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What changed in DYNEX CAPITAL INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of DYNEX CAPITAL INC'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.

+270 added−282 removedSource: 10-K (2024-02-26) vs 10-K (2023-02-27)

Top changes in DYNEX CAPITAL INC's 2023 10-K

270 paragraphs added · 282 removed · 193 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

37 edited+3 added−8 removed61 unchanged
Biggest changeThe following table provides the projected amortization of our net deferred tax hedge gains as of December 31, 2022 that will be recognized as taxable income over the periods indicated, though recognition of deferred tax hedge gains and losses may be accelerated if the underlying instrument originally hedged is terminated or paid off: Period of Recognition for Remaining Hedge Gains, Net December 31, 2022 ($ in thousands) First quarter 2023 $ 18,153 Second quarter 2023 18,162 Third quarter 2023 18,195 Fourth quarter 2023 18,286 Fiscal year 2024 75,368 Fiscal year 2025 and thereafter 547,001 $ 695,165 As of December 31, 2022, we also had $408.6 million of capital loss carryforwards, the majority of which expire in 2027, and $9.3 million of net operating loss (“NOL”) carryforwards, which were all generated prior to January 1, 2018 and will expire over the next 3 years if not used. 7 The following table summarizes our dividends declared per share and their related tax characterization for the periods indicated: Tax Characterization Total Dividends Declared Per Share Ordinary Capital Gain Return of Capital Common dividends declared: Year ended December 31, 2022 $ 0.86186 $ — $ 0.69814 $ 1.56000 Year ended December 31, 2021 $ 0.07506 $ — $ 1.48494 $ 1.56000 Preferred Series B dividends declared: Year ended December 31, 2022 $ — $ — $ — $ — Year ended December 31, 2021 $ 0.63012 $ — $ — $ 0.63012 Preferred Series C dividends declared: Year ended December 31, 2022 $ 1.72500 $ — $ — $ 1.72500 Year ended December 31, 2021 $ 1.72500 $ — $ — $ 1.72500 Qualification as a REIT Qualification as a REIT requires that we satisfy a variety of tests relating to our income, assets, distributions and ownership.
Biggest changeThe following table provides the projected amortization of our net deferred tax hedge gains as of December 31, 2023 that will be recognized as taxable income over the periods indicated, though recognition of deferred tax hedge gains and losses may be accelerated if the underlying instrument originally hedged is terminated or paid off: Period of Recognition for Remaining Hedge Gains, Net December 31, 2023 ($ in thousands) First quarter 2024 $ 25,717 Second quarter 2024 25,657 Third quarter 2024 25,731 Fourth quarter 2024 25,828 Fiscal year 2025 104,115 Fiscal year 2026 and thereafter 654,776 $ 861,824 As of December 31, 2023, we also had $590.8 million of capital loss carryforwards, the majority of which expire by 2028, and $8.1 million of net operating loss (“NOL”) carryforwards, which were all generated prior to January 1, 2018 and will expire over the next 2 years if not used.
Our investments in non-Agency MBS are generally higher quality senior or mezzanine classes (typically rated 'A' or better by one or more of the nationally recognized statistical rating organizations) because they are typically more liquid (i.e., they are more easily converted into cash either through sales or pledges as collateral for repurchase 1 agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS.
Our investments in non-Agency MBS are generally higher quality senior or mezzanine classes 1 (typically rated 'A' or better by one or more of the nationally recognized statistical rating organizations) because they are typically more liquid (i.e., they are more easily converted into cash either through sales or pledges as collateral for repurchase agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS.
Yield maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay, which we believe makes CMBS less costly to hedge relative to RMBS. 2 CMBS IO .
Yield 2 maintenance and prepayment penalty requirements are intended to create an economic disincentive for the loans to prepay, which we believe makes CMBS less costly to hedge relative to RMBS. CMBS IO .
The primary differences between our GAAP net income and our taxable income are (i) unrealized gains and losses are recognized in net income for GAAP purposes but are excluded from taxable income until realized; (ii) realized gains and losses on derivatives that are designated as tax hedges which are recognized in net income for GAAP purposes but are deferred and amortized for tax purposes over the original periods hedged by those derivatives (e.g., ten-years for a short position on a ten-year U.S.
The primary differences between our GAAP net income and our taxable income are (i) unrealized gains and losses are recognized in net income for GAAP purposes but are excluded from taxable income until realized; (ii) realized gains and losses on derivatives that are designated as tax hedges which are recognized in net income for GAAP purposes but are deferred and amortized for tax purposes over the original periods hedged by those derivatives (e.g., ten-years for a short position on a ten-year 6 U.S.
In purchasing investments and obtaining financing, we compete with other mortgage REITs, broker-dealers and investment banking firms, GSEs, mutual funds, banks, hedge funds, mortgage bankers, insurance companies, governmental bodies, including the Federal Reserve, and other entities, many of which may have greater financial resources and a lower cost of capital than we do.
COMPETITION In purchasing investments and obtaining financing, we compete with other mortgage REITs, broker-dealers and investment banking firms, GSEs, mutual funds, banks, hedge funds, mortgage bankers, insurance companies, governmental bodies, including the Federal Reserve, and other entities, many of which may have greater financial resources and a lower cost of capital than we do.
Repurchase agreement lending by larger U.S. domiciled banks has declined in recent years due to increased regulation and changes to regulatory capital requirements. Their repurchase market participation has been replaced by smaller independent broker dealers that are generally less regulated and by U.S. domiciled broker dealer subsidiaries of foreign financial institutions.
Repurchase agreement lending by larger U.S. domiciled banks has declined in recent years due to increased regulation and changes to regulatory capital 4 requirements. Their repurchase market participation has been replaced by smaller independent broker dealers that are generally less regulated and by U.S. domiciled broker dealer subsidiaries of foreign financial institutions.
We 5 hire based on qualifications and evaluate, recognize, reward and promote employees based on performance without regard to race, religion, color, national origin, disability, gender, gender identity, sexual orientation, stereotypes or assumptions based thereon. In addition, equity is fundamental to our philosophy of fair and equitable treatment.
We hire based on qualifications and evaluate, recognize, reward and promote employees based on performance without regard to race, religion, color, national origin, disability, gender, gender identity, sexual orientation, stereotypes or assumptions based thereon. In addition, equity is fundamental to our philosophy of fair and equitable treatment.
The Exchange Act requires us to file reports, proxy statements, and other information with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov . Our website can be found at www.dynexcapital.com .
The Exchange Act requires us to file reports, proxy statements, and other information with the SEC. These materials may be obtained electronically by accessing the SEC’s home page at www.sec.gov . 8 Our website can be found at www.dynexcapital.com .
If the condition described in clause (ii) of the preceding sentence was not satisfied, we 8 still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. Ownership .
If the condition described in clause (ii) of the preceding sentence was not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose. Ownership .
All of the above factors are influenced by market forces beyond our control such as macroeconomic and geopolitical conditions, market volatility, Federal Reserve policy, U.S. fiscal and regulatory policy, and foreign central 4 bank and government policy.
All of the above factors are influenced by market forces beyond our control such as macroeconomic and geopolitical conditions, market volatility, Federal Reserve policy, U.S. fiscal and regulatory policy, and foreign central bank and government policy.
A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a fixed-rate Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral. The actual Agency securities to be delivered are not identified until approximately 2 days before the settlement date.
A TBA security is a forward contract (“TBA contract”) for the purchase (“long position”) or sale (“short position”) of a fixed-rate Agency MBS at a predetermined price with certain principal and interest terms and certain types of collateral. The actual Agency securities to be delivered are not identified until approximately two days before the settlement date.
In addition to the discussion below, details regarding our ESG practices and initiatives will be available in our 2023 Proxy Statement, including details on how we reduce our carbon footprint, our code of business conduct and ethics, and other governance commitments.
In addition to the discussion below, details regarding our ESG practices and initiatives will be available in our 2024 Proxy Statement, including details on how we reduce our carbon footprint, our code of business conduct and ethics, and other governance commitments.
Further, our references to the URLs for these websites are intended to be inactive textual references only. 9
Further, our references to the URLs for these websites are intended to be inactive textual references only.
Repurchase agreements generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We pay interest on our repurchase agreement borrowings at a rate usually based on a spread to certain short-term interest rates and fixed for the term of the borrowing.
Repurchase agreements generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We pay interest on our repurchase agreement borrowings at a rate determined by a spread to certain short-term interest rates and fixed for the term of the borrowing.
Treasury futures position); and (iii) permanent differences due to limitations on the deductibility of certain GAAP expenses from taxable income. The Company estimates its REIT taxable income for the year ended December 31, 2022 is $40.6 million, which includes $22.5 million related to amortization of net deferred tax hedge gains.
Treasury futures position); and (iii) permanent differences due to limitations on the deductibility of certain GAAP expenses from taxable income. The Company estimates its REIT taxable income for the year ended December 31, 2023 is $40.5 million, which includes $80.5 million related to amortization of net deferred tax hedge gains.
The performance of our investment portfolio will depend on many factors including, but not limited to, interest rates, trends of interest rates, the steepness of interest rate curves, prepayment rates on our investments, demand for our investments, general market liquidity, economic and global political conditions, and the credit performance of our investments.
The performance of our investment portfolio will depend on many factors including, but not limited to, interest rates, trends of interest rates, the steepness of interest rate curves, prepayment rates on our investments, demand for our investments, yield spreads for fixed income securities, general market liquidity, economic and global political conditions, and the credit performance of our investments.
As of December 31, 2022, we had 19 full and part-time employees with an average tenure of 13.8 years, and our voluntary turnover rate was 0% for the three years ended December 31, 2022. None of our employees are covered by any collective bargaining agreements, and we are not aware of any union organizing activity relating to our employees.
As of December 31, 2023, we had 22 full and part-time employees with an average tenure of 12.8 years, and our voluntary turnover rate was 0% for the three years ended December 31, 2023. None of our employees are covered by any collective bargaining agreements, and we are not aware of any union organizing activity relating to our employees.
Government agency guarantee and servicer fees. Mortgage pass-through certificates generally distribute cash flows from the underlying collateral on a pro-rata basis among the security holders. Security holders also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.
Mortgage pass-through certificates generally distribute cash flows from the underlying collateral on a pro-rata basis among the security holders. Security holders also receive guarantor advances of principal and interest for delinquent loans in the mortgage pools.
CMBS IO are interest-only securities issued as part of a CMBS securitization and represent the right to receive a portion of the monthly interest payments (but not principal cash flows) on the unpaid principal balance of the underlying pool of commercial mortgage loans. We invest in both Agency-issued and non-Agency issued CMBS IO.
CMBS IO are interest-only securities issued as part of a CMBS securitization and represent the right to receive a portion of the monthly interest payments (but not principal cash flows) on the unpaid principal balance of the underlying pool of commercial mortgage loans.
As of December 31, 2022, the majority of our investments in RMBS were Agency-issued pass-through securities collateralized primarily by pools of fixed-rate single-family mortgage loans. Monthly payments of principal and interest made by the individual borrowers on the mortgage loans underlying the pools are "passed through" to the security holders, after deducting GSE or U.S.
As of December 31, 2023, the majority of our investments were Agency-issued pass-through RMBS collateralized primarily by pools of fixed-rate single-family mortgage loans. Monthly payments of principal and interest made by the individual borrowers on the mortgage loans underlying the pools are "passed through" to the security holders, after deducting GSE or U.S. Government agency guarantee and servicer fees.
CMBS. Our CMBS investments as of December 31, 2022 were fixed-rate Agency-issued securities backed by multifamily housing loans. The loans underlying CMBS are generally fixed-rate with scheduled principal payments generally assuming a 30-year amortization period, but typically requiring balloon payments on average approximately 10 years from origination.
CMBS. Our CMBS investments, which comprised less than 2% of our investment portfolio as of December 31, 2023, were fixed-rate Agency-issued securities backed by multifamily housing loans. The loans underlying CMBS are generally fixed-rate with scheduled principal payments generally assuming a 30-year amortization period, but typically requiring balloon payments on average approximately 10 years from origination.
If we fail to meet either the 75% income test or the 95% income test, or both, in a taxable year, we might nonetheless continue to qualify as a REIT, if our failure was due to reasonable cause and not willful neglect and the nature and amounts of our items of gross income were properly disclosed to the Internal Revenue Service (the “IRS”).
Our primary source of income is interest on obligations secured by mortgages on real property. 7 If we fail to meet either the 75% income test or the 95% income test, or both, in a taxable year, we might nonetheless continue to qualify as a REIT, if our failure was due to reasonable cause and not willful neglect and the nature and amounts of our items of gross income were properly disclosed to the Internal Revenue Service (the “IRS”).
In order to satisfy the 95% income test, 95% of our gross income for the taxable year must consist of either income that qualifies under the 75% income test or certain other types of passive income such as interest and dividends. Our primary source of income is interest on obligations secured by mortgages on real property.
In order to satisfy the 95% income test, 95% of our gross income for the taxable year must consist of either income that qualifies under the 75% income test or certain other types of passive income such as interest and dividends.
The amount of leverage we utilize depends upon a variety of factors, including but not limited to general economic, political and financial market conditions; the actual and anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the credit worthiness of financing counterparties; the health of the U.S. residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our investments; the rating assigned to securities; and our outlook for asset spreads.
The amount of leverage we utilize is contingent on various factors such as prevailing economic, political and financial market conditions; the actual and anticipated liquidity and price volatility of our assets; the gap between the duration of our investments, financings, and hedges; the availability and cost of financing our assets; our opinion of the credit worthiness of financing counterparties; the health of the U.S. residential mortgage and housing markets; our outlook for the level, slope and volatility of interest rates; the credit quality of the loans underlying our investments; the rating assigned to securities; and our outlook for asset spreads.
We regularly review and analyze our compensation practices and engage in ongoing efforts to ensure pay equity within all levels of employment. We strive to maintain a corporate culture that is welcoming, inclusive, and respectful to all. As of December 31, 2022, 53% of our employees were women or self-identified minorities.
We regularly review and analyze our compensation practices and engage in ongoing efforts to ensure pay equity within all levels of employment. We strive to maintain a corporate culture that is welcoming, inclusive, and respectful to all.
In a period of rising interest rates, our earnings and cash flow may be negatively impacted by borrowing costs increasing faster than interest income from our assets, and our book value may decline as a result of declining market values of our MBS.
In a period of rising interest rates, our earnings and cash flow may be negatively impacted by borrowing costs increasing faster than interest income from our assets, and our book value may decline as a result of declining market values of our MBS. 3 Our hedging strategy is dynamic and is based on our assessment of U.S. and global economic conditions and monetary policies.
We have adopted the Sustainability Accounting Standards Board (“SASB”) Conceptual Framework, and we have made available on our website disclosures in accordance with the Financials Sector standards of the SASB. Additional details regarding our ESG practices and initiatives will also be available in our 2023 proxy statement.
We have adopted the Sustainability Accounting Standards Board (“SASB”) Conceptual Framework, and we have made available on our website disclosures in accordance with the Financials Sector standards of the SASB.
Increased competition in the market may reduce the available supply of investments and may drive prices of investments to levels which would negatively impact our ability to earn an acceptable amount of income from these investments.
Increased competition in the market may reduce the available supply of investments and may drive prices of investments to levels which would negatively impact our ability to earn an acceptable amount of income from these investments. Competition can also reduce the availability of borrowing capacity at our repurchase agreement counterparties as such capacity is not unlimited.
Health, Safety, and Wellness The Company strives to offer its employees a healthy work-life balance and an open environment in which they are encouraged to offer thoughts and opinions.
As of December 31, 2023, 50% of our employees were women or self-identified minorities. 5 Health, Safety, and Wellness The Company strives to offer its employees a healthy work-life balance and an open environment in which they are encouraged to offer thoughts and opinions.
The loans collateralizing Agency-issued CMBS IO pools are similar in composition to the pools of loans that collateralize CMBS as discussed above. Non-Agency issued CMBS IO are backed by loans secured by a number of different property types including office buildings, hospitality, and retail, among others.
Non-Agency issued CMBS IO are backed by loans secured by a number of different property types including multifamily, office buildings, hospitality, and retail, among others.
We are primarily invested in Agency MBS including residential MBS (“RMBS”), commercial MBS (“CMBS”) and CMBS interest-only (“CMBS IO”) securities. Agency MBS have an implicit guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac.
Agency MBS have an implicit guaranty of principal payment by an agency of the U.S. government or a U.S. government-sponsored entity (“GSE”) such as Fannie Mae and Freddie Mac. Non-Agency MBS are issued by non-governmental enterprises and do not have a guaranty of principal or interest payments.
Borrowing directly from these sources also reduces our risk to the financial intermediaries. Please refer to "Risk Factors-Risks Related to Our Financing and Hedging Activities" in Item 1A of Part I of this Annual Report on Form 10-K for additional information regarding significant risks related to repurchase agreement financing.
As of December 31, 2023, we did not have more than 10% of equity at risk with any of our repurchase agreement counterparties. Please refer to "Risk Factors-Risks Related to Our Financing and Hedging Activities" in Item 1A of Part I of this Annual Report on Form 10-K for additional information regarding significant risks related to repurchase agreement financing.
FINANCING STRATEGY We use leverage to enhance the returns on our invested capital by pledging our investments as collateral for borrowings primarily through the use of repurchase agreements.
In addition, our non-Agency CMBS IO are well seasoned with a weighted average life remaining of less than two years. FINANCING STRATEGY We employ leverage to enhance the returns on our invested capital by pledging our investments as collateral for borrowings, primarily through the use of repurchase agreements.
Competition can also reduce the availability of borrowing capacity at our repurchase agreement counterparties as such capacity is not unlimited, and many of our repurchase agreement counterparties limit the amount of financing they offer to the mortgage REIT industry. 6 OPERATING AND REGULATORY STRUCTURE Real Estate Investment Trust Requirements As a REIT, we are required to abide by certain requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended (the “Tax Code”).
OPERATING AND REGULATORY STRUCTURE Real Estate Investment Trust Requirements As a REIT, we are required to abide by certain requirements for qualification as a REIT under the Internal Revenue Code of 1986, as amended (the “Tax Code”).
We also intend to enter into derivative contracts only with the counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency. OPERATING POLICIES AND RISK MANAGEMENT We invest our capital and manage our risk according to our “Investment Policy” and “Investment Risk Policy,” which are approved by our Board of Directors.
We also intend to enter into derivative contracts only through a futures commission merchant or with counterparties that we believe have a strong credit rating to mitigate the risk of counterparty default or insolvency.
These policies set forth investment and risk limitations as they relate to the Company's investment activities and set parameters for the Company's investment and capital allocation decisions.
OPERATING POLICIES AND RISK MANAGEMENT We invest our capital and manage our risk according to our “Investment Policy” and “Investment Risk Policy,” which are approved by our Board of Directors. These policies set forth investment and risk limitations as they relate to the Company's investment activities and set parameters for the Company's investment and capital allocation decisions.
Treasury futures, options on U.S. Treasury futures, and options on interest rate swaps (“interest rate swaptions”) to mitigate adverse impacts of interest rate changes on our total economic return. In conducting our hedging activities, we intend to comply with REIT and tax limitations on our hedging instruments, which could limit our activities and the instruments that we may use.
We frequently adjust our hedging portfolio based on our expectation of future interest rates, including the absolute level of rates and the slope of the yield curve versus market expectations. In conducting our hedging activities, we intend to comply with REIT and tax limitations on our hedging instruments, which could limit our activities and the instruments that we may use.
Removed
We also have investments in non-Agency MBS, which consist mainly of CMBS IO. Non-Agency MBS are issued by non-governmental enterprises and do not have a guaranty of principal or interest payments.
Added
As of December 31, 2023, we were primarily invested in Agency MBS, of which over 96% are residential MBS (“Agency RMBS”). Less than 4% of our investment portfolio as of December 31, 2023 was comprised of Agency commercial MBS (“Agency CMBS”) and Agency and non-Agency CMBS interest-only (“CMBS IO”) securities.
Removed
As of December 31, 2022, we did not have more than 5% of equity at risk with any of our repurchase agreement counterparties. In limited instances, a money market fund or securities lender has directly provided funds to us without the involvement of a financial intermediary typically at a lower cost than we would incur borrowing from the financial intermediary.
Added
We invest in both Agency-issued and non-Agency issued CMBS IO, which comprised less than 3% of our investment portfolio as of December 31, 2023. The loans collateralizing Agency-issued CMBS IO pools are similar in composition to the pools of loans that collateralize CMBS as discussed above.
Removed
Our hedging strategy is dynamic and is based on our assessment of U.S. and global economic conditions and monetary policies. We frequently adjust our hedging portfolio based on our expectation of future interest rates, 3 including the absolute level of rates and the slope of the yield curve versus market expectations. During 2022, we used U.S.
Added
The following table summarizes our dividends declared per share and their related tax characterization for the periods indicated: Tax Characterization Total Dividends Declared Per Share Ordinary Capital Gain Return of Capital Common dividends declared: Year ended December 31, 2023 $ 0.74112 $ — $ 0.81888 $ 1.56000 Year ended December 31, 2022 $ 0.86186 $ — $ 0.69814 $ 1.56000 Preferred Series C dividends declared: Year ended December 31, 2023 $ 1.72500 $ — $ — $ 1.72500 Year ended December 31, 2022 $ 1.72500 $ — $ — $ 1.72500 Qualification as a REIT Qualification as a REIT requires that we satisfy a variety of tests relating to our income, assets, distributions and ownership.
Removed
In 2021, we entered into a services agreement with a third-party asset manager to license its proprietary trading, portfolio management, and risk reporting system and to provide the Company additional services including trade settlement and investment accounting services.
Removed
We believe this services agreement is an important step in furthering the foundation for a flexible, scalable, well-controlled and automated operating platform that supports our diversified investment, funding, and hedging strategies.
Removed
Once this system is fully integrated and implemented into our day-to-day operations, we expect to realize operating efficiencies that should enhance our capability to more effectively manage increases in our capital base and assets under management. Furthermore, this system and relationship should allow us to expand our target asset classes with minimal additional costs.
Removed
COMPETITION The business models of mortgage REITs range from investing only in Agency MBS to investing substantially in non-investment grade MBS and originating and securitizing mortgage loans and investing in mortgage servicing rights. Some mortgage REITs will invest in RMBS and related investments only, some in CMBS and related investments only, and some in a mix.
Removed
Each mortgage REIT will assume various types and degrees of risk in its investment strategy.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

74 edited+12 added−15 removed142 unchanged
Biggest changeThough we do not currently have any financial instruments referenced to LIBOR rates, there is no guarantee that a transition from LIBOR to SOFR or any other alternative rate will not result in, among other things, financial market disruptions, significant increases in benchmark rates, or short-term interest rates, any of which could have an adverse effect on our profitability, liquidity, and financial condition. 22 We may change our investment strategy, operating policies, dividend policy, and/or asset allocations without shareholder consent and/or in a manner in which shareholders, analysts, and capital markets may not agree with us.
Biggest changeWe may change our investment strategy, operating policies, dividend policy, and/or asset allocations without shareholder consent and/or in a manner in which shareholders, analysts, and capital markets may not agree with us. 21 A change in our investment strategy or asset allocation may materially change our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations.
Under the terms of most securities we hold, we do not have the right to directly enforce remedies against the issuer of the security, but instead must rely on a corporate trustee to act on behalf of us and other security holders.
Under the terms of most securities we hold, we do not have the right to enforce remedies against the issuer of the security directly, but instead must rely on a corporate trustee to act on behalf of us and other security holders.
Pursuant to the no-action letter, the Division will not recommend that the CFTC take enforcement action against a mortgage REIT if its operator fails to register as a CPO, provided that the mortgage REIT (i) submits a claim to take advantage of the relief and (ii) the mortgage REIT: (a) limits the initial margin and premiums required to establish its commodity interest positions to no greater than 5% of the fair market value of the mortgage REIT’s total assets; (b) limits the net income derived annually from its commodity interest positions, excluding the income from commodity interest positions that are “qualifying hedging transactions,” to less than 5% of its annual gross income; (c) does not market interests in the mortgage REIT to the public as interests in a commodity pool or otherwise in a vehicle for trading in the commodity futures, commodity options or swaps markets; and (d) either: (1) identified itself as a “mortgage REIT” in Item G of its last U.S. income tax return on Form 1120-REIT; or (2) if it has not yet filed its first U.S. income tax return on Form 1120-REIT, it discloses to its shareholders that it intends to identify itself as a “mortgage REIT” in its first U.S. income tax return on Form 1120-REIT.
Pursuant to the no-action letter, the Division will not recommend that the CFTC take enforcement action against a mortgage REIT if its operator fails to register as a CPO, provided that the mortgage REIT (i) submits a claim to take advantage of the relief and (ii) the mortgage REIT: (a) limits the initial margin and premiums required to establish its commodity interest positions to no greater than 5% of the fair market value of the mortgage REIT’s total assets; (b) limits the net income derived annually from its commodity interest positions, excluding the income from commodity interest positions that are “qualifying hedging transactions,” to less than 5% of its annual gross income; (c) does not market 20 interests in the mortgage REIT to the public as interests in a commodity pool or otherwise in a vehicle for trading in the commodity futures, commodity options or swaps markets; and (d) either: (1) identified itself as a “mortgage REIT” in Item G of its last U.S. income tax return on Form 1120-REIT; or (2) if it has not yet filed its first U.S. income tax return on Form 1120-REIT, it discloses to its shareholders that it intends to identify itself as a “mortgage REIT” in its first U.S. income tax return on Form 1120-REIT.
It can be difficult to predict the impact on interest rates of unexpected and uncertain domestic and global political and economic events, such trade conflicts, international politics, global monetary policy and the impact of 10 economic or other sanctions; however, events such as these may have adverse impacts on, among other things, the U.S. economy, financial markets, the cost of borrowing, the value of the assets we hold, and the financial strength of counterparties with whom we transact business.
It can be difficult to predict the impact on interest rates of unexpected and uncertain domestic and global political and economic events, such as trade conflicts, international politics, global monetary policy and the impact of economic or other sanctions; however, events such as these may have adverse impacts on, among other things, the U.S. economy, financial markets, the cost of borrowing, the value of the assets we hold, and the financial strength of counterparties with whom we transact business.
In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties 17 over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
Failure to comply with these covenants could result in an event of default, termination of an agreement, acceleration of all amounts owed under an agreement, and may give the counterparty the right to exercise available remedies under the repurchase agreement, such as the sale of the asset subject to repurchase at the time of default, unless we were able to negotiate a waiver in connection with any such default.
Failure to comply with these covenants could result in an event of default, termination of an agreement, acceleration of all amounts owed under an agreement, and may give the counterparty the right to exercise available remedies under the repurchase agreement, such as the sale 14 of the asset subject to repurchase at the time of default, unless we were able to negotiate a waiver in connection with any such default.
Bankruptcy Code and take 16 possession of and liquidate our collateral under our repurchase agreements without delay. In the event that either we or one of our lenders file for bankruptcy, we may incur losses in amounts equal to the excess of our collateral pledged over the amount of repurchase agreement borrowing due to the lender.
Bankruptcy Code and take possession of and liquidate our collateral under our repurchase agreements without delay. In the event that either we or one of our lenders file for bankruptcy, we may incur losses in amounts equal to the excess of our collateral pledged over the amount of repurchase agreement borrowing due to the lender.
Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences of such qualification. Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
Treasury regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S. federal income tax consequences of such qualification. 18 Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. The stock ownership limit imposed by the Tax Code for REITs and our Restated Articles of Incorporation (“Articles of Incorporation”) may restrict our business combination opportunities.
In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. 19 The stock ownership limit imposed by the Tax Code for REITs and our Restated Articles of Incorporation (“Articles of Incorporation”) may restrict our business combination opportunities.
To the extent that we satisfy this 90% distribution requirement, but distribute less than 100% of our taxable income, including our net capital gain, we will be subject to federal corporate income tax on our undistributed taxable income.
To the extent that we satisfy this 90% distribution requirement, but distribute less than 100% of our taxable income, including our 16 net capital gain, we will be subject to federal corporate income tax on our undistributed taxable income.
Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, 18 some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.
Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals.
Interest rate hedging may fail to protect or could adversely affect our results of operations, book value and liquidity because, among other things: 15 • the performance of instruments used to hedge may not completely correlate with the performance of the assets or liabilities being hedged; • available hedging instruments may not correspond directly with the interest rate risk from which we seek protection; • the duration of the hedge may not match the duration of the related asset or liability given management’s expectation of future changes in interest rates or a result of the inaccuracies of models in forecasting cash flows on the asset being hedged; • the value of derivatives used for hedging will be adjusted from time to time in accordance with GAAP to reflect changes in fair value and downward adjustments will reduce our earnings, shareholders’ equity, and book value; • the amount of income that a REIT may earn from hedging transactions (other than through taxable REIT subsidiaries) to offset interest rate losses may be limited by U.S. federal income tax provisions governing REITs; • interest rate hedging can be relatively expensive, particularly during periods of volatile interest rates; • the credit quality of the party 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 party owing money in the hedging transaction may default on its obligation to pay.
Interest rate hedging may fail to protect or could adversely affect our results of operations, book value and liquidity because, among other things: • the performance of instruments used to hedge may not completely correlate with the performance of the assets or liabilities being hedged; • available hedging instruments may not correspond directly with the interest rate risk from which we seek protection; • the duration of the hedge may not match the duration of the related asset or liability given management’s expectation of future changes in interest ra tes or a result of the inaccuracies of models in forecasting cash flows on the asset being hedged; • the value of derivatives used for hedging will b e adjusted from time to time in accordance with GAAP to reflect changes in fair value and downward adjustments will reduce our earnings, shareholders’ equity, and book value; • the amount of income that a REIT may earn from hedging transactions (other than through taxable REIT subsidiaries) to offset interest rate losses may be limited by U.S. federal income tax provisions governing REITs; • interest rate hedging can be relatively expensive, particularly during periods of volatile interest rates; • the credit quality of the party 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 party owing money in the hedging transaction may default on its obligation to pay.
Our hedging activity will vary in scope based on, among other things, our forecast of future interest rates, our investment portfolio construction and objectives, the actual and implied level and volatility of interest rates, and sources and terms of financing used. No hedging strategy can completely insulate us from the interest rate risks to which we are exposed.
Our hedging activity will vary in scope based on, among other things, our forecast of future interest rates, our investment portfolio construction and objectives, the actual and implied level and volatility of interest rates, and sources and terms of financing used. No hedging strategy can completely insulate us from the interest rate risk to which we are exposed.
We would also be required to post additional collateral if haircuts increase under a repurchase agreement. Furthermore, if we move financing from one counterparty to another with larger haircut requirements, we would have to repay more cash to settle the original borrowing than we would be able to borrow from the new counterparty.
We would also be required to post additional collateral if haircuts increase under a repurchase agreement. Furthermore, if we move financing from one counterparty to another with larger haircut requirements, we would have to repay more cash to settle the original borrowing than we could borrow from the new counterparty.
If the MBS market were to experience a severe or extended period of illiquidity, lenders may refuse to accept our assets as collateral for repurchase agreement financing, which could have a material adverse effect on our results of operations, financial condition and business.
If the MBS market were to experience a severe or extended period of illiquidity, lenders may refuse to accept MBS as collateral for repurchase agreement financing, which could have a material adverse effect on our financial condition and results of operations.
Treasuries, creating excess supply in the market. The combination of these actions have resulted in an increase in interest rates and an inversion of the yield curve, negatively impacting the market value of our investments since the fourth quarter of 2021 and through 2022.
Treasuries, creating excess supply in the market. The combination of these actions have resulted in an increase in interest rates and an inversion of the yield curve, negatively impacting the market value of our investments since the fourth quarter of 2021 through 2023.
During periods of rising rates, particularly interest rate increases that occur with increases to the targeted U.S. Federal Funds Rate (“Federal Funds Rate”), we may experience a decline in our profitability because our borrowing rates may increase faster than our investments mature or the coupons on our investments reset.
During periods of rising rates, particularly interest rate increases that occur with increases to the targeted U.S. Federal Funds Rate (“Federal Funds Rate”), we may experience a decline in our net interest income because our borrowing rates may increase faster than our investments mature or the coupons on our investments reset.
An increase in involuntary prepayments will result in the loss of investment premiums at an accelerated rate which could materially reduce our profitability and dividend. Involuntary prepayments typically increase in periods of economic slowdown or stress, and actions taken as a result by the GSEs and federal, state and local governments.
An increase in involuntary prepayments will result in the loss of investment premiums at an accelerated rate which could materially reduce our interest income and dividend. Involuntary prepayments typically increase in periods of economic slowdown or stress, and actions taken as a result by the GSEs and federal, state and local governments.
Our Board of Directors has approved a share repurchase program which permits the Company to repurchase shares of its common stock or its Series C Preferred Stock at any time or from time-to-time at management’s discretion. Certain of our financing agreements have financial covenants that may be impacted by our share repurchases.
Our Board of Directors has approved a share repurchase program which permits the Company to repurchase shares of its common stock at any time or from time-to-time at management’s discretion. Certain of our financing agreements have financial covenants that may be impacted by our share repurchases.
RISKS RELATED TO OUR INVESTMENT ACTIVITIES Declines in the market value of our investments could negatively impact our comprehensive income, shareholders’ equity, book value per common share, dividends, and liquidity.
RISKS RELATED TO OUR INVESTMENT ACTIVITIES Declines in the market value of our investments could negatively impact our comprehensive income, book value per common share, dividends, and liquidity.
Any future increases in the Federal Funds Rate and market anticipation of the same, are likely to cause our borrowing costs to increase further, negatively impact our net interest income, dividend, and book value per common share.
Any further increases in the Federal Funds Rate and market anticipation of the same, are likely to cause our borrowing costs to increase further, negatively impacting our net interest income, dividend, and book value per common share.
Changes in prepayment rates on the mortgage loans underlying our investments may subject us to reinvestment risk and adversely affect our profitability, the market value of our investments, and our liquidity. We are subject to reinvestment risk as a result of the prepayment, repayment, and sales of our investments.
Changes in prepayment rates on the mortgage loans underlying our investments may subject us to reinvestment risk and adversely affect our interest income, the market value of our investments, and our liquidity. We are subject to reinvestment risk as a result of the prepayment, repayment, and sales of our investments.
Leverage increases returns on our invested capital if we earn a greater return on investments than our cost of borrowing, but can decrease returns if borrowing costs increase and we have not adequately hedged against such an increase.
Leverage increases returns on our invested capital if we earn a greater return on investments than our cost of borrowing but decreases returns if borrowing costs increase and we have not adequately hedged against such an increase.
Furthermore, we may have to dispose of assets at significantly depressed prices i, which could result in significant losses, or we may be forced to curtail our asset acquisition activities if certain events occur including, for example, if we: • are unable to renew or otherwise access new funds under our existing financing arrangements; • are unable to arrange for new financing on acceptable terms; • default on our financial covenants contained in our financing arrangements; or • become subject to larger haircuts under our financing arrangements requiring us to post additional collateral.
Furthermore, we may have to dispose of assets at 13 significantly depressed prices, which could result in significant losses, or we may be forced to curtail our asset purchases if certain events occur including if we: • are unable to renew or otherwise access new funds under our existing financing arrangements; • are unable to arrange for new financing on acceptable terms; • default on our financial covenants contained in our financing arrangements; or • become subject to larger haircuts under our financing arrangements requiring us to post additional collateral.
In addition, virtually all of our repurchase agreements and interest rate swap agreements require us to maintain our status as a REIT and to be exempted from the provisions of the 1940 Act. Compliance with these covenants depends on market factors and the strength of our business and operating results.
In addition, virtually all of our repurchase agreements and derivative agreements require us to maintain our status as a REIT and to be exempted from the provisions of the 1940 Act. Compliance with these covenants depends on market factors and the strength of our business and operating results.
Lenders may therefore respond to adverse market conditions by changing the terms of such financings in a manner that makes it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings.
For example, lenders may respond to adverse market conditions by changing the terms of such financings in a manner that makes it more difficult for us to renew or replace on a continuous basis our maturing short-term repurchase agreement borrowings.
We believe that we have complied with all of the requirements set forth above as of December 31, 2022.
We believe that we have complied with all of the requirements set forth above as of December 31, 2023.
Further, certain of our repurchase agreements and interest rate swap agreements have cross-default, cross-acceleration or similar provisions, such that if we were to violate a covenant under one agreement, that violation could lead to defaults, accelerations, or other adverse events under other agreements, as well.
Further, certain of our repurchase agreements and derivative instruments have cross-default, cross-acceleration or similar provisions, such that if we were to violate a covenant under one agreement, that violation could lead to defaults, accelerations, or other adverse events under other agreements, as well.
Our ability to own equity interests in other entities is limited. If we fail to comply with these limits, we may be forced to liquidate attractive assets on short notice on unfavorable terms in order to maintain our REIT status. • Our ability to invest in taxable subsidiaries is limited under the REIT rules.
If we fail to comply with these limits, we may be forced to liquidate attractive assets on short notice on unfavorable terms in order to maintain our REIT status. • Our ability to invest in taxable subsidiaries is limited under the REIT rules.
On December 7, 2012, the CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) issued no-action relief from commodity pool operator (“CPO”) registration to mortgage REITs that use CFTC-regulated products (“commodity interests”) and that satisfy certain enumerated criteria.
On December 7, 2012, the CFTC’s Division of Swap Dealer and Intermediary Oversight (the “Division”) issued no-action relief from CPO registration to mortgage REITs that use CFTC-regulated products (“commodity interests”) and that satisfy certain enumerated criteria.
Our use of hedging strategies to mitigate our interest rate risk may not be effective and may adversely affect our net income, comprehensive income, liquidity, and shareholders’ equity. We use a variety of derivative instruments to help mitigate increased financing costs and volatility in the market value of our investments from adverse changes in interest rates.
Our use of hedging strategies to mitigate our interest rate risk may not be effective and may adversely affect our net income, comprehensive income, liquidity, and book value per common share. We use a variety of derivative instruments to help mitigate increased financing costs and volatility in the market value of our investments from adverse changes in interest rates.
Our projected amortization of these deferred tax hedge gains into taxable income for 2023 is currently estimated to be $71.3 million, though this amount is subject to change based on a number of factors, particularly given the degree of uncertainty about the trajectory of interest rates.
Our projected amortization of these deferred tax hedge gains into taxable income for 2024 is currently estimated to be $102.9 million, though this amount is subject to change based on a number of factors, particularly given the degree of uncertainty about the trajectory of interest rates.
When credit spreads widen, the market value of our investments will decline because market participants typically require additional yield to hold riskier assets. In addition, the market value of most of our investments will typically decrease as interest rates rise.
When credit spreads widen, the market value of our investments will decline because market participants typically require additional yield to hold riskier assets. In addition, the market value of most of our investments will typically decrease as interest rates rise, as seen during fiscal year 2023.
Our inability to meet these covenants could adversely affect our financial condition, results of operations, and cash flows. In connection with certain of our repurchase agreements and interest rate swap agreements, we are required to maintain certain financial and non-financial covenants.
Our inability to meet these covenants could adversely affect our financial condition, results of operations, and cash flows. In connection with certain of our repurchase agreements and derivative instruments, we are required to maintain certain financial and non-financial covenants.
In addition, the increase in the Federal Funds Rate has significantly 11 increased our borrowing costs, which is likely to continue into 2024 as the Federal Reserve seeks to bring inflation down to better align with its target levels.
The increase in the Federal Funds Rate has also significantly increased our borrowing costs, which is likely to remain elevated into 2024 as the Federal Reserve seeks to bring inflation down to better align with its target levels.
Compensation for voluntary prepayment on CMBS IO securities may not be sufficient to compensate us for the loss of interest as a result of the prepayment. We have no protection from involuntary prepayments. The impact of involuntary prepayments on high premium investments including CMBS IO and higher coupon Agency CMBS is particularly acute because the investment consists entirely of premium.
Compensation for voluntary prepayment on CMBS IO securities may not be sufficient to compensate us for the loss of interest as a result of the prepayment. We have 11 no protection from involuntary prepayments. The impact of involuntary prepayments on CMBS IO is particularly acute because the investment consists entirely of premium.
For example, the conflict between Russia and Ukraine has led to disruption, instability and volatility in global markets and industries. Increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader financial markets may adversely affect the performance and market value of our investments.
For example, the conflicts between Russia and Ukraine and those in the Middle East have led to disruption, instability and volatility in global markets and industries. 10 Increased volatility and deterioration in the markets for mortgages and mortgage-related assets as well as the broader financial markets may adversely affect the performance and market value of our investments.
Interest rate increases may also negatively affect the market value of our securities, and we may not be able to adequately hedge against such increases, resulting in declines in comprehensive income, book value per common share, and liquidity.
Interest rate increases may also negatively affect the market value of our securities, and if we do not adequately hedge against such increases, we will experience declines in comprehensive income, book value per common share, and liquidity.
It is possible that our REIT distribution requirements may exceed the net cash we generate from our operations during 2023, particularly if the Federal Funds Rate continues to increase. 17 We have not established a minimum dividend payment level and we may not have the ability to pay dividends in the future.
It is possible that our REIT distribution requirements may exceed the net cash we generate from our operations during 2024. We have not established a minimum dividend payment level and we may not have the ability to pay dividends in the future.
Changes to prepay expectations on Agency RMBS as well as changes to the Federal Reserve’s reinvestment policy on Agency RMBS may adversely impact the TBA dollar roll market.
For example, changes to prepay expectations on Agency RMBS as well as changes to the Federal Reserve’s reinvestment policy on Agency RMBS have adversely impacted the TBA dollar roll market.
As of December 31, 2022, we have $695.2 million of deferred tax hedge gains which were recognized in GAAP net income during 2022 and prior periods.
As of December 31, 2023, we have $861.8 million of deferred tax hedge gains which were recognized in GAAP net income (loss) during 2023 and prior periods.
As seen in 2022, the Federal Reserve increased the targeted range for the Federal Funds Rate in an effort to slow inflation, which resulted in a significant increase to our repurchase agreement financing costs.
Since 2022, the Federal Reserve has been increasing the targeted range for the Federal Funds Rate in an effort to slow inflation, which has resulted in a significant increase to our 9 repurchase agreement financing costs.
Concerns over economic recession, inflation, interest rate increases, policy priorities of the U.S. government, trade wars, unemployment, the availability and cost of financing, or the mortgage market and a declining real estate market may contribute to increased volatility and diminished expectations for the economy and markets. Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability.
Concerns over economic recession, inflation, subdued growth expectations, interest rate increases, policy priorities of the U.S. government, trade wars, unemployment, the availability and cost of financing, or the mortgage market and a declining real estate market may contribute to increased volatility and diminished expectations for the economy and markets, as experienced in 2023.
Future adverse economic developments or market uncertainty, such as the Federal Reserve’s interest rate increases during 2022, may result in increased margin requirements for our hedging instruments, which may have a material adverse effect on our liquidity position, business, financial condition and results of operations.
Future adverse economic developments or market uncertainty, such as the Federal Reserve’s interest rate increases since 2022 and any proposed new reporting requirements by self-regulatory authorities and Congress, may result in increased margin requirements for our hedging instruments, which may have a material adverse effect on our liquidity, financial condition and results of operations.
If a lender to us in a repurchase transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if we default on our obligations under a repurchase agreement, we will incur losses.
If a lender to us in a repurchase transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if we default on our obligations under a repurchase agreement, we will incur losses. 15 Repurchase agreement transactions are legally structured as the sale of a security to a lender in return for cash from the lender.
Our ability to fund our operations, meet financial obligations, and finance targeted asset acquisitions may be impacted by an inability to secure and maintain our financing through repurchase agreements or other borrowings with our counterparties. Repurchase agreements are short-term commitments of capital with no guaranty of renewal at maturity.
Our ability to fund our operations, meet financial obligations, and finance targeted asset acquisitions may be impacted by an inability to secure and maintain our financing through repurchase agreements or other borrowings with our counterparties.
Furthermore, we have no control over the cybersecurity systems used by our third-party service providers, and such third-party service providers may have limited indemnification obligations to us. Impacts from COVID-19 may continue to adversely affect market conditions.
Furthermore, we have no control over the cybersecurity systems used by our third-party service providers, and such third-party service providers may have limited indemnification obligations to us.
The risk of operational failure or constraints of this third-party service could cause us to default on contractual obligations, fail to meet margin calls, or otherwise experience breaches or disruptions to our critical business relationships, which could have a significant adverse effect on our financial condition or results of operations. 21 Additionally, any failure or interruption of our operational and trading systems or communication or information systems, caused by a cybersecurity breach of our networks or systems, or the third-party service providers’ networks or systems, could cause delays or other problems in our trading or borrowing activities or lead to unauthorized trading activity, any of which may have a significant adverse effect on our financial condition or results of operations.
Additionally, any failure or interruption of our operational and trading systems or communication or information systems, caused by a cybersecurity breach of our networks or systems, or the third-party service providers’ networks or systems, could cause delays or other problems in our trading or borrowing activities or lead to unauthorized trading activity, any of which may have a significant adverse effect on our financial condition or results of operations.
It could be uneconomical to roll our TBA contracts or we may be unable to meet margin calls on our TBA contracts.
We invest in TBA securities and execute TBA dollar roll transactions. It could be uneconomical to roll our TBA contracts or we may be unable to meet margin calls on our TBA contracts.
Geopolitical tensions or conflicts, such as Russia’s invasion of Ukraine, may further heighten the risk of cybersecurity attacks.
Geopolitical tensions or conflicts may further heighten the risk of cybersecurity attacks.
If we do not have liquidity available to cover the margin call at that time, we may be in default under the repurchase agreement until we receive the cash from the prepayment.
If we do not have liquidity available to cover the margin call at that time, we may be in default under the repurchase agreement until we receive the cash from the prepayment. Alternatively, we could be forced to sell assets quickly and on terms unfavorable to us to meet the margin call.
In addition, if the assets we acquire in the future earn lower yields than the assets we currently own, our reported earnings per share will likely decline over time as the older assets pay down or are sold.
In addition, if the assets we acquire in the future earn lower yields than the assets we currently own, our reported earnings per share will likely decline over time as the older assets pay down or are sold. We may be subject to risks associated with artificial intelligence (“AI”) and machine learning technology.
Under certain market conditions, TBA dollar roll transactions may result in negative net interest income whereby the Agency RMBS purchased (or sold) for forward settlement under a TBA contract are priced at a premium to Agency RMBS for settlement in the current month.
Under certain market conditions, Agency RMBS purchased (or sold) for forward settlement under a TBA contract may be priced at a premium to Agency RMBS for settlement in the current month.
As of December 31, 2022, our most restrictive financial covenants require that we have a minimum of $30 million of liquidity and declines in shareholders’ equity no greater than 25% in any quarter and 35% in any year.
As of December 31, 2023, our most restrictive financial covenants require that the declines in our shareholders’ equity are no greater than 25% in any quarter and 35% in any year.
Moreover, the amount of financing that we receive under our financing agreements will be directly related to our lenders’ valuation of the assets subject to such agreements. 14 Typically, the master repurchase agreements that govern our borrowings grant the lender the absolute right, at its sole discretion, to reevaluate the fair market value of the assets subject to such repurchase agreements at any time.
Typically, the master repurchase agreements that govern our borrowings grant the lender the absolute right, at its sole discretion, to reevaluate the fair market value of the assets subject to such repurchase agreements at any time.
We also rely on corporate trustees to act on behalf of us and other holders of securities in enforcing our rights. Loans underlying our non-Agency MBS receive primary and special servicing from third-party service providers, who control all aspects of loan collection, loss mitigation, default management and ultimate resolution of a defaulted loan.
Loans underlying our non-Agency MBS receive primary and special servicing from third-party service providers, who control all aspects of loan collection, loss mitigation, default management and ultimate resolution of a defaulted loan.
Based on market conditions, our leverage, and our liquidity profile, we may decide to not reinvest the cash flows we receive from our investment portfolio. If we retain, rather than reinvest these cash flows, the size of our investment portfolio and the amount of net interest income generated by our investment portfolio will likely decline.
If we retain, rather than reinvest these cash flows, the size of our investment portfolio and the amount of net interest income generated by our investment portfolio will likely decline.
Repurchase agreement transactions are legally structured as the sale of a security to a lender in return for cash from the lender. These transactions are accounted for as financing agreements because the lenders are obligated to resell the same securities back to us at the end of the transaction term.
These transactions are accounted for as financing agreements because the lenders are obligated to resell the same securities back to us at the end of the transaction term.
However, these ownership limits might also delay or prevent a transaction or a change in our control that might be in the best interest of our shareholders. 20 The stock ownership limit imposed by the Tax Code for REITs and our Articles of Incorporation may impair the ability of holders to convert shares of our outstanding preferred stock into shares of our common stock upon a change of control.
The stock ownership limit imposed by the Tax Code for REITs and our Articles of Incorporation may impair the ability of holders to convert shares of our outstanding preferred stock into shares of our common stock upon a change of control.
Share repurchases of our common stock or Series C Preferred Stock may negatively impact our compliance with covenants in our financing agreements and regulatory requirements (including maintaining exclusions from the requirements of the 1940 Act and qualification as a REIT).
Use by third-party service providers could give rise to issues pertaining to data privacy, data protection, and intellectual property considerations. Share repurchases of our common stock or Series C Preferred Stock may negatively impact our compliance with covenants in our financing agreements and regulatory requirements (including maintaining exclusions from the requirements of the 1940 Act and qualification as a REIT).
In addition, our decision to repurchase shares under the Program could adversely affect our competitive position, and could negatively impact our ability in the future to invest in assets that have a greater potential return than our share repurchases. ITEM 1B. UNRESOLVED STAFF COMMENTS None.
In addition, our decision to repurchase shares under the Program could adversely affect our competitive position, and could negatively impact our ability in the future to invest in assets that have a greater potential return than our share repurchases. Our profitability may be impacted by climate-related events and increasing regulatory requirements.
If the IRS disagrees with this treatment, our ability to qualify as a REIT could be adversely affected. 19 Repurchase agreement financing arrangements are structured legally as a sale and repurchase whereby we sell certain of our investments to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price.
Repurchase agreement financing arrangements are structured legally as a sale and repurchase whereby we sell certain of our investments to a counterparty and simultaneously enter into an agreement to repurchase these securities at a later date in exchange for a purchase price. Economically, these agreements are financings which are secured by the investments sold pursuant thereto.
For instance: • Compliance with the REIT income and asset requirements may limit the type or extent of hedging that we can undertake and could limit our ability to invest in TBA securities. • Our ability to own non-real estate related assets and earn non-real estate related income is limited.
Maintaining our REIT status may limit flexibility in managing our operations. For instance: • Compliance with the REIT requirements may limit the type or extent of investment or hedging activities. • Our ability to own non-real estate related assets and earn non-real estate related income is limited. Our ability to own equity interests in other entities is limited.
The ownership limits contained in our Articles of Incorporation are intended to assist us in complying with tax law requirements and to minimize administrative burdens.
The ownership limits contained in our Articles of Incorporation are intended to assist us in complying with tax law requirements and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might be in the best interest of our shareholders.
In an effort to tame rising inflation levels, the Federal Reserve has been aggressively increasing the Federal Funds Rate since the first quarter of 2022, ending the fourth quarter of 2022 with a target range of 4.25%-4.50%.
In an effort to tame rising inflation levels, the Federal Reserve has been aggressively increasing the Federal Funds Rate since the first quarter of 2022, ending the fourth quarter of 2023 with a target range of 5.25%-5.50%. In addition, the Federal Reserve’s quantitative tightening policies have included decreasing the pace of its large-scale purchases of Agency RMBS and U.S.
We invest in securities guaranteed by Fannie Mae and Freddie Mac which are currently under conservatorship by the Federal Housing Finance Agency (“FHFA”). Potential changes to the federal conservatorship of Fannie Mae and Freddie Mac or to the laws and regulations affecting the support that the GSEs receive from the U.S. government may adversely affect our business.
Potential changes to the federal conservatorship of Fannie 12 Mae and Freddie Mac or to the laws and regulations affecting the support that the GSEs receive from the U.S. government may adversely affect the availability, pricing, liquidity, market value, and financing of our assets.
A change in our investment strategy or asset allocation may materially change our exposure to interest rate and/or credit risk, default risk and real estate market fluctuations. These changes could have a material impact on our ability to continue to pay a dividend at a level that we had previously paid before the change in strategy.
These changes could have a material impact on our ability to continue to pay a dividend at a level that we had previously paid before the change in strategy. Furthermore, if any change in investment strategy, asset allocation, operating or dividend policy is perceived negatively by the markets or analysts covering our stock, our stock price may decline.
Rating agencies rate securities based upon their assessment of the safety of the receipt of principal and interest payments on the securities.
Changes in credit ratings for securities we own or for similar securities might negatively impact the market value of these securities. Rating agencies rate securities based upon their assessment of the safety of the receipt of principal and interest payments on the securities.
This service and related technologies may become unavailable due to a variety of reasons, including outages, interruptions, or other failure to perform.
Certain critical functions of our business relating to our trading and borrowing activities, including MBS trading and repurchase agreement borrowing activities, are operated and managed by a third-party service provider. This service and related technologies may become unavailable due to a variety of reasons, including outages, interruptions, or other failure to perform.
Alternatively, we could be forced to sell assets quickly and on terms unfavorable to us to meet the margin call. 12 We may be subject to risks associated with inadequate or untimely services from third-party service providers, which may negatively impact our results of operations.
We may be subject to risks associated with inadequate or untimely services from third-party service providers, which may negatively impact our results of operations. We also rely on corporate trustees to act on behalf of us and other holders of securities in enforcing our rights.
For REIT qualification purposes, we treat repurchase agreement transactions as financing of the investments pledged as collateral.
For REIT qualification purposes, we treat repurchase agreement transactions as financing of the investments pledged as collateral. If the IRS disagrees with this treatment, our ability to qualify as a REIT could be adversely affected.
Though Agency MBS are generally deemed to be very liquid securities, turbulent market conditions may significantly and negatively impact the liquidity and market value of these assets. Non-Agency MBS are typically more difficult to value, less liquid, and experience greater price volatility than Agency MBS. In addition, market values for non-Agency MBS are typically more subjective than Agency MBS.
Turbulent market conditions may significantly and negatively impact the liquidity and market value of MBS. During periods of severe economic stress, a market may not exist for certain of our investments at any price, particularly non-Agency MBS which are typically more difficult to value, less liquid, and experience greater price volatility than Agency MBS.
Credit ratings assigned to debt securities by the credit rating agencies may not accurately reflect the risks associated with those securities. Changes in credit ratings for securities we own or for similar securities might negatively impact the market value of these securities.
Finally, reforms to the GSEs could also negatively impact our ability to comply with the provisions of the 1940 Act (see further discussion below regarding the 1940 Act). Credit ratings assigned to debt securities by the credit rating agencies may not accurately reflect the risks associated with those securities.
In addition, declining interest rates may result in declining market value on MBS, as market participants factor in potentially faster prepayment rates.
If market participants factor in potentially faster prepayment rates, we may also experience declines in the market value of higher coupon MBS.
Removed
As we experienced with the onset of COVID-19 and through the resulting inflation and subsequent market volatility, the impact of interest rate changes may negatively impact the availability and cost of our short-term debt financing, our business operations, and our financial results. We invest in TBA securities and execute TBA dollar roll transactions.
Added
Furthermore, an increasing interest rate environment may expose us to extension risk because prepayments on the loans underlying our MBS are likely to decline, which may reduce our ability to reinvest into higher yielding assets.
Removed
While the Federal Reserve has signaled that the rate of increases may slow as inflation begins to decrease to the Federal Reserve’s target amount of 2%, increases are expected to continue into 2023. In addition, the Federal Reserve’s quantitative tightening policies have included decreasing the pace of its large-scale purchases of Agency RMBS and U.S.
Added
Additionally, concern over geopolitical issues may also contribute to prolonged market volatility and instability.
Removed
In times of severe economic stress, a market may not exist for certain of our assets at any price.
Added
We invest in securities guaranteed by Fannie Mae and Freddie Mac which are currently under conservatorship by the Federal Housing Finance Agency (“FHFA”).

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Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeCommon Stock $ 100.00 $ 91.50 $ 101.70 $ 119.00 $ 121.70 $ 103.01 S&P 500 Index $ 100.00 $ 95.61 $ 125.70 $ 147.02 $ 189.19 $ 154.89 S&P 500 Financials Index $ 100.00 $ 86.96 $ 114.87 $ 112.84 $ 152.19 $ 136.10 FTSE NAREIT mREIT Index $ 100.00 $ 97.39 $ 118.20 $ 96.17 $ 111.14 $ 81.85 (1) Source: Bloomberg 24 The historical information set forth above is not necessarily indicative of future performance.
Biggest changeCommon Stock $ 100.00 $ 111.15 $ 130.06 $ 133.02 $ 112.59 $ 126.13 S&P 500 Index $ 100.00 $ 131.47 $ 155.65 $ 200.29 $ 163.98 $ 207.04 S&P 500 Financials Index $ 100.00 $ 132.09 $ 129.77 $ 175.02 $ 156.52 $ 175.46 FTSE NAREIT mREIT Index $ 100.00 $ 121.27 $ 98.69 $ 114.05 $ 84.00 $ 96.76 (1) Source: Bloomberg 25 The historical information set forth above is not necessarily indicative of future performance.
The following graph is a five-year comparison of shareholders’ cumulative total return, assuming $100 invested at the close of trading on December 31, 2017 with reinvestment of all dividends, in each of: (i) our common stock, (ii) the stocks included in the Standard & Poor’s 500 Index (“S & P 500”); (iii) the stocks included in the S&P 500 Financials Index; and (iv) the stocks included in the FTSE NAREIT Mortgage REIT Index.
The following graph is a five-year comparison of shareholders’ cumulative total return, assuming $100 invested at the close of trading on December 31, 2018 with reinvestment of all dividends, in each of: (i) our common stock, (ii) the stocks included in the Standard & Poor’s 500 Index (“S & P 500”); (iii) the stocks included in the S&P 500 Financials Index; and (iv) the stocks included in the FTSE NAREIT Mortgage REIT Index.
Cumulative Total Stockholder Returns as of December 31, Index (1) 2017 2018 2019 2020 2021 2022 Dynex Capital, Inc.
Cumulative Total Stockholder Returns as of December 31, Index (1) 2018 2019 2020 2021 2022 2023 Dynex Capital, Inc.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the NYSE under the trading symbol “DX”. The common stock was held by approximately 345 holders of record as of February 23, 2023.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the NYSE under the trading symbol “DX”. The common stock was held by approximately 349 holders of record as of February 20, 2024.
On that date, the closing price of our common stock on the NYSE was $13.69 per share. The Company currently pays a monthly dividend on its common stock, and declared and paid cash dividends of $1.56 per common share for each of the years ending December 31, 2022 and December 31, 2021.
On that date, the closing price of our common stock on the NYSE was $12.35 per share. The Company currently pays a monthly dividend on its common stock, and declared and paid cash dividends of $1.56 per common share for the year ending December 31, 2023.
Repurchases may be suspended or discontinued at any time. The Company did not repurchase any shares during the three months ended December 31, 2022. The Company has an at-the-market agreement ("ATM") whereby the Company may offer and sell through its sales agents up to $104.6 million of aggregate value of shares of the Company’s Series C Preferred Stock.
Repurchases may be suspended or discontinued at any time. The Company did not repurchase any shares during the three months ended December 31, 2023. The Company has an at-the-market agreement ("ATM") whereby the Company may offer and sell through its sales agents up to approximately 36.1 million shares of common stock.
During the year ended December 31, 2022, the Company issued 16.9 million shares of its common stock through its ATM program at an aggregate value of $246.9 million, net of $3.1 million in broker commissions, of which 7.3 million shares were issued during the fourth quarter of 2022 at an aggregate value of $92.4 million, net of $1.2 million in broker commissions.
During the year ended December 31, 2023, the Company issued 3,329,802 shares of its common stock through its ATM program at an aggregate value of $42.6 million, net of $0.5 million in broker commissions, of which 482,673 shares were issued during the fourth quarter of 2023 at an aggregate value of $5.9 million, net of $0.1 million in broker commissions.
Removed
During the year ended December 31, 2022, the Company did not issue any shares of its Series C Preferred Stock through its ATM program. The Company also has an ATM agreement whereby the Company may offer and sell through its sales agents up to approximately 36.1 million shares of common stock.

Item 7. Management's Discussion & Analysis

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

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Biggest changeThe following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated: 30 December 31, 2022 Par/Notional Amortized Cost/ Implied Cost Basis (1)(3) Fair Value (2)(3) Weighted Average Coupon Loan Age (in months) (4) 3 Month CPR (4)(5) Estimated Duration (6) Market Yield (4)(7) 30-year fixed-rate: ($s in thousands) 2.0% $ 1,193,344 $ 1,210,065 $ 982,387 23 5.2 % 7.14 4.53 % 2.5% 659,181 685,838 566,525 28 5.9 % 6.67 4.59 % 4.0% 325,726 329,725 309,940 25 7.2 % 5.56 4.75 % 4.5% 803,043 799,786 782,319 4 4.4 % 5.02 4.89 % 5.0% 123,204 125,460 121,707 4 7.2 % 3.99 5.19 % TBA 4.0% 1,539,000 1,454,263 1,447,286 n/a n/a 5.47 n/a TBA 4.5% 380,000 371,173 366,759 n/a n/a 4.79 n/a TBA 5.0% 950,000 947,484 937,523 n/a n/a 4.24 n/a Total $ 5,973,498 $ 5,923,794 $ 5,514,446 18 5.4 % 5.54 4.70 % December 31, 2021 Par/Notional Amortized Cost/ Implied Cost Basis (1)(3) Fair Value (2)(3) Weighted Average Coupon Loan Age (in months) (4) 3 Month CPR (4)(5) Estimated Duration (6) Market Yield (4)(7) 30-year fixed-rate: ($s in thousands) 2.0% $ 1,311,069 $ 1,330,353 $ 1,312,190 11 8.0 % 6.69 1.98 % 2.5% 1,165,810 1,215,841 1,199,092 15 11.3 % 5.83 2.11 % 4.0% 162,868 167,713 175,493 45 34.1 % 3.09 2.30 % TBA 2.0% 965,000 957,600 961,080 n/a n/a 6.54 n/a TBA 2.5% 190,000 193,563 193,585 n/a n/a 5.23 n/a 15-year fixed-rate: TBA 1.5% 375,000 375,259 376,523 n/a n/a 4.58 n/a Total $ 4,169,747 $ 4,240,329 $ 4,217,963 15 11.2 % 6.01 2.06 % (1) Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.
Biggest changeThe following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated: December 31, 2023 Par/Notional Amortized Cost/ Implied Cost Basis (1)(3) Fair Value (2)(3) Weighted Average Coupon Loan Age (in months) (4) 3 Month CPR (4)(5) Estimated Duration (6) Market Yield (7) 30-year fixed-rate: ($s in thousands) 2.0% $ 708,528 $ 720,611 $ 586,361 39 4.4 % 6.81 4.60 % 2.5% 608,580 632,343 525,018 40 4.5 % 6.62 4.59 % 4.0% 354,382 354,965 339,212 34 5.5 % 5.65 4.67 % 4.5% 1,383,019 1,350,697 1,348,108 15 5.0 % 5.08 4.88 % 5.0% 2,070,473 2,035,088 2,057,309 9 4.7 % 4.24 5.10 % 5.5% 897,520 900,218 907,524 8 5.0 % 3.58 5.29 % TBA 4.0% 262,000 240,641 248,040 n/a n/a 5.89 4.72 % TBA 4.5% 223,000 210,940 216,415 n/a n/a 4.75 4.92 % TBA 5.0% 518,000 490,466 512,982 n/a n/a 3.98 5.15 % TBA 5.5% 200,000 191,926 201,047 n/a n/a 2.81 5.36 % TBA 6.0% 200,000 193,369 203,219 n/a n/a 2.15 5.37 % Total $ 7,425,502 $ 7,321,264 $ 7,145,235 17 4.8 % 4.72 4.98 % 31 December 31, 2022 Par/Notional Amortized Cost/ Implied Cost Basis (1)(3) Fair Value (2)(3) Weighted Average Coupon Loan Age (in months) (4) 3 Month CPR (4)(5) Estimated Duration (6) Market Yield (7) 30-year fixed-rate: ($s in thousands) 2.0% $ 1,193,344 $ 1,210,065 $ 982,387 23 5.2 % 7.14 4.53 % 2.5% 659,181 685,838 566,525 28 5.9 % 6.67 4.59 % 4.0% 325,726 329,725 309,940 25 7.2 % 5.56 4.75 % 4.5% 803,043 799,786 782,319 4 4.4 % 5.02 4.89 % 5.0% 123,204 125,460 121,707 4 7.2 % 3.99 5.19 % TBA 4.0% 1,539,000 1,454,263 1,447,286 n/a n/a 5.47 4.80 % TBA 4.5% 380,000 371,173 366,759 n/a n/a 4.79 4.99 % TBA 5.0% 950,000 947,484 937,523 n/a n/a 4.24 5.20 % Total $ 5,973,498 $ 5,923,794 $ 5,514,446 18 5.4 % 5.54 4.83 % (1) Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.
Our interest rate hedges mitigated the impact of higher interest rates on the fair value of our investment portfolio during the year ended December 31, 2022; however, we experienced spread widening across all of our asset classes throughout 2022.
During the year ended December 31, 2022, our interest rate hedges mitigated the impact of higher interest rates on the fair value of our investment portfolio; however, we experienced spread widening across all of our asset classes throughout 2022.
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in dollar roll transactions versus buying specified pools.
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools.
Treasuries; • actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks; • adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom; • uncertainty concerning the long-term fiscal health and stability of the United States; • the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions; • the cost and availability of new equity capital; • changes in our leverage and use of leverage; • changes to our investment strategy, operating policies, dividend policy or asset allocations; • the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions; • the loss or unavailability of our third-party service provider’s service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures; • the level of defaults by borrowers on loans underlying MBS; • changes in our industry; • increased competition; • changes in government regulations affecting our business; • changes or volatility in the repurchase agreement financing markets and other credit markets; • changes to the market for interest rate swaps and other derivative instruments, including changes to margin requirements on derivative instruments; • uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system including the resolution of the conservatorship of Fannie Mae and Freddie Mac; • the composition of the Board of Governors of the Federal Reserve; • the political environment in the U.S.; • systems failures or cybersecurity incidents; and • exposure to current and future claims and litigation.
Treasuries; • actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks; • adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom; • uncertainty concerning the long-term fiscal health and stability of the United States; • the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions; • the cost and availability of new equity capital; • changes in our leverage and use of leverage; • changes to our investment strategy, operating policies, dividend policy or asset allocations; • the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions; • the loss or unavailability of our third-party service provider’s service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures; • the level of defaults by borrowers on loans underlying MBS; • changes in our industry; • increased competition; • changes in government regulations affecting our business; • changes or volatility in the repurchase agreement financing markets and other credit markets; • changes to the market for derivative instruments, including changes to margin requirements on derivative instruments; • uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system including the resolution of the conservatorship of Fannie Mae and Freddie Mac; • the composition of the Board of Governors of the Federal Reserve; • the political environment in the U.S.; • systems failures or cybersecurity incidents; and • exposure to current and future claims and litigation. 39
If such a risk or other factor materializes in future periods, our business, financial condition, liquidity and results of operations may vary materially from those expressed or implied in our forward-looking statements.
If such a risk or other factor materializes in future periods, our business, 38 financial condition, liquidity and results of operations may vary materially from those expressed or implied in our forward-looking statements.
We were in full compliance with our debt covenants as of December 31, 2022, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future. Derivative Instruments Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value.
We were in full compliance with our debt covenants as of December 31, 2023, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future. Derivative Instruments Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value.
Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Annual Report on Form 10-K for additional information. 37 CRITICAL ACCOUNTING ESTIMATES The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP.
Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Annual Report on Form 10-K for additional information. 36 CRITICAL ACCOUNTING ESTIMATES The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP.
Treasury futures $ 642,281 $ 82,066 $ — $ 724,347 Interest rate swaptions 50,940 (3,202) — 47,738 Options on U.S.
Treasury futures $ 642,281 $ 82,066 $ — $ 724,347 Interest rate swaptions 50,940 (3,202) — 47,738 Put options on U.S.
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020 Please refer to “Results of Operations” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of the results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, which is incorporated herein by reference.
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Please refer to “Results of Operations” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of the results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, which is incorporated herein by reference.
RECENT ACCOUNTING PRONOUNCEMENTS There were no accounting pronouncements issued during the year ended December 31, 2022 that are expected to have a material impact on the Company’s financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS There were no accounting pronouncements issued during the year ended December 31, 2023 that are expected to have a material impact on the Company’s financial condition or results of operations.
Additional information regarding the expected impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Liquidity and Capital Resources.” 36 LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments.
Additional information regarding the expected impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Executive Overview” and “Liquidity and Capital Resources.” LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments.
While it is not possible to identify all factors that may cause actual results to differ from historical results or from any results expressed or implied by forward-looking statements, or that may cause our projections, assumptions, expectations or beliefs to change, some of those factors include the following: 39 • the risks and uncertainties referenced in this Annual Report on Form 10-K, especially those incorporated by reference into Part II, Item 1A, “Risk Factors,” and in particular, adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto; • our ability to find suitable reinvestment opportunities; • changes in domestic economic conditions; • geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the war between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict; • changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities; • our investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance; • the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S.
While it is not possible to identify all factors that may cause actual results to differ from historical results or from any results expressed or implied by forward-looking statements, or that may cause our projections, assumptions, expectations or beliefs to change, some of those factors include the following: • the risks and uncertainties referenced in this Annual Report on Form 10-K, especially those incorporated by reference into Part II, Item 1A, “Risk Factors,”; • our ability to find suitable reinvestment opportunities; • changes in domestic economic conditions; • geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the war between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict; • changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities; • our investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance; • the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S.
Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations for next year, or in any year.
Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2024 or in any given year.
Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K for additional important information regarding dividends declared on our taxable income.
Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K for additional important information regarding dividends declared on our taxable income.
The weighted average haircut for our borrowings as of December 31, 2022 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 13-16% for borrowings collateralized with CMBS IO.
The weighted average haircut for our borrowings as of December 31, 2023 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 12-16% for borrowings collateralized with CMBS IO.
Non-GAAP Financial Measures In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: earnings available for distribution (“EAD”) to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread.
Non-GAAP Financial Measures In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: EAD to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread.
In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 6.1 times shareholders’ equity as of December 31, 2022.
In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.8 times shareholders’ equity as of December 31, 2023.
As of December 31, 2022, we had cash collateral posted to our counterparties of $117.8 million under these agreements. Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange.
As of December 31, 2023, we had cash collateral posted to our counterparties of $118.2 million under these agreements. Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange.
We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds.
We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements.
(2) Net proceeds from stock issuance include $246.9 million from common stock ATM program and $3.0 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.
(2) Net proceeds from stock issuance include $42.6 million from common stock ATM program and $4.3 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.
(7) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility. 31 The remainder of our MBS portfolio is mostly comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO.
(7) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility. Less than 4% of our MBS portfolio as of December 31, 2023 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO.
As of December 31, 2022, the Company had amounts outstanding under 24 different repurchase agreements and did not have more than 5% of equity at risk with any counterparty or group of related counterparties.
As of December 31, 2023, the Company had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated: Repurchase Agreements ($s in thousands) Balance Outstanding As of Quarter End Average Balance Outstanding For the Quarter Ended Maximum Balance Outstanding During the Quarter Ended December 31, 2022 $ 2,644,405 $ 2,727,274 $ 3,072,483 September 30, 2022 2,991,876 2,398,268 3,082,138 June 30, 2022 2,202,648 2,486,217 2,949,918 March 31, 2022 2,952,802 2,806,212 2,973,475 December 31, 2021 2,849,916 2,701,191 2,873,523 September 30, 2021 2,527,065 2,529,023 2,590,185 June 30, 2021 2,321,043 2,155,200 2,415,037 March 31, 2021 2,032,089 2,158,121 2,437,163 December 31, 2020 2,437,163 2,500,639 2,594,683 September 30, 2020 2,594,683 2,984,946 3,314,991 June 30, 2020 3,314,991 2,580,296 4,408,106 March 31, 2020 4,408,106 4,701,010 4,917,731 For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement financing) in order to support the amount of the financing.
The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated: Repurchase Agreements ($s in thousands) Balance Outstanding As of Quarter End Average Balance Outstanding For the Quarter Ended Maximum Balance Outstanding During the Quarter Ended December 31, 2023 $ 5,381,104 $ 5,168,821 $ 5,381,354 September 30, 2023 5,002,230 4,773,435 5,037,440 June 30, 2023 4,201,901 3,447,406 4,203,788 March 31, 2023 2,937,124 2,713,481 2,959,263 December 31, 2022 2,644,405 2,727,274 3,072,483 September 30, 2022 2,991,876 2,398,268 3,082,138 June 30, 2022 2,202,648 2,486,217 2,949,918 March 31, 2022 2,952,802 2,806,212 2,973,475 December 31, 2021 2,849,916 2,701,191 2,873,523 September 30, 2021 2,527,065 2,529,023 2,590,185 June 30, 2021 2,321,043 2,155,200 2,415,037 March 31, 2021 2,032,089 2,158,121 2,437,163 December 31, 2020 2,437,163 2,500,639 2,594,683 For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing.
Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions.
Leverage based on repurchase agreement amounts outstanding was 6.2 times shareholders’ equity as of December 31, 2023. Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions.
Forward-looking statements in this Annual Report on Form 10-K may include, but are not limited to statements about: • Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments; 38 • Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets; • Our views on inflation, market interest rates and market spreads; • Our views on the effect of actual or proposed actions of the Federal Reserve or other central banks with respect to monetary policy (including the targeted Federal Funds Rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment; • The effect of regulatory initiatives of the Federal Reserve, the Federal Housing Finance Agency, other financial regulators, and other central banks; • Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments; • Our investment portfolio composition and target investments; • Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments; • Our liquidity and ability to access financing, and the anticipated availability and cost of financing; • Our capital stock activity including the impact of stock issuances and repurchases; • The amount, timing, and funding of future dividends; • Our use of our tax NOL carryforward and other tax loss carryforwards; • Future competition for, and availability of, investments, financing and capital; • Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments; • The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market; • Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators; • Uncertainties regarding the war between Russia and the Ukraine and the related impacts on macroeconomic conditions, including, among other things, interest rates; • The financial position and credit worthiness of the depository institutions in which the Company’s MBS and cash deposits are held; • The impact of applicable tax and accounting requirements on us including our tax treatment of derivative instruments such as TBAs, interest rate swaps, options and futures; • Our future compliance with covenants in our master repurchase agreements, ISDA agreements, and debt covenants in our other contractual agreements; • Our reliance on a single service provider of our trading, portfolio management, risk reporting and accounting services systems; • The implementation in a timely and cost-effective manner of our operating platform, which includes trading, portfolio management, risk reporting, and accounting services systems, and the anticipated benefits thereof; and • Possible future effects of the COVID-19 pandemic.
Forward-looking statements in this Annual Report on Form 10-K may include, but are not limited to statements about: 37 • Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments; • Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets; • Our views on inflation, market interest rates and market spreads; • Our views on the effect of actual or proposed actions of the Federal Reserve or other central banks with respect to monetary policy (including the targeted Fed Funds rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment; • The effect of regulatory initiatives of the Federal Reserve, the Federal Housing Finance Agency, other financial regulators, and other central banks; • Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments; • Our investment portfolio composition and target investments; • Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments; • Our liquidity and ability to access financing, and the anticipated availability and cost of financing; • Our capital stock activity including the impact of stock issuances and repurchases; • The amount, timing, and funding of future dividends; • Our use of our tax NOL carryforward and other tax loss carryforwards; • Future competition for, and availability of, investments, financing and capital; • Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments; • The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market; • Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators; • The impact of recent bank failures, potential new regulations and the potential for other bank failures this year: • The impact of debt ceiling negotiations on interest rates, spreads, the U.S.
To minimize the loss in fair value of our investments from higher interest rates, we continuously monitored and adjusted our hedge position throughout the year as macroeconomic views and market factors changed. We mitigated additional losses in book value from spread widening by strategically repositioning the coupon distribution in our investment portfolio throughout the year.
To minimize the loss in fair value of our investments from higher interest rates, we continuously monitored and adjusted our hedge position throughout the year as macroeconomic views and market factors changed.
(2) Amount includes unrealized gains and losses from changes in fair value of derivatives and realized gains and losses on terminated derivatives and excludes TBA drop income.
(2) Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss.
Gains (Losses) on Investments and Derivative Instruments The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated: Year Ended December 31, 2022 ($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value Investment portfolio: Agency RMBS $ (89,067) $ (208,129) $ (152,734) $ (449,930) Agency CMBS — $ (1,169) $ (14,110) (15,279) CMBS IO — (3,924) (21,153) (25,077) Other non-Agency and loans — 200 (78) 122 Subtotal (89,067) (213,022) (188,075) (490,164) TBA securities (1) (309,527) (26,120) — (335,647) Net loss on investments $ (398,594) $ (239,142) $ (188,075) $ (825,811) 34 Interest rate hedging portfolio: U.S.
Treasury futures 3,645 (2,056) — 1,589 Net gain (loss) on interest rate hedges $ 237,660 $ (248,501) $ — $ (10,841) Total net gain (loss) $ 64,967 $ (30,287) $ 22,843 $ 57,523 35 Year Ended December 31, 2022 ($s in thousands) Realized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in Net Income Unrealized Gain (Loss) Recognized in OCI Total Change in Fair Value Investment portfolio: Agency RMBS $ (89,067) $ (208,129) $ (152,734) $ (449,930) Agency CMBS — $ (1,169) $ (14,110) (15,279) CMBS IO — (3,924) (21,153) (25,077) Other non-Agency and loans — 200 (78) 122 Subtotal (89,067) (213,022) (188,075) (490,164) TBA securities (1) (309,527) (26,120) — (335,647) Net loss on investments $ (398,594) $ (239,142) $ (188,075) $ (825,811) Interest rate hedging portfolio: U.S.
Treasury futures generally have lower margin requirements and offer more liquidity and flexibility in the current rapidly changing interest rate environment. During the year ended December 31, 2022, the Company realized substantial gains on its U.S.
Treasury futures generally have lower margin requirements and offer more liquidity and flexibility in the current volatile interest rate environment. The Company’s realized gains on its U.S.
Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged.
Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin, or collateral..
Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021 Net Interest Income The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated: Year Ended December 31, 2022 2021 ($s in thousands) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Cost of Funds (3)(4) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Cost of Funds (3)(4) Agency RMBS $ 62,942 $ 2,871,291 2.19 % $ 36,017 $ 2,145,989 1.68 % Agency CMBS 3,592 162,538 2.17 % 7,683 210,335 3.62 % CMBS IO (5) 15,555 267,984 5.80 % 15,792 330,420 4.78 % Non-Agency MBS and other investments 350 4,072 8.55 % 525 6,329 8.30 % MBS and loans $ 82,439 $ 3,305,885 2.49 % $ 60,017 $ 2,693,073 2.23 % Cash equivalents 4,256 34 Total interest income $ 86,695 $ 60,051 Repurchase agreement financing (43,612) 2,603,712 (1.65) % (5,671) 2,387,764 (0.23) % Net interest income/net interest spread $ 43,083 0.84 % $ 54,380 2.00 % (1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.
The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated: Year Ended December 31, 2023 2022 ($s in thousands) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Cost of Funds (3)(4) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Cost of Funds (3)(4) Agency RMBS $ 177,695 $ 4,621,304 3.85 % $ 62,942 $ 2,871,291 2.19 % Agency CMBS 3,713 124,157 2.96 % 3,592 162,538 2.17 % CMBS IO (5) 9,666 202,261 4.78 % 15,555 267,984 5.80 % Non-Agency MBS and other investments 128 2,377 5.28 % 350 4,072 8.55 % MBS and loans $ 191,202 $ 4,950,099 3.86 % $ 82,439 $ 3,305,885 2.49 % Cash equivalents 16,315 4,256 Total interest income $ 207,517 $ 86,695 Repurchase agreement financing (215,448) 4,034,561 (5.27) % (43,612) 2,603,712 (1.65) % Net interest (expense) income/net interest spread $ (7,931) (1.41) % $ 43,083 0.84 % (1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.
OAS shown for prior periods may differ from previous disclosures because.the Company regularly updates the third-party model used. (2) Data represents the spread to swap rate on newly issued securities and is sourced from JP Morgan. Summary of Our 2022 Performance Regardless of the macroeconomic environment in which we operate, we seek to preserve book value for our shareholders.
OAS shown for prior periods may differ from previous disclosures because.the Company regularly updates the third-party model used. (2) Data represents the spread to swap rate on newly issued securities and is sourced from J.P. Morgan.
Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our most liquid assets include unrestricted cash and cash equivalents and unencumbered Agency RMBS, CMBS, and CMBS IO.
Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet.
Year Ended Reconciliations of GAAP to Non-GAAP Financial Measures: December 31, 2022 December 31, 2021 ($s in thousands except per share data) Comprehensive (loss) income to common shareholders $ (52,608) $ 17,413 Less: Change in fair value of investments (1) 490,164 81,641 Change in fair value of derivative instruments, net (2) (393,401) (37,905) Preferred stock redemption charge — 2,987 EAD to common shareholders $ 44,155 $ 64,136 Average common shares outstanding 42,491,433 32,596,272 EAD per common share $ 1.04 $ 1.97 Net interest income $ 43,083 $ 54,380 TBA drop income (3) 42,606 43,512 Adjusted net interest income $ 85,689 $ 97,892 General and administrative expenses (32,353) (24,085) Other operating expense, net (1,487) (1,342) Preferred stock dividends (7,694) (8,329) EAD to common shareholders $ 44,155 $ 64,136 Adjusted net interest spread (4) 1.25 % 2.10 % (1) Amount includes realized and unrealized gains and losses recorded in net income and other comprehensive income due to changes in the fair value of the Company’s MBS and other investments.
Year Ended Reconciliations of GAAP to Non-GAAP Financial Measures: December 31, 2023 December 31, 2022 ($s in thousands except per share data) Comprehensive income (loss) to common shareholders $ 9,020 $ (52,608) Less: Change in fair value of investments (1) (90,429) 490,164 Change in fair value of derivative instruments, net (2) 28,808 (393,401) EAD to common shareholders $ (52,601) $ 44,155 Average common shares outstanding 54,809,462 42,491,433 EAD per common share $ (0.96) $ 1.04 Net interest expense $ (7,931) $ 43,083 TBA drop (loss) income (3) (4,097) 42,606 Adjusted net interest (expense) income $ (12,028) $ 85,689 Total operating expenses (32,879) (33,840) Preferred stock dividends (7,694) (7,694) EAD to common shareholders $ (52,601) $ 44,155 (1) Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company’s MBS.
The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated: December 31, 2022 Amortized Cost Fair Value WAVG Life Remaining (1) WAVG Coupon (2) WAVG Market Yield (3) Agency CMBS $ 132,333 $ 124,690 4.8 3.22 % 4.50 % Agency CMBS IO 179,734 168,147 6.3 n/a 5.32 % Non-Agency CMBS IO 59,107 56,839 2.1 n/a 8.54 % Total $ 371,174 $ 349,676 December 31, 2021 Amortized Cost Fair Value WAVG Life Remaining (1) WAVG Coupon (2) WAVG Market Yield (3) Agency CMBS $ 177,211 184,847 5.3 3.25 % 2.02 % Agency CMBS IO 199,523 208,858 6.1 n/a 2.01 % Non-Agency CMBS IO 98,674 100,561 2.8 n/a 2.81 % Total $ 475,408 $ 494,266 (1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated.
The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated: 32 December 31, 2023 ($s in thousands) Amortized Cost Fair Value WAVG Life Remaining (1) WAVG Market Yield (2) Agency CMBS $ 121,799 $ 115,595 4.1 4.74 % Agency CMBS IO 140,824 133,302 5.9 5.19 % Non-Agency CMBS IO 26,490 26,416 1.1 13.32 % Total $ 289,113 $ 275,313 December 31, 2022 ($s in thousands) Amortized Cost Fair Value WAVG Life Remaining (1) WAVG Market Yield (2) Agency CMBS $ 132,333 $ 124,690 4.8 4.50 % Agency CMBS IO 179,734 168,147 6.3 5.32 % Non-Agency CMBS IO 59,107 56,839 2.1 8.54 % Total $ 371,174 $ 349,676 (1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated.
(4) Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.
(4) Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year. (5) Includes Agency and non-Agency issued securities. Gains (Losses) on Investments and Derivative Instruments As shown in the graph in Executive Overview, the 10-year U.S.
During the years ended December 31, 2022 and December 31, 2021, we primarily used U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments.
Treasury futures to hedge the impact of increasing interest rates on our financing costs and fair value of our investments.
The following chart compares the composition of our MBS portfolio including TBA securities as of the dates indicated: To minimize losses due to spread volatility, we frequently changed the coupon distribution in our Agency RMBS and TBA portfolios throughout 2022.
We purchased Agency RMBS with a cost basis of $3.6 billion during the year ended December 31, 2023. 30 The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated: We frequently change the coupon distribution in our Agency RMBS and TBA portfolios in order to minimize losses due to spread volatility.
Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties and our non-Agency CMBS IO, which were all originated prior to 2018, are backed by loans collateralized by a number of different property types, including retail, office, multifamily, hotel, and other properties.
Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 28% retail, 25% office, 15% multifamily, 12% hotel and 20% all other real estate categories.
(2) Represents the weighted average coupon based on par as of the dates indicated. (3) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the dates indicated and assuming zero volatility.
(2) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the dates indicated and assuming zero volatility. Repurchase Agreements We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit.
Longer term, as investors return to the MBS market and demand improves, we expect the fair value of our investment portfolio to increase and our book value to recover.
We expect spreads will remain volatile and range-bound in the intermediate term while the Federal Reserve continues reducing MBS from its balance sheet. Longer term, as investors return to the MBS market and demand improves, we expect the fair value of our investment portfolio to increase and our book value to trend higher.
(3) TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates. (4) The reconciliation for adjusted net interest spread to net interest spread is shown in “Results of Operations - Adjusted Net Interest Income”.
(3) TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates. We primarily use U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments.
As a result, our net deferred tax hedge gain has increased substantially to $695.2 million as of December 31, 2022 compared to $27.0 million as of December 31, 2021. The amortization of our net deferred tax hedge gain will be amortized into REIT taxable income over several years, which we expect to mitigate the impact of higher financing costs.
Due to the significant increase in interest rates over the past two years, our net deferred tax hedge gain has increased substantially to $861.8 million as of December 31, 2023. The amortization of our net deferred tax hedge gain will be amortized into REIT taxable income over several years.
Treasury futures (7,339) 5,198 — (2,141) Net gain on interest rate hedges $ 146,237 $ (46,833) $ — $ 99,404 Total net gain (loss) $ 139,076 $ (65,768) $ (73,532) $ (224) (1) Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
Treasury futures (2,487) 2,056 — (431) Net gain on interest rate hedges $ 690,734 $ 80,920 $ — $ 771,654 Total net gain (loss) $ 292,140 $ (158,222) $ (188,075) $ (54,157) 1) Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.
Treasury futures as well as other interest rate hedges which are included in GAAP earnings, but are not included in EAD or adjusted net interest income. Furthermore, because these U.S. Treasury futures and other derivative instruments were designated as hedges for tax purposes, the realized gains will be amortized into REIT taxable income over the next several years.
Treasury futures as well as other interest rate hedges are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated, but are not included in EAD or adjusted net interest income during any reporting period. Furthermore, because the majority of the U.S.
Total economic loss to our common shareholders, which consists of the decline in book value of $(3.26) offset by dividends declared of $1.56, was $(1.70) per common share, or (9.5)% of beginning book value. 27 The following table provides details about the changes in our financial position during the year ended December 31, 2022: Net Change in Fair Value Components of Comprehensive Loss Common Book Value Rollforward Per Common Share Common shareholders’ book value, December 31, 2021 (1) $ 659,779 $ 17.99 Net interest income $ 43,083 TBA drop income 42,606 G & A and other operating expenses (33,840) Preferred stock dividends (7,694) Changes in fair value: MBS and loans $ (490,164) TBAs (378,253) U.S.
Summary of Results The following table provides details about the changes in our financial position during the year ended December 31, 2023: Net Change in Fair Value Components of Comprehensive Income Common Book Value Rollforward Per Common Share Balance as of December 31, 2022 (1) $ 789,828 $ 14.73 Net interest expense $ (7,931) G & A and other operating expenses (32,879) Preferred stock dividends (7,694) Changes in fair value: MBS and loans $ 90,429 TBAs (22,063) U.S.
We currently estimate our taxable income for 2023 will include approximately $71.3 million from amortization of deferred tax hedge gains. As of December 31, 2022, we also had $408.6 million in capital loss carryforwards, the majority of which expire in 2027, and NOL carryforwards of $9.3 million, which will expire over the next 3 years.
As of December 31, 2023, we also had $590.8 million in capital loss carryforwards, the majority of which expire by 2028, and NOL carryforwards of $8.1 million, which will expire over the next 2 years.
Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate derivative instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Annual Report on Form 10-K. 32 RESULTS OF OPERATIONS The discussion below includes both GAAP and non-GAAP financial measures that management utilizes in its analysis of financial and operating performance.
Treasury futures — 250,000 Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Annual Report on Form 10-K. 33 RESULTS OF OPERATIONS Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 Net Interest Income (Expense) Net interest income and net interest spread declined for the year ended December 31, 2023 compared to year ended December 31, 2022 due to higher borrowing costs resulting from the Federal Reserve’s increases in the Fed Funds rate during 2023.
Treasury rates and information regarding market spreads as of and for the periods indicated: 26 Market Spreads as of: Change in Spreads Year to Date Investment Type: December 31, 2021 March 31, 2022 June 30, 2022 September 30, 2022 December 31, 2022 Agency RMBS: (1) 2.0% coupon 3 10 28 31 27 24 2.5% coupon 11 21 38 41 35 24 3.0% coupon 10 34 38 43 36 26 3.5% coupon 15 22 42 49 39 24 4.0% coupon 7 26 25 46 33 26 4.5% coupon 10 34 25 52 34 24 Agency DUS (Agency CMBS) (2) 31 58 67 91 74 43 Freddie K AAA IO (Agency CMBS IO) (2) 105 150 170 205 235 130 AAA CMBS IO (Non-Agency CMBS IO) (2) 113 145 225 300 315 202 (1) Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data.
Treasury rates for the past twelve months and information regarding market spreads as of and for the periods indicated: 27 Market Spreads as of: Change in Spreads YTD Investment Type: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 Agency RMBS: (1) 2.0% coupon 76 84 67 79 62 14 2.5% coupon 78 88 72 79 68 10 3.0% coupon 79 88 74 78 70 9 3.5% coupon 75 87 73 75 72 3 4.0% coupon 74 87 73 74 62 12 4.5% coupon 73 84 71 79 60 13 5.0% coupon 69 86 75 70 53 16 5.5% coupon 66 87 76 68 50 16 6.0% coupon 60 87 74 60 57 3 Agency DUS (Agency CMBS) (2) 76 80 72 78 74 2 Freddie K AAA IO (Agency CMBS IO) (2) 180 185 175 210 235 (55) AAA CMBS IO (Non-Agency CMBS IO) (2) 225 275 301 350 315 (90) (1) Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data.
Our net income for the year ended December 31, 2022 includes $690.7 million of realized gains from derivative instruments which were designated as interest rate hedges for tax purposes. Though these realized gains are included in our GAAP earnings, the majority will not be included in our REIT taxable income for 2022.
Furthermore, because we designate the majority of our derivative instruments as interest rate hedges for tax purposes, realized gains and losses recognized in GAAP net income are generally not recognized in REIT taxable income until future periods.
Despite these measures, the loss of fair value from our investment portfolio exceeded the gains from our interest rate hedges (excluding TBA drop income) by $96.8 million, and as a result, we reported a comprehensive loss to common shareholders of $(52.6) million, or $(1.24) per common share for the year ended December 31, 2022 and a decline of $(3.26) in book value per common share to $14.73 as of December 31, 2022.
As a result, the net gains on our investment portfolio for the year ended December 31, 2023 exceeded net losses on our interest rate hedges. Comprehensive income to common shareholders for the year ended December 31, 2023 was $9.0 million, or $0.16 per common share.
Treasury futures (431) Interest rate swaptions 47,738 Total net change in fair value (96,763) Comprehensive loss to common shareholders (52,608) (1.24) Capital transactions: Net proceeds from stock issuance (2) 249,891 (0.46) Common dividends declared (67,234) (1.56) Common shareholders' book value, December 31, 2022 (1) $ 789,828 $ 14.73 (1) Common shareholders’ book value is equal to total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111,500.
Treasury futures 1,588 Total net change in fair value 57,524 Comprehensive income to common shareholders 9,020 0.16 Capital transactions: Net proceeds from stock issuance (2) 46,951 (0.02) Common dividends declared (86,564) (1.56) Balance as of December 31, 2023 (1) $ 759,235 $ 13.31 (1) Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's 28 preferred stock, in thousands and on a per common share basis.
Treasury futures to hedge the impact of increasing interest rates on our financing costs and fair value of our investments. Realized and unrealized gains (losses) on these derivative instruments are included in GAAP earnings, but are not included in EAD to common shareholders and are not factored into our repurchase agreement borrowing cost or net interest spread.
Realized and unrealized gains (losses) on these derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company, but are not included in EAD to common shareholders during any reporting period.
In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as these securities are experiencing wider spreads and supply of new originations is significantly limited.
In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS.
For the year ended December 31, 2022, the tax benefit of our hedge gains is approximately $22.5 million, or $0.53 per common share, which is not included in the Company’s calculation of EAD, but is distributable to common shareholders as part of the Company’s ordinary income calculated for tax purposes.
Our estimated REIT taxable income for the year ended December 31, 2023 includes an estimated benefit of approximately $80.5 million, or $1.47 per average common share outstanding, from the amortization of accumulated deferred tax hedge gains, which were estimated to be $861.8 million as of December 31, 2023 compared to $695.2 million as of December 31, 2022.
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EXECUTIVE OVERVIEW Early in 2022, the markets continued to transition away from the COVID-19 pandemic, marked by broad shutdowns and supply chain issues, and began to focus on surging inflation, partially caused by unprecedented fiscal stimulus during the pandemic.
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EXECUTIVE OVERVIEW The focus in early 2023 was the rate of inflation and whether the increases in the Federal Funds Target Rate (“Fed Funds rate”), which started in 2022, would be sufficient to tamp down inflation or if more increases would be needed in 2023.
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The war in Ukraine brought new issues to consider, including major sanctions on Russia and the near-term impact on both food and energy exported by both countries as well as the longer-term impact on global trade.
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The Federal Reserve continued its path of rate increases in early 2023, prompting interest rates across the yield curve to rise. In early March, the U.S. market experienced a regional bank crisis driven by the combination of unhedged low coupon securities and downgrades which spurred large scale and rapid movement of customer deposits.
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Primarily in response to rising global inflation, yields during the first quarter and into the second quarter experienced the fastest and the largest percentage change since 1980, and in an attempt to control inflation, the Federal Reserve clearly signaled that the quantitative easing cycle was over and tightening would begin. 25 As the market started to adjust to the shift in monetary policy and sharply rising energy prices, market volatility also increased.
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Given the severe liquidity issues caused by the loss of deposits, several institutions either failed and were seized or were taken over by larger more solvent institutions.
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Yields across the U.S. Treasury curve rose but were also volatile, marked by both dramatic increases and decreases in short periods of time, and the market demonstrated no signs of stability.
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Interest rates temporarily fell post regional bank crisis before refocusing on inflation and rising throughout most of the year as the Federal Reserve signaled the need for higher interest rates and messaged a need for “higher for longer” U.S. Federal Reserve policy.
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Realized volatility, which is a measure of how much prices actually move in a given day, was the highest it has been since the early 1980s, and this level of volatility existed across many asset classes including MBS, Treasuries, equities, credit assets, currencies and cryptocurrencies.
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In the fourth quarter of 2023, many economic forecasts for 2024 predicted rate cuts, and as a result, interest rates fell going into year end. Despite a very volatile 2023 that experienced over a 170 basis point change in the 10-year U.S. Treasury rate from peak to trough, the rate closed out 2023 virtually unchanged from the end of 2022.
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Agency RMBS lead the way on spread widening as they are directly linked to the reduction of the Federal Reserve’s asset purchase program and its balance sheet, but many other fixed income sectors also experienced significant spread widening in 2022.
Added
Global unrest continues in many parts of the world. The Russia and Ukraine war is ongoing and the attack on Israel by Hamas has created unrest in that region.
Removed
Extreme interest rate volatility and spread widening continued, particularly in September and October, as rates rose rapidly and market direction was uncertain. Central banks across the globe struggled to fight inflation while attempting to balance growth and financial stability. As we closed out 2022, the Federal Reserve started to signal a slowing down or stopping of U.S.
Added
The economic benefit of the reopening of China post Covid-19 26 restrictions did not materialize in 2023, and many are looking to the region to determine what steps China may take to stimulate its economy and work with trade partners on a global basis.
Removed
Federal Funds rate increases in 2023, which provided the market some stability. The market began projecting the end of rate increases and started projecting rate cuts in the near future, leading to an inversion of the yield curve.
Added
Artificial Intelligence and Machine Learning created much enthusiasm for investors and entrepreneurs looking to leverage and seize the opportunity. This was tempered by regulators who fear unintended consequences and ethical dilemmas based on incorrect results and data bias. The debates over these issues will continue into the future. Market Data The charts below show the range of U.S.
Removed
The perception of some certainty also spurred buying activity and as a result, spreads tightened from the widest levels experienced in the third and fourth quarter of 2022. The charts below show the range of U.S.
Added
In all market environments, we seek to pay a consistent dividend and preserve book value for our shareholders. This year, we remained focused on minimizing the impact of volatile interest rates and spreads by actively managing leverage and liquidity.
Removed
The degree of uncertainty and amount of volatility in the macroeconomic environment precluded us from accepting more risk, and so we remained focused on minimizing the impact of higher interest rates and spread widening by maintaining leverage within a lower range and increasing our available liquidity.
Added
Spread tightening experienced late in the fourth quarter of 2023 favorably impacted the fair value of our investment portfolio because we purchased $3.6 billion in Agency RMBS during 2023 when spreads were wider relative to December 31, 2023.
Removed
Book value declined primarily from significant spread widening, particularly in September and October, and which ended the year much wider than at December 31, 2021.
Added
Total economic return to our common shareholders of $0.14 per common share, or 1.0% of beginning book value, consisted of a decline in book value of $(1.42) offset by dividends declared of $1.56.
Removed
During 2022, we raised equity of $246.9 million through our common stock ATM program at an average net issue price of $14.63 per common share compared to an average market price of approximately $15.01 per common share. These issuances contributed to the decline in book value per common share for 2022, but increased our capital base and liquidity.
Added
Realized gains and losses on interest rate hedges are recognized in GAAP net income (loss) in the same reporting period in which the derivative instrument matures or is terminated, but are not included in our earnings available for distribution ("EAD"), a non-GAAP measure, during any reporting period.
Removed
We expect to use this additional liquidity to add assets to our balance sheet with returns in the mid- teens, which exceeds our dividend yield to year end book value per common share of approximately 10.6%.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

20 edited+11 added−8 removed21 unchanged
Biggest changeDecember 31, 2022 Parallel Decrease in Interest Rates of Parallel Increase in Interest Rates of 100 Basis Points 50 Basis Points 50 Basis Points 100 Basis Points Type of Instrument (1) % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity RMBS 2.8 % 20.9 % 1.4 % 10.6 % (1.4) % (10.6) % (2.8) % (21.0) % CMBS 0.1 % 0.5 % — % 0.3 % — % (0.3) % (0.1) % (0.5) % CMBS IO 0.1 % 0.7 % — % 0.4 % — % (0.4) % (0.1) % (0.7) % TBAs 2.0 % 15.2 % 1.1 % 8.2 % (1.2) % (9.1) % (2.5) % (18.9) % Interest rate hedges (5.6) % (41.3) % (2.8) % (20.5) % 2.7 % 20.2 % 5.4 % 40.1 % Total (0.6) % (4.0) % (0.3) % (1.0) % 0.1 % (0.2) % (0.1) % (1.0) % December 31, 2021 Parallel Decrease in Interest Rates of Parallel Increase in Interest Rates of 100 Basis Points 50 Basis Points 50 Basis Points 100 Basis Points Type of Instrument (1) % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity RMBS 2.6 % 18.6 % 1.6 % 11.1 % (1.9) % (13.5) % (4.0) % (28.5) % CMBS 0.2 % 1.4 % 0.1 % 0.7 % (0.1) % (0.7) % (0.2) % (1.3) % CMBS IO 0.2 % 1.1 % 0.1 % 0.6 % (0.1) % (0.6) % (0.2) % (1.1) % TBAs 1.4 % 9.7 % 0.9 % 6.1 % (1.1) % (7.5) % (2.3) % (15.9) % Interest rate hedges (6.9) % (49.1) % (3.5) % (24.6) % 3.5 % 24.9 % 7.0 % 49.5 % Total (2.5) % (18.3) % (0.8) % (6.1) % 0.3 % 2.6 % 0.3 % 2.7 % Non-Parallel Shifts December 31, 2022 December 31, 2021 Basis Point Change in 2-year UST Basis Point Change in 10-year UST % of Market Value (1) % of Common Equity % of Market Value (1) % of Common Equity +25 0 0.2 % 1.7 % 0.3 % 2.5 % +25 +50 (0.1) % (1.0) % 0.2 % 1.3 % +50 +25 0.1 % 0.6 % 0.1 % 2.5 % +50 +100 (0.4) % (2.9) % — % 0.1 % 0 -25 0.1 % 0.4 % (0.2) % (1.2) % -10 -50 — % 0.1 % (0.6) % (4.0) % -25 -75 (0.2) % (1.4) % (1.3) % (9.0) % 42 (1) Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings which are not carried at fair value on our balance sheet due to their short-term maturities.
Biggest changeTreasury rates in Item 7, “Executive Overview”), the tables below show the projected sensitivity of the market value of our financial instruments and the percentage change in shareholders’ equity assuming instantaneous parallel shifts and non-parallel shifts in market interest rates. 40 December 31, 2023 Parallel Decrease in Interest Rates of Parallel Increase in Interest Rates of 100 Basis Points 50 Basis Points 50 Basis Points 100 Basis Points Type of Instrument (1) % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity RMBS 3.5 % 33.8 % 1.8 % 17.9 % (2.0) % (19.4) % (4.1) % (39.6) % CMBS — % 0.4 % — % 0.2 % — % (0.2) % — % (0.4) % CMBS IO 0.1 % 0.5 % — % 0.3 % — % (0.3) % (0.1) % (0.5) % TBAs 0.6 % 5.9 % 0.3 % 3.3 % (0.4) % (4.0) % (0.9) % (8.5) % Interest rate hedges (5.3) % (51.6) % (2.6) % (25.3) % 2.5 % 24.6 % 5.0 % 48.7 % Total (1.1) % (11.0) % (0.4) % (3.6) % 0.1 % 0.8 % — % (0.3) % December 31, 2022 Parallel Decrease in Interest Rates of Parallel Increase in Interest Rates of 100 Basis Points 50 Basis Points 50 Basis Points 100 Basis Points Type of Instrument (1) % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity % of Market Value % of Common Equity RMBS 2.8 % 20.9 % 1.4 % 10.6 % (1.4) % (10.6) % (2.8) % (21.0) % CMBS 0.1 % 0.5 % — % 0.3 % — % (0.3) % (0.1) % (0.5) % CMBS IO 0.1 % 0.7 % — % 0.4 % — % (0.4) % (0.1) % (0.7) % TBAs 2.0 % 15.2 % 1.1 % 8.2 % (1.2) % (9.1) % (2.5) % (18.9) % Interest rate hedges (5.6) % (41.3) % (2.8) % (20.5) % 2.7 % 20.2 % 5.4 % 40.1 % Total (0.6) % (4.0) % (0.3) % (1.0) % 0.1 % (0.2) % (0.1) % (1.0) % Non-Parallel Shifts December 31, 2023 December 31, 2022 Basis Point Change in 2-year UST Basis Point Change in 10-year UST % of Market Value (1) % of Common Equity % of Market Value (1) % of Common Equity +25 0 — % (0.2) % 0.2 % 1.7 % +25 +50 0.1 % 1.4 % (0.1) % (1.0) % +50 +25 — % (0.5) % 0.1 % 0.6 % +50 +100 0.1 % 0.8 % (0.4) % (2.9) % 0 -25 (0.2) % (2.0) % 0.1 % 0.4 % -10 -50 (0.5) % (4.7) % — % 0.1 % -25 -75 (0.9) % (8.8) % (0.2) % (1.4) % (1) Includes changes in market value of our investments and derivative instruments, including TBA securities, but excludes changes in market value of our financings which are not carried at fair value on our balance sheet due to their short-term maturities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to losses resulting from changes in market factors. Our business strategy exposes us to a variety of market risks, including interest rate, spread, prepayment, credit, liquidity, and reinvestment 40 risks.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to losses resulting from changes in market factors. Our business strategy exposes us to a variety of market risks, including interest rate, spread, prepayment, credit, liquidity, and reinvestment risks.
If we retain capital or pay dividends to return capital to shareholders rather than reinvest capital, or if we invest capital in lower yielding assets for liquidity reasons, the size of our investment portfolio and the amount of income generated by our investment portfolio will likely decline. 44
If we retain capital or pay dividends to return capital to shareholders rather than reinvest capital, or if we invest capital in lower yielding assets for liquidity reasons, the size of our investment portfolio and the amount of income generated by our investment portfolio will likely decline.
If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses and adversely affect our cash flow.
If prepayments are slower or faster than assumed, the maturity of our investments will also differ from our expectations, which could reduce the effectiveness of our hedging strategies and may cause losses that adversely affect our cash flow.
Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates, and widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets.
Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates. Widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets.
(2) Assumes a 20-basis point shift in Agency and non-Agency RMBS and CMBS and a 50-basis point shift in Agency and non-Agency CMBS IO. Prepayment Risk Prepayment risk is the risk of an early, unscheduled return of principal on an investment.
(2) Assumes a 20-basis point shift in Agency and non-Agency RMBS and CMBS and a 50-basis point shift in Agency and non-Agency CMBS IO. 42 Prepayment Risk Prepayment risk is the risk of an early, unscheduled return of principal on an investment.
Loans underlying our CMBS and CMBS IO securities typically have some form of prepayment protection provisions (such as prepayment lock-outs) or prepayment compensation provisions (such as yield maintenance or prepayment 43 penalties).
Loans underlying our CMBS and CMBS IO securities typically have some form of prepayment protection provisions (such as prepayment lock-outs) or prepayment compensation provisions (such as yield maintenance or prepayment penalties).
Interest rate risk results from investing in securities that have a fixed coupon or when the coupon may not immediately adjust for changes in interest rates. Interest rate risk also results from the mismatch between the duration of our assets versus the duration of our liabilities and hedges.
Interest rate risk results from investing in securities that have a fixed coupon or a floating coupon that may not immediately adjust for changes in interest rates. Interest rate risk also results from the mismatch between the duration of our assets versus the duration of our liabilities and hedges.
To mitigate credit risk of investing in CMBS IO, we invest in primarily AAA-rated securities in senior tranches, which means we receive the highest payment priority and are the last to absorb losses in the event of a shortfall in cash flows.
To mitigate credit risk of investing in CMBS IO, we invest in primarily AAA-rated securities that are stripped off senior tranches, which means we receive the highest payment priority and are the last to absorb losses in the event of a shortfall in cash flows.
The table below shows the projected sensitivity of the market value of our investments given the indicated change in market spreads as of the dates indicated: December 31, 2022 December 31, 2021 Percentage Change in Percentage Change in Basis Point Change in Market Spreads Market Value of Investments (1) % of Common Equity Market Value of Investments (1) % of Common Equity +20/+50 (2) (1.2) % (9.1) % (1.3) % (9.2) % +10 (0.6) % (4.5) % (0.6) % (4.4) % -10 0.6 % 4.5 % 0.6 % 4.4 % -20/-50 (2) 1.2 % 9.1 % 1.3 % 9.2 % (1) Includes changes in market value of our MBS investments, including TBA securities.
The table below shows the projected sensitivity of the market value of our investments given the indicated change in market spreads as of the dates indicated: December 31, 2023 December 31, 2022 Percentage Change in Percentage Change in Basis Point Change in Market Spreads Market Value of Investments (1) % of Common Equity Market Value of Investments (1) % of Common Equity +20/+50 (2) (1.1) % (10.8) % (1.2) % (9.1) % +10 (0.5) % (5.4) % (0.6) % (4.5) % -10 0.5 % 5.4 % 0.6 % 4.5 % -20/-50 (2) 1.1 % 10.8 % 1.2 % 9.1 % (1) Includes changes in market value of our MBS investments, including TBA securities.
In order to maintain our investment portfolio size and our earnings, we need to reinvest capital received from these events into new interest-earning assets or TBA securities, and if market yields on new investments are lower, our interest income will decline.
In order to maintain our investment portfolio size and our earnings, we need to reinvest capital received from these events into new interest-earning assets or TBA securities, and if market yields on new investments are lower or if financing costs are higher, our net interest income will decline.
As such, the projections for changes in net interest income and market value provided below are limited in usefulness because the modeling assumes no changes to the composition of our investment portfolio or hedging instruments as of the dates indicated.
As such, the projections for changes in market value provided below are limited in usefulness because the modeling assumes no changes to the composition of our investment portfolio or hedging instruments as of the dates indicated.
For further information, including how we attempt to mitigate liquidity risk and monitor our liquidity position and in particular, during the current economic crisis, please refer to “Liquidity and Capital Resources” in Item 7 of this Annual Report on Form 10-K.
For further information, including how we attempt to mitigate liquidity risk and monitor our liquidity position, and in particular, during the current macroeconomic environment, please refer to “Liquidity and Capital Resources” within Item 7 of this 2023 Annual Report on Form 10-K.
Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future rates as well as expected levels of prepayments of our assets.
Our hedging methods are based on many factors, including, but not limited to, our estimates with regard to future interest rates and expected levels of prepayments of our assets.
Credit Risk Credit risk is the risk that we will not receive all contractual amounts due on investments that we own due to default by the borrower or due to a deficiency in proceeds from the liquidation of the collateral securing the obligation. Credit losses on loans could result in lower or negative yields on our investments.
As a result of rising financing costs, our net interest income could fall. Credit Risk Credit risk is the risk that we will not receive all contractual amounts due on investments that we own due to default by the borrower or due to a deficiency in proceeds from the liquidation of the collateral securing the obligation.
This will typically occur when the underlying loan is in default and proceeds from the disposition of the loan collateral are insufficient to pay the prepayment consideration.
These securities are exposed to the loss of investment basis in the event a loan collateralizing the security liquidates without paying yield maintenance or prepayment penalty. This will typically occur when the underlying loan is in default and proceeds from the disposition of the loan collateral are insufficient to pay the prepayment consideration.
Because interest rates do not typically move in a parallel fashion from period to period (as can be seen by the graph for U.S.
Management considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk on the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from period to period (as can be seen by the graph for U.S.
Agency RMBS and Agency CMBS have credit risk to the extent that Fannie Mae or Freddie Mac fails to remit payments on the MBS for which they have issued a guaranty of payment. Given the improved financial performance and conservatorship of these entities and the continued support of the U.S. government, we believe this risk is low.
Credit losses on loans could result in lower or negative yields on our investments. Agency RMBS and Agency CMBS have credit risk to the extent that Fannie Mae or Freddie Mac fails to remit payments on the MBS for which they have issued a guaranty of payment.
Spread Risk Spread risk is the risk of loss from an increase in the market spread between the yield on an investment versus its benchmark index.
As of December 31, 2022, our interest rate hedges were positioned to protect book value losses if the yield curve flattened or inverted further. Spread Risk Spread risk is the risk of loss from an increase in the market spread between the yield on an investment versus its benchmark index.
The projections for market value do not assume any change in credit spreads.
The projections for market value do not assume any change in credit spreads. Our investment portfolio as of December 31, 2023 was 27% larger compared to December 31, 2022, and the composition of our investment portfolio also changed significantly since December 31, 2022.
Removed
The table below shows the projected sensitivity of our net interest income as of the dates indicated assuming an instantaneous parallel shift in interest rates without changes in the composition of our investment portfolio.
Added
As of December 31, 2023, we held a larger percentage of higher coupon assets purchased at a discount relative to the investment portfolio as of December 31, 2022, which contained a larger percentage of lower coupon assets owned at a premium 41 relative to December 31, 2023.
Removed
The percentages shown also do not include the impact of derivative instruments we use to hedge changing interest rates: Projected Change in Net Interest Income Due To Decrease in Interest Rates of Increase in Interest Rates of 50 Basis Points 25 Basis Points 25 Basis Points 50 Basis Points December 31, 2022 72.6 % 36.5 % (36.2) % (72.6) % December 31, 2021 (1) 8.3 % (9.7) % (20.0) % (1) Because the Company does not assume financing rates will be less than 0%, a parallel downward shift in interest rates of 50 basis points is not presented for the portfolio as of December 31, 2021.
Added
Our investment portfolio of higher coupons as of December 31, 2023 exposed us to greater duration variability. We adjusted our hedge position to longer duration hedges in order to benefit our book value in the event of a steeper yield curve, as shown in the non-parallel scenarios presented above.
Removed
Because our MBS portfolio as of the periods indicated in the table above is comprised of fixed rate assets, our interest income will not benefit from an increase in interest rates, while a parallel increase in interest rates would increase our borrowing costs.
Added
However, in the event that rates on the back end of the curve continue to fall, the decline in fair value of our interest rate hedges, particularly the 30-year U.S. Treasury futures, would outpace the increase in fair value of our investments (assuming no subsequent changes to our investments or hedges as of December 31, 2023).
Removed
Conversely, a parallel decrease in interest rates would lower our borrowing costs without causing a decline in our interest income.
Added
In addition, if longer-term interest rates were to continue to fall, we are likely to experience an increase in prepayments on our higher coupon assets, and we would potentially need to reinvest those proceeds into lower yielding assets.
Removed
The increase in projected sensitivity as of December 31, 2022 is significantly higher than the projected sensitivity as of December 31, 2021 because interest rates as of December 31, 2022 were significantly higher than interest rates as of December 31, 2021 as shown in the graph in “Executive Overview.” In addition, because projected Federal Funds Rate increases are resulting in lower projected net interest income as of December 31, 2022 compared to December 31, 2021, the calculation has a smaller denominator compared to December 31, 2021, which results in higher percentage changes in sensitivity to rate changes. 41 Management considers changes in the shape of the interest rate curves in assessing and managing portfolio interest rate risk on the market value of its investments and common equity.
Added
Our prepayment risk as of December 31, 2023 has declined relative to December 31, 2022 and prior periods as the majority of our MBS portfolio consists of securities owned near or below par and prepayment speeds have declined in the current higher interest rate environment.
Removed
Treasury rates in Item 7, “Executive Overview”), the tables below show the projected sensitivity of the market value of our financial instruments and the percentage change in shareholders’ equity assuming instantaneous parallel shifts and non-parallel shifts in market interest rates.
Added
However, if higher yielding investments prepay at a faster rate than anticipated, we may be unable to reinvest the repayments at comparable yields. Our net interest income may be negatively impacted if the proceeds from prepayments are reinvested into assets with lower yields.
Removed
As shown in the tables above, our interest rate hedges as of December 31, 2022 were positioned to minimize losses regardless of the direction in which interest rates move compared to December 31, 2021 when our hedges were positioned to protect our results in an increasing interest rate environment.
Added
In an increasing interest rate environment, lower yielding assets with a fixed rate may extend or prepay slower than anticipated. Because we finance our investments with short-term repurchase agreement financing, we may be required to finance our investments at a higher interest rate without the ability to reinvest principal into higher yielding securities.
Removed
Agency and non-Agency CMBS IO represent the right to excess interest and not principal on the underlying loans. These securities are exposed to the loss of investment basis in the event a loan collateralizing the security liquidates without paying yield maintenance or prepayment penalty.
Added
Given the improved financial performance and conservatorship of these entities and the continued support of the U.S. government, we believe this risk is low. Agency and non-Agency CMBS IO represent the right to excess interest (and not principal) on the underlying loans.
Added
Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation, which is the triggering event that disrupts the Agency CMBS IO cash flow.
Added
For non-Agency CMBS IO, the servicer and master servicer will determine if interest will continue to be advanced upon default of a loan based on their estimate of liquidation proceeds.
Added
Senior non-Agency CMBS IO may benefit from changes in contractual cash flows, including modifications or loan extensions as the senior classes can remain outstanding beyond the original maturity date. 43 In addition, bilateral agreements expose us to increased credit risk related to our counterparties, and we may be at risk of loss of any collateral held by a repurchase or derivative counterparty if the counterparty becomes insolvent or files for bankruptcy.

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