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What changed in DYNEX CAPITAL INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of DYNEX CAPITAL INC's 2023 and 2024 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 2024 report.

+361 added−352 removedSource: 10-K (2025-02-28) vs 10-K (2024-02-26)

Top changes in DYNEX CAPITAL INC's 2024 10-K

361 paragraphs added · 352 removed · 264 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

51 edited+7 added−8 removed42 unchanged
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 $8.1 million of net operating loss (“NOL”) carryforwards, which were all generated prior to January 1, 2018 and will expire over the next 2 years if not used.
Biggest changeThe following table provides the projected amortization of our net deferred tax hedge gains as of December 31, 2024, that will be recognized as taxable income over the periods indicated;.however, recognition of deferred tax hedge gains and losses may be accelerated if the underlying instrument originally hedged is terminated or paid off: 6 Period of Recognition for Remaining Hedge Gains, Net December 31, 2024 ($ in thousands) Fiscal year 2025 $ 100,144 Fiscal year 2026 100,420 Fiscal year 2027 95,831 Fiscal year 2028 and thereafter 422,643 $ 719,038 As of December 31, 2024, we also had $557.9 million of capital loss carryforwards, all of which will expire by either December 31, 2027 or by December 31, 2028.
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 .
Yield maintenance and prepayment penalty 2 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 .
Securities and Exchange Commission (“SEC”) staff no-action letters, companies relying on this exemption must ensure that at least 55% of their assets are mortgage loans and other qualifying assets, and at least 80% of their assets are real estate-related. The 1940 Act requires that we and each of our subsidiaries evaluate our qualification for exemption under the 1940 Act.
Securities and Exchange Commission (“SEC”) staff no-action letters, companies relying on this exemption must ensure that at least 55% of their assets are mortgage loans and other qualifying assets and at least 80% are real estate-related. The 1940 Act requires that we and each of our subsidiaries evaluate our qualification for exemption under the 1940 Act.
Our Code of Conduct is available on our website, along with our Audit Committee Charter, our Whistleblower Policy, our Nominating and Corporate Governance Committee Charter, our Compensation Committee Charter, and our latest ESG disclosures under the SASB framework.
Our Code of Conduct is available on our website, along with our Audit Committee Charter, Whistleblower Policy, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter, and our latest ESG disclosures under the SASB framework.
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.
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 agreement borrowings) and have less exposure to credit losses than lower-rated non-Agency MBS.
Please refer to Part I, Item 1A, "Risk Factors" as well as Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" of this Annual Report on Form 10-K for additional discussions of factors that have the potential to impact our results of operations and financial condition, including current events such as recent shifts in the Federal Reserve’s monetary policy and market trends.
Please refer to Part I, Item 1A, "Risk Factors," as well as Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 7A, "Quantitative and Qualitative Disclosures 4 about Market Risk," of this Annual Report on Form 10-K for additional discussions of factors that have the potential to impact our results of operations and financial condition, including current events such as recent shifts in the Federal Reserve’s monetary policy and market trends.
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.
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 repurchase agreements.
Though the majority of our current investment portfolio is in fixed-rate Agency RMBS, we have allocated capital at various times over the last decade to a variety of other investments including adjustable-rate Agency RMBS, fixed-rate Agency CMBS, investment grade and unrated non-Agency RMBS and CMBS, Agency and non-Agency CMBS IO, and residual interests in securitized mortgage loans.
Though the majority of our current investment portfolio is in fixed-rate Agency RMBS, we have allocated capital at various times over the last decade to a variety of other investments, including adjustable-rate Agency RMBS, fixed-rate Agency CMBS, investment grade and unrated non-Agency RMBS and CMBS, Agency and non-Agency CMBS IO, and residual interests in securitized 1 mortgage loans.
In addition, our business may be impacted by changes in regulatory requirements, including requirements to avoid qualifying as an investment company pursuant to the 1940 Act, and REIT requirements. Our business model is also impacted by the availability and cost of financing and the state of the overall credit markets.
In addition, our business may be impacted by changes in regulatory requirements, including requirements to avoid qualifying as an investment company pursuant to the 1940 Act, as well as REIT requirements. Our business model is also impacted by the availability and cost of financing and the state of the overall credit markets.
Under the “10% asset test,” we may not own more than 10% of the outstanding voting power or value of securities of any single non-governmental issuer, provided such securities do not qualify under the 75% asset test or relate to taxable REIT subsidiaries.
Under the “10% asset test,” we may not own 7 more than 10% of the outstanding voting power or value of securities of any single non-governmental issuer, provided such securities do not qualify under the 75% asset test or relate to taxable REIT subsidiaries.
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 .
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 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.
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 creditworthiness 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.
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.
As of December 31, 2024, 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.
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.
As of December 31, 2024, 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 Part I, Item 1A of this Annual Report on Form 10-K for additional information regarding significant risks related to repurchase agreement financing.
We believe that we are operating our business in accordance with the exemption requirements of Section 3(c)(5)(C) of the 1940 Act. Please refer to Item 1A, "Risk Factors" of this Annual Report on Form 10-K for further discussion. AVAILABLE INFORMATION We are subject to the reporting requirements of the Exchange Act and its rules and regulations.
We believe that we are operating our business in accordance with the exemption requirements of Section 3(c)(5)(C) of the 1940 Act. Please refer to Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K for further discussion. AVAILABLE INFORMATION We are subject to the reporting requirements of the Exchange Act and its rules and regulations.
TBAs purchased or sold for a forward settlement date are generally priced at a discount relative to TBAs settling in the current month. This price difference, often referred to as “drop income”, represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.
TBAs purchased or sold for a forward settlement date are generally priced at a discount relative to TBAs settling in the current month. This price difference, often referred to as “drop income,” represents the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from the trade date to the settlement date.
In addition to the policies described above, we manage our operations and investments to comply with various REIT limitations (as discussed further below in “Operating and Regulatory Structure”) and to avoid qualifying as an investment company as such term is defined in the Investment Company Act of 1940, as amended, (the "1940 Act") or as a commodity pool operator under the Commodity Exchange Act.
In addition to the Investment Policy described above, we manage our operations and investments to comply with various REIT limitations (as discussed further below in “Operating and Regulatory Structure”) and to avoid qualifying as an investment company as such term is defined in the Investment Company Act of 1940, as amended, (the "1940 Act") or as a commodity pool operator under the Commodity Exchange Act.
We also conduct our own independent evaluation of the credit risk on any non-Agency MBS, such that we do not rely solely on the security’s credit rating. Our Investment Risk Policy requires us to perform a variety of stress tests to model the effect of adverse market conditions on our investment portfolio value and our liquidity.
We also conduct our own independent evaluation of the credit risk on any non-Agency MBS, so that we do not rely solely on the security’s credit rating. Our Investment Policy requires us to perform a variety of stress tests to model the effect of adverse market conditions on our investment portfolio value and our liquidity.
Borrowings under uncommitted repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms. Repurchase agreement financing is provided principally by major financial institutions and broker-dealers acting as financial intermediaries for short-term cash investors including money market funds and securities lenders.
Borrowings under uncommitted repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed rollover terms. Repurchase agreement financing is provided principally by major financial institutions and broker-dealers acting as financial intermediaries for short-term cash investors, including money market funds and securities lenders.
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.
Increased competition in the market may reduce the available supply of investments and may drive prices of investments to levels that would negatively impact our ability to earn an acceptable amount of income from these investments. Competition may also reduce the availability of borrowing capacity at our repurchase agreement counterparties as such capacity is not unlimited.
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.
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 due to 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.
Within the overall limits established by these policies, our investment and capital allocation decisions depend on prevailing market conditions and other factors and may change over time in response to opportunities available in different economic and capital market environments.
Within the overall limits established by the Investment Policy, our investment and capital allocation decisions depend on prevailing market conditions and other factors and may change over time in response to opportunities available in different economic and capital market environments.
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.
The primary differences between our GAAP net income and our taxable income are: (i) unrealized gains and losses on investments (including TBAs accounted for as derivatives) are recognized in comprehensive 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.
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.
We invest in both Agency-issued and non-Agency issued CMBS IO, which comprised less than 2% of our investment portfolio as of December 31, 2024. The loans collateralizing Agency-issued CMBS IO pools are similar in composition to the pools of loans that collateralize CMBS as discussed above.
In addition to talent management and development initiatives, the Human Capital Strategy Planning process has included the following: • development of organizational core values and a plan to integrate these values into a variety of human capital processes and practices; • offering of a personal development program for all employees; • formal process for determining current and future human capital requirements; • implementation of improved performance measures designed to better determine individual and team developmental needs.
In addition to talent management and development initiatives, the Human Capital Strategy Planning process has included the following: 5 • development of organizational core values and a plan to integrate these values into a variety of human capital processes and practices; • offering personal and professional development programs for all employees; • formal process for determining current and future human capital requirements; • implementing improved performance measures designed to determine individual and team developmental needs better.
Our Board of Directors may also adjust the Company’s Investment Policy and Investment Risk Policy from time to time based on macroeconomic expectations, market conditions, and risk tolerances among other factors.
Our Board of Directors may also adjust the Company’s Investment Policy from time to time based on macroeconomic expectations, market conditions, and risk tolerances..
Dividend distributions to our shareholders in excess of REIT taxable income are considered to be a return of capital to the shareholder. We use the calendar year for financial reporting in accordance with GAAP as well as for tax purposes.
Dividend distributions to our shareholders in excess of REIT taxable income are considered a return of capital to the shareholder. We use the calendar year for financial reporting in accordance with GAAP and for tax purposes.
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.
As of December 31, 2024, we had 22 full and part-time employees with an average tenure of 10.8 years, and our voluntary turnover rate was 4% for the three years ended December 31, 2024. 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.
See “Factors that Affect Our Results of Operations and Financial Condition” below, Item 1A of Part I, “Risk Factors”, and Item 7A of Part II, “Quantitative and Qualitative Disclosures About Market Risk” of this Annual Report on Form 10-K for further discussion . RMBS.
See “Risk Factors—Factors that Affect Our Results of Operations and Financial Condition” in Part I, Item 1A, and “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of this Annual Report on Form 10-K for further discussion . RMBS.
Factors that Affect Our Results of Operations and Financial Condition Our financial performance is largely driven by the performance of our investment portfolio and related financing and hedging activity and may be impacted by a number of factors such as the absolute level of interest rates, the relative slope of interest rate curves, changes in interest rates and market expectations of future interest rates, actual and estimated future prepayment rates on our investments, supply of and competition for investments, the influence of economic conditions on the credit performance of our investments, and market required yields as reflected by market spreads.
Factors that Affect Our Results of Operations and Financial Condition Our financial performance is primarily driven by the performance of our investment portfolio and related financing and hedging activity and may be impacted by several factors, such as the absolute level of interest rates, the relative slope of interest rate curves, changes in interest rates and market expectations of future interest and prepayment rates, actual prepayments received on our investments, supply of and competition for investments, the influence of economic conditions on the credit performance of our investments, and market required yields as reflected by market spreads.
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.
CMBS. Our CMBS investments comprised less than 1% of our investment portfolio as of December 31, 2024, and are 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.
We will post on our website amendments to the Code of Conduct or waivers from its provisions, if any, which are applicable to any of our directors or executive officers in accordance with the requirements of the SEC or the NYSE. The information on our website is not a part of, nor is it incorporated by reference, into this report.
We will post amendments to the Code of Conduct or waivers from its provisions, if any, on our website that apply to any of our directors or executive officers in accordance with the requirements of the SEC or the NYSE. 8 The information on our website is not a part of, nor is it incorporated by reference, into this Annual Report.
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.
The following table summarizes our dividends declared per share and their related tax characterization for the periods indicated: Tax Characterization Total Dividends Paid Per Share Ordinary Capital Gain Return of Capital Common dividends declared: Year ended December 31, 2024 $ 1.27707 $ — $ 0.30293 $ 1.58000 Year ended December 31, 2023 $ 0.74112 $ — $ 0.81888 $ 1.56000 Preferred Series C dividends declared: Year ended December 31, 2024 $ 1.72500 $ — $ — $ 1.72500 Year ended December 31, 2023 $ 1.72500 $ — $ — $ 1.72500 Qualification as a REIT Qualification as a REIT requires that we satisfy various tests relating to our income, assets, distributions, and ownership.
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.
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, 2024, is $96.3 million, which includes $99.9 million related to the amortization of net deferred tax hedge gains.
We also purchase to-be-announced securities (“TBAs” or “TBA securities”) as a means of investing in non-specified fixed-rate Agency RMBS, and from time to time, we may also sell TBA securities as a means of economically hedging our book value exposure to Agency RMBS.
We also purchase TBA securities (“TBAs”) as a means of investing in non-specified fixed-rate Agency RMBS, and from time to time, we may also sell TBA securities to economically hedge our book value exposure to Agency RMBS.
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”).
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”).
Income determined under GAAP differs from income determined under U.S. federal income tax rules primarily because of temporary differences in income and expense recognition.
Income determined under GAAP differs from income determined under U.S. federal income tax rules due to permanent and temporary differences in income and expense recognition.
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.
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.
These policies also place limits on certain risks to which we are exposed, such as interest rate risk, prepayment risk, earnings at risk, liquidity risk, and shareholders’ equity at risk from changes in fair value of our investment securities, and also set forth limits for the Company’s overall leverage.
The Investment Policy also places limits on certain risks to which we are exposed, such as interest rate risk, liquidity risk, and shareholders’ equity at risk from changes in the fair value of our investment securities. Also, it sets forth limits for the Company’s overall leverage and who is expressly authorized to trade.
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.
As of December 31, 2024, we were primarily invested in Agency MBS, of which over 97% are residential MBS (“Agency RMBS”), including to-be-announced (“TBA”) securities. The remainder of our investment portfolio as of December 31, 2024, was comprised of Agency commercial MBS (“Agency CMBS”) and Agency and non-Agency CMBS interest-only (“CMBS IO”) securities.
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 .
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 . To maintain our REIT status, we must not be deemed to be closely held and must have more than 100 shareholders.
Our Investment Policy currently limits our investment in non-Agency MBS that are rated BBB+ or lower at the time of purchase by any of the nationally recognized statistical ratings organizations to $250 million in market value and limits our shareholders’ equity at risk with respect to such investments to a maximum of $50 million.
Our Investment Policy currently limits our investment in non-Agency MBS that are rated BBB+ or lower at the time of purchase by any of the nationally recognized statistical ratings organizations to 10% of total shareholders’ equity.
In order to maintain our REIT status, we must not be deemed to be closely held and must have more than 100 shareholders. The closely held prohibition requires that not more than 50% of the value of our outstanding shares be owned by five or fewer persons at any time during the last half of our taxable year.
The closely held prohibition requires that not more than 50% of the value of our outstanding shares be owned by five or fewer persons at any time during the last half of our taxable year. The "more than 100 shareholders" rule requires that we have at least 100 shareholders for 335 days of a twelve-month taxable year.
We believe a supportive, collaborative, engaging and equitable culture is key to attracting and retaining skilled, experienced and talented employees as well as fostering the development of the Company’s next generation of leaders.
We believe a supportive, collaborative, engaging, and equitable culture is key to attracting and retaining skilled, experienced, and talented employees and fostering the development of the Company’s next generation of leaders. We have implemented a formal operating process to track, manage, and monitor key corporate goals for the Company and our employees.
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.
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. OPERATING POLICIES AND RISK MANAGEMENT We invest our capital and manage our risk according to our “Investment Policy,” which is approved by our Board of Directors.
HEDGING STRATEGY We use derivative instruments to economically hedge our exposure to adverse changes in interest rates resulting from our ownership of primarily fixed-rate investments financed with short-term repurchase agreements. Changes in interest rates can impact net interest income, the market value of our investments, and therefore, our book value per common share.
HEDGING STRATEGY We use derivative instruments to economically hedge our exposure to adverse changes in interest rates resulting from our ownership of primarily longer-term fixed-rate investments financed using short-term repurchase agreements with interest rates that reset each time we renew our borrowing.
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.
ENVIRONMENTAL, SOCIAL, AND CORPORATE GOVERNANCE We have adopted the Sustainability Accounting Standards Board (“SASB”) Conceptual Framework, and we have made disclosures available on our website in accordance with the Financials Sector standards of the SASB. The information on our website is not a part of, nor is it incorporated by reference, into this Annual Report.
The "more than 100 shareholders" rule requires that we have at least 100 shareholders for 335 days of a twelve-month taxable year. If we failed to satisfy the ownership requirements, we would be subject to fines and be required to take curative action to meet the ownership requirements in order to maintain our REIT status.
If we failed to satisfy the ownership requirements, we would be subject to fines and required to take curative action to meet the ownership requirements in order to maintain our REIT status.
Since CMBS IO securities have no principal associated with them, the interest payments received are based on the unpaid principal balance of the underlying pool of mortgage loans, which is often referred to as the notional amount. Yields on CMBS IO securities are dependent upon the performance of the underlying loans.
Non-Agency issued CMBS IO are backed by loans secured by many different property types, including multifamily, office buildings, hospitality, and retail, among others. Since CMBS IO securities have no principal associated with them, the interest payments received are based on the unpaid principal balance of the underlying mortgage loan pool, which is commonly referred to as the notional amount.
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.
These values propel us to seek different perspectives and build diversity of thought, which is essential in our business. We hire, evaluate, reward, and promote based on experience, performance, and values. Health, Safety, and Wellness The Company strives to offer employees a healthy work-life balance and an open environment in which they are encouraged to offer thoughts and opinions.
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.
The Investment Policy sets forth investment and risk limitations related to the Company's investment activities and sets parameters for the Company's investment and capital allocation decisions.
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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.
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Yields on CMBS IO securities depend on the underlying loans’ performance.
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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.
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Changes in interest rates can impact net interest income, the market value of our investments, and therefore, our book value per common share.
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ENVIRONMENTAL, SOCIAL, AND CORPORATE GOVERNANCE INITIATIVES We believe that environmental, social, and corporate governance ("ESG") practices and initiatives are important in sustaining and growing the Company. Our ESG practices seek to create value by improving the environment and the lives of our employees, shareholders, business partners, and the community.
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Further, we have been increasing employee engagement through monthly Company-wide meetings and an anonymous survey to assess employee satisfaction and solicit feedback on the employee experience at the Company.
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We continually search for opportunities in pursuit of the long-term success of our business and to enhance the communities where we operate through corporate giving, employee volunteering, human capital development, and environmental sustainability programs. Our Board of Directors has formal oversight of our ESG strategies, policies, activities, and communications, including for purposes of risk management.
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Dynex Values As part of our mission and values, Dynex focuses on key attributes that each employee, board member, consultant, and business partner embodies.
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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.
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Delivering value, being curious, building trust, and being kind allow us to build a winning team that is focused on alignment with shareholders, being prepared, looking around corners for potential risks, being a trusted partner, and also helping each other develop and grow professionally.
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Diversity and Inclusion We promote diversity within our workforce and believe diversity extends beyond gender, race, ethnicity, age and sexual orientation to include different perspectives, skills, and experiences and socioeconomic backgrounds.
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We declared common stock dividends of $1.60 for the year ended December 31, 2024. Our monthly dividend of $0.15 for December 2024 is recognized in the year ended December 31, 2024, for GAAP purposes, but it is not recognized as a taxable dividend until it is paid in January 2025.
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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.
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As such, the total dividends declared for tax purposes is $1.58 for the year ended December 31, 2024.
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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.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese 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.
Biggest changeA 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 dividends at a level that we had previously paid before the change in strategy.
A sudden reduction in the liquidity of our investments could limit our ability to finance or could make it difficult to sell investments if the need arises. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the fair value at which we have previously recorded our investments.
A sudden reduction in the liquidity of our investments could limit our ability to finance or make it difficult to sell investments if the need arises. If we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the fair value at which we have previously recorded our investments.
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.
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 credit rating agencies may not accurately reflect the risks associated with those securities.
Such changes may have a negative impact on the value of securities that we own. RISKS RELATED TO OUR FINANCING AND HEDGING ACTIVITIES Our use of leverage, primarily through repurchase agreements, to enhance shareholder returns increases the risk of volatility in our results and could lead to material decreases in comprehensive income, shareholders’ equity, dividends, and liquidity.
Such changes may have a negative impact on the value of securities that we own. RISKS RELATED TO LEVERAGE, FINANCING AND HEDGING ACTIVITIES Our use of leverage, primarily through repurchase agreements, to enhance shareholder returns increases the risk of volatility in our results and could lead to material decreases in comprehensive income, shareholders’ equity, dividends, and liquidity.
RISKS RELATED TO OUR QUALIFICATION AS A REIT AND TAX RELATED OR OTHER REGULATORY MATTERS If we fail to properly conduct our operations, we may not qualify for exemption under the 1940 Act, which may reduce our flexibility and limit our ability to pursue certain opportunities.
RISKS RELATED TO OUR QUALIFICATION AS A REIT AND TAX-RELATED OR OTHER REGULATORY MATTERS If we fail to conduct our operations properly, we may not qualify for exemption under the 1940 Act, which may reduce our flexibility and limit our ability to pursue certain opportunities.
If the IRS were to successfully challenge the opinion, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
If the IRS were to challenge the opinion successfully, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
The terms of our outstanding preferred stock provide that, upon occurrence of a change of control (as defined in the Articles of Incorporation), each holder of our outstanding preferred stock may have the right to convert, in conjunction with a change in control, all or part of such outstanding preferred stock held by such holder into a number of shares of our common stock per share of outstanding preferred stock based on the formulas set forth in our Articles of Incorporation.
The terms of our outstanding preferred stock provide that, upon the occurrence of a change of control (as defined in the Articles of Incorporation), each holder of our outstanding preferred stock may have the right to convert, in conjunction with a change in control, all or part of such outstanding preferred stock held by such holder into a number of shares of our common stock per share of outstanding preferred stock based on the formulas set forth in our Articles of Incorporation.
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.
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.
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.
It can be difficult to predict the impact on interest rates from 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, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from prohibited transactions, we may hold some of our assets through a taxable REIT subsidiary (“TRS”) or other subsidiary corporations that will be subject to corporate-level income tax at regular rates to the extent that such TRS does not have an NOL carryforward.
In addition, to meet the REIT qualification requirements or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from prohibited transactions, we may hold some of our assets through a taxable REIT subsidiary (“TRS”) or other subsidiary corporations that will be subject to corporate-level income tax at regular rates to the extent that such TRS does not have an NOL carryforward.
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.
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.
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.
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.
It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow and our profitability.
It is possible, however, that the IRS could assert that we did not own the securities during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT. 19 Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow and our profitability.
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 use of hedging strategies to mitigate our interest rate risk may not be effective and may adversely affect our net 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.
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.
An increase in involuntary prepayments will result in the 11 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.
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.
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 will have to repay more cash to settle the original borrowing than we could borrow from the new counterparty.
In addition to understanding the key risks described below, investors should understand that it is not possible to predict or identify all risk factors, and consequently, the following is not a complete discussion of all potential risks or uncertainties. Additionally, investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.
In addition to understanding the key risks described below, investors should understand that it is not possible to predict or identify all risk factors. Consequently, the following is not a complete discussion of all potential risks or uncertainties. Additionally, investors should not interpret the disclosure of a risk to imply that the risk has not already materialized.
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.
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 CMBS IO is particularly acute because the investment consists entirely of premium.
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.
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 14 agreement, that violation could lead to defaults, accelerations, or other adverse events under other agreements, as well.
Since our investment portfolio consists substantially of fixed rate instruments, rising interest rates will reduce the market value of our MBS as market participants will in turn demand higher yielding assets. Reductions in the market value of our MBS typically result in margin calls from our lenders, which impacts our liquidity.
Since our investment portfolio consists substantially of fixed rate instruments, rising interest rates will reduce the market value of our MBS as market participants will in turn demand higher yielding 9 assets. Reductions in the market value of our MBS typically result in margin calls from our lenders, which impacts our liquidity.
A return of capital reduces the basis of a shareholder’s investment in our common stock to the extent of such basis and is treated as capital gain thereafter. Our strategy of paying a monthly dividend is designed in part to attract retail shareholders that invest in stocks which pay a monthly dividend.
A return of capital reduces the basis of a shareholder’s investment in our common stock to the extent of such basis and is treated as capital gain thereafter. Our strategy of paying a monthly dividend is designed in part to attract retail shareholders that invest in stocks that pay a monthly dividend.
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 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 decline.
ITEM 1A. RISK FACTORS The following is a discussion of the risk factors that we believe are material to our business. These are factors which, individually or in the aggregate, we think could cause our actual results to differ significantly from anticipated or historical results.
ITEM 1A. RISK FACTORS The following is a discussion of the risk factors we believe are material to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ significantly from anticipated or historical results.
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.
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) may be limited by U.S. federal income tax rules 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.
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.
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.
In addition, if we fail to meet certain other thresholds for distribution of our taxable income, we may be subject to a non-deductible 4% excise tax.
In addition, if we fail to meet certain other thresholds for the distribution of our taxable income, we may be subject to a non-deductible 4% excise tax.
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.
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 that are secured by the investments sold pursuant thereto.
Taxable shareholders receiving common stock will be required to include in income, as a dividend, the full value of such stock, to the extent of our current and accumulated earnings for federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.
Taxable shareholders receiving common stock will be required to include in income, as a dividend, the full value of such stock, to the extent of our current and accumulated earnings for federal income tax purposes. As a result, a U.S. shareholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received.
Our hedging instruments can be traded on an exchange or administered through a clearing house or under bilateral agreements between us and a counterparty. Bilateral agreements expose us to increased counterparty risk, and we may be at risk of loss of any collateral held by a hedging counterparty if the counterparty becomes insolvent or files for bankruptcy.
Our hedging instruments can be traded on an exchange, or administered through a clearing house or under bilateral agreements between us and a counterparty. Bilateral agreements expose us to increased counterparty risk, and we may be at risk of losing any collateral held by a hedging counterparty if the counterparty becomes insolvent or files for bankruptcy.
A disruption or breach could also lead to the unauthorized access, release, misuse, loss or destruction of confidential information, including the personal or confidential information of our employees or third parties, which could lead to regulatory fines, increased expenses due to the costs of remediating a breach, reputational harm, and fewer third parties willing to do business with us.
A disruption or breach could also lead to the unauthorized access, release, misuse, loss, or destruction of proprietary or confidential information, including the personal or confidential information of our employees or third parties, which could lead to regulatory fines, litigation, increased expenses due to the costs of remediating a breach, reputational harm, and fewer third parties willing to do business with us.
Moreover, the amount of financing we receive under our financing agreements will be directly related to our lenders’ valuation of the assets subject to such agreements.
Moreover, the amount of financing we receive under our financing agreements will be related to our lenders’ valuation of the assets subject to such agreements.
If we do not have the funds available to meet our REIT distribution requirements or to avoid corporate and excise taxes, we could be forced to use unattractive options to generate the necessary cash, such as, for example, selling assets at distressed prices, borrowing on unfavorable terms, distributing amounts that would otherwise be invested or used to repay debt, or paying dividends in the form of common stock.
If we do not have the funds available to meet our REIT distribution requirements or to avoid corporate and excise taxes, we could be forced to use unattractive options to generate the necessary cash, such as selling assets at 16 distressed prices, borrowing on unfavorable terms, distributing amounts that would otherwise be invested or used to repay debt, or paying dividends in the form of common stock.
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.
In addition, virtually all of our repurchase agreements and derivative agreements require us to maintain our status as a REIT and be exempt from the provisions of the 1940 Act. Compliance with these covenants depends on market factors, the strength of our business, and operating results.
Any compliance failures associated with share repurchases could have a material negative effect on our business, financial condition and results of operations. Share repurchases also may negatively impact our ability to invest in our target assets in the future.
Any compliance failures associated with share repurchases could have a material adverse effect on our business, financial condition, and results of operations. Share repurchases also may negatively impact our ability to invest in our target assets in the future.
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.
Leverage increases the return on our invested capital if we earn a greater return on investments than our cost of borrowing but decreases return on our invested capital if borrowing costs increase and we have not adequately hedged against such an increase.
If a lender determines that the value of the assets has decreased, the lender has the right to initiate a margin call, which requires us to transfer additional assets to the lender to collateralize the existing borrowing or to repay a portion of the outstanding borrowings.
If a lender determines that the value of the assets has decreased, the lender has the right to initiate a margin call, which requires us to transfer additional assets, including cash, to the lender to collateralize the existing borrowing or to repay a portion of the outstanding borrowings.
Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities, if the lender defaults on its obligation to resell the same securities back to us, we would incur a loss on the transaction equal to the difference between the value of the securities sold and the amount borrowed from the lender including accrued interest.
Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities, if the lender defaults on its obligation to resell the same securities back to us at the end of the transaction term, we would incur a loss on the transaction equal to the difference between the value of the securities sold and the amount borrowed from the lender including accrued interest.
Additionally, if we default on one of our obligations under a repurchase agreement, the lender can terminate the transaction, sell the underlying collateral and cease entering into any other repurchase transactions with us. Any losses we incur on our repurchase transactions could adversely affect our earnings and reduce our ability to pay dividends to our shareholders.
Additionally, if we default on one of our obligations under a repurchase agreement, the lender can 15 terminate the transaction, sell the underlying collateral and cease entering into any other repurchase transactions with us. Any losses we incur on our repurchase transactions could adversely affect our liquidity, earnings, and therefore reduce our ability to pay dividends to our shareholders.
To qualify as a REIT and avoid certain taxes, we must generally distribute at least 90% of our taxable income annually to our stockholders, subject to certain adjustments and excluding any net capital gain.
To qualify as a REIT and avoid certain taxes, we must generally distribute at least 90% of our taxable income annually to our shareholders, subject to certain adjustments and excluding any net capital gain.
Owning securities that are traded in OTC markets may increase our liquidity risk, particularly in a volatile market environment, because our assets may be more difficult to borrow against or sell in a prompt manner and on terms acceptable to us which may result in losses upon sale of these assets.
Owning securities that are traded in OTC markets may increase our liquidity risk, particularly in a volatile market environment, because our assets may be more difficult to borrow against or sell promptly and on terms acceptable to us, which may result in losses upon sale of these assets.
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.
As of December 31, 2024, 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.
Rather, under the current law, qualified REIT dividends constitute “qualified business income” and thus a 20% deduction is available to individual taxpayers with respect to such dividends, resulting in a 29.6% maximum federal tax rate (plus the 3.8% surtax on net investment income, if applicable) for individual U.S. shareholders.
Instead, under the current law, qualified REIT dividends constitute “qualified business income,” and thus, a 20% deduction is available to individual taxpayers with respect to such dividends, resulting in a 29.6% maximum federal tax rate (plus the 3.8% surtax on net investment income, if applicable) for individual U.S. shareholders.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, after consideration of any remaining NOL carryforward but not considering any dividends paid to our shareholders during the respective tax year. The resulting corporate tax liability could be material.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax, after consideration of any remaining NOL carryforward but not considering any dividends paid to our shareholders during 18 the respective tax year. The resulting corporate tax liability could be material.
This would severely impact our profitability and ability to pay dividends to our shareholders. In order to maintain REIT distribution requirements, we may be forced to increase our dividend distributions which could cause us to liquidate attractive assets or incur debt on unfavorable terms.
This would severely impact our business model, profitability, and ability to pay dividends to our shareholders. To maintain REIT distribution requirements, we may be forced to increase our dividend distributions which could cause us to liquidate attractive assets or incur debt on unfavorable terms.
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.
In addition, if the new 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 AI and machine learning technology.
Should a trustee not be required to take action under the terms of the securities, or fail to take action, we could experience losses. Provisions requiring yield maintenance charges, prepayment penalties, defeasance, or lock-outs in CMBS IO securities may not be enforceable.
Should a trustee not be required to act under the terms of the securities or fail to take action, we could experience losses. Provisions requiring yield maintenance charges, prepayment penalties, defeasance, or lockouts in CMBS IO securities may not be enforceable.
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.
Interest rate fluctuations impact us in multiple ways. 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.
We believe that we have complied with all of the requirements set forth above as of December 31, 2023.
We believe that we have complied with all of the requirements set forth above as of December 31, 2024.
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.
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, common stock dividends, market price of our stock, and book value per common share.
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.
In an effort to tame rising inflation levels, the Federal Reserve aggressively increased the Federal Funds Rate starting in the first quarter of 2022 and 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.
Unless we were entitled to relief under certain Tax Code provisions, we also would be disqualified from taxation as a REIT until the fifth taxable year following the year for which we failed to qualify as a REIT.
Unless we are entitled to relief under certain Tax Code provisions, we also will be disqualified from taxation as a REIT until the fifth taxable year following the year for which we failed to qualify as a REIT.
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.
Our Board of Directors has approved a share repurchase program that 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 our share repurchases may impact.
Climate change and regulations intended to control its impact may affect the value of our investments and result in higher compliance and energy costs which would impact the broader economy. There can be no assurance that climate change will not have a material adverse effect on our assets, operations or business. 22 ITEM 1B. UNRESOLVED STAFF COMMENTS None.
Climate change and regulations intended to control its impact may affect the value of our investments and result in higher compliance and energy costs, which would impact the broader economy. There can be no assurance that climate change will not have a material adverse effect on our assets, operations, or business.
If such support is modified or withdrawn, if the U.S. Treasury fails to inject new capital as needed, or if the GSEs are released from conservatorship, the market value of Agency MBS may significantly decline, making it difficult for us to obtain repurchase agreement financing or forcing us to sell assets at substantial losses.
Treasury fails to inject new capital as needed, or if the GSEs are released from conservatorship, the market value of Agency MBS may significantly decline, making it difficult for us to obtain repurchase agreement financing or forcing us to sell assets at substantial losses.
Even with all reasonable security efforts, not every system or network breach can be prevented or even detected. Furthermore, because the vast majority of our employees are working remotely from their homes, there is an increased risk of disruption to our operations because our employees’ residential networks and infrastructure may not be as secure as our office environment.
Even with all reasonable security efforts, not every system or network breach can be prevented or even detected. Furthermore, because certain of our employees are working remotely, there is an increased risk of disruption to our 21 operations because our employees’ residential networks and infrastructure may not be as secure as our office environment.
A material reduction in our liquidity could lead to a reduction of the dividend or potentially the payment of the dividend in Company stock subject to the Tax Code. Interest rate fluctuations could negatively impact our net interest income, comprehensive income, book value per common share, dividends, and liquidity. Interest rate fluctuations impact us in multiple ways.
A material reduction in our liquidity could lead to a reduction of the dividend or potentially the payment of the dividend in Company stock subject to the Tax Code rules and limitations. Interest rate fluctuations could negatively impact our net interest income, comprehensive income, book value per common share, dividends, liquidity, and the market price of our stock.
We amortize the premiums we pay for a security using the effective interest method, so as prepayments increase, the amortization expense of any remaining premium we paid for an investment will also increase, and thereby result in a decline in net interest income.
We amortize the premiums we pay for a security using the effective interest method, so as prepayments increase, the amortization expense of any remaining premium we paid for an investment will also increase, and thereby negatively impact interest income.
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.
Our projected amortization of these deferred tax hedge gains into taxable income for 2025 is currently estimated to be $100.1 million; however, this amount is subject to change based on a number of factors, particularly given the degree of uncertainty about the trajectory of interest rates.
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.
Furthermore, we may have to dispose of assets at 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. 13 In addition, if the Federal Reserve revises capital requirements for lenders, the economy may slow or reduce capital market liquidity.
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.
To maintain our investment portfolio size and our earnings, we need to reinvest capital received from these events into new investments, and if market yields on new investments are lower, our interest income will decline.
Significant margin calls may have a material adverse effect on our results of operations, financial condition, business, liquidity, and ability to make distributions to our shareholders, and could cause the value of our capital stock to decline.
Significant margin calls related to our repurchase agreement borrowings or variation margin related to our hedging instruments may have a material adverse effect on our results of operations, financial condition, business, liquidity, and ability to make distributions to our shareholders, and could cause the value of our capital stock to decline.
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 of December 31, 2024, we have $719.0 million of deferred tax hedge gains, which were recognized in GAAP net income (loss) during 2024 and prior periods.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. shareholders that are taxed at individual rates is lower than corresponding maximum ordinary income tax rates. Dividends payable by REITs, however, are generally not eligible for the reduced rates on qualified dividend income.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends. The maximum tax rate applicable to “qualified dividend income” payable to U.S. shareholders that are taxed at individual rates is lower than the corresponding maximum ordinary income tax rates.
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.
In 2022 and 2023, 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.
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.
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.
Qualifying as a REIT involves highly technical and complex provisions of the Tax Code, and a technical or inadvertent violation could jeopardize our REIT qualification. Maintaining our REIT status may reduce our flexibility to manage our operations.
Maintaining our REIT status may reduce our flexibility to manage our operations. Qualification as a REIT involves the application of highly technical and complex Tax Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification.
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.
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 the availability, pricing, liquidity, market value, and financing of our assets. 12 As conservator, the FHFA has assumed all the powers of the shareholders, directors, and officers of the GSEs with the goal of preserving and conserving their assets.
Tax opinions are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, we must emphasize that the opinion is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs.
In addition, we must emphasize that the opinion is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income.
If we are unable to negotiate a covenant waiver, or replace or refinance our assets under a new repurchase agreement on favorable terms or at all, our financial condition, results of operations and cash flows may be adversely affected.
If we are unable to negotiate a covenant waiver, or replace or refinance our assets under a new repurchase agreement on favorable terms or at all, we may be forced to sell assets at an inopportune time which will likely have a negative impact on our financial condition, results of operations, liquidity and cash flows.
The effects of climate change could affect our profitability and adversely impact the value of the real estate assets securing our investments. Changing market dynamics, global policy developments and the increasing frequency and impact of extreme weather events on critical infrastructure could have the potential to disrupt our business and the business of our third-party providers.
Changing market dynamics, global policy developments, and the increasing frequency and impact of extreme weather events on critical infrastructure could have the potential to disrupt our business and the business of our third-party providers.
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.
It is possible that our REIT distribution requirements may exceed the net cash we generate from our operations. We have not established a minimum dividend payment level, and we may not have the ability to pay dividends in the future. Furthermore, our monthly dividend strategy could attract shareholders who are especially sensitive to the level and frequency of the dividend.
Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets.
Our business is materially affected by conditions in the mortgage and real estate markets as well as the broader financial markets. Significant adverse changes in financial market conditions can result in a deleveraging of the global financial system and the forced sale of large quantities of mortgage-related and other financial assets.
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.
Concerns over economic recession, inflation, subdued growth expectations, interest rate increases, changes to U.S. fiscal and monetary policy, trade wars, new or increased tariffs, geopolitical issues, unemployment, the availability and cost of financing, or conditions in the mortgage and real estate market have historically contributed, and may continue to contribute to increased and prolonged volatility and diminished expectations for the economy and markets.
In addition, if the Federal Reserve revises capital requirements for lenders, the economy may slow or reduce capital market liquidity. As a result, our lenders may be required to significantly increase the cost of the financing that they provide to us, or the amounts of collateral they require as a condition to providing us with financing.
As a result, our lenders may be required to significantly increase the cost of the financing that they provide to us or the amounts of collateral they require as a condition to providing us with financing.
Recent technological advances in AI and machine learning technology may pose risks to us. In the future, we may utilize machine learning to leverage new technology and create efficiencies or opportunities. Our use of AI could give rise to legal or regulatory action, create liabilities, or materially harm our business.
Recent technological advances in AI and machine learning technology may pose risks to us. In the future, we may utilize machine learning to leverage new technology and create efficiencies or opportunities.
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).
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 22 requirements of the 1940 Act and qualification as a REIT).
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.
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, which would adversely affect our liquidity, earnings and ability to pay dividends to our shareholders.
Part of our investment strategy includes deciding whether to reinvest payments received on our existing investment portfolio. 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.
Based on market conditions, our leverage, and our liquidity profile, we may decide not to reinvest the cash flows we receive from our investment portfolio, or we may pursue alternate investment strategies.
Credit spreads change based on a number of factors, including, but not limited to, macroeconomic and systemic changes, factors specific to a particular security such as prepayment performance or credit performance, market psychology, and Federal Reserve monetary policies.
Credit spreads change based on several factors, including, but not limited to, macroeconomic and systemic changes, factors specific to a particular security such as prepayment performance or credit performance, market psychology, and Federal Reserve monetary policies. When credit spreads widen, the market value of our investments will decline because market participants typically require additional yield to hold riskier assets.
Furthermore, our monthly dividend strategy could attract shareholders that are especially sensitive to the level and frequency of the dividend. If we were to reduce the dividend or change back to a quarterly payment cycle, our share price could materially decline.
If we were to reduce the dividend or change back to a quarterly payment cycle, our share price could materially decline.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeTo mitigate the risk of a cybersecurity incident both internally and with third-parties, the Company’s IT consultants provide mandatory cybersecurity training for all employees and contractors. They also conduct periodic training and awareness campaigns by sending employees simulated phishing attacks. Results of these simulated phishing attacks are reviewed and reported to management and the Board of Directors.
Biggest changeOur IT team reports directly to the Company’s Chief Technology Officer (“CTO”) for executive oversight and accountability. To mitigate the risk of a cybersecurity incident both internally and with third parties, the Company’s IT team provides mandatory cybersecurity training for all employees and contractors. They also conduct periodic training and awareness campaigns by sending employees simulated phishing attacks.
In addition to training of its employees and consultants, the Company’s devices and servers are equipped with cybersecurity software applications, which are continuously monitored by an expert third-party managed security service provider that has numerous certifications recognized in the IT industry and provides security services for several Fortune 100 companies and certain highly secure government agencies.
In addition to training its employees and consultants, the Company’s devices and servers are equipped with cybersecurity software applications, which are continuously monitored by an expert third-party managed security service provider that has numerous certifications recognized in the IT industry and provides security services for several Fortune 100 companies and certain highly secure government agencies.
Management presents to the Board of Directors on our cybersecurity strategy, results of testing and training and, as needed, to inform the Board of Directors and Audit Committee of any new or emerging threats or risks. The Company is not aware of any material breaches in its cybersecurity operations during the three years ended December 31, 2023.
Management presents to the Board of Directors on our cybersecurity strategy, results of testing and training, and, as needed, to inform the Board of Directors and Audit Committee of any new or emerging threats or risks. The Company is not aware of any material breaches in its cybersecurity operations during the three years ended December 31, 2024.
Further, the Company has not identified any cybersecurity threats likely to materially affect the Company’s business strategy, results of operations, or financial conditions. For more information, please also refer to our risk factor related to our reliance on third-party service providers under Item 1A, “Risk Factors” of this Annual Report on Form 10-K. 23
Further, the Company has not identified any specific cybersecurity threats likely to materially affect the Company’s business strategy, results of operations, or financial conditions. For more information, please also refer to our risk factor related to our reliance on third-party service providers under Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
As a part of this assessment, the Audit Committee reviews and discusses the risks identified by management and the Company’s policies and practices in place to mitigate those cybersecurity-related risks.
As a part of these assessments, the Audit Committee reviews and discusses the risks identified by management and the Company’s policies and practices in place to mitigate those cybersecurity-related risks.
The Company’s IT services including, but not limited to, service desk support, endpoint management, network and server administration, cloud engineering, and cybersecurity and incident management, are provided by third-party consultants who are employed on a contract basis. Our IT consultants report directly to the Company’s CFO for executive oversight and accountability.
The Company’s IT services including, but not limited to, service desk support, endpoint management, network and server administration, cloud engineering, and cybersecurity and incident management, are provided by an IT team consisting of primarily third-party consultants who are employed on a contract basis with assistance from the Company’s IT employees.
Different data analytics techniques are used to detect suspicious system behavior, provide contextual information, and block malicious activity. Any detected threat or malicious activity will immediately alert the security team for further investigation and remediation. The Audit Committee oversees the Company’s enterprise risk management program, which includes an annual assessment of cybersecurity risk.
Different data analytics techniques are used to detect 23 suspicious system behavior, provide contextual information, and block malicious activity. Any detected threat or malicious activity will immediately alert the security team for further investigation and remediation.
Added
The results of these simulated phishing attacks are reviewed and reported to management and the Board of Directors.
Added
Periodically, the Company engages a third party to perform both internal and external penetration testing to assess strengths and vulnerabilities of the Company’s readiness against cyber attacks. The Audit Committee oversees the Company’s enterprise risk management program, which includes periodic assessments of cybersecurity risk.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeAccordingly, we do not make or endorse any predictions as to future share performance. The Company’s Board of Directors has authorized the repurchase of up to $60 million of the Company’s outstanding shares of common stock and up to $30 million of the Company’s Series C Preferred Stock through March 31, 2024.
Biggest changeAccordingly, we do not make or endorse any predictions as to future share 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, 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.
The following graph is a five-year comparison of shareholders’ cumulative total return, assuming $100 invested at the close of trading on December 31, 2019 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) 2018 2019 2020 2021 2022 2023 Dynex Capital, Inc.
Cumulative Total Stockholder Returns as of December 31, Index (1) 2019 2020 2021 2022 2023 2024 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 349 holders of record as of February 20, 2024.
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 12, 2025.
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.
On that date, the closing price of our common stock on the NYSE was $13.26 per share. The Company currently pays a monthly dividend on its common stock and declared a total of $1.60 per common share for the year ending December 31, 2024.
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.
During the year ended December 31, 2024, the Company issued 16.8 million shares of its common stock through its ATM program at an aggregate value of $207.6 million, net of $2.6 million in broker commissions, of which 5.2 million shares were issued during the fourth quarter of 2024 at an aggregate value of $64.4 million, net of $0.8 million in broker commissions.
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.
The Program is authorized through April 30, 2026, although it may be modified or terminated by the Board of Directors at any time. The Company has an at-the-market agreement ("ATM") whereby the Company may offer and sell through its sales agents up to approximately 69.4 million shares of common stock.
Common 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.
Common Stock $ 100.00 $ 117.01 $ 119.68 $ 101.30 $ 113.48 $ 129.01 S&P 500 Index $ 100.00 $ 118.39 $ 152.34 $ 124.73 $ 157.48 $ 196.85 S&P 500 Financials Index $ 100.00 $ 98.24 $ 132.50 $ 118.49 $ 132.83 $ 173.35 FTSE NAREIT mREIT Index $ 100.00 $ 81.38 $ 94.05 $ 69.27 $ 79.79 $ 79.96 (1) Source: Bloomberg 25 The historical information set forth above is not necessarily indicative of future performance.
Removed
Subject to applicable securities laws and the terms of the Series C Preferred Stock designation, which is contained in our Articles of Incorporation, future repurchases of common stock will be made at times and in amounts as the Company deems appropriate, provided that the repurchase price per share is less than the Company's estimate of the current net book value of a share of common stock.
Added
The Company’s Board of Directors has authorized a share repurchase program (the “Program”) of up to $100 million of the Company’s outstanding shares of common stock and up to $50 million of the Company’s Series C Preferred Stock through open market transactions, privately negotiated transactions, trading plans adopted in accordance with Rule 10b5-1 under the Exchange Act, block transactions or otherwise.
Added
The Program permits the Company to repurchase shares of common stock or Series C Preferred Stock at any time or from time-to-time at management’s discretion.
Added
The decision to purchase shares will depend on a variety of factors, including, but not limited to, the market prices of the common stock and the Series C Preferred Stock, as applicable, general market and economic conditions, and applicable legal and regulatory requirements.
Added
The Program does not obligate the Company to purchase any shares, and any open market repurchases under the Program will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price, and volume of open market stock repurchases.

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: 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.
Biggest changeThe following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated: December 31, 2024 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% $ 655,356 $ 666,107 $ 516,541 51 5.0 % 6.49 5.42 % 2.5% 561,625 582,776 463,402 52 4.3 % 6.37 5.33 % 4.0% 324,615 325,091 299,774 45 6.4 % 5.92 5.25 % 4.5% 1,323,371 1,291,410 1,252,219 27 7.4 % 5.79 5.33 % 5.0% 2,356,262 2,315,518 2,284,613 18 5.7 % 5.19 5.47 % 5.5% 2,193,064 2,207,296 2,178,180 13 5.3 % 4.53 5.61 % 6.0% 303,470 307,211 307,509 13 13.2 % 3.60 5.74 % TBA 4.0% 462,000 424,917 421,796 n/a n/a 6.62 5.20 % TBA 4.5% 383,000 361,610 359,837 n/a n/a 5.95 5.35 % TBA 5.0% 710,000 693,938 684,706 n/a n/a 5.20 5.51 % TBA 5.5% 864,000 860,609 852,053 n/a n/a 4.21 5.73 % Total $ 10,136,763 $ 10,036,483 $ 9,620,630 23 6.1 % 5.22 5.49 % 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 % (1) Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.
This discussion also contains non-GAAP financial measures, which are discussed in the section “Non-GAAP Financial Measures.” For a complete description of our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Item 1 of Part I of this Annual Report on Form 10-K.
This discussion also contains non-GAAP financial measures, which are discussed in the section “Non-GAAP Financial Measures.” For a complete description of our business, including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1 of this Annual Report on Form 10-K.
We also include in our measure of liquidity the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement.
In our measure of liquidity, we also include the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement.
This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in fair value of the collateral and/or the failure by us to repay the borrowing at maturity.
This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in the fair value of the collateral and/or the failure by us to repay the borrowing at maturity.
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.
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, 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.
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
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; 33 • 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.
We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment.
We include 100% of the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment.
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility.
We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. We do not believe we are subject to any covenants that materially restrict our financing flexibility.
Additional sources may also include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock.
Additional sources may include proceeds from the sale of investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock.
Forward-looking statements are inherently subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Not all of these risks and other factors are known to us.
Forward-looking statements are inherently subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Not all these risks and other factors are known to us.
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.
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.
The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings.
The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and uncommitted nature of the repurchase agreement borrowings.
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.
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 2025 or in any given year.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Part I, Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed.
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.
While it is not possible to identify all factors that may cause actual results to differ from historical results or 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 I, 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 wars between Russia and Ukraine and between Israel and Hamas, 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.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our financial statements and the related notes included in Part II, Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties.
If we make dividend distributions in excess of our operating cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale).
If we make dividend distributions in excess of our portfolio cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale).
Actual results, however, may differ from the estimated amounts we have recorded. The following discussion provides information on our critical accounting policies that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions.
Actual results, however, may differ significantly from the estimated amounts we have recorded. The following discussion provides information on our critical accounting policies, which require management's most difficult, subjective, or complex judgments, and may result in materially different results under different assumptions and conditions.
Treasury rate ranged from a low of 3.31% in April 2023 to a high of 4.99% in October 2023, yet ended the year where it started at 3.88%. Credit spreads, which were wider for the majority of 2023, also tightened during the fourth quarter of 2023.
Treasury rate ranged from a low of 3.31% in April 2023 to a high of 4.99% in October 2023, yet ended the year where it started at 3.88%. Credit spreads, which were wider for most of 2023, also tightened during the fourth quarter of 2023.
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.
Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 Please refer to “Results of Operations” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023 for a discussion of the results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022, which is incorporated herein by reference.
Forward-looking statements generally can be identified by use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize.
Forward-looking statements generally can be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could,” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize.
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.
Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business," as well as Part I, Item 1A, “Risk Factors” of this Form 10-K for additional important information regarding dividends declared on our taxable income.
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.
The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon several 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.
Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income or its distribution requirements in accordance with the Tax Code.
Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income, its distribution requirements in accordance with the Tax Code or total economic return.
However, these non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner.
Non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner.
Treasury market as well as the impact more broadly on fixed income and equity markets: • Uncertainties regarding the war between Russia and the Ukraine or Israel and Hamas 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 or any global health crisis.
Treasury market and the impact more broadly on fixed income and equity markets: 32 • Uncertainties regarding the war between Russia and Ukraine or Israel and Hamas and the related impacts on macroeconomic conditions, including, among other things, interest rates; • The financial position and creditworthiness 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 for our trading, portfolio management, and risk reporting 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 any global health crisis.
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.
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 7.9 times shareholders’ equity as of December 31, 2024.
We purchased $3.6 billion of Agency RMBS throughout the year when credit spreads were wider relative to December 31, 2023. As a 34 result, the fair value of our investment portfolio including TBA securities increased a net $68.4 million for the year ended December 31, 2023.
We purchased $3.6 billion of Agency RMBS throughout the year when credit spreads were wider relative to December 31, 2023. As a result, the fair value of our investment portfolio, including TBAs, increased a net $68.4 million for the year ended December 31, 2023.
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. According to Freddie Mac, 99.8% of the loans in K-deals are current as of November 2023.
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. According to Freddie Mac, 99.8% of the loans in K-deals are current as of September 2024.
FORWARD-LOOKING STATEMENTS Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act.
FORWARD-LOOKING STATEMENTS Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
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.
We were in full compliance with our debt covenants as of December 31, 2024, and we are not aware of circumstances that could potentially result in our non-compliance in the near 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.
Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, taking into account all information currently available to us, and are applicable only as of the date of this report.
Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, considering all information currently available to us, and are applicable only as of the date of this report.
Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.
Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in EAD because management views drop income as the economic equivalent of net interest income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date.
In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We also communicate frequently with our counterparties.
In performing these analyses, we will also consider the current state of the fixed-income markets and the repurchase agreement markets to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing.
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.
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 earnings available for distribution (“EAD”) to common shareholders (including per common share) and economic net interest income and the related metric economic net interest spread.
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.
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: 27% retail, 40% office, 4% multifamily, 10% hotel and 19% all other real estate categories.
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.
As of December 31, 2024, we had amounts outstanding under 27 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.
Derivative Assets and Liabilities The table below discloses details on the Company's interest rate hedges held as of December 31, 2023 compared to hedging portfolio held as of December 31, 2022: Notional Amount Long (Short) December 31, 2023 December 31, 2022 ($s in thousands) 30-year U.S. Treasury futures $ (700,000) $ — 10-year U.S. Treasury futures (4,180,000) (4,180,000) 5-year U.S.
The table below discloses details on the Company's interest rate hedges held as of December 31, 2024, compared to hedging portfolio held as of December 31, 2023: Notional Amount Long (Short) December 31, 2024 December 31, 2023 ($s in thousands) 30-year U.S. Treasury futures $ (516,500) $ (700,000) 10-year U.S.
Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash.
Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in cash. As of December 31, 2024, we had cash collateral posted to our counterparties of $244.4 million under these agreements.
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.
The weighted average haircut for our borrowings as of December 31, 2024, was consistent with prior periods, typically averaging less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 10-14% for borrowings collateralized with CMBS IO.
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.
Our repurchase agreement borrowings are 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.
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, frequent potential for a government shutdown, the impact on global markets stemming from global central bank policies, and the wars between Russia and Ukraine and between Israel and Hamas.
We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, the size of the Federal Reserve’s balance sheet, quantitative tightening or easing measures, the frequent potential for a government shutdown, and the impact on global markets stemming from global central bank policies.
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.
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, 2024 $ 6,563,120 $ 6,431,743 $ 6,568,805 September 30, 2024 6,423,890 5,943,805 6,461,475 June 30, 2024 5,494,428 5,410,282 5,529,856 March 31, 2024 5,284,708 5,365,575 5,469,434 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 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.
We generally fund our dividend distributions through our cash flows from operations.
We generally fund dividend distributions through portfolio cash flows.
The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value. Management reviews the assumptions and inputs utilized in the valuation techniques.
To determine each security's valuation, the pricing service uses either a market approach or income approach, which rely on observable market data. The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value.
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, 2023 ($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 $ (74,916) $ 141,263 $ 16,343 $ 82,690 Agency CMBS — 96 1,342 1,438 CMBS IO — 1,111 5,148 6,259 Other non-Agency and loans — 31 10 41 Subtotal (74,916) 142,501 22,843 90,428 TBA securities (1) (97,777) 75,713 — (22,064) Net (loss) gain on investments $ (172,693) $ 218,214 $ 22,843 $ 68,364 Interest rate hedging portfolio: U.S.
Treasury futures $ (46,955) $ 221,063 $ — $ 174,108 Interest rate swaps (2) 16,105 136,676 — 152,781 Net (loss) gain on interest rate hedges $ (30,850) $ 357,739 $ — $ 326,889 Total net gain (loss) $ 6,174 $ 138,345 $ (13,987) $ 130,532 Year Ended December 31, 2023 ($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 $ (74,916) $ 141,263 $ 16,343 $ 82,690 Agency CMBS — 96 1,342 1,438 CMBS IO — 1,111 5,148 6,259 Other non-Agency and loans — 31 10 41 Subtotal (74,916) 142,501 22,843 90,428 TBA securities (1) (97,777) 75,713 — (22,064) Net (loss) gain on investments $ (172,693) $ 218,214 $ 22,843 $ 68,364 Interest rate hedging portfolio: U.S.
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.
The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated: December 31, 2024 ($s in thousands) Amortized Cost Fair Value WAVG Life Remaining (1) WAVG Market Yield (2) Agency CMBS $ 99,848 $ 95,463 2.6 4.76 % Agency CMBS IO 109,335 103,606 5.7 7.21 % Non-Agency CMBS IO 8,256 10,780 1.3 26.42 % Total $ 217,439 $ 209,849 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 (1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated.
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.
Treasury rates for the past year and information regarding market spreads as of and for the periods indicated: 27 Market Spreads as of: Change in Spreads YTD Investment Type: (1) December 31, 2024 September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 Agency RMBS: 2.0% coupon 89 83 86 84 76 13 2.5% coupon 93 83 87 84 78 15 4.0% coupon 69 71 78 74 74 (5) 4.5% coupon 68 70 73 71 73 (5) 5.0% coupon 69 66 67 68 69 — 5.5% coupon 72 64 68 65 66 6 6.0% coupon 74 54 65 62 60 14 Agency DUS (Agency CMBS) (2) 96 104 95 94 105 (9) Freddie K AAA IO (Agency CMBS IO) (2) 120 135 150 165 180 (60) AAA CMBS IO (Non-Agency CMBS IO) (2) 119 122 135 168 225 (106) (1) Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data.
(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.
(4) Financing cost 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. (6) Represents a non-GAAP measure.
If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment.
The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment.
As of December 31, 2023, we had cash collateral posted to our counterparties of $118.2 million under these agreements. Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange.
Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange.
The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated: Year Ended December 31, 2023 2022 ($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.
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, 2024 2023 ($s in thousands) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Financing Cost (3)(4) Interest Income/Expense Average Balance (1)(2) Effective Yield/ Financing Cost (3)(4) Agency RMBS $ 289,781 $ 6,477,575 4.47 % $ 177,695 $ 4,621,304 3.85 % Agency CMBS 3,247 106,641 3.00 % 3,713 124,157 2.96 % CMBS IO (5) 11,029 140,353 7.86 % 9,666 202,261 4.78 % Non-Agency MBS and other investments 78 1,396 5.04 % 128 2,377 5.28 % MBS and loans $ 304,135 $ 6,725,965 4.52 % $ 191,202 $ 4,950,099 3.86 % Cash equivalents 15,399 16,315 Total interest income $ 319,534 $ 207,517 Repurchase agreement financing (313,657) 5,790,037 (5.33) % (215,448) 4,034,561 (5.27) % Net interest income (expense)/net interest spread $ 5,877 (0.81) % $ (7,931) (1.41) % Net periodic interest 16,105 0.28 % — — % Economic net interest income (expense)/spread (6) $ 21,982 (0.53) % $ (7,931) (1.41) % (1) Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.
(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.
(7) Represents the weighted average market yield projected using cash flows generated from the forward curve based on market prices as of the date indicated and assuming zero volatility.
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.
Year Ended Reconciliations of GAAP to Non-GAAP Financial Measures: December 31, 2024 December 31, 2023 ($s in thousands except per share data) Comprehensive income to common shareholders (GAAP) $ 92,217 $ 9,020 Less: Change in fair value of investments (1) 157,845 (90,429) Change in fair value of derivative instruments, net (2) (274,966) 28,808 EAD to common shareholders (non-GAAP) $ (24,904) $ (52,601) Average common shares outstanding 70,766,410 54,809,462 EAD per common share (non-GAAP) $ (0.35) $ (0.96) Net interest income (loss) (GAAP) $ 5,877 $ (7,931) Net periodic interest from interest rate swaps 16,105 — Economic net interest income (expense) (non-GAAP) 21,982 (7,931) TBA drop loss (3) (2,694) (4,097) Total operating expenses (36,498) (32,879) Preferred stock dividends (7,694) (7,694) EAD to common shareholders (non-GAAP) $ (24,904) $ (52,601) Net interest spread (GAAP) (0.81) % (1.41) % Net periodic interest as a percentage of average repurchase borrowings 0.28 % — % Economic net interest spread (non-GAAP) (0.53) % (1.41) % (1) Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company’s MBS.
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.
Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet.
Our liquidity as of December 31, 2023 was $453.6 million, which consisted of unrestricted cash of $119.6 million, unencumbered Agency MBS with a fair value of $157.6 million, and noncash collateral received from our counterparties, which consisted of U.S. Treasuries and Agency RMBS, with a fair value of $176.3 million.
Our liquidity as of December 31, 2024, was $658.3 million, which consisted of unrestricted cash of $377.1 million and unencumbered Agency MBS with a fair value of $281.2 million. Our liquidity as of December 31, 2023, was $453.6 million.
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.
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.
Our Agency MBS, as well as a majority of our non-Agency MBS, are substantially similar to securities that either are actively traded or have been recently traded in their respective market. Pricing services and brokers have access to observable market information through trading desks and various information services.
The fair value of our Agency MBS, as well as a majority of our non-Agency MBS, is based on estimated prices provided by third-party pricing services who have access to observable market information through trading desks and various information services. Most of our MBS are substantially similar to securities actively traded and observable in the market.
(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.
(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.
Dividends As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions.
Among these factors, we focus on economic returns and taxable income within the context of the distribution requirements. As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions, including the separate dividend requirements of the Series C Preferred Stock.
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 174,108 Interest rate swaps 152,781 Total net change in fair value 130,532 Comprehensive income to common shareholders 92,217 Capital transactions: Net proceeds from stock issuance (2) 338,315 Common dividends declared (116,331) Balance as of December 31, 2024 (1) $ 1,073,436 $ 12.70 (1) Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's preferred stock of $111.5 million, in thousands and on a per common share basis.
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.
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. Our non-Agency CMBS IO investments are nearing maturity and have very little amortized cost remaining; any changes in actual payments may result in large swings in yield as shown below.
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 futures (735,000) (4,180,000) 4-5 year interest rate swaps (pay-fixed rate of 3.42%) (1,275,000) — 6-7 year interest rate swaps (pay-fixed rate of 3.61%) (3,085,000) — 9-10 year interest rate swaps (pay-fixed rate of 3.83%) (1,025,000) — 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.
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.
Despite the growth in our balance sheet, we managed our operating expenses and lowered our expense ratio by approximately 70 basis points compared to the prior year. 28 The following table summarizes the changes in the Company's financial position during 2024: ($s in thousands except per share data) Net Change in Fair Value Components of Comprehensive Income Common Book Value Rollforward Per Common Share Balance as of December 31, 2023 (1) $ 759,235 $ 13.31 Net interest income $ 5,877 G & A and other operating expenses (36,498) Preferred stock dividends (7,694) Changes in fair value: MBS and loans $ (157,845) TBAs (38,512) U.S.
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.
Realized gains (losses) resulting from the difference in fair value and the amount of cash received or paid upon termination or maturity of 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 generally not recognized in REIT taxable income until future periods.
Examples of these observable inputs and assumptions include market interest rates, credit spreads, cash flows and projected prepayment speeds, among other things.
Examples of these observable inputs and assumptions used in the valuation techniques include market interest rates, credit spreads, cash flows, and projected prepayment speeds, among other factors. Management reviews the prices it receives from the pricing service for reasonableness using broker quotes as well as other third-party pricing services.
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 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 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. 2) Realized gain (loss) for interest rate swaps consists of net periodic interest benefit of $16.1 million for the year ended December 31, 2024.
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.
The following charts compare the composition of our MBS portfolio (including TBAs) as of the dates indicated: We purchased approximately $2.2 billion of higher coupon Agency RMBS during the year ended December 31, 2024, of which $335.1 million were pending settlement as of December 31, 2024.
As a result, the decline in the fair value of our investments including TBA securities exceeded the gains from our interest rate hedges by $54.2 million.
However, gains from our hedging portfolio exceeded the losses in fair value of our investments by $130.5 million.
Reconciliations of EAD to common shareholders and adjusted net interest income to the related GAAP financial measures are provided below.
Reconciliations of each non-GAAP measure to certain GAAP financial measures are provided below.
(3) TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates. We primarily use U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments.
Year Ended ($s in thousands) December 31, 2024 December 31, 2023 Gain (loss) on derivative instruments, net $ 288,377 $ (32,905) Less: TBA drop loss 2,694 4,097 Net periodic interest from interest rate swaps (16,105) — Change in fair value of derivative instruments, net $ 274,966 $ (28,808) (3) TBA drop income (loss) 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. 30 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.
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.
Our remaining net deferred tax hedge gain was estimated to be $719.0 million as of December 31, 2024, which will be amortized into REIT taxable income over several years. As of December 31, 2024, we also had $557.9 million in capital loss carryforwards, all of which will expire by either December 31, 2027 or by December 31, 2028.
Removed
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.
Added
EXECUTIVE OVERVIEW In late 2023, the 10-year U.S. Treasury approached 5% based on inflation fears, but into the end of 2023 and early 2024, there was optimism that many rate cuts were on the near term horizon which spurred longer term rates to fall in the early part of 2024.
Removed
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.
Added
As the year progressed and more economic data was available, it became clear that growth was still moderate and the early outlook for rate cuts was too aggressive. Beginning in September, the Federal Reserve began to cut interest rates, reversing the direction of short-term rates for the first time since March of 2022.
Removed
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.
Added
The Federal Funds rate cut in September was followed by two more rate cuts before year end. This shift in policy and the outlook for 2025 changed the shape of the yield curve, and by the end of 2024, the yield curve was no longer inverted with short-term rates below longer-term rates.
Removed
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.
Added
This change in the shape of the yield curve allows levered mortgage investors, like Dynex, to earn a positive carry by investing in longer term bonds with a higher yield than its repurchase based financing cost which is generally tied to shorter-term rates.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

27 edited+6 added−6 removed19 unchanged
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.
Biggest changeDecember 31, 2024 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 3.6 % 33.0 % 1.9 % 17.4 % (2.0) % (18.3) % (4.1) % (37.1) % CMBS/ CMBS IO 0.1 % 0.8 % — % 0.3 % — % (0.3) % (0.1) % (0.8) % TBAs 1.0 % 9.6 % 0.6 % 5.3 % (0.7) % (6.0) % (1.3) % (12.2) % Interest rate hedges (5.0) % (46.2) % (2.5) % (22.6) % 2.3 % 21.2 % 4.6 % 41.9 % Total (0.3) % (2.8) % — % 0.4 % (0.4) % (3.4) % (0.9) % (8.2) % 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/ CMBS IO 0.1 % 0.9 % — % 0.5 % — % (0.5) % (0.1) % (0.9) % 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, 2024 December 31, 2023 Non-Parallel Shifts 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 Bearish Steepening +25 +50 (0.3) % (2.5) % 0.1 % 1.4 % +50 +100 (0.7) % (6.6) % 0.1 % 0.8 % Flattening +50 +25 (0.3) % (2.5) % — % (0.5) % +100 +50 (0.5) % (4.9) % — % (0.3) % Bullish Steepening -25 +0 0.1 % 1.4 % 0.3 % 2.5 % -50 -10 0.3 % 2.6 % 0.4 % 3.6 % -75 -25 0.4 % 3.6 % 0.4 % 3.8 % Flattening +0 -25 — % (0.4) % (0.2) % (2.0) % -10 -50 (0.1) % (1.1) % (0.5) % (4.7) % -25 -75 (0.3) % (3.0) % (0.9) % (8.8) % (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.
Changes in types of our investments, the returns earned on these investments, future interest rates, credit spreads, the shape of the yield curve, the availability of financing, and/or the mix of our investments and financings including derivative instruments may cause actual results to differ significantly from the modeled results shown in the tables below.
Changes in the types of our investments, the returns earned on these investments, future interest rates, credit spreads, the shape of the yield curve, the availability of financing, and/or the mix of our investments and financings, including derivative instruments, may cause actual results to differ significantly from the modeled results shown in the tables below.
Estimates of prepayment speeds can vary significantly by investor for the same security, and therefore estimates of security and portfolio duration can vary significantly between market participants. We continuously monitor market conditions, economic conditions, interest rates and other market activity and frequently adjust the composition of our investments and hedges throughout any given period.
Estimates of prepayment speeds can vary significantly by investor for the same security, and therefore, estimates of security and portfolio duration can vary considerably between market participants. We continuously monitor market conditions, economic conditions, interest rates, and other market activity and frequently adjust the composition of our investments and hedges throughout any given period.
(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.
(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.
In addition, declines in the market value of our investments pledged as collateral for repurchase agreement borrowings and for our derivative instruments may result in counterparties initiating margin calls for additional collateral.
In addition, declines in the market value of our investments pledged as collateral for repurchase 37 agreement borrowings and for our derivative instruments may result in counterparties initiating margin calls for additional collateral.
We are subject to prepayment risk from premiums paid on investments, which are amortized as a reduction in interest income using the effective interest method under GAAP. Our comprehensive income and book value per common share may also be negatively impacted by prepayments if the fair value of the investment materially exceeds the par balance of the underlying security.
We are subject to prepayment risk from premiums paid on investments, which are amortized as a reduction in interest income using the effective interest method. Our comprehensive income and book value per common share may also be negatively impacted by prepayments if the fair value of the investment materially exceeds the par balance of the underlying security.
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).
Loans 36 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).
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.
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” in Item 7 of this Annual Report on Form 10-K.
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.
Interest rate risk results from investing in securities with 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.
The amount of the impact will depend on the composition of our portfolio, our hedging strategy, the effectiveness of our hedging instruments as well as the magnitude and the duration of the change in interest rates. We manage interest rate risk within tolerances set by our Board of Directors.
The amount of the impact will depend on the composition of our portfolio, our hedging strategy, the effectiveness of our hedging instruments and the magnitude and duration of the change in interest rates. We manage interest rate risk within tolerances set by our Board of Directors.
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.
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, 2024 December 31, 2023 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) % (10.4) % (1.1) % (10.8) % +10 (0.6) % (5.2) % (0.5) % (5.4) % -10 0.6 % 5.2 % 0.5 % 5.4 % -20/-50 (2) 1.1 % 10.4 % 1.1 % 10.8 % (1) Includes changes in market value of our MBS investments, including TBA securities.
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.
Our prepayment risk as of December 31, 2024, has declined relative to 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.
We seek to manage our prepayment risk on our MBS by diversifying our investments and investing in securities which either contain loans for which the underlying borrowers have some disincentive to refinance or have some sort of prepayment prohibition or yield maintenance as is the case with CMBS and CMBS IO.
We seek to manage our prepayment risk on our MBS by diversifying our investments and investing in securities that either contain loans for which the underlying borrowers have a disincentive to refinance or have some provision of prepayment prohibition or yield maintenance, as is the case with CMBS and CMBS IO.
Liquidity Risk We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. Our repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed roll-over terms.
Liquidity Risk We have liquidity risk principally from the use of recourse repurchase agreements to finance our ownership of securities. Our repurchase agreements are renewable at the discretion of our lenders and do not contain guaranteed rollover terms.
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 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 income generated by our investment portfolio will likely decline.
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.
Our hedging methods are based on many factors, including, but not limited to, our estimates regarding future interest rates and expected levels of prepayments of our assets.
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.
Management evaluates changes in interest rate curves to manage portfolio interest rate risk and the market value of its investments and common equity. Because interest rates do not typically move in a parallel fashion from 34 period to period (as can be seen by the graph for U.S.
Sensitivity to changes in market spreads is derived from models that are dependent on various assumptions, and actual changes in market value in response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.
Fluctuations in spreads typically vary based on the type of investment. Sensitivity to changes in market spreads is derived from models that are dependent on various assumptions, and actual changes in market value in response to changes in market spreads could differ materially from the projected sensitivity if actual conditions differ from these assumptions.
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.
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.
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.
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.
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.
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.
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.
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. 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.
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.
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.
Market spreads could change based on macroeconomic or systemic factors as well as the factors specific to a particular security such as prepayment performance or credit performance. Other factors that could impact credit spreads include technical issues such as supply and demand for a particular type of security or Federal Reserve monetary policy.
Other factors that could impact credit spreads include technical issues, such as supply and demand for a particular type of security or Federal Reserve monetary policy. We do not hedge spread risk given the complexity of hedging credit spreads and, in our opinion, the lack of liquid instruments available to use as hedges.
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.
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. Changes in market spreads represent the market's valuation of the perceived riskiness of an asset relative to risk-free rates.
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.
The projections for market value do not assume any change in credit spreads. 35 Interest rates as of December 31, 2024, were 70-80 basis points higher versus December 31, 2023.
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.
The percentage change is also magnified because we held a larger portfolio with higher coupons as of December 31, 2024 versus December 31, 2023.
Removed
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.
Added
Treasury rates in Item 7, “Executive Overview”), the tables below show the projected sensitivity of our financial instruments and equity to both parallel and non-parallel shifts in market interest rates.
Removed
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).
Added
As interest rates increase, the duration of our investment portfolio, net of hedges, increases, so models project the percentage change in fair value of our investments, net of hedges and our common equity will show a sharper percentage change in value in bearish-rate scenarios as of December 31, 2024 versus December 31, 2023.
Removed
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.
Added
Conversely, models project the percentage change in fair value of our investments, net of hedges and our common equity will show a smaller percentage change in value in bullish-rate scenarios as of December 31, 2024 versus December 31, 2023.
Removed
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.
Added
Widening spreads reduce the market value of our investments as market participants require additional yield to hold riskier assets. Market spreads could change based on macroeconomic or systemic factors as well as the factors specific to a particular security, such as prepayment performance or credit performance.
Removed
We do not hedge spread risk given the complexity of hedging credit spreads and in our opinion, the lack of liquid instruments available to use as hedges. Fluctuations in spreads typically vary based on the type of investment.
Added
As a result of rising financing costs, our net interest income could fall or could be negative for extended periods of time.
Removed
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
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.

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