AG Mortgage Investment Trust(MITT) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, operations, equity, cash flows, and detailed notes Consolidated Balance Sheets The consolidated balance sheets show a significant increase in total assets and liabilities from December 2018 to September 2019 Total Assets, Liabilities, and Stockholders' Equity (in thousands) | Metric | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------------------------- | :-------------------------------- | :--------------------------------- | | Total Assets | $4,748,909 | $3,548,926 | | Total Liabilities | $3,914,736 | $2,892,915 | | Total Stockholders' Equity | $834,173 | $656,011 | - Agency real estate securities increased significantly from $1,988,280 thousand in Dec 2018 to $2,793,950 thousand in Sep 2019, reflecting a substantial portfolio expansion[12] - Residential mortgage loans at fair value more than doubled, from $186,096 thousand in Dec 2018 to $379,377 thousand in Sep 2019[12] Consolidated Statements of Operations Net income decreased for the three months ended September 30, 2019, due to higher interest expense and lower equity in earnings from affiliates Consolidated Statements of Operations for Three Months Ended September 30 (in thousands) | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Interest Income | $17,601 | $21,011 | | Total Other Income/(Loss) | $5,250 | $(4,304) | | Total Expenses | $12,238 | $7,290 | | Net Income/(Loss) | $10,049 | $23,377 | | Net Income/(Loss) Available to Common Stockholders | $6,329 | $20,010 | | Basic EPS | $0.19 | $0.70 | | Diluted EPS | $0.19 | $0.70 | Consolidated Statements of Operations for Nine Months Ended September 30 (in thousands) | Metric | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Interest Income | $52,374 | $64,783 | | Total Other Income/(Loss) | $37,136 | $(22,253) | | Total Expenses | $32,343 | $19,760 | | Net Income/(Loss) | $57,882 | $39,793 | | Net Income/(Loss) Available to Common Stockholders | $47,427 | $29,691 | | Basic EPS | $1.48 | $1.05 | | Diluted EPS | $1.48 | $1.05 | - Unrealized gain/(loss) on real estate securities and loans, net, shifted from a gain of $700 thousand in Q3 2018 to a gain of $11,726 thousand in Q3 2019, indicating improved market valuations for these assets[15] Consolidated Statements of Stockholders' Equity Stockholders' equity increased from July 1 to September 30, 2019, driven by preferred stock issuance and net income, offset by dividends Stockholders' Equity Changes for Three Months Ended September 30, 2019 (in thousands) | Metric | Balance at July 1, 2019 (in thousands) | Balance at September 30, 2019 (in thousands) | | :----------------------------------------- | :------------------------------------- | :------------------------------------------- | | Total Stockholders' Equity | $730,864 | $834,173 | | Net proceeds from issuance of preferred stock | — | $111,183 | | Net Income/(Loss) | — | $10,049 | | Common dividends declared | — | $(14,731) | - The company issued 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, contributing $111,183 thousand to equity during the three months ended September 30, 2019[19] Stockholders' Equity Changes for Nine Months Ended September 30, 2019 (in thousands) | Metric | Balance at January 1, 2019 (in thousands) | Balance at September 30, 2019 (in thousands) | | :----------------------------------------- | :---------------------------------------- | :------------------------------------------- | | Total Stockholders' Equity | $656,011 | $834,173 | | Net proceeds from issuance of common stock | — | $66,063 | | Net proceeds from issuance of preferred stock | — | $111,183 | | Net Income/(Loss) | — | $57,882 | | Common dividends declared | — | $(47,438) | Consolidated Statements of Cash Flows Cash flows shifted from investing activities providing cash in 2018 to using cash in 2019, with increased financing from stock issuances Cash Flow Activities for Nine Months Ended September 30 (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :--------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by (used in) operating activities | $33,808 | $57,132 | | Net cash provided by (used in) investing activities | $(1,198,079) | $30,757 | | Net cash provided by (used in) financing activities | $1,147,672 | $(64,442) | | Net change in cash, cash equivalents and restricted cash | $(16,599) | $23,447 | - Investing activities saw a substantial increase in purchases of real estate securities and residential mortgage loans in 2019 compared to 2018[25] - Financing activities were significantly boosted by net proceeds from the issuance of common stock ($66,063 thousand) and preferred stock ($111,183 thousand) in 2019[25] Notes to Consolidated Financial Statements (unaudited) These notes provide detailed disclosures on the company's organization, accounting policies, investment portfolios, fair value, and financing arrangements 1. Organization AG Mortgage Investment Trust, Inc. is a hybrid mortgage REIT investing in Agency RMBS, Credit Investments, and single-family rental properties - The Company is a hybrid mortgage REIT that invests in Agency RMBS, Credit Investments (Non-Agency RMBS, ABS, CMBS, loans, Credit Excess MSRs), and single-family rental properties[30] - The Company is externally managed by AG REIT Management, LLC, a wholly-owned subsidiary of Angelo, Gordon & Co., L.P[37] - The Company conducts its operations to qualify and be taxed as a real estate investment trust ('REIT') under the Internal Revenue Code[38] 2. Summary of significant accounting policies This section outlines key accounting principles, fair value measurements, revenue recognition, and consolidation criteria for financial statements - The financial statements are prepared in accordance with GAAP for interim financial reporting, requiring management to make estimates and assumptions[40][44] - The Company has chosen to make a fair value election for its real estate securities, mortgage loan portfolio, and Excess MSRs, with periodic changes in fair value recognized in current period earnings[50][61][75] - The Company evaluates entities for consolidation under ASC 810-10, particularly for Variable Interest Entities (VIEs), and accounts for transfers of financial assets under ASC 860-10, classifying them as sales or secured financings[84][90] 3. Real Estate Securities This note details the company's real estate securities portfolio, recorded at fair value, showing a significant increase in Agency RMBS Real Estate Securities Fair Value (in thousands) | Asset Type | September 30, 2019 (Fair Value in thousands) | December 31, 2018 (Fair Value in thousands) | | :--------------- | :------------------------------------------- | :------------------------------------------ | | Agency RMBS | $2,793,950 | $1,988,280 | | Non-Agency RMBS | $717,879 | $625,350 | | ABS | $12,292 | $21,160 | | CMBS | $305,367 | $261,385 | | Total | $3,829,488 | $2,896,175 | - For the nine months ended September 30, 2019, the Company recognized an OTTI charge of $14.2 million on its securities, primarily due to adverse changes in cash flows[132] - The Company sold 71 securities for total proceeds of $677.6 million during the nine months ended September 30, 2019, recording net realized gains of $10.4 million[141] 4. Loans This note details the company's residential and commercial mortgage loan portfolios, recorded at fair value, highlighting significant residential loan purchases and securitization Loan Portfolio Fair Value (in thousands) | Loan Type | September 30, 2019 (Fair Value in thousands) | December 31, 2018 (Fair Value in thousands) | | :----------------------- | :------------------------------------------- | :------------------------------------------ | | Residential mortgage loans | $379,377 | $186,096 | | Commercial loans | $146,518 | $98,574 | - The Company purchased residential mortgage loan portfolios with gross acquisition fair values totaling $19.7 million, $37.6 million, and $143.6 million in February, July, and August 2019, respectively[154] - In August 2019, the Company entered into a securitization transaction of certain residential mortgage loans, resulting in the consolidation of a VIE and recording transferred assets as secured borrowings of $221.6 million[165][166] 5. Excess MSRs This note details the company's Excess Mortgage Servicing Rights (MSRs) portfolio, recorded at fair value, showing a decrease and recognized OTTI charges Excess MSRs Fair Value (in thousands) | Metric | September 30, 2019 (Fair Value in thousands) | December 31, 2018 (Fair Value in thousands) | | :--------------- | :------------------------------------------- | :------------------------------------------ | | Agency Excess MSRs | $18,003 | $26,442 | | Credit Excess MSRs | $152 | $208 | | Total Excess MSRs | $18,155 | $26,650 | - For the nine months ended September 30, 2019, the Company recognized an OTTI charge of $2.6 million on its Excess MSRs[183] 6. Single-family rental properties This note details the company's single-family rental properties, including carrying amounts, depreciation, operating expenses, and future minimum rent Single-Family Rental Properties, Net (in thousands) | Component | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----------------------------- | :-------------------------------- | :--------------------------------- | | Land | $29,104 | $29,104 | | Building and improvements | $110,874 | $109,812 | | In-place lease intangibles | $2,097 | $2,098 | | Less: Accumulated depreciation and amortization | $(5,977) | $(2,336) | | Single-family rental properties, net | $136,098 | $138,678 | - For the nine months ended September 30, 2019, the Company recognized $3.6 million in property depreciation and amortization and incurred $5.8 million in property operating expenses[186][187][189] Schedule of Non-Cancellable, Contractual, Future Minimum Rent Under Leases (in thousands) | Period Ending December 31, | Amount (in thousands) | | :------------------------- | :-------------------- | | 2019 (last 3 months) | $3,174 | | 2020 | $4,531 | | 2021 | $98 | | 2022 | $11 | | Total | $7,814 | 7. Fair value measurements This note details fair value measurements, categorizing financial instruments by input observability and highlighting significant unobservable inputs for complex assets - The Company uses a fair value hierarchy (Level 1, 2, 3) based on input observability, with Level 3 measurements relying on significant unobservable inputs for assets like residential mortgage loans and Excess MSRs[192][198][205] Level 3 Asset Class Fair Value and Valuation Techniques (in thousands) | Asset Class (Level 3) | Fair Value at Sep 30, 2019 (in thousands) | Valuation Technique | Unobservable Input | | :--------------------------- | :---------------------------------------- | :-------------------- | :----------------- | | Non-Agency RMBS | $649,479 | Discounted Cash Flow | Yield, Projected Collateral Prepayments, Losses, Severities | | Residential Mortgage Loans | $337,107 | Discounted Cash Flow | Yield, Projected Collateral Prepayments, Losses, Severities | | Commercial Loans | $58,661 | Discounted Cash Flow | Yield, Credit Spread, Recovery Percentage | | Excess Mortgage Servicing Rights | $18,003 | Discounted Cash Flow | Yield, Projected Collateral Prepayments | - Transfers into Level 3 occurred for 9 Non-Agency RMBS securities during the three months ended September 30, 2019, due to reduced market transparency[210] 8. Financing arrangements This note details the company's financing arrangements, including repurchase agreements, term loans, and revolving facilities, emphasizing diversification and margin call management Financing Arrangement Balances (in thousands) | Financing Arrangement | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------- | :-------------------------------- | :--------------------------------- | | Repurchase agreements | $3,416,151 | $2,595,873 | | Term loan, net | $102,014 | $102,017 | | Revolving facilities | $108,837 | $124,615 | | Total | $3,627,002 | $2,822,505 | - The Company pledges real estate securities and loans as collateral under repurchase agreements, which are accounted for as financings and typically have short-term maturities (30 to 90 days)[233] - As of September 30, 2019, the Company had 45 financing counterparties, with outstanding debt with 32 of them, demonstrating a diversified financing strategy[250] 9. Other assets and liabilities This note provides a detailed breakdown of the company's 'Other assets' and 'Other liabilities,' including interest receivables/payables, unsettled trades, and derivative instruments Other Assets and Liabilities (in thousands) | Category | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------------- | :-------------------------------- | :--------------------------------- | | Total Other assets | $30,183 | $33,503 | | Total Other liabilities | $43,436 | $45,180 | - Beginning in 2017, the daily exchange of variation margin for centrally cleared derivative instruments is accounted for as a direct reduction to the carrying value of the derivative asset or liability, reflecting the unsettled fair value[260][262] Derivative Notional Amounts (in thousands) | Derivative Type (Notional Amount) | September 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------------------- | :-------------------------------- | :--------------------------------- | | Pay Fix/Receive Float Interest Rate Swap Agreements | $1,348,750 | $1,963,500 | | Payer Swaptions | $895,000 | $260,000 | | Long TBAs | $150,000 | — | 10. Earnings per share This note reconciles basic and diluted earnings per share for common stockholders and lists common and preferred stock dividends declared Earnings Per Share for Three Months Ended September 30 | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :----------------------------------------- | :------------------------------ | :------------------------------ | | Net income/(loss) available to common stockholders | $6,329 (in thousands) | $20,010 (in thousands) | | Basic weighted average common shares outstanding | 32,736 (in thousands) | 28,422 (in thousands) | | Basic Earnings/(Loss) Per Share | $0.19 | $0.70 | | Diluted Earnings/(Loss) Per Share | $0.19 | $0.70 | Earnings Per Share for Nine Months Ended September 30 | Metric | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----------------------------------------- | :----------------------------- | :----------------------------- | | Net income/(loss) available to common stockholders | $47,427 (in thousands) | $29,691 (in thousands) | | Basic weighted average common shares outstanding | 32,007 (in thousands) | 28,274 (in thousands) | | Basic Earnings/(Loss) Per Share | $1.48 | $1.05 | | Diluted Earnings/(Loss) Per Share | $1.48 | $1.05 | Common Stock Dividends Per Share | Common Stock Dividends | 2019 Total Dividend Per Share | 2018 Total Dividend Per Share | | :--------------------- | :---------------------------- | :---------------------------- | | Total | $1.45 | $1.475 | 11. Income taxes This note explains the company's REIT tax status, exemption from federal income tax, excise tax on undistributed income, and the role of Taxable REIT Subsidiaries - As a REIT, the Company is generally not subject to federal or state corporate income tax if it makes qualifying distributions and satisfies REIT requirements[106][292] Excise Tax Expense for Three Months Ended September 30 (in thousands) | Excise Tax Expense | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | | :----------------- | :--------------------------------------------- | :--------------------------------------------- | | Excise tax | $186 | $375 | Excise Tax Expense for Nine Months Ended September 30 (in thousands) | Excise Tax Expense | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :----------------- | :-------------------------------------------- | :-------------------------------------------- | | Excise tax | $464 | $1,125 | 12. Related party transactions This note details transactions with related parties, including management fees, expense reimbursements, and investments in affiliated entities - The Company pays a management fee to its Manager, AG REIT Management, LLC, equal to 1.50% per annum of Stockholders' Equity, calculated and paid quarterly[300] Management Fees to Affiliate for Three Months Ended September 30 (in thousands) | Management Fees | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | | :---------------- | :--------------------------------------------- | :--------------------------------------------- | | Management fee to affiliate | $2,346 | $2,384 | - The Company has unfunded capital commitments to affiliated entities: $2.2 million remaining for MATH (Mortgage Acquisition Trust I LLC) and $7.2 million for LOTS (LOT SP I LLC) as of September 30, 2019[318][319] 13. Equity This note details the company's equity structure, including its shelf registration, preferred stock characteristics, and recent equity offerings - The Company has a shelf registration statement (2018 Registration Statement) for up to $750.0 million of securities, with $591.2 million available for issuance as of September 30, 2019[332] - On September 17, 2019, the Company completed a public offering of 4,600,000 shares of 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, generating net proceeds of approximately $111.2 million[338][340] - On February 14, 2019, the Company completed a public offering of 3,450,000 shares of common stock, resulting in net proceeds of approximately $57.4 million[337] 14. Commitments and Contingencies This note outlines the company's outstanding commitments related to affiliated investments and commercial loans, and confirms no material legal proceedings Commitments (in thousands) | Commitment Type | Total Commitment (in thousands) | Funded Commitment (in thousands) | Remaining Commitment (in thousands) | | :------------------- | :------------------------------ | :------------------------------- | :---------------------------------- | | MATH | $46,820 | $44,590 | $2,230 | | Commercial loan G | $84,515 | $39,189 | $45,326 | | Commercial loan I | $20,000 | $9,435 | $10,565 | | Commercial loan J | $30,000 | $3,233 | $26,767 | | Commercial loan K | $20,000 | $7,661 | $12,339 | | LOTS | $17,922 | $10,714 | $7,208 | | Total | $219,257 | $114,822 | $104,435 | - The Company has committed to fund revolving loans in an aggregate principal amount not to exceed $12.4 million subsequent to quarter-end, which remains unfunded[344] - As of September 30, 2019, the Company was not involved in any material legal proceedings[341] 15. Segment reporting This note presents financial results by two reportable segments: Securities and Loans, and Single-Family Rental Properties, reflecting management's business review - The Company has two reportable segments: (i) Securities and Loans (including Excess MSRs and Arc Home) and (ii) Single-Family Rental Properties[345] Net Income/(Loss) Available to Common Stockholders by Segment (Three Months Ended Sep 30, 2019, in thousands) | Segment (Three Months Ended Sep 30, 2019) | Net Income/(Loss) Available to Common Stockholders (in thousands) | | :---------------------------------------- | :---------------------------------------------------------------- | | Securities and Loans | $16,287 | | Single-Family Rental Properties | $(1,058) | | Corporate | $(8,900) | | Total | $6,329 | Net Income/(Loss) Available to Common Stockholders by Segment (Nine Months Ended Sep 30, 2019, in thousands) | Segment (Nine Months Ended Sep 30, 2019) | Net Income/(Loss) Available to Common Stockholders (in thousands) | | :--------------------------------------- | :---------------------------------------------------------------- | | Securities and Loans | $76,960 | | Single-Family Rental Properties | $(3,284) | | Corporate | $(26,249) | | Total | $47,427 | 16. Subsequent Events Subsequent to September 30, 2019, the company agreed to sell its single-family rental properties portfolio for approximately $137 million - Subsequent to September 30, 2019, the Company signed a purchase and sale agreement to sell its single-family rental properties portfolio for approximately $137 million[357] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's detailed analysis of the company's financial condition, operating results, investment strategies, and market conditions Our company The company is a hybrid mortgage REIT, externally managed by Angelo Gordon, investing in diversified portfolios and operating as a REIT - The Company is a hybrid mortgage REIT that opportunistically invests in Agency RMBS, Credit Investments (Residential, Commercial, ABS), and Single-Family Rental Properties[361] - The Company is externally managed by AG REIT Management, LLC, a wholly-owned subsidiary of Angelo Gordon, and operates to qualify as a REIT for U.S. federal income tax purposes[361] - The Company's common stock and preferred stocks (Series A, B, and C) are traded on the New York Stock Exchange (NYSE)[361] Our investment portfolio The company's investment portfolio is segmented into Securities and Loans and Single-Family Rental Properties, with detailed classifications of various asset types - The investment portfolio is divided into two segments: Securities and Loans (Agency RMBS, Residential Investments, Commercial Investments, ABS) and Single-Family Rental Properties[362] - Residential Investments include Non-Agency RMBS (Prime, Alt-A/Subprime), Credit Risk Transfer securities (CRTs), Non-U.S. RMBS, Interest Only securities, Re/Non-Performing Loans, and New Origination Loans (Non-QM loans, Lot Loans)[364][365][366][367] - Commercial Investments comprise CMBS, Interest Only securities, commercial real estate loans, and Freddie Mac K-Series[368] Market conditions Q3 2019 market conditions included slowing home price appreciation, stable credit, a Federal Reserve rate cut, and mixed mortgage sector spreads - National home prices increased 3.2% year-over-year in Q3 2019, down from 3.6% in the previous quarter, with housing demand exceeding tight inventory[376] - The Federal Reserve cut the federal funds interest rate to 1.75%-2.00% in September 2019 due to weakening economic data, subdued inflation, and global trade disputes[376] - Mortgage sector spreads tightened in Q3 2019, but Agency MBS spreads widened against benchmarks due to elevated gross supply, prepayment uncertainty, and increased implied volatility[376] Results of operations Operating results are driven by portfolio size, net interest income, and asset fair values, with varying net income trends for three and nine-month periods - Primary drivers of operating results include the size and composition of the investment portfolio, net interest income, fair market value of assets, and supply/demand for target assets[378] Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018 Net income available to common stockholders decreased significantly in Q3 2019 due to lower net interest income, higher expenses, and reduced affiliate earnings Operating Results for Three Months Ended September 30 (in thousands) | Metric | Sep 30, 2019 (in thousands) | Sep 30, 2018 (in thousands) | Increase/(Decrease) (in thousands) | | :----------------------------------------- | :-------------------------- | :-------------------------- | :--------------------------------- | | Net Interest Income | $17,601 | $21,011 | $(3,410) | | Total Other Income/(Loss) | $5,250 | $(4,304) | $9,554 | | Total Expenses | $12,238 | $7,290 | $4,948 | | Net Income/(Loss) Available to Common Stockholders | $6,329 | $20,010 | $(13,681) | - Interest income increased by $1,032 thousand, but interest expense increased by $4,442 thousand, leading to a decrease in net interest income[379] - Unrealized gain/(loss) on real estate securities and loans, net, saw a significant increase of $11,026 thousand, contributing positively to other income[379] Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018 Net income available to common stockholders increased for the nine months ended September 30, 2019, driven by a positive swing in unrealized gains Operating Results for Nine Months Ended September 30 (in thousands) | Metric | Sep 30, 2019 (in thousands) | Sep 30, 2018 (in thousands) | Increase/(Decrease) (in thousands) | | :----------------------------------------- | :-------------------------- | :-------------------------- | :--------------------------------- | | Net Interest Income | $52,374 | $64,783 | $(12,409) | | Total Other Income/(Loss) | $37,136 | $(22,253) | $59,389 | | Total Expenses | $32,343 | $19,760 | $12,583 | | Net Income/(Loss) Available to Common Stockholders | $47,427 | $29,691 | $17,736 | - Unrealized gain/(loss) on real estate securities and loans, net, shifted from a loss of $36,032 thousand in 2018 to a gain of $101,644 thousand in 2019, representing a $137,676 thousand increase[406] - Rental income increased significantly by $9,074 thousand due to holding the Single-Family Rental (SFR) portfolio for the entire nine-month period in 2019[406][409] Book value per share Book value per common share decreased from $19.16 in September 2018 to $17.16 in September 2019, with an undepreciated non-GAAP metric also presented Book Value Per Share | Metric | September 30, 2019 | December 31, 2018 | September 30, 2018 | | :--------------------------- | :----------------- | :---------------- | :----------------- | | Book value per share | $17.16 | $17.21 | $19.16 | | Undepreciated book value per share | $17.34 | $17.30 | $19.18 | - Book value per common share decreased from $19.16 at September 30, 2018, to $17.16 at September 30, 2019[424] Core Earnings Core Earnings, a non-GAAP measure, adjusts net income for non-recurring items to evaluate core performance and provide supplemental investor information - Core Earnings is a non-GAAP measure that excludes unrealized/realized gains/losses on investments and derivatives, OTTI, transaction-related expenses, SFR depreciation/amortization, certain deal-related performance fees, and foreign currency gains/losses[435] Core Earnings for Three Months Ended September 30 (in thousands) | Metric | Three Months Ended Sep 30, 2019 (in thousands) | Three Months Ended Sep 30, 2018 (in thousands) | | :----------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net Income/(loss) available to common stockholders | $6,329 | $20,010 | | Core Earnings | $13,003 | $15,725 | | Core Earnings, per Diluted Share | $0.40 | $0.56 | Core Earnings for Nine Months Ended September 30 (in thousands) | Metric | Nine Months Ended Sep 30, 2019 (in thousands) | Nine Months Ended Sep 30, 2018 (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income/(loss) available to common stockholders | $47,427 | $29,691 | | Core Earnings | $38,402 | $45,586 | | Core Earnings, per Diluted Share | $1.20 | $1.61 | Investment activities The company opportunistically invests in a diversified portfolio of Agency RMBS, Credit Investments, and Single-Family Rental Properties, with ongoing portfolio management and credit review - The investment portfolio is opportunistically managed, with asset mix adjustments based on market conditions, liquidity, duration, interest rate expectations, and hedging[437][438] Investment Portfolio Carrying Value (in thousands) | Segment/Asset Type (Carrying Value) | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :---------------------------------- | :-------------------------- | :-------------------------- | | Agency RMBS | $2,965,667 | $2,015,586 | | Residential Investments | $1,369,769 | $1,019,116 | | Commercial Investments | $457,761 | $365,052 | | ABS | $12,292 | $21,160 | | Single-Family Rental Properties | $136,098 | $138,678 | | Total Investment Portfolio | $4,941,587 | $3,559,592 | - The company maintains a comprehensive portfolio management process, including quarterly credit reviews, to evaluate and manage asset-specific credit issues and identify portfolio-wide credit trends[440] Financing activities The company uses leverage through repurchase agreements, facilities, and securitized debt, focusing on counterparty diversification and margin call management - The Company primarily uses repurchase agreements, facilities, and securitized debt for leverage, with 32 counterparties providing outstanding debt as of September 30, 2019[479][485] - The cost of financing decreased from 3.19% at December 31, 2018, to 2.77% at September 30, 2019, following Federal Reserve rate cuts in Q3 2019[481] Leverage Metrics (in thousands) | Leverage Metric (in thousands) | September 30, 2019 | December 31, 2018 | | :----------------------------- | :----------------- | :---------------- | | GAAP Leverage | $3,868,362 | $2,833,363 | | Economic Leverage | $3,886,772 | $2,876,376 | | GAAP Leverage Ratio | 4.6x | 4.3x | | Economic Leverage Ratio | 4.7x | 4.4x | Hedging activities The company uses derivative instruments and short positions to hedge interest rate and foreign currency risks, with daily settlement for centrally cleared derivatives - The Company uses derivative instruments (interest rate swaps, swaptions, futures) and short positions in U.S. Treasury securities to hedge interest rate risk in its Securities and Loans Segment[515] - For centrally cleared derivatives, daily variation margin exchanges are accounted for as direct reductions to the carrying value of the derivative asset or liability, reflecting unsettled fair value[516] Derivative Notional Amounts for Hedging (in thousands) | Derivative Type (Notional Amount) | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Pay Fix/Receive Float Interest Rate Swap Agreements | $1,437,930 | $1,963,500 | | Payer Swaptions | $895,000 | $260,000 | | Long positions on U.S. Treasury Futures | $25,000 | $30,000 | Dividends The company intends to make regular quarterly distributions to common stockholders, subject to Board authorization and REIT requirements, based on taxable income - The Company intends to make regular quarterly distributions to common stockholders, requiring distribution of at least 90% of its REIT ordinary taxable income[529] - As of September 30, 2019, the estimated undistributed taxable income was approximately $1.11 per share[530] Dividends Per Share | Stock Type (Dividends Per Share) | 2019 Total | 2018 Total | | :------------------------------- | :--------- | :--------- | | Common Stock | $1.45 | $1.475 | | 8.25% Series A Preferred Stock | $1.54689 | $1.54689 | | 8.00% Series B Preferred Stock | $1.50 | $1.50 | Liquidity and capital resources Liquidity is supported by borrowings, investment cash flows, operating results, and capital market transactions, with leverage and margin call risks actively managed - As of September 30, 2019, the Company had $147.1 million in liquidity, comprising $31.5 million in cash and $115.6 million in unpledged Agency fixed rate securities and CMOs[534] - The Company's financing arrangements totaled $3.8 billion from 32 counterparties as of September 30, 2019, with maturities ranging from October 1, 2019, to October 10, 2023[536] - Cash flows for the nine months ended September 30, 2019, included $33.8 million from operations, $(1,198.1) million used in investing, and $1,147.6 million provided by financing activities[548] Contractual obligations Contractual obligations include a management agreement, share-based compensation, unfunded commitments to affiliates, commercial loans, and accrued interest payable - The Company has a management agreement with its Manager, entitling the Manager to a quarterly management fee of 1.50% of Stockholders' Equity per annum and reimbursement of certain operating expenses[554][555] - Unfunded commitments include $2.2 million for MATH and $7.2 million for LOTS, along with various commercial loan commitments, totaling $104.4 million in remaining commitments as of September 30, 2019[561][562][568] - Accrued interest on financing arrangements totaled $7.5 million as of September 30, 2019, a decrease from $12.3 million at December 31, 2018, primarily due to shorter contractual maturities[564] Off-balance sheet arrangements Off-balance sheet arrangements primarily involve long and short To-Be-Announced (TBA) positions and equity method investments in affiliates, with no material liquidity impact expected - As of September 30, 2019, the Company had a net long TBA position with a net payable amount of $154.0 million and a fair market value of $153.2 million[565] - Investments in debt and equity of affiliates, accounted for using the equity method, include Agency Excess MSR, Re/Non-Performing Loans, New Origination Loans, Freddie Mac K-Series, CMBS Interest Only, and AG Arc[566] Affiliate Investments (in thousands) | Affiliate Investment (Equity) | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | | :---------------------------- | :-------------------------- | :-------------------------- | | Total Investments excluding AG Arc | $83,233 | $74,526 | | AG Arc, at fair value | $27,271 | $20,360 | | Total Investments in debt and equity of affiliates | $141,249 | $84,892 | Certain related person transactions The company has a policy for approving related person transactions, ensuring audit committee review and fair market pricing for affiliated acquisitions - The Board of Directors has a policy for approving 'related person transactions' exceeding $120,000, requiring audit committee review and approval to ensure best interests and avoid conflicts of interest[571] - The Company pays Red Creek Asset Management LLC (a related party) arm's-length asset management fees for Re/Non-Performing Loans and non-QM loans, totaling $393,484 for the nine months ended September 30, 2019[574] - The Company engaged in multiple affiliated transactions to acquire real estate securities and loans from affiliates, with pricing confirmed by third-party market pricing or independent valuation vendors[583][584][585][586][587][589] Critical accounting policies Critical accounting policies involve significant estimates and judgments, particularly in fair value measurements, relying on independent pricing services and models - Consolidated financial statements are prepared in accordance with GAAP, requiring significant estimates and judgments, particularly for fair value measurements[591] - The Company relies on independent pricing of assets at each quarter-end to estimate fair market value, acknowledging that actual results may differ materially from these estimates[592] Foreign currency remeasurement Foreign currency denominated assets and liabilities are remeasured into U.S. dollars at period-end rates, with effects recognized in the Consolidated Statements of Operations - Assets and liabilities denominated in foreign currencies are remeasured into U.S. dollars using period-end exchange rates, while income and expenses use average exchange rates[593] - Remeasurement effects on monetary assets and liabilities of foreign investments are included in 'Foreign currency gain/(loss), net' in the Consolidated Statements of Operations[593] Inflation The company's performance is primarily influenced by interest rates rather than inflation, as its assets and liabilities are largely interest rate sensitive - The Company's performance is more sensitive to interest rates than inflation, as its assets and liabilities are largely interest rate sensitive[594] - Changes in interest rates do not necessarily correlate with inflation rates[594] Compliance with Investment Company Act and REIT tests The company aims to maintain its exempt status under the Investment Company Act and its qualification as a REIT, monitoring compliance with asset and income tests - The Company intends to maintain its exempt status under the Investment Company Act and its qualification as a REIT[595] - For the year ended December 31, 2018, the Company believes it met the REIT income and asset tests, as well as all other REIT requirements, including common stock ownership and net income distribution[596] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's primary market risks, including interest rate, liquidity, prepayment, real estate value, credit, basis, seasonality, and foreign currency risks Interest rate risk The company is highly sensitive to interest rate risk, which impacts investment yields and financing costs, and is managed through monitoring, structuring, and derivatives - Interest rate risk is a primary market risk, impacting investment yields and financing costs, and is managed through monitoring, financing structure, and derivative instruments[599] - Rising interest rates generally decrease the fair value of real estate securities and loan portfolios, especially fixed-rate assets, which have higher duration[603] Sensitivity to Changes in Interest Rates | Change in Interest Rates (basis points) | Percentage Change in GAAP Equity | Percentage Change in Assets | Percentage Change in Projected Net Interest Income | | :-------------------------------------- | :------------------------------- | :-------------------------- | :----------------------------------------------- | | 75 | (4.7)% | (0.8)% | (8.3)% | | 50 | (2.7)% | (0.5)% | (5.2)% | | 25 | (1.1)% | (0.2)% | (2.4)% | | (25) | 0.7 % | 0.1 % | 2.0 % | | (50) | 1.3 % | 0.2 % | 4.3 % | | (75) | 1.7 % | 0.3 % | 6.7 % | Liquidity risk The company manages liquidity risk from financing long-maturity assets with shorter-term borrowings through prudent leverage, daily monitoring, and diversified financing - Primary liquidity risk stems from financing long-maturity assets with shorter-term borrowings, mitigated by prudent leverage, daily liquidity monitoring, and a cushion of cash and unpledged assets[610][612] - Margin calls on financing arrangements and derivative instruments pose liquidity risks, requiring additional collateral (cash or securities) if asset fair values decline[613][614] - Initial margin requirements for centrally cleared trades can increase significantly with rising interest rates or volatility, negatively impacting liquidity[616] Prepayment risk Prepayment risk affects asset yields and income through amortization of premiums and accretion of discounts, and is mitigated by diversifying asset characteristics - Increased prepayment rates (CPR) accelerate the amortization of purchase premiums on assets, reducing the yield or interest income[618] - Slower prepayments on Non-Agency RMBS or mortgage loans can reduce income due to slower accretion of purchase discounts and may lead to impairments[619] - The Company mitigates prepayment risk by investing in assets with diverse prepayment characteristics and maintaining a mix of assets purchased at a premium and a discount[622] Real estate value risk Real estate value risk arises from volatile property values, impacting collateral for RMBS and CMBS, and potentially increasing loan losses and strategic defaults - Residential and commercial property values are volatile and affected by national, regional, and local economic conditions, local real estate conditions, and demographic factors[623] - Decreases in property values can cause losses, reduce collateral value for RMBS and CMBS, and increase strategic defaults by residential mortgage borrowers[623] Credit risk The company is exposed to credit risk from borrower defaults and credit spread widening on its Non-Agency assets, managed through due diligence and non-recourse financing - The Company is exposed to credit risk from borrower defaults and credit spread widening on its Non-Agency assets (residential/commercial mortgage loans, Non-Agency RMBS, ABS, CMBS, Excess MSRs, Interest Only investments)[624] - Credit risk is managed through pre-acquisition due diligence, including evaluation of collateral characteristics, market trends, and prepayment/default rates, and by using non-recourse financing[624] Basis risk Basis risk is the potential decline in book value due to widening market spreads between Agency RMBS yields and comparable duration Treasury securities, generally unhedged - Basis risk is the risk of book value decline from widening market spreads between Agency RMBS yields and comparable duration Treasury securities[625] - Factors like Federal Reserve monetary policy, market liquidity, and changes in required rates of return contribute to basis risk, which is generally not mitigated by interest rate swaps[625] Seasonality The Single-Family Rental (SFR) portfolio's operating results may be impacted by seasonal factors, such as higher resident move-outs and increased property operating costs during summer - The SFR portfolio may experience higher resident move-outs during summer months, impacting rental revenues and turnover costs[626] - Property operating costs for SFR can be seasonally impacted by increased expenses like HVAC repairs and landscaping during the summer[626] Foreign currency risk The company aims to hedge foreign currency exposures using forward contracts, though hedging may not eliminate all risk and collateralization could affect liquidity - The Company intends to hedge foreign currency exposures using forward contracts to fix U.S. dollar amounts of foreign currency denominated cash flows[628] - Currency hedging strategies may not eliminate all risk due to timing/amount uncertainties or imperfect hedges, and collateralization requirements could adversely affect liquidity[627] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures as of September 30, 2019, concluding they were effective, with no material changes in internal control Evaluation of Disclosure Controls and Procedures Management evaluated and concluded that the company's disclosure controls and procedures were effective as of September 30, 2019 - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of September 30, 2019[630] - The disclosure controls and procedures were concluded to be effective in providing reasonable assurance for timely and accurate reporting of required information[630] Changes in Internal Control over Financial Reporting No material changes occurred in the company's internal control over financial reporting during the period covered by this quarterly report - No material changes occurred in internal control over financial reporting during the period covered by the quarterly report[631] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not a party to any material litigation or legal proceedings, nor is it aware of any threatened litigation with a material adverse effect - As of the report date, the Company is not a party to any material litigation or legal proceedings[632] - There are no known threatened litigations or legal proceedings that would have a material adverse effect on the Company's results of operations or financial condition[632] Item 1A. Risk Factors This section refers to comprehensive risk factors from prior filings, highlighting foreign currency risk and potential adverse effects of hedging activities - Investors are referred to the 'Risk Factors' section in the Annual Report on Form 10-K for December 31, 2018, and subsequent filings for a comprehensive list of risks[634] - Investments denominated in foreign currencies subject the Company to foreign currency risk, which may adversely affect business, financial condition, results of operations, and dividend-paying ability[635] - Hedging strategies, while intended to limit losses, may adversely affect earnings and reduce cash available for distribution to stockholders due to various factors, including cost, imperfect correlation, and counterparty risk[636][637] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds are reported for the period - No unregistered sales of equity securities or use of proceeds to report[639] Item 3. Defaults Upon Senior Securities No defaults upon senior securities are reported for the period - No defaults upon senior securities to report[640] Item 4. Mine Safety Disclosures No mine safety disclosures are reported for the period - No mine safety disclosures to report[641] Item 5. Other Information No other information is reported for the period - No other information to report[642] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including corporate documents, key agreements, and Sarbanes-Oxley certifications - The exhibits include foundational corporate documents such as Articles of Amendment and Restatement, Amended and Restated Bylaws, and Articles Supplementary for various preferred stock series[643] - Key agreements filed as exhibits include the Management Agreement, Equity Incentive Plan, Master Repurchase and Securities Contracts, and Underwriting Agreements for recent stock offerings[643][645][647] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act of 2002 are included[647] SIGNATURES This section contains the required signatures of the company's principal executive and financial officers, certifying the report's filing on November 5, 2019 - The report is signed by David N. Roberts, Chief Executive Officer, and Brian C. Sigman, Chief Financial Officer and Treasurer[648] - The filing date of the report is November 5, 2019[648]