The following discussion contains forward-looking statements and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in this report.
Our company
We are a residential mortgage REIT with a focus on investing in a diversified risk-adjusted portfolio of residential mortgage-related assets in theU.S. mortgage market. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and capital appreciation. Our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans within the growing non-agency segment of the housing market. We obtain our assets through Arc Home, our residential mortgage loan originator in which we own an approximate 44.6% interest, and through other third-party origination partners. We finance our acquired loans through various financing lines on a short-term basis and utilizeAngelo Gordon 's proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit. Through our ownership in Arc Home, we also have exposure to mortgage banking activities. Arc Home is a multi-channel licensed mortgage originator and servicer primarily engaged in the business of originating and selling residential mortgage loans while retaining the mortgage servicing rights associated with the loans that it originates. Our investment portfolio (which excludes our ownership in Arc Home) includes Residential Investments and Agency RMBS. Currently, our Residential Investments primarily consist of Non-QM Loans and GSE Non-Owner Occupied Loans. We may also invest in other types of residential mortgage loans and other mortgage related assets. We were incorporated inMaryland onMarch 1, 2011 and commenced operations inJuly 2011 . We conduct our operations to qualify and be taxed as a REIT forU.S. federal income tax purposes. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act. 47 --------------------------------------------------------------------------------
We are externally managed by our Manager, an affiliate of
pursuant to a management agreement. Our Manager has delegated to
the overall responsibility of its day-to-day duties and obligations arising
under the management agreement.
alternative investment firm focusing on credit and real estate strategies.
Executive summary
During the year ended 2021, we focused on executing our mission to become a pure-play residential mortgage REIT by simplifying our portfolio through exiting all of our commercial investments, growing our portfolio of newly-originated non-agency loans, and increasing our pace of securitization activity in order to obtain long-term, non-recourse financing without mark-to-market margin calls. During 2021, we significantly increased the size of our investment portfolio and also completed five Non-QM securitizations throughAngelo Gordon 's proprietary securitization platform. Further, we focused on strengthening our capital base by entering into various financing facilities and raising capital in order to provide for continued growth and execution of our business strategy. Subsequent to year end, we continued to grow our portfolio of newly-originated non-agency loans and completed two additional securitizations. See below for detail on these activities during 2021 and subsequent to year end.
Investment Activity
•Purchased$2.5 billion of Non-QM Loans and GSE Non-Owner Occupied Loans,$833.4 million of which were purchased from Arc Home; •Participated in two rated securitizations alongside otherAngelo Gordon funds in which Non-QM Loans with a fair value of$397.3 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management ofAngelo Gordon retaining the subordinate tranches; •$171.4 million were securitized through our unconsolidated ownership interest in MATT, in which we have an approximate 44.6% interest; •$225.9 million were securitized alongside one private fund under the management ofAngelo Gordon and we contributed approximately 41% of the underlying loans; •Sold Non-Agency RMBS for gross proceeds of$44.6 million ; •Exited remaining commercial investments; •Received gross proceeds of$148.4 million from the full repayment or sales of our Commercial Loans, inclusive of receiving all accrued or deferred interest outstanding; and •Sold our remaining CMBS portfolio for gross proceeds of$67.7 million .
Financing Activity
•Executed three rated securitizations in which Non-QM Loans with a fair value of$880.9 million were securitized, converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; •Entered into certain financing arrangements with a maximum uncommitted borrowing capacity of$2.3 billion to finance non-agency mortgage loans, of which approximately$1.0 billion of the maximum uncommitted borrowing capacity remains available as ofDecember 31, 2021 ; and •Repaid$10 million secured note and accrued interest to our Manager upon maturity onMarch 31, 2021 . Capital Activity •Completed a public offering issuing 8.1 million shares of common stock for net proceeds of approximately$80.0 million after deducting estimated offering expenses; •Utilized ATM program to issue 1.0 million shares of common stock, raising net proceeds of approximately$13.1 million ; •Repurchased 0.3 million shares of common stock for$3.6 million ; •Entered into two privately negotiated exchange offers with existing holders of our preferred stock, issuing 1.4 million shares of common stock in exchange for 0.7 million shares of preferred stock; and •Implemented a reverse stock split primarily to decrease volatility in trading for our common stock. The reverse stock split was effective following the close of business onJuly 22, 2021 (the "Effective Time"). At the Effective Time, every three issued and outstanding shares of our common stock was converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of our common stock on the date of the Effective Time. 48 --------------------------------------------------------------------------------
Subsequent Event Activity
•Purchased$519.0 million of non-agency mortgage loans, inclusive Non-QM Loans, GSE Non-Owner Occupied Loans, and other qualifying mortgage loans.$233.0 million of these non-agency mortgage loans were purchased from Arc Home; •Participated in our first rated securitization of GSE Non-Owner Occupied Loans, in which loans with a fair value of$474.9 million were securitized; •Participated in a rated securitization in which Non-QM Loans with a fair value of$301.7 million were securitized; and •Announced that onFebruary 18, 2022 our Board of Directors declared first quarter 2022 preferred stock dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock in the amount of$0.51563 ,$0.50 and$0.50 per share, respectively. The dividends will be paid onMarch 17, 2022 to holders of record onFebruary 28, 2022 .
Presentation of investment, financing and hedging activities
In the "Investment activities," "Financing activities," "Hedging activities" and "Liquidity and capital resources" sections of this Part II, Item 7, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Note 2 to the "Notes to Consolidated Financial Statements" for a discussion of investments in debt and equity of affiliates. See below for further terms used when describing our investment portfolio. •Our "Investment portfolio" includes Agency RMBS and our credit portfolio. •Our "Credit portfolio" or "credit investments" refer to our residential investments, inclusive of loans and credit securities. •"Loans" refer to our Non-QM Loans and Re/Non-Performing Loans, exclusive of retained tranches from unconsolidated securitizations, GSE Non-Owner Occupied Loans, and Land Related Financing. •"Credit securities" refer to the retained tranches from unconsolidated securitizations of Non-QM Loans and Re/Non-Performing Loans. •"Real estate securities" refers to our Agency RMBS and our credit securities. •Our "GAAP Investment portfolio" includes Agency RMBS and our GAAP Credit portfolio. •Our "GAAP Credit portfolio" refers to our credit portfolio exclusive of all investments held within affiliated entities.
For a reconciliation of our Investment portfolio to our
portfolio, see the GAAP Investment Portfolio Reconciliation Table below.
Special Note Regarding COVID-19 Pandemic
InMarch 2020 , the global pandemic associated with COVID-19 and the related economic conditions caused financial and mortgage-related asset markets to come under extreme duress, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. The illiquidity was exacerbated by inadequate demand for MBS among primary dealers due to balance sheet constraints. Refer to the "Financing activities-Forbearance and Reinstatement Agreements" section below for further details related to the impact these economic conditions had on us. Although market conditions improved during 2021, the COVID-19 pandemic is ongoing with new variants emerging despite growing vaccination rates. As a result, the full impact of COVID-19 (including the impact of any significant variants) on the mortgage REIT industry, credit markets, and, consequently, on our financial condition and results of operations for future periods remains uncertain. Future developments with respect to the COVID-19 pandemic, including among others, the emergence of new variants, the effectiveness and durability of current vaccines and government stimulus measures, could materially and adversely affect our business, operations, operating results, financial condition, liquidity, or capital levels. 49 --------------------------------------------------------------------------------
Market Conditions
During 2021, the financial markets generally continued their recovery from the unprecedented dislocation caused by the COVID-19 pandemic and the resulting economic shutdown across much of theU.S. economy. In addition, mortgage and housing fundamentals continued to be favorable throughout the year. Delinquency and forbearance rates continued to decline and home prices reached another record high, rising 19.1% year-over-year. Limited availability of homes against fundamentally strong housing demand has been a driving factor for persistent home price appreciation. Other fundamentals continued to be favorable due to strong labor conditions and residual support from federal stimulus and payment accommodations, whose positive effects should persist into 2022. Some near-term headwinds could be created by the term-driven expiration of mortgage payment forbearance, resumption of foreclosure activity and sunset of other relief programs. However, we believe these risks should be offset by strong demand for labor, rising collateral prices and persistently tight new mortgage underwriting, the latter of which remains near 2014 levels, according to theMortgage Bankers Association . Non-Agency Loans and Securitizations: Non-QM securitization issuance topped$10 billion in a record quarter for the sector driven by strong origination volume as well as older vintages exiting their respective non-call windows Annual issuance also hit a record at approximately$25 billion , which was in line with the market's expectations for 2020 prior to the COVID-19 pandemic disruption. Despite the amount of supply in the market during the fourth quarter, execution was orderly with spreads slightly widening. The prospect of raising rates did bring about concerns on extension risk among buyers of the most senior bonds, causing issuers to transition from pro-rata capital structures to sequential capital structures. Non-QM loan volumes remained elevated, with some originators doubling their monthly production over the course of 2021. During the third quarter, an increased amount of agency-eligible mortgage loans backed by investment properties and second homes were being issued into thePrivate Label Securities ("PLS") market as originators looked for liquidity away from the GSE's as a result of amendments made to the Preferred Stock Purchase Agreement betweenTreasury and the GSEs earlier in the year. However these volumes declined during the fourth quarter as originators returned to delivering most, if not all, of their production back to the GSEs due to theSeptember 14, 2020 suspension of certain amendments made to the Preferred Stock Purchase Agreement. Agency RMBS: Despite theFederal Reserve's commencement of tapering its monthly bond purchases during the fourth quarter, spreads on Agency RMBS modestly tightened. Valuations continued to be supported by bank demand, moderating supply, and strong carry due to persistent specialness of TBA dollar roll income. Payups on specified pools have also held steady as holders of TBA rotate into specified pools in anticipation of a shrinkingFederal Reserve presence and subsequent weakening of TBA dollar roll income. Post year-end however, spreads have begun to widen in response to theFederal Reserve communicating its desire to begin winding down their balance sheet earlier than the market had anticipated. Non-Agency RMBS: Spreads for securitized residential debt sectors were mixed during the fourth quarter. Most Credit Risk Transfer tranches generally widened 10-20 basis points while other new-issue senior tranches widened 10-15 basis points. Legacy mortgages were mostly unchanged during the quarter. Many of the same themes that have supported the sector persisted during the quarter, including favorable collateral fundamentals, record high home prices, demand for yield, and continued employment gains. Issuance of new RMBS rose approximately 14% to$55 billion in the fourth quarter, and for the full year 2021, RMBS issuance totaled$200 billion , surpassing the post-Great Financial Crisis peak of$137 billion in 2019, though some of this year's issuance was delayed from 2020. The rise was mostly due to issuance of Jumbo 2.0 and Agency-eligible securities, which collectively comprised over half of the annual growth. Non-QM, Single-Family Rental, and Non-Performing Loans also saw meaningful annual increases in 2021. In light of various market uncertainties, in particular the pervasive uncertainties of the COVID-19 pandemic for theU.S. and global economy, there can be no assurance that the trends and conditions described above will not change in a manner materially adverse to the mortgage REIT industry and/or our Company.
Results of Operations for the Fiscal Year 2021 and 2020
Our operating results can be affected by a number of factors and primarily
depend on the size and composition of our investment portfolio, the level of our
net interest income, the fair value of our assets and the supply of, and demand
for, our investments in residential mortgages in the marketplace, among other
things, which can be impacted by unanticipated credit events, such as defaults,
liquidations or delinquencies, experienced by borrowers whose mortgage loans are
included in our investment portfolio and other unanticipated events in our
markets. Our primary source of net income or loss available to common
stockholders is our net interest income, less our cost of hedging, which
represents the difference between the interest earned on our investment
portfolio and the costs of financing and economic hedges in place on our
investment portfolio, as well as any income or losses from our equity
investments in affiliates.
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Year Ended
The table below presents certain information from our consolidated statements of
operations for the years ended
Year
Ended
December 31, 2021 December 31, 2020 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 70,662 $ 74,525 $ (3,863) Interest expense 27,250 36,945 (9,695) Total Net Interest Income 43,412 37,580 5,832 Other Income/(Loss) Net interest component of interest rate swaps (4,862) 731 (5,593) Net realized gain/(loss) 1,698 (256,522) 258,220 Net unrealized gain/(loss) 62,699 (169,813) 232,512 Other income/(loss), net 37 1,534 (1,497) Total Other Income/(Loss) 59,572 (424,070) 483,642 Expenses Management fee to affiliate 6,814 7,181 (367) Other operating expenses 13,357 15,911 (2,554) Transaction related expenses 7,328 (1,235) 8,563 Restructuring related expenses - 10,200 (10,200) Excise tax - (815) 815 Servicing fees 3,188 2,224 964 Total Expenses 30,687 33,466 (2,779) Income/(loss) before equity in earnings/(loss) from affiliates 72,297 (419,956) 492,253 Equity in earnings/(loss) from affiliates 31,889 (1,629) 33,518 Net Income/(Loss) from Continuing Operations 104,186 (421,585) 525,771 Net Income/(Loss) from Discontinued Operations - 666 (666) Net Income/(Loss) 104,186 (420,919) 525,105 Gain on Exchange Offers, net 472 10,574 (10,102) Dividends on preferred stock (18,785) (20,549) 1,764 Net Income/(Loss) Available to Common Stockholders $ 85,873 $ (430,894) $ 516,767 Interest income
Interest income is calculated using the effective interest method for our GAAP
investment portfolio and calculated based on the actual coupon rate.
Interest income decreased fromDecember 31, 2020 toDecember 31, 2021 primarily due to the decrease in the weighted average yield of our GAAP investment portfolio which decreased by 1.00% from 4.61% for the year endedDecember 31, 2020 to 3.61% for the year endedDecember 31, 2021 . This was offset by a$0.4 billion increase in the weighted average cost of our GAAP investment portfolio from$1.6 billion for the year endedDecember 31, 2020 to$2.0 billion for the year endedDecember 31, 2021 . 51 --------------------------------------------------------------------------------
Interest expense
Interest expense is calculated based on the actual financing rate and the
outstanding financing balance of our GAAP investment portfolio.
Interest expense decreased fromDecember 31, 2020 toDecember 31, 2021 primarily due to a decrease in the weighted average financing rate on our GAAP investment portfolio, inclusive of securitized debt, which decreased by 1.20% from 2.79% for the year endedDecember 31, 2020 to 1.59% for the year endedDecember 31, 2021 . This was offset by an increase in the weighted average financing balance on our GAAP investment portfolio, inclusive of securitized debt, during the period which increased by$0.4 billion from$1.3 billion for the year endedDecember 31, 2020 to$1.7 billion for the year endedDecember 31, 2021 .
Net interest component of interest rate swaps
Net interest component of interest rate swaps represents the net interest income
received or expense paid on our interest rate swaps.
We recognized losses on the net interest component of interest rate swaps for the year endedDecember 31, 2021 compared with gains for the year endedDecember 31, 2020 primarily due to the difference in terms on the outstanding interest rate swaps during the periods. We also exited our entire interest rate swap portfolio in the first quarter of 2020 and began growing our interest rate swap portfolio in the fourth quarter of 2020 and throughout 2021 in connection with the growth of our GAAP investment portfolio. As of theDecember 31, 2021 , we held an interest rate swap portfolio with a notional value of$888.5 million , a weighted average receive-variable rate of 0.15%, and a weighted average pay-fix rate of 0.85%.
Net realized gain/(loss)
The following table presents a summary of Net realized gain/(loss) for the years
ended
Year Ended
December 31, 2021 December 31, 2020
Sales of Residential mortgage loans and loans transferred
to or sold from Other assets
$ 6,374 $ (56,815) Sales/Seizures of real estate securities (1) (6,088) (130,567) Sales of Commercial loans (2,518) (6,470) Settlement of derivatives and other instruments 3,930 (62,670) Total Net realized gain/(loss) $
1,698 $ (256,522)
(1)Certain realized losses on real estate securities during the year ended
no financing counterparty seizures during the year ended
Net unrealized gain/(loss)
The following table presents a summary of Net unrealized gain/(loss) for the
years ended
Year Ended
December 31, 2021 December 31, 2020
Residential mortgage loans $ 25,018 $ (5,851)
Real estate securities (2,648) (136,773)
Commercial loans 16,148 (16,842)
Excess mortgage servicing rights 1,515 457
Derivatives 19,137 (9,864)
Securitized debt 3,529 (940)
Total Net unrealized gain/(loss) $ 62,699 $ (169,813)
Management fee to affiliate
Our management fee is based upon a percentage of our Stockholders' Equity. See
the "Contractual obligations" section of this Part II, Item 7 for further detail
on the calculation of our management fee and for the definition of Stockholders'
Equity. Management fees decreased from December 31, 2020 to December 31, 2021
primarily due to a decrease in our Stockholders' Equity as calculated pursuant
to our Management Agreement.
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Other operating expenses
Other operating expenses is primarily comprised of professional fees, directors'
and officers' ("D&O") insurance, directors' fees, and certain non-investment
related and investment related expenses reimbursable to the Manager. We are
required to reimburse our Manager or its affiliates for operating expenses
incurred by our Manager or its affiliates on our behalf, including certain
compensation expenses and other expenses relating to legal, accounting, due
diligence, and other services. Refer to the "Contractual obligations" section
below for more detail on certain expenses reimbursable to the Manager. The
following table presents a summary of Other operating expenses broken out
between non-investment related expenses and investment related expenses for the
years ended December 31, 2021 and 2020 (in thousands):
Year Ended
December 31, 2021 December 31, 2020 Non-Investment Related Expenses Affiliate reimbursement - Operating expenses (1) $ 4,322 $ 6,320 Professional Fees 2,409 2,472 D&O insurance 1,465 1,063 Directors' compensation 672 680 Equity based compensation to affiliate - 163 Other 877 711 Total Corporate Expenses 9,745 11,409 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 1,157 1,116 Residential mortgage loan related expenses 2,218 3,064 Other 237 322 Total Investment Expenses 3,612 4,502 Total Other operating expenses $ 13,357 $ 15,911
(1)For the year ended
to receive expense reimbursements of
Transaction related expenses
Transaction related expenses are expenses associated with securitizing residential mortgage loans as well as certain other transaction and performance related fees associated with assets we invest in. These fees increased from the year endedDecember 31, 2020 toDecember 31, 2021 primarily as a result of the various securitizations of Non-QM Loans transacted in 2021. Additionally, in the period endedMarch 31, 2020 , the Company reversed previously accrued deal related performance fees due to a decline in the price of the related assets and the seizure of such assets by financing counterparties.
Restructuring related expenses
Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement and subsequent Reinstatement Agreement during 2020. Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement and the Reinstatement Agreement.
Excise tax
Excise tax represents a four percent tax on the required amount of any ordinary income and net capital gains not distributed during the year. The expense is calculated in accordance with applicable tax regulations.
During the year ended
taxes primarily as a result of losses associated with COVID-19. We did not
record any excise taxes for the year ended
Servicing fees
We incur servicing fee expenses in connection with the servicing of our Residential mortgage loans. The weighted average cost of our GAAP Residential mortgage loan portfolio increased by$0.6 billion from$0.6 billion for the year endedDecember 31, 2020 to$1.2 billion for the year endedDecember 31, 2021 . This increase was primarily the result of purchases of Non-QM 53 --------------------------------------------------------------------------------
Loans and GSE Non-Owner Occupied Loans in 2021. As a result, servicing fees
increased from the year ended
2021
Equity in earnings/(loss) from affiliates
Equity in earnings/(loss) from affiliates represents our share of earnings and
profits of investments held within affiliated entities. Substantially all of
these investments are comprised of real estate securities, loans, and our
investment in AG Arc which holds our investment in Arc Home. The below table
reconciles the net income/(loss) to the "Equity in earnings/(loss) from
affiliates" line item on our consolidated statements of operations (in
thousands):
Year Ended
December 31, 2021 December 31, 2020
Non-QM Loans (1) $ 12,594 $ (26,511)
AG Arc (2) 3,681 23,260
Land Related Financing 2,455 2,620
Other (3) 13,159 (998)
Equity in earnings/(loss) from affiliates $ 31,889 $
(1,629)
(1)The earnings within MATT for the year endedDecember 31, 2021 were primarily the result of mark-to-market gains on its Non-QM Loan portfolio and net interest income, offset by expenses. The losses generated within MATT for the year endedDecember 31, 2020 were primarily the result of mark-to-market losses on its Non-QM Loan portfolio and related financing, offset by net interest income. (2)The earnings/(loss) at AG Arc during the year endedDecember 31, 2021 were primarily the result of$5.4 million of net income related to Arc Home's lending and servicing operations, offset by$(2.3) million related to changes in the fair value of the MSR portfolio held by Arc Home. Earnings/(loss) recognized by AG Arc do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the year endedDecember 31, 2021 , we eliminated$5.3 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. (3)The earnings for the year endedDecember 31, 2021 were primarily the result of accelerated accretion as a result of paydowns on certain Re/Non-Performing Loans held at discounts.
Gain on Exchange Offers, net
We completed two privately negotiated exchange offers during the year endedDecember 31, 2021 . As a result of the exchange offers, we exchanged 153,325 shares of our 8.25% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), 437,087 shares of our 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock"), and 154,383 shares of our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") (collectively, "preferred stock") for a total of 1,367,264 shares of common stock. We recognized a gain of$0.5 million in connection with the offers. We completed a public exchange offer and two privately negotiated exchange offers during the year endedDecember 31, 2020 . As a result of the exchange offers, we exchanged a total of 253,482 shares of our Series A Preferred Stock, 435,272 shares of our Series B Preferred Stock, and 716,822 shares of our Series C Preferred Stock for a total of 1,698,645 shares of common stock and cash consideration of$8.0 million . We recognized a gain of$10.6 million in connection with the exchange offers.
Book value and Adjusted book value per share
On
outstanding shares of common stock. The reverse stock split was effected
following the close of business on
common shares outstanding for all periods presented have been adjusted on a
retroactive basis to reflect the one-for-three reverse stock split.
Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP, including all vested shares issued to our Manager and our independent directors under our equity incentive plans as of quarter-end. As ofDecember 31, 2021 , the net proceeds on our preferred stock were$220.5 million . As ofDecember 31, 2021 , the liquidation preference for our issued and outstanding preferred stock was$228.0 million . As ofDecember 31, 2021 and 2020, our book value per common share calculated using stockholders' equity less net proceeds on our preferred stock as the numerator was$14.64 and$12.40 , respectively. As ofDecember 31, 2021 and 2020, our adjusted book value per common share calculated using stockholders' equity less the liquidation preference of our preferred stock as the numerator was$14.32 and$11.81 , respectively. 54 --------------------------------------------------------------------------------
Net interest margin and leverage ratio
Net interest margin and leverage ratio are metrics that management believes
should be considered when evaluating the performance of our investment
portfolio.
GAAP net interest margin and non-GAAP net interest margin, a non-GAAP financial measure, are calculated by subtracting the weighted average cost of funds from the weighted average yield for our GAAP investment portfolio and our investment portfolio, respectively, both of which exclude cash held by us. The weighted average yield on our investment portfolio represents an effective interest rate, which utilizes all estimates of future cash flows and adjusts for actual prepayment and cash flow activity as of quarter-end. The calculation of weighted average yield is weighted on fair value at quarter-end. The weighted average cost of funds is the sum of the weighted average funding costs on total financing arrangements outstanding at quarter-end, including all non-recourse financing arrangements, and our weighted average hedging cost, which is the weighted average of the net pay rate on our interest rate swaps. GAAP and non-GAAP cost of funds are weighted by the outstanding financing arrangements on our GAAP investment portfolio and our investment portfolio, respectively, and the fair value of securitized debt at quarter-end. Our leverage ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the availability and price of our financing, the available capacity to finance our assets, and anticipated regulatory developments. See the "Financing activities" section below for more detail on our leverage ratio. The table below sets forth the net interest margin and leverage ratio on our investment portfolio as ofDecember 31, 2021 and 2020 and a reconciliation to the net interest margin and leverage ratio on our GAAP investment portfolio:December 31, 2021 GAAP Investment Investments in Debt and Weighted Average Portfolio Equity of Affiliates Investment Portfolio Yield 3.72 % 9.21 % 3.84 % Cost of Funds (a) 2.06 % 3.41 % 2.08 % Net Interest Margin 1.66 % 5.80 % 1.76 % Leverage Ratio (b) 4.9x (c) 2.4x December 31, 2020 GAAP Investment Investments in Debt and Weighted Average Portfolio Equity of Affiliates Investment Portfolio Yield 3.73 % 7.78 % 4.36 % Cost of Funds (a) 1.82 % 4.87 % 2.09 % Net Interest Margin 1.91 % 2.91 % 2.27 % Leverage Ratio (b) 2.4x (c) 1.5x (a)Includes cost of non-recourse financing arrangements. (b)The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage. The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section. (c)Refer to the "Financing activities" section below for an aggregate breakout of leverage. Core Earnings One of our objectives is to generate net income from net interest margin on the portfolio, and management uses Core Earnings, as one of several metrics, to help measure our performance against this objective. Management believes that this non-GAAP measure, when considered with our GAAP financial statements, provides supplemental information useful for investors to help evaluate our financial performance. However, management also believes that our definition of Core Earnings has important limitations as it does not include certain earnings or losses our management team considers in evaluating our financial performance. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. This non-GAAP measure should not be considered a substitute for, or superior to, Net Income/(loss) available to common stockholders or Net income/(loss) per diluted common share calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated. We define Core Earnings, a non-GAAP financial measure, as Net Income/(loss) available to common stockholders excluding (i) (a) unrealized gains/(losses) on real estate securities, loans, derivatives and other investments, inclusive of our investment in 55 -------------------------------------------------------------------------------- AG Arc, and (b) net realized gains/(losses) on the sale or termination of such instruments, (ii) any transaction related expenses incurred in connection with the acquisition or disposition of our investments, (iii) accrued deal-related performance fees payable to Arc Home and third party operators to the extent the primary component of the accrual relates to items that are excluded from Core Earnings, such as unrealized and realized gains/(losses), (iv) realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and the derivatives intended to offset changes in the fair value of those net mortgage servicing rights, (v) deferred taxes recognized at our taxable REIT subsidiaries, if any, (vi) any foreign currency gain/(loss) relating to monetary assets and liabilities, (vii) income from discontinued operations, and (viii) any gains/(losses) associated with exchange transactions on our common and preferred stock. Items (i) through (viii) above include any amount related to those items held in affiliated entities. Management considers the transaction related expenses referenced in (ii) above to be similar to realized losses incurred at the acquisition or disposition of an asset and does not view them as being part of its core operations. Management views the exclusion described in (iv) above to be consistent with how it calculates Core Earnings on the remainder of its portfolio. Management excludes all deferred taxes because it believes deferred taxes are not representative of current operations. Core Earnings include the net interest income and other income earned on our investments on a yield adjusted basis, including TBA dollar roll income/(loss) or any other investment activity that may earn or pay net interest or its economic equivalent. A reconciliation of "Net Income/(loss) available to common stockholders" to Core Earnings for the years endedDecember 31, 2021 and 2020 is set forth below (in thousands, except per share data):
Year Ended
December 31, 2021 December 31, 2020 Net Income/(loss) available to common stockholders $ 85,873 $ (430,894) Add (Deduct): Net realized (gain)/loss (1,698) 256,522 Net unrealized (gain)/loss (62,699) 169,813
Transaction related expenses and deal related performance
fees (1)
8,558 (613) Equity in (earnings)/loss from affiliates (31,889) 1,629
Net interest income and expenses from equity method
investments (2)(3)
23,807 38,025 Net (income)/loss from discontinued operations - (666) Other (income)/loss, net (14) (1,528) (Gains) from Exchange Offers, net (472)(10,574) Dollar roll income/(loss) (3,377) 322 Core Earnings $ 18,089 $ 22,036 Core Earnings, per Diluted Share (4) $ 1.11 $ 1.88 (1)For the years endedDecember 31, 2021 and 2020, total transaction related expenses and deal related performance fees included$7.3 million and$(1.2 million) , respectively, recorded within the "Transaction related expenses" line item and$1.2 million and$0.6 million , respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2)For the years endedDecember 31, 2021 and 2020,$2.5 million or$0.15 per share and$(3.9 million) or$(0.33) per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives were excluded from Core Earnings per diluted share. (3)Core income or loss recognized by AG Arc does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the year endedDecember 31, 2021 , we eliminated$5.3 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. We did not eliminate any intra-entity profits for the year endedDecember 31, 2020 . Refer to Note 2 to the "Notes to Consolidated Financial Statements" for more information on this accounting policy. (4)All per share amounts for all periods presented have been adjusted to reflect the one-for-three reverse stock split.
Investment activities
We aim to allocate capital to investment opportunities with attractive
risk/return profiles in our target asset classes. Our investment activities
primarily include acquiring and securitizing newly-originated residential
mortgage loans. We finance our acquired loans through various financing lines on
a short-term basis and securitize the loans to obtain long-term, non-recourse,
non-mark-to-market financing as market conditions permit. We are also currently
investing in 30 Year Fixed Rate Agency RMBS to utilize excess liquidity. Our
investment and capital allocation decisions depend on prevailing market
conditions and compliance with Investment Company Act and REIT tests, among
other factors, and may change over time in response to opportunities available
in different economic and capital market environments. As a result, in reacting
to market conditions and
56
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taking into account a variety of other factors, including liquidity, duration,
and interest rate expectations, the mix of our assets changes over time as we
opportunistically deploy capital. We actively evaluate our investments based on
factors including, among others, the characteristics of the underlying
collateral, geography, expected return, expected future prepayment trends,
supply of and demand for our investments, costs of financing, costs of hedging,
expected future interest rate volatility, and the overall shape of the U.S.
Treasury and interest rate swap yield curves.
We allocate our equity by investment type using the fair value of our investment
portfolio, less any associated leverage, inclusive of any long TBA position (at
cost). We allocate all non-investment portfolio related assets and liabilities
to our investment portfolio based on the characteristics of such assets and
liabilities in order to sum to stockholders' equity per the consolidated balance
sheets. Our equity allocation method is a non-GAAP methodology and may not be
comparable to the similarly titled measure or concepts of other companies, who
may use different calculations and allocation methodologies.
The following table presents a summary of the allocated equity of our investment
portfolio as of
Allocated Equity Percent of Equity
December 31, December 31,
2021 2020 December 31, 2021 December 31, 2020
Residential Investments $ 459,058 $ 229,183 80.5 % 56.0 %
Commercial Investments - 99,668 - % 24.3 %
Agency RMBS 111,322 80,854 19.5 % 19.7 %
Total $ 570,380 $ 409,705 100.0 % 100.0 %
The following table presents a summary of our investment portfolio as of
($ in thousands):
Fair Value Percent of Investment Portfolio Fair Value
Leverage Ratio (a)
December 31 ,December 31 ,December 31 ,December 31, 2021 2020 2021 2020December 31, 2021 December 31, 2020 Residential Investments$ 2,725,889 $ 691,478 84.6 % 49.5 % 2.1x 0.2x Commercial Investments - 182,296 - % 13.1 % - 0.9x Agency RMBS 495,713 521,843 15.4 % 37.4 % 3.7x 6.1x Total: Investment Portfolio$ 3,221,602 $ 1,395,617 100.0 % 100.0 % 2.4x 1.5x
Investments in Debt and
Equity of Affiliates (b)$ 72,026 $ 217,964 N/A N/A (c) (c) Total:GAAP Investment Portfolio$ 3,149,576 $ 1,177,653 N/A N/A 4.9x 2.4x (a)The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section and is calculated by dividing each investment type's total recourse financing arrangements by its allocated equity (described in the chart below). Cash posted as collateral has been allocated pro-rata by each respective asset class's Economic Leverage amount. The Economic Leverage Ratio excludes any fully non-recourse financing arrangements and includes any net receivables or payables on TBAs. The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage. (b)Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (c)Refer to the "Financing activities" section below for an aggregate breakout of leverage. 57
-------------------------------------------------------------------------------- The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as ofDecember 31, 2021 and 2020 ($ in thousands):December 31 ,December 31, 2021 2020 Unrealized Weighted Average Weighted Weighted Average
Instrument Current Face Amortized Cost Mark-to-Market Fair Value (1) Coupon (2) Average Yield Life (Years) (3) Fair Value (1) Credit Investments: Residential Investments Non-QM Loans (4)$ 1,780,012 $ 1,846,162 $ 12,636$ 1,858,798 4.91 % 3.85 % 4.78 $ - GSE Non-Owner Occupied Loans 429,424 439,463 1,374 440,837 3.64 % 3.19 % 6.84 - MATT Non-QM Loans (5) 488,364 46,795 (958) 45,837 0.91 % 4.04 % 0.77 153,200 Re/Non-Performing Loans 428,472 345,650 14,481 360,131 3.55 % 6.82 % 6.57 478,565 Land Related Financing 16,891 16,891 - 16,891 14.50 % 14.50 % 0.46 22,824 Interest Only (6) 160,154 3,507 (112) 3,395 0.38 % 10.12 % 1.81 320 Non-Agency RMBS - - - - - % - % - 36,569 Total Residential Investments 3,303,317 2,698,468 27,421 2,725,889 4.12 % 4.21 % 4.52
691,478
Total Commercial Investments - - - - - % - % - 182,296 Total Credit Investments 3,303,317 2,698,468 27,421 2,725,889 4.12 % 4.21 % 4.52 873,774 Agency RMBS: 30 Year Fixed Rate 490,435 502,362 (6,649) 495,713 2.18 % 1.78 % 7.46 518,352 Excess MSR - - - - - - % - 3,491 Total Agency RMBS 490,435 502,362 (6,649) 495,713 2.18 % 1.78 % 7.46 521,843
Total: Investment Portfolio
3.85 % 3.84 % 4.90
Investments in Debt and Equity of
Affiliates$ 548,580 $ 72,720 $ (694)$ 72,026 1.72 % 9.21 % 0.86$ 217,964 Total: GAAP Investment Portfolio$ 3,245,172 $ 3,128,110 $ 21,466$ 3,149,576 4.04 % 3.72 % 5.59$ 1,177,653 (1)Refer to Note 10 to the "Notes of the Consolidated Financial Statements" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. Our assets held through Investments in debt and equity of affiliates are included in the "MATT Non-QM Loans," "Re/Non-Performing Loans," "Land Related Financing," and "Excess MSR" line items above. (2)Equity residuals with a zero coupon rate are excluded from this calculation. (3)Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. (4)Prior to 2021, we acquired Non-QM Loans through our equity method investment in MATT. This line item represents direct purchases of Non-QM Loans, which began in Q1 2021, and retained tranches of certain Non-QM securitizations. (5)As ofDecember 31, 2021 , this line item primarily includes retained tranches from past securitizations. (6)As ofDecember 31, 2021 , this line item includes Non-QM interest-only bonds. 58 --------------------------------------------------------------------------------
Credit Investments
The following table presents the fair value of the securities and loans in our
credit portfolio and a reconciliation to our GAAP credit portfolio (in
thousands):
Fair Value
December 31, 2021 December 31, 2020
Residential loans (1) $ 2,663,992 $ 563,263
Commercial real estate loans - 125,508
Total loans 2,663,992 688,771
Non-Agency RMBS (2) 61,897 128,215
CMBS (3) - 56,788
Total Credit securities 61,897 185,003
Total Credit Investments $ 2,725,889 $ 873,774
Less: Investments in Debt and Equity of Affiliates $ 72,026 $ 217,547
Total GAAP Credit Portfolio $
2,653,863 $ 656,227
(1)Includes Non-QM Loans, GSE Non-Owner Occupied Loans, Re/Non-Performing Loans, and Land Related Financing not held in securitized form. (2)Includes Non-QM Loans and Re/Non-Performing Loans held in securitized form, as well as Prime, Alt-A/Subprime, Credit Risk Transfer, Non-U.S RMBS, andInterest-Only Securities . (3)Includes Conduit, Single-Asset/Single-Borrower, Freddie Mac K-Series, and Interest-Only investments. Residential loans
The following table presents information regarding credit quality for certain
categories within our Residential loan portfolio ($ in thousands):
December 31, 2021 December 31 , Weighted Average (1)(2) Aging by Unpaid Principal Balance (1)(2) 2020 Unpaid Principal Original LTV Balance Fair Value Ratio Current FICO (3) Current 30-59 Days 60-89 Days 90+ Days Fair Value Non-QM Loans$ 1,765,118 $ 1,844,198 68.19 % 742$ 1,735,644 $ 15,596 $ 2,666 $ 11,212 $ - GSE Non-Owner Occupied Loans 429,424 440,837 65.44 % 754 425,594 3,830 - - - MATT Non-QM Loans 11,250 11,839 58.13 % 677 6,558 575 - 4,117 100,264 Re/Non-Performing Loans 384,659 350,227 79.20 % 639 256,096 35,974 12,324 73,736 440,175 Land Related Financing 16,891 16,891 N/A N/A N/A N/A N/A N/A 22,824 Total Residential loans$ 2,607,342 $ 2,663,992 69.71 % 723$ 2,423,892 $ 55,975 $ 14,990 $ 89,065 $ 563,263 Less: Investments in Debt and Equity of Affiliates 28,349 28,886 58.42 % 677 6,560 575 - 4,322
127,822
Total GAAP Residential Loans
69.76 % 723$ 2,417,332 $ 55,400 $ 14,990 $ 84,743 $ 435,441 (1)Weighted average and aging data excludes residual positions where we consolidate a securitization and the positions are recorded on our balance sheet as Re/Non-Performing Loans. There may be limited data available regarding the underlying collateral of the residual positions. (2)Weighted average and aging data excludes Land Related Financing. (3)Weighted average current FICO excludes borrowers where FICO scores were not available.
See Note 3 to the “Notes to Consolidated Financial Statements” for a breakout of
geographic concentration of credit risk within loans we include in the
“Residential mortgage loans, at fair value” and “Securitized residential
mortgage loans, at fair value” line items on our consolidated balance sheets.
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Credit securities
The following table presents the fair value of our credit securities portfolio
by credit rating as of
Credit Rating –
December 31, 2021 December 31, 2020
AAA $ - $ 630
BB - 9,037
B 10,528 25,318
Below B - 17,046
Not Rated 51,369 132,972
Total: Credit Securities $ 61,897 $ 185,003
Less: Investments in Debt and Equity of
Affiliates $ 43,140 $ 89,725
Total: GAAP Basis $ 18,757 $ 95,278
(1)Represents the minimum rating for rated assets of S&P, Moody and Fitch credit
ratings, stated in terms of the S&P equivalent.
(2)Certain Re/Non-Performing Loans held in securitized form are presented net of
non-recourse securitized debt.
The following table presents the geographic concentration of the underlying
collateral for our Non-Agency RMBS portfolio ($ in thousands):
December 31, 2021 December 31, 2020 Non-Agency RMBS Non-Agency RMBS State Fair Value Percentage State Fair Value (1) Percentage (1) California$ 31,480 50.9 % California$ 40,593 32.5 % New York 11,092 17.9 % New York 17,742 14.2 % Florida 3,661 5.9 % Florida 10,982 8.8 % New Jersey 1,684 2.7 % Texas 4,216 3.4 % Texas 1,511 2.4 % New Jersey 4,028 3.2 % Other 12,469 20.2 % Other 50,654 37.9 % Total$ 61,897 100.0 % Total$ 128,215 100.0 % (1)As ofDecember 31, 2020 Non-Agency RMBS fair value includes$3.2 million of investments where there was no data regarding the underlying collateral. These positions were excluded from the percent calculation.
Agency RMBS
The following table presents the fair value ($ in thousands) and the Constant
Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the
periods presented:
Fair Value CPR (1)(2)
Agency RMBS December 31, 2021 December 31, 2020 December 31, 2021 December 31, 2020
30 Year Fixed Rate $ 495,713 $ 518,352 6.1 % 2.7 %
(1)Represents the weighted average monthly CPRs published during the period for
our in-place portfolio.
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Investments in debt and equity of affiliates
The below table details our investments in debt and equity of affiliates as of
December 31, 2021 December 31, 2020
Assets Liabilities Equity Net Income/(Loss) Assets Liabilities Equity Net Income/(Loss)
MATT Non-QM Loans (1) $ 45,837 $ (30,471) $ 15,366 $ 12,594 $ 153,200
Re/Non-Performing Loans (2)
9,298 (5,538) 3,760 13,191 41,523 (5,588) 35,935 2,483 Land Related Financing (3) 16,891 - 16,891 2,455 22,824 - 22,824 2,620 Residential Investments - Fair Value / Net income/(loss) 72,026 (36,009) 36,017 28,240 217,547 (116,723) 100,824 (21,408) Other - - - (32) 417 - 417 (3,481) Total Investments excluding AG Arc - Fair value / Net income/(Loss) 72,026 (36,009) 36,017 28,208 217,964 (116,723) 101,241 (24,889) AG Arc - Fair value / Net income/(loss) 53,435 - 53,435 3,681 45,341 - 45,341 23,260 Cash and Other assets/(liabilities) 3,698 (1,127) 2,571 - 5,279 (1,194) 4,085 - Investments in debt and equity of affiliates / Equity in earnings/(loss) from affiliates$ 129,159 $ (37,136) $ 92,023 $ 31,889$ 268,584 $ (117,917) $ 150,667 $ (1,629) (1)As ofDecember 31, 2021 , MATT primarily holds retained tranches from past securitizations which continue to reduce in size due to ongoing principal repayments and we do not expect to acquire additional investments within this equity method investment. (2)Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (3)Land Related Financing continues to reduce in size due to ongoing principal repayments and we do not expect to originate new loans within this equity method investment. Financing activities We use leverage to finance the purchase of our investment portfolio. Our leverage has primarily been in the form of repurchase agreements, revolving facilities, and securitized debt. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date and typically have a term 30 to 90 days. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The size of the haircut reflects the perceived risk associated with the pledged asset. Haircuts may change as our financing arrangements mature or roll and are sensitive to governmental regulations. Interest rates on borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at which time we may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. We have also used revolving facilities, which are typically longer term in nature than repurchase agreements, to finance loans. Interest rates on these facilities are based on prevailing rates corresponding to the terms of the borrowings, and interest is paid on a monthly basis. Repurchase agreements and revolving facilities, which we refer to as our financing arrangements, are generally mark-to-market with respect to margin calls and recourse to us. We had outstanding financing arrangements with five counterparties as ofDecember 31, 2021 andDecember 31, 2020 . Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity and liquidity, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that we fail to comply with the covenants contained in these financing arrangements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the associated agreement. As ofDecember 31, 2021 , we are in compliance with all of our financial covenants. We also use securitized debt to finance our loan portfolio. Securitized debt is generally non-mark-to-market with respect to margins calls and non-recourse to us. 61 --------------------------------------------------------------------------------
Forbearance and Reinstatement Agreements
In connection with the market disruption created by the COVID-19 pandemic, inMarch 2020 , we received notifications of alleged events of default and deficiency notices from several of our financing counterparties. We engaged in discussions with our financing counterparties and, as a result, entered into a series of forbearance agreements (collectively, the "Forbearance Agreement") with certain of our financing counterparties (the "Participating Counterparties") pursuant to which each Participating Counterparty agreed to forbear from exercising its rights and remedies with respect to events of default and any and all other defaults under the applicable financing arrangement (each, a "Bilateral Agreement") for the period endingJune 15, 2020 . OnJune 10, 2020 , we and the Participating Counterparties entered into a reinstatement agreement (the "Reinstatement Agreement"), pursuant to which the Forbearance Agreement was terminated and each Participating Counterparty permanently waived all existing and prior events of default under the applicable Bilateral Agreements. Pursuant to the Reinstatement Agreement, the Bilateral Agreements were reinstated with certain amendments to reflect current market terms (i.e., increased haircuts and higher coupons), updated financial covenants, and various reporting requirements from us to the Participating Counterparties, releases, certain netting obligations and cross-default provisions. As a result of the Reinstatement Agreement, default interest on our outstanding borrowings under the Bilateral Agreements ceased to accrue as ofJune 10, 2020 , all cash margin was applied to outstanding balances owed by us, and principal and interest payments on the underlying collateral were permitted to flow to and be used by us, just as it was prior to the Forbearance Agreements. In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the Forbearance Agreement have been terminated and released. We also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent.
Concurrently, on
with one of our financing counterparties on substantially the same terms as
those set forth in the Reinstatement Agreement.
Refer to Note 12 in the “Notes to Consolidated Financial Statements” for more
information on deficiencies that are now settled.
Recourse and non-recourse financing
The below table provides detail on the breakout between recourse and
non-recourse financing as of
December 31, 2021 December 31, 2020 Recourse financing - Financing arrangements$ 1,791,596 $ 569,644 Recourse financing - Secured debt (1) - 10,393 Non-recourse financing - Securitized debt, at fair value 999,215 355,159
Non-recourse financing – Financing arrangements included
in Investments in Debt and Equity of Affiliates (2)
22,156 111,135 Total Financing 2,812,967 1,046,331 Less:
Recourse financing – Financing arrangements included in
Investments in Debt and Equity of Affiliates
13,853 5,597
Non-recourse financing – Financing arrangements included
in Investments in Debt and Equity of Affiliates (2)
22,156 111,135 Total Financing in Investments in Debt and Equity of Affiliates 36,009 116,732 Total GAAP Financing$ 2,776,958 $ 929,599 (1)See the "Contractual obligations-Secured debt" section below for more detail on Secured debt from our Manager. (2)OnJanuary 29, 2021 , we and private funds under the management ofAngelo Gordon entered into an amendment with respect to our Restructured Financing Arrangement in MATT. The amendment converted the existing financing to a mark-to-market facility with respect to margin calls that is recourse to us and the private funds managed byAngelo Gordon that invest in MATT up to our and each funds' allocation of the$50.0 million commitment to MATH, which is further described in the "Contractual Obligations-MATT Financing Arrangement Restructuring" section below and Note 12 to the "Notes of the Consolidated Financial Statements." 62 -------------------------------------------------------------------------------- See Note 6 to the "Notes to Consolidated Financial Statements" for a breakout of the "Financing arrangements" line item on our consolidated balance sheets. See Note 2 and Note 3 to the "Notes to Consolidated Financial Statements" for more detail on securitized debt and our consolidated variable interest entities.
Leverage
We define GAAP leverage as the sum of (1) our GAAP financing arrangements, net of any restricted cash posted on such financing arrangements, (2) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled, and (3) securitized debt, at fair value. We define Economic Leverage, a non-GAAP metric, as the sum of: (i) our GAAP leverage, exclusive of any fully non-recourse financing arrangements, (ii) financing arrangements held through affiliated entities, net of any restricted cash posted on such financing arrangements, exclusive of any financing utilized through AG Arc, any adjustment related to unsettled trades as described in (2) in the previous sentence, and any non-recourse financing arrangements and (iii) our net TBA position (at cost), if any. The calculations in the tables below divide GAAP leverage and Economic Leverage by our GAAP stockholders' equity to derive our leverage ratios. The following tables present a reconciliation of our Economic Leverage ratio to GAAP Leverage ($ in thousands): December 31, 2021 Leverage Stockholders' Equity Leverage Ratio GAAP Leverage$ 2,772,094 $ 570,380 4.9x Financing arrangements through affiliated entities 35,744 Non-recourse financing arrangements (1) (1,021,371) Net TBA receivable/(payable) adjustment (394,212) Economic Leverage$ 1,392,255 $ 570,380 2.4x
(1) Non-recourse financing arrangements include securitized debt and other
non-recourse financing held within MATT.
Leverage Stockholders' Equity Leverage Ratio GAAP Leverage$ 979,303 $ 409,705 2.4x Financing arrangements through affiliated entities 116,688 Non-recourse financing arrangements (1) (466,294) Economic Leverage$ 629,697 $ 409,705 1.5x
(1) Non-recourse financing arrangements include securitized debt and other
non-recourse financing held within MATT.
Hedging activities
Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions in to-be-announced securities. In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements" for more information.
Dividends
Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income 63 -------------------------------------------------------------------------------- until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, (vi) methods of depreciation and (vii) differences between GAAP income or losses in our TRSs' and taxable income resulting from dividend distributions to the REIT from our TRSs. Undistributed taxable income is based on current estimates and is not finalized until we file our annual tax return for that tax year, typically in October of the following year. We did not have any undistributed taxable income as ofDecember 31, 2021 . OnMarch 27, 2020 , we announced that our Board of Directors approved a suspension of our quarterly dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, beginning with the preferred dividend that would have been declared inMay 2020 , as well as a suspension of the quarterly dividend on the common stock, beginning with the dividend that normally would have been declared inMarch 2020 , in order to conserve capital and improve our liquidity position during the market volatility due to the COVID-19 pandemic. Under the terms of the Articles Supplementary governing our series of preferred stock, we cannot pay cash dividends with respect to our common stock if dividends on our preferred stock are in arrears. OnDecember 17, 2020 , we paid our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock dividends that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of$1.54689 ,$1.50 and$1.50 per share, respectively. OnDecember 22, 2020 , our Board of Directors declared a dividend of$0.09 per common share for the fourth quarter 2020 which was paid onJanuary 29, 2021 to shareholders of record at the close of business onDecember 31, 2020 . During 2021, we declared our preferred and common dividends in the ordinary course of business.
On
outstanding shares of common stock. The reverse stock split was effected
following the close of business on
common shares outstanding for all periods presented have been adjusted on a
retroactive basis to reflect the one-for-three reverse stock split.
The following tables detail our common stock dividends declared during the years endedDecember 31, 2021 and 2020: 2021 Declaration Date Record Date Payment Date Dividend Per Share 3/22/2021 4/1/2021 4/30/2021 $ 0.18 6/15/2021 6/30/2021 7/30/2021 0.21 9/15/2021 9/30/2021 10/29/2021 0.21 12/15/2021 12/31/2021 1/31/2022 0.21 Total $ 0.81 2020 Declaration Date Record Date Payment Date Dividend Per Share 12/22/2020 12/31/2020 1/29/2021 $ 0.09
The following tables detail our preferred stock dividends declared during the
years ended
2021 Cash Dividend Per Share
Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C
2/16/2021 2/26/2021 3/17/2021 $ 0.51563 $ 0.50 $ 0.50
5/17/2021 5/28/2021 6/17/2021 0.51563 0.50 0.50
7/30/2021 8/31/2021 9/17/2021 0.51563 0.50 0.50
11/5/2021 11/30/2021 12/17/2021 0.51563 0.50 0.50
Total $ 2.06252 $ 2.00 $ 2.00
2020 Cash Dividend Per Share
Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C
2/14/2020 2/28/2020 3/17/2020 $ 0.51563 $ 0.50 $ 0.50
11/6/2020 11/30/2020 12/17/2020 1.54689 1.50 1.50
Total $ 2.06252 $ 2.00 $ 2.00
64
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Liquidity and capital resources
Our liquidity determines our ability to meet our cash obligations, including
distributions to our stockholders, payment of our expenses, financing our
investments and satisfying other general business needs.
Our principal sources of cash as ofDecember 31, 2021 consisted of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase loans, real estate securities, and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations. AtDecember 31, 2021 , we had$137.3 million of liquidity, which consisted of$68.1 million of cash and$69.2 million of unencumbered assets available to support our liquidity needs. AtJanuary 31, 2022 , we had$134.3 million of liquidity, which consisted of$67.8 million of cash and$66.5 million of unencumbered assets available to support our liquidity needs. Refer to the "Contractual obligations" section of this Part II, Item 7 for additional obligations that could impact our liquidity.
Margin requirements
The fair value of our loans and real estate securities fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls in the ordinary course of our business. In seeking to manage effectively the margin requirements established by our lenders, we maintain a position of cash and, when owned, unpledged Agency RMBS. We refer to this position as our "liquidity." The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our assets. Typically, if interest rates increase or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will need to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in the residential mortgage market. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which may force us to liquidate assets into potentially unfavorable market conditions and harm our results of operations and financial condition. Further, an unexpected rise in interest rates and a corresponding fall in the fair value of our securities may also force us to liquidate assets under difficult market conditions, thereby harming our results of operations and financial condition, in an effort to maintain sufficient liquidity to meet increased margin calls. Similar to the margin calls that we receive on our borrowing agreements, we may also receive margin calls on our derivative instruments when their fair value declines. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the terms of the derivatives involved. We may also receive margin calls on our derivatives based on the implied volatility of interest rates. Our posting of collateral with our counterparties can be done in cash or securities, and is generally bilateral, which means that if the fair value of our interest rate hedges increases, our counterparty will be required to post collateral with us. Refer to the "Liquidity risk - derivatives" section of Item 7A below for a further discussion on margin.
Refer to the “Financing activities-Forbearance and Reinstatement Agreements”
section above for information on the impact of COVID-19 on margin calls in 2020.
65 --------------------------------------------------------------------------------
Cash Flows
The below details changes to our cash, cash equivalents, and restricted cash for
the years ended
Years
Ended
December 31, 2021 December 31, 2020 Change Cash, cash equivalents, and restricted cash, Beginning of Period $ 62,318 $ 125,369$ (63,051) Net cash provided by (used in) operating activities (1) 26,298 4,156 22,142 Net cash provided by (used in) investing activities (2) (1,899,691) 2,193,455 (4,093,146) Net cash provided by (used in) financing activities (3) 1,911,294 (2,260,500) 4,171,794 Net change in cash, cash equivalents and restricted cash 37,901 (62,889) 100,790 Effect of exchange rate changes on cash 10 (162) 172 Cash, cash equivalents, and restricted cash, End of Period $ 100,229 $ 62,318$ 37,911 (1)Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the years endedDecember 31, 2021 and 2020, respectively. Our investment portfolio grew in 2021 following a significant reduction in our investment portfolio size in 2020 as a result of the COVID-19 pandemic. In addition, distributions received from our equity method investments increased period over period. (2)Cash used in investing activities for the year endedDecember 31, 2021 was primarily attributable to purchases of investments less sales of investments and principal repayments of investments. Cash used by investing activities for the year endedDecember 31, 2020 was primarily attributable to sales of investments and principal repayments of investments less purchases of investments. The difference period over period is primarily due to the increased level of investment activity during 2021 as we focused on growing our investment portfolio as compared to significant sales in 2020 as a result of the COVID-19 pandemic. (3)Cash provided by financing activities for the year endedDecember 31, 2021 was primarily attributable to borrowing of financing arrangements, proceeds from the issuance of securitized debt, and net proceeds from the issuance of common stock offset by offset by repayment of borrowings under financing arrangements, principal repayments of securitized debt, and dividend payments. Cash used in financing activities for the year endedDecember 31, 2020 was primarily attributable to repayments of financing arrangements and dividend payments offset by borrowings under financing arrangements. The difference period over period is primarily due to financing added to support the increased level of investment and securitization activity during 2021 as compared to a reduction in financing arrangements as a result of significant sales in 2020 due to the COVID-19 pandemic.
Stock repurchase programs
OnNovember 3, 2015 , our Board of Directors authorized a stock repurchase program ("Repurchase Program") to repurchase up to$25.0 million of our outstanding common stock. Such authorization does not have an expiration date. As part of the Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. Subject to applicable securities laws, the timing, manner, price and amount of any repurchases of common stock under the Repurchase Program may be determined by our discretion, using available cash resources. Shares of common stock repurchased by us under the Repurchase Program, if any, will be cancelled and, until reissued, will be deemed to be authorized but unissued shares of common stock as required byMaryland law. The Repurchase Program may be suspended or discontinued by us at any time and without prior notice and the authorization does not obligate us to acquire any particular amount of common stock. The cost of the acquisition of shares of our own stock in excess of the aggregate par value of the shares first reduces additional paid-in capital, to the extent available, with any residual cost applied against retained earnings. We repurchased 0.3 million shares under the Repurchase Program during the year endedDecember 31, 2021 . We did not repurchase shares under the Repurchase Program during the year endedDecember 31, 2020 . Approximately$11.0 million of common stock remained authorized for future share repurchases under the Repurchase Program as ofDecember 31, 2021 .
Equity distribution agreements
OnMay 5, 2017 , we entered into an equity distribution agreement with each ofCredit Suisse Securities (USA) LLC andJMP Securities LLC (collectively, the "Sales Agents"), which we refer to as the "Equity Distribution Agreements," pursuant to which we may sell up to$100.0 million aggregate offering price of shares of our common stock from time to time through the Sales 66 -------------------------------------------------------------------------------- Agents, under the Securities Act of 1933. For the year endedDecember 31, 2021 , we sold 1.0 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately$13.1 million . For the year endedDecember 31, 2020 , we sold 0.7 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately$7.1 million . Since inception of the program, the Company has sold approximately 2.2 million shares of common stock under the Equity Distribution Agreements for gross proceeds of$48.3 million . Common stock offering OnNovember 22, 2021 , we completed a public offering of 7.0 million shares of our common stock and subsequently issued an additional 1.1 million shares pursuant to the underwriters' exercise of their over-allotment option at a price of$9.98 per share. Net proceeds to us from the offering were approximately$80.0 million , after deducting estimated offering expenses.
Exchange Offers
The below details the privately negotiated exchange agreements with existing holders of our preferred shares exchanged for common shares during the year endedDecember 31, 2021 . Subsequent to each transaction closed, the Preferred Stock exchanged pursuant to the exchange agreement was reclassified as authorized but unissued shares of preferred stock without designation as to class or series ($ in thousands). Preferred Shares Exchanged Shares of Series A Shares of Series B Shares of Series C Total Preferred Date Preferred Stock Preferred Stock Preferred Stock Stock Par Value Common Shares Exchanged March 17, 2021 153,325 350,609 -$ 12,598 937,462 June 14, 2021 - 86,478 154,383 6,022 429,802
As of
Preferred Stock, 3.7 million shares of Series B Preferred Stock, and 3.7 million
shares of Series C Preferred Stock.
Common Stock Issuance to the Manager
Refer to “Contractual obligations-Management agreement” below for more detail
related to the Second Management Agreement Amendment.
Forward-looking statements regarding liquidity
Based upon our current portfolio, leverage and available borrowing arrangements, we believe the net proceeds of our common equity offerings, preferred equity offerings, and private placements, combined with cash flow from operations and our available borrowing capacity will be sufficient to enable us to meet our anticipated liquidity requirements, including funding our investment activities, paying fees under our management agreement, funding our distributions to stockholders and paying general corporate expenses.
Contractual obligations
Management agreement
OnJune 29, 2011 , we entered into a management agreement with our Manager, pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders' Equity, per annum. For purposes of calculating the management fee, "Stockholders' Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders' equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders' Equity, for purposes of calculating the management fee, could be greater or less than the 67 -------------------------------------------------------------------------------- amount of stockholders' equity shown on our financial statements. For the years endedDecember 31, 2021 and 2020, we have incurred management fees of$6.8 million and$7.2 million , respectively. As ofDecember 31, 2021 and 2020, we have recorded management fees payable of$1.8 million and$1.7 million , respectively. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager. For the years endedDecember 31, 2021 and 2020, we have accrued$6.3 million and$7.4 million , respectively, representing a reimbursement of expenses which are recorded within the "Other operating expenses" and "Transaction related expenses" line items on the consolidated statements of operations.
As of
Manager of
reimbursements of
OnApril 6, 2020 , we executed an amendment to the management agreement, pursuant to which the Manager agreed to defer our payment of the management fee and reimbursement of expenses, effective the first quarter of 2020 throughSeptember 30, 2020 . All deferred expense reimbursements were paid as ofSeptember 30, 2020 . OnSeptember 24, 2020 , we executed an amendment (the "Second Management Agreement Amendment") to the management agreement, pursuant to which the Manager agreed to receive a portion of the deferred base management fee in shares of common stock. Pursuant to the Second Management Agreement Amendment, the Manager agreed to purchase (i) 405,123 shares of common stock in full satisfaction of the deferred base management fee of$3.8 million payable by us in respect to the first and second quarters of 2020 and (ii) 51,500 shares of common stock in satisfaction of$0.5 million of the base management fee payable by us in respect to the third quarter of 2020. The shares of common stock issued to the Manager were valued at$9.45 per share based on the midpoint of the estimated range of our book value per share as ofAugust 31, 2020 . The remaining third quarter 2020 management fee was paid in the normal course of business.
Incentive fee
In connection with our common stock offering inNovember 2021 , including the Manager's purchase of 700,000 shares in the offering, onNovember 22, 2021 , we and the Manager executed an amendment (the "Third Amendment") to the management agreement, pursuant to which we will pay the Manager an annual incentive fee in addition to the base management fee. Pursuant to the Third Amendment, the Manager waived the annual incentive fee with respect to the fiscal years endingDecember 31, 2021 andDecember 31, 2022 , and the annual incentive fee will first be payable with respect to the fiscal year endingDecember 31, 2023 . The annual incentive fee with respect to each applicable fiscal year will be equal to 15% of the amount by which our cumulative adjusted net income from the date of the Third Amendment exceeds the cumulative hurdle amount, which represents an 8% return (cumulative, but not compounding) on an equity hurdle base consisting of the sum of (i) our adjusted book value (calculated in the manner described in our public filings) as ofOctober 31, 2021 , (ii)$80.0 million , and (iii) the gross proceeds of any subsequent public or private common stock offerings by us. The annual incentive fee will be payable in cash, or, at the option of our Board of Directors, shares of our common stock or a combination of cash and shares. In addition, pursuant to the Third Amendment, the term of the management agreement was extended untilJune 30, 2023 , unless earlier terminated in accordance with its terms. Thereafter, the management agreement will continue to renew automatically each year for an additional one-year period, unless the Company or the Manager exercise its respective termination rights. All other terms and conditions of the management agreement continued without change.
Secured debt
OnApril 10, 2020 , in connection with the first Forbearance Agreement, we issued a secured promissory note (the "Note") to the Manager evidencing a$10 million loan made by the Manager to us. Additionally, onApril 27, 2020 , in connection with the second Forbearance Agreement, we entered into an amendment to the Note to reflect an additional$10 million loan by the Manager to us. The$10 million loan made by the Manager onApril 10, 2020 was repaid in full with interest when it matured onMarch 31, 2021 , and the$10 million loan made onApril 27, 2020 was repaid in full with interest when it matured on July 68 -------------------------------------------------------------------------------- 27, 2020. The unpaid balance of the Note accrued interest at a rate of 6.0% per annum. Interest on the Note was payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note. The Note and accrued interest on the Note, when outstanding, were included within the due to affiliates amount, which is included within the "Other Liabilities" line item in the consolidated balance sheets.
Share-based compensation
Effective onApril 15, 2020 upon the approval of our stockholders at our Annual Meeting, the 2020 Equity Incentive Plan provides for 666,666 shares of common stock to be issued. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during any fiscal year, shall not exceed$300,000 in total value (calculating the value of any such awards based on the grant date fair value). As ofDecember 31, 2021 , 599,312 shares of common stock were available to be awarded under the Equity Incentive Plan. Since our IPO, we have granted an aggregate of 35,264 and 67,354 shares of restricted common stock to our independent directors under our equity incentive plans, datedJuly 6, 2011 (the "2011 Equity Incentive Plans") and our 2020 Equity Incentive Plan, respectively. As ofDecember 31, 2021 , all the shares of restricted common stock granted to our independent directors have vested. Following approval of our stockholders at our 2021 annual meeting of stockholders, theAG Mortgage Investment Trust, Inc. 2021 Manager Equity Incentive Plan (the "2021 Manager Plan") became effective onApril 7, 2021 and provides for a maximum of 573,425 shares of common stock that may be subject to awards thereunder to our Manager. As ofDecember 31, 2021 , there were no shares or awards issued under the 2021 Manager Plan. Further, since our IPO, we have issued 13,416 shares of restricted common stock and 40,000 restricted stock units to our Manager under our 2011 Equity Incentive Plans. As ofJuly 1, 2020 , all shares of restricted common stock and restricted stock units granted to our Manager have fully vested.
Unfunded commitments
See Note 12 of the “Notes to Consolidated Financial Statements” for details on
our commitments as of
MATT Financing Arrangement Restructuring
See Note 10 and Note 12 of the "Notes to Consolidated Financial Statements" for detail on the MATT Restructured Financing Arrangement and our commitments as ofDecember 31, 2021 .
Off-balance sheet arrangements
Our investments in debt and equity of affiliates primarily consist of real estate securities, loans, and our interest in AG Arc. Investments in debt and equity of affiliates are accounted for using the equity method of accounting. Certain of our investments in debt and equity of affiliates securitize residential mortgage loans and retain interests in the subordinated tranches of the transferred assets. These retained interests are included in the MATT Non-QM Loans and Re/Non-Performing Loans line items of our investment portfolio. See Note 2 to the "Notes to Consolidated Financial Statements" for a discussion of investments in debt and equity of affiliates. We have entered into TBA positions in connection with purchases of GSE Non-Owner Occupied Loans. We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. As ofDecember 31, 2021 , we had a net short TBA position with a net receivable amount and fair market value of$394.2 million and recorded$13 thousand in the "Other liabilities" line item on our consolidated balance sheets. In addition to our investments in debt and equity of affiliates and TBA positions described above, we also have commitments outstanding on certain loans. For additional information on our commitments as ofDecember 31, 2021 , refer to Note 12 of the "Notes to Consolidated Financial Statements." Exclusive of our investments in debt and equity of affiliates described above, we do not expect these commitments, taken as a whole, to be significant to, or to have a material impact on, our overall liquidity or capital resources or our operations. 69 --------------------------------------------------------------------------------
Critical accounting policies
We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as ofDecember 31, 2021 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in arriving at those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. Moreover, the uncertainty over the ultimate impact that that the COVID-19 pandemic will have on the global economy generally, and on our business in particular, makes any estimate and assumption inherently less certain than would be the case absent the current and potential impacts of the COVID-19 pandemic. Our most critical accounting policies are believed to include (i) Valuation of financial instruments, (ii) Accounting for loans, (iii) Accounting for real estate securities, (iv) Interest income recognition, (v) Financing arrangements, and (vi) Investment consolidation. These policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements are based are reasonable at the time made and based upon information available to us at that time. We rely upon third-party pricing of our assets at each-quarter end to arrive at what we believe to be reasonable estimates of fair value, whenever available. For more information on our fair value measurements, see Note 5 to the "Notes to Consolidated Financial Statements." For a review of our significant accounting policies and the recent accounting pronouncements that may impact our results of operations, see Note 2 to the "Notes to Consolidated Financial Statements."
REIT Qualification
We have elected to be taxed as a REIT forU.S. federal income tax purposes. Provided that we maintain our qualification as a REIT, we generally will not be subject toU.S. federal income tax on our REIT taxable income that we distribute currently to our stockholders. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code, relating to, among other things, the sources of our gross income and the composition and values of our assets (which, based on the types of assets we own, can fluctuate rapidly, significantly and unpredictably), our distribution levels and the diversity of ownership of our shares. We cannot assure you that we will be able to comply with such requirements. Failure to qualify as a REIT in any taxable year would cause us to be subject toU.S. federal income tax on our taxable income at regular corporate rates (and any applicable state and local taxes). Even if we qualify for taxation as a REIT, we may be subject to certainU.S. federal, state, local, and non-U.S. taxes on our income. For example, any income generated by our domestic TRSs will be subject toU.S. federal, state, and local income tax. Any taxes paid by a TRS will reduce the cash available for distribution to our stockholders. 70 --------------------------------------------------------------------------------
Exclusion From Regulation Under the Investment Company Act
We conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes, of the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive ofU.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things,U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). We conduct our operations such that we will not be considered an investment company under Section 3(a)(1) of the Investment Company Act by complying with the 40% Test and not engaging primarily (or holding ourselves out as being engaged primarily) in the business of investing, reinvesting, or trading in securities. Rather, through wholly-owned or majority-owned subsidiaries, we are primarily engaged in the non-investment company businesses of these subsidiaries, namely the real estate finance business of purchasing or otherwise acquiring mortgage loans and other interests in real estate. We currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(7) of the Investment Company Act, each a "3(c)(7) subsidiary." In addition, we currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act, each a "3(c)(5)(C) subsidiary." While investments in 3(c)(7) subsidiaries are considered investment securities for the purposes of the 40% Test, investments in 3(c)(5)(C) subsidiaries are not considered investment securities for the purposes of the 40% Test, nor are investments in subsidiaries that rely on the exclusion provided by Section 3(a)(1)(C). Therefore, our investments in 3(c)(7) subsidiaries and other investment securities cannot exceed 40% of the value of our total assets (excludingU.S. government securities and cash) on an unconsolidated basis. Section 3(c)(5)(C) of the Investment Company Act exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. TheSEC staff generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). Both the 40% Test and the requirements of the Section 3(c)(5)(C) exclusion limit the types of businesses in which we may engage and the types of assets we may hold, as well as the timing of sales and purchases of assets. The determination that we qualify for this exemption from being regulated as an investment company depends on various factual matters and circumstances. We closely monitor our holdings to ensure continuing and ongoing compliance with these tests. If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this report.
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