AG Mortgage Investment Trust(MITT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the company's unaudited consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes providing context and breakdowns of key financial accounts and accounting policies for the period ended September 30, 2023 Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and equity, as of September 30, 2023, and December 31, 2022 - Total assets increased to $4.88 billion as of September 30, 2023, from $4.37 billion at December 31, 2022, primarily driven by an increase in securitized residential mortgage loans, while total liabilities also rose, leading to a slight decrease in total stockholders' equity[11] Consolidated Balance Sheet Metrics | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Assets | $4,881,756 | $4,369,778 | $511,978 | 11.7% | | Securitized residential mortgage loans | $4,343,371 | $3,707,146 | $636,225 | 17.2% | | Total Liabilities | $4,431,334 | $3,906,978 | $524,356 | 13.4% | | Total Stockholders' Equity | $450,422 | $462,800 | $(12,378) | -2.7% | Consolidated Statements of Operations This section presents the company's revenues, expenses, and net income or loss for the three and nine months ended September 30, 2023 and 2022 - For the nine months ended September 30, 2023, the company reported a net income of $18.43 million, a significant improvement from a net loss of $(64.79 million) in the prior year period, primarily driven by a substantial reduction in net unrealized losses and an increase in net interest income, despite higher interest expenses[16] Consolidated Statements of Operations Metrics (Nine Months Ended Sep 30) | Metric (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | :------- | | Net Income/(Loss) | $18,431 | $(64,794) | $83,225 | 128.4% | | Net Income/(Loss) Available to Common Stockholders | $4,673 | $(78,552) | $83,225 | 106.0% | | Basic EPS | $0.23 | $(3.38) | $3.61 | 106.8% | | Total Net Interest Income | $34,493 | $49,023 | $(14,530) | -29.6% | | Net Unrealized Gain/(Loss) | $(257) | $(123,032) | $122,775 | 99.8% | Consolidated Statements of Stockholders' Equity This section outlines changes in the company's stockholders' equity, including net income, dividends, and stock repurchases, for the periods presented - For the nine months ended September 30, 2023, total stockholders' equity decreased to $450.42 million from $462.80 million at the beginning of the year, primarily due to common and preferred dividends declared and common stock repurchases, partially offset by net income[22] Consolidated Statements of Stockholders' Equity Metrics (Nine Months Ended Sep 30) | Metric (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Balance at January 1 | $462,800 | $570,380 | | Repurchase of common stock | $(6,352) | $(13,372) | | Common dividends declared | $(10,960) | $(14,400) | | Preferred dividends declared | $(13,758) | $(13,758) | | Net Income/(Loss) | $18,431 | $(64,794) | | Balance at September 30 | $450,422 | $464,296 | Consolidated Statements of Cash Flows This section details the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 - For the nine months ended September 30, 2023, net cash provided by operating activities increased slightly to $18.12 million, while cash used in investing activities significantly decreased, leading to an overall increase in cash and cash equivalents and restricted cash by $40.46 million[25] Consolidated Statements of Cash Flows Metrics (Nine Months Ended Sep 30) | Metric (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | Change (in thousands) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Net cash provided by (used in) operating activities | $18,120 | $16,806 | $1,314 | | Net cash provided by (used in) investing activities | $(471,590) | $(1,491,640) | $1,020,050 | | Net cash provided by (used in) financing activities | $493,929 | $1,474,041 | $(980,112) | | Net change in cash and cash equivalents and restricted cash | $40,459 | $(793) | $41,252 | | Cash and cash equivalents and restricted cash, End of Period | $139,262 | $99,436 | $39,826 | Note 1. Organization This note describes the company's business as a residential mortgage REIT, its external management structure, and the pending acquisition of Western Asset Mortgage Capital Corporation - AG Mortgage Investment Trust, Inc. is a residential mortgage REIT focused on acquiring and securitizing newly-originated residential mortgage loans, primarily within the non-agency segment[28][32][35] - The company's investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans within the non-agency segment of the housing market[28] - The company is externally managed by AG REIT Management, LLC, a wholly-owned subsidiary of Angelo, Gordon & Co., L.P., which became an indirect subsidiary of TPG Inc. on November 1, 2023[32][177] - On August 8, 2023, the company entered into a Merger Agreement to acquire Western Asset Mortgage Capital Corporation (WMC), with the merger expected to close in the fourth quarter of 2023, subject to WMC's common stockholders' approval[35][36][244] - Under the merger terms, each WMC common stock share will convert into 1.498 shares of the company's common stock (approximately 9.2 million shares in aggregate) and a cash payment from the Manager[37] - The Manager's base management fee will be reduced by $0.6 million for the first four quarters following the merger's effective time, totaling an aggregate $2.4 million waiver[38] - The company paid a $3.0 million termination fee to Terra Property Trust, Inc. on behalf of WMC in connection with WMC's termination of a prior merger agreement[40] Note 2. Summary of Significant Accounting Policies This note outlines the company's accounting principles, including GAAP compliance, consolidation of VIEs, fair value option, and the impact of the LIBOR transition - The financial statements are prepared in accordance with GAAP for interim reporting, consolidating Variable Interest Entities (VIEs) where the company is the primary beneficiary and electing the fair value option for their assets and liabilities, with no significant changes to accounting policies or material impact from the LIBOR transition[42][43][49][51] - The company's unaudited consolidated financial statements are prepared on the accrual basis of accounting in accordance with GAAP for interim financial reporting[42] - The company consolidates Variable Interest Entities (VIEs) when it is determined to be the primary beneficiary, electing the fair value option for the assets and liabilities of these VIEs[45][49] - There have been no significant changes to the company's accounting policies since the Form 10-K for the year ended December 31, 2022[43] - The transition from LIBOR to an alternative benchmark did not have a material impact on the consolidated financial statements[51] Note 3. Loans This note details the company's residential mortgage loan portfolio, including fair value, credit quality, loan activity, and geographic concentration - The company's total residential mortgage loan portfolio, at fair value, increased to $4.48 billion as of September 30, 2023, from $4.13 billion at December 31, 2022, primarily in securitized non-agency loans, with a weighted average current FICO of 744 and original LTV of 69.80%[55][60][64][67] Residential Mortgage Loans (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Residential mortgage loans, at fair value | $4,482,654 | $4,128,597 | $354,057 | 8.6% | | Securitized residential mortgage loans, at fair value | $4,343,371 | $3,707,146 | $636,225 | 17.2% | | Securitized debt, at fair value (Non-Agency VIEs) | $3,718,992 | $3,078,593 | $640,399 | 20.8% | Credit Quality (Sep 30, 2023) | Credit Quality (Sep 30, 2023) | Value | | :---------------------------- | :---- | | Weighted Average Original LTV Ratio | 69.80% | | Weighted Average Current FICO | 744 | Loan Activity (Nine Months Ended Sep 30, 2023) | Loan Activity (Nine Months Ended Sep 30, 2023) | Unpaid Principal Balance (in thousands) | Fair Value (in thousands) | Proceeds (in thousands) | Realized Gains (in thousands) | Realized Losses (in thousands) | | :--------------------------------------------- | :-------------------------------------- | :------------------------ | :---------------------- | :---------------------------- | :----------------------------- | | Purchases | $942,658 | $947,897 | N/A | N/A | N/A | | Sales | N/A | N/A | $310,780 | $5,151 | $(16,037) | Geographic Concentration (Sep 30, 2023) | Geographic Concentration (Sep 30, 2023) | Percentage of Fair Value | | :------------------------------------ | :----------------------- | | California | 32% | | New York | 14% | | Florida | 11% | Note 4. Real Estate Securities This note provides information on the company's real estate securities portfolio, including fair value, composition, credit ratings, and sales activity - The company's real estate securities portfolio, at fair value, increased to $170.21 million as of September 30, 2023, from $43.72 million at December 31, 2022, primarily driven by an increase in Agency RMBS, with a significant portion of Non-Agency RMBS being 'Not Rated'[82][90][376] Real Estate Securities (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Real Estate Securities, at fair value | $170,213 | $43,719 | $126,494 | 289.3% | | Agency RMBS, at fair value | $135,002 | $19,124 | $115,878 | 605.9% | Non-Agency RMBS Credit Rating (Sep 30, 2023) | Non-Agency RMBS Credit Rating (Sep 30, 2023) | Fair Value (in thousands) | Percentage | | :------------------------------------------- | :------------------------ | :--------- | | Not Rated | $36,614 | 49.0% | Real Estate Securities Sales (Nine Months Ended Sep 30, 2023) | Real Estate Securities Sales (Nine Months Ended Sep 30, 2023) | Proceeds (in thousands) | Realized Gains (in thousands) | Realized Losses (in thousands) | | :------------------------------------------------------------ | :---------------------- | :---------------------------- | :----------------------------- | | Total Sales | $149,143 | $391 | $(429) | - The company's retained interest in unconsolidated VIEs (GCAT Non-Agency Securities and Interest Only) had a fair value of $14.50 million as of September 30, 2023, down from $14.92 million at December 31, 2022[93] Note 5. Fair Value Measurements This note explains the company's fair value measurement hierarchy, valuation methodologies, and significant unobservable inputs used for financial instruments - The company measures financial instruments at fair value using a hierarchy of inputs (Level 1, 2, and 3), with a significant portion of assets and liabilities, including securitized residential mortgage loans and securitized debt, measured using Level 3 inputs, indicating reliance on unobservable inputs[99][108][111] - Fair value is determined in accordance with ASC 820, prioritizing Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (significant unobservable inputs)[99] Total Assets and Liabilities Measured at Fair Value (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :------------------------------------ | :-------------------------- | :-------------------------- | | Total Assets Measured at Fair Value | $4,700,044 | $4,230,937 | | Total Liabilities Measured at Fair Value | $(3,833,173) | $(3,262,361) | Level 3 Assets (Sep 30, 2023) | Level 3 Assets (Sep 30, 2023) | Fair Value (in thousands) | | :---------------------------- | :------------------------ | | Securitized residential mortgage loans | $4,343,371 | | Residential mortgage loans | $138,498 | | Non-Agency RMBS | $14,496 | | AG Arc | $35,203 | Level 3 Liabilities (Sep 30, 2023) | Level 3 Liabilities (Sep 30, 2023) | Fair Value (in thousands) | | :--------------------------------- | :------------------------ | | Securitized debt | $(3,831,515) | - Valuation of residential mortgage loans, securitized debt, and certain securities is determined by the Manager using third-party pricing services, valuation analyses, or model-based pricing, considering observable inputs and macroeconomic factors[108] - Significant unobservable inputs for loans and securities include yields, prepayment rates, probability of default, and loss severity; for AG Arc, the book value multiple is a significant unobservable input[111][127] - There were no transfers of assets or liabilities between Levels 1, 2, and 3 of the fair value hierarchy during the three and nine months ended September 30, 2023 and 2022[112][113] Note 6. Financing This note details the company's financing arrangements, including securitized debt and other financing, their carrying values, funding costs, and covenant compliance - The company's total financing, including financing arrangements and securitized debt, increased to $4.40 billion as of September 30, 2023, from $3.88 billion at December 31, 2022, with securitized debt constituting the largest portion and generally non-recourse[132][144] Total Financing (Carrying Value, in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Financing (Carrying Value) | $4,397,428 | $3,883,539 | $513,889 | 13.2% | | Securitized debt, at fair value | $3,831,515 | $3,262,352 | $569,163 | 17.5% | | Financing arrangements | $565,913 | $621,187 | $(55,274) | -8.9% | | Weighted Average Funding Cost | 4.93% | 4.31% | 0.62% | 14.4% | Contractual Maturity (Financing Arrangements, Sep 30, 2023) | Contractual Maturity (Financing Arrangements, Sep 30, 2023) | Amount (in thousands) | | :-------------------------------------------------------- | :-------------------- | | Within 30 Days | $173,978 | | Over 30 Days to 3 Months | $197,685 | | Over 3 Months to 12 Months | $194,250 | - The company was in compliance with all of its financial covenants as of September 30, 2023[144] Note 7. Other Assets and Liabilities This note provides details on other assets and liabilities, including interest receivable and payable, accrued expenses, and the company's use of derivative instruments - The company's total other assets increased to $29.31 million as of September 30, 2023, from $27.60 million at December 31, 2022, primarily due to higher interest receivable, while total other liabilities also increased significantly to $30.27 million from $19.59 million, driven by higher interest payable and accrued expenses[148][150][153] Other Assets and Liabilities (in thousands) | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total Other assets | $29,307 | $27,595 | $1,712 | 6.2% | | Total Other liabilities | $30,267 | $19,593 | $10,674 | 54.5% | Derivative Instruments (Sep 30, 2023) | Derivative Instruments (Sep 30, 2023) | Notional Amount (in thousands) | | :------------------------------------ | :----------------------------- | | Pay Fix/Receive Float Interest Rate Swap Agreements | $405,000 | | Forward Purchase Commitments | $242,775 | Derivative Gains/(Losses) (Nine Months Ended Sep 30) | Derivative Gains/(Losses) (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :--------------------------------------------------- | :------------------ | :------------------ | | Total income/(loss) | $10,514 | $112,533 | - As of September 30, 2023, the company's restricted cash balance included $11.1 million of collateral related to certain derivatives[156] Note 8. Earnings Per Share This note presents the company's basic and diluted earnings per share calculations for the periods ended September 30, 2023 and 2022 - For the nine months ended September 30, 2023, the company reported basic and diluted earnings per share of $0.23, a significant improvement from a loss of $(3.38) per share in the prior year period, driven by a positive net income available to common stockholders[164] Earnings Per Share Metrics (Nine Months Ended Sep 30) | Metric (Nine Months Ended Sep 30) | 2023 (in thousands, except per share data) | 2022 (in thousands, except per share data) | | :-------------------------------- | :----------------------------------------- | :----------------------------------------- | | Net Income/(Loss) Available to Common Stockholders | $4,673 | $(78,552) | | Basic EPS | $0.23 | $(3.38) | | Diluted EPS | $0.23 | $(3.38) | | Weighted Average Common Shares Outstanding | 20,508 | 23,250 | Note 9. Income Taxes This note discusses the company's REIT tax status, its Taxable REIT Subsidiaries, income tax expense, and the valuation allowance against deferred tax assets - The company operates as a REIT, generally exempt from federal income tax on distributed taxable income, but has Taxable REIT Subsidiaries (TRSs) subject to corporate income tax, with an income tax expense of $0.24 million for the nine months ended September 30, 2023, and a full valuation allowance against deferred tax assets[170][173][174] - The company conducts its operations to qualify and be taxed as a REIT, generally not subject to federal income tax on qualifying distributions[170] - The company has wholly owned domestic Taxable REIT Subsidiaries (TRSs) that are subject to U.S. federal, state, and local income tax[173] Income Tax Expense (Nine Months Ended Sep 30) | Income Tax Expense (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :-------------------------------------------- | :------------------ | :------------------ | | Income tax expense | $239 | $179 | - As of September 30, 2023, the company recorded a deferred tax asset of approximately $30.4 million but established a full valuation allowance due to uncertainty of realization[174] - The company did not record any excise tax for the three and nine months ended September 30, 2023 and 2022[172] Note 10. Related Party Transactions This note details the company's external management agreement, management fees, expense reimbursements, and investments in affiliates, including Arc Home - The company is externally managed by AG REIT Management, LLC, an affiliate of Angelo Gordon (now part of TPG), with a management fee of 1.50% of Stockholders' Equity, waived incentive fees for 2021 and 2022, a $2.4 million fee reduction related to the WMC merger, and significant investments in affiliates like Arc Home[176][180][181][184][188][199] - The company is externally managed by AG REIT Management, LLC, a subsidiary of Angelo Gordon, which became an indirect subsidiary of TPG Inc. on November 1, 2023[176][177] - The management fee is 1.50% per annum of the company's Stockholders' Equity, calculated and paid quarterly[181] Management Fee to Affiliate (Nine Months Ended Sep 30) | Management Fee to Affiliate (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :----------------------------------------------------- | :------------------ | :------------------ | | Management fee to affiliate | $6,190 | $5,984 | - The Manager waived the annual incentive fee for fiscal years 2021 and 2022; no incentive fee expense was incurred for the three and nine months ended September 30, 2023[185] - In connection with the WMC merger, the base management fee will be reduced by $0.6 million for the first four quarters (aggregate $2.4 million waiver) following the merger's effective time[180] Expense Reimbursements to Manager or its Affiliates (Nine Months Ended Sep 30) | Expense Reimbursements to Manager or its Affiliates (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :----------------------------------------------------------------------------- | :------------------ | :------------------ | | Non-investment related expenses | $4,200 | $4,215 | | Investment related expenses | $360 | $637 | | Transaction related expenses | $707 | $2,484 | | Total Expense reimbursements | $5,267 | $7,336 | - The company owns an approximate 44.6% interest in Arc Home, a residential mortgage loan originator[199] Equity in Earnings/(Loss) from Affiliates (Nine Months Ended Sep 30) | Equity in Earnings/(Loss) from Affiliates (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :----------------------------------------------------------------- | :------------------ | :------------------ | | Equity in earnings/(loss) from affiliates | $642 | $(9,486) | Residential Mortgage Loans Sold by Arc Home to the Company (Nine Months Ended Sep 30) | Residential Mortgage Loans Sold by Arc Home to the Company (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :------------------------------------------------------------------------------------ | :------------------ | :------------------ | | Unpaid Principal Balance | $442,695 | $1,028,339 | Intra-Entity Profits Eliminated (Nine Months Ended Sep 30) | Intra-Entity Profits Eliminated (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :--------------------------------------------------------- | :------------------ | :------------------ | | Intra-Entity Profits Eliminated | $1,141 | $5,869 | Note 11. Equity This note details the company's stock repurchase programs, equity distribution agreements, shelf registration statement, and outstanding preferred stock - The company has several stock repurchase programs, including $1.5 million remaining under the 2022 program and $15.0 million available under the 2023 program, with no repurchases under the $20.0 million Preferred Repurchase Program, and 9.12 million shares of preferred stock outstanding with an aggregate liquidation preference of $227.99 million as of September 30, 2023[222][227][228][230][231][235] - The 2022 Repurchase Program had approximately $1.5 million of common stock authorized for future repurchases as of September 30, 2023[222][225] Common Stock Repurchases (Nine Months Ended Sep 30, 2023) | Common Stock Repurchases (Nine Months Ended Sep 30, 2023) | Value | | :-------------------------------------------------------- | :---- | | Total Number of Shares Purchased | 1,110,281 | | Weighted Average Price Paid per Share | $5.72 | - The 2023 Repurchase Program, authorized for $15.0 million, had the full amount available for repurchase as of September 30, 2023[227] - The Preferred Repurchase Program, authorized for up to $20.0 million, has not had any share repurchases since its authorization[228] - No shares of common stock were issued under the Equity Distribution Agreements during the three and nine months ended September 30, 2023[230] - A new shelf registration statement for up to $1.0 billion of securities became effective on May 26, 2021, and will expire on May 28, 2024[231] Preferred Stock Outstanding (Sep 30, 2023) | Preferred Stock Outstanding (Sep 30, 2023) | Shares (in thousands) | Aggregate Liquidation Preference (in thousands) | | :----------------------------------------- | :-------------------- | :---------------------------------------------- | | Total | 9,120 | $227,991 | - The Series C Preferred Stock will transition to a floating rate (three-month LIBOR + 6.476% per annum) on or after September 17, 2024[236] Note 12. Commitments and Contingencies This note outlines the company's outstanding commitments for loan purchases and confirms the absence of material legal proceedings - As of September 30, 2023, the company had outstanding commitments of $248.25 million for Non-Agency and Agency-Eligible Loans, primarily through forward purchase commitments with Arc Home, and was not involved in any material legal proceedings[238][240] Commitment Type (Sep 30, 2023) | Commitment Type (Sep 30, 2023) | Total Commitment (in thousands) | | :----------------------------- | :------------------------------ | | Non-Agency and Agency-Eligible Loans | $248,250 | - The company was not involved in any material legal proceedings as of September 30, 2023[238] Note 13. Subsequent Events This note reports on events occurring after the quarter-end, including dividend declarations and updates on the WMC merger approval process - Post-quarter end, the company declared a Q4 2023 common stock dividend of $0.08 per share and Q4 2023 preferred stock dividends, with company stockholders approving the WMC merger stock issuance on November 7, 2023, and the merger expected to close in Q4 2023[242][243][244] - On October 24, 2023, the Board of Directors declared an interim fourth quarter 2023 common stock dividend of $0.08 per share, paid on November 8, 2023[242] - On November 3, 2023, the Board of Directors declared fourth quarter 2023 preferred stock dividends for Series A ($0.51563), Series B ($0.50), and Series C ($0.50) per share, to be paid on December 18, 2023[243] - On November 7, 2023, the company's stockholders approved the issuance of common stock in connection with the Merger with WMC; WMC's special stockholders meeting was adjourned to December 5, 2023, for approval, with the merger expected to close in Q4 2023[244] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the company's financial performance, investment strategy, and market conditions for Q3 2023 and the nine months ended September 30, 2023, including a significant improvement in net income, ongoing efforts to acquire and securitize residential mortgage loans, and the pending merger with WMC - The company is a residential mortgage REIT focused on acquiring and securitizing newly-originated residential mortgage loans in the non-agency segment, aiming for attractive risk-adjusted returns through dividends and capital appreciation[251][252] - The company is externally managed by AG REIT Management, LLC, a subsidiary of Angelo Gordon, which is now part of TPG Inc., leveraging their expertise and securitization platform[261][263] - The proposed merger with Western Asset Mortgage Capital Corporation (WMC) is expected to close in Q4 2023, following the company's stockholder approval for common stock issuance[250][256] - Financial markets experienced volatility in Q3 2023 due to inflation, monetary policy, and geopolitical risks, with the 10-year U.S. treasury yield increasing over 100 basis points and 30-year fixed mortgage rates reaching 7.8% by October[264][265][269] - Home prices continued to rally, with the national S&P/Case-Shiller Home Price Index up 5.3% through the first seven months of the year, exceeding the prior peak[268] Q3 2023 Financial Highlights | Q3 2023 Financial Highlights | Value | | :--------------------------- | :---- | | Book Value per share | $11.37 | | Adjusted Book Value per share | $11.00 | | Net Income/(Loss) Available to Common Stockholders per diluted common share | $(0.33) | | Earnings Available for Distribution per diluted common share | $0.10 | | GAAP Leverage Ratio | 9.7x | | Economic Leverage Ratio | 1.2x | | Dividend per common share declared | $0.18 | Investment Activity (Q3 2023) | Investment Activity (Q3 2023) | Fair Value / Gross Proceeds (in millions) | | :---------------------------- | :---------------------------------------- | | Purchased Non-Agency Loans | $291.2 | | Purchased Agency-Eligible Loans | $414.6 | | Sold Non-Agency Loans | $73.8 | | Sold Re/Non-Performing Loans | $68.7 | | Sold Agency RMBS | $149.1 | - The company executed two rated securitizations in Q3 2023, converting recourse financing to non-recourse financing for Agency-Eligible Loans ($318.3 million UPB) and Non-Agency Loans ($406.4 million UPB)[252] Financial Performance (Nine Months Ended Sep 30) | Financial Performance (Nine Months Ended Sep 30) | 2023 (in thousands) | 2022 (in thousands) | | :----------------------------------------------- | :------------------ | :------------------ | | Net Income/(Loss) Available to Common Stockholders | $4,673 | $(78,552) | | Earnings Available for Distribution (EAD) | $4,326 | $713 | | EAD per Diluted Share | $0.21 | $0.03 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to various market risks, including interest rate, liquidity, real estate value, credit, prepayment, basis, and capital markets risk, which it manages through monitoring, financing structures, and derivatives - The company's primary market risks include interest rates, liquidity, real estate, credit, prepayment rates, basis, and capital markets risk, heightened by sustained inflation, rising mortgage rates, and Federal Reserve actions[438] - Interest rate risk is managed by monitoring investment and financing rates, structuring financing arrangements with varied terms, and using derivative instruments (e.g., interest rate swaps) to adjust interest rate sensitivity[439] Duration Gap (Sep 30, 2023) | Duration Gap (Sep 30, 2023) | Years | | :-------------------------- | :---- | | Agency RMBS subtotal | — | | Securitized product subtotal | 4.12 | | Residential Mortgage Loans subtotal | 0.18 | | Total | 4.30 | Estimated Impact of Interest Rate Changes (Sep 30, 2023) | Estimated Impact of Interest Rate Changes (Sep 30, 2023) | Change in Fair Value as a Percentage of GAAP Equity | | :------------------------------------------------------- | :-------------------------------------------------- | | +75 basis points | (6.9)% | | +50 basis points | (4.6)% | | +25 basis points | (2.3)% | | -25 basis points | 2.4% | | -50 basis points | 4.7% | | -75 basis points | 7.2% | - Liquidity risk, primarily from financing long-maturity assets with shorter-term financings, is mitigated by maintaining prudent leverage, daily liquidity monitoring, and a cushion of cash and unpledged assets[453] - The company is subject to margin calls on both financing arrangements and derivative instruments, which can significantly impact its liquidity position[454][456] - Real estate value risk is influenced by national, regional, and local economic conditions, natural disasters, and demographic factors, which can lead to losses and reduced collateral value[458] - Credit risk from increased borrower defaults and credit spread widening is managed through pre-acquisition due diligence and the use of non-recourse financing[460] - Prepayment risk, where changes in prepayment rates affect asset yields and hedging effectiveness, is mitigated by investing in assets with diverse prepayment characteristics[462][465] - Basis risk, the decline in book value due to widening market spreads between Agency RMBS and Treasury securities, is generally not protected by interest rate swaps[466] - Capital market risk relates to the ability to raise capital through equity or debt instruments, which is crucial for a REIT required to distribute a significant portion of its taxable income[467] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2023, providing reasonable assurance for timely and accurate reporting[469] - No change occurred in the company's internal control over financial reporting during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting[470] PART II. OTHER INFORMATION Item 1. Legal Proceedings As of the report date, the company is not a party to any material litigation or legal proceedings, nor is it aware of any threatened litigation that would have a material adverse effect on its operations or financial condition - The company is not a party to any material litigation or legal proceedings, nor is it aware of any threatened litigation that would have a material adverse effect on its results of operations or financial condition[472] Item 1A. Risk Factors This section refers readers to the comprehensive risk factors detailed in the company's Annual Report on Form 10-K and other filings - Readers are referred to the risks identified under the caption "Risk Factors" in the company's Annual Report on Form 10-K for the year ended December 31, 2022, its Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, and subsequent filings, as well as the "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections herein[473] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report during the period - There were no unregistered sales of equity securities and use of proceeds to report[474] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report during the period - There were no defaults upon senior securities to report[475] Item 4. Mine Safety Disclosures There were no mine safety disclosures to report during the period - There were no mine safety disclosures to report[476] Item 5. Other Information This section reports on Rule 10b5-1 trading arrangements and the stockholder approval of the Common Stock Issuance Proposal related to the WMC merger - No director or officer adopted, modified, or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended September 30, 2023[478] - At a special meeting on November 7, 2023, the company's stockholders approved the Common Stock Issuance Proposal related to the merger with Western Asset Mortgage Capital Corporation (WMC)[479][480] Common Stock Issuance Proposal Vote (Nov 7, 2023) | Common Stock Issuance Proposal Vote (Nov 7, 2023) | Votes | | :------------------------------------------------ | :---- | | Votes For | 9,874,603 | | Votes Against | 333,923 | | Abstentions | 68,467 | - The Adjournment Proposal was approved but was not necessary given the approval of the Common Stock Issuance Proposal[480][482] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including the Merger Agreement, organizational documents, and various certifications - Key exhibits filed include the Agreement and Plan of Merger (Exhibit 2.1), Articles of Amendment and Restatement (Exhibit 3.1), Amended and Restated Bylaws (Exhibit 3.3), Articles Supplementary for various preferred stock series (Exhibits 3.4-3.6), specimen stock certificates (Exhibits 4.1-4.4), the Fourth Amendment to Management Agreement (Exhibit 10.1), and certifications under Rule 13a-14(a) and 18 U.S.C. Section 1350 (Exhibits 31.1, 31.2, 32.1, 32.2)[484][485][486]