NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements of American Capital Mortgage Investment Corp. (referred to throughout this report as the "Company", "we", "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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 income and expenses during the reporting period. Actual results could differ from those estimates.
Our unaudited interim consolidated financial statements include the accounts of all of our wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
Note 2. Organization
We were incorporated in Maryland on March 15, 2011 and commenced operations on August 9, 2011 following the completion of our initial public offering (“IPO”). We are externally managed by American Capital MTGE Management, LLC (our “Manager”). The parent company of our Manager was acquired by American Capital Agency Corp. (“AGNC”), effective July 1, 2016, and as a result of that transaction, we and our Manager are no longer affiliated with American Capital, Ltd. Our common stock is traded on the NASDAQ Global Select Market under the symbol “MTGE.”
We invest in, finance and manage a leveraged portfolio of real estate-related investments, which we define to include agency residential mortgage-backed securities (“RMBS”), non-agency mortgage investments, other mortgage-related investments and other real estate investments. Agency RMBS include residential mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”) structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored enterprise (“GSE”), such as Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as Government National Mortgage Association (“Ginnie Mae”). Non-agency mortgage investments include RMBS backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency. Non-agency mortgage investments may also include prime and non-prime residential mortgage loans. Other mortgage-related investments may include mortgage servicing rights (“MSR”), GSE credit risk transfer securities (“CRT”), commercial mortgage-backed securities (“CMBS”), commercial mortgage loans and mortgage-related derivatives. Other real estate investments may include equity and debt investments in skilled nursing, assisted living and senior housing properties operated by third-parties.
Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term through a combination of dividends and net book value appreciation. In pursuing this objective, we rely on our Manager’s expertise to construct and manage a diversified investment portfolio by identifying asset classes that, when properly financed and hedged, are designed to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, we are required to distribute annually at least 90% of our taxable net income. As long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.
Note 3. Summary of Significant Accounting Policies
Fair Value of Financial Assets
We have elected the option to account for all of our financial assets, including all mortgage-related investments, at estimated fair value, with changes in fair value reflected in income during the period in which they occur. In management's view, this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of hedging instruments. See Note 10 - Fair Value Measurements.
Interest Income
Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums or discounts associated with the purchase of agency RMBS and non-agency securities of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method.
We estimate long-term prepayment speeds using a third-party service and market data. The third-party service estimates prepayment speeds for our securities using models that incorporate the mortgage rates, age, size and loan-to-value ratios of the outstanding underlying loans, as well as current mortgage rates, forward yield curves, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service, and based on our Manager’s judgment, we may make adjustments to its estimates. Actual and anticipated prepayment experience is reviewed at least quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts actually received plus currently anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.
At the time we purchase non-agency securities and loans that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on inputs and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.
Mortgage Servicing Rights, at Fair Value
Our MSR represent the right to service mortgage loans for a servicing fee. MSR are reported at fair value on our consolidated balance sheets, with changes in fair value related to changes in valuation inputs and assumptions reported as unrealized loss on MSR on the consolidated statements of operations. Servicing fees, incentive fees and ancillary income are reported within servicing income on the consolidated statements of operations. The related servicing expenses and realization of cash flows related to underlying loan repayments, net of recoveries of contractual prepayment protection, are recorded in servicing expenses on the consolidated statements of operations. See Note 11 - Mortgage Servicing Rights for further discussion on MSR.
The accounting model used to evaluate whether a transfer of MSR qualifies as a sale is based on a risks and rewards approach, as MSR are not financial assets. In certain cases where we transfered the economics of MSR while retaining the actual servicing function, we retained the risk associated with servicing and, as a result, the transfer did not qualify for sale accounting. As such, we retained the MSR, together with an offsetting financing liability on our consolidated balance sheets. We have elected the option to account for MSR financing liabilities at estimated fair value, with changes in fair value reflected in income during the period in which they occur. See Note 13 - Accounts Payable and Other Accrued Liabilities for the presentations of our mortgage servicing liability.
We may be obligated to fund advances of principal and interest payments due to third party loan investors prior to receiving payment on the loans from the individual borrowers. We may also be obligated to fund advances of real estate taxes
and insurance, protective advances to preserve the value of the underlying property, and expenses associated with remedial action in respect of defaulted loans. These servicing advances are reported within other assets on the consolidated balance sheets.
Real Property Owned
We account for our acquisitions of real property as business combinations. The purchase price is allocated to tangible and intangible assets based on their respective fair values, with acquisition costs expensed as incurred. Tangible assets primarily consist of land, buildings and furniture, fixtures and equipment. Depreciable tangible assets are depreciated on a straight-line basis over their estimated useful lives, which can range from 7 years for furniture, fixtures and equipment to 40 years for buildings.
The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that depreciable lives may need to be changed. We consider external factors relating to each asset and the existence of a master lease that may link the cash flows of an individual asset to a larger portfolio of assets leased to the same tenant. If these factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value is reduced to the estimated fair market value. In addition, we are exposed to the risks inherent in investments in real estate, and in particular, the senior housing and health care industries. A downturn in these industries or in the real estate markets in which our properties are located could adversely affect the value of our properties and our ability to sell properties for a price or terms acceptable to us.
Intangible assets can include goodwill and identifiable intangible assets such as above or below market component of in-place leases and the value associated with the presence of in-place tenants or residents. Goodwill is calculated as the excess of consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill and intangible assets are included in other assets on the consolidated balance sheets and tested annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired.
Lease and Rental Income
For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight line basis over the lease term when collectability is reasonably assured. Recognizing lease income on a straight line basis results in a difference in the timing of revenue amounts from what is contractually due. If the Company determines that collectability of straight line lease income is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established.
Resident rental income is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care-related services is recognized as services are provided.
Noncontrolling Interests
Arrangements with noncontrolling interest holders are reported as a component of equity separate from the Company’s stockholders' equity, recorded at the initial carrying amount, and increased or decreased for the noncontrolling interest’s share of net income or loss. Net income attributable to a noncontrolling interest is included in net income on the consolidated statements of operations.
Deferred Loan Expenses
We amortize deferred financing costs, which are reported within secured debt on our consolidated balance sheets, as a component of interest expense of the secured debt over the terms of the related borrowings using a method that approximates a level yield.
Repurchase Agreements
We finance the acquisition of agency RMBS and non-agency securities for our investment portfolio through repurchase transactions under master repurchase agreements. We account for repurchase transactions as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. The contractual amounts approximate fair value due to their short-term maturities or floating rate coupons.
Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements
From time to time we borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see
Derivatives
below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Our reverse repurchase agreements generally mature daily. The fair value of our reverse repurchase agreements is assumed to equal cost as the interest rates are reset daily.
Derivatives
We utilize a risk management strategy, under which we may use a variety of derivative instruments to hedge some of our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of market conditions. The principal instruments that we currently use are interest rate swaps and options to enter into interest rate swaps (“interest rate swaptions”). We also utilize forward contracts for the purchase or sale of agency RMBS, or to-be-announced forward (“TBA”) contracts, and short sales of U.S. Treasury securities and U.S. Treasury futures contracts. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, such as synthetic total return swaps.
We also enter into TBA contracts as a means of investing in and financing agency RMBS (thereby increasing our “at
risk” leverage) or as a means of disposing of or reducing our exposure to agency RMBS (thereby reducing our “at risk” leverage). Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, agency RMBS with certain principal and interest terms and certain types of collateral, but the particular agency RMBS to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a “dollar roll.” The agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to agency RMBS for settlement in the current month. This difference (or discount) is referred to as the “price drop.” The price drop is the economic equivalent of net interest carry income on the underlying agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as “dollar roll income (loss).” Consequently, forward purchases of agency RMBS and dollar roll transactions represent a form of off-balance sheet financing.
We recognize all derivative instruments as either assets or liabilities on the balance sheets, measured at fair value. As we have not designated any derivatives as hedging instruments, all changes in fair value are reported in earnings in our consolidated statements of operations in unrealized gain (loss) on other derivatives and securities, net during the period in which they occur. Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with each counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets.
The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We attempt to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.
Interest rate swap agreements
We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement and other financing facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR (“payer swaps”) with terms up to 15 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over-the-counter (“OTC”) market and may be centrally cleared through a registered commodities exchange (“centrally cleared swaps”).
We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying
rates, including the overnight index swap rate and LIBOR forward rate, to produce the daily settlement price. We estimate the fair value of our “non-centrally cleared” interest rate swaps based on valuations obtained from third-party pricing services and the swap counterparty (collectively, “third-party valuations”). The third-party valuations are model-driven using observable inputs consisting of LIBOR and the forward yield curve. We also consider the creditworthiness of both us and our counterparties and the impact of netting and credit enhancement provisions contained in each derivative agreement, such as collateral postings. All of our “non-centrally cleared” interest rate swaps are subject to bilateral collateral arrangements. Consequently, no credit valuation adjustment was made in determining the fair value of such instruments.
The payment of periodic settlements of net interest on interest rate swaps is reported in realized loss on periodic settlements of interest rate swaps, net in our consolidated statements of operations. Cash payments received or paid for the early termination of an interest rate swap agreement are recorded as realized loss on other derivatives and securities, net in our consolidated statements of operations. Changes in fair value of our interest rate swap agreements are reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
Interest rate swaptions
We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates
on the performance of our investment portfolio. The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay or receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. The difference between the premium and the fair value of the swaption is reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid and reported in realized loss on other derivatives and securities, net in our consolidated statements of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized loss on other derivatives and securities, net in our consolidated statements of operations.
Interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of our interest rate swaption agreements based on model-driven valuations obtained from third-party
pricing services and the swaption counterparty. These estimates incorporate observable inputs and include the fair value of the future interest rate swaps that we have the option to enter into, as well as the remaining length of time that we have to exercise the options, adjusted for non-performance risk, if any.
TBA securities
A TBA security is a forward contract for the purchase (“long position”) or sale (“short position”) of agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency RMBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA contracts as a means of acquiring or disposing of agency RMBS and we may from time to time utilize TBA dollar roll transactions to finance agency RMBS purchases.
We account for all TBA contracts as derivatives since we cannot assert that it is probable at the inception and throughout the term of the contract that it will not settle net and will result in physical delivery of an agency security when it is issued. A TBA dollar roll transaction is a series of derivative transactions. The net settlement of a TBA contract is reported as realized loss on other derivatives and securities, net and changes in the fair value of our TBA contracts are reported as unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
We estimate the fair value of TBA securities based on similar methods used to value our agency RMBS.
Forward commitments to purchase or sell specified securities
We may enter into a forward commitment to purchase or sell specified securities as a means of acquiring assets or as a hedge against short-term changes in interest rates. Such forward commitments usually require physical settlement. Contracts for the purchase or sale of specified securities are accounted for as derivatives if the delivery of the specified agency RMBS and settlement extends beyond established market conventions. Realized gains and losses associated with forward
commitments are recognized in realized loss on other derivatives and securities, net and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.
We estimate the fair value of forward commitments to purchase or sell specified RMBS based on methods used to value our RMBS, as well as the remaining length of time of the forward commitment.
U.S. Treasury securities
We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. Realized gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in realized loss on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.
Note 4. Agency Securities
The following tables summarize our investments in agency RMBS as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Agency RMBS:
|
|
|
|
|
|
Par value
|
$
|
2,497,287
|
|
|
$
|
742,260
|
|
|
$
|
3,239,547
|
|
Unamortized premium
|
122,334
|
|
|
42,470
|
|
|
164,804
|
|
Amortized cost
|
2,619,621
|
|
|
784,730
|
|
|
3,404,351
|
|
Gross unrealized gains
|
44,826
|
|
|
12,424
|
|
|
57,250
|
|
Gross unrealized losses
|
(600
|
)
|
|
(358
|
)
|
|
(958
|
)
|
Agency RMBS, at fair value
|
$
|
2,663,847
|
|
|
$
|
796,796
|
|
|
$
|
3,460,643
|
|
|
|
|
|
|
|
Weighted average coupon as of June 30, 2016
|
3.51
|
%
|
|
3.61
|
%
|
|
3.53
|
%
|
Weighted average yield as of June 30, 2016
|
2.61
|
%
|
|
2.63
|
%
|
|
2.62
|
%
|
Weighted average yield for the three months ended June 30, 2016
|
2.43
|
%
|
|
2.28
|
%
|
|
2.40
|
%
|
Weighted average yield for the six months ended June 30, 2016
|
2.30
|
%
|
|
2.27
|
%
|
|
2.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Agency RMBS:
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
3,304,336
|
|
|
$
|
52,334
|
|
|
$
|
(958
|
)
|
|
$
|
3,355,712
|
|
Adjustable rate
|
|
100,015
|
|
|
4,916
|
|
|
—
|
|
|
104,931
|
|
Total Agency RMBS
|
|
$
|
3,404,351
|
|
|
$
|
57,250
|
|
|
$
|
(958
|
)
|
|
$
|
3,460,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Agency RMBS:
|
|
|
|
|
|
Par value
|
$
|
2,421,576
|
|
|
$
|
651,622
|
|
|
$
|
3,073,198
|
|
Unamortized premium
|
127,871
|
|
|
34,869
|
|
|
162,740
|
|
Amortized cost
|
2,549,447
|
|
|
686,491
|
|
|
3,235,938
|
|
Gross unrealized gains
|
9,745
|
|
|
3,378
|
|
|
13,123
|
|
Gross unrealized losses
|
(23,194
|
)
|
|
(8,615
|
)
|
|
(31,809
|
)
|
Agency RMBS, at fair value
|
$
|
2,535,998
|
|
|
$
|
681,254
|
|
|
$
|
3,217,252
|
|
|
|
|
|
|
|
|
Weighted average coupon as of December 31, 2015
|
3.58
|
%
|
|
3.58
|
%
|
|
3.58
|
%
|
Weighted average yield as of December 31, 2015
|
2.68
|
%
|
|
2.71
|
%
|
|
2.68
|
%
|
Weighted average yield for the year ended December 31, 2015
|
2.58
|
%
|
|
2.64
|
%
|
|
2.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Amortized Cost
|
|
Gross Unrealized Gain
|
|
Gross Unrealized Loss
|
|
Fair Value
|
Agency RMBS:
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
3,131,136
|
|
|
$
|
10,086
|
|
|
$
|
(31,809
|
)
|
|
$
|
3,109,413
|
|
Adjustable rate
|
|
104,802
|
|
|
3,037
|
|
|
—
|
|
|
107,839
|
|
Total Agency RMBS
|
|
$
|
3,235,938
|
|
|
$
|
13,123
|
|
|
$
|
(31,809
|
)
|
|
$
|
3,217,252
|
|
Actual maturities of agency RMBS are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments.
The following table summarizes our agency RMBS as of
June 30, 2016 and December 31, 2015
according to their estimated weighted average life classification (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
Weighted Average Life
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Yield
|
|
Coupon
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Yield
|
|
Coupon
|
Less than three years
|
|
$
|
19,403
|
|
|
$
|
18,864
|
|
|
2.49
|
%
|
|
3.48
|
%
|
|
$
|
—
|
|
|
$
|
—
|
|
|
N/A
|
|
|
N/A
|
|
Greater than three years and less than or equal to five years
|
|
858,670
|
|
|
838,768
|
|
|
2.36
|
%
|
|
3.30
|
%
|
|
742,523
|
|
|
740,513
|
|
|
2.25
|
%
|
|
3.29
|
%
|
Greater than five years and less than or equal to 10 years
|
|
2,324,210
|
|
|
2,289,005
|
|
|
2.71
|
%
|
|
3.68
|
%
|
|
2,466,730
|
|
|
2,487,369
|
|
|
2.81
|
%
|
|
3.67
|
%
|
Greater than 10 years
|
|
258,360
|
|
|
257,714
|
|
|
2.61
|
%
|
|
3.00
|
%
|
|
7,999
|
|
|
8,056
|
|
|
3.03
|
%
|
|
3.50
|
%
|
Total
|
|
$
|
3,460,643
|
|
|
$
|
3,404,351
|
|
|
2.62
|
%
|
|
3.53
|
%
|
|
$
|
3,217,252
|
|
|
$
|
3,235,938
|
|
|
2.68
|
%
|
|
3.58
|
%
|
As of
June 30, 2016 and December 31, 2015
, none of our agency RMBS had an estimated weighted average life of less than
2.6 years
and
3.2 years
, respectively. As of
June 30, 2016 and December 31, 2015
, the estimated weighted average life of our agency security portfolio was
6.7 years
and
7.0 years
, respectively, which incorporates anticipated future prepayment assumptions. As of
June 30, 2016 and December 31, 2015
, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was
10.1%
and
8.5%
, respectively. Our estimates may differ materially for different types of securities and thus individual holdings may have a wide range of projected CPRs.
Realized Gains and Losses
The following table summarizes our net realized gains and losses from the sale of agency RMBS during
the three and six months ended June 30, 2016 and 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Proceeds from agency RMBS sold
|
|
$
|
450,164
|
|
|
$
|
805,288
|
|
|
$
|
585,213
|
|
|
$
|
1,235,875
|
|
Increase (decrease) in receivable for agency RMBS sold
|
|
—
|
|
|
(142,817
|
)
|
|
—
|
|
|
208,942
|
|
Less agency RMBS sold, at cost
|
|
(447,496
|
)
|
|
(669,132
|
)
|
|
(582,125
|
)
|
|
(1,450,544
|
)
|
Realized gain (loss) on agency securities, net
|
|
$
|
2,668
|
|
|
$
|
(6,661
|
)
|
|
$
|
3,088
|
|
|
$
|
(5,727
|
)
|
|
|
|
|
|
|
|
|
|
Gross realized gains on sale of agency RMBS
|
|
$
|
2,670
|
|
|
$
|
365
|
|
|
$
|
3,372
|
|
|
$
|
3,964
|
|
Gross realized losses on sale of agency RMBS
|
|
(2
|
)
|
|
(7,026
|
)
|
|
(284
|
)
|
|
(9,691
|
)
|
Realized gain (loss) on agency securities, net
|
|
$
|
2,668
|
|
|
$
|
(6,661
|
)
|
|
$
|
3,088
|
|
|
$
|
(5,727
|
)
|
Pledged Assets
The following tables summarize our agency RMBS pledged as collateral under repurchase agreements, derivative agreements and FHLB advances by type as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
Agency RMBS Pledged:
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Under Repurchase Agreements
|
|
|
|
|
|
|
Fair value
|
|
$
|
2,113,617
|
|
|
$
|
550,929
|
|
|
$
|
2,664,546
|
|
Accrued interest on pledged agency RMBS
|
|
5,893
|
|
|
1,534
|
|
|
7,427
|
|
Under Derivative Agreements
|
|
|
|
|
|
|
Fair value
|
|
8,385
|
|
|
3,926
|
|
|
12,311
|
|
Accrued interest on pledged agency RMBS
|
|
24
|
|
|
11
|
|
|
35
|
|
Under FHLB Advances
|
|
|
|
|
|
|
Fair value
|
|
210,984
|
|
|
79,246
|
|
|
290,230
|
|
Accrued interest on pledged agency RMBS
|
|
584
|
|
|
220
|
|
|
804
|
|
Total Fair Value of Agency RMBS Pledged and Accrued Interest
|
|
$
|
2,339,487
|
|
|
$
|
635,866
|
|
|
$
|
2,975,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Agency RMBS Pledged:
|
|
Fannie Mae
|
|
Freddie Mac
|
|
Total
|
Under Repurchase Agreements
|
|
|
|
|
|
|
Fair value
|
|
$
|
2,261,124
|
|
|
$
|
639,460
|
|
|
$
|
2,900,584
|
|
Accrued interest on pledged agency RMBS
|
|
6,428
|
|
|
1,826
|
|
|
8,254
|
|
Under Derivative Agreements
|
|
|
|
|
|
|
Fair value
|
|
1,708
|
|
|
1,866
|
|
|
3,574
|
|
Accrued interest on pledged agency RMBS
|
|
5
|
|
|
5
|
|
|
10
|
|
Under FHLB Advances
|
|
|
|
|
|
|
Fair value
|
|
249,590
|
|
|
20,927
|
|
|
270,517
|
|
Accrued interest on pledged agency RMBS
|
|
741
|
|
|
62
|
|
|
803
|
|
Total Fair Value of Agency RMBS Pledged and Accrued Interest
|
|
$
|
2,519,596
|
|
|
$
|
664,146
|
|
|
$
|
3,183,742
|
|
The following table summarizes our agency RMBS pledged as collateral under repurchase agreements and FHLB advances, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Remaining Maturity
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
30 days or less
|
|
$
|
1,412,726
|
|
|
$
|
1,387,836
|
|
|
$
|
3,913
|
|
|
$
|
1,637,388
|
|
|
$
|
1,647,007
|
|
|
$
|
4,718
|
|
31 - 59 days
|
|
60,707
|
|
|
60,324
|
|
|
175
|
|
|
340,855
|
|
|
340,852
|
|
|
940
|
|
60 - 90 days
|
|
335,428
|
|
|
327,776
|
|
|
948
|
|
|
329,397
|
|
|
330,832
|
|
|
932
|
|
Greater than 90 days
|
|
1,145,915
|
|
|
1,124,826
|
|
|
3,195
|
|
|
863,461
|
|
|
870,764
|
|
|
2,467
|
|
Total
|
|
$
|
2,954,776
|
|
|
$
|
2,900,762
|
|
|
$
|
8,231
|
|
|
$
|
3,171,101
|
|
|
$
|
3,189,455
|
|
|
$
|
9,057
|
|
As of
June 30, 2016 and December 31, 2015
, none of our repurchase agreement borrowings backed by agency RMBS were due on demand or mature overnight. As of
June 30, 2016
, all of our FHLB advances backed by agency RMBS had remaining maturities greater than 90 days.
Note 5. Non-Agency Securities
The following tables summarize our non-agency securities as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Fair
Value
|
|
Gross Unrealized
|
|
Amortized Cost
|
|
Premium (Discount)
|
|
Par/ Current Face
|
|
Weighted Average
|
Category
|
|
|
Gains
|
|
Losses
|
|
|
|
|
Coupon
(1)
|
|
Yield
|
Prime
|
|
$
|
199,892
|
|
|
$
|
6,293
|
|
|
$
|
(4,191
|
)
|
|
$
|
197,790
|
|
|
$
|
(20,471
|
)
|
|
$
|
218,261
|
|
|
2.93
|
%
|
|
4.95
|
%
|
CRT
|
|
326,182
|
|
|
4,771
|
|
|
(5,872
|
)
|
|
327,283
|
|
|
1,698
|
|
|
325,585
|
|
|
4.86
|
%
|
|
5.26
|
%
|
Alt-A
|
|
387,059
|
|
|
26,950
|
|
|
(8,701
|
)
|
|
368,810
|
|
|
(140,575
|
)
|
|
509,385
|
|
|
1.84
|
%
|
|
6.14
|
%
|
Option-ARM
|
|
151,718
|
|
|
6,317
|
|
|
(5,788
|
)
|
|
151,189
|
|
|
(33,936
|
)
|
|
185,125
|
|
|
0.73
|
%
|
|
4.57
|
%
|
Subprime
|
|
196,789
|
|
|
311
|
|
|
(1,002
|
)
|
|
197,480
|
|
|
(985
|
)
|
|
198,465
|
|
|
3.93
|
%
|
|
4.49
|
%
|
Total
|
|
$
|
1,261,640
|
|
|
$
|
44,642
|
|
|
$
|
(25,554
|
)
|
|
$
|
1,242,552
|
|
|
$
|
(194,269
|
)
|
|
$
|
1,436,821
|
|
|
2.83
|
%
|
|
5.27
|
%
|
————————
|
|
(1)
|
Coupon rates are floating, except for
$28.8 million
,
$17.5 million
and
$130.7 million
fair value of fixed-rate prime, Alt-A and subprime non-agency securities, respectively, as of
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Fair
Value
|
|
Gross Unrealized
|
|
Amortized Cost
|
|
Premium (Discount)
|
|
Par/ Current Face
|
|
Weighted Average
|
Category
|
|
|
Gains
|
|
Losses
|
|
|
|
|
Coupon
(1)
|
|
Yield
|
Prime
|
|
$
|
411,780
|
|
|
$
|
6,797
|
|
|
$
|
(3,681
|
)
|
|
$
|
408,664
|
|
|
$
|
(22,387
|
)
|
|
$
|
431,051
|
|
|
3.24
|
%
|
|
4.49
|
%
|
CRT
|
|
361,028
|
|
|
605
|
|
|
(11,910
|
)
|
|
372,333
|
|
|
3,999
|
|
|
368,334
|
|
|
4.65
|
%
|
|
5.93
|
%
|
Alt-A
|
|
430,679
|
|
|
28,560
|
|
|
(8,001
|
)
|
|
410,120
|
|
|
(150,257
|
)
|
|
560,377
|
|
|
1.76
|
%
|
|
6.65
|
%
|
Option-ARM
|
|
150,014
|
|
|
6,802
|
|
|
(5,742
|
)
|
|
148,954
|
|
|
(34,454
|
)
|
|
183,408
|
|
|
0.68
|
%
|
|
5.43
|
%
|
Subprime
|
|
204,170
|
|
|
2,355
|
|
|
(1,227
|
)
|
|
203,042
|
|
|
(13,270
|
)
|
|
216,312
|
|
|
3.57
|
%
|
|
4.56
|
%
|
Total
|
|
$
|
1,557,671
|
|
|
$
|
45,119
|
|
|
$
|
(30,561
|
)
|
|
$
|
1,543,113
|
|
|
$
|
(216,369
|
)
|
|
$
|
1,759,482
|
|
|
2.84
|
%
|
|
5.51
|
%
|
————————
|
|
(1)
|
Coupon rates are floating, except for
$226.9 million
,
$25.9 million
and
$171.4 million
fair value of fixed-rate prime, Alt-A and subprime non-agency securities, respectively, as of
December 31, 2015
.
|
The following table summarizes our non-agency securities at fair value, by their estimated weighted average life classifications as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
Weighted Average Life
|
|
Fair Value
|
|
Amortized
Cost
|
|
Coupon
|
|
Yield
|
|
Fair Value
|
|
Amortized
Cost
|
|
Coupon
|
|
Yield
|
≤ 5 years
|
|
$
|
457,285
|
|
|
$
|
448,510
|
|
|
3.51
|
%
|
|
5.16
|
%
|
|
$
|
369,907
|
|
|
$
|
363,087
|
|
|
3.15
|
%
|
|
5.22
|
%
|
> 5 to ≤ 7 years
|
|
587,706
|
|
|
575,431
|
|
|
2.36
|
%
|
|
5.47
|
%
|
|
635,840
|
|
|
620,734
|
|
|
2.12
|
%
|
|
5.68
|
%
|
> 7 years
|
|
216,649
|
|
|
218,611
|
|
|
2.86
|
%
|
|
4.95
|
%
|
|
551,924
|
|
|
559,292
|
|
|
3.53
|
%
|
|
5.51
|
%
|
Total
|
|
$
|
1,261,640
|
|
|
$
|
1,242,552
|
|
|
2.83
|
%
|
|
5.27
|
%
|
|
$
|
1,557,671
|
|
|
$
|
1,543,113
|
|
|
2.84
|
%
|
|
5.51
|
%
|
Our Prime non-agency RMBS include investments in securitization trusts collateralized by prime mortgage loans, which are residential mortgage loans that are considered to have been originated with relatively stringent underwriting standards at the time of origination. Our Prime securities with a combined fair value of
$173.1 million
as of
June 30, 2016
are collateralized by loans that were originated between 2002 and 2006, a period of generally weaker underwriting standards and elevated housing prices. As a result, there is still material credit risk embedded in these vintages. As of
June 30, 2016
, Prime securities also include
$26.8
million in fair value of securities with underlying mortgage loans that were originated with more stringent underwriting between 2010 and 2015. As of
June 30, 2016
, our Prime securities have both fixed and floating rate coupons ranging from
1.1%
to
6.5%
, and have underlying collateral with weighted average coupons ranging from
2.8%
to
5.6%
.
Our CRT securities reference the performance of loans that have been guaranteed by Fannie Mae and Freddie Mac subject to their underwriting standards. As of
June 30, 2016
, our CRT securities have floating rate coupons ranging from
3.1%
to
6.5%
, with weighted average coupons of underlying collateral ranging from
3.6%
to
4.6%
. The loans underlying our CRT securities were originated between 2012 and 2015.
Our Alt-A non-agency RMBS are collateralized by Alt-A mortgage loans that were originated from 2002 to 2007. Alt-A, or alternative A-paper, mortgage loans are considered to have more credit risk than prime mortgage loans and less credit risk than sub-prime mortgage loans. Alt-A loans are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. As of
June 30, 2016
, our Alt-A securities have both fixed and floating rate coupons ranging from
0.5%
to
6.5%
with weighted average coupons of underlying collateral ranging from
3.0%
to
6.8%
.
Our Option-ARM non-agency RMBS include senior tranches in securitization trusts that are collateralized by residential mortgages that have origination and underwriting characteristics similar to Alt-A mortgage loans, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. As of
June 30, 2016
, our Option-ARM securities have coupons ranging from
0.6%
to
1.2%
and have underlying collateral with weighted average coupons between
2.9%
and
4.1%
. The loans underlying our Option-ARM securities were originated between 2004 and 2007.
Our Subprime non-agency RMBS issued prior to 2015 include investments in securitization trusts collateralized by residential mortgages originated during or before 2007 that were originally considered to be of lower credit quality. As of
June 30, 2016
, our Subprime securities issued prior to 2015 have a fair value of
$40.1 million
with fixed and floating rate coupons ranging from
4.0%
to
5.9%
and have underlying collateral with weighted-average coupons ranging from
4.9%
to
6.2%
. Additionally, we have classified certain non-performing loans that were securitized between 2014 and 2016 as Subprime securities. These securitizations are backed by loans originated during or before 2016 and, as of
June 30, 2016
, have a fair value of
$156.7 million
. As of
June 30, 2016
, our Subprime securities issued between 2014 and 2016 have fixed rate coupons ranging from
3.4%
to
4.4%
and have underlying collateral with weighted-average coupons ranging from
4.2%
to
6.4%
.
More than
97%
of our non-agency RMBS are rated below investment grade or have not been rated by credit agencies as of
June 30, 2016
.
Realized Gains and Losses
The following table summarizes our net realized gains and losses from the sale of non-agency securities during
the three and six months ended June 30, 2016 and 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Proceeds from non-agency securities sold
|
|
$
|
131,912
|
|
|
$
|
148,410
|
|
|
$
|
547,530
|
|
|
$
|
218,978
|
|
Decrease in receivable for non-agency securities sold
|
|
(4,595
|
)
|
|
—
|
|
|
(2,565
|
)
|
|
—
|
|
Less: non-agency securities sold, at cost
|
|
(123,673
|
)
|
|
(145,259
|
)
|
|
(542,956
|
)
|
|
(212,581
|
)
|
Realized gain on non-agency securities, net
|
|
$
|
3,644
|
|
|
$
|
3,151
|
|
|
$
|
2,009
|
|
|
$
|
6,397
|
|
|
|
|
|
|
|
|
|
|
Gross realized gain on sale of non-agency securities
|
|
$
|
3,838
|
|
|
$
|
3,456
|
|
|
$
|
7,765
|
|
|
$
|
6,893
|
|
Gross realized loss on sale of non-agency securities
|
|
(194
|
)
|
|
(305
|
)
|
|
(5,756
|
)
|
|
(496
|
)
|
Realized gain on non-agency securities, net
|
|
$
|
3,644
|
|
|
$
|
3,151
|
|
|
$
|
2,009
|
|
|
$
|
6,397
|
|
Pledged Assets
Non-agency securities with a fair value of
$1.1 billion
and
$1.4 billion
were pledged as collateral under financing arrangements as of
June 30, 2016 and December 31, 2015
, respectively, none of which were due on demand or mature overnight.
The following table summarizes our non-agency securities pledged as collateral under repurchase agreements and FHLB advances, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Remaining Maturity
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
|
Fair Value
|
|
Amortized
Cost
|
|
Accrued Interest
|
30 days or less
|
|
$
|
969,265
|
|
|
$
|
954,772
|
|
|
$
|
1,324
|
|
|
$
|
1,067,283
|
|
|
$
|
1,056,492
|
|
|
$
|
1,669
|
|
31 - 59 days
|
|
67,797
|
|
|
64,139
|
|
|
55
|
|
|
200,120
|
|
|
196,500
|
|
|
217
|
|
60 - 90 days
|
|
63,051
|
|
|
62,851
|
|
|
92
|
|
|
168,528
|
|
|
166,695
|
|
|
361
|
|
Greater than 90 days
|
|
1,440
|
|
|
1,483
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,101,553
|
|
|
$
|
1,083,245
|
|
|
$
|
1,473
|
|
|
$
|
1,435,931
|
|
|
$
|
1,419,687
|
|
|
$
|
2,247
|
|
As of
June 30, 2016 and December 31, 2015
, none of our repurchase agreement borrowings and FHLB advances backed by non-agency securities were due on demand or mature overnight.
Note 6. Investments in Real Property
Investment Activity
During May 2016, our wholly owned subsidiary, Capital Healthcare Investments, LLC ("CHI"), invested in a portfolio of five skilled nursing facilities with 642 beds located in Texas for total consideration of
$48 million
. These facilities have been leased to an operator pursuant to a triple net lease for a term of
15 years
with two 5-year extensions and a lease escalation of
2.25%
per annum.
During June 2016, CHI and Discovery Senior Living entered into a joint venture to acquire an assisted living community comprised of 94 units in Louisiana for total consideration of
$22 million
. The joint venture was structured in a manner intended to comply with the REIT Income Diversification and Empowerment Act (“RIDEA”), with Discovery Senior Living owning a
5%
noncontrolling interest. Discovery Senior Living, which has operated similar communities, manages the community under a long-term management agreement, which is cancellable under certain conditions.
Under RIDEA, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent
contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” A “qualified health care property” includes real property and any personal property that is, or is necessary or incidental to the use of, a hospital, nursing facility, assisted living facility, congregate care facility, qualified continuing care facility, or other licensed facility which extends medical or nursing or ancillary services to patients. Resident level rents and related operating expenses are subject to federal and state income taxes as the operations of such facilities are included in a TRS.
The total purchase price for all properties acquired has been allocated to tangible and intangible assets, liabilities and noncontrolling interests based upon their respective fair values in accordance with our accounting policies. As of
June 30, 2016
, all purchase price allocations are preliminary and may be subject to change. The following provides our preliminary purchase price allocations for real property investment activity during
the six months ended June 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
Buildings and improvements
|
|
$
|
56,305
|
|
Land
|
|
4,383
|
|
Furniture, fixtures and equipment
|
|
3,837
|
|
Goodwill
|
|
5,840
|
|
Total assets acquired
|
|
$
|
70,365
|
|
Notes Payable
In May 2016, a wholly-owned subsidiary of CHI entered into a loan agreement with a
two-year term
(with the option to extend for two additional terms of twelve months each) secured by a portfolio of five skilled nursing facilities in Texas. The note payable has a principal amount of
$33.6 million
and an interest rate of LIBOR plus
4.25%
.
In June 2016, a wholly-owned subsidiary of the joint venture between CHI and Discovery Senior Living entered into a loan agreement with a
ten-year term
(with the first three years interest only). The note payable has a principal amount of
$16.7 million
and an interest rate of
4.58%
.
The following is a summary of our secured debt principal activity for the six months ended June 30, 2016 (dollars in thousands):
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
Beginning balance
|
|
$
|
—
|
|
Debt issued
|
|
50,250
|
|
Deferred financing costs, net of amortization
|
|
(920
|
)
|
Principal repayments
|
|
(30
|
)
|
Ending balance
|
|
$
|
49,300
|
|
Income from Investments in Real Property
The following table presents the components of net income from our real property investments for
the three and six months ended June 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
For the Three and Six Months Ended
June 30, 2016
|
Lease income
|
|
$
|
666
|
|
Rental income
|
|
248
|
|
Healthcare real estate income
|
|
914
|
|
|
|
|
Interest expense
|
|
294
|
|
Depreciation
|
|
211
|
|
Acquisition costs
|
|
538
|
|
Tenant expenses
|
|
60
|
|
Healthcare real estate expense
|
|
1,103
|
|
Net healthcare loss
|
|
$
|
(189
|
)
|
Acquisition costs primarily represent costs incurred with property acquisitions, including due diligence costs and fees for legal and valuation services.
For the year ended December 31, 2015, the pro forma healthcare real estate income and net healthcare income inclusive of real property investments would have been approximately
$9 million
and
$2 million
, respectively.
At
June 30, 2016
, future minimum lease payments receivable are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
June 30, 2016
|
2016
|
|
$
|
2,262
|
|
2017
|
|
4,601
|
|
2018
|
|
4,705
|
|
2019
|
|
4,811
|
|
2020
|
|
4,919
|
|
Thereafter
|
|
55,705
|
|
Total
|
|
$
|
77,003
|
|
Note 7. Repurchase Agreements and Other Financing Arrangements
We pledge certain of our securities as collateral under repurchase and other financing arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of
June 30, 2016 and December 31, 2015
, we have met all margin call requirements and had no agency or non-agency repurchase agreements with original overnight maturities. Repurchase agreements are carried at cost, which approximates fair value due to their short-term maturities or floating rate coupons.
As of
June 30, 2016 and December 31, 2015
, our borrowings under repurchase agreements had the following collateral characteristics (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
Collateral Type
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
Agency securities
|
|
$
|
2,455,231
|
|
|
0.78
|
%
|
|
209
|
|
$
|
2,728,065
|
|
|
0.60
|
%
|
|
243
|
Non-agency securities
|
|
826,952
|
|
|
1.97
|
%
|
|
23
|
|
936,650
|
|
|
1.86
|
%
|
|
27
|
U.S. Treasury securities
|
|
20,160
|
|
|
0.50
|
%
|
|
1
|
|
—
|
|
|
N/A
|
|
|
N/A
|
Total repurchase agreements
|
|
$
|
3,302,343
|
|
|
1.08
|
%
|
|
162
|
|
$
|
3,664,715
|
|
|
0.92
|
%
|
|
188
|
The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Weighted Average
|
|
|
|
Weighted Average
|
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
|
Borrowings
Outstanding
|
|
Interest Rate
|
|
Days
to Maturity
|
Agency and non-agency
|
|
|
|
|
|
|
|
|
|
|
|
|
≤ 1 month
|
|
$
|
2,094,392
|
|
|
1.13
|
%
|
|
13
|
|
$
|
2,045,776
|
|
|
0.97
|
%
|
|
15
|
> 1 to ≤ 2 months
|
|
106,990
|
|
|
1.31
|
%
|
|
43
|
|
504,348
|
|
|
1.01
|
%
|
|
42
|
> 2 to ≤ 3 months
|
|
384,628
|
|
|
0.93
|
%
|
|
82
|
|
363,365
|
|
|
0.90
|
%
|
|
78
|
> 3 to ≤ 6 months
|
|
174,012
|
|
|
0.84
|
%
|
|
140
|
|
—
|
|
|
N/A
|
|
|
N/A
|
> 6 to ≤ 9 months
|
|
7,161
|
|
|
0.87
|
%
|
|
230
|
|
100,000
|
|
|
0.78
|
%
|
|
259
|
> 9 to ≤ 12 months
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
136,226
|
|
|
0.77
|
%
|
|
334
|
> 12 months
|
|
515,000
|
|
|
1.03
|
%
|
|
858
|
|
515,000
|
|
|
0.72
|
%
|
|
1040
|
Total
|
|
3,282,183
|
|
|
1.08
|
%
|
|
162
|
|
3,664,715
|
|
|
0.92
|
%
|
|
188
|
U.S. Treasury
|
|
20,160
|
|
|
0.50
|
%
|
|
1
|
|
—
|
|
|
N/A
|
|
|
N/A
|
Total repurchase agreements
|
|
$
|
3,302,343
|
|
|
1.08
|
%
|
|
162
|
|
$
|
3,664,715
|
|
|
0.92
|
%
|
|
188
|
We had repurchase agreements with
32
and
31
financial institutions as of
June 30, 2016 and December 31, 2015
. In addition, less than
5%
of stockholders' equity was at risk due to collateral pledged in excess of borrowings under repurchase agreements with any one counterparty, with the top five counterparties representing less than
23%
of our stockholders' equity at risk as of
June 30, 2016
.
We had agency RMBS with fair values of
$2.7 billion
and
$2.9 billion
as of
June 30, 2016 and December 31, 2015
, respectively, and non-agency securities with fair values of
$1.1 billion
and
$1.2 billion
pledged as collateral against repurchase agreements as of
June 30, 2016 and December 31, 2015
, respectively.
Federal Home Loan Bank Advances
In April 2015, our wholly owned subsidiary Woodmont Insurance Co. LLC (“Woodmont”) was accepted for membership in the Federal Home Loan Bank (“FHLB”) of Des Moines. In January, 2016, the FHFA released its final rule on proposed changes to regulations concerning FHLB membership criteria, requiring the termination of Woodmont's FHLB membership in February 2017 and repayment of all FHLB advances at the earlier of their contractual maturity dates or February 2017. We do not expect this development to have a material impact on our ability to finance our investment activities.
As of
June 30, 2016
, Woodmont had
$273.7 million
in outstanding secured advances, with a weighted average borrowing rate of
0.56%
, a weighted average term to maturity of
0.6
years, floating interest rate resets and a one month cancellation feature. These advances were collateralized by
$290.2 million
in agency securities as of
June 30, 2016
.
Note 8. Derivatives and Other Securities
In connection with our risk management strategy, we hedge a portion of our exposure to market risks, including interest rate risk, prepayment risk and credit risk, by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or write put or call options on TBA securities or we may invest in other types of derivative securities, including synthetic total return swaps and credit default swaps. Our risk management strategy attempts to manage the overall risk of the portfolio and reduce fluctuations in book value. We do not use derivative or other hedging instruments for speculative purposes. Derivatives have not been designated as hedging instruments. We do not offset our derivatives and related cash collateral with the same counterparties under any master netting arrangements. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 3.
The table below presents the balance sheet location and fair value information for our derivatives outstanding as of
June 30, 2016 and December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
3,152
|
|
Interest rate swaptions
|
|
588
|
|
|
1,961
|
|
TBA securities
|
|
8,569
|
|
|
1,958
|
|
Interest only swaps
|
|
467
|
|
|
—
|
|
U.S. Treasury futures
|
|
—
|
|
|
1,080
|
|
Derivative assets, at fair value
|
|
$
|
9,624
|
|
|
$
|
8,151
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
71,291
|
|
|
$
|
55,651
|
|
TBA securities
|
|
751
|
|
|
1,151
|
|
Credit default swaps
|
|
3,085
|
|
|
1,972
|
|
Interest only swaps
|
|
—
|
|
|
76
|
|
U.S. Treasury futures
|
|
8,624
|
|
|
—
|
|
Derivative liabilities, at fair value
|
|
$
|
83,751
|
|
|
$
|
58,850
|
|
The following tables summarize the effect of our outstanding derivatives and other securities on our consolidated statements of operations during
the three and six months ended June 30, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Loss on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Loss on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
Interest rate swaps
|
|
$
|
(2,531
|
)
|
$
|
(14,978
|
)
|
$
|
1,690
|
|
|
$
|
(4,433
|
)
|
$
|
(21,749
|
)
|
$
|
50,282
|
|
Interest rate swaptions
|
|
—
|
|
(1,307
|
)
|
898
|
|
|
—
|
|
—
|
|
943
|
|
TBA securities
|
|
—
|
|
4,962
|
|
4,924
|
|
|
—
|
|
(2,936
|
)
|
(9,290
|
)
|
U.S. Treasury securities
|
|
—
|
|
3
|
|
435
|
|
|
—
|
|
(6,807
|
)
|
(3,393
|
)
|
U.S. Treasury futures
|
|
—
|
|
2,402
|
|
(8,617
|
)
|
|
—
|
|
(563
|
)
|
3,679
|
|
Short sales of U.S. Treasuries
|
|
—
|
|
(2,981
|
)
|
(996
|
)
|
|
—
|
|
97
|
|
613
|
|
Agency mortgage REIT equity investments
|
|
—
|
|
1,396
|
|
(1,146
|
)
|
|
—
|
|
—
|
|
—
|
|
Mortgage options
|
|
—
|
|
(10
|
)
|
(15
|
)
|
|
—
|
|
22
|
|
(353
|
)
|
Interest only swaps
|
|
—
|
|
661
|
|
53
|
|
|
—
|
|
(930
|
)
|
(739
|
)
|
Credit default swaps
|
|
—
|
|
(9
|
)
|
(516
|
)
|
|
—
|
|
325
|
|
(74
|
)
|
Credit default option
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
340
|
|
FHLB stock
|
|
—
|
|
137
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Total
|
|
$
|
(2,531
|
)
|
$
|
(9,724
|
)
|
$
|
(3,290
|
)
|
|
$
|
(4,433
|
)
|
$
|
(32,541
|
)
|
$
|
42,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Loss on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
|
Realized Loss on Periodic Settlements of Interest Rate Swaps, net
|
Realized Loss on Other Derivatives and Securities, net
|
Unrealized Gain (Loss) on Other Derivatives and Securities, net
|
Interest rate swaps
|
|
$
|
(6,361
|
)
|
$
|
(38,350
|
)
|
$
|
(20,641
|
)
|
|
$
|
(8,744
|
)
|
$
|
(29,574
|
)
|
$
|
7,176
|
|
Interest rate swaptions
|
|
—
|
|
(1,307
|
)
|
(66
|
)
|
|
—
|
|
(520
|
)
|
(334
|
)
|
TBA securities
|
|
—
|
|
8,249
|
|
7,011
|
|
|
—
|
|
13,500
|
|
(16,473
|
)
|
U.S. Treasury securities
|
|
—
|
|
4,452
|
|
435
|
|
|
—
|
|
9,094
|
|
(738
|
)
|
U.S. Treasury futures
|
|
—
|
|
(9,723
|
)
|
(9,704
|
)
|
|
—
|
|
(2,778
|
)
|
1,746
|
|
Short sales of U.S. Treasuries
|
|
—
|
|
(12,473
|
)
|
(1,729
|
)
|
|
—
|
|
(5,084
|
)
|
934
|
|
Agency mortgage REIT equity investments
|
|
—
|
|
1,640
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Mortgage options
|
|
—
|
|
(10
|
)
|
—
|
|
|
—
|
|
22
|
|
—
|
|
Interest only swaps
|
|
—
|
|
1,420
|
|
543
|
|
|
—
|
|
(284
|
)
|
(311
|
)
|
Credit default swaps
|
|
—
|
|
(495
|
)
|
(1,419
|
)
|
|
—
|
|
325
|
|
(74
|
)
|
Credit default option
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
340
|
|
FHLB stock
|
|
—
|
|
301
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Total
|
|
$
|
(6,361
|
)
|
$
|
(46,296
|
)
|
$
|
(25,570
|
)
|
|
$
|
(8,744
|
)
|
$
|
(15,299
|
)
|
$
|
(7,734
|
)
|
The following tables summarize changes in notional amounts for our outstanding derivatives and other securities for
the six months ended June 30, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
Notional
Amount
|
|
Additions/ Long Positions
|
|
Expirations/
Terminations/ Short Positions
|
|
June 30, 2016
Notional
Amount
|
Interest rate swaps
|
$
|
2,290,000
|
|
|
660,000
|
|
|
(750,000
|
)
|
|
$
|
2,200,000
|
|
Interest rate swaptions
|
$
|
250,000
|
|
|
—
|
|
|
(100,000
|
)
|
|
$
|
150,000
|
|
TBA securities
|
$
|
59,878
|
|
|
8,003,859
|
|
|
(7,776,861
|
)
|
|
$
|
286,876
|
|
U.S. Treasuries
|
$
|
—
|
|
|
285,000
|
|
|
(252,000
|
)
|
|
$
|
33,000
|
|
U.S. Treasury futures
|
$
|
(350,000
|
)
|
|
700,000
|
|
|
(650,000
|
)
|
|
$
|
(300,000
|
)
|
Short sales of U.S. Treasuries
|
$
|
(269,000
|
)
|
|
676,000
|
|
|
(457,000
|
)
|
|
$
|
(50,000
|
)
|
Mortgage options
|
$
|
—
|
|
|
50,000
|
|
|
(50,000
|
)
|
|
$
|
—
|
|
Interest only swaps
|
$
|
40,128
|
|
|
—
|
|
|
(3,426
|
)
|
|
$
|
36,702
|
|
Credit default swaps
|
$
|
49,500
|
|
|
—
|
|
|
(500
|
)
|
|
$
|
49,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
Notional
Amount
|
|
Additions/ Long Positions
|
|
Expirations/
Terminations/ Short Positions
|
|
June 30, 2015
Notional
Amount
|
Interest rate swaps
|
$
|
4,015,000
|
|
|
—
|
|
|
(1,225,000
|
)
|
|
$
|
2,790,000
|
|
Interest rate swaptions
|
$
|
550,000
|
|
|
—
|
|
|
(100,000
|
)
|
|
$
|
450,000
|
|
TBA securities
|
$
|
296,172
|
|
|
19,145,070
|
|
|
(19,498,669
|
)
|
|
$
|
(57,427
|
)
|
U.S. Treasuries
|
$
|
756,500
|
|
|
2,430,250
|
|
|
(2,906,750
|
)
|
|
$
|
280,000
|
|
U.S. Treasury futures
|
$
|
(150,000
|
)
|
|
300,000
|
|
|
(300,000
|
)
|
|
$
|
(150,000
|
)
|
Short sales of U.S. Treasuries
|
$
|
(228,500
|
)
|
|
679,500
|
|
|
(476,000
|
)
|
|
$
|
(25,000
|
)
|
Mortgage options
|
$
|
—
|
|
|
50,000
|
|
|
(50,000
|
)
|
|
$
|
—
|
|
Interest only swaps
|
$
|
48,739
|
|
|
—
|
|
|
(4,975
|
)
|
|
$
|
43,764
|
|
Credit default swaps
|
$
|
—
|
|
|
50,000
|
|
|
(500
|
)
|
|
$
|
49,500
|
|
Credit default options
|
$
|
—
|
|
|
50,000
|
|
|
(500
|
)
|
|
$
|
49,500
|
|
Interest Rate Swap Agreements
As of
June 30, 2016 and December 31, 2015
, our derivative portfolio included interest rate swaps, which are used to manage the interest rate risk created by our use of short-term and floating rate financing. Under our interest rate swaps, we typically pay a fixed rate and receive a floating rate based on LIBOR with terms usually ranging up to 15 years. As of
June 30, 2016 and December 31, 2015
, we had interest rate swap agreements summarized in the tables below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Interest Rate Swaps
|
|
Balance Sheet Location
|
|
Notional Amount
|
|
Fair Value
|
|
Notional Amount
|
|
Fair Value
|
Interest rate swap assets
|
|
Derivative assets, at fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
725,000
|
|
|
$
|
3,152
|
|
Interest rate swap liabilities
|
|
Derivative liabilities, at fair value
|
|
2,200,000
|
|
|
(71,291
|
)
|
|
1,565,000
|
|
|
(55,651
|
)
|
|
|
|
|
$
|
2,200,000
|
|
|
$
|
(71,291
|
)
|
|
$
|
2,290,000
|
|
|
$
|
(52,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Notional
Amount
|
|
Fair Value
|
|
Weighted Average
|
Current Maturity Date for Interest Rate Swaps
(1)
|
|
|
|
Fixed
Pay Rate (2)
|
|
Receive
Rate
(3)
|
|
Maturity
(Years)
|
≤ 3 years
|
|
$
|
1,315,000
|
|
|
$
|
(9,294
|
)
|
|
1.08
|
%
|
|
0.64
|
%
|
|
1.8
|
> 3 to ≤ 5 years
|
|
175,000
|
|
|
(3,098
|
)
|
|
1.31
|
%
|
|
0.64
|
%
|
|
3.9
|
> 5 to ≤ 7 years
|
|
710,000
|
|
|
(58,899
|
)
|
|
2.72
|
%
|
|
0.64
|
%
|
|
5.7
|
Total
|
|
$
|
2,200,000
|
|
|
$
|
(71,291
|
)
|
|
1.63
|
%
|
|
0.64
|
%
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Notional
Amount
|
|
Fair Value
|
|
Weighted Average
|
Current Maturity Date for Interest Rate Swaps
(4)
|
|
|
|
Fixed
Pay Rate
(2)
|
|
Receive
Rate
(3)
|
|
Maturity
(Years)
|
≤ 3 years
|
|
$
|
865,000
|
|
|
$
|
(268
|
)
|
|
1.09
|
%
|
|
0.41
|
%
|
|
1.8
|
> 3 to ≤ 5 years
|
|
550,000
|
|
|
(5,054
|
)
|
|
1.72
|
%
|
|
0.42
|
%
|
|
3.4
|
> 5 to ≤ 7 years
|
|
625,000
|
|
|
(35,866
|
)
|
|
3.16
|
%
|
|
0.46
|
%
|
|
5.9
|
> 7 years
|
|
250,000
|
|
|
(11,311
|
)
|
|
2.71
|
%
|
|
0.60
|
%
|
|
7.9
|
Total
|
|
$
|
2,290,000
|
|
|
$
|
(52,499
|
)
|
|
1.98
|
%
|
|
0.43
|
%
|
|
4.0
|
————————
|
|
(1)
|
Includes swaps with an aggregate notional of
$0.5 billion
with deferred start dates averaging
0.5 years
from
June 30, 2016
.
|
|
|
(2)
|
Excluding forward starting swaps, the weighted average pay rate was
1.17%
and
1.36%
as of
June 30, 2016 and December 31, 2015
, respectively.
|
|
|
(3)
|
Weighted average receive rate excludes impact of forward starting interest rate swaps.
|
|
|
(4)
|
Includes swaps with an aggregate notional of
$0.7 billion
with deferred start dates averaging
0.6 years
from
December 31, 2015
.
|
Interest rate swaps with a liability fair value of
$(58.9) million
and notional amount of
$1.3 billion
were centrally cleared on a registered exchange as of
June 30, 2016
.
Interest Rate Swaption Agreements
Our interest rate swaption agreements provide us the option to enter into interest rate swap agreements in the future where we would pay a fixed rate and receive LIBOR. The following tables present certain information about our interest rate swaption agreements as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Option
|
|
Underlying Swap
|
Current Option Expiration Date
|
|
Cost
|
|
Fair Value
|
|
Weighted Average Years to Expiration
|
|
Notional Amount
|
|
Pay Rate
|
|
Weighted Average Term (Years)
|
|
|
|
|
|
|
≤ 3 months
|
|
$
|
3,493
|
|
|
$
|
536
|
|
|
0.2
|
|
$
|
50,000
|
|
|
3.00
|
%
|
|
7.5
|
>12 to ≤ 24 months
|
|
2,735
|
|
|
52
|
|
|
1.4
|
|
100,000
|
|
|
3.21
|
%
|
|
5.0
|
Total / weighted average
|
|
$
|
6,228
|
|
|
$
|
588
|
|
|
1.0
|
|
$
|
150,000
|
|
|
3.14
|
%
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Option
|
|
Underlying Swap
|
Current Option Expiration Date
|
|
Cost
|
|
Fair Value
|
|
Weighted Average Years to Expiration
|
|
Notional Amount
|
|
Pay Rate
|
|
Weighted Average Term (Years)
|
|
|
|
|
|
|
≤ 3 months
|
|
$
|
3,493
|
|
|
$
|
1,307
|
|
|
0.2
|
|
$
|
50,000
|
|
|
3.00
|
%
|
|
8.0
|
> 3 to ≤ 12 months
|
|
1,308
|
|
|
—
|
|
|
0.3
|
|
100,000
|
|
|
4.13
|
%
|
|
7.0
|
>12 to ≤ 24 months
|
|
2,735
|
|
|
654
|
|
|
1.9
|
|
100,000
|
|
|
3.21
|
%
|
|
5.0
|
Total / weighted average
|
|
$
|
7,536
|
|
|
$
|
1,961
|
|
|
0.9
|
|
$
|
250,000
|
|
|
3.54
|
%
|
|
6.4
|
TBA Securities
As of
June 30, 2016 and December 31, 2015
, we had contracts to purchase (“long position”) and sell (“short position”) TBA securities on a forward basis, presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Purchase and Sale Contracts for TBA Securities
|
|
Notional
Amount
(1)
|
|
Fair
Value
(2)
|
|
Notional
Amount
(1)
|
|
Fair
Value
(2)
|
TBA assets
|
|
|
|
|
|
|
|
|
Purchase of TBA securities
|
|
$
|
715,046
|
|
|
$
|
6,631
|
|
|
$
|
267,300
|
|
|
$
|
1,321
|
|
Sale of TBA securities
|
|
(102,516
|
)
|
|
1,938
|
|
|
(305,586
|
)
|
|
637
|
|
Total TBA assets
|
|
612,530
|
|
|
8,569
|
|
|
(38,286
|
)
|
|
1,958
|
|
|
|
|
|
|
|
|
|
|
TBA liabilities
|
|
|
|
|
|
|
|
|
Purchase of TBA securities
|
|
11,346
|
|
|
(16
|
)
|
|
220,157
|
|
|
(581
|
)
|
Sale of TBA securities
|
|
(337,000
|
)
|
|
(735
|
)
|
|
(121,993
|
)
|
|
(570
|
)
|
Total TBA liabilities
|
|
(325,654
|
)
|
|
(751
|
)
|
|
98,164
|
|
|
(1,151
|
)
|
Total net TBA
|
|
$
|
286,876
|
|
|
$
|
7,818
|
|
|
$
|
59,878
|
|
|
$
|
807
|
|
————————
|
|
(1)
|
Notional amount represents the par value or principal balance of the underlying agency security.
|
|
|
(2)
|
Fair value represents the current market value of the agency RMBS underlying the TBA contract as of period end, less the forward price to be paid for the underlying agency RMBS.
|
U.S. Treasury Securities and Futures
We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We had U.S. Treasury securities with a fair value of
$33.5 million
and a face amount of
$33.0 million
as of
June 30, 2016
, which is presented as U.S. Treasury securities, at fair value on the consolidated balance sheets. In addition, we had short positions in U.S. Treasury futures with a notional amount of
$(300.0) million
and
$(350.0) million
as of
June 30, 2016 and December 31, 2015
, respectively. These short U.S. Treasury futures had fair values of
$(8.6) million
and
$1.1 million
as of
June 30, 2016 and December 31, 2015
, respectively, and are presented in derivative assets (liabilities), at fair value on the consolidated balance sheets.
We had obligations to return U.S. Treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions with a fair value of
$51.1 million
and
$266.0 million
as of
June 30, 2016 and December 31, 2015
, respectively. The borrowed securities were collateralized by cash payments of
$51.2 million
and
$281.6 million
as of
June 30, 2016 and December 31, 2015
, respectively, which are presented as receivables under reverse repurchase agreements on the consolidated balance sheets. All changes in fair value of long and short U.S. Treasury securities and futures are recorded in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.
Credit Default Swaps
We hold credit default swaps to mitigate a portion of the potential impact of credit risk on the fair values of our CRT non-agency securities. As of
June 30, 2016
, we had credit default swaps with a notional amount of
$49.0 million
and a liability fair value of
$3.1 million
. Credit default swaps are presented in derivative liabilities, at fair value on the consolidated balance sheets.
Credit Risk-Related Contingent Features
The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, both we and our counterparties may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments is included in restricted cash and cash equivalents on our consolidated balance sheets.
Each of our ISDA Master Agreements contains provisions pursuant to which we are required to fully collateralize our obligations under our interest rate swap agreements if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within our ISDA Master Agreements. We are also required to post initial collateral upon execution of certain of our swap transactions. If we breach any of these provisions, we will be required to settle our obligations under the agreements at their termination values, which approximates fair value.
Further, each of our ISDA Master Agreements also contains a cross default provision under which a default under certain of our other indebtedness in excess of a certain threshold causes an event of default under the agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements at their termination values if we fail to maintain either our REIT status or certain minimum equity thresholds, or comply with limits on our leverage above certain specified levels. As of
June 30, 2016
, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to our consolidated financial statements.
Concerning our non-centrally cleared interest rate swap and swaption agreements, we did not have counterparty credit risk with any single counterparty in excess of
1%
of our equity, as of
June 30, 2016
.
In the case of centrally cleared interest rate swap contracts, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract; however, the risk is considered minimal due to initial and daily exchange of mark to market margin requirements and the clearinghouse guarantee fund and other resources that are available in the event of a clearing member default.
Note 9. Offsetting Assets and Liabilities
Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets.
The following tables present information about our assets and liabilities that are subject to such agreements and can potentially be offset on our consolidated balance sheets as of
June 30, 2016 and December 31, 2015
(in thousands):
Offsetting of Financial Assets and Derivative Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Received
(1)
|
|
Net Amount
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions
(2)(3)
|
|
$
|
588
|
|
|
$
|
—
|
|
|
$
|
588
|
|
|
$
|
(536
|
)
|
|
$
|
(52
|
)
|
|
$
|
—
|
|
Receivable under reverse repurchase agreements
|
|
51,156
|
|
|
—
|
|
|
51,156
|
|
|
(51,156
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
51,744
|
|
|
$
|
—
|
|
|
$
|
51,744
|
|
|
$
|
(51,692
|
)
|
|
$
|
(52
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions
(2)
|
|
$
|
5,113
|
|
|
$
|
—
|
|
|
$
|
5,113
|
|
|
$
|
(2,789
|
)
|
|
$
|
(959
|
)
|
|
$
|
1,365
|
|
Receivable under reverse repurchase agreements
|
|
281,618
|
|
|
—
|
|
|
281,618
|
|
|
(258,597
|
)
|
|
(23,021
|
)
|
|
—
|
|
Total
|
|
$
|
286,731
|
|
|
$
|
—
|
|
|
$
|
286,731
|
|
|
$
|
(261,386
|
)
|
|
$
|
(23,980
|
)
|
|
$
|
1,365
|
|
Offsetting of Financial Liabilities and Derivative Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Consolidated Balance Sheets
|
|
Net Amounts Presented
in the Consolidated Balance Sheets
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets
|
|
|
|
|
|
|
|
Financial Instruments
|
|
Collateral Pledged
(1)
|
|
Net Amount
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
(2)(3)
|
|
$
|
71,291
|
|
|
$
|
—
|
|
|
$
|
71,291
|
|
|
$
|
(536
|
)
|
|
$
|
(70,755
|
)
|
|
$
|
—
|
|
Repurchase agreements
|
|
3,302,343
|
|
|
—
|
|
|
3,302,343
|
|
|
(51,156
|
)
|
|
(3,251,187
|
)
|
|
—
|
|
FHLB advances
|
|
273,700
|
|
|
—
|
|
|
273,700
|
|
|
—
|
|
|
(273,700
|
)
|
|
—
|
|
Total
|
|
$
|
3,647,334
|
|
|
$
|
—
|
|
|
$
|
3,647,334
|
|
|
$
|
(51,692
|
)
|
|
$
|
(3,595,642
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
(2)
|
|
$
|
55,651
|
|
|
$
|
—
|
|
|
$
|
55,651
|
|
|
$
|
(2,789
|
)
|
|
$
|
(52,862
|
)
|
|
$
|
—
|
|
Repurchase agreements
|
|
3,664,715
|
|
|
—
|
|
|
3,664,715
|
|
|
(258,597
|
)
|
|
(3,406,118
|
)
|
|
—
|
|
FHLB advances
|
|
442,900
|
|
|
—
|
|
|
442,900
|
|
|
—
|
|
|
(442,900
|
)
|
|
—
|
|
Total
|
|
$
|
4,163,266
|
|
|
$
|
—
|
|
|
$
|
4,163,266
|
|
|
$
|
(261,386
|
)
|
|
$
|
(3,901,880
|
)
|
|
$
|
—
|
|
————————
|
|
(1)
|
Includes cash and securities received / pledged as collateral, at fair value. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero on a counterparty by counterparty basis, as applicable. Refer to Notes 4 and 5 for additional information regarding assets pledged as collateral.
|
|
|
(2)
|
Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 8 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.
|
|
|
(3)
|
Interest rate swaps and swaptions are subject to master netting arrangements which could reduce our maximum amount of loss due to credit risk by
$0.5 million
as of
June 30, 2016
.
|
Note 10. Fair Value Measurements
We have elected the option to account for all of our financial assets, including RMBS, at fair value, with changes in fair value reflected in income during the period in which they occur. We have determined that this presentation most appropriately represents our financial results and position. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the assumptions market participants would use when pricing an asset or liability.
We determine the fair value of our agency and non-agency securities, including securities held as collateral, based upon fair value estimates obtained from multiple third-party pricing services and dealers. In determining fair value, third-party pricing sources use various valuation approaches, including market and income approaches. Factors used by third-party sources in estimating the fair value of an instrument may include observable inputs such as recent trading activity, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third-party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, default and loss severity, especially when estimating fair values for securities with lower levels of recent trading activity. When possible, we make inquiries of third-party pricing sources to understand their use of significant inputs and assumptions.
We review the various third-party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third-party estimates for each position, comparison to recent trade activity for similar securities, and our Manager's review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third-party pricing sources, we will exclude third-party prices for securities from our determination of fair value if we determine (based on our validation procedures and our Manager's market knowledge and expertise) that the price is significantly different than observable market data would indicate and we cannot obtain a satisfactory understanding from the third party source as to the significant inputs used to determine the price.
We determine the fair value of our MSR based upon third party estimates, corroborated by internally developed discounted cash flow models that utilize observable market-based inputs and include substantial unobservable market data inputs (including prepayment speeds, delinquency levels and discount rates).
We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. We use the results of the validation procedures described above as part of our determination of the appropriate fair value measurement hierarchy classification. The three levels of hierarchy are defined as follows:
|
|
•
|
Level 1 Inputs - Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.
|
|
|
•
|
Level 2 Inputs - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
|
|
|
•
|
Level 3 Inputs - Significant unobservable market inputs that are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities.
|
The following tables present our financial instruments carried at fair value as of
June 30, 2016 and December 31, 2015
, on the consolidated balance sheets by the valuation hierarchy, as described above (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Agency securities
|
|
$
|
—
|
|
|
$
|
3,460,643
|
|
|
$
|
—
|
|
|
$
|
3,460,643
|
|
Non-agency securities
|
|
—
|
|
|
1,261,640
|
|
|
—
|
|
|
1,261,640
|
|
U.S. Treasury securities
|
|
33,525
|
|
|
—
|
|
|
—
|
|
|
33,525
|
|
Derivative assets
|
|
—
|
|
|
9,624
|
|
|
—
|
|
|
9,624
|
|
MSR assets
|
|
—
|
|
|
—
|
|
|
53,321
|
|
|
53,321
|
|
Total
|
|
$
|
33,525
|
|
|
$
|
4,731,907
|
|
|
$
|
53,321
|
|
|
$
|
4,818,753
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
83,751
|
|
|
$
|
—
|
|
|
$
|
83,751
|
|
Obligation to return securities borrowed under reverse repurchase agreements
|
|
51,128
|
|
|
—
|
|
|
—
|
|
|
51,128
|
|
Total
|
|
$
|
51,128
|
|
|
$
|
83,751
|
|
|
$
|
—
|
|
|
$
|
134,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets
|
|
|
|
|
|
|
|
|
Agency securities
|
|
$
|
—
|
|
|
$
|
3,217,252
|
|
|
$
|
—
|
|
|
$
|
3,217,252
|
|
Non-agency securities
|
|
—
|
|
|
1,557,671
|
|
|
—
|
|
|
1,557,671
|
|
Derivative assets
|
|
—
|
|
|
8,151
|
|
|
—
|
|
|
8,151
|
|
MSR assets
|
|
—
|
|
|
—
|
|
|
83,647
|
|
|
83,647
|
|
Total
|
|
$
|
—
|
|
|
$
|
4,783,074
|
|
|
$
|
83,647
|
|
|
$
|
4,866,721
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
—
|
|
|
$
|
58,850
|
|
|
$
|
—
|
|
|
$
|
58,850
|
|
Obligation to return securities borrowed under reverse repurchase agreements
|
|
266,001
|
|
|
—
|
|
|
—
|
|
|
266,001
|
|
MSR financing liabilities
|
|
—
|
|
|
—
|
|
|
12,790
|
|
|
12,790
|
|
Total
|
|
$
|
266,001
|
|
|
$
|
58,850
|
|
|
$
|
12,790
|
|
|
$
|
337,641
|
|
Our agency and non-agency securities are valued using the various market data described above, which include inputs determined to be observable or whose significant value drivers are observable. Accordingly, our agency and non-agency securities are classified as Level 2 in the fair value hierarchy as of
June 30, 2016
.
For information regarding valuation of our derivative instruments, please refer to the discussion of derivative and other hedging instruments in Note 3. Our interest rate swaps and other derivatives are classified as Level 2 in the fair value hierarchy.
The fair value of our obligation to return securities borrowed under reverse repurchase agreements is based upon the value of the underlying borrowed U.S. Treasury securities as of the reporting date. Both U.S. Treasury securities and our
obligation to return borrowed U.S. Treasury securities are classified as Level 1 in the fair value hierarchy.
Excluded from the table above are financial instruments, including cash and cash equivalents, restricted cash and cash equivalents, receivables, payables, borrowings under repurchase agreements and FHLB advances, which are presented in our consolidated financial statements at cost, which is determined to approximate fair value, primarily due to the short duration of these instruments. The cost basis of repurchase agreement borrowings with initial terms of greater than one year is determined to approximate fair value, primarily as such agreements have floating rates based on an index plus or minus a fixed spread and the fixed spread is generally consistent with those demanded in the market. We estimate the fair value of these instruments using Level 2 inputs.
The following table presents a summary of the changes in fair value for Level 3 assets carried at fair value for
the six months ended June 30, 2016 and 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2016
|
|
|
MSR Under Secured Financing
(1)
|
|
Purchased MSR
(2)
|
|
Total MSR
|
Balance as of December 31, 2015
|
|
$
|
12,790
|
|
|
$
|
70,857
|
|
|
$
|
83,647
|
|
Losses included in net income:
|
|
|
|
|
|
|
Realized losses
|
|
—
|
|
|
(4,721
|
)
|
|
(4,721
|
)
|
Unrealized losses
|
|
—
|
|
|
(12,815
|
)
|
|
(12,815
|
)
|
Total net losses included in net income
|
|
—
|
|
|
(17,536
|
)
|
|
(17,536
|
)
|
Dispositions
|
|
(12,790
|
)
|
|
—
|
|
|
(12,790
|
)
|
Balance as of June 30, 2016
|
|
$
|
—
|
|
|
$
|
53,321
|
|
|
$
|
53,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2015
|
|
|
MSR Under Secured Financing
(1)
|
|
Purchased MSR
(2)
|
|
Total MSR
|
Balance as of December 31, 2014
|
|
$
|
14,003
|
|
|
$
|
79,637
|
|
|
$
|
93,640
|
|
Losses included in net income:
|
|
|
|
|
|
|
Realized losses
|
|
(1,014
|
)
|
|
(5,233
|
)
|
|
(6,247
|
)
|
Unrealized losses
|
|
1,583
|
|
|
1,669
|
|
|
3,252
|
|
Total net gains (losses) included in net income
|
|
569
|
|
|
(3,564
|
)
|
|
(2,995
|
)
|
Purchases, net of purchase price adjustments
|
|
—
|
|
|
1,054
|
|
|
1,054
|
|
Balance as of June 30, 2015
|
|
$
|
14,572
|
|
|
$
|
77,127
|
|
|
$
|
91,699
|
|
————————
|
|
(1)
|
Losses related to MSR under secured financing are offset in their entirety by gains associated with related MSR financing liabilities.
|
|
|
(2)
|
Realized losses on purchased MSR are included in servicing expense and unrealized gains (losses) on purchased MSR are included in unrealized gain (loss) on mortgage servicing rights on the consolidated statements of operations.
|
We use third-party pricing providers in the fair value measurement of our Level 3 MSR. We review the various third-party fair value estimates used to determine the fair value of our MSR and perform procedures to validate their reasonableness.
In reviewing the estimated fair values of our Level 3 MSR, we use internal models and estimates of prepayment and
delinquency rates on the loans underlying our MSR. The significant unobservable inputs used in estimating the fair value measurement of our Level 3 MSR assets and financing liabilities include assumptions for underlying loan constant prepayment rates and delinquency rates, as well as discount rates. A significant increase in any one of these individual inputs in isolation would likely result in a decrease in fair value measurement. Additionally, a change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of delinquency and a directionally opposite change in the assumption used for prepayment rates. Overall MSR market conditions could have a more significant impact on our Level 3 fair values than changes in any one unobservable input.
The following table presents the range of our estimates of loan constant voluntary prepayment rates and constant default rates, together with the discount rates used by third-party pricing providers in estimating the fair value of our Level 3 MSR as of
June 30, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
Unobservable Level 3 Input
|
|
Fair Value
|
|
Minimum
|
|
Weighted
Average
|
|
Maximum
|
Purchased MSR:
|
|
$
|
53,321
|
|
|
|
|
|
|
|
Constant prepayment rate
|
|
|
|
10.2%
|
|
11.2%
|
|
12.0%
|
Constant default rate
|
|
|
|
0.2%
|
|
0.3%
|
|
0.4%
|
Discount rate
|
|
|
|
8.3%
|
|
8.8%
|
|
9.3%
|
Note 11. Mortgage Servicing Rights
Our subsidiary, Residential Credit Solutions, Inc. (“RCS”), is a licensed mortgage servicer based in Fort Worth, Texas that has approvals from Fannie Mae and Freddie Mac to hold and manage MSR and residential mortgage loans. RCS holds
$53.3 million
of MSR representing approximately
29 thousand
underlying loans, with a combined unpaid principal balance of approximately
$5.9 billion
, as of
June 30, 2016
. We have elected to account for MSR at estimated fair value, with changes in fair value reported in net income. The following table summarizes activity related to MSR accounted for as purchases during
the six months ended June 30, 2016 and 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
Beginning balance
|
|
$
|
70,857
|
|
|
$
|
79,637
|
|
Additions from purchases of MSR
|
|
—
|
|
|
1,054
|
|
Changes in fair value due to:
|
|
|
|
|
Changes in valuation inputs or assumptions used in valuation model
|
|
(12,815
|
)
|
|
1,669
|
|
Other changes in fair value
(1)
|
|
(4,721
|
)
|
|
(5,233
|
)
|
Ending balance
|
|
$
|
53,321
|
|
|
$
|
77,127
|
|
————————
|
|
(1)
|
Other changes in fair value primarily represents changes due to the realization of cash flows.
|
The following table presents the components of net servicing loss for
the three and six months ended June 30, 2016 and 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Servicing fee income
|
|
$
|
4,039
|
|
|
$
|
7,786
|
|
|
$
|
10,453
|
|
|
$
|
15,734
|
|
Incentive, ancillary and other income
|
|
127
|
|
|
3,602
|
|
|
3,362
|
|
|
7,458
|
|
Servicing income
|
|
4,166
|
|
|
11,388
|
|
|
13,815
|
|
|
23,192
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefit costs
|
|
2,558
|
|
|
7,622
|
|
|
14,167
|
|
|
15,019
|
|
Facility costs
|
|
985
|
|
|
2,592
|
|
|
2,126
|
|
|
5,420
|
|
Realization of cash flows from MSR
|
|
2,821
|
|
|
2,820
|
|
|
4,721
|
|
|
5,233
|
|
Other servicing costs
|
|
3,585
|
|
|
2,465
|
|
|
6,840
|
|
|
5,897
|
|
Servicing expense
|
|
9,949
|
|
|
15,499
|
|
|
27,854
|
|
|
31,569
|
|
|
|
|
|
|
|
|
|
|
Net servicing loss
|
|
$
|
(5,783
|
)
|
|
$
|
(4,111
|
)
|
|
$
|
(14,039
|
)
|
|
$
|
(8,377
|
)
|
RCS Assets Sale
In late 2015, we entered into a definitive agreement to sell substantially all of RCS' subservicing assets and operations to Ditech Financial (“Ditech”), a subsidiary of Walter Investment Management Corp. In connection with the transaction, Ditech agreed to acquire certain assets of the RCS servicing platform, hire a number of core RCS employees and assume certain existing residential mortgage loan subservicing agreements. The transaction closed on January 28, 2016, and the servicing transfers were completed during the second quarter. Since the closing of the transaction and the completion of the servicing transfers, RCS has operated as a servicing oversight platform with respect to its owned MSR, which are subserviced by Ditech.
Risk Mitigation Activities
The Company’s acquisitions of MSR expose us to certain risks, including interest rate risk and representation and warranty risk. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. Our primary method of managing the prepayment risk associated with our MSR portfolio is asset selection, both in respect of products and the originators of the underlying loans. Representation and warranty risk refers to the representations and warranties we make (or are deemed to have made) to the applicable investor (including, without limitation, the GSEs) regarding, among other things, the origination and servicing of mortgage loans with respect to which we have acquired MSR. We mitigate representation and warranty risk through our due diligence in connection with MSR acquisitions, including counterparty reviews and loan file reviews, as well as negotiated contractual protections from our MSR transaction counterparties with respect to origination and prior servicing.
Note 12. Other Assets
The following table summarizes our other assets as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Servicing advances
|
|
$
|
8,383
|
|
|
$
|
21,619
|
|
FHLB membership stock
|
|
11,489
|
|
|
17,726
|
|
Prepaid expenses
|
|
1,553
|
|
|
2,272
|
|
Accounts receivable
|
|
4,807
|
|
|
4,606
|
|
Intangible assets
(1)
|
|
10,840
|
|
|
5,000
|
|
Other
|
|
4,870
|
|
|
3,691
|
|
Total other assets
|
|
$
|
41,942
|
|
|
$
|
54,914
|
|
————————
|
|
(1)
|
Includes
$5.8 million
of goodwill related to healthcare real estate investments as of
June 30, 2016
.
|
Servicing Advances
We are required to fund cash advances in connection with our servicing operations. These servicing advances are reported within other assets on the consolidated balance sheets and represent advances for principal and interest, property taxes and insurance, as well as certain out-of-pocket expenses incurred by the Company in the performance of its servicing obligations. The decrease in servicing advances during the first half of 2016 was driven primarily by the sale of RCS assets discussed in Note 11.
Federal Home Loan Bank Membership Stock
As a condition of our membership in the FHLB of Des Moines, we are obligated to purchase membership stock based on the total assets of our wholly-owned captive insurance subsidiary and activity-based stock in the FHLB based upon the aggregate amount of advances. As of
June 30, 2016 and December 31, 2015
, we held
$11.5 million
and
$17.7 million
of membership and activity-based stock, respectively. FHLB stock is carried at cost, which equals par value, and can only be redeemed or sold at its par value, and only to the FHLB of Des Moines.
Note 13. Accounts Payable and Other Accrued Liabilities
The following table summarizes our accounts payable and other accrued liabilities as of
June 30, 2016 and December 31, 2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
Cash collateral held
|
|
$
|
2,586
|
|
|
$
|
1,126
|
|
Due to manager
|
|
1,351
|
|
|
1,674
|
|
Accrued interest
|
|
4,270
|
|
|
4,523
|
|
MSR financing liability, at fair value
(1)
|
|
—
|
|
|
12,790
|
|
Other accounts payable and accrued expenses
|
|
15,403
|
|
|
18,544
|
|
Total accounts payable and other accrued liabilities
|
|
$
|
23,610
|
|
|
$
|
38,657
|
|
——————
|
|
(1)
|
MSR financing liability represented obligations associated with MSR accounted for as financing arrangements, with estimated fair value changes reported in net income. RCS had no MSR accounted for as financing arrangements as of
June 30, 2016
.
|
Note 14. Stockholders’ Equity
Redeemable Preferred Stock
Pursuant to our charter, we are authorized to designate and issue up to
50.0 million
shares of preferred stock in one or more classes or series. Our Board of Directors has designated
2.3 million
shares as
8.125%
Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”). As of
June 30, 2016
, we had
47.8 million
of authorized but unissued shares of preferred stock. Shares of our Series A Preferred Stock are redeemable at
$25.00
per share plus accumulated and unpaid dividends (whether or not declared) exclusively at our option commencing on May 22, 2019, or earlier under certain circumstances intended to preserve our qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October. As of
June 30, 2016
, we had declared all required quarterly dividends on the Series A Preferred Stock.
Our Board of Directors may designate additional series of authorized preferred stock ranking junior to or in parity with the Series A Preferred Stock or designate additional shares of the Series A Preferred Stock and authorize the issuance of such shares.
Common Stock Repurchase Program
Our Board of Directors adopted a program that authorizes repurchases of our common stock up to
$300 million
. In October 2015, our Board of Directors extended its authorization through
December 31, 2016
. Shares of our common stock may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than our estimate of our current net asset value per common share. Generally, when we repurchase our common stock at a discount to our net asset value, the net asset value of our remaining shares of common stock outstanding increases. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.
We did not repurchase any shares of our common stock during
the three months ended June 30, 2016
and during
the six months ended June 30, 2016
, we repurchased approximately
2.0 million
shares of our common stock at an average repurchase price of
$13.21
per share, including expenses, totaling
$26.5 million
. As of
June 30, 2016
, we had
$55.1 million
available under current board authorization for repurchases of our common stock through December 31, 2016.
Long-Term Incentive Plan
We sponsor the American Capital Mortgage Investment Corp. Amended and Restated Equity Incentive Plan ("Incentive Plan" or "plan"), as amended March 4, 2016, to provide for the issuance of equity-based awards, including stock options, restricted stock, restricted stock units ("RSU") and unrestricted stock to our independent directors and certain members of RCS management. We issued
38,315
and
175,294
shares of common stock related to the vesting of RSU awards during
the three and six months ended June 30, 2016
, respectively.
Net Income per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. Any shares subject to performance conditions that would not be issuable at period end, if that were the end of the contingency period, have been excluded from diluted net income per common share.
The following summarizes the net income per common share for
the three and six months ended June 30, 2016 and 2015
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Weighted average common shares calculation:
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
45,777
|
|
|
51,179
|
|
|
46,214
|
|
|
51,172
|
|
Effect of stock based compensation
|
|
1
|
|
|
11
|
|
|
1
|
|
|
11
|
|
Diluted weighted average common shares outstanding
|
|
45,778
|
|
|
51,190
|
|
|
46,215
|
|
|
51,183
|
|
Net income (loss) available to common shareholders
|
|
$
|
39,015
|
|
|
$
|
(41,074
|
)
|
|
$
|
16,601
|
|
|
$
|
(11,128
|
)
|
Net income (loss) per common share — basic
|
|
$
|
0.85
|
|
|
$
|
(0.80
|
)
|
|
$
|
0.36
|
|
|
$
|
(0.22
|
)
|
Net income (loss) per common share — diluted
|
|
$
|
0.85
|
|
|
$
|
(0.80
|
)
|
|
$
|
0.36
|
|
|
$
|
(0.22
|
)
|