What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-04-29 · 502 added, 405 removed, 1364 unchanged (40% of the section changed)

6 unchanged sentences

statements that involve risks and uncertainties.

Forward-looking statements are

those that are not historical in nature.

Forward-looking statements

are those that are not historical in nature.

As a result of

2 unchanged sentences

differ materially from those anticipated in such forward-looking statements.

We are a specialty finance company that invests in residential mortgage-backed securities

(“RMBS”) which are issued and

We are a specialty finance company that invests in residential mortgage-backed

securities (“RMBS”) which are issued and

guaranteed by a federally chartered corporation or agency (“Agency RMBS”).

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the Securities and Exchange Commission (the “SEC”).

Our business objective is to provide attractive risk-adjusted total returns over the

long term through a combination of capital

Our business objective is to provide attractive risk-adjusted total returns over

the long term through a combination of capital

appreciation and the payment of regular monthly distributions.

2 unchanged sentences

allocating capital between the two categories of Agency RMBS described above.

We seek to generate income from (i) the net interest

to generate income from (i) the net interest

margin on our leveraged PT RMBS portfolio and the leveraged portion

3 unchanged sentences

certain of our structured Agency RMBS through short-term borrowings

structured as repurchase

structured as repurchase agreements.

PT RMBS and structured

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We generally will not be subject to U.S.

federal income tax to the extent that we

currently distribute all of our

federal income tax to the extent that we currently

distribute all of our

REIT taxable income (as defined in the Code) to our stockholders and maintain

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prior to its termination in June 2021.

On January 20, 2021, we entered into an underwriting agreement (the “January 2021

Underwriting Agreement”) with J.P.

On January 20, 2021, we entered into an underwriting agreement (the “January 2021 Underwriting

Agreement”) with J.P.

Securities LLC (“J.P.

1 unchanged sentence

Morgan purchased the

shares of our common stock from the Company pursuant to the January 2021

Underwriting Agreement at $5.20 per share.

shares of our common stock from

the Company pursuant to the January 2021 Underwriting Agreement

at $5.20 per share.

we granted J.P.

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transactions.

Through March

30, 2022, we issued a total of 15,835,700 shares under the October 2021 Equity

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termination date.

From the inception of the stock repurchase program through March 31, 2022, the Company

repurchased a total of 5,685,511

shares at an aggregate cost of approximately $40.4

million, including commissions and fees, for a weighted average price

The Company did not repurchase any shares of its common stock during the

three months ended March 31, 2022 or the year

ended December 31, 2021.

From the inception of the stock repurchase program through June 30, 2022, the Company

repurchased a total of 6,561,810 shares

at an aggregate cost of approximately $42.6 million, including commissions and fees,

for a weighted average price of $6.49 per share.

During the six months ended June 30, 2022, the Company repurchased a total of 876,299

shares of its common stock at an aggregate

cost of approximately $2.2 million, including commissions and fees, for a weighted average

price of $2.53 per share.

Factors that Affect our Results of Operations and Financial Condition

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increases in our cost of funds resulting from increases in the Fed Funds rate that

are controlled by the Fed and are likely to

continue to occur in 2022;

are controlled by the Fed which have

occurred, and are likely to continue to occur, in 2022;

the requirements to qualify as a REIT and the requirements to qualify for

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the Company’s

six and three

Company’s results

of operations

for the three

Income Summary

for the three

$208.9 million,

$46.2 million,

for the three

1 unchanged sentence

The components

for the three

those components

are presented

(in thousands)

Six Months Ended June 30,

Three Months Ended, June 30,

Interest income

2 unchanged sentences

Losses on RMBS and derivative contracts

Net portfolio deficiency

Net portfolio loss

Net (loss) income

Reconciliations

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Our presentation

not be comparable

be comparable

to similarly-titled

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and net earnings

excluding realized

and unrealized

the Company’s

Company’s results

of operations

Net Earnings Excluding Realized and Unrealized Gains and Losses

1 unchanged sentence

Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Includes realized

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of the interest

on repurchase

our derivative

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to each period

these periods.

interest expense

is that these

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interest expense.

interest income,

when calculated

of derivative

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Gains or losses

the discussions

of the discussions

that economic

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The unrealized

losses on derivative

in our statements

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of the economic

hedging strategy

our financial

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Economic Interest Expense and Economic Net Interest Income

3 unchanged sentences

Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Reflects the effect of derivative instrument hedges for only the period

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million increase

offset by the

$634.5 million

combined with

point ("bps")

29 bps increase

in the average

cost of funds,

combined with

million increase

On an economic

$10.1 million

$12.6 million,

respectively, resulting

$43.5 million

income, respectively.

$27.1 million

of net interest

income, consisting

offset by $8.2

For the three

$27.7 million

of net interest

income, consisting

offset by $1.6

million increase

average assets

and borrowings

2022 compared

of our capital

raising activity

ended December

71 bps increase

$244.2 million

million increase

66 bps increase

in the average

cost of funds,

$236.6 million

average outstanding

On an economic

for the three

million, respectively,

$6.7 million,

respectively, resulting

in $29.1 million

income, respectively.

economic interest

expense during

positive performance

of our hedging

below provide

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expense, cost

the six months

economic basis.

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

($ in thousands)

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Portfolio yields and costs of borrowings presented in the tables above and the

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Economic interest expense and economic net interest income

presented in the table above and the tables on page 32 include the effect

presented in the table above and the tables on page 35 includes the effect

of our derivative instrument hedges for only the periods presented.

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Interest Income and Average Asset Yield

the six months

$56.1 million,

respectively.

the six months

respectively.

2021, respectively.

2022 as compared

million increase

$634.5 million

combined with

$35.3 million

million, respectively.

2022 and 2021,

2021, respectively.

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For the three

2022 as compared

million increase

$244.2 million

combined with

million increase

below presents

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of structured

for each quarter

($ in thousands)

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Three Months Ended

June 30, 2022

March 31, 2022

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March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Interest Expense and the Cost of Funds

We had average

total interest

$4,118.4 million

$10.8 million

the six months

respectively.

for the comparable

million increase

cost of funds,

to the increase

combined with

million increase

$12.6 million

2021, respectively.

in the average

economic cost

We had average

of $4,111.5 million and

total interest

2021, respectively.

cost of funds

2021, respectively.

cost of funds

average outstanding

for the three

2021, respectively.

a 1 bps decrease

in the average

economic cost

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directly affect

economic cost

110 bps below the

average six-month

for the quarter

cost of funds

average one-month

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and six-month

for each quarter

date and 2021

economic basis.

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Average GAAP Cost of Funds

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Gains or Losses

below presents

for the three

(in thousands)

Realized losses on sales of RMBS

Six Months Ended June 30,

Three Months Ended June 30,

Realized (losses) gains on sales of RMBS

Unrealized losses on RMBS

Total losses on

Gains on interest rate futures

Gains on interest rate swaps

Losses on payer swaptions (short positions)

Gains on payer swaptions (long positions)

Losses on interest rate caps

Gains on interest rate floors

Gains (losses) on interest rate futures

Gains (losses) on interest rate swaps

(Losses) gains on payer swaptions (short positions)

Gains (losses) on payer swaptions (long positions)

Gains on interest rate caps

Gains (losses) on interest rate floors

Gains (losses) on TBA securities (short positions)

Gains (losses) on TBA securities (long positions)

Gains on TBA securities (short positions)

(losses) from derivative instruments

yield on those

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of our asset/liability

received proceeds

$988.5 million,

the six months

respectively, from

received proceeds

million, respectively,

sales of RMBS.

and unrealized

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in our portfolio.

negative impact

The unrealized

on the underlying

premiums increase.

To the extent

to par, unrealized

discount accreted

on the underlying

the reporting

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Mortgage Rate

June 30, 2022

March 31, 2022

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Administration Ltd.

Total operating expenses

Company’s total

were approximately

respectively.

million, respectively,

to approximately

million, respectively,

below presents

(in thousands)

Six Months Ended June 30,

Three Months Ended June 30,

Management fees

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Audit, legal and other professional fees

Other direct REIT operating expenses

Other expenses

Direct REIT operating expenses

Other administrative

Total expenses

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Company’s pro rata portion of certain overhead costs set forth in the management agreement.

On April 1, 2022, pursuant to the third amendment to the management agreement

entered into on November 16, 2021, the

Manager began providing certain repurchase agreement trading, clearing and

administrative services to the Company that had been

previously provided by AVM, L.P.

On April 1, 2022, pursuant to the third amendment to the management agreement entered into on November 16, 2021,

the Manager began providing certain repurchase agreement trading, clearing and administrative services to the Company

that had been previously provided by AVM, L.P.

under an agreement terminated on March 31, 2022.

In consideration for such services, the Company

will pay the following fees to the Manager:

In consideration for

such services, the Company will pay the following fees to the Manager:

A daily fee equal to the outstanding principal balance of repurchase agreement funding

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less than or equal to $5 billion, and

multiplied by 1.0 basis points for any amount of aggregate outstanding principal

multiplied by 1.0 basis point for any amount of aggregate outstanding principal

balance in excess of $5 billion, and

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The following table summarizes the management fee and overhead allocation

expenses for each quarter in 2022 to date and

expenses for the six months ended June 30, 2022

and 2021, and for each quarter in 2022 to date and 2021.

($ in thousands)

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Three Months Ended

June 30, 2022

March 31, 2022

3 unchanged sentences

March 31, 2021

Six Months Ended

June 30, 2022

June 30, 2021

Mortgage-Backed Securities

at fair value

million compared

$259.4 million

9.4% and 12.9%,

respectively.

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Portfolio (%)

June 30, 2022

March 31, 2022

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Asset Category

March 31, 2022

June 30, 2022

Fixed Rate RMBS

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($ in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Total Portfolio

March 31, 2022

June 30, 2022

December 31, 2021

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of the RMBS in the Company’s investment portfolio

at March 31, 2022.

at June 30, 2022.

An effective duration of 3.390 indicates that an interest rate increase

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of commercial

other financial

and had borrowings

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market rates.

our established

provide borrowing

we had obligations

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$51.1 million.

Through April

Through August

able to maintain

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with comparable

through September

through November

The table below presents information about our period end,

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Three Months Ended

June 30, 2022

March 31, 2022

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market causes

liquidity position

to the extent

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related margin

in sufficient

of the levered

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to (i) borrow

the TBA security

Our borrowing

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of the market

To the extent the

To the extent the market

asset collateralizing

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asset pledged

be over collateralized

over collateralized

margin returned

2 unchanged sentences

and make margin

Typically, but not always,

Typically, but not

parties agree

so as to avoid

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on an individual

the six months

average haircut

11 unchanged sentences

physical delivery

financing sources

position could

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must generally

provide additional

the underlying

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RMBS in order

but generally

our activities

4 unchanged sentences

million during

the six months

below, we may

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that are deemed to be “at the market” offerings and privately negotiated transactions.

March 31, 2022, we issued a total of

June 30, 2022, we issued a total of

15,835,700 shares under the October 2021 Equity Distribution Agreement for aggregate

2 unchanged sentences

Economic Summary

period whereby

the Fed migrated

from reluctantly

acknowledging

policy regime

pandemic emerged

first quarter

a more aggressive

The Fed announced

simultaneously

The acceleration

emerged during

and has continued

another transitional

for the economy,

policy changed

developments.

began to accelerate

second quarter

expenditures,

highest levels

related lock-downs

in particular

global inflationary

that may have

late February

2022, western

nations began

progressively

severe sanctions

These sanctions,

of many commodities.

global supplier

of many commodities

China, authorities

imposed lock-downs

to the closure

of many manufacturing

further exacerbating

in particular,

The unemployment

the pre-pandemic

lows, unemployment

lowest levels

growing rapidly,

rate of inflation.

and most market

months market

participants,

to anticipate

and especially

were the cause

these constraints

as the effects

itself declined

The sub-components

by the effects

on the supply

of labor, or lack

in the fourth

dropped their

that inflation

energy inflation,

may even accelerate

of life cannot

price pressures

remain elevated

as affordability

to deteriorate

due to higher

inflated home

sum, inflation

and not likely

in the near-term.

Fed’s anticipated

rate volatility

very elevated

pandemic first

of the forces

the uncertainty

COVID related

and the uncertain

these forces,

that volatility

very elevated

forces subside.

the remainder

of 2022 hinges

and the impact

these factors

and the unemployment

As the outlook

for inflation

changed materially

to the upside

policy by the

2022, interest

and the curve

first quarter

Note increased

basis points,

on the 5-year

Note increased

and the yield

was “transitory.”

The Fed quickly

policy accommodation

to constraining

their balance

in the Ukraine,

which started

in late February

the inflationary

the beginning

of the second

market participants

year-over-year

effects would

kick in, since

in the second

and the monthly

core consumer

(“CPI”) readings

a 0.6% increase

was accelerating

second quarter,

not moderating,

broader based.

Further, survey-based

recent measures

are the highest

in four decades.

While several

economic activity

strong, particularly

the unemployment

measures have

In particular,

interest rate

the economy, such

as the housing

consumer goods

such as sales

light trucks,

have declined

stock markets

declined materially

equity indices

major currencies,

Euro, Yen, Yuan and most

market currencies.

With inflation

to the highest

the Fed intent

the Fed Funds

rate to levels

rate of 2.50%

interest rates

further during

Treasury Note

on the 2-year

Note increased

by 82.8 basis

80 basis points.

2022 the yield

curve actually

by approximately

Yields on both

declined modestly

The Fed reacted

these developments

The Fed raised

the Fed Funds

rate by another

75 basis points

for the re-steepening

was the release

the Fed’s January

which strongly

Fed may actually

revealed that

Funds futures

market, anticipates

and 250 basis

and the pending

the Fed’s Agency

RMBS portfolio,

potential for

sales in addition

to the prepayment

related run-off,

in poor returns

for the sector.

poor performance

has continued

second quarter

these factors

is transitioning

from a prolonged

from not only

daily purchases

- $40 billion

the reinvestment

of all paydowns

existing holdings

bank community

growth resulting

Going forward

only purchasing

their monthly

and eventually

removes reserves

for the first

2022 was -5.0%

and the excess

return versus

Longer duration/lower

coupon mortgages

underperformed

higher coupon/lower

underperformed

15-year maturities

underperformed

higher coupons.

The same pattern

excess returns

versus comparable

has also continued

second quarter

rates continue

Fed to continue

each remaining

range of 3.5%

Fed’s long-term

to be between

their efforts

under control

the Fed Funds

from remaining

the Fed’s target

rate of inflation.

from accommodation

to the extreme

policy accommodation

a restrictive

policy stance

– has materially

The Fed’s policy

market participants

expect a global

market participants

has inverted.

the Fed Funds

futures market

market expects

first quarter

Accordingly, the

Treasury Note

on the 10-year

Incoming economic

curve inversion.

with inflation

stop tightening.

Such conditions,

high – reflecting

reflect market

for inflation

to ultimately

be contained,

and the largest

RMBS investors

the sector, Agency

rates increased

those observed

Fed via quantitative

easing (which

is now quantitative

their holdings

run-off), large

domestic banks

to quantitative

are experiencing

reserves/deposits)

money managers

other sectors

income markets

as more attractive

or are experiencing

assets across

are collectively

causing demand

decline materially

higher coupon,

30-year securities

in production

by originators.

large amounts

may eventually

have performed

third quarter.

credit sensitive

income markets

under pressure

likely to further

the economies

while negative

income markets.

This is consistent

sector’s history

of performance

in a counter-cyclical

Recent Legislative

and Regulatory

taken a number

of the impacts

of the COVID-19

Fed announced

a $700 billion

asset purchase

Specifically, the

Fed announced

that it would

at least $500

0.0% – 0.25%,

already lowered

the Fed Funds

Powell announced

recent events

achieve maximum

FOMC continued

this commitment

at all subsequent

meetings through

to climb modestly

sufficient for

2% long term.

FOMC reiterated

with a strong

and inflation

2%, it expected

soon be appropriate

to the deterioration

17 unchanged sentences

by early March

the Fed would

begin reducing

FOMC announced

Fed’s balance

June of 2022,

in accordance

of $30 billion

Treasuries and

month, phased

in over three

likely beginning

Act was passed

Trump on March

steep decline

things, provided

each American

a year, increased

municipalities

to the airline

an additional

to individuals,

small businesses,

testing efforts.

Various provisions

in July 2020,

2020), expanded

benefits (July

and a moratorium

on foreclosures

2020, President

Trump issued Executive

the Department

Disease Control

and Prevention

the Department

and Department

of the Treasury

halt residential

and foreclosures,

through temporary

$17.5 billion

numbers expected

of $60 billion

Treasuries and

former President

an additional

9 unchanged sentences

Mae and Freddie

July 31, 2021

and September

respectively.

2 unchanged sentences

respectively.

the expirations

2021, effectively

4 unchanged sentences

this limitation,

40% month-over-month

176% year-over-year,

respectively, although

below pre-pandemic

the comparable

respectively, and

historic average

for the comparable

Trump administration

25 unchanged sentences

material litigation

of its assets,

FHFA’s regulatory capital

4 unchanged sentences

However, no definitive

or legislation

the conservatorship,

20 unchanged sentences

effectiveness

GSEs announced

the additional

capital required

a risk to the

of the Uniform

Mortgage-Backed

impact liquidity

in the market

TBA securities.

will be replaced

11 unchanged sentences

Notwithstanding

this possible

this extension,

a joint statement

1 unchanged sentence

calls on banks

new contracts

as a reference

institutions,

based on U.S.

We will monitor

the emergence

as it appears

new benchmark

rate investments.

At this time,

however, no consensus

accepted alternatives

at addressing

mostly becomes

2022, establishes

mostly became

for the selection

8 unchanged sentences

substantially

reserved judgment,

however, on a

spread-adjusted

of Representatives

“LIBOR Act”),

which provides

the Adjustable

Act (the “LIBOR

of the Consolidated

Appropriations

for a statutory

new benchmark

as a benchmark

fallback mechanism

rate by operation

any such contract.

Act establishes

1 unchanged sentence

from litigation

of or related

as the recommended

not be construed

16 unchanged sentences

by application

States Senate

to the Committee

Urban Affairs.

continue until

2 unchanged sentences

rate investments.

At this time,

however, no consensus

Effective January

18 unchanged sentences

pool of mortgage

from the pool

The respective

47 unchanged sentences

market yields.

Although lower

term interest

71 unchanged sentences

plans to reduce

The Fed’s planned

Fed’s planned

balance sheet

10 unchanged sentences

may be removed

pool into which

were securitized.

27 unchanged sentences

rate markets.

SOFR or LIBOR

typically increase

16 unchanged sentences

rate swaptions.

extremely volatile

unprecedented

policy accommodation

rapid removal

of the accommodation.

market pricing

in the futures

markets implies

rate to approximately

induced downturn

Fed’s monetary

of the second

2022 inflation

Fed policy, interest

for the economy.

Specifically, the

May, released in

market expectations.

Survey measures

expectations,

day, surged to

and was again

expectations.

elevated inflation

implying inflationary

clearly spread

those sectors

related supply

late 2021/early

the May, June and

July meetings.

Fed to continuing

rate by another

to affect economic

has acknowledged

their actions

most sensitive

– have already

other economic

the manufacturing

Initial claims

for unemployment

approximately

reading reported

contain inflation

This is reflected

for longer-term

shorter maturity

remain elevated,

Treasury Note

yielding approximately

3.07% on August

effect – more

to be ultimately

albeit potentially

at the expense

of a recession,

whereby shorter

maturity U.S.

Treasuries yield

than long-term

This condition

negative returns

for the second

quarter (-3.9%)

and year-to-date

and such returns

than comparable

duration U.S.

Treasuries by

2.3%, respectively.

duration U.S.

Treasuries were

extreme levels

COVID-19 pandemic

that triggered

unprecedented

fiscal stimulus

As the economy

rapidly, inflationary

were exacerbated

supply constraints,

of labor, resulting

further stimulated

induced shutdowns

supply constraints,

another source

of inflationary

2022 unfolds,

have intensified

their accommodation

may even begin

sales of U.S.

For the Company,

rise materially

possibly into

the Company’s

fear possible

sales of Agency

first quarter

these securities

underperformed

Company’s shareholders

in the residential

housing market

However, as the

Company’s Agency

at discounts,

current market

is challenging

for the Company’s

and all Agency

levered investors.

To counter these challenging

market conditions,

to take steps

impact through

asset selection

and the lower

use of leverage.

The Company’s

buy-back program

shares, which

to book value

at a discount

to the Company’s

in the market

actually delivered

better returns

income markets

second quarter

reason, returns

to the sector

largest participants

in the sector

money managers

from increasing

their investments

However, if the

could outperform

other sectors

the prospects

funding rates

and declining

third quarter

have performed

that occurred

Our condensed

5 unchanged sentences

Our most critical

involve decisions

estimates involve

and assessments

7 unchanged sentences

ended December

Capital Expenditures

material commitments

1 unchanged sentence

Sheet Arrangements

have any off-balance

any off-balance

sheet arrangements.

14 unchanged sentences

on derivative

that are treated

tax purposes.

3 unchanged sentences

the following

dividends since

the completion

(in thousands, except per share amounts)

On April 13, 2022, the Company declared a dividend of $0.045 per share

to be paid on May 27, 2022.

The effect of this dividend is included in

the table above, but is not reflected in the Company’s financial statements

as of March 31, 2022.

On July 13, 2022, the Company declared a dividend of $0.045 per share

to be paid on August 29, 2022.

The effect of this dividend is included

in the table above, but is not reflected in the Company’s financial statements

as of June 30, 2022.

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-Q

Item 2. Management’s Discussion and Analysis