What changed in this filing

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Item 1. Business

2024-02-22 compared with 2023-02-21 · 35 added, 83 removed, 206 unchanged (36% of the section changed)

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government agency or a federally chartered corporation (“non-Agency RMBS”);

• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;

• other real estate-related financing arrangements.

Treasury securities;

• a real estate-related financing arrangement.

During the periods presented in this Report, we also invested in:

• CMBS that are guaranteed by a U.S.

government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);

• credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);

• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;

• a commercial mortgage loan.

Treasury securities.

We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification.

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Human Capital

As previously discussed, we do not have employees and our Manager is responsible for providing us with our management team.

Our Manager's long-term success, including its success in managing our business, relies on its ability to attract, develop and retain talent.

Our Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees.

Our Manager is committed to improving diversity at all levels and in all functions across its global business and remains focused on increasing representation of women and other underrepresented employees.

Table of Conten t s

As previously discussed, we do not have any employees.

Instead, under our management agreement, our Manager is responsible for providing us with our management team.

Our executive officers may also serve as officers of our Manager.

For additional information, refer to Item 13 — “Certain Relationships and Related Transactions, and Director Independence”.

Our Manager's long-term success depends on its ability to retain, develop, engage and attract top talent.

Our Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees in developing their full potential both personally and professionally.

Our Manager believes that diversity and inclusion are good for business.

Our Manager is committed to further strengthening diversity at all levels and in all functions across its global business.

Increasing representation of women and diverse employees remains a focus for our Manager, as does building a more inclusive work environment.

All employees are required to take periodic unconscious bias training.

Employees are also encouraged to participate in any of our Manager’s various employee resource groups where employees with diverse backgrounds, experiences and perspectives can connect.

Manager’s various employee resource groups are sponsored by its senior leaders and are designed by employees, for employees .

Our Competitive Advantages

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We have invested in a diversified pool of mortgage assets that generate attractive risk-adjusted returns.

Our current investment portfolio includes Agency RMBS, non-Agency RMBS, non-Agency CMBS and TBAs.

Our assets have also historically included, and may in the future include, Agency CMBS, GSE CRT, residential mortgage loans, commercial mortgage loans and other real estate-related investments.

Our current investment portfolio includes Agency RMBS, non-Agency RMBS and non-Agency CMBS.

Our investment portfolio has also historically included, and may in the future include Agency CMBS, credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”), residential mortgage loans, commercial mortgage loans, TBAs and other real estate-related investments.

We refer to all of these investment types collectively as our target assets.

In addition to direct purchases of our target assets, we also invest in ventures managed by an affiliate of our Manager, which, in turn, invest in our target assets.

We have also purchased U.S.

Treasury securities and, in addition to direct purchases of our target assets, invested in ventures managed by an affiliate of our Manager, which, in turn, invested in our target assets.

We accept varying levels of interest rate risk by managing our hedge portfolio and accept certain levels of credit and spread risk to earn income.

Agency RMBS are residential mortgage-backed securities issued by a U.S.

government agency such as Ginnie Mae, or a federally chartered corporation such as Fannie Mae or Freddie Mac (Government Sponsored Enterprises or “GSEs”) that are secured by a collection of mortgages.

government agency such as Ginnie Mae, or a federally chartered corporation such as Fannie Mae or Freddie Mac (Government Sponsored Enterprises or “GSEs”) that are

secured by a collection of mortgages.

Payments of principal and interest on Agency RMBS, not the market value of the securities themselves, are guaranteed by the issuer.

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Instead, Agency RMBS provide for monthly payments of both principal and interest.

In effect, these payments are a

Table of Conten t s

“pass-through” of scheduled and unscheduled principal payments and the monthly interest payments made by the individual borrowers on the mortgage loans, net of any fees paid to the servicers, guarantors or other related parties of the securities.

In effect, these payments are a “pass-through” of scheduled and unscheduled principal payments and the monthly interest payments made by the individual borrowers on the mortgage loans, net of any fees paid to the servicers, guarantors or other related parties of the securities.

The principal may be prepaid at any time due to prepayments or defaults on the underlying mortgage loans.

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The mortgage loan collateral for non-Agency RMBS generally consists of residential mortgage loans that do not conform to U.S.

government agency or federally chartered corporation underwriting guidelines due to certain factors including mortgage balance in excess of such guidelines, borrower characteristics, loan characteristics and level of documentation.

Our current investments in non-Agency RMBS are collateralized by prime, jumbo prime and Alt-A mortgage loans.

We have also historically invested in non-Agency RMBS collateralized by subprime and reperforming mortgage loans.

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Prime and Jumbo Prime Mortgage Loans

Prime mortgage loans are mortgage loans that generally require borrower credit histories, debt-to-income ratios and loan-to-value ratios similar to those dictated by GSE underwriting guidelines, though in certain cases they may not meet the same income documentation or other requirements.

Jumbo prime mortgage loans are mortgage loans with requirements similar to prime mortgage loans except that the mortgage balance exceeds the maximum amount permitted by GSE underwriting guidelines.

Alt-A Mortgage Loans

Alt-A mortgage loans are mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to GSE underwriting guidelines, but whose borrower characteristics may.

Generally, Alt-A mortgage loans allow homeowners to qualify for a mortgage loan with reduced or alternative forms of documentation.

The credit quality of Alt-A borrowers generally exceeds the credit quality of subprime borrowers.

Subprime Mortgage Loans

Subprime mortgage loans are loans that do not conform to GSE underwriting guidelines.

Subprime borrowers generally have imperfect or impaired credit histories and low credit scores.

Reperforming Mortgage Loans

Reperforming mortgage loans are residential mortgage loans that have a history of delinquency and may have been restructured since origination.

Reperforming mortgage loans may or may not have originally conformed to GSE underwriting guidelines.

Due to past delinquencies, borrowers generally have impaired credit histories and low credit scores, and may have a greater than normal risk of future delinquencies and defaults.

We have also invested in non-Agency RMBS structured as re-securitizations of a real estate mortgage investment conduit (“Re-REMIC”).

A Re-REMIC is a transaction in which an existing security or securities is transferred to a special purpose entity that has formed a securitization vehicle that has issued multiple classes of securities secured by and payable from cash flows on the underlying securities.

government agency or federally chartered corporation underwriting guidelines due

to certain factors including mortgage balance in excess of such guidelines, borrower characteristics, loan characteristics and level of documentation.

Unconsolidated Ventures

We have investments in unconsolidated ventures.

During the periods presented in this Report, we have invested in unconsolidated ventures.

In circumstances where we have a non-controlling interest but we are deemed to be able to exert significant influence over the affairs of the enterprise, we utilize the equity method of accounting.

Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses.

As of December 31, 2022, our unconsolidated ventures were in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

Agency CMBS are structured pass-through certificates representing interests in pools of commercial loans that are secured by commercial property and issued by a U.S.

government agency or federally chartered corporation.

Types of Agency CMBS include Fannie Mae DUS (Delegated Underwriting and Servicing), Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral.

government agency or federally chartered corporation sources these loans from a network of approved multifamily sellers/servicers and guarantees the timely payment of interest and principal on these investments.

Unlike single family residential mortgages in which the borrower, generally, can prepay at any time, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.

Common restrictions include yield maintenance (a prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date) and prepayment penalties.

Additionally, Agency CMBS include Ginnie Mae Construction Loan Certificates (“CLCs”) and the resulting Project Loan Certificates (“PLCs”) when the construction project is complete.

The investor in the CLC is committed to fund the full amount of the project;

however, actual funding generally occurs monthly as construction progresses on the property.

Ginnie Mae guarantees the timely payment of principal and interest on each CLC and PLC.

Ginnie Mae CLCs pay interest only during construction, while PLCs pay principal and interest.

The mortgage loans underlying the PLCs generally contain a lock-out and prepayment penalty period of 10 years.

Ginnie Mae does not guarantee the payment of prepayment penalties.

Table of Conten t s

Government-Sponsored Enterprises Credit Risk Transfer Securities

GSE CRTs are structured to provide credit protection to the issuer with respect to defaults and other credit events within pools of mortgage loans secured by single family properties that collateralize Agency RMBS issued and guaranteed by the GSEs or within pools of mortgage loans secured by multifamily properties that collateralize Agency CMBS issued and guaranteed by the GSEs.

This credit protection is achieved by allowing the GSEs to reduce the outstanding class principal balance of the securities as designated credit events on the loans arise.

The GSEs make monthly coupon payments of interest and periodic payments of principal based on prepayments to the holders of the securities.

To date, all GSE CRTs have paid a floating interest rate benchmarked to one-month London Interbank Offered Rate (“LIBOR”) or the Secured Overnight Financing Rate (“SOFR”).

As of December 31, 2023, our one remaining unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.

TBAs are forward contracts to purchase or sell Agency RMBS.

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Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms.

Loan Participation Interest

In August 2018, we invested in a loan participation interest in a secured loan to a non-bank servicer that was collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans.

Mortgage servicing rights represented the right to perform and control the servicing of mortgage loans in exchange for a fee.

We sold our loan participation interest in April 2020.

Financing Strategy

We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to SOFR.

We also used secured loans from the Federal Home Loan Bank of Indianapolis (“FHLBI”) to finance a portion of our investment portfolio.

We repaid our secured loans during 2020 with proceeds from sales of assets that collateralized the secured loans.

We terminated our membership in FHLBI in the third quarter of 2020.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to the secured overnight financing rate (“SOFR”).

We have also financed investments through issuances of equity, and may utilize other forms of financing in the future.

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The amount of financing we receive under a repurchase agreement is limited to a specified percentage of the estimated market value of the assets we sell to the buyer.

The difference between the sale price and

Table of Conten t s

repurchase price is the cost, or interest expense, of financing under a repurchase agreement.

The difference between the sale price and repurchase price is the cost, or interest expense, of financing under a repurchase agreement.

Under repurchase agreement financing arrangements, certain buyers require us to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

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Changes in spreads impact our book value per common share and our liquidity and could cause us to sell assets and to change our investment strategy to maintain liquidity and preserve book value per common share.

Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads.

Table of Conten t s

Elevated inflation, monetary policy tightening by the Federal Open Market Committee (“FOMC”) and concerns around the health of the regional banking system have impacted and may continue to impact credit spreads.

We believe that our investment strategy will generally keep our credit losses and financing costs low.

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This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.

The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve.

Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated.

Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022.

CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels.

Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.

Given tightening lending conditions, loans may continue to experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.

Given deteriorating fundamentals and tightening lending conditions, borrowers may experience difficulties meeting their obligations and refinancing loans upon scheduled maturities.

Loans may experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.

We also expect credit rating agencies to continue to reassess transactions negatively impacted by these adverse changes, which may result in our investments being downgraded.

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Liquidity in the form of cash, unencumbered assets and future cash inflows is consistently monitored and evaluated versus internal targets.

One such measure that we use to monitor our liquidity is unrestricted cash and unencumbered investments, which consists of cash and cash equivalents as reported in our consolidated balances sheets and investments that have not been pledged as collateral for repurchase agreement borrowings.

Foreign Exchange Rate Risk

We have an investment in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S.

We had an investment in an unconsolidated joint venture whose net assets and results of operations were exposed to foreign currency translation risk when translated in U.S.

dollars upon consolidation.

We have historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.

We historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.

Investment Guidelines

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It also reviews its compliance with our investment policies and procedures, including our investment guidelines, and our Manager provides our board of directors an investment performance report at the end of each quarter in conjunction with its review of our quarterly results.

Table of Conten t s

Investment Process

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Our Corporate Information

Our principal executive offices are located at 1555 Peachtree Street, N.E., Suite 1800, Atlanta, Georgia 30309.

Our principal executive offices are located at 1331 Spring Street, N.W., Suite 2500, Atlanta, Georgia 30309.

Our telephone number is (404) 892-0896.

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The information on our website is not intended to form a part of or be incorporated by reference into this Report.

Table of Conten t s

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 1. Business