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What changed in Cherry Hill Mortgage Investment Corp's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Cherry Hill Mortgage Investment Corp's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+300 added−279 removedSource: 10-K (2024-03-07) vs 10-K (2023-03-07)

Top changes in Cherry Hill Mortgage Investment Corp's 2023 10-K

300 paragraphs added · 279 removed · 223 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWe expect that most of our assets will be held in wholly-owned or majority-owned subsidiaries of our Operating Partnership and that most of these subsidiaries will rely on the exception from the definitions of investment company provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for entities that, among other requirements, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” Section 3(c)(5)(C), as interpreted by the staff of the SEC, generally requires an entity to invest at least 55% of its assets in certain “qualifying real estate interests,” and at least 80% of its assets in qualifying real estate interests plus “real estate-related assets” (with no more than 20% comprised of miscellaneous assets).
Biggest changeWe expect that most of our assets will be held in wholly-owned or majority-owned subsidiaries of our Operating Partnership and that most of these subsidiaries will rely on the exception from the definitions of investment company provided by Section 3(c)(5)(C) of the Investment Company Act, which is available for entities that, among other requirements, are “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate”.
Servicing Related Asset Strategy. The primary focus of our Servicing Related Asset strategy is the acquisition of MSRs from servicers on a bulk and/or flow purchase basis on terms to be negotiated in the future. We currently expect that our investments in Excess MSRs will be through the creation of intercompany Excess MSRs from the MSRs so acquired.
The primary focus of our Servicing Related Asset strategy is the acquisition of MSRs from servicers on a bulk and/or flow purchase basis on terms to be negotiated in the future. We currently expect that our investments in Excess MSRs will be through the creation of intercompany Excess MSRs from the MSRs so acquired.
Our Strategy Our strategy, which may change due to the availability and terms of capital and as market conditions warrant, involves: • allocating a substantial portion of our equity capital to the acquisition of Servicing Related Assets; 9 Table of Contents • the creation of intercompany Excess MSRs from MSRs acquired by our mortgage servicing subsidiary, Aurora; • acquiring RMBS on a leveraged basis; and • opportunistically mitigating our prepayment and interest rate and, to a lesser extent, credit risk by using a variety of hedging instruments and, where applicable and available, recapture agreements.
Our Strategy Our strategy, which may change due to the availability and terms of capital and as market conditions warrant, involves: • allocating a substantial portion of our equity capital to the acquisition of Servicing Related Assets; • the creation of intercompany Excess MSRs from MSRs acquired by our mortgage servicing subsidiary, Aurora; • acquiring RMBS on a leveraged basis; and • opportunistically mitigating our prepayment and interest rate and, to a lesser extent, credit risk by using a variety of hedging instruments and, where applicable and available, recapture agreements. 9 Table of Contents Servicing Related Asset Strategy.
See “Item 8. Consolidated Financial Statements and Supplementary Data—Note 12—Notes Payable.” We may utilize other types of borrowings in the future, including corporate debt, securitization, or other more complex financing structures. Additionally, we may take advantage of available borrowings, if any, under new programs established by the U.S. Government to finance our assets.
See “Item 8. Consolidated Financial Statements and Supplementary Data—Note 12—Notes Payable”. We may utilize other types of borrowings in the future, including corporate debt, securitization, or other more complex financing structures. Additionally, we may take advantage of available borrowings, if any, under new programs established by the U.S. Government to finance our assets.
Changes to our investment guidelines may include, without limitation, modification or expansion of the types of assets which we may acquire. Our board of directors receives a report of our investments each quarter in conjunction with our board’s review of our quarterly results.
Changes to our investment guidelines may include, without limitation, modification or expansion of the types of assets which we may acquire. 11 Table of Contents Our board of directors receives a report of our investments each quarter in conjunction with our board’s review of our quarterly results.
We have entered into repurchase agreements with 34 counterparties as of December 31, 2022. From time to time, we expect to negotiate and enter into additional master repurchase agreements with other counterparties that could produce opportunities to acquire certain RMBS that may not be available from our existing counterparties. See “Item 7.
We have entered into repurchase agreements with 35 counterparties as of December 31, 2023. From time to time, we expect to negotiate and enter into additional master repurchase agreements with other counterparties that could produce opportunities to acquire certain RMBS that may not be available from our existing counterparties. See “Item 7.
Our Investment Guidelines The investment guidelines for our assets and borrowings are as follows: • No investment will be made if it causes us to fail to qualify as a REIT under the Code. • No investment will be made if it causes us to be regulated as an investment company under the Investment Company Act. • We will not enter into principal transactions or split price executions with Freedom Mortgage or any of its affiliates unless such transaction is otherwise in accordance with our investment guidelines and the management agreement between us and our Manager and the terms of such transaction are at least as favorable to us as to Freedom Mortgage or its affiliate. • Any proposed material investment that is outside our targeted asset classes must be approved by at least a majority of our independent directors. 11 Table of Contents Our Manager makes the determinations as to the percentage of assets that are invested in each of our targeted asset classes, consistent with our investment guidelines.
Our Investment Guidelines The investment guidelines for our assets and borrowings are as follows: • No investment will be made if it causes us to fail to qualify as a REIT under the Code. • No investment will be made if it causes us to be regulated as an investment company under the Investment Company Act. • We will not enter into principal transactions or split price executions with Freedom Mortgage or any of its affiliates unless such transaction is otherwise in accordance with our investment guidelines and the management agreement between us and our Manager and the terms of such transaction are at least as favorable to us as to Freedom Mortgage or its affiliate. • Any proposed material investment that is outside our targeted asset classes must be approved by at least a majority of our independent directors.
Our common stock, our 8.20% Series A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (our “Series B Preferred Stock”) are listed and traded on the New York Stock Exchange (“NYSE”) under the symbols “CHMI,” “CHMI-PRA” and “CHMI-PRB,” respectively.
Our common stock, our 8.20% Series A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (our “Series B Preferred Stock”) are listed and traded on the New York Stock Exchange (“NYSE”) under the symbols “CHMI”, “CHMI-PRA” and “CHMI-PRB”, respectively.
Government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” Excluded from the term “investment securities,” among other things, are U.S.
Government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test”. Excluded from the term “investment securities”, among other things, are U.S.
Competition We compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities for investment opportunities in general. See “Item 1A.
Competition We compete with other mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies and other entities for investment opportunities in general. See “Item 1A. Risk Factors—We operate in a highly competitive market”.
Risk Factors—We operate in a highly competitive market.” Human Capital Resources We are externally managed and rely on our Manager to provide the personnel necessary to conduct our investment operations. As of the date of this Annual Report, there are 12 individuals who work in our business.
Human Capital Resources We are externally managed and rely on our Manager to provide the personnel necessary to conduct our investment operations. As of the date of this Annual Report, there are 12 individuals who work in our business.
We also may raise capital by issuing unsecured debt or preferred or common stock. 12 Table of Contents Interest and Financing Risk Hedging Subject to maintaining our qualification as a REIT and maintaining an exception from the definitions of “investment company” under the Investment Company Act (or otherwise not falling within those definitions), we use certain derivative financial instruments and other hedging instruments to mitigate interest rate risk and financing pricing risk we expect to arise from our repurchase agreement financings associated with our RMBS and the MSR financing facilities for our MSRs.
Interest and Financing Risk Hedging Subject to maintaining our qualification as a REIT and maintaining an exception from the definitions of “investment company” under the Investment Company Act (or otherwise not falling within those definitions), we use certain derivative financial instruments and other hedging instruments to mitigate interest rate risk and financing pricing risk we expect to arise from our repurchase agreement financings associated with our RMBS and the MSR financing facilities for our MSRs.
We operate our business through the following segments: (i) investments in RMBS; (ii) investments in Servicing Related Assets; and (iii) “All Other.” For information regarding the segments in which we operate, see “Item 8.
We operate our business through the following segments: (i) investments in RMBS; (ii) investments in Servicing Related Assets; and (iii) “All Other.” For information regarding the segments in which we operate, see “Item 8. Consolidated Financial Statements and Supplementary Data—Note 3—Segment Reporting”.
We rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business. For additional information regarding the management agreement with our Manager, please see “Item 7.
We rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business. For additional information regarding the management agreement with our Manager, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations—Management Agreement”.
Hutchby, our Chief Financial Officer, Treasurer and Secretary; and our MSR portfolio manager. Our Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and is subject to the regulatory oversight of the SEC.
Our Manager is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and is subject to the regulatory oversight of the SEC.
Consolidated Financial Statements and Supplementary Data—Note 3—Segment Reporting.” Our Targeted Asset Classes Our primary targeted asset classes currently consist of: • RMBS, including Agency RMBS, residential mortgage pass-through certificates, CMOs and TBAs; and • Servicing Related Assets consisting of MSRs and Excess MSRs.
Our Targeted Asset Classes Our primary targeted asset classes currently consist of: • RMBS, including Agency RMBS, residential mortgage pass-through certificates, CMOs and TBAs; and • Servicing Related Assets consisting of MSRs and Excess MSRs.
Policies with Respect to Certain Other Activities If our board of directors determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities, the retention of cash flow and other funds from debt financing, or a combination of these methods.
Consolidated Financial Statements and Supplementary Data—Note 2—Basis of Presentation and Significant Accounting Policies—Derivatives and Hedging Activities”. 12 Table of Contents Policies with Respect to Certain Other Activities If our board of directors determines that additional funding is required, we may raise such funds through additional offerings of equity or debt securities, the retention of cash flow and other funds from debt financing, or a combination of these methods.
However, certain subsidiaries might rely on Section 3(c)(7) of the Investment Company Act and, therefore, our Operating Partnership’s interest in each of these subsidiaries would constitute an “investment security” for purposes of determining whether our Operating Partnership passes the 40% test. 14 Table of Contents In the event that we or our Operating Partnership were to acquire assets that could make either entity fall within the definition of an investment company under Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act, we believe that we and our Operating Partnership would still qualify for an exception from the definitions of “investment company” provided by Section 3(c)(5)(C), Section 3(c)(6) or both.
In the event that we or our Operating Partnership were to acquire assets that could make either entity fall within the definition of an investment company under Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act, we believe that we and our Operating Partnership would still qualify for an exception from the definitions of “investment company” provided by Section 3(c)(5)(C), Section 3(c)(6) or both.
Our overall hedging strategy reflects the natural but limited hedging effect on our RMBS of our Servicing Related Assets, which tend to increase in value as interest rates rise. See “Item 8. Consolidated Financial Statements and Supplementary Data—Note 2—Basis of Presentation and Significant Accounting Policies—Derivatives and Hedging Activities”.
Our overall hedging strategy reflects the natural but limited hedging effect on our RMBS of our Servicing Related Assets, which tend to increase in value as interest rates rise. See “Item 8.
As a result, we have relied on equity compensation in the form of long-term incentive plan units, which are a special category of limited partnership interests in the Operating Partnership, to incentivize and retain our personnel. 13 Table of Contents Our Tax Status We have elected to be taxed as a REIT under the Code.
As a result, we have relied on equity compensation in the form of long-term incentive plan units, which are a special category of limited partnership interests in the Operating Partnership, to incentivize and retain our personnel. Environmental Considerations Our environmental strategy is based on simplicity and transparency.
We have a Risk Committee to monitor our investment policies, portfolio holdings, financing and hedging strategies and compliance with our investment guidelines. Our Risk Committee is made up of personnel provided to the Company through our Manager and those personnel are as follows: Mr. Lown, our President and Chief Executive Officer; Mr. Evans, our Chief Investment Officer; Mr.
Our Manager’s Risk Committee is made up of personnel provided to the Company through our Manager and those personnel are as follows: Mr. Lown, our President and Chief Executive Officer; Mr. Evans, our Chief Investment Officer; Mr. Hutchby, our Chief Financial Officer, Treasurer and Secretary; and our MSR portfolio manager.
For purposes of the exception provided by Section 3(c)(5)(C), we classify investments and other assets based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate related asset.
For purposes of the exception provided by Section 3(c)(5)(C), we classify investments and other assets based in large measure on no-action letters issued by the SEC staff and other SEC interpretive guidance and, in the absence of SEC guidance, on our view of what constitutes a qualifying real estate asset and a real estate related asset. 14 Table of Contents However, certain subsidiaries might rely on Section 3(c)(7) of the Investment Company Act and, therefore, our Operating Partnership’s interest in each of these subsidiaries would constitute an “investment security” for purposes of determining whether our Operating Partnership passes the 40% test.
Our Manager’s acquisition decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. In addition, our investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders.
Our Manager makes the determinations as to the percentage of assets that are invested in each of our targeted asset classes, consistent with our investment guidelines. Our Manager’s acquisition decisions depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations—Management Agreement.” The principal office and place of business of our Manager is 1451 Route 34, Suite 303, Farmingdale, New Jersey 07727, and the telephone number of our Manager’s executive offices is (877) 870-7005.
The principal office and place of business of our Manager is 1451 Route 34, Suite 303, Farmingdale, New Jersey 07727, and the telephone number of our Manager’s executive offices is (877) 870-7005. Our Manager has a Risk Committee that monitors our investment policies, portfolio holdings, financing and hedging strategies and compliance with our investment guidelines.
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In addition, our investment guidelines may be changed from time to time by our board of directors without the approval of our stockholders.
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We also may raise capital by issuing unsecured debt or preferred or common stock.
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Specifically, we endeavor to minimize our environmental impact by (1) reducing waste that is generated by our Company and sent to landfills, (2) purchasing, to the extent practicable, environmentally responsible products, and (3) reducing internal paper usage. We believe that the Company’s corporate footprint and business operations have a relatively modest impact on the environment.
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Nevertheless, we believe in promoting a sustainable environment by using resources as efficiently and responsibly as practicable.
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Our commitment to these principles is reflected in our daily activities in a variety of ways: • To reduce waste and promote a cleaner environment, we recycle paper, glass, plastic and aluminum cans, electronic equipment, batteries and ink cartridges, and we emphasize electronic communications, record storage e-statements and invoices to reduce our office paper usage. • To reduce our carbon footprint, we utilize video conferencing as an alternative to business travel. • To reduce energy usage, we use Energy Star ® certified products, printers and televisions.
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Although we are unable to predict the rate at which climate change will progress, we recognize that the physical effects of climate change could have a material adverse effect on our operations.
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To the extent that climate change impacts changes in weather patterns, assets in which we hold a direct or indirect interest could experience severe weather, including hurricanes, severe winter storms, wildfires and flooding due to increases in storm intensity and rising sea levels, among other effects that could impact house prices and housing-related costs and/or disrupt borrowers’ ability to pay their mortgage.
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Moreover, long term climate change could trigger extreme weather conditions that result in macroeconomic and demographic shifts. Over time, these conditions could result in repricing of the assets that we hold.
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There can be no assurance that climate change and severe weather will not have a material adverse effect on our financial performance. 13 Table of Contents Our Tax Status We have elected to be taxed as a REIT under the Code.
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Section 3(c)(5)(C), as interpreted by the staff of the SEC, generally requires an entity to invest at least 55% of its assets in certain “qualifying real estate interests”, and at least 80% of its assets in qualifying real estate interests plus “real estate-related assets” (with no more than 20% comprised of miscellaneous assets).

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeUnder current Maryland law, our present and former directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from: • actual receipt of an improper benefit or profit in money, property or services; or • active and deliberate dishonesty by the director or officer that was established by a final judgment and is material to the cause of action.
Biggest changeUnder current Maryland law, our present and former directors and officers will not have any liability to us or our stockholders for money damages other than liability resulting from: • actual receipt of an improper benefit or profit in money, property or services; or • active and deliberate dishonesty by the director or officer that was established by a final judgment and is material to the cause of action. 30 Table of Contents In addition, our charter authorizes us to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law, and our bylaws require us to indemnify our present and former directors and officers, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us as a director or officer in those and other capacities.
If, after such consultation, the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent shall use such substitute or successor base rate.
If, after such consultation, the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent shall use such substitute or successor base rate.
Risks Related to Our Preferred Stock Our 8.20% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock,” and together with the Series A Preferred Stock, the “Preferred Stock”) ranks junior to our existing and future indebtedness and will rank junior to any other class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to the Preferred Stock with respect to the payment of dividends and the distribution of assets in the event of our liquidation, dissolution or winding up (“Senior Stock”), and your interests could be diluted by the issuance of additional shares of preferred stock and by other transactions.
Risks Related to Our Preferred Stock Our 8.20% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”) and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (the “Series B Preferred Stock”, and together with the Series A Preferred Stock, the “Preferred Stock”) ranks junior to our existing and future indebtedness and will rank junior to any other class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to the Preferred Stock with respect to the payment of dividends and the distribution of assets in the event of our liquidation, dissolution or winding up (“Senior Stock”), and your interests could be diluted by the issuance of additional shares of preferred stock and by other transactions.
Our Manager relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. These models are based on assumptions and actual results may differ significantly from the modeled expectations. Our Manager relies on analytical models and information and data supplied by third parties.
Our Manager relies on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. These models are based on assumptions and actual results may differ significantly from the modeled expectations. Our Manager relies on analytical models and information and data, including models, information and data supplied by third parties.
CME Term SOFR is derived from daily SOFR, which is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions. This means that CME Term SOFR is fundamentally different from USD LIBOR for two key reasons. Daily SOFR is a secured rate, while USD LIBOR is an unsecured rate.
CME Term SOFR is derived from daily SOFR, which is a broad U.S. Treasury repo financing rate that represents overnight secured funding transactions. This means that CME Term SOFR is fundamentally different from USD LIBOR for two key reasons. Daily SOFR is a secured rate, while USD LIBOR was an unsecured rate.
In addition, the predictive models used by our Manager may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices.
In addition, the predictive models used by our Manager on our behalf may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain assets than actual market prices.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include: • the uncertainty and economic impact of global pandemics, including the COVID-19 pandemic and the resulting impact on market liquidity, the value of assets and availability of financing; , • actual or anticipated variations in our quarterly operating results; • increases in market interest rates that lead purchasers of our common stock to demand a higher yield or to seek alternative investments; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions or departures of key personnel; • actions by stockholders; • speculation in the press or investment community; • general market, economic and political conditions and the impact of these conditions on the global credit markets; • the operating performance of other similar companies; • changes in accounting principles; and • passage of legislation, changes in monetary policy or other regulatory developments that adversely affect us or our industry.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include: • the uncertainty and economic impact of global pandemics, including the COVID-19 pandemic and the resulting impact on market liquidity, the value of assets and availability of financing; • actual or anticipated variations in our quarterly operating results; • increases in market interest rates that lead purchasers of our common stock to demand a higher yield or to seek alternative investments; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions or departures of key personnel; 31 Table of Contents • actions by stockholders; • speculation in the press or investment community; • general market, economic and political conditions and the impact of these conditions on the global credit markets; • the operating performance of other similar companies; • changes in accounting principles; and • passage of legislation, changes in monetary policy or other regulatory developments that adversely affect us or our industry.
We could also be materially and adversely affected if a mortgage servicer is unable to adequately service the underlying mortgage loans due to the following reasons, among others: • its failure to comply with applicable laws and regulations; • its failure to perform its loss mitigation obligations; • a downgrade in its servicer rating; • its failure to perform adequately in its external audits; • a failure in or poor performance of its operational systems or infrastructure; • a data breach and other cybersecurity incidents impacting a mortgage servicer; • regulatory or legal scrutiny, enforcement proceedings, consent orders or similar actions regarding any aspect of its operations, including, but not limited to, servicing practices and foreclosure processes lengthening foreclosure timelines; or • the transfer of servicing to another party.
We could also be materially and adversely affected if a mortgage servicer is unable to adequately service the underlying mortgage loans due to the following reasons, among others: • its failure to comply with applicable laws and regulations; • its failure to perform its loss mitigation obligations; • a downgrade in its servicer rating; 16 Table of Contents • its failure to perform adequately in its external audits; • a failure in or poor performance of its operational systems or infrastructure; • a data breach and other cybersecurity incidents impacting a mortgage servicer; • regulatory or legal scrutiny, enforcement proceedings, consent orders or similar actions regarding any aspect of its operations, including, but not limited to, servicing practices and foreclosure processes lengthening foreclosure timelines; or • the transfer of servicing to another party.
The composition and characteristics of CME Term SOFR are not the same as those of USD LIBOR and there is no guarantee that CME Term SOFR is a comparable substitute for USD LIBOR. The composition and characteristics of CME Term SOFR are not the same as those of USD LIBOR.
The composition and characteristics of CME Term SOFR are not the same as were those of USD LIBOR and there is no guarantee that CME Term SOFR is a comparable substitute for USD LIBOR. The composition and characteristics of CME Term SOFR are not the same as were those of USD LIBOR.
From and including April 15, 2024 (the “floating rate period”), and because USD LIBOR will have ceased publication, under the terms of the Series B Preferred Stock, we will appoint a calculation agent and the calculation agent will consult with an investment bank of national standing to determine whether there is an industry accepted substitute or successor base rate to USD LIBOR.
From and including April 15, 2024 (the “floating rate period”), and because USD LIBOR has ceased publication, under the terms of the Series B Preferred Stock, we will appoint a calculation agent and the calculation agent will consult with an investment bank of national standing to determine whether there is an industry accepted substitute or successor base rate to USD LIBOR.
SOFR is filtered by FRBNY to remove a portion of the foregoing transactions considered to be “specials.” According to FRBNY, “specials” are repos for specific-issue collateral which take place at cash-lending rates below those for general collateral repos because cash providers are willing to accept a lesser return on their cash in order to obtain a particular security.
SOFR is filtered by FRBNY to remove a portion of the foregoing transactions considered to be “specials”. According to FRBNY, “specials” are repos for specific-issue collateral which take place at cash-lending rates below those for general collateral repos because cash providers are willing to accept a lesser return on their cash in order to obtain a particular security.
In addition, models are only as accurate as the assumptions that go into building the models. Our Manager’s use of models and data may induce it to purchase certain assets at prices that are too high, sell certain other assets at prices that are too low or miss favorable opportunities altogether.
In addition, models are only as accurate as the assumptions that go into building the models. Our Manager’s use of models and data on our behalf may induce it to purchase certain assets at prices that are too high, sell certain other assets at prices that are too low or miss favorable opportunities altogether.
Further, the REIT rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. 41 Table of Contents Our ownership limitation may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their common stock.
Further, the REIT rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Our ownership limitation may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their common stock.
Taking into account the time value of money, this acceleration of U.S. federal income tax liabilities may reduce a stockholder’s after-tax return on his or her investment to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate phantom income. 42 Table of Contents Liquidation of our assets may jeopardize our REIT qualification.
Taking into account the time value of money, this acceleration of U.S. federal income tax liabilities may reduce a stockholder’s after-tax return on his or her investment to an amount less than the after-tax return on an investment with an identical before-tax rate of return that did not generate phantom income. Liquidation of our assets may jeopardize our REIT qualification.
Downward adjustments or “mark-to-market losses” would reduce our total stockholders’ equity; • the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and • the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
Downward adjustments or “mark-to-market losses” would reduce our total stockholders’ equity; • the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and 24 Table of Contents • the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful. Some models, such as prepayment models or mortgage default models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses.
Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful. 20 Table of Contents Some models, such as prepayment models or mortgage default models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses.
If our Manager ceases to be our Manager for any reason, including upon the non-renewal of our management agreement, and we are unable to obtain financing or enter into or maintain derivative transactions, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be materially adversely affected.
If our Manager ceases to be our external manager for any reason, including upon the non-renewal of the management agreement between us and our Manager, and we are unable to obtain financing or enter into or maintain derivative transactions, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be materially adversely affected.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: 39 Table of Contents • 85% of our REIT ordinary income for that year; • 95% of our REIT capital gain net income for that year; and • any undistributed taxable income from prior years.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: • 85% of our REIT ordinary income for that year; • 95% of our REIT capital gain net income for that year; and • any undistributed taxable income from prior years.
Poor decisions could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. 27 Table of Contents There will be conflicts of interest in our relationships with our Manager and Freedom Mortgage, which could result in decisions that are not in the best interests of our stockholders.
Poor decisions could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. There will be conflicts of interest in our relationships with our Manager and Freedom Mortgage, which could result in decisions that are not in the best interests of our stockholders.
As a result of these and other factors, holders of our Preferred Stock may experience a decrease, which could be substantial and rapid, in the market price of the Preferred Stock, including decreases unrelated to our operating performance or prospects. Future offerings of debt or equity securities may adversely affect the market price of our Preferred Stock.
As a result of these and other factors, holders of our Preferred Stock may experience a decrease, which could be substantial and rapid, in the market price of the Preferred Stock, including decreases unrelated to our operating performance or prospects. 35 Table of Contents Future offerings of debt or equity securities may adversely affect the market price of our Preferred Stock.
If we failed one of those tests, we would either be required to pay a penalty tax, which could be material, to maintain REIT status, or we would fail to qualify as a REIT. 40 Table of Contents The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.
If we failed one of those tests, we would either be required to pay a penalty tax, which could be material, to maintain REIT status, or we would fail to qualify as a REIT. The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.
Our board of directors approves our major strategies, including our strategies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other strategies without a vote of our stockholders. Certain provisions of Maryland law could inhibit a change in our control.
Our board of directors approves our major strategies, including our strategies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other strategies without a vote of our stockholders. 29 Table of Contents Certain provisions of Maryland law could inhibit a change in our control.
These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in our control that is in the best interests of our stockholders. 31 Table of Contents Risks Related to Our Common Stock The market price and trading volume of our common stock may be volatile.
These requirements make it more difficult to change our management by removing and replacing directors and may prevent a change in our control that is in the best interests of our stockholders. Risks Related to Our Common Stock The market price and trading volume of our common stock may be volatile.
Changes in the GSEs decisions as to when to repurchase delinquent loans can materially impact prepayment rates. Interest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our income during periods of changing interest rates.
Changes in the GSEs decisions as to when to repurchase delinquent loans can materially impact prepayment rates. 19 Table of Contents Interest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our income during periods of changing interest rates.
Further, we cannot predict or control the impact future actions by the Federal Reserve will have on our business. Accordingly, future actions by the Federal Reserve could have a material and adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
We cannot predict or control the impact future actions by the Federal Reserve will have on the overall economy or on our business. Accordingly, future actions by the Federal Reserve could have a material and adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
Unless our failure to qualify as a REIT was subject to relief under U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
Unless our failure to qualify as a REIT was subject to relief under U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. 38 Table of Contents Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business. Distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary income.
In addition, some of our distributions may include a return of capital, which would reduce the amount of capital available to operate our business. 32 Table of Contents Distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary income.
Accordingly, if our common stock is delisted from the NYSE, the ability to transfer or sell shares of our Preferred Stock may be limited and the market value of our Preferred Stock will likely be materially adversely affected. 36 Table of Contents Future discontinuance of U.S. dollar LIBOR might adversely affect the value of investments in the Series B Preferred Stock.
Accordingly, if our common stock is delisted from the NYSE, the ability to transfer or sell shares of our Preferred Stock may be limited and the market value of our Preferred Stock will likely be materially adversely affected. The discontinuance of U.S. dollar LIBOR might adversely affect the value of investments in the Series B Preferred Stock.
Further, there is no assurance that the characteristics of any successor rate will be similar to USD LIBOR, or that any successor rate will produce the economic equivalent of USD LIBOR. Potential conflicts of interest in connection with replacing USD LIBOR.
Further, there is no assurance that the characteristics of any successor rate will be similar to USD LIBOR, or that any successor rate will produce the economic equivalent of USD LIBOR. 36 Table of Contents Potential conflicts of interest in connection with replacing USD LIBOR.
Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. 25 Table of Contents We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments.
Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. We may change our investment strategy, investment guidelines and asset allocation without notice or stockholder consent, which may result in riskier investments.
If the rate at which dividends accrue on the Series B Preferred Stock on any day or for any dividend period during the floating rate period declines to zero or becomes negative, no dividends will accrue on the Series B Preferred Stock with respect to that day or dividend period. 38 Table of Contents FRBNY started publishing SOFR in April 2018.
If the rate at which dividends accrue on the Series B Preferred Stock on any day or for any dividend period during the floating rate period declines to zero or becomes negative, no dividends will accrue on the Series B Preferred Stock with respect to that day or dividend period. FRBNY started publishing SOFR in April 2018.
The Preferred Stock has not been rated. We have not sought to obtain a rating for our Preferred Stock, and the Preferred Stock may never be rated.
We have not sought to obtain a rating for our Preferred Stock, and the Preferred Stock may never be rated.
Other than these limited circumstances, holders of our Preferred Stock generally do not have any voting rights. 35 Table of Contents The market price of our Preferred Stock could be substantially affected by various factors.
Other than these limited circumstances, holders of our Preferred Stock generally do not have any voting rights. The market price of our Preferred Stock could be substantially affected by various factors.
FRBNY notes that it obtains information from DTCC Solutions LLC, an affiliate of DTCC. FRBNY publishes SOFR daily on its website at https://apps.newyorkfed.org/markets/autorates/sofr.
FRBNY notes that it obtains information from DTCC Solutions LLC, an affiliate of DTCC. 37 Table of Contents FRBNY publishes SOFR daily on its website at https://apps.newyorkfed.org/markets/autorates/sofr.
We did not redeem any Series A Preferred Stock during the year ended December 31, 2022.
We did not redeem any Series A Preferred Stock during the year ended December 31, 2023.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including: • “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and • “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. 30 Table of Contents We have elected to opt-out of these provisions of the MGCL, in the case of the business combination provisions, by resolution of our board of directors exempting any business combination between us and any other person (provided that such business combination is first approved by our board of directors, including a majority of our directors who are not affiliates or associates of such person), and, in the case of the control share provisions, pursuant to a provision in our bylaws.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or impeding a change of control under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the then-prevailing market price of our common stock, including: • “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of our then-outstanding stock) or an affiliate of an interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder, and thereafter require two supermajority stockholder votes to approve any such combination; and • “control share” provisions that provide that a holder of “control shares” of the Company (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), entitle the acquiror to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares,” subject to certain exceptions) generally has no voting rights with respect to the control shares except to the extent approved by our stockholders by the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is input correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose values are particularly sensitive to various factors.
All valuation models rely on correct market data inputs. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is input correctly, “model prices” will often differ substantially from market prices, especially for securities with complex characteristics or whose values are particularly sensitive to various factors.
We do not directly service the mortgage loans underlying our Servicing Related Assets. Instead, we contract with third-party servicers to perform all servicing obligations. As a result, our investments in Servicing Related Assets are dependent on the entity performing the actual servicing of the mortgage loans, called the mortgage servicer, to perform its servicing obligations.
Instead, we contract with third-party servicers to perform all servicing obligations. As a result, our investments in Servicing Related Assets are dependent on the entity performing the actual servicing of the mortgage loans, called the mortgage servicer, to perform its servicing obligations.
Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation, and are therefore more speculative and of more limited reliability. 20 Table of Contents All valuation models rely on correct market data inputs.
Furthermore, because predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data, and, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, or deep economic recessions or depressions), such models must employ greater degrees of extrapolation, and are therefore more speculative and of more limited reliability.
In addition, we will indemnify our Manager, Freedom Mortgage, and their respective affiliates and each of their officers, directors, trustees, members, stockholders, partners, managers, Investment Committee members, employees, agents, successors and assigns, with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, fraud or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement.
In addition, we will indemnify our Manager, Freedom Mortgage, and their respective affiliates and each of their officers, directors, trustees, members, stockholders, partners, managers, Investment Committee members, employees, agents, successors and assigns, with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, fraud or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement. 28 Table of Contents If our Manager ceases to be our Manager pursuant to the management agreement, our lenders and our derivative counterparties may cease doing business with us.
That fee will increase the effective cost to us of terminating the management agreement or electing not to renew the management agreement, thereby adversely affecting our ability to terminate our Manager without cause.
The termination fee, if one is payable, will increase the effective cost to us of terminating or electing not to renew the management agreement, thereby adversely affecting our ability to terminate our Manager without cause.
These requirements limit the types of assets those subsidiaries can own and the timing of sales and purchases of those assets. 29 Table of Contents To classify the assets held by our subsidiaries as qualifying real estate interests or real estate-related assets, we seek to rely on no-action letters and other guidance published by the SEC staff regarding those kinds of assets, as well as upon our analyses (in consultation with outside counsel) of guidance published with respect to other types of assets.
To classify the assets held by our subsidiaries as qualifying real estate interests or real estate-related assets, we seek to rely on no-action letters and other guidance published by the SEC staff regarding those kinds of assets, as well as upon our analyses (in consultation with outside counsel) of guidance published with respect to other types of assets.
Such scrutiny could result in our incurring meaningful additional costs or fines or being subject to material operational requirements or restrictions, each of which could adversely affect our business and results of operations.
Such scrutiny could result in our incurring meaningful additional costs or fines or being subject to governmental actions such as denial, suspension or revocation of licenses, or other material operational requirements or restrictions, each of which could adversely affect our business and results of operations.
If our Manager ceases to be our Manager, it would constitute an event of default or early termination event under some of our financing and hedging agreements, upon which our counterparties would have the right to terminate their agreements with us.
If our Manager ceases to be our external manager without the consent of certain of our counterparties, it would constitute an event of default or early termination event under the applicable financing or hedging environment, upon which those counterparties would have the right to terminate their agreements with us.
To the extent we do not utilize derivatives to hedge against changes in the fair value of our Servicing Related Assets, our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, those assets as interest rates change.
To the extent we do not utilize derivatives to hedge against changes in the fair value of our Servicing Related Assets, our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, those assets as interest rates change. 18 Table of Contents If delinquencies on mortgage loans increase, the value of our Servicing Related Assets may decline significantly.
If the IRS were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
If the IRS were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs. 40 Table of Contents Complying with REIT requirements may limit our ability to hedge effectively.
An increase in delinquencies on the mortgage loans underlying the Servicing Related Assets will generally result in lower revenue because, typically, servicers will only collect servicing fees from GSEs or mortgage owners for performing loans. Our expectation of delinquencies is a significant assumption underlying the cash flow projections on the related pools of mortgage loans.
Delinquency rates have a significant impact on the value of our Servicing Related Assets. An increase in delinquencies on the mortgage loans underlying the Servicing Related Assets will generally result in lower revenue because, typically, servicers will only collect servicing fees from GSEs or mortgage owners for performing loans.
If delinquencies are significantly greater than expected, the actual fair value of the Servicing Related Assets could be diminished. As a result, we could suffer a loss. Prepayment rates can change, adversely affecting the performance of our assets.
Our expectation of delinquencies is a significant assumption underlying the cash flow projections on the related pools of mortgage loans. If delinquencies are significantly greater than expected, the actual fair value of the Servicing Related Assets could be diminished. As a result, we could suffer a loss. Prepayment rates can change, adversely affecting the performance of our assets.
The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock.
The more favorable rates applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our stock. 41 Table of Contents We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our Preferred Stock and on our common stock, to pay our indebtedness or to fund our other liquidity needs. 34 Table of Contents Holders of our Preferred Stock may not be able to exercise conversion rights upon a change of control.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our Preferred Stock and on our common stock, to pay our indebtedness or to fund our other liquidity needs.
We will declare and make distributions to our stockholders only to the extent approved by our board of directors. 26 Table of Contents Risks Related to Our Relationship with our Manager We are dependent on our Manager and certain key personnel that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates or elects not to renew the management agreement or such key personnel are no longer available to us.
Risks Related to Our Relationship with our Manager We are dependent on our Manager and certain key personnel that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates or elects not to renew the management agreement or such key personnel are no longer available to us.
In addition, the change of control conversion feature of the Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change of control transaction under circumstances that otherwise could provide the holders of Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that stockholders may otherwise believe is in their best interests.
In addition, the change of control conversion feature of the Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change of control transaction under circumstances that otherwise could provide the holders of Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that stockholders may otherwise believe is in their best interests. 34 Table of Contents Our charter, including the articles supplementary designating the Preferred Stock, contains restrictions upon transfer and ownership of our stock, which may impair the ability of holders to acquire the Preferred Stock or convert Preferred Stock into our common stock.
Termination of our management agreement without cause or an election not to renew the term of the management agreement will result in a significant termination fee payable by us.
Termination of our management agreement without cause or an election not to renew the term of the management agreement will result in a significant termination fee payable by us unless the management agreement is terminated or not renewed in connection with an internalization event (as defined in the management agreement).
Our acquisition of Servicing Related Assets on underlying loans or securitized by an Agency requires the prior consent of that Agency. The Agencies may require that we submit ourselves to costly or burdensome conditions as a prerequisite to their consent to our investments in Servicing Related Assets.
The Agencies may require that we submit ourselves to costly or burdensome conditions as a prerequisite to their consent to our investments in Servicing Related Assets.
Our management agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives, except that under our management agreement neither our Manager nor any entity controlled by or under common control with our Manager is permitted to raise or sponsor any new pooled investment vehicle whose investment policies, guidelines or plans target as its primary investment category investments in Excess MSRs.
In addition, in the future, our Manager or its affiliates may have investments in and/or earn fees from such other investment vehicles that are higher than their economic interests in us and which may therefore create an incentive to allocate investments to such other investment vehicles. 27 Table of Contents Our management agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives, except that under our management agreement neither our Manager nor any entity controlled by or under common control with our Manager is permitted to raise or sponsor any new pooled investment vehicle whose investment policies, guidelines or plans target as its primary investment category investments in Excess MSRs.
If exercisable, the change of control conversion rights applicable to our Preferred Stock may not adequately compensate holders of our Preferred Stock. These change of control conversion rights may also make it more difficult for a party to acquire us or discourage a party from acquiring us.
These change of control conversion rights may also make it more difficult for a party to acquire us or discourage a party from acquiring us.
Sales of substantial amounts of shares of our common stock or securities convertible into our common stock, or the perception that such sales could occur, may adversely affect prevailing market values for our common stock. 32 Table of Contents Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute the common stock holdings of our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute the common stock holdings of our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.
Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our common or preferred securities and a resulting increased risk of litigation and regulatory enforcement actions. 28 Table of Contents The management agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our common or preferred securities and a resulting increased risk of litigation and regulatory enforcement actions.
If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of our Preferred Stock then outstanding.
If we are forced to liquidate our assets to pay our creditors, we may not have sufficient assets to pay amounts due on any or all of our Preferred Stock then outstanding. We may in the future incur substantial amounts of debt and other obligations that will rank senior to our Preferred Stock.
The determination of the fair value of Servicing Related Assets requires our management to make numerous estimates and assumptions that could materially differ from actual results.
We record our Servicing Related Assets on our balance sheet at fair value, and changes in their fair value are reflected in our consolidated results of operations. The determination of the fair value of Servicing Related Assets requires our management to make numerous estimates and assumptions that could materially differ from actual results.
Certain of our subsidiaries rely on the exception provided by Section 3(c)(5)(C) under the Investment Company Act which is designed for entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exception generally requires that at least 55% of the entity’s assets consist of qualifying real estate interests and at least 80% of the entity’s assets consist of qualifying real estate interests or real estate-related assets (with no more than 20% in miscellaneous assets).
Certain of our subsidiaries rely on the exception provided by Section 3(c)(5)(C) under the Investment Company Act which is designed for entities primarily engaged in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate”.
If our mortgage servicers commit a material breach of their obligations as a servicer, we may be subject to damages if the breach is not cured within a specified period of time following notice. In addition, poor performance by a mortgage servicer may result in greater than expected delinquencies and foreclosures and losses on the mortgage loans underlying our MSRs.
The performance of the loans underlying our MSRs is subject to risks associated with inadequate or untimely servicing. If our mortgage servicers commit a material breach of their obligations as a servicer, we may be subject to damages if the breach is not cured within a specified period of time following notice.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock. At any time, the U.S. federal income tax laws or regulations governing REITs or the taxation of REIT stockholders or the administrative interpretations of those laws or regulations may be amended.
At any time, the U.S. federal income tax laws or regulations governing REITs or the taxation of REIT stockholders or the administrative interpretations of those laws or regulations may be amended.
For example, since publication of daily SOFR began in April 2018, daily changes in daily SOFR have, on occasion, been more volatile than daily changes in comparable benchmark or other market rates. 37 Table of Contents Because daily SOFR is published by the Federal Reserve Bank of New York based on data received from other sources, we have no control over its determination, calculation or publication.
Because daily SOFR is published by the Federal Reserve Bank of New York based on data received from other sources, we have no control over its determination, calculation or publication.
This could increase the cost of our hedging activities or expose us to greater risks associated with interest rate changes or other changes than we would otherwise want to bear.
Any hedging income earned by a TRS would be subject to U.S. federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with interest rate changes or other changes than we would otherwise want to bear.
We have paid dividends in our own stock in the past and may pay dividends in our own stock in the future. If in the future we choose to pay dividends in our own stock, our stockholders may be required to pay tax in excess of the cash that they receive.
If in the future we choose to pay dividends in our own stock, our stockholders may be required to pay tax in excess of the cash that they receive. 39 Table of Contents Despite qualification as a REIT, we may face other tax liabilities that reduce our cash flows.
Complying with REIT requirements may limit our ability to hedge effectively. The REIT provisions of the Code substantially limit our ability to hedge. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income.
The REIT provisions of the Code substantially limit our ability to hedge. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a TRS.
As of December 31, 2022, we have 4,781,635 shares of preferred stock outstanding, including 2,781,635 shares of Series A Preferred Stock and 2,000,000 shares of Series B Preferred Stock.
Our charter currently authorizes the issuance of up to 100,000,000 shares of preferred stock in one or more classes or series. As of December 31, 2023, we have 4,781,635 shares of preferred stock outstanding, including 2,781,635 shares of Series A Preferred Stock and 2,000,000 shares of Series B Preferred Stock.
The failure of any of the key personnel provided to us through our Manager to service our business with the requisite time and dedication could materially and adversely affect our ability to execute our business strategy.
The failure of any of the key personnel provided to us through our Manager to service our business with the requisite time and dedication could materially and adversely affect our ability to execute our business strategy. 26 Table of Contents The management fee payable to our Manager is payable regardless of the performance of our portfolio, which may reduce our Manager’s incentive to devote the time and effort to seeking profitable opportunities for our portfolio.
Holders of the Series B Preferred Stock should be aware that, when USD LIBOR is discontinued or otherwise unavailable, the dividend rate on the Series B Preferred Stock will be determined for the relevant period by the fallback provisions applicable to such stock.
All tenors of U.S. dollar LIBOR (“USD LIBOR”) ceased publication immediately after June 30, 2023. Holders of the Series B Preferred Stock should be aware that the dividend rate on the Series B Preferred Stock will be determined for the relevant period by the fallback provisions applicable to such stock.
We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and our ability to operate our business. Our business is highly dependent on communications and information systems.
We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could disrupt our business. Our business is highly dependent on information technology.
Generally, borrowers tend to prepay their mortgage loans when prevailing mortgage rates fall below the interest rates on their mortgage loans.
Generally, borrowers tend to prepay their mortgage loans when prevailing mortgage rates fall below the interest rates on their mortgage loans. If borrowers prepay their mortgage loans at rates that are faster or slower than expected, it may adversely affect our results.
Any one of the foregoing outcomes could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
Any one of the foregoing outcomes could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. It is also possible that short-term interest rates may exceed long-term interest rates, in which event our borrowing costs may exceed our interest income and we could incur losses.
It is also possible that short-term interest rates may exceed long-term interest rates, in which event our borrowing costs may exceed our interest income and we could incur losses. 19 Table of Contents We cannot predict the impact future actions by the U.S. Federal Reserve (“Federal Reserve”) will have on our business, and any such actions may negatively impact us.
We cannot predict the impact future actions by the U.S. Federal Reserve (“Federal Reserve”) will have on our business, and any such actions may negatively impact us.
In that case, there is no assurance we would be able to establish a suitable replacement facility on acceptable terms or at all. 24 Table of Contents Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
A substantial increase in our delinquency or foreclosure rate or the inability to process claims could adversely affect our ability to access the capital and secondary markets for our financing needs. Our ability to invest in, and dispose of, our investments in Servicing Related Assets is subject to the receipt of third-party consents.
In addition, poor performance by a mortgage servicer may result in greater than expected delinquencies and foreclosures and losses on the mortgage loans underlying our MSRs. A substantial increase in our delinquency or foreclosure rate or the inability to process claims could adversely affect our ability to access the capital and secondary markets for our financing needs.
COVID-19, or any future pandemics or epidemics, and resulting impacts on the financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, results of operations and ability to pay distributions. 16 Table of Contents We are dependent on mortgage servicers to service the mortgage loans relating to our Servicing Related Assets, and any failure by these mortgage servicers to service the mortgage loans relating to our Servicing Related Assets could have a material and adverse effect on us.
We are dependent on mortgage servicers to service the mortgage loans relating to our Servicing Related Assets, and any failure by these mortgage servicers to service the mortgage loans relating to our Servicing Related Assets could have a material and adverse effect on us. We do not directly service the mortgage loans underlying our Servicing Related Assets.
Such a default also would constitute a default under many of our financing agreements with other counterparties.
Such a default also would constitute a default under many of our financing agreements with other counterparties. In that case, there is no assurance we would be able to establish a suitable replacement facility on acceptable terms or at all.
Any of the foregoing events could have a material and adverse effect on us. 17 Table of Contents The performance of loans underlying our MSRs may be adversely affected by the performance of the related mortgage servicer. The performance of the loans underlying our MSRs is subject to risks associated with inadequate or untimely servicing.
Any of the foregoing events could have a material and adverse effect on us. Our ability to own and manage MSRs is subject to terms and conditions established by the GSEs, which are subject to change.
Removed
The long-term macroeconomic effects of the COVID-19 pandemic and any future pandemic or epidemic could have an adverse impact on our financial performance and results of operations. Outbreaks of contagious disease, including COVID-19, or other adverse public health developments in the U.S. or worldwide could have a material adverse effect on our business, financial condition and results of operations.

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Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of December 31, 2022, the Company is not aware of any material legal or regulatory claims or proceedings.
Biggest changeItem 3. Legal Proceedings From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of December 31, 2023, the Company is not aware of any material legal or regulatory claims or proceedings.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeEach LTIP-OP Unit awarded is deemed equivalent to an award of one share of our common stock under the 2013 Plan and reduces the 2013 Plan’s share authorization for other awards on a one-for-one basis. 46 Table of Contents The following table presents information with respect to the Company’s equity compensation plans as of December 31, 2022: Equity Incentive Plan Information As of December 31, 2022 Number of Securities Issued or to be Issued Upon Exercise Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans Equity compensation Plans Approved By Shareholders 915,464 LTIP-OP Units 459,897 Forfeited LTIP-OP Units (5,832 ) Converted LTIP-OP Units (44,795 ) Redeemed LTIP-OP Units (9,054 ) Shares of Common Stock 178,421 Forfeited Shares of Common Stock (3,155 ) Equity Compensation Plans Not Approved By Shareholders - LTIP-OP Units are a special class of partnership interest in the Operating Partnership.
Biggest changeThe following table presents information with respect to the Company’s equity compensation plans as of December 31, 2023: Equity Incentive Plan Information As of December 31, 2023 Number of Securities Issued or to be Issued Upon Exercise Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans Equity compensation Plans Approved By Shareholders 2,788,165 LTIP-OP Units 552,097 Forfeited LTIP-OP Units (5,832 ) Converted LTIP-OP Units (44,795 ) Redeemed LTIP-OP Units (9,054 ) Shares of Common Stock 220,256 Forfeited Shares of Common Stock (3,155 ) Equity Compensation Plans Not Approved By Shareholders - LTIP-OP Units are a special class of partnership interest in the Operating Partnership.
BMI Mortgage REITs Index, a peer group index, from December 31, 2018 to December 31, 2022. The graph assumes that $100 was invested on December 31, 2017 in our common stock, the S&P 500 Index, the Russell 2000 Index and the S&P U.S. BMI Mortgage REITs Index and that all dividends were reinvested without the payment of any commissions.
BMI Mortgage REITs Index, a peer group index, from December 31, 2018 to December 31, 2023. The graph assumes that $100 was invested on December 31, 2017 in our common stock, the S&P 500 Index, the Russell 2000 Index and the S&P U.S. BMI Mortgage REITs Index and that all dividends were reinvested without the payment of any commissions.
Holders As of March 7, 2023, we had six holders of record of our common stock. The six holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of our common stock. Such information was obtained from our registrar and transfer agent.
Holders As of March 7, 2024, we had six holders of record of our common stock. The six holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of our common stock. Such information was obtained from our registrar and transfer agent.
The following table sets forth the dividends declared on our common stock during each calendar quarter for 2022 and 2021: Declaration Date Record Date Payment Date Amount per Share 2022 Fourth Quarter 12/16/2022 12/30/2022 1/31/2023 $ 0.27 Third Quarter 9/15/2022 9/30/2022 10/25/2022 $ 0.27 Second Quarter 6/17/2022 6/30/2022 7/26/2022 $ 0.27 First Quarter 3/11/2022 3/31/2022 4/26/2022 $ 0.27 2021 Fourth Quarter 12/9/2021 12/31/2021 1/25/2022 $ 0.27 Third Quarter 9/17/2021 9/30/2021 10/26/2021 $ 0.27 Second Quarter 6/17/2021 6/30/2021 7/27/2021 $ 0.27 First Quarter 3/4/2021 3/31/2021 4/27/2021 $ 0.27 Stockholder Return Performance The following graph is a comparison of the cumulative total stockholder return on our common stock, the S&P 500 Index, the Russell 2000 Index and the S&P U.S.
The following table sets forth the dividends declared on our common stock during each calendar quarter for 2023 and 2022: Declaration Date Record Date Payment Date Amount per Share 2023 Fourth Quarter 12/8/2023 12/29/2023 1/31/2024 $ 0.15 Third Quarter 9/14/2023 9/29/2023 10/31/2023 $ 0.15 Second Quarter 6/15/2023 6/30/2023 7/31/2023 $ 0.15 First Quarter 3/16/2023 3/31/2023 4/25/2023 $ 0.27 2022 Fourth Quarter 12/16/2022 12/30/2022 1/31/2023 $ 0.27 Third Quarter 9/15/2022 9/30/2022 10/25/2022 $ 0.27 Second Quarter 6/17/2022 6/30/2022 7/26/2022 $ 0.27 First Quarter 3/11/2022 3/31/2022 4/26/2022 $ 0.27 45 Table of Contents Stockholder Return Performance The following graph is a comparison of the cumulative total stockholder return on our common stock, the S&P 500 Index, the Russell 2000 Index and the S&P U.S.
BMI Mortgage REITs Index comprised the following companies: AFC Gamma Inc., AG Mortgage Investment Trust, Inc., AGNC Investment Corp., Angel Oak Mortgage, Inc., Apollo Commercial Real Estate Finance, Inc., Arbor Realty Trust, Inc., Ares Commercial RE Corporation, Arlington Asset Invt Corp., ARMOUR Residential REIT, Inc., Blackstone Mortgage Trust, Inc., BrightSpire Capital, Inc., Broadmark Realty Capital Inc., Chimera Investment Corporation, Claros Mortgage Trust, Inc., Dynex Capital, Inc., Ellington Financial Inc., Ellington Residential Mortgage REIT, Franklin BSP Realty Trust, Inc., Granite Point Mortgage Trust, Inc., Great Ajax Corp., Hannon Armstrong Sustainable Infrastructure Capital, Inc., Invesco Mortgage Capital Inc., KKR Real Estate Finance Trust Inc., Ladder Capital Corp, Lument Finance Trust, Inc., MFA Financial, Inc., New York Mortgage Trust, Inc., NexPoint Real Estate Finance, Inc., Orchid Island Capital, Inc., PennyMac Mortgage Investment Trust, Ready Capital Corporation, Redwood Trust, Inc., Rithm Capital Corp., Sachem Capital Corp., Seven Hills Realty Trust, Starwood Property Trust, Inc., TPG RE Finance Trust, Inc, and Western Asset Mortgage Capital Corporation.
BMI Mortgage REITs Index comprised the following companies: AFC Gamma Inc., AG Mortgage Investment Trust, Inc., AGNC Investment Corp., Angel Oak Mortgage, Inc., Apollo Commercial Real Estate Finance, Inc., Arbor Realty Trust, Inc., Ares Commercial RE Corporation, Arlington Asset Invt Corp., ARMOUR Residential REIT, Inc., Blackstone Mortgage Trust, Inc., BrightSpire Capital, Inc., Broadmark Realty Capital Inc., Chimera Investment Corporation, Claros Mortgage Trust, Inc., Dynex Capital, Inc., Ellington Financial Inc., Ellington Residential Mortgage REIT, Franklin BSP Realty Trust, Inc., Granite Point Mortgage Trust, Inc., Great Ajax Corp., Hannon Armstrong Sustainable Infrastructure Capital, Inc., Invesco Mortgage Capital Inc., KKR Real Estate Finance Trust Inc., Ladder Capital Corp, Lument Finance Trust, Inc., MFA Financial, Inc., New York Mortgage Trust, Inc., NexPoint Real Estate Finance, Inc., Orchid Island Capital, Inc., PennyMac Mortgage Investment Trust, Ready Capital Corporation, Redwood Trust, Inc., Rithm Capital Corp., Sachem Capital Corp., Seven Hills Realty Trust, Starwood Property Trust, Inc., TPG RE Finance Trust, Inc, and Western Asset Mortgage Capital Corporation. 46 Table of Contents Securities Authorized For Issuance Under Equity Compensation Plans During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”).
The 2013 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards, including long term incentive plan units (“LTIP-OP Units”) of the Operating Partnership.
The 2013 Plan, which expired by its terms in October 2023, provided for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights (“SARs”), performance units, incentive awards and other equity-based awards, including long term incentive plan units (“LTIP-OP Units”) of the Operating Partnership.
There can be no assurance that the performance of our common stock will continue in line with the same or similar trends depicted in the graph below: 45 Table of Contents December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 30, 2022 Cherry Hill Mortgage Investment Corporation $ 106.63 $ $99.46 $ $72.09 $ $73.25 $ $61.09 Russel 2000 $ 88.15 $ $110.65 $ $132.74 $ $152.41 $ $121.26 S&P U.S.
There can be no assurance that the performance of our common stock will continue in line with the same or similar trends depicted in the graph below: December 31, 2019 December 31, 2020 December 31, 2021 December 30, 2022 December 29, 2023 Cherry Hill Mortgage Investment Corporation $ 93.27 $ 67.61 $ 68.70 $ 57.29 $ 46.48 Russel 2000 $ 125.52 $ 150.58 $ 172.90 $ 137.56 $ 160.85 S&P U.S.
BMI Mortgage REITs (A) $ 97.38 $ $116.47 $ $92.20 $ $105.80 $ $78.71 S&P 500 $ 94.82 $ $124.68 $ $147.62 $ $190.00 $ $155.59 Source: S&P Capital IQ Pro (A) In addition to the Company, as of December 31, 2022, the S&P U.S.
BMI Mortgage REITs (A) $ 119.61 $ 94.68 $ 108.65 $ 80.83 $ 93.30 S&P 500 $ 131.49 $ 155.68 $ 200.37 $ 164.08 $ 207.21 Source: S&P Capital IQ Pro (A) In addition to the Company, as of December 31, 2023, the S&P U.S.
Securities Authorized For Issuance Under Equity Compensation Plans During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”).
In April 2023, the Company’s board of directors adopted the Cherry Hill Mortgage Investment Corporation 2023 Equity Incentive Plan (the “2023 Plan”). In June 2023, at the Company’s annual meeting of stockholders, the 2023 Plan was approved.
Added
The 2023 Plan, which expires by its term in April 2033, permits the Company to provide equity-based compensation in the form of options to purchase shares of the Company’s common stock, stock awards, SARs, performance units, incentive awards and other equity-based awards (including LTIP-OP Units).
Added
Each LTIP-OP Unit awarded is deemed equivalent to an award of one share of our common stock under the 2023 Plan and reduces the 2023 Plan’s share authorization for other awards on a one-for-one basis.
Added
The 2023 Plan replaced the 2013 Plan upon the 2023 Plan’s approval by stockholders and no further awards will be made by the Company under the 2013 Plan. Currently outstanding awards granted under the 2013 Plan will remain effective in accordance with their terms.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeResults of Operations Presented below is a comparison of the Company’s results of operations for the periods indicated (dollars in thousands): Results of Operations Year Ended December 31, 2022 2021 Income Interest income $ 29,642 $ 14,956 Interest expense 17,563 5,768 Net interest income 12,079 9,188 Servicing fee income 53,430 54,157 Servicing costs 11,837 13,624 Net servicing income 41,593 40,533 Other income (loss) Realized gain (loss) on RMBS, available-for-sale, net (99,694 ) 548 Realized gain (loss) on derivatives, net 1,363 (9,339 ) Realized gain on acquired assets, net 12 15 Unrealized gain (loss) on derivatives, net 61,864 (1,745 ) Unrealized gain (loss) on investments in Servicing Related Assets 22,976 (11,062 ) Total Income 40,193 28,138 Expenses General and administrative expense 6,305 6,983 Management fee to affiliate 6,629 7,844 Total Expenses 12,934 14,827 Income Before Income Taxes 27,259 13,311 Provision for corporate business taxes 5,070 781 Net Income 22,189 12,530 Net income allocated to noncontrolling interests in Operating Partnership (450 ) (247 ) Dividends on preferred stock 9,853 9,853 Net Income Applicable to Common Stockholders $ 11,886 $ 2,430 55 Table of Contents Presented below is summary financial data on our segments together with the data for the Company as a whole, for the periods indicated (dollars in thousands): Segment Summary Data Servicing Related Assets RMBS All Other Total Income Statement Year Ended December 31, 2022 Interest income $ - $ 29,642 $ - $ 29,642 Interest expense 3,837 13,726 - 17,563 Net interest income (expense) (3,837 ) 15,916 - 12,079 Servicing fee income 53,430 - - 53,430 Servicing costs 11,837 - - 11,837 Net servicing income 41,593 - - 41,593 Other income (expense) (26,655 ) 13,176 - (13,479 ) Other operating expenses 2,099 692 10,143 12,934 Provision for corporate business taxes 5,070 - - 5,070 Net Income (Loss) $ 3,932 $ 28,400 $ (10,143 ) $ 22,189 Year Ended December 31, 2021 Interest income $ 376 $ 14,580 $ - $ 14,956 Interest expense 4,484 1,284 - 5,768 Net interest income (expense) (4,108 ) 13,296 - 9,188 Servicing fee income 54,157 - - 54,157 Servicing costs 13,624 - - 13,624 Net servicing income 40,533 - - 40,533 Other income (expense) (34,103 ) 12,520 - (21,583 ) Other operating expenses 3,040 717 11,070 14,827 Provision for corporate business taxes 781 - - 781 Net Income (Loss) $ (1,499 ) $ 25,099 $ (11,070 ) $ 12,530 56 Table of Contents Servicing Related Assets RMBS All Other Total Balance Sheet December 31, 2022 Investments $ 279,739 $ 931,431 $ - $ 1,211,170 Other assets 32,849 106,885 57,921 197,655 Total assets 312,588 1,038,316 57,921 1,408,825 Debt 183,888 825,962 - 1,009,850 Other liabilities 29,047 92,875 11,537 133,459 Total liabilities 212,935 918,837 11,537 1,143,309 Net assets $ 99,653 $ 119,479 $ 46,384 $ 265,516 December 31, 2021 Investments $ 218,727 $ 953,496 $ - $ 1,172,223 Other assets 44,506 21,611 64,522 130,639 Total assets 263,233 975,107 64,522 1,302,862 Debt 145,268 865,494 - 1,010,762 Other liabilities 1,847 1,411 10,026 13,284 Total liabilities 147,115 866,905 10,026 1,024,046 Net assets $ 116,118 $ 108,202 $ 54,496 $ 278,816 Interest Income Interest income for the year ended December 31, 2022 was $29.6 million as compared to $15.0 million for the year ended December 31, 2021.
Biggest changeInterest paid in accordance with repurchase transactions is recorded in interest expense on the consolidated statements of income (loss). 54 Table of Contents Results of Operations Presented below is a comparison of the Company’s results of operations for the periods indicated (dollars in thousands): Results of Operations Year Ended December 31, 2023 2022 Income Interest income $ 49,985 $ 29,642 Interest expense 51,642 17,563 Net interest income (expense) (1,657 ) 12,079 Servicing fee income 53,427 53,430 Servicing costs 11,248 11,837 Net servicing income 42,179 41,593 Other income (loss) Realized loss on RMBS, net (36,315 ) (99,694 ) Realized gain on derivatives, net 33,821 1,363 Realized gain on acquired assets, net 23 12 Unrealized gain on RMBS, measured at fair value through earnings, net 9,755 - Unrealized gain (loss) on derivatives, net (43,071 ) 61,864 Unrealized gain (loss) on investments in Servicing Related Assets (25,937 ) 22,976 Total Income (Loss) (21,202 ) 40,193 Expenses General and administrative expense 6,900 6,305 Management fee to affiliate 6,830 6,629 Total Expenses 13,730 12,934 Income (Loss) Before Income Taxes (34,932 ) 27,259 Provision for corporate business taxes 523 5,070 Net Income (Loss) (35,455 ) 22,189 Net (income) loss allocated to noncontrolling interests in Operating Partnership 661 (450 ) Dividends on preferred stock 9,853 9,853 Net Income (Loss) Applicable to Common Stockholders $ (44,647 ) $ 11,886 55 Table of Contents Presented below is summary financial data on our segments together with the data for the Company as a whole, for the periods indicated (dollars in thousands): Segment Summary Data Servicing Related Assets RMBS All Other Total Income Statement Year Ended December 31, 2023 Interest income $ - $ 49,985 $ - $ 49,985 Interest expense 1,572 50,070 - 51,642 Net interest expense (1,572 ) (85 ) - (1,657 ) Servicing fee income 53,427 - - 53,427 Servicing costs 11,248 - - 11,248 Net servicing income 42,179 - - 42,179 Other expense (29,443 ) (32,281 ) - (61,724 ) Other operating expenses (2,231 ) (664 ) (10,835 ) (13,730 ) Provision for corporate business taxes (523 ) - - (523 ) Net Income (Loss) $ 8,410 $ (33,030 ) $ (10,835 ) $ (35,455 ) Year Ended December 31, 2022 Interest income $ - $ 29,642 $ - $ 29,642 Interest expense 3,837 13,726 - 17,563 Net interest income (expense) (3,837 ) 15,916 - 12,079 Servicing fee income 53,430 - - 53,430 Servicing costs 11,837 - - 11,837 Net servicing income 41,593 - - 41,593 Other income (expense) (26,655 ) 13,176 - (13,479 ) Other operating expenses (2,099 ) (692 ) (10,143 ) (12,934 ) Provision for corporate business taxes (5,070 ) - - (5,070 ) Net Income (Loss) $ 3,932 $ 28,400 $ (10,143 ) $ 22,189 Servicing Related Assets RMBS All Other Total Balance Sheet December 31, 2023 Investments $ 253,629 $ 1,012,130 $ - $ 1,265,759 Other assets 33,785 39,939 53,509 127,233 Total assets 287,414 1,052,069 53,509 1,392,992 Debt 169,314 903,489 - 1,072,803 Other liabilities 4,240 47,990 9,584 61,814 Total liabilities 173,554 951,479 9,584 1,134,617 Net Assets $ 113,860 $ 100,590 $ 43,925 $ 258,375 December 31, 2022 Investments $ 279,739 $ 931,431 $ - $ 1,211,170 Other assets 32,849 106,885 57,921 197,655 Total assets 312,588 1,038,316 57,921 1,408,825 Debt 183,888 825,962 - 1,009,850 Other liabilities 29,047 92,875 11,537 133,459 Total liabilities 212,935 918,837 11,537 1,143,309 Net Assets $ 99,653 $ 119,479 $ 46,384 $ 265,516 56 Table of Contents Interest Income Interest income for the year ended December 31, 2023 was $50.0 million as compared to $29.6 million for the year ended December 31, 2022.
Higher interest rates imposed by the Federal Reserve to address inflation may increase our interest expense, which expense may not be fully offset by any resulting increase in our interest income.
The higher interest rates imposed by the Federal Reserve to address inflation may increase our interest expense, which expense may not be fully offset by any resulting increase in our interest income.
In addition to Servicing Related Assets, we invest in RMBS, primarily those backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe to be favorable prepayment and duration characteristics. Our RMBS consist primarily of Agency RMBS on which the payments of principal and interest are guaranteed by an Agency.
In addition to Servicing Related Assets, we invest in RMBS, primarily those backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe to be favorable prepayment and duration characteristics. Our RMBS consist solely of Agency RMBS on which the payments of principal and interest are guaranteed by an Agency.
Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, Freedom Mortgage will sell the loan to Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora.
Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, RoundPoint will sell the loan to Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora.
In December 2021, the Internal Revenue Service issued a revenue procedure that temporarily reduced the minimum amount of the total distribution that must be paid in cash to 10% for distributions declared on or after November 1, 2021, and on or before June 30, 2022, provided certain other parameters detailed in the Revenue Procedure are satisfied.
In December 2021, the Internal Revenue Service issued a revenue procedure that temporarily reduces the minimum amount of the total distribution that must be paid in cash to 10% for distributions declared on or after November 1, 2021, and on or before June 30, 2022, provided certain other parameters detailed in the Revenue Procedure are satisfied.
For information on our assessment of the realizability of deferred tax assets, see “Item 8. Consolidated Financial Statements and Supplementary Data - Note 16. Income Taxes”. We assess our tax positions for all open tax years and determine if we have any material unrecognized liabilities in accordance with ASC 740.
For information on our assessment of the realizability of deferred tax assets, see “Item 8. Consolidated Financial Statements and Supplementary Data—Note 15. Income Taxes”. We assess our tax positions for all open tax years and determine if we have any material unrecognized liabilities in accordance with ASC 740.
MSR Financing As of December 31, 2022, the Company had two separate MSR financing facilities: (i) the Freddie Mac MSR Revolver, which is a revolving credit facility for up to $100.0 million that is secured by all Freddie Mac MSRs owned by Aurora; and (ii) the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora.
MSR Financing As of December 31, 2023, the Company had two separate MSR financing facilities: (i) the Freddie Mac MSR Revolver, which is a revolving credit facility for up to $100.0 million that is secured by all Freddie Mac MSRs owned by Aurora; and (ii) the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora.
The price at which the security is sold generally represents the market value of the security less a discount or “haircut.” The weighted average haircut on our repurchase debt at December 31, 2022 was approximately 4.3%.
The price at which the security is sold generally represents the market value of the security less a discount or “haircut.” The weighted average haircut on our repurchase debt at December 31, 2023 was approximately 4.3%.
As of December 31, 2022, our exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
As of December 31, 2023, our exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our REIT taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. 68 Table of Contents
Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our REIT taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
In October 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”). Under the Fannie Mae MSR Revolving Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time.
In October 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), pursuant to which Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time.
Joint Marketing Recapture Agreement We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers. In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned subsidiary of Freedom Mortgage.
Joint Marketing Recapture Agreement We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers. In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and from August 2020 to September 2023, a wholly-owned subsidiary of Freedom Mortgage.
In June 2022, the Borrowers entered into an amendment to the Freddie Mac MSR Revolver that extended the revolving period for an additional 364 days with the option for one more renewal of 364 days. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan.
In July 2023, the Borrowers entered into an amendment to the Freddie Mac MSR Revolver that extended the revolving period for an additional 364 days with the option for one more renewal of 364 days. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan.
The Sub-REIT has elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2020. From time to time, we may issue and sell shares of our common stock or preferred stock, including additional shares of our Class A Preferred Stock or Class B Preferred Stock. See “Item 8.
The Sub-REIT has elected to be taxed as a REIT under the Code commencing with its taxable year ended December 31, 2020. 48 Table of Contents From time to time, we may issue and sell shares of our common stock or preferred stock, including additional shares of our Series A Preferred Stock or Series B Preferred Stock. See “Item 8.
Earnings available for distribution (“EAD”) is a non-GAAP financial measure that we define as GAAP net income (loss), excluding realized gain (loss) on RMBS, realized and unrealized gain (loss) on derivatives, realized gain (loss) on acquired assets, realized and unrealized gain (loss) on investments in MSRs (net of any estimated MSR amortization) and any tax expense (benefit) on realized and unrealized gain (loss) on MSRs.
Earnings available for distribution (“EAD”) is a non-GAAP financial measure that we define as GAAP net income (loss), excluding realized gain (loss) on RMBS, unrealized gain (loss) on RMBS measured at fair value through earnings, realized and unrealized gain (loss) on derivatives, realized gain (loss) on acquired assets, realized and unrealized gain (loss) on investments in MSRs (net of any estimated MSR amortization) and any tax expense (benefit) on realized and unrealized gain (loss) on MSRs.
Net Income Allocated to Noncontrolling Interests in Operating Partnership Net income allocated to noncontrolling interests in the Operating Partnership, which are LTIP-OP Units owned by our directors and officers and by certain other individuals who provide services to us through the Manager, represented approximately 2.0% of net income for each of the years ended December 31, 2022 and December 31, 2021.
Net Income Allocated to Noncontrolling Interests in Operating Partnership Net income allocated to noncontrolling interests in the Operating Partnership, which are LTIP-OP Units owned by our directors and officers and by certain other individuals who provide services to us through the Manager, represented approximately 1.9% and 2.0% of net income for the years ended December 31, 2023 and December 31, 2022, respectively.
This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, available-for-sale, net in the consolidated statements of income (loss). 51 Table of Contents Impact of Changes in Market Interest Rates on Our Assets The value of our assets may be affected by prepayment speeds on mortgage loans.
This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS, net in the consolidated statements of income (loss). Impact of Changes in Market Interest Rates on Our Assets The value of our assets may be affected by prepayment speeds on mortgage loans.
Basis of Presentation and Significant Accounting Policies”. 53 Table of Contents Investments in MSRs We have elected the fair value option to record our investments in MSRs in order to provide users of our consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs.
Consolidated Financial Statements and Supplementary Data—Note 2. Basis of Presentation and Significant Accounting Policies”. Investments in MSRs We have elected the fair value option to record our investments in MSRs in order to provide users of our consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs.
Transactions with Related Parties” for information regarding Aurora’s recapture agreements. 52 Table of Contents With respect to our business operations, increases in interest rates, in general, may over time cause: • the interest expense associated with our borrowings to increase; • the value of our assets to fluctuate; • the coupons on any adjustable-rate and hybrid RMBS we may own to reset, although on a delayed basis, to higher interest rates; • prepayments on our RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and • an increase in the value of any interest rate swap agreements we may enter into as part of our hedging strategy.
With respect to our business operations, increases in interest rates, in general, may over time cause: • the interest expense associated with our borrowings to increase; • the value of our assets to fluctuate; • the coupons on any adjustable-rate and hybrid RMBS we may own to reset, although on a delayed basis, to higher interest rates; • prepayments on our RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and • an increase in the value of any interest rate swap agreements we may enter into as part of our hedging strategy.
The weighted average term to maturity of our borrowings under repurchase agreements as of December 31, 2022 and December 31, 2021 was 18 days and 38 days, respectively.
The weighted average term to maturity of our borrowings under repurchase agreements as of December 31, 2023 and December 31, 2022 was 21 days and 18 days, respectively.
The amount, timing and frequency of distributions will be authorized by our board of directors based upon a variety of factors, including: • actual results of operations; • our level of retained cash flows; • our ability to make additional investments in our target assets; • restrictions under Maryland law; • the terms of our preferred stock; • any debt service requirements; • our taxable income; • the annual distribution requirements under the REIT provisions of the Code; and • other factors that our board of directors may deem relevant. 65 Table of Contents Our ability to make distributions to our stockholders will depend upon the performance of our investment portfolio, and, in turn, upon our Manager’s management of our business.
The amount, timing and frequency of distributions will be authorized by our board of directors based upon a variety of factors, including: • actual results of operations; • our level of retained cash flows; • our ability to make additional investments in our target assets; • restrictions under Maryland law; • the terms of our preferred stock; • any debt service requirements; • our taxable income; • the annual distribution requirements under the REIT provisions of the Code; and • other factors that our board of directors may deem relevant.
Distributions will be made quarterly in cash to the extent that cash is available for distribution. We may not be able to generate sufficient cash available for distribution to pay distributions to our stockholders. In addition, our board of directors may change our distribution policy with respect to our common stock in the future.
We may not be able to generate sufficient cash available for distribution to pay distributions to our stockholders. In addition, our board of directors may change our distribution policy with respect to our common stock in the future.
General and Administrative Expense General and administrative expense for the year ended December 31, 2022 was $6.3 million as compared to $7.0 million for the year ended December 31, 2021.
General and Administrative Expense General and administrative expense for the year ended December 31, 2023 was $6.9 million as compared to $6.3 million for the year ended December 31, 2022.
We record these liabilities to the extent we deem them more-likely-than-not to be incurred. We record interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income (loss). We have not incurred any interest or penalties. Investments in Securities We have elected to classify our investments in RMBS as available-for-sale.
We record these liabilities to the extent we deem them more-likely-than-not to be incurred. We record interest and penalties related to income taxes within the provision for income taxes in the consolidated statements of income (loss). We have not incurred any interest or penalties.
The Company also has an at-the-market offering program for its Series A Preferred Stock (the “Preferred Series A ATM Program”) pursuant to which it may offer through one or more sales agents and sell from time to time up to $35.0 million of its Series A Preferred Stock at prices prevailing at the time, subject to volume and other regulatory limitations.
Prior to January 29, 2024, the Company had an at-the-market offering program for its Series A Preferred Stock (the “Preferred Series A ATM Program”) pursuant to which it could offer and sell through one or more sales agents up to $35.0 million in shares of its Series A Preferred Stock at prices prevailing at the time, subject to volume and other regulatory limitations.
The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred. Servicing fee income received and servicing expenses incurred are reported on the consolidated statements of income (loss).
The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred.
The $63.6 million increase in unrealized gain on derivatives for the year ended December 31, 2022 as compared to December 31, 2021 was primarily due to changes in interest rates and the composition of our derivatives relative to the prior year.
The $105.0 million increase in unrealized loss on derivatives for the year ended December 31, 2023 as compared to December 31, 2022 was primarily due to changes in interest rates and the composition of our derivatives relative to the prior year.
The weighted average difference between the market value of the assets and the face amount of available financing for the RMBS repurchase agreements, or the haircut, was 4.3 % and 4.6% as of December 31, 2022 and December 31, 2021, respectively.
The RMBS repurchase agreements are guaranteed by the Company. The weighted average difference between the market value of the assets and the face amount of available financing for the RMBS repurchase agreements, or the haircut, was 4.3% as of December 31, 2023 and December 31, 2022.
For the period indicated below, our accumulated other comprehensive income (loss) changed as a result of the indicated gains and losses (dollars in thousands): 58 Table of Contents Accumulated Other Comprehensive Income (Loss) Year Ended December 31, 2022 Accumulated other comprehensive gain, December 31, 2021 $ 7,527 Other comprehensive loss (36,631 ) Accumulated other comprehensive loss, December 31, 2022 $ (29,104 ) Year Ended December 31, 2021 Accumulated other comprehensive gain, December 31, 2020 $ 35,594 Other comprehensive loss (28,067 ) Accumulated other comprehensive gain, December 31, 2021 $ 7,527 Our GAAP equity changes as the values of our RMBS are marked to market each quarter, among other factors.
For the period indicated below, our accumulated other comprehensive income (loss) changed as a result of the indicated gains and losses (dollars in thousands): Accumulated Other Comprehensive Income (Loss) Year Ended December 31, 2023 Accumulated other comprehensive loss, December 31, 2022 $ (29,104 ) Other comprehensive income 26,559 Accumulated other comprehensive loss, December 31, 2023 $ (2,545 ) Year Ended December 31, 2022 Accumulated other comprehensive income, December 31, 2021 $ 7,527 Other comprehensive loss (36,631 ) Accumulated other comprehensive loss, December 31, 2022 $ (29,104 ) Our GAAP equity changes as the values of our RMBS are marked to market each quarter, among other factors.
In the event we elect not to renew the term, we will be required to pay our Manager the termination fee described above. We may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from us to our Manager, in which case no termination fee would be due.
We may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from us to our Manager, in which case no termination fee would be due.
In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply the potential for lower income on new asset purchases but may have a positive impact on stated book value of our existing assets.
Wider spreads imply the potential for greater income on new asset purchases but may have a negative impact on our stated book value. Wider spreads may also negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets.
The $34.1 million increase in unrealized gain on our investments in Servicing Related Assets for December 31, 2022 as compared to December 31, 2021 was primarily due to changes in valuation inputs or assumptions.
The $48.9 million increase in unrealized loss on our investments in Servicing Related Assets for December 31, 2023 as compared to December 31, 2022 was primarily due to changes in valuation inputs or assumptions.
At December 31, 2022 and December 31, 2021, approximately $116.0 million and $83.0 million, respectively, was outstanding under the Fannie Mae MSR Revolving Facility. Cash Flows Operating and Investing Activities Our operating activities provided cash of approximately $59.9 million and $48.0 million for the years ended December 31, 2022 and December 31, 2021, respectively.
At December 31, 2023 and December 31, 2022, approximately $106.0 million and $116.0 million, respectively, was outstanding under the Fannie Mae MSR Revolving Facility. 64 Table of Contents Cash Flows Operating and Investing Activities Our operating activities provided cash of approximately $40.7 million and $59.9 million for the years ended December 31, 2023 and December 31, 2022, respectively.
Unrealized Gain (Loss) on Investments in Servicing Related Assets Unrealized gain on our investments in Servicing Related Assets for the year ended December 31, 2022 was $23.0 million as compared to an unrealized loss of $11.1 million for the year ended December 31, 2021.
Unrealized Gain (Loss) on Investments in Servicing Related Assets Unrealized loss on our investments in Servicing Related Assets for the year ended December 31, 2023 was $25.9 million as compared to a gain of $23.0 million for the year ended December 31, 2022.
The following tables set forth certain characteristics of the mortgage loans underlying those MSRs as of the dates indicated (dollars in thousands): MSR Collateral Characteristics As of December 31, 2022 Collateral Characteristics Current Carrying Amount Current Principal Balance WA Coupon (A) WA Servicing Fee (A) WA Maturity (months) (A) WA Loan Age (months) (A) ARMs % (B) MSRs $ 279,739 $ 21,688,353 3.49 % 0.25 % 310 31 0.1 % MSR Total/Weighted Average $ 279,739 $ 21,688,353 3.49 % 0.25 % 310 31 0.1 % 60 Table of Contents As of December 31, 2021 Collateral Characteristics Current Carrying Amount Current Principal Balance WA Coupon (A) WA Servicing Fee (A) WA Maturity (months) (A) WA Loan Age (months) (A) ARMs % (B) MSRs $ 218,727 $ 20,773,278 3.51 % 0.25 % 316 25 0.1 % MSR Total/Weighted Average $ 218,727 $ 20,773,278 3.51 % 0.25 % 316 25 0.1 % A) Weighted average coupon, servicing fee, maturity and loan age of the underlying residential mortgage loans in the pool are based on the unpaid principal balance.
The following tables set forth certain characteristics of the mortgage loans underlying those MSRs as of the dates indicated (dollars in thousands): MSR Collateral Characteristics As of December 31, 2023 Collateral Characteristics Current Carrying Amount Current Principal Balance WA Coupon (A) WA Servicing Fee (A) WA Maturity (months) (A) WA Loan Age (months) (A) ARMs % (B) MSRs $ 253,629 $ 19,972,994 3.48 % 0.25 % 300 42 0.1 % MSR Total/Weighted Average $ 253,629 $ 19,972,994 3.48 % 0.25 % 300 42 0.1 % As of December 31, 2022 Collateral Characteristics Current Carrying Amount Current Principal Balance WA Coupon (A) WA Servicing Fee (A) WA Maturity (months) (A) WA Loan Age (months) (A) ARMs % (B) MSRs $ 279,739 $ 21,688,353 3.49 % 0.25 % 310 31 0.1 % MSR Total/Weighted Average $ 279,739 $ 21,688,353 3.49 % 0.25 % 310 31 0.1 % (A) Weighted average coupon, servicing fee, maturity and loan age of the underlying residential mortgage loans in the pool are based on the unpaid principal balance.
Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss).
If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision for (reversal of) credit losses on securities in the consolidated statements of income (loss).
The primary causes of mark to market changes are changes in interest rates and credit spreads. During the years ended December 31, 2022 and December 31, 2021, increases in the 10 Year U.S.
The primary causes of mark to market changes are changes in interest rates and nominal spreads. During the year ended December 31, 2023, volatility in the 10 Year U.S.
The $10.7 million decrease in realized loss on derivatives for the year ended December 31, 2022 as compared to December 31, 2021 was substantially comprised of an increase of $30.0 million in gains on U.S. treasury futures, an increase of $7.3 million in interest income on interest rate swaps, offset by an increase of $23.1 million in losses on TBAs and an increase of $3.9 million in losses on interest rate swaps.
The $32.4 million increase in realized gain on derivatives for the year ended December 31, 2023 as compared to December 31, 2022 was substantially comprised of an increase of $40.8 million in gains on TBAs and an increase of $23.9 million in interest income on interest rate swaps, offset by an increase of $32.7 million in losses on U.S. treasury futures.
During the years ended December 31, 2022 and December 31, 2021, the Company did not issue and sell any shares of Series A Preferred Stock pursuant to the Preferred Series A ATM Program. In September 2019, the Company initiated a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of its common stock.
During the years ended December 31, 2023 and December 31, 2022, the Company did not repurchase any common stock pursuant to the repurchase program. In December 2023, the Company initiated a Preferred Stock repurchase program that allows for the repurchase of up to an aggregate of $50.0 million of its Preferred Stock.
Repurchase transactions are treated as collateralized financing transactions and are carried at their contractual amounts as specified in the respective transactions. Accrued interest payable is included in “Accrued expenses and other liabilities” on the consolidated balance sheets.
Repurchase Transactions We finance the acquisition of our RMBS for our portfolio through repurchase transactions under master repurchase agreements. Repurchase transactions are treated as collateralized financing transactions and are carried at their contractual amounts as specified in the respective transactions. Accrued interest payable is included in “Accrued expenses and other liabilities” on the consolidated balance sheets.
Securities financed through repurchase transactions remain on our consolidated balance sheet as an asset and cash received from the purchaser is recorded on our consolidated balance sheet as a liability. Interest paid in accordance with repurchase transactions is recorded in interest expense on the consolidated statements of income (loss).
Securities financed through repurchase transactions remain on our consolidated balance sheet as an asset and cash received from the purchaser is recorded on our consolidated balance sheet as a liability.
Our investing activities used cash of approximately $128.2 million and provided cash of approximately $166.5 million for the years ended December 31, 2022 and December 31, 2021, respectively. The cash used by our investing activities during the year ended December 31, 2022 resulted from the purchase of RMBS and MSRs offset by principal paydowns of RMBS.
Our investing activities used cash of approximately $104.1 million and $128.2 million for the years ended December 31, 2023 and December 31, 2022, respectively. The cash used by our investing activities during the years ended December 31, 2023 and December 31, 2022 resulted from RMBS purchases offset by RMBS sales and principal paydowns of RMBS.
Our Manager may also terminate the Management Agreement upon 60 days’ written notice if we default in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to us, whereupon we would be required to pay our Manager the termination fee described above.
Our Manager may also terminate the Management Agreement upon 60 days’ written notice if we default in the performance of any material term of the Management Agreement and the default continues for a period of 30 days after written notice to us, whereupon we would be required to pay our Manager the termination fee described above. 67 Table of Contents Subservicing Agreements As of December 31, 2023, Aurora had four subservicing agreements in place, one of which is with Freedom Mortgage.
The maximum credit amount outstanding at any one time under the Fannie Mae MSR Revolving Facility is $150.0 million. The revolving period is 24 months which may be extended by agreement with the lender. During the revolving period, borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor.
The maximum credit amount outstanding at any one time under the Fannie Mae MSR Revolving Facility is $150.0 million. The revolving period is 24 months which may be extended by agreement with the lender.
The $14.6 million increase in interest income for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was due to ATM proceeds being used to purchase new securities, as well as replacing lower yielding securities with higher yielding securities in the existing portfolio coupled with a decrease in price premium amortization driven by lower prepayment speeds.
The $20.4 million increase in interest income for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was due to purchases of new securities, as well as replacing lower yielding securities with higher yielding securities coupled with portfolio positioning, which resulted in a decrease in price premium amortization driven by lower prepayment speeds.
Realized Gain (Loss) on Derivatives, Net Realized gain on derivatives for the year ended December 31, 2022 was $1.4 million as compared to a loss of $9.3 million for the year ended December 31, 2021.
Realized Gain on Derivatives, Net Realized gain on derivatives for the year ended December 31, 2023 was $33.8 million as compared to $1.4 million for the year ended December 31, 2022.
The following table summarizes our contractual obligations for borrowed money as of the dates indicated (dollars in thousands): Contractual Obligations Characteristics As of December 31, 2022 Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Repurchase agreements Borrowings under repurchase agreements $ 825,962 $ - $ - $ - $ 825,962 Interest on repurchase agreement borrowings (A) $ 2,797 $ - $ - $ - $ 2,797 Freddie Mac MSR Revolver Borrowings under Freddie Mac MSR Revolver $ 68,500 $ - $ - $ - $ 68,500 Interest on Freddie Mac MSR Revolver borrowings $ 1,010 $ - $ - $ - $ 1,010 Fannie Mae MSR Revolving Facility Borrowings under Fannie Mae MSR Revolving Facility $ 627 $ 16,406 $ 98,967 $ - $ 116,000 Interest on Fannie Mae MSR Revolving Facility $ 700 $ - $ - $ - $ 700 66 Table of Contents As of December 31, 2021 Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Repurchase agreements Borrowings under repurchase agreements $ 865,494 $ - $ - $ - $ 865,494 Interest on repurchase agreement borrowings (A) $ 135 $ - $ - $ - $ 135 Freddie Mac MSR Revolver Borrowings under Freddie Mac MSR Revolver $ 63,000 $ - $ - $ - $ 63,000 Interest on Freddie Mac MSR Revolver borrowings $ 578 $ - $ - $ - $ 578 Fannie Mae MSR Revolving Facility Borrowings under Fannie Mae MSR Revolving Facility $ - $ 7,566 $ 75,434 $ - $ 83,000 Interest on Fannie Mae MSR Revolving Facility $ 215 $ - $ - $ - $ 215 (A) Interest expense is calculated based on the interest rate in effect at December 31, 2022 and December 31, 2021, respectively, and includes all interest expense incurred through those dates.
The following table summarizes our contractual obligations for borrowed money as of the dates indicated (dollars in thousands): Contractual Obligations Characteristics As of December 31, 2023 Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Repurchase agreements Borrowings under repurchase agreements $ 903,489 $ - $ - $ - $ 903,489 Interest on repurchase agreement borrowings (A) $ 3,930 $ - $ - $ - $ 3,930 Freddie Mac MSR Revolver Borrowings under Freddie Mac MSR Revolver $ 64,500 $ - $ - $ - $ 64,500 Interest on Freddie Mac MSR Revolver borrowings $ 1,329 $ - $ - $ - $ 1,329 Fannie Mae MSR Revolving Facility Borrowings under Fannie Mae MSR Revolving Facility $ - $ 8,679 $ 97,321 $ - $ 106,000 Interest on Fannie Mae MSR Revolving Facility $ 747 $ - $ - $ - $ 747 As of December 31, 2022 Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total Repurchase agreements Borrowings under repurchase agreements $ 825,962 $ - $ - $ - $ 825,962 Interest on repurchase agreement borrowings (A) $ 2,797 $ - $ - $ - $ 2,797 Freddie Mac MSR Revolver Borrowings under Freddie Mac MSR Revolver $ 68,500 $ - $ - $ - $ 68,500 Interest on Freddie Mac MSR Revolver borrowings $ 1,010 $ - $ - $ - $ 1,010 Fannie Mae MSR Revolving Facility Borrowings under Fannie Mae MSR Revolving Facility $ 627 $ 16,406 $ 98,967 $ - $ 116,000 Interest on Fannie Mae MSR Revolving Facility $ 700 $ - $ - $ - $ 700 (A) Interest expense is calculated based on the interest rate in effect at December 31, 2023 and December 31, 2022, respectively, and includes all interest expense incurred through those dates. 66 Table of Contents Management Agreement The Management Agreement with our Manager provides that our Manager is entitled to receive a management fee, the reimbursement of certain expenses and, in certain circumstances, a termination fee.
The shares were sold at a weighted average price of $8.88 per share for aggregate gross proceeds of approximately $10.2 million before fees of approximately $200,000.
The shares were sold at a weighted average price of $6.50 per share for aggregate gross proceeds of approximately $33.9 million before fees of approximately $677,000.
Such termination fee will be payable upon termination or non-renewal of the Management Agreement by us without cause or by our Manager if we materially breach the Management Agreement. We pay all of our direct operating expenses, except those specifically required to be borne by our Manager under the Management Agreement.
Such termination fee will be payable upon termination or non-renewal of the Management Agreement by us without cause or by our Manager if we materially breach the Management Agreement.
Set forth below is the positive net spread between the yield on RMBS and our costs of funding those assets at the end of each of the quarters indicated below: Average Net Yield Spread at Period End Quarter Ended Average Asset Yield Average Cost of Funds Average Net Interest Rate Spread December 31, 2022 4.29 % 0.69 % 3.60 % September 30, 2022 3.90 % 0.77 % 3.13 % June 30, 2022 3.56 % 0.32 % 3.25 % March 31, 2022 2.98 % 0.49 % 2.49 % December 31, 2021 2.93 % 0.62 % 2.31 % September 30, 2021 2.94 % 0.63 % 2.31 % June 30, 2021 2.94 % 0.62 % 2.32 % March 31, 2021 3.04 % 0.53 % 2.52 % The Average Cost of Funds also includes the benefits of related swaps.
Set forth below is the positive net spread between the yield on RMBS and our costs of funding those assets at the end of each of the quarters indicated below: Average Net Yield Spread at Period End Quarter Ended Average Asset Yield Average Cost of Funds (A) Average Net Interest Rate Spread December 31, 2023 4.77 % 0.96 % 3.81 % September 30, 2023 4.66 % 0.87 % 3.79 % June 30, 2023 4.49 % 0.53 % 3.96 % March 31, 2023 4.40 % 0.73 % 3.68 % December 31, 2022 4.29 % 0.69 % 3.60 % September 30, 2022 3.90 % 0.77 % 3.13 % June 30, 2022 3.56 % 0.32 % 3.25 % March 31, 2022 2.98 % 0.49 % 2.49 % (A) Average Cost of Funds also includes the benefits of related swaps. 50 Table of Contents Changes in the Market Value of Our Assets We hold our Servicing Related Assets as long-term investments.
Any benefit we expect to receive from lower prepayments on the mortgages underlying our MSRS and RMBS could be offset by increased volatility in the market and increased hedging costs attributable to such volatility. We cannot predict or control the impact future actions by the Federal Reserve will have on the overall economy or on our business.
Any benefit we expect to receive from lower prepayments on the mortgages underlying our MSRs and RMBS could be offset by increased volatility in the market and increased hedging costs attributable to such volatility and by increased funding costs.
In addition, if we have hedged our interest rate risk, extension may cause the security to be outstanding longer than the related hedge, thereby reducing the protection intended to be provided by the hedge.
As a result, we would have an asset with a lower yield than current investments for a longer period of time. In addition, if we have hedged our interest rate risk, extension may cause the security to be outstanding longer than the related hedge, thereby reducing the protection intended to be provided by the hedge.
The following tables provide additional information regarding borrowings under our repurchase agreements (dollars in thousands): Repurchase Agreement Characteristics As of December 31, 2022 RMBS Market Value Repurchase Agreements Weighted Average Rate Less than one month $ 750,218 $ 715,899 4.39 % One to three months 114,418 110,063 4.53 % Total/Weighted Average $ 864,636 $ 825,962 4.41 % As of December 31, 2021 RMBS Market Value Repurchase Agreements Weighted Average Rate Less than one month $ 297,720 $ 291,007 0.13 % One to three months 595,168 574,487 0.14 % Total/Weighted Average $ 892,888 $ 865,494 0.14 % The amount of collateral as of December 31, 2022 and December 31, 2021, including cash, was $869.0 million and $905.1 million, respectively.
The following tables provide additional information regarding borrowings under our repurchase agreements (dollars in thousands): Repurchase Agreement Characteristics As of December 31, 2023 RMBS Market Value Repurchase Agreements Weighted Average Rate Less than one month $ 833,443 $ 772,466 5.55 % One to three months 139,778 131,023 5.55 % Total/Weighted Average $ 973,221 $ 903,489 5.55 % As of December 31, 2022 RMBS Market Value Repurchase Agreements Weighted Average Rate Less than one month $ 750,218 $ 715,899 4.39 % One to three months 114,418 110,063 4.53 % Total/Weighted Average $ 864,636 $ 825,962 4.41 % The amount of collateral as of December 31, 2023 and December 31, 2022, including cash, was $984.2 million and $869.0 million, respectively.
The agreement continues in effect while the subservicing agreement remains in effect. Inflation Substantially all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates.
As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates.
The shares were sold at a weighted average price of $6.50 per share for aggregate gross proceeds of approximately $33.9 million before fees of approximately $677,000. During the year ended December 31, 2021, the Company issued and sold 1,148,398 shares of common stock under the Common Stock ATM Program.
The shares were sold at a weighted average price of $4.87 per share for aggregate gross proceeds of approximately $31.5 million before fees of approximately $631,000. During the year ended December 31, 2022, the Company issued and sold 5,212,841 shares of common stock pursuant to the Common Stock ATM Program.
(C) The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities. 61 Table of Contents The following table summarizes the net interest spread of our RMBS portfolio as of the dates indicated: Net Interest Spread December 31, 2022 December 31, 2021 Weighted Average Asset Yield 4.44 % 3.19 % Weighted Average Interest Expense 0.67 % 0.73 % Net Interest Spread 3.77 % 2.46 % Liquidity and Capital Resources Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs.
The following table summarizes the net interest spread of our RMBS portfolio as of the dates indicated: Net Interest Spread December 31, 2023 December 31, 2022 Weighted Average Asset Yield 5.33 % 4.44 % Weighted Average Interest Expense (A) 1.51 % 0.67 % Net Interest Spread 3.82 % 3.77 % (A) Weighted average interest expense includes the benefits of related swaps. 61 Table of Contents Liquidity and Capital Resources Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs.
Income Taxes We elected to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013. We expect to continue to qualify to be treated as a REIT.
Servicing fee income received and servicing expenses incurred are reported on the consolidated statements of income (loss). 53 Table of Contents Income Taxes We elected to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013. We expect to continue to qualify to be treated as a REIT.
Fair value of our investments in RMBS is determined based upon prices obtained from third-party pricing providers. Changes in underlying assumptions used in estimating fair value impact the carrying value of the investments in RMBS as well as their yield. For additional information on our assessment of credit-related impairment and our fair value methodology, see “Item 8.
Changes in underlying assumptions used in estimating fair value impact the carrying value of the investments in RMBS as well as their yield. For additional information on our assessment of credit-related impairment and our fair value methodology, see “Item 8. Consolidated Financial Statements and Supplementary Data—Note 4. Investments in RMBS and Note 9. Fair Value”.
Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. At December 31, 2022 and December 31, 2021, approximately $68.5 million and $63.0 million, respectively, was outstanding under the Freddie Mac MSR Revolver. 64 Table of Contents Fannie Mae MSR Revolving Facility .
Amounts borrowed bear interest at a weighted average borrowing rate of 7.7%. At December 31, 2023 and December 31, 2022, approximately $64.5 million and $68.5 million, respectively, was outstanding under the Freddie Mac MSR Revolver. Fannie Mae MSR Revolving Facility .
As of December 31, 2022, approximately $36.3 million was remaining under the Common Stock ATM Program. During the year ended December 31, 2022, the Company issued and sold 5,212,841 shares of common stock under the Common Stock ATM Program.
As of December 31, 2023, approximately $4.8 million was remaining pursuant to the Common Stock ATM Program. During the year ended December 31, 2023, the Company issued and sold 6,470,004 shares of common stock under the Common Stock ATM Program.
Changes in the Market Value of Our Assets We hold our Servicing Related Assets as long-term investments. Our MSRs are carried at their fair value with changes in their fair value recorded in other income or loss in our consolidated statements of income (loss).
Our MSRs are carried at their fair value with changes in their fair value recorded in other income (loss) in our consolidated statements of income (loss).
Non-GAAP Financial Measures This Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains analysis and discussion of non-GAAP financial measures, including: • earnings available for distribution; and • earnings available for distribution per average common share.
Unrealized gain (loss) on available-for-sale RMBS is recorded in accumulated other comprehensive income (loss). 58 Table of Contents Non-GAAP Financial Measures This Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains analysis and discussion of non-GAAP financial measures, including: • earnings available for distribution; and • earnings available for distribution per average common share.
Aurora has or is in the process of obtaining the licenses necessary to invest in MSRs on a nationwide basis and is an approved seller/servicer for Fannie Mae and Freddie Mac.
Our asset acquisition strategy focuses on acquiring a diversified portfolio of residential mortgage assets that balances the risk and reward opportunities our Manager observes in the marketplace. Aurora has or is in the process of obtaining the licenses necessary to invest in MSRs on a nationwide basis and is an approved seller/servicer for Fannie Mae and Freddie Mac.
We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates. 62 Table of Contents As of the date of this filing, we believe we have sufficient liquid assets to satisfy all of our short-term recourse liabilities and to satisfy covenants in our financing documents.
We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.
Accordingly, future actions by the Federal Reserve could have a material and adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders. 50 Table of Contents Factors Impacting our Operating Results Our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of discounts.
Factors Impacting our Operating Results Our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of discounts.
Our common stock, our Series A Preferred Stock and our Series B Preferred Stock are listed and traded on the NYSE under the symbols “CHMI”, “CHMI-PRA” and “CHMI-PRB”, respectively.
Our common stock, our Series A Preferred Stock and our Series B Preferred Stock are listed and traded on the NYSE under the symbols “CHMI”, “CHMI-PRA” and “CHMI-PRB”, respectively. We are externally managed by our Manager, Cherry Hill Mortgage Management, LLC, an SEC-registered investment adviser.
EAD for the year ended December 31, 2022 as compared to the year ended December 31, 2021 increased primarily due to changes in interest rates and a decrease in price premium amortization on the Company’s RMBS driven by lower prepayment speeds. 59 Table of Contents The following table reconciles the GAAP measure of net income (loss) to EAD and related per average common share amounts, for the periods indicated (dollars in thousands): Year Ended December 31, 2022 2021 Net Income $ 22,189 $ 12,530 Realized loss (gain) on RMBS, net 99,694 (548 ) Realized loss on derivatives, net (A) 16,051 26,763 Realized gain on acquired assets, net (12 ) (15 ) Unrealized loss (gain) on derivatives, net (61,864 ) 1,745 Unrealized gain on investments in MSRs, net of estimated MSR amortization (53,182 ) (16,358 ) Tax expense on realized and unrealized gain on MSRs 9,460 4,639 Total EAD: $ 32,336 $ 28,756 EAD attributable to noncontrolling interests in Operating Partnership (656 ) (566 ) Dividends on preferred stock 9,853 9,853 EAD Attributable to Common Stockholders $ 21,827 $ 18,337 EAD Attributable to Common Stockholders, per Diluted Share $ 1.10 $ 1.06 GAAP Net Income Per Share of Common Stock, per Diluted Share $ 0.60 $ 0.14 (A) Excludes drop income on TBA dollar rolls of $6.3 million and $13.1 million and interest rate swap periodic interest income of $11.1 million and $3.8 million, and includes trading expenses of $0 and $539,000 for the years ended December 31, 2022 and December 31, 2021, respectively.
The following table reconciles the GAAP measure of net income (loss) to EAD and related per average common share amounts, for the periods indicated (dollars in thousands): Year Ended December 31, 2023 2022 Net Income (Loss) $ (35,455 ) $ 22,189 Realized loss on RMBS, net 36,315 99,694 Realized loss on derivatives, net (A) 4,377 16,051 Realized gain on acquired assets, net (23 ) (12 ) Unrealized gain on RMBS measured at fair value through earnings, net (9,755 ) - Unrealized loss (gain) on derivatives, net 43,071 (61,864 ) Unrealized gain on investments in MSRs, net of estimated MSR amortization (12,593 ) (53,182 ) Tax expense on realized and unrealized gain on MSRs 2,876 9,460 Total EAD: $ 28,813 $ 32,336 EAD attributable to noncontrolling interests in Operating Partnership (537 ) (656 ) Dividends on preferred stock 9,853 9,853 EAD Attributable to Common Stockholders $ 18,423 $ 21,827 EAD Attributable to Common Stockholders, per Diluted Share $ 0.70 $ 1.10 GAAP Net Income (Loss) Per Share of Common Stock, per Diluted Share $ (1.70) $ 0.60 (A) Excludes drop income on TBA dollar rolls of $3.2 million and $6.3 million and interest rate swap periodic interest income of $35.0 million and $11.1 million for the years ended December 31, 2023 and December 31, 2022, respectively. 59 Table of Contents Our Portfolio MSRs Aurora’s MSR portfolio of Fannie Mae and Freddie Mac MSRs have an aggregate UPB of approximately $20.0 billion as of December 31, 2023.
Set forth below is the average aggregate balance of borrowings under the Company’s repurchase agreements for each of the periods shown and the aggregate balance as of the end of each such period (dollars in thousands): Repurchase Agreement Average and Maximum Amounts Quarter Ended Average Monthly Amount Maximum Month-End Amount Quarter Ending Amount December 31, 2022 $ 808,623 $ 825,962 $ 825,962 September 30, 2022 $ 776,544 $ 865,414 $ 865,414 June 30, 2022 $ 679,702 $ 702,130 $ 683,173 March 31, 2022 $ 820,270 $ 859,726 $ 764,885 December 31, 2021 $ 830,099 $ 865,494 $ 865,494 September 30, 2021 $ 790,587 $ 821,540 $ 777,416 June 30, 2021 $ 858,269 $ 897,047 $ 897,047 March 31, 2021 $ 1,012,389 $ 1,118,231 $ 934,001 63 Table of Contents The decrease in the Company’s borrowings under its repurchase agreements for the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the sale of RMBS securities during 2022 in response to rising interest rates.
Set forth below is the average aggregate balance of borrowings under the Company’s repurchase agreements for each of the periods shown and the aggregate balance as of the end of each such period (dollars in thousands): Repurchase Agreement Average and Maximum Amounts Quarter Ended Average Monthly Amount Maximum Month-End Amount Quarter Ending Amount December 31, 2023 $ 897,547 $ 903,489 $ 903,489 September 30, 2023 $ 972,935 $ 984,931 $ 967,289 June 30, 2023 $ 992,631 $ 1,010,934 $ 979,907 March 31, 2023 $ 972,138 $ 991,618 $ 991,618 December 31, 2022 $ 808,623 $ 825,962 $ 825,962 September 30, 2022 $ 776,544 $ 865,414 $ 865,414 June 30, 2022 $ 679,702 $ 702,130 $ 683,173 March 31, 2022 $ 820,270 $ 859,726 $ 764,885 The increase in the Company’s borrowings under its repurchase agreements for the year ended December 31, 2023 as compared to the year ended December 31, 2022 was due to the Company financing new security purchases during the year. 63 Table of Contents These short-term borrowings were used to finance certain of our investments in RMBS.
Our balance sheet, results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of, or cash flows from, the Servicing Related Assets as interest rates change.
Our balance sheet, results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of, or cash flows from, the Servicing Related Assets as interest rates change. 51 Table of Contents A slower than anticipated rate of prepayment due to an increase in market interest rates also will cause the life of the related RMBS to extend beyond that which was projected.
Earnings Available for Distribution EAD for the years ended December 31, 2022 and December 31, 2021, as compared to the prior year, increased by approximately $3.5 million or $0.04 per average common share, and decreased by approximately $11.8 million or $0.72 per average common share, respectively.
Earnings Available for Distribution EAD for the year ended December 31, 2023 as compared to the year ended December 31, 2022, decreased by approximately $3.4 million or $0.40 per average common share primarily due to changes in interest rates.
In this case, we may be able to reduce the amount of collateral required to secure borrowings. Credit Risk We are subject to varying degrees of credit risk in connection with our assets.
Conversely, tighter spreads imply the potential for lower income on new asset purchases but may have a positive impact on stated book value of our existing assets. In this case, we may be able to reduce the amount of collateral required to secure borrowings. Credit Risk We are subject to varying degrees of credit risk in connection with our assets.
The amount of the wages, salary and benefits reimbursed with respect to the officers our Manager provides to us is subject to the approval of the compensation committee of our board of directors. 67 Table of Contents The term of the Management Agreement expires on October 22, 2023 and will be automatically renewed for a one-year term on each anniversary of such date thereafter unless terminated or not renewed as described below.
The term of the Management Agreement expires on October 22, 2024 and will be automatically renewed for a one-year term on each anniversary of such date thereafter unless terminated or not renewed as described below.
Our operating cash flow differs from our net income due primarily to: (i) accretion of discount or premium on our RMBS, (ii) unrealized gains or losses on our Servicing Related Assets, and (iii) impairment on our securities, if any.
Our operating cash flow differs from our net income due primarily to: (i) accretion of discount or premium on our RMBS, (ii) unrealized gains or losses on our RMBS and Servicing Related Assets, and (iii) impairment on our securities, if any. 62 Table of Contents Repurchase Agreements As of December 31, 2023, we had repurchase agreements with 35 counterparties and approximately $903.5 million of outstanding repurchase agreement borrowings from 14 of those counterparties, which were used to finance RMBS.
Subservicing Agreements As of December 31, 2022, Aurora had four subservicing agreements in place, one of which is with Freedom Mortgage. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020, Freedom Mortgage continued to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default.
Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020, Freedom Mortgage continued to subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Freedom Mortgage ceased subservicing these loans during 2021 because these loans and any related advance claims had been rehabilitated or liquidated.
Our RMBS are carried at their fair value, as available-for-sale in accordance with ASC 320, Investments – Debt and Equity Securities. We evaluate the cost basis of our RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities.
We evaluate the cost basis of our available-for-sale RMBS on a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security’s cost basis is considered impaired.
Our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlie the MSRs held by Aurora or the non-Agency RMBS held in our portfolio.
Prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be affected by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlie the MSRs held by Aurora.
We also seek to operate our business in a manner that does not require us to register as an investment company under the Investment Company Act. Effective January 1, 2020, the Operating Partnership, owned 98.0% by the Company as of December 31, 2022, contributed substantially all of its assets to CHMI Sub-REIT, Inc.
We also seek to operate our business in a manner that does not require us to register as an investment company under the Investment Company Act. We conduct substantially all of our operations and own substantially all of our assets through our Operating Partnership. We are the sole general partner of our Operating Partnership.
The $11.8 million increase in interest expense for the year ended December 31, 2022 as compared to the year ended December 31, 2021, was due to a rise in interest rates as well as an increase in the notes payable balance.
Interest Expense Interest expense for the year ended December 31, 2023 was $51.6 million as compared to $17.6 million for the year ended December 31, 2022. The $34.0 million increase in interest expense for the year ended December 31, 2023 as compared to the year ended December 31, 2022, was due to a rise in financing rates of all assets.
See “Item 8. Consolidated Financial Statements and Supplementary Data—Note 7.
See “Item 8. Consolidated Financial Statements and Supplementary Data—Note 7. Transactions with Related Parties” for information regarding Aurora’s recapture agreements.
Contractual Obligations Our contractual obligations as of December 31, 2022 and December 31, 2021 included repurchase agreements, borrowings under our MSR financing arrangements, our Management Agreement with our Manager, and our subservicing agreements.
Our GAAP loss per share for the year ended December 31, 2023 was $1.70 and our GAAP earnings per share for the year ended December 31, 2022 were $0.60. 65 Table of Contents Contractual Obligations Our contractual obligations as of December 31, 2023 and December 31, 2022 included repurchase agreements, borrowings under our MSR financing arrangements, our Management Agreement with our Manager, and our subservicing agreements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+1 added−2 removed20 unchanged
Biggest changeTo mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “—Interest Rate Risk.” Actual economic conditions or implementation of decisions by our Manager may produce results that differ significantly from the estimates and assumptions used in our models. 69 Table of Contents Prepayment Risk; Extension Risk The following tables summarize the estimated change in fair value of our MSRs as of the dates indicated given several parallel shifts in the discount rate, voluntary prepayment rate and servicing cost (dollars in thousands): MSR Fair Value Changes As of December 31, 2022 (20)% (10)% -% 10% 20% Discount Rate Shift in % Estimated FV $ 305,821 $ 292,241 $ 279,739 $ 268,201 $ 257,526 Change in FV $ 26,082 $ 12,502 $ - $ (11,538 ) $ (22,213 ) % Change in FV 9 % 4 % - (4 )% (8 )% Voluntary Prepayment Rate Shift in % Estimated FV $ 296,237 $ 288,025 $ 279,739 $ 271,707 $ 264,005 Change in FV $ 16,498 $ 8,286 $ - $ (8,032 ) $ (15,734 ) % Change in FV 6 % 3 % - (3 )% (6 )% Servicing Cost Shift in % Estimated FV $ 288,345 $ 284,042 $ 279,739 $ 275,436 $ 271,133 Change in FV $ 8,606 $ 4,303 $ - $ (4,303 ) $ (8,606 ) % Change in FV 3 % 2 % - (2 )% (3 )% As of December 31, 2021 (20)% (10)% -% 10% 20% Discount Rate Shift in % Estimated FV $ 233,342 $ 225,813 $ 218,727 $ 212,050 $ 205,749 Change in FV $ 14,614 $ 7,085 $ - $ (6,677 ) $ (12,979 ) % Change in FV 7 % 3 % - (3 )% (6 )% Voluntary Prepayment Rate Shift in % Estimated FV $ 244,460 $ 231,026 $ 218,727 $ 207,458 $ 197,103 Change in FV $ 25,732 $ 12,298 $ - $ (11,270 ) $ (21,624 ) % Change in FV 12 % 6 % - (5 )% (10 )% Servicing Cost Shift in % Estimated FV $ 225,480 $ 222,104 $ 218,727 $ 215,351 $ 211,975 Change in FV $ 6,752 $ 3,376 $ - $ (3,376 ) $ (6,752 ) % Change in FV 3 % 2 % - (2 )% (3 )% 70 Table of Contents The following tables summarize the estimated change in fair value of our RMBS as of the dates indicated given several parallel shifts in interest rates (dollars in thousands): RMBS Fair Value Changes As of December 31, 2022 Fair Value Change December 31, 2022 +25 Bps +50 Bps +75 Bps +100 Bps +150 Bps RMBS Portfolio RMBS, available-for-sale, net of swaps $ 785,308 RMBS Total Return (%) 0.07 % 0.10 % 0.09 % 0.05 % (0.17 )% RMBS Dollar Return $ 571 $ 814 $ 723 $ 357 $ (1,298 ) As of December 31, 2021 Fair Value Change December 31, 2021 +25 Bps +50 Bps +75 Bps +100 Bps +150 Bps RMBS Portfolio RMBS, available-for-sale, net of swaps $ 1,429,335 RMBS Total Return (%) (0.18 )% (0.49 )% (0.92 )% (1.44 )% (2.74 )% RMBS Dollar Return $ (2,584 ) $ (7,016 ) $ (13,110 ) $ (20,635 ) $ (39,125 ) The sensitivity analysis is hypothetical and is presented solely to assist an analysis of the possible effects on the fair value under various scenarios.
Biggest changeActual economic conditions or implementation of decisions by our Manager may produce results that differ significantly from the estimates and assumptions used in our models. 69 Table of Contents Prepayment Risk; Extension Risk The following tables summarize the estimated change in fair value of our MSRs as of the dates indicated given several parallel shifts in the discount rate, voluntary prepayment rate and servicing cost (dollars in thousands): MSR Fair Value Changes As of December 31, 2023 (20)% (10)% -% 10% 20% Discount Rate Shift in % Estimated FV $ 278,018 $ 265,310 $ 253,629 $ 242,863 $ 232,917 Change in FV $ 24,389 $ 11,682 $ - $ (10,766 ) $ (20,712 ) % Change in FV 10 % 5 % - (4 )% (8 )% Voluntary Prepayment Rate Shift in % Estimated FV $ 265,422 $ 259,981 $ 253,629 $ 246,972 $ 240,306 Change in FV $ 11,793 $ 6,352 $ - $ (6,657 ) $ (13,322 ) % Change in FV 5 % 3 % - (3 )% (5 )% Servicing Cost Shift in % Estimated FV $ 262,597 $ 258,113 $ 253,629 $ 249,144 $ 244,660 Change in FV $ 8,968 $ 4,484 $ - $ (4,484 ) $ (8,968 ) % Change in FV 4 % 2 % - (2 )% (4 )% As of December 31, 2022 (20)% (10)% -% 10% 20% Discount Rate Shift in % Estimated FV $ 305,821 $ 292,241 $ 279,739 $ 268,201 $ 257,526 Change in FV $ 26,082 $ 12,502 $ - $ (11,538 ) $ (22,213 ) % Change in FV 9 % 4 % - (4 )% (8 )% Voluntary Prepayment Rate Shift in % Estimated FV $ 296,237 $ 288,025 $ 279,739 $ 271,707 $ 264,005 Change in FV $ 16,498 $ 8,286 $ - $ (8,032 ) $ (15,734 ) % Change in FV 6 % 3 % - (3 )% (6 )% Servicing Cost Shift in % Estimated FV $ 288,345 $ 284,042 $ 279,739 $ 275,436 $ 271,133 Change in FV $ 8,606 $ 4,303 $ - $ (4,303 ) $ (8,606 ) % Change in FV 3 % 2 % - (2 )% (3 )% 70 Table of Contents The following tables summarize the estimated change in fair value of our RMBS as of the dates indicated given several parallel shifts in interest rates (dollars in thousands): RMBS Fair Value Changes As of December 31, 2023 December 31, 2023 (0.75)% (0.50)% (0.25)% 0.25% 0.50% 0.75% RMBS Portfolio RMBS, net of swaps $ 749,491 Estimated FV $ 753,297 $ 752,391 $ 751,103 $ 747,569 $ 745,369 $ 742,833 Change in FV $ 3,806 $ 2,900 $ 1,612 $ (1,922 ) $ (4,122 ) $ (6,658 ) % Change in FV 0.51 % 0.39 % 0.22 % (0.26 )% (0.55 )% (0.89 )% As of December 31, 2022 December 31, 2022 (0.75)% (0.50)% (0.25)% 0.25% 0.50% 0.75% RMBS Portfolio RMBS, net of swaps $ 785,308 Estimated FV $ 781,962 $ 783,468 $ 784,625 $ 785,583 $ 785,537 $ 785,188 Change in FV $ (3,346 ) $ (1,840 ) $ (683 ) $ 275 $ 229 $ (120 ) % Change in FV (0.43 )% (0.23 )% (0.09 )% 0.04 % 0.03 % (0.02 )% The sensitivity analysis is hypothetical and is presented solely to assist an analysis of the possible effects on the fair value under various scenarios.
As of December 31, 2022, the Company’s exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
As of December 31, 2023, the Company’s exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
In general, we finance the acquisition of certain of our assets through financings in the form of repurchase agreements and bank facilities. We expect to make use of additional MSR financing, as well as possibly warehouse facilities, securitizations, re-securitizations, and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements.
We expect to make use of additional MSR financing, as well as possibly warehouse facilities, securitizations, re-securitizations, and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements.
This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings.
This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “—Interest Rate Risk”.
The illiquidity of these assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.
A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.
Weakness in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
Weakness in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. 71 Table of Contents Liquidity Risk Our Servicing Related Assets, as well as some of the assets that may in the future comprise our portfolio, are not publicly traded.
While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake. 68 Table of Contents Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.
In addition, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. 71 Table of Contents Counterparty Risk When we engage in repurchase transactions, we generally sell securities to lenders (i.e., the repurchase agreement counterparties) and receive cash from the lenders.
In addition, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.
The lenders are obligated to resell the same securities back to us at the end of the term of the transaction.
Counterparty Risk When we engage in repurchase transactions, we generally sell securities to lenders (i.e., the repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction.
Removed
Interest Rate Risk Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations.
Added
We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we finance the acquisition of certain of our assets through financings in the form of repurchase agreements and bank facilities.
Removed
Liquidity Risk Our Servicing Related Assets, as well as some of the assets that may in the future comprise our portfolio, are not publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities.

Other CHMI 10-K year-over-year comparisons