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Item 7. Management’s Discussion and Analysis

2020-03-12 compared with 2019-03-08 · 219 added, 171 removed, 398 unchanged (49% of the section changed)

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We are a Maryland real estate investment trust, or "REIT," formed in August 2012 that specializes in acquiring, investing in, and managing residential mortgage- and real estate-related assets.

Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately for the risks associated with them.

Our primary objective is to generate attractive current yields and risk-adjusted total returns for our shareholders by making investments that we believe compensate us appropriately

for the risks associated with them.

We seek to attain this objective by constructing and actively managing a portfolio consisting primarily of residential mortgage-backed securities, or "RMBS," for which the principal and interest payments are guaranteed by a U.S.

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government-sponsored entity, or "Agency RMBS," and, to a lesser extent, RMBS that do not carry such guarantees, or "non-Agency RMBS," such as RMBS backed by prime jumbo, Alternative A-paper, manufactured housing, and subprime residential mortgage loans.

We also may opportunistically acquire and manage other types of residential mortgage-related and real estate-related asset classes, such as residential mortgage loans, mortgage servicing rights, or "MSRs," and credit risk transfer securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other residential mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.

We were formed through an initial strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 24-year history of investing in a broad spectrum of mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." As of December 31, 2018 , the Blackstone Funds owned approximately 25% of our outstanding common shares.

We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS," residential mortgage loans, mortgage servicing rights, or "MSRs," and credit risk transfer securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.

We were formed through an initial strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 25-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." As of December 31, 2019 , the Blackstone Funds owned approximately 25% of our outstanding common shares.

We are externally managed and advised by our Manager, an affiliate of Ellington.

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We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, or the "Investment Company Act."

As of December 31, 2018 , our book value per share was $12.30, as compared $14.45 as of December 31, 2017.

As of December 31, 2019 , our book value per share was $12.91, as compared to $12.30 as of December 31, 2018.

Trends and Recent Market Developments

Federal Reserve, or "Federal Reserve," raised the target range for the federal funds rate four times in 2018, and ended the year with a target range of 2.25%- 2.50%.

After the final raise of the year, in December, the Federal Reserve moderated its language about future rate increases, and indicated that future rate decisions will be highly data-dependent.

At the January 2019 Federal Open Market Committee meeting ("January 2019 FOMC Meeting"), the Federal Reserve left the target range unchanged, while the minutes from that meeting noted that the committee will be “patient” as it determines future adjustments to the target range.

LIBOR rates, which drive many of our financing costs, increased during 2018, with one-month LIBOR increasing 94 basis points over the course of the year, to 2.50%, and three-month LIBOR rising 111 basis points to 2.81%.

The spread between one- and three-month LIBOR widened to 30 basis points at the end of 2018, as compared to 13 basis points at the end of 2017.

Over the course of 2018, the 2-year U.S.

Treasury yield increased 60 basis points and finished the year at 2.49%, while the 10-year U.S.

Treasury yield increased 28 basis points to 2.68%.

At year end, the spread between the 2-year U.S.

Treasury yield and 10-year U.S.

Treasury yield was just 20 basis points, compared to 52 basis points at the end of 2017, and 126 basis points at the end of 2016.

The Treasury yield curve has now flattened for eight consecutive quarters, and has periodically been inverted recently in the two-to-five year sector.

At the beginning of each quarter of 2018, the Federal Reserve increased the amount of the tapering of its reinvestments, in line with the tapering schedule it had laid out in September 2017, with the stated objective that its securities portfolio would run off until reaching a level no larger "than necessary to implement monetary policy efficiently and effectively." The tapering of reinvestments reached their previously scheduled caps in October 2018, at $20 billion per month for Agency RMBS and $30 billion per month for U.S.

However, at the January 2019 FOMC Meeting, the Federal Reserve indicated that it might deviate from its previously announced tapering schedule going forward, "if future economic conditions were to warrant" a more accommodative monetary policy than can be achieved solely by reducing the federal funds rate.

Mortgage rates steadily increased during the first eleven months of 2018, before reversing course in December.

The Freddie Mac survey 30-year mortgage rate rose 82 basis points between year-end 2017 and the end of November, before declining 26 basis points to end the year at 4.55%.

Overall, Agency RMBS prepayment rates were muted throughout the year.

The Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, declined steadily over the course of 2018;

by year end it had dropped over 35%, reaching its lowest seasonally-adjusted level in over 18 years.

In contrast to the remarkable stability of the prior year, 2018 saw several periods of volatility in the equity and debt markets.

Interest rates rose during most of the year, before reversing course in November and declining into year end.

After reaching new highs in January, equities sold off violently in February, driven in part by concerns over inflation and rising interest rates.

By February 8 th , just nine trading days after reaching its all-time high, the S&P 500 Index entered correction territory.

At the same time, long-term interest rates rose steadily and broke out of their 2017 ranges, with the 10-year U.S.

Treasury yield reaching 2.95% on February 21 st , marking the highest daily close in more than four years and 91 basis points higher than the 2017 lows reached the previous September.

The Chicago Board Options Exchange Volatility Index, known as the VIX, jumped 282% between January 1 st and February 5 th , with a 20-point surge occurring on February 5 th , its largest one-day movement on record.

On February 9 th , the Merrill Lynch Option Volatility Estimate Index, or MOVE Index, closed 54% above its year-end level, reaching its highest level since April 2017.

During this period, yield spreads across many credit and Agency products widened in sympathy with the interest rate and equity market volatility.

During the second and third quarters of 2018, market volatility subsided and the yield curve continued to flatten.

Entering the fourth quarter, many domestic equity indices were again trading near their all-time highs and U.S.

Treasury yields were near their highest levels of 2018.

During the fourth quarter, however, a confluence of factors weighed on markets, including fears of a looming trade war, recessionary and global growth concerns, and worries that the Federal Reserve and other central banks were ending their accommodative monetary policies.

US equities declined sharply during the fourth quarter, with some indices reaching bear market territory, and many indices ending with a loss for the full year.

The S&P 500 (down 14.0%), the Russell 2000 (down 20.5%), and the Dow Jones Industrial average (down 11.8%) all posted their worst quarterly performance since 2011.

Many stock markets across Europe and Asia performed even worse.

During this period, yield spreads in virtually every fixed income sector widened relative to U.S.

Treasuries, with many sectors finishing the year at or near their 2-year widest levels.

Several measures of volatility spiked, including the VIX and MOVE indices.

For the year, the Bloomberg Barclays U.S.

MBS Agency Fixed Rate Index generated a positive absolute return, but a negative excess return relative to U.S.

Treasuries, reflecting that RMBS underperformed their benchmark hedging instruments for the year.

The Bloomberg Barclays U.S.

Corporate Bond Investment Grade and High Yield Indices, meanwhile, both finished the year with negative returns.

Amidst the uncertainty, there was a flight to safety going into year end.

The 10-year U.S.

Treasury, which had risen 83 basis points year-to-date through November 8 th , reversed course and declined by 55 basis points through December 31 st .

While the Federal Reserve did raise short-term interest rates again in December, it moderated its language about future rate increases.

The yield curve flattened further, and the yield on the 2-year U.S.

Treasury inverted with that of the 5-year U.S.

Treasury for three weeks during December, stoking fears of a full yield curve inversion, and whether that might signal a looming recession.

Market Overview

After raising the target range for the federal funds rate four times in 2018, the U.S.

Federal Reserve, or "Federal Reserve," elected to maintain the range of 2.25%–2.50% during the first half of 2019, before lowering the range by 25 basis points at each of its July, September, and October meetings, to the current range of 1.50%–1.75%.

These were the first reductions since 2008 and were in response to uncertainties around global growth and trade negotiations.

At its final meeting of the year, in December 2019, the Federal Reserve elected to leave the target range unchanged.

In March 2019, the Federal Reserve announced that over the following six months it would gradually end the tapering of its U.S.

Treasury security reinvestments.

According to the plan, beginning in May, the monthly tapering of U.S.

Treasury security reinvestments would decrease to $15 billion, from $30 billion, and the tapering would end altogether at the end of September.

Additionally, the tapering of Agency RMBS would continue at $20 billion per month, but beginning in October, monthly paydowns from Agency RMBS up to the $20 billion monthly cap would be reinvested in U.S.

Treasury securities.

Then, in July, the Federal Reserve announced that it would end the tapering of its U.S.

Treasury security reinvestments on August 1, 2019, two months earlier than previously planned.

It also announced that it would reinvest principal payments from Agency RMBS into U.S.

Treasury securities, up to $20 billion per month, and that it would reinvest principal payments in excess of $20 billion into Agency RMBS.

The Federal Reserve confirmed this plan at its December meeting.

During the week of September 16, 2019, interest rates on overnight repo spiked to unusually high levels.

In response, the Federal Reserve conducted overnight and term repo operations to provide liquidity to the repo market, and repo rates normalized as a result.

To help prevent future spikes in overnight repo rates, the Federal Reserve began buying short-term U.S.

Treasury bills in October, and committed to continue purchasing them at least into the second quarter of 2020.

The Federal Reserve also committed to continue these repo operations through January 2020 to address any year-end liquidity issues.

Repo markets remained relatively stable in the fourth quarter of 2019, allaying fears of year-end volatility.

LIBOR rates, which drive many of our financing costs, steadily declined during 2019 before increasing modestly in December.

For the year, one-month LIBOR decreased 74 basis points to 1.76% at year end, and three-month LIBOR fell 90 basis points to 1.91%, a 15 basis point positive spread, as compared to a 30 basis point positive spread at the

However, at several points during 2019, in anticipation of near-term interest rate cuts by the Federal Reserve, the spread between one- and three-month LIBOR inverted.

Over the course of 2019, interest rates declined across the U.S.

Treasury yield curve, with the two-year U.S.

Treasury yield decreasing 92 basis points to finish the year at 1.57%, and the ten-year U.S.

Treasury yield declining 76 basis points to 1.92%.

During one week in the third quarter, the spread between the two-year U.S.

Treasury yield and ten-year U.S.

Treasury yield inverted, which had not happened since June 2007.

As of the end of the third quarter, the entire two-month through five-year segment of the U.S.

Treasury yield curve was inverted.

During the fourth quarter, the yield curve normalized, and the spread between the two-year and ten-year U.S.

Treasury yields was 35 basis points at year end, its steepest level in more than 18 months.

Mortgage rates declined sharply during the first eight months of the year, before increasing moderately going into year end.

The Freddie Mac survey 30-year mortgage rate declined 106 basis points between December 31, 2018 and September 5, 2019, before increasing 25 basis points to end the year at 3.74%.

With falling mortgage rates, Agency RMBS prepayment rates surged, increasing from 6.6% in January to 21.2% in October, before retracing to 17.0% in December.

real GDP increased at an estimated annualized rate of 3.1% in the first quarter, 2.0% in the second quarter, 2.1% in the third quarter, and 2.1% in the fourth quarter.

Total unemployment declined throughout the year, falling to 3.5% as of year-end 2019, as compared to 3.9% as of year-end 2018.

Each of the Bloomberg Barclays US MBS Index ("BB MBS Index"), Bloomberg Barclays US Corporate Bond Index ("BB IG Index"), and Bloomberg Barclays US Corporate High Yield Bond Index ("BB HY Index") generated positive returns for each quarter of 2019;

and for the full year, each generated excess returns (on a duration-adjusted basis) over the Bloomberg Barclays US Treasury Index ("BB UST Index").

During 2019, the BB MBS Index generated a positive return of 6.35% and an excess return of 0.61%;

the BB IG Index generated a positive return of 14.5% and an excess return of 6.76%;

and the BB HY Index generated a positive return of 14.3% and an excess return of 9.3%.

Changing market sentiment around central bank policies, trade negotiations, global growth prospects, and geopolitical tensions drove market fluctuations during 2019, but over the course of the year most asset classes performed well, as interest rates ratcheted tighter and the yield curve remained flat, and at times, inverted.

During the first quarter of the year, the market weakness of December 2018 reversed course, and most fixed income and equity assets performed well.

Dovish messaging from the Federal Reserve soothed the stock and bond markets and sparked a market rally;

domestic equity indexes rose, yield spreads on most credit assets and many Agency assets tightened, and market volatility declined.

Interest rates were range-bound for the first two months of the year before dropping considerably in March.

At March 31, 2019 the yield on the ten-year U.S.

Treasury note had declined to 2.41%, down 83 basis points from early November 2018.

Meanwhile, the yield curve continued to flatten, with a portion of the curve even inverting for a week in March, again stoking fears of a full yield curve inversion, and whether that might signal a looming recession.

The Federal Reserve appeared to end its rate hiking cycle and also announced a slowdown of its balance sheet runoff in March;

in Europe, the European Central Bank ("ECB") introduced new stimulus measures in response to slowing growth, including a recession in Italy.

Moving into the second quarter, volatility remained low, and equities and many credit assets continued to perform well in April.

Meanwhile, declining interest rates continued to drive increases in actual and projected prepayments, which in turn led to modest widening of Agency RMBS yield spreads and increases in pay-ups on specified pools, trends that would continue through most of 2019.

Volatility returned to the markets in May, however, as global trade tensions escalated.

By the end of May, the Merrill Lynch Option Volatility Estimate Index, or "MOVE Index," which had just reached an all-time low in March, spiked to its highest level in more than two years.

Meanwhile, domestic equities sold off, yield spreads on most fixed income assets widened, and interest rates plummeted.

Over the course of the month, the S&P 500 declined 6% while the yield on the ten-year U.S.

Treasury fell 38 basis points.

Both the BB IG Index and BB HY Index underperformed relative to the BB UST Index, while the BB MBS Index had its worst performance relative to U.S.

Treasuries since November 2016.

In June, interest rate futures markets implied a near-certain probability of a rate cut in July, which spurred a broad rally across most asset classes.

Long-term U.S.

Treasury yields continued their precipitous decline, with the ten-year yield dropping below 2% for the first time since November 2016.

In Europe, the ECB signaled that it was ready to launch another round of stimulus, and the total amount of negative-yielding sovereign bonds reached $13 trillion globally.

In July, the market was optimistic about U.S./China trade negotiations, and anticipating an interest rate cut by the Federal Reserve, domestic equities hit record highs.

On July 31, the Federal Reserve indeed cut short term rates by 25 basis points, and announced an end to its U.S.

Treasury security portfolio runoff two months early.

Sentiment flipped in August, however, and significant market volatility returned, as messaging from the Federal Reserve shifted hawkish, concerns over global growth intensified, and U.S.

trade negotiations with China grew tense following China's devaluation of its currency.

During the month,

the MOVE Index hit a 3.5-year high, and the VIX volatility index spiked to its highest level since the beginning of the year.

Meanwhile, domestic equities fell, interest rates plummeted, various parts of the yield curve inverted, and yield spreads on many fixed income assets fluctuated.

Over the course of the month, the S&P 500 declined by 1.8% while the yield on the ten-year U.S.

Treasury fell by 52 basis points, finishing the month below the yield on the two-year U.S.

The Federal Reserve responded to the increased volatility by pledging more monetary stimulus should the global slowdown damage the U.S.

economy, while several central banks around the globe also responded by cutting interest rates.

Moving into September, volatility subsided;

the VIX and MOVE indexes declined, domestic equities recovered, and U.S.

Treasury yields rose.

The ECB cut its short-term rate in September, its first cut since 2016, and announced a quantitative easing program.

Later in the month, the Federal Reserve cut its short term rate again, though the decision was not unanimous, clouding the outlook for future reductions.

Domestic equity indexes posted positive returns for the month, and medium-term and long-term U.S.

Treasury yields rose.

Markets remained steady in the fourth quarter.

Trade concerns eased with the announcement that the U.S.

and China had reached agreement on "Phase One" of a trade deal in principle, and with the signing of the U.S.–Mexico–Canada Agreement.

Meanwhile, accommodative monetary policy continued globally with a third rate cut from the Federal Reserve, the ECB restarting asset purchases, and additional policy support in China.

Domestic equity indexes set new record highs and volatility was low as the VIX hit its low point for the year in November, and the ten-year traded in a 41-basis point range for the quarter, as compared to a range of 133 basis points during the year's first three quarters.

Interest rates drifted up modestly, slowing prepayments in November and December and supporting agency yield spreads, and the yield curve steepened moderately going into year end.

Over the course of 2019, market optimism over global stimulus, including three interest rate cuts by the Federal Reserve, and progress on trade negotiations seemed to prevail over various macroeconomic concerns including slowing global growth, the Federal Reserve signaling an end to interest rate cuts, geopolitical tensions, and an upcoming U.S.

presidential election.

Coming off of a weak December in 2018, virtually all investment classes performed well over 2019.

Domestic equities had one of the best years of the decade, with the NASDAQ up 35%, the S&P up 29%, and the Dow Jones Industrial Average up 22%.

The BB IG Index and BB HY Index each generated returns over 14% and significant excess returns to the BB UST Index.

Safer assets rallied as well, with the BB MBS Index generating positive absolute and excess returns to the BB UST Index, despite falling mortgage rates and significant increases in prepayments;

gold prices appreciating 18%;

and the yield on the ten-year U.S.

Treasury note reaching a 3-year low in September, before finishing the year below 2%.

Portfolio Overview and Outlook

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Our overall RMBS portfolio decreased by 9% to $1.402 billion as of December 31, 2019 , as compared to $1.540 billion as of December 31, 2018.

Although our portfolio was smaller year over year, our equity base was also smaller, and our overall debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 9.2:1 as of December 31, 2018 from 8.2:1 as of December 31, 2017.

Our overall debt-to-equity ratio, adjusted for unsettled purchases and sales, decreased to 8.1:1 as of December 31, 2019 from 9.2:1 as of December 31, 2018.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

During the year, we took advantage of various periods of market weakness in Agency RMBS to cover portions of our TBA short positions.

At year end we held a much smaller short TBA position that we use for hedging purposes, compared to the previous year end:

as of December 31, 2018 , we had short TBAs of $294.0 million, as compared to $713.4 million as of December 31, 2017.

Also as of December 31, 2018 , we had $95.1 million in notional amount of long TBAs held for investment purposes, as compared to $113.1 million as of December 31, 2017.

As a result, our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—increased year over year to 8.7:1 from 5.7:1, and also was meaningfully higher than the quarter-end average over the past three years ended December 31, 2017, also of 5.7:1.

TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced."

Agency RMBS prices generally declined over the course of the year, and our long portfolio had significant realized and unrealized losses.

Partially offsetting these losses were significant gains on interest rate swaps and short positions in TBAs, U.S.

Treasury securities, and futures as interest rates rose.

Short positions in TBAs, though smaller in size than previous years, continue to represent a significant portion of our interest rate hedging portfolio.

Average pay-ups on our specified pools decreased to 0.58% as of December 31, 2018 , as compared to 0.68% as of December 31, 2017.

Pay-ups are price premiums for specified pools relative to their TBA counterparts.

Despite fluctuations in interest rates and yield spreads, increasing prepayment rates, and at times an inverted yield curve, our Agency RMBS portfolio had excellent performance in 2019.

Pay-ups on our specified pools steadily increased during the year, and along with declining interest rates, helped generate net realized and unrealized gains on our portfolio.

Pay-ups are price premiums for specified pools relative to their TBA counterparts, and reflect the prepayment protection that specified pools provide.

TBAs are forward-settling Agency RMBS where the mortgage pass-through certificates to be delivered are "To-Be-Announced." The decline in mortgage rates and associated increase in actual and projected prepayments during the year drove the expansion of pay-ups.

Average pay-ups on our specified pools increased to 2.05% as of December 31, 2019 , as compared to 1.86% as of September 30, 2019, 1.56% as of June 30, 2019, 0.99% as of March 31, 2019, and 0.58% as of December 31, 2018.

At different points in 2019, in response to market opportunities, we either increased or decreased our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—by varying the sizes of our net short TBA position and/or our long RMBS portfolio.

The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for each of the following period ends, to illustrate these fluctuations.

Notional Amount of Long TBAs

Notional Amount of Short TBAs

Fair Value of Mortgage-backed Securities

Net Short TBA Underlying Market Value (1)

Net Mortgage Assets-to-Equity Ratio

($ In thousands)

December 31, 2019

September 30, 2019

June 30, 2019

March 31, 2019

December 31, 2018

Market value represents the current market value of the underlying Agency RMBS (on a forward delivery basis) as of period end.

During the year we continued to hedge interest rate risk, primarily through the use of interest rate swaps, short positions in TBAs, U.S.

Treasury securities, and futures.

The decline in interest rates during the year generated net realized and unrealized losses on our interest rate hedges.

We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should:

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Our non-Agency RMBS performed well during the year, driven by strong net interest income and net realized and unrealized gains.

Fundamentals underlying non-Agency RMBS continue to remain strong, led by a stable housing market.

Our total investment in non-Agency RMBS decreased year over year to $11.2 million as of December 31, 2018 as compared to $18.0 million as of December 31, 2017.

Fundamentals underlying non-Agency RMBS remain strong, led by a stable housing market.

Our total investment in non-Agency RMBS was $8.9 million and $11.2 million as of December 31, 2019 and 2018, respectively.

To the extent that more attractive entry points develop in non-Agency RMBS, we may increase our capital allocation to this sector.

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September 30, 2019

March 31, 2019

December 31, 2018

Three-Month Constant Prepayment Rates

Excludes Agency fixed-rate RMBS without any prepayment history.

Prior period calculation methodology has been conformed to current period calculation methodology.

The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2019 and 2018.

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Current Principal

Weighted Average Loan Age (Months)

Current Principal

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20-year fixed-rate mortgages:

Total 20-year fixed-rate mortgages

30-year fixed-rate mortgages:

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Total fixed-rate Agency RMBS

For the year ended December 31, 2018 , prices on our Agency RMBS portfolio generally declined, and we had total net realized and unrealized losses on our Agency RMBS of $(40.2) million, or $(3.14) per share.

Prices on our Agency RMBS portfolio generally rose during the year ended December 31, 2019 and we had total net realized and unrealized gains on our Agency RMBS of $51.9 million, or $4.16 per share.

Our Agency RMBS portfolio turnover was 52% for the year.

In addition, we had total net realized and unrealized gains of $0.5 million, or $0.04 per share, on our non-Agency RMBS portfolio.

Throughout the year ended December 31, 2018 , we continued to hedge interest rate risk, primarily through the use of interest rate swaps and short positions in TBAs, U.S.

During the year ended December 31, 2019 , we continued to hedge interest rate risk, primarily through the use of interest rate swaps and short positions in TBAs, U.S.

Treasury securities, and futures.

For the year, we had total net realized and unrealized gains of $11.9 million, or $0.93 per share, on our interest rate hedging portfolio, as interest rates increased.

In our hedging portfolio, the relative proportion (based on 10-year equivalents 1 ) of short positions in TBAs decreased year over year relative to our other interest rate hedges, as we increased our overall exposure to Agency RMBS.

For the year, we had total net realized and unrealized losses of $(33.0) million, or $(2.65) per share, on our interest rate hedging portfolio, as interest rates declined.

In our hedging portfolio, the relative proportion, based on 10-year equivalents, of net short positions in TBAs decreased year over year relative to our other interest rate hedges.

10-year equivalents for a group of positions represent the amount of 10-year U.S.

Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.

The relative makeup of our interest rate hedging portfolio can change materially from period to period.

After giving effect to quarterly dividends in the aggregate amount of $1.45 per share, our book value per share decreased to $12.30 as of December 31, 2018 , from $14.45 as of December 31, 2017, and we had an economic return of (4.8%) for the year ended December 31, 2018 .

Economic return is computed by adding back dividends declared to ending book value per share, and comparing that amount to book value per share as of the beginning of the year.

After giving effect to aggregate dividends during the year of $1.18 per share, our book value per share increased to $12.91 as of December 31, 2019 , from $12.30 as of December 31, 2018, and we had an economic return of 14.6% for the year ended December 31, 2019 .

Economic return is computed by adding back dividends declared to ending book value per share, and comparing that amount to book value per share as of the beginning of the quarter.

Our net Agency premium as a percentage of the fair value of our specified pool holdings is one metric that we use to measure the overall prepayment risk of our specified pool portfolio.

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The lower our net Agency premium, the less we believe that our specified pool portfolio is exposed to market-wide increases in Agency RMBS prepayments.

As of December 31, 2018 and December 31, 2017, our net Agency premium as a percentage of fair value of our specified pool holdings was approximately 2.7% and 3.5%, respectively.

Excluding TBA positions used to hedge our specified pool holdings, our Agency premium as a percentage of fair value was approximately 2.9% and 4.8% as of December 31, 2018 and December 31, 2017, respectively.

As of December 31, 2019 and 2018, our net Agency premium as a percentage of fair value of our specified pool holdings was approximately 5.3% and 2.7%, respectively.

Excluding TBA positions used to hedge our specified pool holdings, our Agency premium as a percentage of fair value was approximately 5.8% and 2.9% as of December 31, 2019 and 2018, respectively.

Our Agency premium percentage and net Agency premium percentage may fluctuate from period to period based on a variety of factors, including market factors such as interest rates and mortgage rates, and, in the case of our net Agency premium percentage, based on the degree to which we hedge prepayment risk with short TBAs.

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We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which continues to be shaped by interest rate risk, prepayment risk, shifting central bank and government policies, regulatory changes, and developing technologies.

Over the course of the year ended December 31, 2018 our cost of borrowing through repurchase agreements increased as LIBOR increased.

Our average borrowing cost of repo for the year ended December 31, 2018 was 2.06%, as compared to 1.21% for the year ended December 31, 2017.

As of December 31, 2019, the weighted average borrowing rate on our repurchase agreements declined to 2.00% from 2.56% as of December 31, 2018.

For the year ended December 31, 2019 , however, our average borrowing cost on repo increased to 2.52% as compared to 2.06% for the year ended December 31, 2018.

While large banks still dominate the repo market, non-bank firms, not subject to the same regulations as banks, are active in providing repo financing.

Most of our outstanding repo financing is still provided by banks and bank affiliates;

however, in limited amounts, we have also entered into repo agreements with non-bank dealers.

however, we have also entered into repo agreements with non-bank dealers.

In general, we continue to see strong appetite and competitive terms from both types of lenders.

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Adjusted for unsettled security purchases and sales, our debt-to-equity ratio was 8.1:1 as of December 31, 2019 , as compared to 9.2:1 as of December 31, 2018.

Our leverage ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

1 "10-year equivalents" for a group of positions represent the amount of 10-year U.S.

Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.

Critical Accounting Policies

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All inter-company balances and transactions have been eliminated.

Certain of our critical accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and

expenses during the reporting period.

Actual results could differ from those estimates.

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Summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements.

Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

Management utilizes such methodologies to assign a good faith

fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

See the notes to our consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities.

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federal income tax purposes.

As a REIT, we generally are not subject to corporate-level federal and state income tax on net income we distribute to our shareholders.

As a REIT, we generally are not subject to corporate-level federal and state income tax on net income we distribute to our shareholders within the prescribed timeframes.

To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable income to our shareholders.

Even if we qualify as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income.

If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S.

federal, state, and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which the Company fails to qualify as a REIT.

If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S.

federal, state, and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which we fail to qualify as a REIT.

We follow the authoritative guidance on accounting for and disclosure of uncertainty on tax positions, which requires management to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.

For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The Company did not have any unrecognized tax benefits resulting from tax positions related to the current period or to 2017, 2016, or 2015 (its open tax years).

We did not have any unrecognized tax benefits resulting from tax positions related to the current period or our open tax years.

In the normal course of business, we may be subject to examination by federal, state, local, and foreign jurisdictions, where applicable, for the current period and our open tax years.

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we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.

Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a

later date based on changing tax laws, regulations, and interpretations thereof.

Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof.

There were no amounts accrued for penalties or interest as of or during the periods presented in the consolidated financial statements included in this Annual Report on Form 10-K.

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Excludes Agency IOs.

The vast majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency CMOs.

Within this strategy, we generally target Agency RMBS pools that, taking into account their particular composition and based on our prepayment projections, should:

(1) generate attractive yields relative to other Agency RMBS and U.S.

Treasury securities, (2) have less prepayment sensitivity to government policy shocks and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months when actual prepayment experience can be observed.

As of both December 31, 2018 and December 31, 2017, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

The vast majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2019 and 2018, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

Our most prevalent method of financing RMBS is through short-term repos, which generally have maturities of 180 days or less.

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The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for LIBOR.

To the extent that our future repo borrowing costs continue to be highly correlated with LIBOR, our swap agreements help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.

To the extent that our future repo borrowing costs continue to be highly correlated with LIBOR, our LIBOR-based interest rate swap agreements help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.

While for the time being we are continuing to enter into LIBOR-based interest rate swap agreements, we are currently considering entering into SOFR-based interest rate swap agreements as well.

In the case of TBAs, most of our positions are short TBA positions with a negative duration, meaning that as interest rates rise, the value of the short position increases, so these positions serve as a hedge against increases in interest rates.

In the event that interest rates rise, the increase in value of the short TBA position serves to offset corollary increases in our current and/or future borrowing costs under our repurchase agreements.

While we use TBAs to hedge interest rate risk, from time to time we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

Our ability to engage in TBA transactions may be limited by our intention to remain qualified as a REIT.

While we use TBAs to hedge interest rate risk, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

As of December 31, 2019 , as part of our interest rate hedging program, we also held short positions in U.S.

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Adjusted for unsettled security purchases and sales, our debt-to-equity ratio was 8.1:1 and 9.2:1 as of December 31, 2019 and 2018, respectively.

Our leverage ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions.

Shareholders' Equity

As of December 31, 2018 , our shareholders' equity decreased to $153.8 million from $192.7 million as of December 31, 2017.

This decrease principally consisted of net loss of $(11.3) million , dividends declared of $(18.4) million , and common shares repurchased of $(9.4) million .

As of December 31, 2019 , our shareholders' equity increased to $160.8 million from $153.8 million as of December 31, 2018.

This increase principally consisted of net income of $22.3 million, partially offset by dividends declared of $(14.7) million, and common shares repurchased of $(0.7) million.

As of December 31, 2019 , our book value per share was $12.91, as compared to $12.30 as of December 31, 2018.

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Core Earnings

Core Earnings consists of net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and, if applicable, items of income or loss that are of a non-recurring nature.

Core Earnings includes net realized and change in net unrealized gains (losses) associated with payments and accruals of periodic payments on interest rate swaps.

Our interest income is subject to fluctuations based on adjustments to premium amortization as a result of changes in prepayments of our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).

We refer to this adjustment as a "Catch-up Premium Amortization Adjustment." Adjusted Core Earnings represents Core Earnings excluding the effect of the Catch-up Premium Amortization Adjustment on interest income.

Core Earnings and Adjusted Core Earnings are supplemental non-GAAP financial measures.

We believe that Core Earnings and Adjusted Core Earnings provide information useful to investors because they are metrics that we use to assess our performance and to evaluate the effective net yield provided by the portfolio.

Moreover, one of our objectives is to generate income from the net interest margin on the portfolio, and Core Earnings and Adjusted Core Earnings are used to help measure the extent to which this objective is being achieved.

However, because Core Earnings and Adjusted Core Earnings are incomplete measures of our financial results and differ from net income (loss) computed in accordance with U.S.

GAAP, they should be considered as supplementary to, and not as substitutes for, net income (loss) computed in accordance with U.S.

The table below reconciles Core Earnings and Adjusted Core Earnings for the years ended December 31, 2018 and 2017 to the line, Net Income (Loss), on our Consolidated Statement of Operations, which we believe is the most directly comparable U.S.

GAAP measure:

Core Earnings consists of net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding, if applicable, any non-recurring items of income or loss.

Core Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income.

The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).

The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

Core Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

Core Earnings is a supplemental non-GAAP financial measure.

We believe that Core Earnings provides information useful to investors because it is a metric that we use to assess our performance and to evaluate the effective net yield provided by the portfolio.

Moreover, one of our objectives is to generate income from the net interest margin on the portfolio, and Core Earnings is used to help measure the extent to which this objective is being achieved.

In addition, we believe that presenting Core Earnings enables our investors to measure, evaluate and compare our operating performance to that of our peer companies.

However, because Core Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP.

In previous periods, we presented two related supplemental non-GAAP financial measures, which we referred to as "Core Earnings" and "Adjusted Core Earnings." Subsequent to September 30, 2019, we modified our definition of Core Earnings to exclude the effect of the Catch-up Premium Amortization Adjustment.

This new definition of Core Earnings now matches the definition of what we previously presented as Adjusted Core Earnings, and so we will no longer present a supplemental non-GAAP financial measure called "Adjusted Core Earnings." As a result, when comparing Core Earnings for periods ending on or after December 31, 2019 against periods ending on or before September 30, 2019, "Core Earnings" as presented in those later periods should be compared against "Adjusted Core Earnings" as presented in those earlier periods.

These changes are intended to help investors focus on what we believe is the more useful supplemental non-GAAP financial measure when measuring and evaluating our operating performance, and when comparing our operating performance to that of our peer companies.

Similarly, net interest margin for the year ended December 31, 2019 (and future periods) should be compared against adjusted net interest margin as presented in earlier periods.

The following table reconciles, for the years ended December 31, 2019 and 2018, Core Earnings (based on the newly modified definition of "Core Earnings" described above) to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

Year Ended December 31,

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Net realized (gains) losses on securities

Net realized gains (losses) on financial derivatives, excluding periodic payments (1)

Change in net unrealized (gains) losses on securities

Change in net unrealized gains (losses) on financial derivatives, excluding accrued periodic payments (2)

Net realized (gains) losses on financial derivatives

Change in net unrealized (gains) losses on financial derivatives

Net realized gains (losses) on periodic settlements of interest rate swaps

Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps

Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment

Core Earnings

Catch-up Premium Amortization Adjustment

Adjusted Core Earnings

Weighted Average Shares Outstanding

Core Earnings Per Share

Adjusted Core Earnings Per Share

For the year ended December 31, 2018 , represents Net realized gains (losses) on financial derivatives of $19.4 million less Net realized gains (losses) on periodic settlements of interest rate swaps of $1.0 million .

For the year ended December 31, 2017 , represents Net realized gains (losses) on financial derivatives of $(9.1) million less Net realized gains (losses) on periodic settlements of interest rate swaps of $(2.5) million .

For the year ended December 31, 2018 , represents Change in net unrealized gains (losses) on financial derivatives of $(11.4) million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $(0.4) million For the year ended December 31, 2017 , represents Change in net unrealized gains (losses) on financial derivatives of $2.6 million less Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps of $0.2 million .

Results of Operations for the Years Ended December 31, 2018 and 2017

Conformed to current period presentation.

Net Income (Loss)

Net loss for the year ended December 31, 2018 was $(11.3) million , as compared to net income of $10.8 million for the year ended December 31, 2017 .

The year-over-year reversal in our results of operations was principally due to an increase in Total Other Loss combined with an increase in interest expense.

Net income (loss) for the year ended December 31, 2019 was $22.3 million , as compared to $(11.3) million for the year ended December 31, 2018 .

The year-over-year reversal in net income (loss) was primarily due to a reversal from Total Other (Loss) for the year ended December 31, 2018 , to Total Other Income for the year ended December 31, 2019 , partially offset by a decline in net interest income.

Interest Income

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Before interest expense, we earned approximately $42.4 million and $53.4 million in interest income on these securities for the years ended December 31, 2019 and 2018, respectively.

The year-over-year increase in interest income resulted from a combination of higher asset yields and higher average holdings.

Our average holdings increased following the leveraged deployment, in Agency RMBS, of capital raised through our equity offering and ATM program towards the end of the second quarter of 2017.

Some of the variability in our interest income and portfolio yields is due to the Catch-up Premium Amortization Adjustment.

For the year ended December 31, 2018 , we had a negative Catch-up Premium Amortization Adjustment of approximately $(37) thousand which decreased our interest income.

For the year ended December 31, 2017 we had a positive Catch-up Premium Amortization Adjustment of approximately $1.2 million, which increased interest income.

The year-over-year decrease in interest income primarily resulted from lower average holdings on our Agency RMBS portfolio, combined with a larger negative Catch-up Premium Amortization Adjustment, both of which decreased interest income.

The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields.

For the years ended December 31, 2019 and 2018, we had a negative Catch-up Premium Amortization Adjustment of approximately $(5.9) million and $(38) thousand, respectively, which decreased interest income.

Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 3.29% and 3.30% for the years ended December 31, 2019 and 2018, respectively.

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Treasury securities.

The year-over-year increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the increase in short-term interest rates, as well as an increase in average borrowings as a result of a larger asset base.

The year-over-year increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the increase in short-term interest rates and wider spreads, partially offset by lower average outstanding borrowings.

Our average outstanding repo borrowings for the year ended December 31, 2019 was $1.38 billion , and we had an average cost of funds on repo borrowings of 2.52% .

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For the years ended December 31, 2019 and 2018, average six-month LIBOR was 2.32% and 2.49%, respectively.

For the year ended December 31, 2018 , the weighted average yield of our portfolio of Agency and non-Agency RMBS was 3.30% , while our total average cost of funds, including interest rate swaps and short U.S.

For the year ended December 31, 2019 , the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 3.29%, while our total average cost of funds, including interest rate swaps and short U.S.

Treasury securities, was 2.41% , resulting in a net interest margin of 0.88%.

By comparison, for the year ended December 31, 2017 , the weighted average yield of our Agency and non-Agency RMBS was 3.10% , while our average cost of funds, including interest rate swaps and short U.S.

By comparison, for the year ended December 31, 2018 , the weighted average yield of our Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 3.30%, while our average cost of funds, including interest rate swaps and short U.S.

Treasury securities, was 2.10% , resulting in a net interest margin of 1.20%.

For the years ended December 31, 2018 and 2017, excluding the impact of the Catch-up Premium Amortization Adjustment, the weighted average yield of our portfolio was 3.30% and 3.02%, respectively, and our adjusted net interest margin was 1.20% and 1.55%, respectively.

Management Fees

For years ended December 31, 2018 and 2017, our management fee expense was approximately $2.5 million and $2.7

million, respectively.

For years ended December 31, 2019 and 2018, our management fee expense was approximately $2.4 million and $2.5 million , respectively.

The decrease in management fee was primarily due to a smaller capital base year over year.

Management fees are calculated based on our shareholders' equity at the end of each quarter.

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Other operating expenses, as presented above, include professional fees, compensation expense, insurance expense, and various other expenses incurred in connection with the operation of our business.

For both years ended December 31, 2018 and 2017 our other operating expenses were approximately $3.0 million .

Our expense ratio, which represents our annualized management fees and other operating expenses as a percentage of our average shareholders' equity, decreased to 3.1% for the year ended December 31, 2018 , as compared to 3.3% for the year ended December 31, 2017 .

The decrease in our expense ratio was due to an increase in our average shareholders' equity for the year ended December 31, 2018 , as compared to the year ended December 31, 2017 .

For the years ended December 31, 2019 and 2018, our other operating expenses were approximately $2.9 million and $3.0 million, respectively.

Other Income (Loss)

Other income (loss) consists of net realized and net change in unrealized gain (losses) on securities and financial derivatives.

For the year ended December 31, 2018 , Other income (loss) was $(27.8) million , consisting of net realized and change in net unrealized losses of $(35.8) million on our securities, primarily our Agency RMBS, partially offset by net realized and change in net unrealized gains of $7.9 million on our financial derivatives.

The increase in interest rates during the year ended December 31, 2018 led to significant realized and unrealized losses on our securities portfolio.

We had net realized and unrealized losses of $(40.2) million on our Agency RMBS, partially offset by net realized and unrealized gains of $4.0 million on our net short U.S.

Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives.

For the year ended December 31, 2019 , Other income (loss) was $19.0 million , consisting of net realized and change in net unrealized gains of $51.5 million on our securities, primarily our Agency RMBS, partially offset by net realized

and change in net unrealized losses of $(32.5) million on our financial derivatives.

The increase in prices on our Agency RMBS holdings, primarily as a result of the decrease in interest rates during the year ended December 31, 2019 , led to significant gains on our securities portfolio.

The decrease in interest rates also led to losses on our interest rate hedges, including net realized and unrealized losses of $(21.5) million on our interest rate swaps, $(5.8) million on our futures, and $(5.1) million on our TBAs.

For the year ended December 31, 2019 , as measured by sales and excluding paydowns, we turned over approximately 52% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $2.8 million on our Agency RMBS portfolio.

Other income (loss) for the year ended December 31, 2018 was $(27.8) million and consisted of net realized and change in net unrealized losses of $(35.8) million on our securities, primarily our Agency RMBS, partially offset by net realized and change in net unrealized gains of $7.9 million on our financial derivatives.

During the year ended December 31, 2018, the increase in interest rates and overall decline in RMBS prices led to significant realized and unrealized losses on our securities portfolio, as well as significant realized and unrealized net gains on our interest rate hedges.

The net realized and unrealized losses on securities primarily consisted of $(40.2) million of net losses on our Agency RMBS, partially offset by net gains of $4.0 million on our net short U.S.

Treasury securities;

The net realized and unrealized gains on our financial derivatives primarily included $14.4 million of net realized and unrealized gains from our net TBA short positions and interest rate swaps, partially offset by losses on our futures of $6.3 million.

The overall declines in RMBS prices and increases in interest rates positively affected the results for our TBA short positions and interest rate swaps.

For the year ended December 31, 2018 , as measured by sales and excluding paydowns, we turned over approximately 72% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized losses of $(29.3) million on our Agency RMBS portfolio.

Other income (loss) for the year ended December 31, 2017 was $(13.7) million and consisted of net realized and change in net unrealized losses of $(7.2) million on our securities, primarily our Agency RMBS and net realized and change in net unrealized losses of $(6.5) million on our financial derivatives.

Although Agency RMBS spreads generally tightened during the year ended December 31, 2017, asset prices were mixed, with shorter-duration RMBS (such as higher-coupon pools and 15-year pools) generally underperforming longer-duration RMBS.

Given the characteristics of our portfolio, especially its concentration in higher-coupon pools, this led to net unrealized losses on our portfolio for the year.

The net realized and unrealized losses on our financial derivatives primarily included ($7.2) million of net realized and unrealized losses on our net TBA short positions, which was only partially offset by $0.8 million of net realized and unrealized gains on our other financial derivatives, primarily interest rate swaps.

Low volatility and a muted prepayment environment negatively affected our net short TBA hedges.

while the net realized and unrealized gains on our financial derivatives primarily included net gains of $14.4 million from our net TBA short positions and interest rate swaps, partially offset by net losses on our futures of $(6.3) million.

For the year ended December 31, 2018, as measured by sales and excluding paydowns, we turned over approximately 72% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized losses of $(29.3) million on our Agency RMBS portfolio.

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Amounts at risk under our repurchase agreements as of December 31, 2019 and 2018 does not include $0.9 million and $0.2 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.

Our derivatives, excluding TBAs, are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Act.

We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions.

Our derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act." We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions.

Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral.

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In the case of cleared derivatives, the clearinghouse becomes our counterparty and the future commission merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral.

As of December 31, 2018 , we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with three counterparties of approximately $11.6 million.

As of December 31, 2019 , we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with two counterparties of approximately $10.4 million.

We also had $9.0 million of initial margin for cleared over-the-counter, or "OTC," derivatives posted to central clearinghouses as of that date.

As of December 31, 2017, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with five counterparties of approximately $11.9 million.

As of December 31, 2018, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with three counterparties of approximately $11.6 million.

We also had $9.8 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date.

Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

If a particular counterparty's collateral held by us is greater than the aggregate fair value of the financial derivatives plus our collateral held directly by the

counterparty, there is no amount at risk for the particular counterparty.

If a particular counterparty's collateral held by us is greater than the aggregate fair value of the financial derivatives plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis.

The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.

As of December 31, 2019 , in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with five counterparties of approximately $1.2 million.

As of December 31, 2018, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with eight counterparties of approximately $2.5 million.

As of December 31, 2017, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with 12 counterparties of approximately $3.5 million.

Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

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Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $206.4 million .

Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $33.0 million .

We used $15.5 million to pay dividends and $0.7 million to repurchase common shares.

As a result of these activities, there was an increase in our cash holdings of $16.8 million , from $18.6 million as of December 31, 2018 to $35.4 million as of December 31, 2019 .

For the year ended December 31, 2018, our operating activities provided net cash of $28.8 million and our investing activities provided net cash of $62.8 million.

Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $9.1 million.

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As a result of these activities, there was a decrease in our cash holdings of $37.5 million, from $56.1 million as of December 31, 2017 to $18.6 million as of December 31, 2018.

For the year ended December 31, 2017, our operating activities provided net cash of $34.4 million and our investing activities used net cash of $475.5 million.

Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $18.4 million.

We received net proceeds from the issuance of common shares of $59.1 million, after underwriters' discounts and third party agent commissions.

We used $17.6 million to pay dividends and $0.5 million to pay offering costs.

As a result of these activities, there was an increase in our cash holdings of

$22.6 million from $33.5 million as of December 31, 2016 to $56.1 million as of December 31, 2017.

On June 13, 2018, our Board of Trustees approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.2 million common shares.

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Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations.

This program superseded the program that was previously adopted on February 6, 2018.

For the year ended December 31, 2018 , we repurchased 852,380 common shares at an average price per share of $11.01 and a total cost of $9.4 million.

Under the current repurchase program adopted on June 13, 2018, we have repurchased 264,323 shares through March 1, 2019 for an aggregate cost of $2.8 million.

During the year ended December 31, 2019 , we repurchased 73,816 common shares at an average price per share of $10.12 and a total cost of $0.7 million .

Under the current repurchase program adopted on June 13, 2018, we have repurchased 298,029 common shares through March 6, 2020 at an average price per share of $10.46 and an aggregate cost of $3.1 million, and have authorization to repurchase an additional 901,971 common shares.

Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements.

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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.

What changed 10-K

Item 7. Management’s Discussion and Analysis