans has increased over their repurchase price.
+Added: Ultimately, we may not be able to recover the loans sold, which could result in a loss to us if the value of such loans has increased over their repurchase price.
If we act as the purchaser under a loan financing line, a risk exists that the seller will not pay to us the agreed upon sum on the delivery date at which point we would generally be entitled to sell the relevant loans that we purchased.
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Our lenders and our derivative counterparties may require us to post additional collateral, which may force us to liquidate assets, and if we fail to post sufficient collateral our debts may be accelerated and/or our derivative contracts terminated on unfavorable terms.
−Removed: Our loan financing lines and our future loan financing lines and derivative contracts, such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts or options, may allow our lenders and derivative counterparties, as the case may be, to varying degrees, to determine an updated market value of our collateral and derivative contracts to reflect current market conditions.
+Added: Our loan financing lines and derivative contracts, such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts or options, may allow our lenders and derivative counterparties, as the case may be, to varying degrees, to determine an updated market value of our collateral and derivative contracts to reflect current market conditions.
If the market value of our collateral or our derivative contracts with a particular lender or derivative counterparty declines in value, we may be required by the lender or derivative counterparty to provide additional collateral or repay a portion of the funds advanced on minimal notice, which is known as a margin call.
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Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.
+Added: Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control.
+Added: Recently, there has been a significant rise in inflation and the U.S.
+Added: Federal Reserve Board has raised, and may continue to raise, interest rates in an effort to curb inflation.
+Added: These increases in interest rates and inflation have led, and may continue to lead, to economic volatility, increased borrowing costs, price increases and risks of recession.
Our primary interest rate exposures relate to the yield on our loans and the financing cost of our debt, as well as any interest rate swaps utilized for hedging purposes.
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As of December 31, 2023, we had approximately $484.3 million of recourse debt outstanding, all of which bears interest at a floating rate.
−Removed: Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we have utilized, and in the future expect to continue to utilize various derivative instruments and other
−Removed: hedging instruments to mitigate interest rate risk, credit risk and other risks.
+Added: Subject to maintaining our qualification as a REIT and maintaining our exclusion from regulation as an investment company under the Investment Company Act, we have utilized, and in the future expect to continue to utilize various derivative instruments and other hedging instruments to mitigate interest rate risk, credit risk and other risks.
For example, we may opportunistically enter into hedging transactions with respect to interest rate exposure on one or more of our assets or liabilities.
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Any such hedging transactions could take a variety of forms, including the use of derivative instruments such as interest rate swap contracts, index swap contracts, interest rate cap or floor contracts, futures or forward contracts and options.
−Removed: However, it is impossible to fully hedge our investments.
+Added: However, it is not possible to fully hedge all of the risks associated with our investments.
Furthermore, certain hedging transactions could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument).
−Removed: The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges.
+Added: The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges, which may result in an economic loss.
These economic losses would be reflected in our results of operations, and our ability to fund these obligations would depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could materially and adversely affect us.
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Registered swap and security-based swap dealers are subject to minimum capital and margin requirements and business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest, and other regulatory burdens.
−Removed: These requirements further increase the overall costs for OTC derivative dealers, which costs may be passed along to market participants as market changes continue to be implemented.
+Added: These requirements further increase the overall costs for OTC derivative dealers, which may be passed along to market participants as market changes continue to be implemented.
Although the Dodd-Frank Act required many OTC derivative transactions previously entered into on a principal-to-principal basis to be submitted for clearing by a regulated clearinghouse, not all of our derivative transactions will be subject to the clearing requirements.
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The risk of counterparty nonperformance can be significant in the case of these OTC instruments, and although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk.
−Removed: A liquid secondary market may not exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses.
+Added: A liquid secondary market may not exist for hedging instruments to be purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses.
While the Dodd-Frank Act is intended to bring more stability and lower counterparty risk to the derivatives market by requiring central clearing of certain standardized derivatives trades, not all of our trades are or will be subject to a clearing requirement because the trades are grandfathered or because they are bespoke, or because they are within a class that is not currently subject to mandatory clearing.
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Regulators have also recently required swap dealers to collect margin on the uncleared swap transactions that they enter into with financial entities such as mortgage REITs, thereby potentially also increasing our costs.
−Removed: Furthermore, a mortgage REIT that enters into derivatives transactions, including swap agreements and futures contracts, may be considered to be a regulated commodity pool that is required to be operated by a registered or exempt “commodity pool operator.” On December 7, 2012, the CFTC issued a No-Action Letter that provides mortgage REITs relief from such commodity pool operator registration requirement (the “No-Action Letter”) if they meet certain conditions and submit a claim for such no-action relief by email to the CFTC.
−Removed: We believe we meet the conditions set forth in the No-Action Letter and have filed our claim with the CFTC to perfect the use of the no-action relief from commodity pool operator registration.
−Removed: However, if in the future we do not meet the conditions set forth in the No-Action Letter or the relief provided by the No-Action Letter becomes unavailable for any other reason, we may need to seek to obtain an alternative exemption from registration for our Manager, which is currently not registered as a commodity pool operator with the CFTC, and we may become subject to additional compliance, disclosure, recordkeeping and reporting requirements, which may increase our costs and materially and adversely affect us.
+Added: Furthermore, unless it satisfies the criteria for no-action relief from the CFTC’s commodity pool operator registration rules, a mortgage REIT that enters into derivatives transactions, including swap agreements and futures contracts, may be considered to be a regulated commodity pool that is required to be operated by a registered or exempt “commodity pool operator.” Although we believe we satisfy the criteria for this no-action relief, there can be no assurance that we will continue to do so or that such no-action relief will continue to be available.
+Added: If such no-action relief becomes unavailable for any reason, we would need to seek to obtain an alternative exemption from registration for our Manager, which is currently not registered as a commodity pool operator with the CFTC, and we may become subject to additional compliance, disclosure, recordkeeping and reporting requirements, which may increase our costs and materially and adversely affect us.
Risks Related to Our Organizational Structure
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LLC, and Xylem Finance LLC (the “DK Entity”), an affiliate of Davidson Kempner Capital Management LP, each beneficially own over 10% of our outstanding common stock.
−Removed: As a result, each of the MS Entity and the DK Entity have significant influence in the election of our directors, who exercise overall supervision and control over us and our subsidiaries.
+Added: As a result, each of the MS Entity and the DK Entity has significant influence in the election of our directors, who exercise overall supervision and control over us and our subsidiaries.
In addition, pursuant to the shareholder rights agreement that we and our Manager entered into with the MS Entity in connection with our IPO, the MS Entity, subject to certain limitations, has the right to designate one nominee for election to our Board of Directors for so long as the MS Entity and its affiliates beneficially own, in the aggregate, shares of our common stock representing at least 10% of the shares of our common stock then outstanding (excluding shares of our common stock that are subject to issuance upon the exercise or exchange of rights of conversion, or any options, warrants or other rights to acquire shares of our common stock).
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For purposes of the ownership requirements in this shareholder rights agreement, shares of our common stock that are subject to issuance upon the exercise or exchange of rights of conversion, or any options, warrants or other rights to acquire shares, will not be counted as outstanding.
−Removed: These and certain other pre-IPO
−Removed: investors were granted rights to receive a share of our Manager’s revenues received under the Management Agreement in connection with their investments prior to the IPO.
+Added: These and certain other pre-IPO investors were granted rights to receive a share of our Manager’s revenues received under the Management Agreement in connection with their investments prior to the IPO.
Additionally, the MS Entity and the DK Entity, and our other pre-IPO investors entered into a registration rights agreement with us in connection with our IPO, pursuant to which they are entitled to registration rights in respect of shares of our common stock.
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As a result, we expect that each of these parties will continue to influence the outcome of matters required to be submitted to stockholders for approval, including the election of our directors, amendments to our charter, the removal of our directors for cause, and the approval of significant transactions, such as mergers or other sales of our company or our assets.
−Removed: The influence exerted by these stockholders over our business and affairs might not be consistent with your best interests as a stockholder and their receipt of a share of the fees received by our Manager under the Management Agreement may result in their interests not being aligned with the interests of other stockholders.
−Removed: In addition, this concentration of voting control and influence may have the effect of delaying, deferring or preventing a transaction or change in control of us which might involve a premium price for shares of our common stock or otherwise be in your best interest as a stockholder.
+Added: The influence exerted by these stockholders over our business and affairs might not be consistent with the best interests of our stockholders and their receipt of a share of the fees received by our Manager under the Management Agreement may result in their interests not being aligned with the interests of other stockholders.
+Added: In addition, this concentration of voting control and influence may have the effect of delaying, deferring or preventing a transaction or change in control of us which might involve a premium price for shares of our common stock or otherwise be in the best interests of our stockholders.
Certain provisions of Maryland law could inhibit a change in control.
−Removed: Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of inhibiting a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock.
+Added: Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of inhibiting a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a
+Added: premium over the then-prevailing market price of our common stock.
Under the MGCL, certain “business combinations” (including a merger, consolidation, statutory share exchange or, in certain circumstances specified under the statute, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any interested stockholder (as defined in the statute) or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder.
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Our charter authorizes us to issue additional authorized but unissued shares of our common stock and preferred stock.
−Removed: In addition, a majority of our entire Board of Directors may, without stockholder approval, approve amendments to our charter to increase the aggregate number of our authorized shares of stock or the number of shares of stock of any class or series that we have authority to issue and may
−Removed: classify or reclassify unissued shares of our common stock or preferred stock and may set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms and conditions of redemption of the classified or reclassified shares.
+Added: In addition, a majority of our entire Board of Directors may, without stockholder approval, approve amendments to our charter to increase the aggregate number of our authorized shares of stock or the number of shares of stock of any class or series that we have authority to issue and may classify or reclassify unissued shares of our common stock or preferred stock and may set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms and conditions of redemption of the classified or reclassified shares.
As a result, among other things, our Board of Directors may establish a class or series of shares of our common stock or preferred stock that could delay or prevent a transaction or a change in control of us that might involve a premium price for our common stock or otherwise be in the best interests of our stockholders.
−Removed: Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interest.
+Added: Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit our stockholders’ recourse in the event of actions not in their best interests.
Maryland law permits a Maryland corporation to include in its charter a provision eliminating the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from actual receipt of an improper benefit or profit in money, property or services or active and deliberate dishonesty that is established by a final judgment and is material to the cause of action.
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• any individual who, while a director or officer of ours and at our request, serves or has served as a director, officer, partner, member, manager, trustee, employee or agent of another corporation, partnership, limited liability company, joint venture, real estate investment trust, trust, employee benefit plan or any other enterprise and who is made or threatened to be made a party to, or witness in, a proceeding by reason of his or her service in that capacity.
−Removed: As a result, we and our stockholders may have more limited rights against our present and former directors and officers than might otherwise exist absent the current provisions in our charter or that might exist with other companies, which could limit your recourse in the event of actions not in your best interest.
+Added: As a result, we and our stockholders may have more limited rights against our present and former directors and officers than might otherwise exist absent the current provisions in our charter or that might exist with other companies, which could limit our stockholders’ recourse in the event of actions not in their best interests.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.
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Accordingly, except for Retained Opportunities, to the maximum extent permitted from time to time by Maryland law and our charter, none of our directors or officers who is also an officer, director, employee, agent, partner, manager, member, or stockholder of Angel Oak is required to present, communicate or offer any business opportunity to us and can hold and exploit any business opportunity, or direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to any person or entity other than us.
−Removed: As a result, our directors and officers who are also officers, directors, employees, agents, partners, managers, members, or stockholders of Angel Oak may compete with us for investments or other business opportunities and we and our stockholders may have more
−Removed: limited rights against our directors and officers than might otherwise exist, which might limit your recourse in the event of actions not in your best interest.
+Added: As a result, our directors and officers who are also officers, directors, employees, agents, partners, managers, members, or stockholders of Angel Oak may compete with us for investments or other business opportunities and we and our stockholders may have more limited rights against our directors and officers than might otherwise exist, which might limit our stockholders recourse in the event of actions not in their best interests.
The ownership limits in our charter may discourage a takeover or business combination that may have benefited our stock.
Due to limitations on the concentration of ownership of REIT stock imposed by the Code, and subject to certain exceptions, our charter provides that no person may beneficially or constructively own (1) shares of common stock in excess of 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common stock or (2) shares of stock in excess of 9.8% in value of the outstanding shares of our stock.
−Removed: These and other restrictions on ownership and transfer of our shares contained in our charter may discourage a change in control of us and may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to you or which may cause a change in our management.
−Removed: In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease your ability to sell shares of our common stock.
+Added: These and other restrictions on ownership and transfer of our shares contained in our charter may discourage a change in control of our company and may deter individuals or entities from making tender offers for shares of our common stock on terms that might be financially attractive to our stockholders or which may cause a change in our management.
+Added: In addition to deterring potential transactions that may be favorable to our stockholders, these provisions may also decrease their ability to sell shares of our common stock.
Our charter generally does not permit the ownership in excess of 9.8% of our common stock or of all classes and series of our stock, and attempts to acquire our shares in excess of the stock ownership limits will be ineffective unless an exemption is granted by our Board of Directors.
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We also rely on distributions from our operating partnership to meet any of our obligations, including any tax liability on taxable income allocated to us from our operating partnership.
−Removed: In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries.
+Added: In addition, because we are a holding company, stockholders’ claims are structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our operating partnership and its subsidiaries.
Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our operating partnership and its subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our operating partnership’s and its subsidiaries’ liabilities and obligations have been paid in full.
Conflicts of interest could arise in the future between the interests of our stockholders and the interests of partners in our operating partnership, which may impede business decisions that could benefit our stockholders.
−Removed: Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our operating partnership or any future partner thereof, on the other.
+Added: Conflicts of interest could arise in the future as a result of the relationships between us and our affiliates, and our operating partnership or any future partner thereof.
Our directors and officers have duties to our company under applicable Maryland law in connection with the management of our company.
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The fiduciary duties and obligations of the general partner and its limited partners may come into conflict with the duties of our directors and officers to our company.
−Removed: Under the terms of the partnership agreement of our operating partnership, if there is a conflict between the interests of our stockholders on one hand and any limited partners on the other, the general partner will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or any limited partners;
−Removed: provided, however, that at such times as we own a controlling economic interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or any limited partners shall be resolved in favor of our stockholders.
−Removed: The partnership agreement also provides that the general partner will not be liable to our operating partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by our operating partnership or any limited partner, except for liability for the general partner’s intentional harm or gross negligence.
+Added: Under the terms of the partnership agreement of our operating partnership, if there is a conflict between the interests of our stockholders and any limited partners, the general partner will endeavor in good faith to resolve the conflict in a manner not adverse to either our stockholders or any limited partners;
+Added: provided that at such times as we own a controlling economic interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either our stockholders or any limited partners shall be resolved in favor of our stockholders.
+Added: The partnership agreement also provides that the general partner will not be liable to our operating partnership, its partners or any other person bound by the partnership agreement for monetary damages for losses sustained, liabilities incurred or benefits not derived by our operating partnership or any limited partner, except for liability due to the general partner’s intentional harm or gross negligence.
Moreover, the partnership agreement provides that our operating partnership is required to indemnify the general partner or any affiliate of the general partner or any of their respective trustees, directors, officers, stockholders, partners, members, employees, representatives or agents, and officers, employees, representatives or agents of our operating partnership and other persons that the general partner may designate from time to time, in its sole and absolute discretion, against any and all losses, claims, damages, liabilities, joint or several, expenses (including attorneys’ fees and other legal fees and expenses), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, that relate to the operations of our operating partnership, except (1) if the act or omission of the person was material to the matter giving rise to the action and either was committed in bad faith or was the result of active or deliberate dishonesty, (2) for any loss resulting from any transaction for which the indemnified party actually received an improper personal benefit, in money, property or services or otherwise in violation or breach of any provision of the partnership agreement or (3) in the case of a criminal proceeding, if the indemnified person had reason to believe that the act or omission was unlawful.
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federal income tax purposes commencing with our taxable year ended December 31, 2019.
−Removed: As long as we meet the requirements under the Code for qualification and taxation as a REIT each year, we can deduct dividends
−Removed: paid to our stockholders when calculating our REIT taxable income.
+Added: As long as we meet the requirements under the Code for qualification and taxation as a REIT each year, we can deduct dividends paid to our stockholders when calculating our REIT taxable income.
For us to qualify as a REIT, we must meet detailed technical requirements, including income, asset and stock ownership tests, under several Code provisions that have not been extensively interpreted by judges or administrative officers.
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federal income tax at the regular corporate rate and would not be entitled to deduct dividends paid to our stockholders from our taxable income.
+Added: In addition, we could possibly be subject to the corporate alternative minimum tax and the 1% excise tax on stock repurchases (and certain economically similar transactions).
Consequently, our net assets and distributions to our stockholders would be substantially reduced because of our increased tax liability.
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If our qualification as a REIT terminates, we may not be able to elect to be treated as a REIT for four taxable years following the year during which we lost the qualification.
+Added: Even as a REIT, we may face tax liabilities that reduce our cash flow.
An entity that qualifies as a REIT under the Code generally will not be subject to U.S.
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Our taxable income may substantially exceed our net income as determined by GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur, in which case we may have taxable income in excess of cash flow from our operating activities.
−Removed: In such event, we may generate less cash flow than taxable income in a particular year.
+Added: In such event, we may generate less cash flow than taxable income in a particular
In such circumstances, in order to satisfy the distribution requirement and to avoid U.S.
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Under special rules applicable to REITs that own a TMP, a portion of our income will be treated as if it were EII derived from a REMIC residual interest.
−Removed: While we do not intend to distribute EII to our stockholders, and instead to hold any REMIC residual interests that give rise to EII through a TRS and to retain, and to pay corporate income tax on, EII from TMPs, there can be no assurance that we will be able to do so in all situations and that our stockholders will not receive distributions of EII.
+Added: While we do not intend to distribute EII to our stockholders, and intend to hold any REMIC residual interests that give rise to EII through a TRS and to retain, and to pay corporate income tax on, EII from TMPs, there can be no assurance that we will be able to do so in all situations and that our stockholders will not receive distributions of EII.
Additionally, the manner in which EII is calculated, or would be distributed to stockholders, is unclear under current law, and shareholders may be required to take into account EII or the amount taken into account by one or more shareholders could be significantly increased if the IRS were to successfully challenge our method of calculating EII.
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We generally do not intend, and as the sole owner of the general partner of our operating partnership, do not intend to permit our operating partnership, to take actions we believe would cause us to fail to satisfy the asset tests described above.
−Removed: However, if we fail to comply with these requirements at the end of any calendar quarter after the first calendar quarter for which we qualified as a REIT, we must generally
−Removed: correct such failure within 30 days after the end of such calendar quarter to prevent us from losing our REIT qualification.
+Added: However, if we fail to comply with these requirements at the end of any calendar quarter after the first calendar quarter for which we qualified as a REIT, we must generally correct such failure within 30 days after the end of such calendar quarter to prevent us from losing our REIT qualification.
As a result, we may be required to liquidate otherwise profitable assets prematurely, which could reduce the return on our assets, which could materially and adversely affect us.
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As a result of these rules, we may need to limit our use of otherwise advantageous hedging techniques or implement those hedges through a TRS.
−Removed: The use of a TRS could increase the cost of our hedging activities (because the TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose ourselves to greater risks associated with interest rate or other changes than we would otherwise incur.
+Added: The use of a TRS could increase the cost of our hedging activities (because the TRS would be subject to tax on income or gain resulting from hedges entered into by it) or expose us to greater risks than we would otherwise incur.
General Risk Factors
−Removed: Future sales of shares of our common stock or other securities convertible into shares of our common stock could cause the market value of shares of our common stock to decline and could result in dilution of your shares.
+Added: Future sales of shares of our common stock or other securities convertible into shares of our common stock could cause the market value of shares of our common stock to decline and could result in dilution of existing shares.
In connection with the closing of our IPO and a concurrent private placement of shares of our common stock, we entered into registration rights agreements with our pre-IPO investors and the investor in our concurrent private placement, respectively.
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In the future, we may attempt to increase our capital resources by making offerings of debt securities (or causing our operating partnership to issue debt securities) or additional offerings of equity securities.
−Removed: Upon bankruptcy or liquidation, holders of our debt securities, our Series A preferred stock and other preferred stock, if issued, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of shares of our common stock.
−Removed: Our Series A preferred stock does, and additional preferred stock could, have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders of shares of our common stock.
+Added: Upon bankruptcy or liquidation, holders of our debt securities, our preferred stock, if issued, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of shares of our common stock.
+Added: Any preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to pay a dividend or other distribution to the holders of shares of our common stock.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
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We may suffer losses as a result of the adverse impact of any of these events, and these losses may adversely impact our performance and may cause the market value of shares of our common stock to decline or be more volatile.
−Removed: A prolonged economic slowdown, a recession, or
−Removed: declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets, or result in a decision by lenders not to extend credit to us.
+Added: A prolonged economic slowdown, a recession, or declining real estate values could impair the performance of our investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the capital markets, or result in a decision by lenders not to extend credit to us.
Losses resulting from these types of events may not be fully insurable.
The absence of affordable insurance coverage for these types of events may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments.
−Removed: If the properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.
−Removed: The obligations associated with being a public company will require significant resources and attention from our Manager’s senior management team.
+Added: If the borrowers and/or properties underlying our interests are unable to obtain affordable insurance coverage, the value of our interests could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.
+Added: The obligations associated with being a public company require significant resources and attention from our Manager’s senior management team.
As a public company with listed equity securities, we are required to comply with various laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and requirements of the NYSE.
1 unchanged sentence
The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls over financial reporting.
−Removed: While Section 404 of the Sarbanes-Oxley Act requires, among other things, that we assess the effectiveness of our internal control structure and procedures for financial reporting on an annual basis, for as long as we are both a Smaller Reporting Company and a non-accelerated filer, the registered public accounting firm that issues an audit report on our financial statements will not be required to attest to or report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act.
−Removed: An independent assessment of the effectiveness of our internal controls could detect problems that our management's assessment might not.
−Removed: We cannot be certain if the scaled SEC reporting options available to Smaller Reporting Companies will make our common stock less attractive to investors, which could make the market price and trading volume of shares of our common stock be more volatile and decline significantly.
+Added: In addition, Section 404 of the Sarbanes-Oxley Act requires us to evaluate and report on our internal control over financial reporting and, beginning with this Annual Report on Form 10-K now that we are a Smaller Reporting Company and an accelerated filer, have our independent auditors annually attest to our evaluation, as well as issue their own opinion on our internal control over financial reporting.
+Added: We cannot be certain if the scaled SEC reporting options available to Smaller Reporting Companies will make our
+Added: common stock less attractive to investors, which could make the market price and trading volume of shares of our common stock be more volatile and decline significantly.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud.
11 unchanged sentences
If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to public companies could be impaired.
−Removed: Unresolved Staff Comments
−Removed: As of December 31, 2022, we did not own any property.
−Removed: Our principal offices are located in space leased by an affiliate of our Manager at 3344 Peachtree Road Northeast, Suite 1725, Atlanta, Georgia 30326.
−Removed: Legal Proceedings
−Removed: Mine Safety Disclosures
−Removed: Not applicable.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.