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What changed in Ellington Credit Co's 10-K — 2022 vs 2023

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

+359 added−386 removedSource: 10-K (2023-03-10) vs 10-K (2022-03-11)

Top changes in Ellington Credit Co's 2023 10-K

359 paragraphs added · 386 removed · 272 edited across 4 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeMany of our competitors are significantly larger than us, have greater access to capital and other resources, and may have other advantages over us. Our competitors may include other investment vehicles managed by Ellington or its affiliates, including Ellington Financial Inc.
Biggest changeCompetition In acquiring our assets, we compete with other mortgage REITs, specialty finance companies, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies, and other entities. Many of our competitors are significantly larger than us, have greater access to capital and other resources, and may have other advantages over us.
Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires an entity to invest at least 55% of its assets in "mortgages and 12 other liens on and interests in real estate," which we refer to as "qualifying real estate interests," and at least 80% of its assets in qualifying real estate interests plus "real estate-related assets." In satisfying the 55% requirement, the entity may treat agency securities issued with respect to an underlying pool of mortgage loans in which it holds all of the certificates issued by the pool as qualifying real estate interests.
Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires an entity to invest at least 55% of its assets in "mortgages and other liens on and interests in real estate," which we refer to as "qualifying real estate interests," and at least 80% of its assets in qualifying real estate interests plus "real estate-related assets." In satisfying the 55% requirement, the entity may treat agency securities issued with respect to an underlying pool of mortgage loans in which it holds all of the certificates issued by the pool as qualifying real estate interests.
We seek to attain this objective by constructing and actively managing a portfolio consisting primarily of residential mortgage-backed securities, or "RMBS," for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or "Agency RMBS," and, to a lesser extent, RMBS backed by prime jumbo, Alternative A-paper, or "Alt-A," mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "non-QM loans," mortgages on single-family-rental properties, manufactured housing, and subprime residential mortgage loans, or "non-Agency RMBS." We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS"; residential mortgage loans; mortgage servicing rights, or "MSRs"; and credit risk transfer 3 securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other residential and commercial mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.
We seek to attain this objective by constructing and actively managing a portfolio consisting primarily of residential mortgage-backed securities, or "RMBS," for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity, or "Agency RMBS," and, to a lesser extent, RMBS backed by prime jumbo, Alternative A-paper, or "Alt-A," mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "non-QM loans," mortgages on single-family-rental properties, manufactured housing, and subprime residential mortgage loans, or "non-Agency RMBS." We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS"; residential mortgage loans; mortgage servicing rights, or "MSRs"; and credit risk transfer 4 securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other residential and commercial mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.
The CMOs we acquire will not be treated as qualifying real estate interests for purposes of the 55% requirement. We also have formed, and may in the future form, certain other wholly-owned or majority-owned subsidiaries that will invest in CMOs and, subject to our investment guidelines, other real estate-related assets.
The CMOs we acquire will not be treated as qualifying real estate interests for purposes of the 55% requirement. 13 We also have formed, and may in the future form, certain other wholly-owned or majority-owned subsidiaries that will invest in CMOs and, subject to our investment guidelines, other real estate-related assets.
In particular, our strategy consists of: • utilizing an investment model that focuses on security selection and allocates capital to assets that balance a range of mortgage-related risks; • constructing and actively managing a hybrid investment portfolio consisting primarily of Agency RMBS and, to a lesser extent, non-Agency RMBS, designed to: ◦ take advantage of opportunities in the Agency RMBS market by acquiring Agency RMBS on a leveraged basis; and ◦ take advantage of opportunities in the non-Agency residential mortgage market by purchasing investment grade and non-investment grade non-Agency RMBS, including senior and subordinated securities; 4 • opportunistically acquiring and managing other mortgage- and real estate-related assets, such as MSRs, CRTs, CMBS, and residential mortgage loans, that we would hold for appreciation and/or current income; and • opportunistically mitigating our interest rate and prepayment risk and, to a lesser extent, credit risk, by using a variety of hedging instruments.
In particular, our strategy consists of: • utilizing an investment model that focuses on security selection and allocates capital to assets that balance a range of mortgage-related risks; • constructing and actively managing a hybrid investment portfolio consisting primarily of Agency RMBS and, to a lesser extent, non-Agency RMBS, designed to: ◦ take advantage of opportunities in the Agency RMBS market by acquiring Agency RMBS on a leveraged basis; and ◦ take advantage of opportunities in the non-Agency residential mortgage market by purchasing investment grade and non-investment grade non-Agency RMBS, including senior and subordinated securities; 5 • opportunistically acquiring and managing other mortgage- and real estate-related assets, such as MSRs, CRTs, CMBS, and residential mortgage loans, that we would hold for appreciation and/or current income; and • opportunistically mitigating our interest rate and prepayment risk and, to a lesser extent, credit risk, by using a variety of hedging instruments.
In the event we elect not to renew the term, we will be required to pay our Manager a termination fee equal to 5% of our Shareholders' Equity, as defined in the management agreement, as of the end of the month preceding the date of the notice of termination or non-renewal 9 of the management agreement.
In the event we elect not to renew the term, we will be required to pay our Manager a termination fee equal to 5% of our Shareholders' Equity, as defined in the management agreement, as of the end of the month preceding the date of the notice of termination or non-renewal of the management agreement.
Additionally, unless approved in advance by a majority of our independent trustees or pursuant to and in accordance with a policy that has been approved by a majority of our independent trustees, all cross transactions must be effected at the then-prevailing market prices.
Additionally, unless approved in advance by a majority of our independent trustees or pursuant to and in accordance with a policy that has been approved by a majority of our 11 independent trustees, all cross transactions must be effected at the then-prevailing market prices.
Furthermore, we believe that Ellington's extensive experience in buying, selling, analyzing, and structuring fixed income securities, coupled with its broad access to market information and trading flows, provides us with a steady flow of opportunities to acquire assets with favorable trade executions. 5 Our Targeted Assets Asset Class Principal Assets Agency RMBS .
Furthermore, we believe that Ellington's extensive experience in buying, selling, analyzing, and structuring fixed income securities, coupled with its broad access to market information and trading flows, provides us with a steady flow of opportunities to acquire assets with favorable trade executions. 6 Our Targeted Assets Asset Class Principal Assets Agency RMBS .
For accounting purposes, in accordance with generally accepted accounting principles in the United States of America, or "U.S. GAAP," we classify TBA transactions as derivatives. 6 Non-Agency RMBS We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, and subprime residential, and single-family-rental mortgage loans.
For accounting purposes, in accordance with generally accepted accounting principles in the United States of America, or "U.S. GAAP," we classify TBA transactions as derivatives. 7 Non-Agency RMBS We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, and subprime residential, and single-family-rental mortgage loans.
Our Financing Strategies and Use of Leverage We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing and market conditions. As of December 31, 2021, all of our debt financings consisted of repos.
Our Financing Strategies and Use of Leverage We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing and market conditions. As of December 31, 2022, all of our debt financings consisted of repos.
The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filing we make with the SEC. In addition, all of our reports filed with or furnished to the SEC can be obtained at the SEC's website at www.sec.gov . 13
The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filing we make with the SEC. In addition, all of our reports filed with or furnished to the SEC can be obtained at the SEC's website at www.sec.gov . 14
We were formed through an initial strategic venture among affiliates of Ellington, an investment management firm and registered investment adviser with a 27-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, and the Blackstone Funds.
We were formed through an initial strategic venture among affiliates of Ellington, an investment management firm and registered investment adviser with a 28-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, and the Blackstone Funds.
In addition, throughout Ellington's 27-year history of investing in RMBS and related derivatives, it has developed strong relationships with a wide range of dealers and other market participants that provide Ellington access to a broad range of trading opportunities and market information.
In addition, throughout Ellington's 28-year history of investing in RMBS and related derivatives, it has developed strong relationships with a wide range of dealers and other market participants that provide Ellington access to a broad range of trading opportunities and market information.
The interest rate hedging instruments that we use and may use in the future include, without limitation: • interest rate swaps (including floating-to-fixed, fixed-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable); 7 • TBAs; • CMOs; • U.S.
The interest rate hedging instruments that we use and may use in the future include, without limitation: • interest rate swaps (including floating-to-fixed, fixed-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable); • TBAs; • CMOs; 8 • U.S.
As a result, we do not have a targeted debt-to-equity ratio. 8 Management Agreement Upon our inception in September 2012, we entered into a management agreement with our Manager pursuant to which our Manager provides for the day-to-day management of our operations.
As a result, we do not have a targeted debt-to-equity ratio. 9 Management Agreement Upon our inception in September 2012, we entered into a management agreement with our Manager pursuant to which our Manager provides for the day-to-day management of our operations.
Term and Termination The current term of the management agreement will expire in September 2022 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless terminated as described below.
Term and Termination The current term of the management agreement will expire in September 2023 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless terminated as described below.
The members of our management team are Michael Vranos, founder and Chief Executive Officer of Ellington, who serves as our Co-Chief Investment Officer and as a member of our Board of Trustees; Laurence Penn, Vice Chairman and Chief Operating Officer of Ellington, who serves as our President and Chief Executive Officer and as a member of our Board of Trustees; Mark Tecotzky, Vice Chairman—Co-Head of Credit Strategies of Ellington, who serves as our Co-Chief Investment Officer; Christopher Smernoff, who serves as our Chief Financial Officer; JR Herlihy, a Managing Director of Ellington, who serves as our Chief Operating Officer; Daniel Margolis, General Counsel of Ellington, who serves as our General Counsel; Vincent Ambrico, who serves as our Controller; and Jason Frank, Associate General Counsel of Ellington, who serves as our Deputy General Counsel and Secretary.
The members of our management team are Michael Vranos, founder and Chief Executive Officer of Ellington, who serves as our Co-Chief Investment Officer and as a member of our Board of Trustees; Laurence Penn, Vice Chairman and Chief Operating Officer of Ellington, who serves as our President and Chief Executive Officer and as a member of our Board of Trustees; Mark Tecotzky, Vice Chairman—Co-Head of Credit Strategies of Ellington, who serves as our Co-Chief Investment Officer; Christopher Smernoff, who serves as our Chief Financial Officer; JR Herlihy, a Managing Director of Ellington, who serves as our Chief Operating Officer; Daniel Margolis, General Counsel of Ellington, who serves as our General Counsel; and Vincent Ambrico, who serves as our Controller.
Our Manager is responsible for all costs incident to the performance of its duties under the management agreement, including compensation of Ellington's employees and other related expenses, other than our allocable portion of the costs incurred by our Manager for certain dedicated or partially dedicated employees, including a Chief Financial Officer, one or more controllers, an in-house legal counsel, an investor relations professional, certain internal audit staff in connection with Sarbanes-Oxley compliance initiatives and certain other personnel performing duties for us, based on the portion of their working time and efforts spent on our matters and subject to approval of the reimbursed amounts by the Compensation Committee of our Board of Trustees.
Our Manager is responsible for all costs incident to the performance of its duties under the management agreement, including compensation of Ellington's employees and other related expenses, other than our allocable portion of the costs incurred by our Manager for certain dedicated or partially dedicated employees, including a Chief Financial Officer, one or more controllers, an in-house legal counsel, an investor relations professional, and certain other personnel performing duties for us, based on the portion of their working time and efforts spent on our matters and subject to approval of the reimbursed amounts by the Compensation Committee of our Board of Trustees.
As of December 31, 2021, Ellington managed various funds, accounts, and other vehicles, comprising approximately $11.6 billion of assets under management (excluding our assets but including $5.4 billion of accounts that do not employ financial leverage), with strategies that are similar to, or that overlap with, our strategy.
As of December 31, 2022, Ellington managed various funds, accounts, and other vehicles, comprising approximately $7.6 billion of assets under management (excluding our assets but including $2.5 billion of accounts that do not employ financial leverage), with strategies that are similar to, or that overlap with, our strategy.
As of December 31, 2021, Ellington had over 170 employees and had assets under management of approximately $13.3 billion, of which (i) approximately $7.9 billion consisted of our company, as well as Ellington Financial Inc., a Delaware corporation that elected to be taxed as a REIT (NYSE: EFC), and various hedge funds and other alternative investment vehicles that employ financial leverage, and (ii) approximately $5.4 billion consisted of accounts that do not employ financial leverage.
As of December 31, 2022, Ellington had over 170 employees and had assets under management of approximately $9.0 billion, of which (i) approximately $6.5 billion consisted of our company, as well as Ellington Financial Inc., a Delaware corporation that elected to be taxed as a REIT (NYSE: EFC), and various hedge funds and other alternative investment vehicles that employ financial leverage, and (ii) approximately $2.5 billion consisted of accounts that do not employ financial leverage.
In addition, we utilize derivatives and other hedging instruments to opportunistically manage our interest rate risk. Interest Rate Hedging We opportunistically manage our interest rate risk by using various hedging strategies to mitigate such risks, subject to maintaining our qualification as a REIT and maintaining our exclusion from registration as an investment company under the Investment Company Act.
Interest Rate Hedging We opportunistically manage our interest rate risk by using various hedging strategies to mitigate such risks, subject to maintaining our qualification as a REIT and maintaining our exclusion from registration as an investment company under the Investment Company Act.
The $13.3 billion and $7.9 billion in assets under management include approximately $1.2 billion in Ellington-managed CLOs. For these purposes, the Ellington-managed CLO figure represents the aggregate outstanding balance of CLO notes and market value of CLO equity, excluding any notes and equity held by other Ellington-managed funds and accounts.
The $9.0 billion and $6.5 billion in assets under management include approximately $1.0 billion in Ellington-managed CLOs. For these purposes, the Ellington-managed CLO figure represents the aggregate outstanding balance of CLO notes and market value of CLO equity, excluding any notes and equity held by other Ellington-managed funds and accounts.
We believe that our Manager is uniquely qualified to implement our strategy. Our strategy is consistent with Ellington's investment approach, which is based on its distinctive strengths in sourcing, analyzing, trading, and hedging for complex MBS and other mortgage- and non-mortgage-related products.
We leverage these skills and resources for purposes of attaining our objectives. We believe that our Manager is uniquely qualified to implement our strategy. Our strategy is consistent with Ellington's investment approach, which is based on its distinctive strengths in sourcing, analyzing, trading, and hedging for complex MBS and other mortgage- and non-mortgage-related products.
Human Capital Resources We currently do not have any employees. All of our executive officers, and our partially dedicated personnel, which include our Chief Financial Officer, Chief Operating Officer, controller, accounting staff, in-house legal counsel, and internal audit staff, are employees of Ellington or one or more of its affiliates. See "—Management Agreement" above.
All of our executive officers, and our partially dedicated personnel, which include our Chief Financial Officer, Chief Operating Officer, controller, accounting staff, in-house legal counsel, and internal audit staff, are employees of Ellington or one or more of its affiliates. See "—Management Agreement" above.
Our Board of Trustees reviews our Manager's performance annually and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of our Board of Trustees or of the holders of a majority of our outstanding common shares, we may terminate the management agreement based either upon unsatisfactory performance by our Manager that is materially detrimental to us or upon a determination by our independent trustees that the management fees payable to our Manager are not fair, subject to the right of our Manager to prevent such a fee-based termination by agreeing to a reduction of the management fees payable to our Manager.
We have the right to terminate the management agreement for cause, as defined in the management agreement, at any time during the term upon 30 days' prior written notice, without payment of any termination fee. 10 Our Board of Trustees reviews our Manager's performance annually and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of our Board of Trustees or of the holders of a majority of our outstanding common shares, we may terminate the management agreement based either upon unsatisfactory performance by our Manager that is materially detrimental to us or upon a determination by our independent trustees that the management fees payable to our Manager are not fair, subject to the right of our Manager to prevent such a fee-based termination by agreeing to a reduction of the management fees payable to our Manager.
An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our common shares.
A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of our common shares. An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our common shares.
Our Manager uses Ellington's proprietary models to identify attractive assets, value these assets, monitor and forecast the performance of these assets, and (subject to maintaining our qualification as a REIT) opportunistically hedge our interest rate risk, hedge our prepayment risk, and hedge our credit risk. We leverage these skills and resources for purposes of attaining our objectives.
Our Manager uses Ellington's proprietary models to identify attractive assets, value these assets, monitor and forecast the performance of these assets, and (subject to maintaining our qualification as a REIT) opportunistically hedge our interest rate risk and yield spread risk, hedge our prepayment risk, and hedge our credit risk.
Government in the mortgage market and changes to legislation and regulations affecting these entities; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities we own and intend to acquire; changes in rates of default and/or recovery rates on our non-Agency assets; our ability to borrow to finance our assets; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; our ability to maintain our qualification as a real estate investment trust, or "REIT"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy , such as those resulting from the economic effects related to the novel coronavirus (“COVID-19”) pandemic .
Government in the mortgage market and changes to legislation and regulations affecting these entities; market volatility; changes in the prepayment rates on the mortgage loans underlying the securities we own and intend to acquire; changes in rates of default and/or recovery rates on our non-Agency assets; our ability to borrow to finance our assets and the available terms for such borrowings; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the "Investment Company Act"; our ability to maintain our qualification as a real estate investment trust, or "REIT"; and risks associated with investing in real estate assets, including changes in business conditions and the general economy such as changes to fiscal or monetary policy, heightened inflation, slower growth or recession, and currency fluctuations.
GAAP accounting purposes which is being crossed at market prices, or the cross transaction has received approval of a majority of our independent trustees. 10 Although we believe such restrictions on our Manager's ability to engage in cross transactions on our behalf mitigate many risks, cross transactions, even at market prices, may potentially create a conflict of interest between our Manager's and our officers' duties to and interests in us and their duties to and interests in the other party.
Although we believe such restrictions on our Manager's ability to engage in cross transactions on our behalf mitigate many risks, cross transactions, even at market prices, may potentially create a conflict of interest between our Manager's and our officers' duties to and interests in us and their duties to and interests in the other party.
As of December 31, 2021, we had approximately $1.1 billion outstanding under repos with 15 counterparties, and given that we had approximately $154.2 million of shareholders' equity as of December 31, 2021, our debt-to-equity ratio was 6.9 to 1. Our debt-to-equity ratio does not account for liabilities other than debt financings.
As of December 31, 2022, we had approximately $0.8 billion outstanding under repos with 16 counterparties, and given that we had approximately $112.4 million of shareholders' equity as of December 31, 2022, our debt-to-equity ratio was 7.5 to 1. Our debt-to-equity ratio does not account for liabilities other than debt financings.
See "Risk Factors—Risks Related to Our Organization and Structure—Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations." Investment Advisers Act of 1940 Both Ellington and our Manager are registered as investment advisers under the Advisers Act and are subject to the regulatory oversight of the Division of Investment Management of the SEC.
See "Risk Factors—Risks Related to Our Organization and Structure—Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations.
In addition, nothing in the management agreement binds or restricts our Manager or any of its affiliates, officers, or employees from buying, selling, or trading any securities or commodities for their own accounts or for the accounts of others for whom our Manager or any of its affiliates, officers, or employees may be acting. 11 Competition In acquiring our assets, we compete with other mortgage REITs, specialty finance companies, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies, and other entities.
In addition, nothing in the management agreement binds or restricts our Manager or any of its affiliates, officers, or employees from buying, selling, or trading any securities or commodities for their own accounts or for the accounts of others for whom our Manager or any of its affiliates, officers, or employees may be acting.
In addition to existing companies, other companies may be organized for similar purposes in the future, including companies focused on purchasing mortgage assets. A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of our common shares.
Our competitors may 12 include other investment vehicles managed by Ellington or its affiliates, including Ellington Financial Inc. In addition to existing companies, other companies may be organized for similar purposes in the future, including companies focused on purchasing mortgage assets.
No termination fee will be due to the Manager if the Manager decides not to renew the management agreement. We have the right to terminate the management agreement for cause, as defined in the management agreement, at any time during the term upon 30 days' prior written notice, without payment of any termination fee.
No termination fee will be due to the Manager if the Manager decides not to renew the management agreement.
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In addition, we utilize derivatives and other hedging instruments to opportunistically manage our interest rate and yield spread risk.
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GAAP accounting purposes which is being crossed at market prices, or the cross transaction has received approval of a majority of our independent trustees.
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Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the government. Additionally, many of our competitors are not subject to REIT tax compliance or required to maintain an exclusion from the Investment Company Act.
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If we were required to register as an investment company under the Investment Company Act, we would be subject to the restrictions imposed by the Investment Company Act, which would require us to make material changes to our strategy.
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Investment Advisers Act of 1940 Both Ellington and our Manager are registered as investment advisers under the Advisers Act and are subject to the regulatory oversight of the Division of Investment Management of the SEC. Human Capital Resources We currently do not have any employees.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeGovernment, may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets. • Certain actions by the Federal Reserve could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Prepayment rates can change, adversely affecting the performance of our assets. • Interest rate caps on the ARMs and hybrid ARMs that back our RMBS may reduce our net interest margin during periods of rising or high interest rates. • Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our targeted assets. • Difficult conditions in the mortgage and residential real estate markets as well as general market concerns may adversely affect the value of the assets in which we invest. • Our assets include subordinated and lower-rated securities that generally have greater risks of loss than senior and higher-rated securities. • Less stringent underwriting guidelines and the resultant potential for delinquencies or defaults on certain mortgage loans could lead to losses on many of the non-Agency RMBS we hold, as well as other mortgage-related investments that we currently hold and/or may hold in the future. • Investments in second-lien mortgage loans could subject us to increased risk of losses. • The principal and interest payments on our non-Agency RMBS and any CRTs that we may purchase are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk. • The planned discontinuation of LIBOR and transition from LIBOR to an alternative reference rate may adversely affect the value and liquidity of the financial obligations to be held or issued by us that are linked to LIBOR. • Residential mortgage loans, including subprime, non-performing, and sub-performing residential mortgage loans, are subject to increased risks. • To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses. • We rely on mortgage servicers for our loss mitigation efforts, and we also may engage in our own loss mitigation efforts with respect to whole mortgage loans and loan pools that we may purchase.
Biggest changeGovernment, may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Certain actions by the Federal Reserve could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Prepayment rates can change, adversely affecting the performance of our assets. • Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets. • Interest rate caps on ARMs and hybrid ARMs, including those that back our RMBS, may reduce our net interest margin during periods of rising or high interest rates. • Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our targeted assets. • Difficult conditions in the mortgage and residential real estate markets as well as general market concerns may adversely affect the value of the assets in which we invest. • Our assets include subordinated and lower-rated securities that generally have greater risks of loss than senior and higher-rated securities. • Less stringent underwriting guidelines and the resultant potential for delinquencies or defaults on certain mortgage loans could lead to losses on many of the non-Agency RMBS we hold, as well as other mortgage-related investments that we currently hold and/or may hold in the future. • The principal and interest payments on our non-Agency RMBS and any CRTs that we may purchase are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk. • The planned discontinuation of LIBOR and transition from LIBOR to an alternative reference rate may adversely affect the value and liquidity of the financial obligations to be held or issued by us that are linked to LIBOR. • Non-government guaranteed residential mortgage loans, including subprime, non-performing, and sub-performing residential mortgage loans, are subject to increased risks. • To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses. • We rely on mortgage servicers for our loss mitigation efforts, and we also may engage in our own loss mitigation efforts with respect to whole mortgage loans and loan pools that we may purchase.
Government securities for purposes of the REIT 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property or other qualifying income for purposes of the REIT 75% gross income test, we treat the GAAP value of our TBAs under which we contract to purchase to-be-announced Agency RMBS ("long TBAs") as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the REIT 75% gross income test, based on an opinion of Hunton Andrews Kurth LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a long TBA should be treated as ownership of real estate assets, and (ii) for purposes of the REIT 75% gross income test, any gain recognized by us in connection with the settlement of our long TBAs should be treated as gain from the sale or disposition 43 of an interest in mortgages on real property.
Government securities for purposes of the REIT 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property or other qualifying income for purposes of the REIT 75% gross income test, we treat the GAAP value of our TBAs under which we contract to purchase to-be-announced Agency RMBS ("long TBAs") as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the REIT 75% gross income test, based on an opinion of Hunton Andrews Kurth LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a long TBA should be treated as ownership of real estate assets, and (ii) for purposes of the REIT 75% gross income test, any gain recognized by us in connection with the settlement of our long TBAs should be treated as gain from the sale or disposition of an interest in mortgages on real property.
In addition, some portion of our hedges are cleared through a central counterparty clearinghouse, or "CCP," which we access through a futures commission merchant, or "FCM." If an FCM that holds our cleared derivatives account were to 29 become insolvent, the CCP will make an effort to move our futures positions to an alternate FCM, though it is possible that such transfer would fail, which would result in a total cancellation of our positions in the account; in such a case, if we wished to reinstate such hedging positions, we would have to re-initiate such positions with an alternate FCM.
In addition, some portion of our hedges are cleared through a central counterparty clearinghouse, or "CCP," which we access through a futures commission merchant, or "FCM." If an FCM that holds our cleared derivatives account were to become insolvent, the CCP will make an effort to move our futures positions to an alternate FCM, though it is possible that such transfer would fail, which would result in a total cancellation of our positions in the account; in such a case, if we wished to reinstate such hedging positions, we would have to re-initiate such positions with an alternate FCM.
The management agreement provides that it may be terminated by us based on performance upon the affirmative vote of at least two-thirds of our Board of Trustees, or by a vote of the holders of at least a majority of our outstanding common shares, based either upon unsatisfactory performance by our Manager that is materially detrimental to us or upon a determination by 36 our independent trustees that the management fees payable to our Manager are not fair, subject to our Manager's right to prevent such a fee-based termination by accepting a mutually acceptable reduction of management fees.
The management agreement provides that it may be terminated by us based on performance upon the affirmative vote of at least two-thirds of our Board of Trustees, or by a vote of the holders of at least a majority of our outstanding common shares, based either upon unsatisfactory performance by our Manager that is materially detrimental to us or upon a determination by our independent trustees that the management fees payable to our Manager are not fair, subject to our Manager's right to prevent such a fee-based termination by accepting a mutually acceptable reduction of management fees.
If we enter into such a transaction in the future we will be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as "excess 45 inclusion income," that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).
If we enter into such a transaction in the future we will be taxable at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool, referred to as "excess inclusion income," that is allocable to the percentage of our shares held in record name by disqualified organizations (generally tax-exempt entities that are exempt from the tax on unrelated business taxable income, such as state pension plans and charitable remainder trusts and government entities).
Although we do not intend to operate our non-Agency RMBS investment strategy on a credit-hedged basis in general, we may from time to time opportunistically enter into short positions using credit default swaps to protect against adverse credit events with respect to our non-Agency RMBS, provided that our ability to do so may be limited in order to maintain our qualification as a REIT and maintain our exclusion from registration as an investment company under the Investment Company Act.
Although we do not intend to operate our non-Agency RMBS investment strategy on a credit-hedged basis in general, we may from time to time opportunistically enter into short positions using credit default swaps to protect against adverse credit events with respect to our non-Agency RMBS, provided that our ability to do so may be limited in order to maintain our 29 qualification as a REIT and maintain our exclusion from registration as an investment company under the Investment Company Act.
Residential mortgage loans are also subject to property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies or "special hazard risk," and to reduction in a borrower's mortgage debt by a bankruptcy court, or "bankruptcy risk." In addition, claims may be assessed against us on account of our position as a mortgage holder or property owner, including assignee liability, environmental hazards, and other liabilities.
Residential mortgage loans are also subject to property damage caused by hazards, such as earthquakes or environmental hazards, not covered by standard property insurance policies or "special hazard risk," and to reduction in a borrower's mortgage debt by a bankruptcy court, or "bankruptcy risk." In addition, claims may be assessed against us on account of our position as a 22 mortgage holder or property owner, including assignee liability, environmental hazards, and other liabilities.
Certain provisions of the Maryland General Corporation Law, or the "MGCL," applicable to a Maryland real estate investment trust may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize a premium over the then prevailing market price of such shares.
Certain provisions of the Maryland General Corporation Law, or the "MGCL," applicable to a Maryland real estate investment trust may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change in our control under circumstances that otherwise could provide the holders of our common shares with the opportunity to realize 38 a premium over the then prevailing market price of such shares.
Government significantly reduced its support for any or all of them, we may be unable or significantly limited in our ability to acquire Agency RMBS, which would drastically reduce the amount and type of Agency RMBS available for purchase which, in turn, could materially adversely affect our ability to maintain our exclusion from registration as an investment company under the Investment Company Act and our ability to maintain our 16 qualification as a REIT.
Government significantly reduced its support for any or all of them, we may be unable or significantly limited in our ability to acquire Agency RMBS, which would drastically reduce the amount and type of Agency RMBS available for purchase which, in turn, could materially adversely affect our ability to maintain our exclusion from registration as an investment company under the Investment Company Act and our ability to maintain our qualification as a REIT.
Risks Related to our Relationship with our Manager and Ellington • Our relationship with our Manager and Ellington poses risks to us. • We are dependent on our Manager and certain key personnel of Ellington that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates the management agreement or such key personnel are no longer available to us. • There are conflicts of interest in our relationships with our Manager and Ellington, which could result in decisions that are not in the best interests of our shareholders.
Risks Related to our Relationship with our Manager and Ellington • We are dependent on our Manager and certain key personnel of Ellington that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates the management agreement or such key personnel are no longer available to us. • There are conflicts of interest in our relationships with our Manager and Ellington, which could result in decisions that are not in the best interests of our shareholders.
Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more delinquent from the Agency RMBS pools that they have issued when the cost of guaranteed payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the non-performing loans in their portfolios.
Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more delinquent from the Agency RMBS pools that they have issued when the cost of guaranteed payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding 18 the non-performing loans in their portfolios.
The COVID-19 pandemic and certain of the actions taken to reduce the spread of the disease, based on governmental mandates and recommendations, including restrictions on travel, restrictions on the ability of individuals to assemble in groups, and restrictions on the ability of certain businesses to operate, have resulted in lost business revenue, rapid and significant increases in unemployment, and changes in consumer behavior, all of which have materially and adversely affected the economy.
The COVID-19 pandemic and certain of the actions taken to reduce the spread of the disease, based on governmental mandates and recommendations, including restrictions on travel, restrictions on the ability of individuals to assemble in groups, and restrictions on the ability of certain businesses to operate, have resulted in lost business revenue, rapid and significant 32 increases in unemployment, and changes in consumer behavior, all of which have materially and adversely affected the economy.
Because repurchase agreements are generally short-term transactions, lenders may respond to adverse market conditions in a manner that makes it more difficult for us to renew or replace on a 26 continuous basis our maturing short-term borrowings and have, and may continue to, impose more onerous conditions when rolling such repurchase agreements.
Because repurchase agreements are generally short-term transactions, lenders may respond to adverse market conditions in a manner that makes it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have, and may continue to, impose more onerous conditions when rolling such repurchase agreements.
This resolution, however, may be altered or repealed in whole or in 39 part at any time. If this resolution is repealed, or our Board of Trustees does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or our Board of Trustees does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Our compliance with the REIT income and asset tests and the accuracy of our tax reporting to shareholders also depend upon our ability to successfully manage the calculation and composition of our gross and net taxable income, our E&P and our assets on an ongoing basis. Even a technical or inadvertent mistake could jeopardize our REIT status.
Our compliance with the REIT income and asset tests and the accuracy of our tax reporting to shareholders also depend upon our ability to successfully manage the calculation and composition of our gross and net taxable income, our E&P and our assets on an ongoing basis. Even a technical 40 or inadvertent mistake could jeopardize our REIT status.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: • 85% of our REIT ordinary income for that year; • 95% of our REIT capital gain net income for that year; and • any undistributed taxable income from prior years.
In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of: • 85% of our REIT ordinary income for that year; 41 • 95% of our REIT capital gain net income for that year; and • any undistributed taxable income from prior years.
Second, particular investments may underperform relative to any hedges that our Manager may have constructed for these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, 18 whereas their corresponding hedges often have the potential for unlimited loss.
Second, particular investments may underperform relative to any hedges that our Manager may have constructed for these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss.
As a result, an investment in our common shares may not be suitable for investors with lower risk tolerance. Risks Related to Our Organization and Structure Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations.
As a result, an investment in our common shares may not be suitable for investors with lower risk tolerance. 37 Risks Related to Our Organization and Structure Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations.
Our Manager's reliance on Ellington's models and data may induce it to purchase certain assets at prices that are too high, to sell certain other assets at prices that are 24 too low, or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.
Our Manager's reliance on Ellington's models and data may induce it to purchase certain assets at prices that are too high, to sell certain other assets at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.
GAAP. 25 Furthermore, in determining the fair value of our assets, our Manager uses proprietary models that require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, assumptions concerning future prepayment rates, interest rates, default rates and loss severities.
GAAP. Furthermore, in determining the fair value of our assets, our Manager uses proprietary models that require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, assumptions concerning future prepayment rates, interest rates, default rates and loss severities.
We have conducted and intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Both we and our Operating Partnership are organized as holding companies and conduct our business primarily through wholly-owned subsidiaries of our Operating 38 Partnership.
We have conducted and intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Both we and our Operating Partnership are organized as holding companies and conduct our business primarily through wholly-owned subsidiaries of our Operating Partnership.
In certain circumstances, the ability to deduct interest expense by any TRS that we may form could be limited. We intend to structure our foreign TRSs so that their income and operations will not be subject to U.S. federal, state and local income tax.
In certain circumstances, the ability to deduct interest expense by any TRS that we may form could be limited. 43 We intend to structure our foreign TRSs so that their income and operations will not be subject to U.S. federal, state and local income tax.
E&P in our foreign TRSs are taxable to us, and are not qualifying income for the purposes of the REIT 44 75% gross income tests, regardless of whether such earnings are distributed to us. In addition, losses in our foreign TRSs generally will not provide any tax benefit prior to liquidation.
E&P in our foreign TRSs are taxable to us, and are not qualifying income for the purposes of the REIT 75% gross income tests, regardless of whether such earnings are distributed to us. In addition, losses in our foreign TRSs generally will not provide any tax benefit prior to liquidation.
If COVID-19 continues to spread, efforts to contain COVID-19 are unsuccessful, or the United States experiences another highly infectious or contagious disease in the future, our business, financial condition, liquidity, and results of operations could be materially and adversely affected.
If COVID-19 continues to spread and/or mutate and efforts to contain COVID-19 are unsuccessful, or the United States experiences another highly infectious or contagious disease in the future, our business, financial condition, liquidity, and results of operations could be materially and adversely affected.
In the event we terminate the management agreement as discussed above or elect not to renew the management agreement, we will be required to pay our Manager a termination fee equal to 5% of our shareholders' equity as of the month-end preceding the date of the notice of termination or non-renewal.
In the event we 35 terminate the management agreement as discussed above or elect not to renew the management agreement, we will be required to pay our Manager a termination fee equal to 5% of our shareholders' equity as of the month-end preceding the date of the notice of termination or non-renewal.
Many factors delaying foreclosure, such as borrower lawsuits and judicial backlog and scrutiny, are outside of a servicer's control and have delayed, and will likely continue to delay, foreclosure processing in both judicial states (where foreclosures require court involvement) and non-judicial states.
Many factors delaying foreclosure, such as borrower lawsuits and judicial backlog and scrutiny, are outside of a servicer's 23 control and have delayed, and will likely continue to delay, foreclosure processing in both judicial states (where foreclosures require court involvement) and non-judicial states.
A number of factors, including a general economic downturn, unemployment, acts of God, pandemics such as the COVID-19 pandemic , terrorism, social unrest, and civil disturbances, may impair borrowers' abilities to repay their mortgage loans.
A number of factors, including a general economic downturn, unemployment, acts of God, pandemics such as the COVID-19 pandemic, inflation, terrorism, social unrest, and civil disturbances, may impair borrowers' abilities to repay their mortgage loans.
Smernoff, our Chief Financial Officer, also serves as the Chief Accounting Officer of Ellington Financial Inc. Mr. Herlihy, our Chief Operating Officer, also serves as the Chief Financial Officer of Ellington Financial Inc., and as a Managing Director of Ellington. 35 We may acquire or sell assets in which Ellington or its affiliates have or may have an interest.
Smernoff, our Chief Financial Officer, also serves as the Chief Accounting Officer of Ellington Financial Inc. Mr. Herlihy, our Chief Operating Officer, also serves as the Chief Financial Officer of Ellington Financial Inc., and as a Managing Director of Ellington. We may acquire or sell assets in which Ellington or its affiliates have or may have an interest.
Residential mortgage loans, including subprime, non-performing, and sub-performing residential mortgage loans, are subject to increased risks. We may acquire and manage residential mortgage loans. Residential mortgage loans, including subprime, non-performing, and sub-performing mortgage loans, are subject to increased risk of loss. Unlike Agency RMBS, residential mortgage loans generally are not guaranteed by the U.S.
Non-government guaranteed residential mortgage loans, including subprime, non-performing, and sub-performing residential mortgage loans, are subject to increased risks. We may acquire and manage residential mortgage loans. Non-government guaranteed residential mortgage loans, including subprime, non-performing, and sub-performing mortgage loans, are subject to increased risk of loss. Unlike Agency RMBS, residential mortgage loans generally are not guaranteed by the U.S.
If our third-party service providers including mortgage servicers do not perform as expected, our business, 22 financial condition and results of operations and our ability to pay dividends to our shareholders may be materially adversely affected.
If our third-party service providers including mortgage servicers do not perform as expected, our business, financial condition and results of operations and our ability to pay dividends to our shareholders may be materially adversely affected.
If we fail to qualify as a REIT in any calendar year, and do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax (and any applicable state and local taxes) on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income (although such dividends received by certain non-corporate U.S. taxpayers generally would be subject to a preferential rate of taxation).
If we fail to maintain our qualification as a REIT in any calendar year, and do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax (and any applicable state and local taxes) on our taxable income at regular corporate rates, and dividends paid to our shareholders would not be deductible by us in computing our taxable income (although such dividends received by certain non-corporate U.S. taxpayers generally would be subject to a preferential rate of taxation).
A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized.
A haircut is the 28 percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized.
Similarly, Ellington or its affiliates may acquire or sell assets in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue and consummate such transactions.
Similarly, Ellington or its affiliates may acquire or sell assets in which we have or may have an interest. Although such acquisitions or dispositions may 34 present conflicts of interest, we nonetheless may pursue and consummate such transactions.
Our hedging activity is expected to vary in scope based on the level and 28 volatility of interest rates, the types of liabilities and assets held and other changing market conditions.
Our hedging activity is expected to vary in scope based on the level and volatility of interest rates, the types of liabilities and assets held and other changing market conditions.
In addition, any domestic TRSs we form will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distributions to shareholders. The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.
In addition, any domestic TRSs we form will be subject to regular corporate U.S. federal, state and local taxes. Any of these taxes would decrease cash available for distributions to shareholders. The failure of RMBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to maintain our qualification as a REIT.
The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Report, including the matters set forth below in this Item 1A. 15 If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected.
The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Report, including the matters set forth below in this Item 1A. 16 If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected.
Mortgage loans that were underwritten pursuant to less stringent or looser underwriting guidelines, or that were poorly underwritten to their stated guidelines, have experienced, and should be expected to experience in the future, substantially higher rates of delinquencies, defaults, and foreclosures than those experienced by mortgage loans that were underwritten in a manner more consistent with Fannie Mae or Freddie Mac guidelines.
Mortgage loans that are underwritten pursuant to less stringent or looser underwriting guidelines, or that are poorly underwritten to their stated guidelines, have experienced, and should be expected to experience in the future, substantially higher rates of delinquencies, defaults, and foreclosures than those experienced by mortgage loans that are underwritten in a manner more consistent with Fannie Mae or Freddie Mac guidelines.
T he management agreement has a current term that expires on September 24, 2022, and will be automatically renewed for successive one-year terms thereafter unless notice of non-renewal is delivered by either party to the other party at least 180 days prior to the expiration of the then current term.
T he management agreement has a current term that expires on September 24, 2023, and will be automatically renewed for successive one-year terms thereafter unless notice of non-renewal is delivered by either party to the other party at least 180 days prior to the expiration of the then current term.
Unless our failure to qualify as a REIT was subject to relief under the U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
Unless our failure to maintain our qualification as a REIT was subject to relief under the U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify. Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.
Our Manager's entitlement to non-performance-based compensation might reduce its incentive to devote the time and effort of its professionals to seeking profitable opportunities for 34 our portfolio, which could result in a lower performance of our portfolio and materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
Our Manager's entitlement to non-performance-based compensation might reduce its incentive to devote the time and effort of its professionals to seeking profitable opportunities for 33 our portfolio, which could result in a lower performance of our portfolio and materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
In addition, even when specific underwriting guidelines were represented by loan originators as having been used in connection with the origination of mortgage loans, these guidelines were in many cases not followed as a result of aggressive lending practices, fraud (including borrower or appraisal fraud), or other factors.
In addition, even when specific underwriting guidelines are represented by loan originators as having been used in connection with the origination of mortgage loans, these guidelines are in many cases not followed as a result of aggressive lending practices, fraud (including borrower or appraisal fraud), or other factors.
Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy, including inflation, energy costs, unemployment, geopolitical issues, concerns over the creditworthiness of governments worldwide and the stability of the global banking system.
Our business is materially affected by conditions in the residential mortgage market, the residential real estate market, the financial markets, and the economy, including inflation, interest rates, energy costs, unemployment, geopolitical issues, concerns over the creditworthiness of governments worldwide and the stability of the global banking system.
Our use of the "Ellington" brand, trademark and logo overseas will therefore be unlicensed and could expose us to a claim of infringement. 37 Risks Related to Our Common Shares Our shareholders may not receive dividends or dividends may not grow over time.
Our use of the "Ellington" brand, trademark and logo overseas will therefore be unlicensed and could expose us to a claim of infringement. 36 Risks Related to Our Common Shares Our shareholders may not receive dividends or dividends may not grow over time.
To the extent that our portfolio is concentrated in any one region or type of security, downturns or other significant events or developments relating generally to such region or type of security may result in defaults on a number of our assets within a short time period, which may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
To the extent that our portfolio is concentrated in any one region or type of security, downturns or other significant events or developments relating generally to such region or type of security, such as natural disasters, may result in defaults on a number of our assets within a short time period, which may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
In order for us to qualify as a REIT, no more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts.
In order for us to maintain our qualification as a REIT, no more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts.
In addition, our declaration of trust provides that our Board of Trustees may authorize us to revoke or otherwise terminate our REIT election without the approval of our shareholders. • We operate in a highly competitive market. • An increase in interest rates may cause a decrease in the issuance volumes of certain of our targeted assets, which could adversely affect our ability to acquire targeted assets that satisfy our investment objectives and to generate income and pay dividends. • Lack of diversification in the number of assets we acquire would increase our dependence on relatively few individual assets. • Our ability to pay dividends will depend on our operating results, our financial condition and other factors, and we may not be able to pay dividends at a fixed rate or at all under certain circumstances. • We may invest in securities in the developing CRT sector that are subject to mortgage credit risk.
In addition, our declaration of trust provides that our Board of Trustees may authorize us to revoke or otherwise terminate our REIT election without the approval of our shareholders. • We operate in a highly competitive market. • An increase in interest rates may cause a decrease in the issuance volumes of certain of our targeted assets, which could adversely affect our ability to acquire targeted assets that satisfy our investment objectives and to generate income and pay dividends. • Lack of diversification in the number of assets we acquire would increase our dependence on relatively few individual assets. • Our ability to pay dividends will depend on our operating results, our financial condition and other factors, and we may not be able to pay dividends at a fixed rate or at all under certain circumstances. • Investments in second-lien mortgage loans could subject us to increased risk of losses. • We may invest in securities in the developing CRT sector that are subject to mortgage credit risk.
Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest and a penalty to the IRS based upon the amount of any deduction we take for deficiency dividends. Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest and a penalty to the IRS based upon the amount of any deduction we take for deficiency dividends. Even if we maintain our qualification as a REIT, we may face other tax liabilities that reduce our cash flows.
These underwriting guidelines were more permissive as to borrower credit history or credit score, borrower debt-to-income ratio, loan-to-value ratio, and/or as to documentation (such as whether and to what extent borrower income was required to be disclosed or verified).
These underwriting guidelines are more permissive as to borrower credit history or credit score, borrower debt-to-income ratio, loan-to-value ratio, and/or as to documentation (such as whether and to what extent borrower income was required to be disclosed or verified).
If the IRS were to successfully treat our mark-to-market gains as subject to the prohibited transaction tax or to successfully challenge the treatment or timing of recognition of our mark-to-market gains or losses with respect to our qualified liability hedges, we could owe material federal income or penalty tax or, in some circumstances, even fail to qualify as a REIT.
If the IRS were to successfully treat our mark-to-market gains as subject to the prohibited transaction tax or to successfully challenge the treatment or timing of recognition of our mark-to-market gains or losses with respect to our qualified liability hedges, we could owe material federal income or penalty tax or, in some circumstances, even fail to maintain our qualification as a REIT.
To qualify as a REIT, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares of beneficial interest. In order to meet these tests, we may be required to forego investments we might otherwise make.
To maintain our qualification as a REIT, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and the ownership of our shares of beneficial interest. In order to meet these tests, we may be required to forego investments we might otherwise make.
In order to help us qualify as a REIT, among other purposes, our declaration of trust generally prohibits any person from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares.
In order to help us maintain our qualification as a REIT, among other purposes, our declaration of trust generally prohibits any person from beneficially or constructively owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our shares.
To qualify as a REIT, we must distribute to our shareholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined excluding any net capital gains and without regard to the deduction for dividends paid.
To maintain our qualification as a REIT, we must distribute to our shareholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined excluding any net capital gains and without regard to the deduction for dividends paid.
Also, the risk of declining real estate values, in particular, is amplified in subordinated MBS, as are the risks associated with possible changes in the market's perception of the entity issuing or guaranteeing them, or by changes in government regulations and tax policies.
Also, the risk of declining real estate values, in particular, is amplified in subordinated MBS, CMBS and CRTs, as are the risks 20 associated with possible changes in the market's perception of the entity issuing or guaranteeing them, or by changes in government regulations and tax policies.
These circumstances may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders. • We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as well as increase losses when economic conditions are unfavorable. • Our rights under repo agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders. • Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our shareholders. 14 • Hedging instruments and other derivatives, including some credit default swaps, may not, in many cases, be traded on exchanges, or may not be guaranteed or regulated by any U.S. or foreign governmental authority and involve risks and costs that could result in material losses. • Certain of our hedging instruments are regulated by the CFTC and such regulations may adversely impact our ability to enter into such hedging instruments and cause us to incur increased costs. • Our use of derivatives may expose us to counterparty risk. • We engage in short selling transactions, which may subject us to additional risks. • We may change our investment strategy, investment guidelines, hedging strategy, and asset allocation, operational, and management policies without notice or shareholder consent, which may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
These circumstances may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. • Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders. • We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our shareholders, as well as increase losses when economic conditions are unfavorable. • Our rights under repo agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders. • Hedging against interest rate changes and other risks may materially adversely affect our business, financial condition and results of operations and our ability to pay dividends to our shareholders. 15 • Hedging instruments and other derivatives, including some credit default swaps, may not, in many cases, be traded on exchanges, or may not be guaranteed or regulated by any U.S. or foreign governmental authority and involve risks and costs that could result in material losses. • Our use of derivatives may expose us to counterparty risk. • We engage in short selling transactions, which may subject us to additional risks. • We may change our investment strategy, investment guidelines, hedging strategy, and asset allocation, operational, and management policies without notice or shareholder consent, which may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
Our failure to qualify as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common shares and would substantially reduce the cash available for distribution to our shareholders.
Our failure to maintain our qualification as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common shares and would substantially reduce the cash available for distribution to our shareholders.
It is possible, however, that the IRS could successfully assert that we do not own the RMBS during the term of the repurchase agreement, in which case we could fail to qualify as a REIT. Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
It is possible, however, that the IRS could successfully assert that we do not own the RMBS during the term of the repurchase agreement, in which case we could fail to maintain our qualification as a REIT. 42 Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
Significant repurchase activity could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders. 23 We could be subject to liability for potential violations of various federal, state and local laws and regulations, including predatory lending laws, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
We could be subject to liability for potential violations of various federal, state and local laws and regulations, including predatory lending laws, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our shareholders.
Further, if we fail to qualify as a REIT, we might need to borrow money or sell assets in order to pay any resulting tax. Our 41 payment of income tax would decrease the amount of our income available for distribution to our shareholders.
Further, if we fail to maintain our qualification as a REIT, we might need to borrow money or sell assets in order to pay any resulting tax. Our payment of income tax would decrease the amount of our income available for distribution to our shareholders.
Our failure to qualify as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common shares and would substantially reduce the cash available for distribution to our shareholders. • Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments. • Complying with REIT requirements may limit our ability to hedge effectively.
Federal Income Tax Risks • Your investment has various U.S. federal, state, and local income tax risks. • Our failure to qualify as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common shares and would substantially reduce the cash available for distribution to our shareholders. • Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments. • Complying with REIT requirements may limit our ability to hedge effectively.
Real estate assets are subject to various risks, including: • declines in the value of real estate; • acts of God, including pandemics, such as the COVID-19 pandemic, earthquakes, floods, wildfires, hurricanes, mudslides, volcanic eruptions and other natural disasters, which may result in uninsured losses; • acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001; • adverse changes in national and local economic and market conditions; • changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and zoning ordinances; • costs of remediation and liabilities associated with environmental conditions such as indoor mold; • potential liabilities for other legal actions related to property ownership including tort claims; and • the potential for uninsured or under-insured property losses.
Real estate assets are subject to various risks, including: • declines in the value of real estate, including due to declining property cash flows or rising capitalization rates; • acts of God, including pandemics, such as the COVID-19 pandemic, earthquakes, floods, wildfires, hurricanes, mudslides, volcanic eruptions and other natural disasters, which may result in uninsured losses; • acts of war, such as Russia's invasion of Ukraine, or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001; • adverse changes in national and local economic and market conditions; • changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and zoning ordinances; • costs of remediation and liabilities associated with environmental conditions such as indoor mold; 24 • potential liabilities for other legal actions related to property ownership including tort claims; and • the potential for uninsured or under-insured property losses.
Ginnie Mae, which guarantees MBS backed by federally insured or guaranteed loans primarily consisting of loans insured by the Federal Housing Administration, or "FHA," or guaranteed by the Department of Veterans Affairs, or "VA," is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the United States.
Ginnie Mae, which guarantees MBS backed by federally insured or guaranteed loans primarily consisting of loans insured by the Federal Housing Administration, or "FHA," or guaranteed by the Department of Veterans Affairs, or "VA," is part of the U.S. Department of Housing and Urban Development and its guarantees are backed by the full faith and credit of the United States.
See "—Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders" below.
See also "—Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to shareholders" for the impact of higher interest rates on our business.
In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, certain of Ellington's personnel, as well as third-party service providers that provide services to us, are working remotely.
In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, certain of Ellington's personnel, as well as the third-party service providers that provide services to us, are working remotely. Since the initial outbreak of COVID-19, certain of Ellington’s personnel and our service providers continue to work remotely.
At any time, industry-wide or company-specific regulatory inquiries or proceedings can be initiated and we cannot predict when or if any such regulatory inquiries or proceedings will be initiated that involve us or Ellington or its affiliates, including our Manager.
We, Ellington, or its affiliates may be subject to regulatory inquiries and proceedings, or other legal proceedings. At any time, industry-wide or company-specific regulatory inquiries or proceedings can be initiated and we cannot predict when or if any such regulatory inquiries or proceedings will be initiated that involve us or Ellington or its affiliates, including our Manager.
In the future, Fannie Mae and Freddie Mac may issue CRTs with a variety of other structures. Risks Related to the COVID-19 Pandemic The global outbreak of the COVID-19 pandemic has adversely affected, and could again adversely affect, our business, financial condition, liquidity, and results of operations.
In the future, Fannie Mae and Freddie Mac may issue CRTs with a variety of other structures. Risks Related to the COVID-19 Pandemic The global outbreak of the COVID-19 pandemic adversely affected, and this pandemic or future epidemics or pandemics could adversely affect in the future, our business, financial condition, liquidity, and results of operations.
The COVID-19 pandemic has negatively affected our business, and we believe that it could do so again. This pandemic caused significant volatility and disruption in the financial markets both globally and in the United States.
The COVID-19 pandemic negatively affected our business, and we believe that it (or a future epidemic or pandemic) could do so again in the future. This pandemic caused significant volatility and disruption in the financial markets both globally and in the United States.
Moreover, certain actions taken by U.S. or other governmental authorities that are intended to ameliorate the macroeconomic effects of the COVID-19 pandemic or an outbreak due to another highly infectious or contagious disease in the 32 future could harm our business.
Moreover, certain actions taken by U.S. or other governmental authorities to ameliorate the macroeconomic effects of the COVID-19 pandemic or an outbreak due to another highly infectious or contagious disease in the future, harmed, and could harm in the future, our business.
The future path of interest rates is highly uncertain. While we opportunistically hedge our exposure to changes in interest rates, such hedging may be limited by our intention to remain qualified as a REIT, and we can provide no assurance that our hedges will be successful, or that we will be able to enter into or maintain such hedges.
While we opportunistically hedge our exposure to changes in interest rates, such hedging may be limited by our intention to remain qualified as a REIT, and we can provide no assurance that our hedges will be successful, or that we will be able to enter into or maintain such hedges.
Government will ultimately take with respect to these GSEs. Fannie Mae, Freddie Mac, and Ginnie Mae could each be dissolved, and the U.S. Government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae, Freddie Mac, or Ginnie Mae were eliminated, or their structures were to change radically, or if the U.S.
Fannie Mae, Freddie Mac, and Ginnie Mae could each be dissolved, and the U.S. Government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae, Freddie Mac, or Ginnie Mae were eliminated, or their structures were to change radically, or if the U.S.
If long-term rates were to increase significantly, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because borrowers would be less likely to prepay their mortgages.
Fixed income assets, including many RMBS, typically decline in value if interest rates increase. If long-term rates were to increase significantly, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because borrowers would be less likely to prepay their mortgages.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include: • actual or anticipated variations in our quarterly operating results or dividends; • changes in our earnings estimates, failure to meet earnings or operating results expectations of public market analysts and investors, or publication of research reports about us or the real estate specialty finance industry; • increases in market interest rates that lead purchasers of our common shares to demand a higher yield; • repurchases and issuances by us of our common shares; • passage of legislation, changes in applicable law, court rulings, enforcement actions or other regulatory developments that adversely affect us or our industry; • changes in government policies or changes in timing of implementation of government policies, including with respect to Fannie Mae, Freddie Mac, and Ginnie Mae; • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions or departures of key management personnel; • actions by shareholders; • speculation in the press or investment community; • adverse changes in global, national, regional and local economic and market conditions, including those relating to pandemics, such as the COVID-19 pandemic; • our inclusion in, or exclusion from, various stock indices; • our operating performance and the performance of other similar companies; and • changes in accounting principles. 48 Future offerings of debt securities, which would rank senior to our common shares upon our bankruptcy liquidation, and future offerings of equity securities which could dilute the common share holdings of our existing shareholders and may be senior to our common shares for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common shares.
Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include: • actual or anticipated variations in our quarterly operating results or dividends; • changes in our earnings estimates, failure to meet earnings or operating results expectations of public market analysts and investors, or publication of research reports about us or the real estate specialty finance industry; • increases in market interest rates that lead purchasers of our common shares to demand a higher yield; • repurchases and issuances by us of our common shares; • passage of legislation, changes in applicable law, court rulings, enforcement actions or other regulatory developments that adversely affect us or our industry; • changes in government policies or changes in timing of implementation of government policies, including with respect to Fannie Mae, Freddie Mac, and Ginnie Mae; 47 • changes in market valuations of similar companies; • adverse market reaction to any increased indebtedness we incur in the future; • additions or departures of key management personnel; • actions by shareholders; • speculation in the press or investment community; • adverse changes in global, national, regional and local economic and market conditions, including those relating to pandemics, such as the COVID-19 pandemic, concerns regarding a recession and geopolitical conflicts, such as the war in Ukraine; • our inclusion in, or exclusion from, various stock indices; • our operating performance and the performance of other similar companies; and • changes in accounting principles.
As a result, we and our shareholders may have more limited rights against our present and former trustees and officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies, which could limit your recourse in the event of actions not in your best interest.
As a result, we and our shareholders may have more limited rights against our present and former trustees and officers than might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other companies, which could limit your recourse in the event of actions not in your best interest. 39 Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management.
However, no definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs in the U.S. mortgage market, and it is not possible at this time to predict the scope and nature of the actions that the U.S.
No definitive proposals or legislation have been released or enacted with respect to ending the conservatorship, unwinding the GSEs, or materially reducing the roles of the GSEs in the U.S. mortgage market, and it is not possible to predict the scope and nature of the actions that the U.S. Government will ultimately take with respect to these GSEs.
If these personnel are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, quarantines, office closures, ineffective remote work arrangements, or technology failures or limitations, our operations would be adversely impacted.
If these personnel are unable to work effectively, including because of illness, quarantines, office closures, ineffective remote work arrangements, or technology failures or limitations, our operations would be adversely impacted.
Risks Related to Our Organization and Structure • Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations. • The ownership limits in our declaration of trust may discourage a takeover or business combination that may have benefited our shareholders. • Our shareholders' ability to control our operations is severely limited. • Certain provisions of Maryland law could inhibit a change in our control. • Our authorized but unissued common and preferred shares may prevent a change in our control. • Our rights and the rights of our shareholders to take action against our trustees and officers or against our Manager or Ellington are limited, which could limit your recourse in the event actions are taken that are not in your best interests. • Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management. • Our declaration of trust generally does not permit ownership in excess of 9.8% of any class or series of our shares of beneficial interest, and attempts to acquire our shares in excess of the share ownership limits will be ineffective unless an exemption is granted by our Board of Trustees.
If we were required to register as an investment company under the Investment Company Act, we would be subject to the restrictions imposed by the Investment Company Act, which would require us to make material changes to our strategy. • The ownership limits in our declaration of trust may discourage a takeover or business combination that may have benefited our shareholders. • Our shareholders' ability to control our operations is severely limited. • Certain provisions of Maryland law could inhibit a change in our control. • Our authorized but unissued common and preferred shares may prevent a change in our control. • Our rights and the rights of our shareholders to take action against our trustees and officers or against our Manager or Ellington are limited, which could limit your recourse in the event actions are taken that are not in your best interests. • Our declaration of trust contains provisions that make removal of our trustees difficult, which could make it difficult for our shareholders to effect changes to our management. • Our declaration of trust generally does not permit ownership in excess of 9.8% of any class or series of our shares of beneficial interest, and attempts to acquire our shares in excess of the share ownership limits will be ineffective unless an exemption is granted by our Board of Trustees.
Although the interest we earn on our RMBS backed by ARMs generally will adjust for changing interest rates, such interest rate adjustments may not occur as quickly as the interest rate adjustments to any related borrowings, and such interest rate adjustments will generally be subject to interest rate caps, which potentially could cause such RMBS to acquire many of the characteristics of fixed rate securities if interest rates were to rise above the cap levels.
Although the interest we earn on our RMBS backed by ARMs generally will adjust for changing interest rates, such interest rate adjustments may not occur as quickly as the interest rate adjustments to any related borrowings, and such interest rate adjustments will generally be subject to interest rate caps, which potentially could cause such RMBS to acquire many of the characteristics of fixed rate securities during periods of rising or high interest rates.
A sufficiently deep and/or rapid increase in margin calls or haircuts would have an adverse impact on our liquidity. 27 Consequently, depending on market conditions at the relevant time, we may have to rely on additional equity issuances to meet our capital and financing needs, which may be dilutive to our shareholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders, and other purposes.
Consequently, depending on market conditions at the relevant time, we may have to rely on additional equity issuances to meet our capital and financing needs, which may be dilutive to our shareholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash distributions to our shareholders, and other purposes.
In the event that we cannot obtain sufficient funding and capital on acceptable terms, there may be a negative impact on the value of our common shares and our ability to pay dividends to our shareholders, and you may lose part or all of your investment. 47 We, Ellington, or its affiliates may be subject to regulatory inquiries and proceedings, or other legal proceedings.
In the event that we cannot obtain sufficient funding and capital on acceptable terms, there may be a negative impact on the value of our common shares and our ability to pay dividends to our shareholders, and you may lose part or all of your investment.
In addition, if there is a contraction in the overall availability of financing for our assets, including if the regulatory capital requirements imposed on our lenders change, our lenders may significantly increase the cost of the financing that they provide to us, or increase the amounts of collateral they require as a condition to providing us with financing.
In addition, if there is a contraction in the overall availability of financing for our assets, including if the regulatory capital requirements imposed on our lenders change or our shareholders’ equity decreases to levels that make us a less attractive financing counterparty, our lenders may significantly increase the cost of the financing that they provide to us, increase the 27 amounts of collateral they require as a condition to providing us with financing, or even cease providing us with financing.
As a result, there was a significant nationwide increase in loan delinquencies, forbearances, deferments, and modifications in the first half of 2020, which, if a similar increase were to occur, could adversely affect our results of operations. Future outbreaks involving other highly infectious or contagious diseases could have similar adverse effects.
As a result, there was a significant nationwide increase in loan delinquencies, forbearances, deferments, and modifications in the first half of 2020, which increased delinquencies and losses on our loans and otherwise adversely affected our results of operations in the first half of 2020. Future outbreaks involving other highly infectious or contagious diseases could have similar adverse effects.

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Item 7. Management's Discussion & Analysis

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

97 edited+50 added−63 removed63 unchanged
Biggest changeThe following table sets forth the dividend distributions authorized by the Board of Trustees for the periods indicated below: Year Ended December 31, 2021 Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.10 1,311 December 7, 2021 December 30, 2021 January 25, 2022 0.10 1,310 November 5, 2021 November 30, 2021 December 27, 2021 0.10 1,294 October 7, 2021 October 29, 2021 November 26, 2021 0.30 3,881 September 14, 2021 September 30, 2021 October 25, 2021 0.30 3,876 June 9, 2021 June 30, 2021 July 26, 2021 0.28 3,456 March 3, 2021 March 31, 2021 April 26, 2021 Year Ended December 31, 2020 Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.28 $ 3,456 December 17, 2020 December 31, 2020 January 25, 2021 0.28 3,454 September 10, 2020 September 30, 2020 October 26, 2020 0.28 3,450 June 10, 2020 June 30, 2020 July 27, 2020 0.28 3,449 March 4, 2020 March 31, 2020 April 27, 2020 On January 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on February 25, 2022 to shareholders of record as of January 31, 2022.
Biggest changeThe following table sets forth the dividend distributions authorized by the Board of Trustees for the periods indicated below: Year Ended December 31, 2022: Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.08 $ 1,070 December 7, 2022 December 30, 2022 January 25, 2023 0.08 1,063 November 7, 2022 November 30, 2022 December 27, 2022 0.08 1,060 October 6, 2022 October 31, 2022 November 25, 2022 0.08 1,060 September 8, 2022 September 30, 2022 October 25, 2022 0.08 1,058 August 4, 2022 August 31, 2022 September 26, 2022 0.08 1,046 July 8, 2022 July 29, 2022 August 25, 2022 0.08 1,046 June 7, 2022 June 30, 2022 July 25, 2022 0.08 1,049 May 2, 2022 May 31, 2022 June 27, 2022 0.10 1,311 April 7, 2022 April 29, 2022 May 25, 2022 0.10 1,311 March 7, 2022 March 31, 2022 April 25, 2022 0.10 1,311 February 7, 2022 February 28, 2022 March 25, 2022 0.10 1,311 January 7, 2022 January 31, 2022 February 25, 2022 Year Ended December 31, 2021: Dividend Per Share Dividend Amount Declaration Date Record Date Payment Date (In thousands) $ 0.10 1,311 December 7, 2021 December 30, 2021 January 25, 2022 0.10 1,310 November 5, 2021 November 30, 2021 December 27, 2021 0.10 1,294 October 7, 2021 October 29, 2021 November 26, 2021 0.30 3,881 September 14, 2021 September 30, 2021 October 25, 2021 0.30 3,876 June 9, 2021 June 30, 2021 July 26, 2021 0.28 3,456 March 3, 2021 March 31, 2021 April 26, 2021 On January 9, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on February 27, 2023 to shareholders of record as of January 31, 2023.
We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable 59 tax regulations. Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.
We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations. Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.
As such, the mortgage-backed securities are recorded at fair value on our Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on our Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities. Purchase and sales transactions are generally recorded on trade date.
As such, the mortgage-backed securities are recorded at fair value on our Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on our Consolidated Statement of Operations as a component of Change in net 57 unrealized gains (losses) on securities. Purchase and sales transactions are generally recorded on trade date.
The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.
The 66 delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.
Electing the fair value option allows us to 58 record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner.
Electing the fair value option allows us to record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner.
Net realized and unrealized losses of $(32.3) million on securities primarily consisted of $(34.5) million of net realized and unrealized losses on our Agency RMBS which were partially offset by net realized gains of 65 $1.9 million on our short U.S. Treasury securities.
Net realized and unrealized losses of $(32.3) million on securities primarily consisted of $(34.5) million of net realized and unrealized losses on our Agency RMBS which were partially offset by net realized gains of $1.9 million on our short U.S. Treasury securities.
We were initially formed through a strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 27-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." We are externally managed and advised by our Manager, an affiliate of Ellington.
We were initially formed through a strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 28-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." We are externally managed and advised by our Manager, an affiliate of Ellington.
Off-Balance Sheet Arrangements As of December 31, 2021, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Off-Balance Sheet Arrangements As of December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof. See Note 2 and Note 12 to our consolidated financial statements for additional details on income taxes.
Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, 58 regulations, and interpretations thereof. See Note 2 to our consolidated financial statements for additional details on income taxes.
The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended December, 31, 2021, September 30, 2021, June 30, 2021, March 31, 2021, and December 31, 2020.
The following table summarizes prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended December 31, 2022, September 30, 2022, June 30, 2022, March 31, 2022, and December, 31, 2021.
Core Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).
Adjusted Distributable Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income. The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).
Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty 67 less the counterparty's collateral held by us.
Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us.
The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from period to period. Core Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps. Core Earnings is a supplemental non-GAAP financial measure.
The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter. Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps. Adjusted Distributable Earnings is a supplemental non-GAAP financial measure.
We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to the COVID-19 pandemic and to quantitative tightening, exhibits high levels of interest rate risk, prepayment risk, financing and liquidity risk, shifting central bank and government policies, regulatory changes, and disruptive technological developments.
We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to quantitative tightening, shifting central bank and government policies, regulatory changes, and disruptive technological developments, exhibits high levels of interest rate risk, prepayment risk (including extension risk), financing and liquidity risk.
Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $19.2 million. We also received proceeds, net of offering costs paid, from the issuances of common shares of $8.9 million. We used $17.3 million to pay dividends.
Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $19.2 million. We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid of $8.9 million. We used $17.3 million to pay dividends.
Treasury securities. 64 Interest Expense For the years ended December 31, 2021 and 2020, the majority of interest expense that we incurred was related to our repo borrowings, which we use to finance our assets. We also incur interest expense in connection with our short positions in U.S.
Treasury securities. 63 Interest Expense For the years ended December 31, 2022 and 2021, the majority of interest expense that we incurred was related to our repo borrowings, which we use to finance our assets. We also incur interest expense in connection with our short positions in U.S.
Inflation Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors 69 influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Inflation Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors generally influence our performance more than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $290.8 million.
Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $155.0 million.
Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. As of December 31, 2021, substantially all of our borrowings were secured by specified pools.
Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. As of December 31, 2022, the majority of our borrowings were secured by specified pools.
Amounts at risk under our repurchase agreements as of December 31, 2021 and 2020 does not include $2.6 million and $2.9 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.
Amounts at risk under our repurchase agreements as of December 31, 2022 and December 31, 2021 does not include $1.5 million and $2.6 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.
Treasury securities as well as on our counterparties' cash collateral held by us. Our total interest expense for the year ended December 31, 2021 was $2.7 million, which primarily consisted of $2.1 million of interest expense on our repo borrowings, and $0.6 million of interest expense related to our short positions in U.S. Treasury securities.
Treasury securities as well as on our counterparties' cash collateral held by us. Our total interest expense for the year ended December 31, 2022 was $14.8 million, which primarily consisted of $14.1 million of interest expense on our repo borrowings, and $0.7 million of interest expense related to our short positions in U.S. Treasury securities.
Our short-term (the 12 months ending December 31, 2022) and long-term (beyond December 31, 2022) liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses.
Our short-term (the 12 months following period end) and long-term (beyond 12 months from period end) liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses.
Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction. These provisions may differ for each of our lenders.
Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction.
For the years ended December 31, 2021 and 2020, we recognized a Catch-up Premium Amortization Adjustment of $1.7 million and $(4.6) million, respectively, which is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations.
For the years ended December 31, 2022 and 2021, we recognized a Catch-up Premium Amortization Adjustment of $3.1 million and $1.7 million, respectively. The Catch-up Premium Amortization Adjustment is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations.
As of December 31, 2021 and 2020, our total debt-to-equity ratio was 6.9:1 and 6.1:1, respectively. Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of both December 31, 2021 and 2020 had an aggregate fair value of $1.1 billion.
As of December 31, 2022 and 2021, our total debt-to-equity ratio was 7.5:1 and 6.9:1, respectively. Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of December 31, 2022 and 2021 had an aggregate fair value of $0.9 billion and $1.1 billion.
Three-Month Period Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 Three-Month Constant Prepayment Rates 20.7% 21.9% 22.8% 23.6% 21.0% (1) Excludes recent purchases of fixed rate Agency specified pools with no prepayment history. 56 The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2021 and 2020.
Three-Month Period Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 Three-Month Constant Prepayment Rates 6.1% 9.8% 13.9% 17.0% 20.7% (1) Excludes recent purchases of fixed rate Agency specified pools with no prepayment history. 55 The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2022 and 2021.
As of December 31, 2021, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with two counterparties of approximately $11.3 million. As of December 31, 2020, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $5.1 million.
As of December 31, 2022, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with three counterparties of approximately $24.5 million. As of December 31, 2021, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $11.3 million.
For the year ended December 31, 2021, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.36%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 0.44%, resulting in a net interest margin of 1.92%.
For the year ended December 31, 2022, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.80%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 1.25%, resulting in a net interest margin of 1.55%.
As of December 31, 2021, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $4.1 million. As of December 31, 2020, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $3.5 million.
As of December 31, 2022, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with eight counterparties of approximately $4.6 million. As of December 31, 2021, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $4.1 million.
This mismatch in maturities, together with the uncertainty of RMBS prepayments, and other potential changes in timing and/or amount of cash flows on our RMBS assets, creates the risk that changes in interest rates will cause our financing costs with respect to our RMBS to increase relative to the income on our RMBS over the term of our investments. 60 Financial Derivatives The following table summarizes our portfolio of financial derivative holdings as of December 31, 2021 and 2020: (In thousands) December 31, 2021 December 31, 2020 Financial derivatives–assets, at fair value: TBA securities purchase contracts $ 158 $ 1,720 TBA securities sale contracts 750 — Fixed payer interest rate swaps 5,165 457 Fixed receiver interest rate swaps 289 614 Futures 276 — Total financial derivatives–assets, at fair value 6,638 2,791 Financial derivatives–liabilities, at fair value: TBA securities purchase contracts (182) — TBA securities sale contracts (168) (699) Fixed payer interest rate swaps (465) (5,208) Fixed receiver interest rate swaps (143) (377) Futures (145) (346) Total financial derivatives–liabilities, at fair value (1,103) (6,630) Total $ 5,535 $ (3,839) Pursuant to our hedging program, we engage in a variety of interest rate hedging activities that are designed to reduce the interest rate risk with respect to the liabilities incurred to acquire or hold RMBS.
This mismatch in maturities, together with the uncertainty of RMBS prepayments, and other potential changes in timing and/or amount of cash flows on our RMBS assets, creates the risk that changes in interest rates will cause our financing costs with respect to our RMBS to increase relative to the income on our RMBS over the term of our investments. 59 Financial Derivatives The following table summarizes our portfolio of financial derivative holdings as of December 31, 2022 and 2021: (In thousands) December 31, 2022 December 31, 2021 Financial derivatives–assets, at fair value: TBA securities purchase contracts $ — $ 158 TBA securities sale contracts 3,568 750 Fixed payer interest rate swaps 65,202 5,165 Fixed receiver interest rate swaps — 289 Futures — 276 Total financial derivatives–assets, at fair value 68,770 6,638 Financial derivatives–liabilities, at fair value: TBA securities purchase contracts (664) (182) TBA securities sale contracts — (168) Fixed payer interest rate swaps — (465) Fixed receiver interest rate swaps (2,373) (143) Futures (82) (145) Total financial derivatives–liabilities, at fair value (3,119) (1,103) Total $ 65,651 $ 5,535 Pursuant to our hedging program, we engage in a variety of interest rate hedging activities that are designed to reduce the interest rate risk with respect to the liabilities incurred to acquire or hold RMBS.
As of both December 31, 2021 and December 31, 2020, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated Balance Sheet. As of December 31, 2021, we had $1.1 billion of outstanding borrowings with 15 counterparties.
As of both December 31, 2022 and December 31, 2021, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated Balance Sheet. As of December 31, 2022, we had $0.8 billion of outstanding borrowings with 16 counterparties.
As of December 31, 2021, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $52.7 million. As of December 31, 2020, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $53.7 million.
As of December 31, 2022, we had an aggregate amount at risk under our repurchase agreements with 17 counterparties of $49.8 million. As of December 31, 2021, we had an aggregate amount at risk under our repurchase agreements with 15 counterparties of $52.7 million.
Our Agency portfolio turnover was approximately 88% for the year ended December 31, 2021, and we recognized net realized gains of $1.4 million. During the year ended December 31, 2021, we continued to hedge interest rate risk through the use of interest rate swaps, and short positions in TBAs, U.S. Treasury securities, and futures.
Our Agency portfolio turnover was approximately 147% for the year ended December 31, 2022, and we recognized net realized losses of $(77.2) million. For the year ended December 31, 2022, we continued to hedge interest rate risk through the use of interest rate swaps, and short positions in TBAs, U.S. Treasury securities, and futures.
Our total interest expense for the year ended December 31, 2020 was $10.0 million, consisting primarily of $9.7 million of interest expense on our repo borrowings, and $0.2 million of interest expense related primarily to our short positions in U.S. Treasury securities.
Our total interest expense for the year ended December 31, 2021 was $2.7 million, which primarily consisted of $2.1 million of interest expense on our repo borrowings, and $0.6 million of interest expense related to our short positions in U.S. Treasury securities.
Treasury securities sold short (118,750) (117,195) 98.69 (117,322) 98.80 — — — — — Reverse repurchase agreements 117,505 117,505 100.00 117,505 100.00 — — — — — Total $ 1,311,671 $ 1,306,427 $ 1,081,380 $ 1,040,029 (1) Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.
Treasury securities sold short (500) (498) 99.60 (499) 99.80 (118,750) (117,195) 98.69 (117,322) 98.80 Reverse repurchase agreements 499 499 100.00 499 100.00 117,505 117,505 100.00 117,505 100.00 Total $ 893,302 $ 966,744 $ 1,311,671 $ 1,306,427 (1) Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.
On February 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on March 25, 2022 to shareholders of record as of February 28, 2022.
On February 7, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on March 27, 2023 to shareholders of record as of February 28, 2023. 67 On March 7, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on April 25, 2023 to shareholders of record as of March 31, 2023.
If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling securities plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty. We held cash and cash equivalents of $69.0 million and $58.2 million as of December 31, 2021 and 2020, respectively.
If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling contracts plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty. As of December 31, 2022, we had cash and cash equivalents of $34.8 million.
December 31, 2021 December 31, 2020 Weighted Average Weighted Average Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity (In thousands) 30 days or less $ 162,089 0.18 % 13 $ 307,544 0.27 % 15 31-60 days 235,321 0.21 43 541,104 0.23 44 61-90 days 114,931 0.18 72 92,314 0.26 74 91-120 days 104,361 0.17 106 — — — 121-150 days 148,855 0.16 133 2,371 0.27 126 151-180 days 56,337 0.15 163 53,150 0.32 162 181-364 days 242,941 0.19 238 18,762 0.26 257 Total $ 1,064,835 0.18 % 111 $ 1,015,245 0.25 % 48 We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions.
December 31, 2022 December 31, 2021 Weighted Average Weighted Average Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity Borrowings Outstanding Interest Rate Remaining Days to Maturity (In thousands) 30 days or less $ 563,926 4.01 % 14 $ 162,089 0.18 % 13 31-60 days 210,569 2.73 44 235,321 0.21 43 61-90 days 67,960 4.16 72 114,931 0.18 72 91-120 days — — — 104,361 0.17 106 121-150 days — — — 148,855 0.16 133 151-180 days — — — 56,337 0.15 163 181-364 days — — — 242,941 0.19 238 Total $ 842,455 3.70 % 26 $ 1,064,835 0.18 % 111 We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions.
By comparison, for the year ended December 31, 2020, the weighted average yield of our Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.82%, while our total adjusted average cost of funds, including interest rate swaps and short U.S. Treasury securities, was 1.01%, resulting in a net interest margin of 1.81%.
By comparison, for the year ended December 31, 2021, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.36%, while our total adjusted average cost of funds, including interest rate swaps and short U.S.
(2) Excludes IOs. The majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2021 and 2020, investments in non-Agency RMBS constituted a relatively small portion of our total investments.
The majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2022 and 2021, investments in non-Agency RMBS constituted a relatively small portion of our total investments, although we expect to increase our portfolio of non-Agency RMBS given current market opportunities.
Under the current repurchase program adopted on June 13, 2018, we have repurchased 434,171 common shares through March 4, 2022 at an average price per share of $9.45 and an aggregate cost of $4.1 million, and have authorization to repurchase an additional 765,829 common shares.
Under the current repurchase program adopted on June 13, 2018, we have repurchased 474,192 common shares through March 3, 2023 at an average price per share of $9.21 and an aggregate cost of $4.4 million, and have authorization to repurchase an additional 725,808 common shares.
For the year ended December 31, 2020, we had a negative Catch-up Premium Amortization Adjustment of approximately $(4.6) million, which decreased interest income. Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.36% and 2.82% for the years ended December 31, 2021 and 2020, respectively.
For the years ended December 31, 202, and 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $3.1 million and $1.7 million, respectively, which increased interest income. Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.80% and 2.36% for the years ended December 31, 2022 and 2021, respectively.
We did not purchase any shares under this program during the year ended December 31, 2021. Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements.
Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements.
We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, or the "Investment Company Act." On April 2, 2021, we commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $75.0 million of common shares from time to time.
On April 2, 2021, we commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $75.0 million of common shares from time to time.
As a result of these activities, there was an increase in our cash holdings of $10.9 million, from $58.2 million as of December 31, 2020 to $69.0 million as of December 31, 2021. For the year ended December 31, 2020, our operating activities provided net cash of $24.4 million and our investing activities provided net cash of $304.1 million.
As a result of these activities, there was an increase in our cash holdings of $10.9 million, from $58.2 million as of December 31, 2020 to $69.0 million as of December 31, 2021.
During the year ended December 31, 2021, we issued 163,269 common shares under the ATM program which provided $1.9 million of net proceeds after $29 thousand of agent commissions and offering costs.
During the year ended December 31, 2022, we issued 268,780 common shares under the ATM program which provided $2.0 million of net proceeds after $38 thousand of agent commissions and $86 thousand of offering costs.
Quarter Ended Borrowings Outstanding at Quarter End Average Borrowings Outstanding Maximum Borrowings Outstanding at Any Month End (In thousands) December 31, 2021 $ 1,064,835 $ 1,068,384 $ 1,088,712 September 30, 2021 1,062,197 1,114,820 1,140,182 June 30, 2021 1,135,497 1,166,954 1,196,779 March 31, 2021 1,106,724 1,040,521 1,106,724 December 31, 2020 1,015,245 1,033,128 1,050,840 September 30, 2020 1,061,640 1,030,402 1,096,065 June 30, 2020 909,821 941,242 920,712 March 31, 2020 (1) 1,109,342 1,281,507 1,308,377 December 31, 2019 1,296,272 1,301,270 1,319,839 September 30, 2019 1,337,984 1,369,722 1,374,080 June 30, 2019 1,442,043 1,412,434 1,442,043 March 31, 2019 1,427,147 1,422,333 1,427,147 (1) For the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.
Quarter Ended Borrowings Outstanding at Quarter End Average Borrowings Outstanding Maximum Borrowings Outstanding at Any Month End (In thousands) December 31, 2022 $ 842,455 $ 899,752 $ 881,401 September 30, 2022 938,046 928,942 940,321 June 30, 2022 950,339 1,070,229 1,087,826 March 31, 2022 1,211,163 1,133,738 1,211,163 December 31, 2021 1,064,835 1,068,384 1,088,712 September 30, 2021 1,062,197 1,114,820 1,140,182 June 30, 2021 1,135,497 1,166,954 1,196,779 March 31, 2021 1,106,724 1,040,521 1,106,724 December 31, 2020 1,015,245 1,033,128 1,050,840 September 30, 2020 1,061,640 1,030,402 1,096,065 June 30, 2020 909,821 941,242 920,712 March 31, 2020 (1) 1,109,342 1,281,507 1,308,377 (1) During the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.
Liquidity and Capital Resources Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs.
Treasury securities and our financial derivatives, respectively, were primarily the result of the increase in long-term interest rates. Liquidity and Capital Resources Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs.
The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the years ended December 31, 2021 and 2020: Agency (1) Non-Agency (1) Total (1) (In thousands) Interest Income Average Holdings Yield Interest Income Average Holdings Yield Interest Income Average Holdings Yield Year ended December 31, 2021 $ 27,497 $ 1,118,346 2.46 % $ 757 $ 8,485 8.91 % $ 28,254 $ 1,126,831 2.51 % Year ended December 31, 2020 $ 25,337 $ 1,095,537 2.31 % $ 1,552 $ 20,837 7.45 % $ 26,889 $ 1,116,374 2.41 % (1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S.
The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the years ended December 31, 2022 and 2021: Agency (1) Non-Agency (1) Total (1) (In thousands) Interest Income Average Holdings Yield Interest Income Average Holdings Yield Interest Income Average Holdings Yield Year ended December 31, 2022 $ 31,866 $ 1,067,399 2.99 % $ 1,558 $ 14,115 11.04 % $ 33,424 $ 1,081,514 3.09 % Year ended December 31, 2021 $ 27,497 $ 1,118,346 2.46 % $ 757 $ 8,485 8.91 % $ 28,254 $ 1,126,831 2.51 % (1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S.
After giving effect to dividends during the year ended December 31, 2021 of $1.18 per share, our book value per share decreased to $11.76 as of December 31, 2021, from $13.48 as of December 31, 2020, and we had an economic return of (4.0)% for the year ended December 31, 2021.
After giving effect to dividends declared during the year ended December 31, 2022 of $1.04 per share, our book value per share decreased to $8.40 as of December 31, 2022, from $11.76 as of December 31, 2021, and we had a negative economic return of (19.7%) for the year ended December 31, 2022.
Our debt-to-equity ratio was 6.9:1 as of December 31, 2021, as compared to 6.1:1 as of December 31, 2020. Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.
Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions. Shareholders' Equity As of December 31, 2022, our shareholders' equity decreased to $112.4 million from $154.2 million as of December 31, 2021.
Since our inception, the Blackstone Funds had held special non-voting membership interests in the holding company that owns our Manager. In August 2021, an Ellington affiliate purchased these special non-voting membership interests from the Blackstone Funds.
Since our inception, the Blackstone Funds had held special non-voting membership interests in the holding company that owns our Manager. In August 2021, an Ellington affiliate purchased these special non-voting membership interests from the Blackstone Funds. We use leverage in both our Agency and non-Agency RMBS strategies, although we expect leverage in our non-Agency strategy to be significantly lower.
As of December 31, 2021, we had outstanding borrowings under repurchase agreements in the amount of $1.1 billion with 15 counterparties. We have elected to be taxed as a REIT for U.S. federal income tax purposes.
We have financed our RMBS exclusively through repurchase agreements, which we account for as collateralized borrowings. As of December 31, 2022, we had outstanding borrowings under repurchase agreements in the amount of $842.5 million with 16 counterparties. We have elected to be taxed as a REIT for U.S. federal income tax purposes.
Management Fees For each of the years ended December 31, 2021 and 2020, our management fee expense was approximately $2.4 million. Management fees are calculated based on our shareholders' equity at the end of each quarter.
Treasury securities, was 0.44%, resulting in a net interest margin of 1.92%. 64 Management Fees For the years ended December 31, 2022 and 2021, our management fee expense was approximately $1.8 million and $2.4 million, respectively. Management fees are calculated based on our shareholders' equity at the end of each quarter.
However, because Core Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP. 63 The following table reconciles, for the years ended December 31, 2021 and 2020, Core Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure: Year Ended December 31, (In thousands except for share amounts) 2021 2020 Net Income (Loss) $ (6,309) $ 20,112 Adjustments: Net realized (gains) losses on securities (3,818) (12,117) Change in net unrealized (gains) losses on securities 36,090 (15,625) Net realized (gains) losses on financial derivatives 2,526 13,204 Change in net unrealized (gains) losses on financial derivatives (8,600) 5,955 Net realized gains (losses) on periodic settlements of interest rate swaps (1,856) (810) Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps (355) (134) Non-recurring expenses 58 351 Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment (1,662) 4,619 Subtotal 22,383 (4,557) Core Earnings $ 16,074 $ 15,555 Weighted Average Shares Outstanding 12,683,761 12,353,246 Core Earnings Per Share $ 1.27 $ 1.26 Results of Operations for the Years Ended December 31, 2021 and 2020 Net Income (Loss) Net income (loss) for the year ended December 31, 2021 was $(6.3) million, as compared to $20.1 million for the year ended December 31, 2020.
The following table reconciles, for the years ended December 31, 2022 and 2021, Adjusted Distributable Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure: Year Ended December 31, (In thousands except for share amounts) 2022 2021 Net Income (Loss) $ (30,198) $ (6,309) Adjustments: Net realized (gains) losses on securities 73,682 (3,818) Change in net unrealized (gains) losses on securities 79,103 36,090 Net realized (gains) losses on financial derivatives (48,996) 2,526 Change in net unrealized (gains) losses on financial derivatives (58,533) (8,600) Net realized gains (losses) on periodic settlements of interest rate swaps 626 (1,856) Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps 1,282 (355) Non-recurring expenses — 58 Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment (3,144) (1,662) Subtotal 44,020 22,383 Adjusted Distributable Earnings $ 13,822 $ 16,074 Weighted Average Shares Outstanding 13,163,106 12,683,761 Adjusted Distributable Earnings Per Share $ 1.05 $ 1.27 Results of Operations for the Years Ended December 31, 2022 and 2021 Net Income (Loss) Net income (loss) for the year ended December 31, 2022 was $(30.2) million, as compared to $(6.3) million for the year ended December 31, 2021.
Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or the Secured Overnight Financing Rate, or "SOFR," for those same periods.
Treasury futures; and • Other derivatives. We generally enter into these transactions to offset the potential adverse effects of rising interest rates on short-term repurchase agreements. Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or SOFR for those same periods.
We also had $3.9 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date. Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us.
Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us.
We may enter into reverse repurchase agreements with third-party broker-dealers whereby we purchase securities under agreements to resell at an agreed-upon price and date. In general, we most often will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities.
In general, we most often 68 will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities.
As of December 31, 2021, we had cash and cash equivalents of $69.0 million, along with other unencumbered assets of approximately $16.7 million. This compares to cash and cash equivalents of $58.2 million and unencumbered assets of $47.4 million at December 31, 2020.
As of December 31, 2022, we had cash and cash equivalents of $34.8 million, in addition to other unencumbered assets of $2.9 million. This compares to cash and cash equivalents of $69.0 million and other unencumbered assets of $16.7 million as of December 31, 2021.
As of December 31, 2021 and 2020, we had $1.1 billion and $1.0 billion outstanding under our repurchase agreements, respectively. As of December 31, 2021, our outstanding repurchase agreements were with 15 counterparties.
These provisions may differ for each of our lenders. 65 As of December 31, 2022 and December 31, 2021, we had $0.8 billion and $1.1 billion outstanding under our repurchase agreements, respectively. As of December 31, 2022, our outstanding repurchase agreements were with 16 counterparties.
Our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—increased during the year, driven by a larger RMBS portfolio as well as a decrease in shareholders' equity year over year.
During the course of the year, w e increased our allocation to non-Agency RMBS and expect to continue to do so given current market opportunities. 54 Our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—declined during the year.
During the year ended December 31, 2021, we issued 163,269 common shares under the ATM program which provided $1.9 million of net proceeds after $29 thousand of agent commissions and offering costs. As of December 31, 2021, the Company had $73.0 million of common shares available to be issued remaining under the ATM program.
From commencement of the ATM program through March 3, 2023, we issued 838,809 common shares under the ATM program, which provided $7.1 million of net proceeds after $0.1 million of agent commissions and $0.1 million of offering costs. As of December 31, 2022, we had $67.7 million of common shares available to be issued remaining under the ATM program.
From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity 55 ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio. The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for the last five quarters, to illustrate this fluctuation.
The decrease was driven by a smaller Agency RMBS portfolio, partially offset by lower shareholder's equity and a smaller net short TBA position. From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio.
As of December 31, 2021, our book value per share was $11.76, as compared to $13.48 as of December 31, 2020. 62 Results of Operations for the Years Ended December 31, 2021 and 2020 The following table summarizes our results of operations for the years ended December 31, 2021 and 2020: Year Ended December 31, (In thousands except for per share amounts) 2021 2020 Interest Income (Expense) Interest income $ 28,364 $ 27,320 Interest expense (2,723) (9,965) Net interest income 25,641 17,355 Expenses Management fees to affiliate 2,402 2,357 Other operating expenses 3,350 3,469 Total expenses 5,752 5,826 Other Income (Loss) Net realized and change in net unrealized gains (losses) on securities (32,272) 27,742 Net realized and change in net unrealized gains (losses) on financial derivatives 6,074 (19,159) Total Other Income (Loss) (26,198) 8,583 Net Income (Loss) $ (6,309) $ 20,112 Net Income (Loss) Per Common Share $ (0.50) $ 1.63 Core Earnings Core Earnings consists of net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding, if applicable, any non-recurring items of income or loss.
As of December 31, 2022, our book value per share was $8.40, as compared to $11.76 as of December 31, 2021. 61 Results of Operations for the Years Ended December 31, 2022 and 2021 The following table summarizes our results of operations for the years ended December 31, 2022 and 2021: Year Ended December 31, (In thousands except for per share amounts) 2022 2021 Interest Income (Expense) Interest income $ 35,006 $ 28,364 Interest expense (14,820) (2,723) Net interest income 20,186 25,641 Expenses Management fees to affiliate 1,758 2,402 Other operating expenses 3,370 3,350 Total expenses 5,128 5,752 Other Income (Loss) Net realized and change in net unrealized gains (losses) on securities (152,785) (32,272) Net realized and change in net unrealized gains (losses) on financial derivatives 107,529 6,074 Total Other Income (Loss) (45,256) (26,198) Net Income (Loss) $ (30,198) $ (6,309) Net Income (Loss) Per Common Share $ (2.29) $ (0.50) Adjusted Distributable Earnings Beginning with the financial results for the quarter ended June 30, 2022, the supplemental non-GAAP financial measure that we previously referred to as "Core Earnings," we now refer to as "Adjusted Distributable Earnings." We calculate Adjusted Distributable Earnings (formerly referred to as Core Earnings) as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding other income or loss items that are of a non-recurring nature.
Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates. The relative makeup of our interest rate hedging portfolio can change materially from period to period.
We ended the year with a net short TBA position, both on a notional basis and as measured by 10-year equivalents. Ten-year equivalents for a group of positions represent the amount of 10-year U.S. Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.
For the year ended December 31, 2020, Other income (loss) was $8.6 million, consisting primarily of net realized and change in net unrealized gains of $27.0 million on our Agency RMBS and $3.2 million on our non-Agency RMBS, which were partially offset by net realized and change in net unrealized losses of $(2.7) million on our short U.S.
For the year ended December 31, 2022, Other income (loss) was $(45.3) million, consisting primarily of net realized and unrealized losses of $(152.8) million on our securities, which were partially offset by net realized and unrealized gains of $107.5 million on our financial derivatives.
Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $37.6 million. We used $13.8 million to pay dividends and $1.0 million to repurchase common shares.
Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $22.0 million. We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid of $2.0 million. We used $13.9 million to pay dividends, and $0.3 million to repurchase common shares.
As of December 31, 2021 and 2020, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.2% and 5.3%, respectively. 66 The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under repurchase agreements for the past twelve quarters.
As of December 31, 2022 and December 31, 2021, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.5% and 5.2%, respectively.
Critical Accounting Estimates Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S. GAAP," and Regulation S-X.
Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions. Critical Accounting Estimates Our consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, or "U.S. GAAP," and Regulation S-X.
December 31, 2021 December 31, 2020 Coupon (%) Current Principal Fair Value Weighted Average Loan Age (Months) Current Principal Fair Value Weighted Average Loan Age (Months) (In thousands) (In thousands) Fixed-rate Agency RMBS: 15-year fixed-rate mortgages: 2.00–2.49 $ 39,608 $ 40,857 10 $ — $ — — 2.50–2.99 26,752 27,734 32 16,385 17,236 42 3.00–3.49 22,935 24,062 48 14,001 14,824 37 3.50–3.99 21,311 22,638 54 25,113 27,177 50 4.00–4.49 14,121 15,101 46 21,529 23,347 33 4.50–4.99 306 318 147 550 575 135 Total 15-year fixed-rate mortgages 125,033 130,710 33 77,578 83,159 42 20-year fixed-rate mortgages: 2.00–2.49 28,153 28,289 16 32,333 33,633 4 2.50–2.99 2,200 2,255 17 3,212 3,382 5 3.00–3.49 1,998 2,090 22 2,496 2,647 10 4.00–4.49 1,751 1,928 17 2,161 2,492 5 4.50–4.99 806 871 39 1,300 1,417 27 5.00–5.49 824 914 40 1,057 1,192 28 Total 20-year fixed-rate mortgages 35,732 36,347 18 42,559 44,763 6 30-year fixed-rate mortgages: 2.00–2.49 342,662 342,371 3 — — — 2.50–2.99 159,754 164,340 8 16,361 17,383 3 3.00–3.49 81,860 85,828 32 98,654 105,085 28 3.50–3.99 170,743 183,150 63 245,320 266,547 51 4.00–4.49 135,518 146,946 67 191,033 209,502 55 4.50–4.99 100,695 109,672 61 146,843 162,645 49 5.00–5.49 30,130 33,303 73 54,804 61,719 51 5.50–5.99 4,828 5,442 68 7,890 8,951 49 6.00–6.49 1,653 1,852 39 2,658 3,049 27 Total 30-year fixed-rate mortgages 1,027,843 1,072,904 33 763,563 834,881 48 Total fixed-rate Agency RMBS $ 1,188,608 $ 1,239,961 32 $ 883,700 $ 962,803 45 For the year ended December 31, 2021, we had total net realized and unrealized losses on our Agency securities of $(34.5) million, or $(2.72) per share.
December 31, 2022 December 31, 2021 Coupon (%) Current Principal Fair Value Weighted Average Loan Age (Months) Current Principal Fair Value Weighted Average Loan Age (Months) (In thousands) (In thousands) Fixed-rate Agency RMBS: 15-year fixed-rate mortgages: 1.50-1.99 $ 3,608 $ 3,153 27 $ — $ — — 2.00–2.49 — — — 39,608 40,857 10 2.50–2.99 3,764 3,497 41 26,752 27,734 32 3.00–3.49 15,596 14,746 50 22,935 24,062 48 3.50–3.99 12,627 12,244 78 21,311 22,638 54 4.00–4.49 11,712 11,539 52 14,121 15,101 46 4.50–4.99 146 145 155 306 318 147 Total 15-year fixed-rate mortgages 47,453 45,324 56 125,033 130,710 33 20-year fixed-rate mortgages: 2.00–2.49 4,750 4,038 30 28,153 28,289 16 2.50–2.99 1,852 1,625 29 2,200 2,255 17 3.00–3.49 1,362 1,236 34 1,998 2,090 22 4.00–4.49 1,500 1,447 29 1,751 1,928 17 4.50–4.99 563 554 51 806 871 39 5.00–5.49 785 791 52 824 914 40 Total 20-year fixed-rate mortgages 10,812 9,691 33 35,732 36,347 18 30-year fixed-rate mortgages: 2.00–2.49 48,278 39,718 22 342,662 342,371 3 2.50–2.99 96,776 82,982 26 159,754 164,340 8 3.00–3.49 175,838 156,401 32 81,860 85,828 32 3.50–3.99 125,167 116,561 76 170,743 183,150 63 4.00–4.49 164,444 157,268 58 135,518 146,946 67 4.50–4.99 123,176 120,663 48 100,695 109,672 61 5.00–5.49 86,820 86,325 25 30,130 33,303 73 5.50–5.99 8,567 8,710 38 4,828 5,442 68 6.00–6.49 10,610 10,887 7 1,653 1,852 39 6.50–6.99 2,147 2,239 — — — — Total 30-year fixed-rate mortgages 841,823 781,754 44 1,027,843 1,072,904 33 Total fixed-rate Agency RMBS $ 900,088 $ 836,769 44 $ 1,188,608 $ 1,239,961 32 For the year ended December 31, 2022, we had total net realized and unrealized losses on our Agency securities of $(156.2) million, or $(11.86) per share.
Financing For the year ended December 31, 2021, our average repo borrowing cost decreased to 0.19%, as compared to 0.91% for the year ended December 31, 2020, mainly as a result of decreases in short-term interest rates. As of December 31, 2021 and 2020, the weighted average borrowing rate on our repurchase agreements was 0.18% and 0.25%, respectively.
Financing For the year ended December 31, 2022, our average repo borrowing cost increased to 1.40%, as compared to 0.19% for the year ended December 31, 2021. This increase in average repo borrowing cost was the result of significant increases in short-term interest rates during the year ended December 31, 2022.
Financial Condition Investment portfolio The following tables summarize our securities portfolio as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (In thousands) Current Principal Fair Value Average Price (1) Cost Average Cost (1) Current Principal Fair Value Average Price (1) Cost Average Cost (1) Agency RMBS (2) 15-year fixed-rate mortgages $ 125,033 $ 130,710 $ 104.54 $ 130,099 $ 104.05 $ 77,578 $ 83,159 $ 107.19 $ 80,144 $ 103.31 20-year fixed-rate mortgages 35,732 36,347 101.72 37,211 104.14 42,559 44,763 105.18 44,247 103.97 30-year fixed-rate mortgages 1,027,843 1,072,904 104.38 1,066,347 103.75 763,563 834,881 109.34 799,360 104.69 ARMs 11,491 11,960 104.08 12,034 104.73 19,459 20,442 105.05 19,981 102.68 Reverse mortgages 35,313 37,297 105.62 37,652 106.62 61,653 67,474 109.44 65,494 106.23 Total Agency RMBS 1,235,412 1,289,218 104.36 1,283,343 103.88 964,812 1,050,719 108.90 1,009,226 104.60 Non-Agency RMBS (2) 10,672 9,056 84.86 7,234 67.78 23,140 17,612 76.11 15,369 66.42 Total RMBS (2) 1,246,084 1,298,274 104.19 1,290,577 103.57 987,952 1,068,331 108.14 1,024,595 103.71 Agency IOs n/a 10,289 n/a 12,983 n/a n/a 13,049 n/a 15,434 n/a Non-Agency IOs n/a 2,798 n/a 2,684 n/a n/a — n/a — n/a Total mortgage-backed securities $ 1,311,361 $ 1,306,244 $ 1,081,380 $ 1,040,029 U.S.
Financial Condition Investment portfolio The following tables summarize our securities portfolio as of December 31, 2022 and 2021: December 31, 2022 December 31, 2021 (In thousands) Current Principal Fair Value Average Price (1) Cost Average Cost (1) Current Principal Fair Value Average Price (1) Cost Average Cost (1) Agency RMBS (2) 15-year fixed-rate mortgages $ 47,453 $ 45,324 $ 95.51 $ 48,899 $ 103.05 $ 125,033 $ 130,710 $ 104.54 $ 130,099 $ 104.05 20-year fixed-rate mortgages 10,812 9,691 89.63 11,508 106.44 35,732 36,347 101.72 37,211 104.14 30-year fixed-rate mortgages 841,823 781,754 92.86 849,168 100.87 1,027,843 1,072,904 104.38 1,066,347 103.75 ARMs 8,696 8,663 99.62 9,595 110.34 11,491 11,960 104.08 12,034 104.73 Reverse mortgages 17,506 17,852 101.98 19,659 112.30 35,313 37,297 105.62 37,652 106.62 Total Agency RMBS 926,290 863,284 93.20 938,829 101.35 1,235,412 1,289,218 104.36 1,283,343 103.88 Non-Agency RMBS (2) 16,895 12,566 74.38 12,414 73.48 10,672 9,056 84.86 7,234 67.78 Total RMBS (2) 943,185 875,850 92.86 951,243 100.85 1,246,084 1,298,274 104.19 1,290,577 103.57 Agency IOs n/a 9,313 n/a 9,212 n/a n/a 10,289 n/a 12,983 n/a Non-Agency IOs n/a 8,138 n/a 6,289 n/a n/a 2,798 n/a 2,684 n/a Total mortgage-backed securities $ 893,301 $ 966,744 $ 1,311,361 $ 1,306,244 U.S.
Interest Income Our portfolio as of both December 31, 2021 and 2020 consisted primarily of Agency RMBS, and to a lesser extent, non-Agency RMBS. Before interest expense, we earned approximately $28.3 million and $26.9 million in interest income on these securities for the years ended December 31, 2021 and 2020, respectively.
Before interest expense, we earned approximately $33.4 million and $28.3 million in interest income on these securities for the years ended December, 2022 and 2021, respectively.
We had total net realized and unrealized gains of $14.5 million, or $1.14 per share, on our interest rate hedging portfolio as interest rates increased during the year.
We had total net realized and unrealized gains of $122.6 million, or $9.31 per share, on our interest rate hedging portfolio, as interest rates increased significantly during the year. These gains 56 were partially offset by net realized and unrealized losses of $(11.7) million, or $(0.89) per share, on our long TBAs held for investment.
On March 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on April 25, 2022 to shareholders of record as of March 31, 2022. For the year ended December 31, 2021, our operating activities provided net cash of $27.9 million and our investing activities used net cash of $15.2 million.
As a result of these activities, there was a decrease in our cash holdings of $34.2 million, from $69.0 million as of December 31, 2021 to $34.8 million as of December 31, 2022. For the year ended December 31, 2021, our operating activities provided net cash of $27.9 million and our investing activities used net cash of $15.2 million.
The decrease in other operating expenses for the year ended December 31, 2021 was primarily due to a decrease in professional fees partially offset by an increase in compensation expense. Other Income (Loss) Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives.
For both of the years ended December 31, 2022 and 2021, our other operating expenses were approximately $3.4 million. Other Income (Loss) Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives.
Shareholders' Equity As of December 31, 2021, our shareholders' equity decreased to $154.2 million from $166.4 million as of December 31, 2020. This decrease principally consisted of dividends declared of $15.1 million and a net loss of $(6.3) million, partially offset by net proceeds from the issuances of common shares of $9.0 million.
This decrease principally consisted of a net loss of $(30.2) million and dividends declared of $13.7 million, partially offset by net proceeds from the issuance of common shares of $2.0 million.
While we use TBAs to hedge interest rate risk and certain other risks, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS. 61 The composition and relative mix of our hedging instruments may vary from period to period given the amount of our liabilities outstanding or anticipated to be entered into, the overall market environment and our view as to which instruments best enable us to execute our hedging goals.
While we use TBAs to hedge interest rate risk and certain other risks, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.
While large banks still dominate the repo market, non-bank firms, not subject to the same regulations as banks, are active in providing repo financing. Most of our outstanding repo financing is still provided by banks and bank affiliates; however, we have also entered into repo agreements with non-bank dealers.
Most of our outstanding repo financing is still provided by banks and bank affiliates; however, we have also entered into repo agreements with non-bank dealers. Our debt-to-equity ratio was 7.5:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021.
(2) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S. Treasury securities, and express the total as a percentage of our average outstanding repurchase agreement borrowings.
Treasury Securities (1)(2) Total (1) Average Borrowed Funds Interest Expense Average Cost of Funds Net periodic expense paid or payable Adjustment to Average Cost of Funds Interest expense Adjustment to Average Cost of Funds Interest and net periodic expense paid or payable Adjusted Average Cost of Funds (In thousands) Year ended December 31, 2022 $ 1,007,307 $ 14,105 1.40 % $ (2,200) (0.22) % $ 675 0.07 % $ 12,580 1.25 % Year ended December 31, 2021 $ 1,097,793 $ 2,130 0.19 % $ 2,149 0.20 % $ 561 0.05 % $ 4,840 0.44 % (1) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

9 edited+4 added−1 removed18 unchanged
Biggest changeIn addition to measuring and mitigating the risk related to changes in interest rates with respect to the generally shorter-term liabilities we incur to acquire and hold generally longer-lived RMBS, we also monitor the effect of changes in interest rates on the discounted present value of our portfolio of assets and liabilities.
Biggest changeIn general, such hedging instruments are used to mitigate the interest rate risk arising from the mismatch between the duration of our financed Agency RMBS and the duration of the liabilities used to finance such assets. 69 In addition to measuring and mitigating the risk related to changes in interest rates with respect to the generally shorter-term liabilities we incur to acquire and hold generally longer-lived RMBS, we also monitor the effect of changes in interest rates on the discounted present value of our portfolio of assets and liabilities.
Therefore, our current or future portfolios may have risks that differ significantly from those of our December 31, 2021 portfolio estimated above. Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above.
Therefore, our current or future portfolios may have risks that differ significantly from those of our December 31, 2022 portfolio estimated above. Moreover, the impact of changing interest rates on fair value can change significantly when interest rates change by a greater amount than the hypothetical shifts assumed above.
The following sensitivity analysis table shows the estimated impact on the fair value of our portfolio segregated by certain identified categories as of December 31, 2021, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.
The following sensitivity analysis table shows the estimated impact on the fair value of our portfolio segregated by certain identified categories as of December 31, 2022, assuming a static portfolio and immediate and parallel shifts in interest rates from current levels as indicated below.
The above analysis utilizes assumptions and estimates based on management's judgment and experience, and relies on financial models, which are inherently imperfect; in fact, different models can produce different results for the same securities. 70 While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we intend to actively trade many of the instruments in our portfolio and intend to diversify our portfolio to reflect a portfolio comprised primarily of Agency RMBS, and, to a lesser extent, non-Agency RMBS and mortgage-related assets.
While the table above reflects the estimated impacts of immediate parallel interest rate increases and decreases on specific categories of instruments in our portfolio, we intend to actively trade many of the instruments in our portfolio and intend to diversify our portfolio to reflect a portfolio comprised primarily of Agency RMBS, and, to a lesser extent, non-Agency RMBS and mortgage-related assets.
Credit Risk We are subject to credit risk in connection with certain of our assets, especially our non-Agency RMBS.
For example, prepayment rates are generally lower in states with substantially higher mortgage recording taxes. Credit Risk We are subject to credit risk in connection with certain of our assets, especially our non-Agency RMBS.
This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Changes in prepayment rates will have varying effects on the different types of securities in our portfolio, and we attempt to take these effects into account in making asset management decisions.
Changes in prepayment rates will have varying effects on the different types of securities in our portfolio, and we attempt to take these effects into account in making asset management decisions.
Additionally, increases in prepayment rates may cause us to experience losses on our investment in interest-only securities, or "IOs," and inverse interest only securities, or "IIOs," as these securities are extremely sensitive to prepayment rates. Finally, prepayment rates, besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation.
Increases in prepayment rates may cause us to experience both realized and unrealized losses on our interest-only securities, or "IOs," and inverse interest only securities, or "IIOs," as these securities are extremely sensitive to prepayment rates.
Treasury Securities, Interest Rate Swaps, and Futures (21,938) (14.22) % (44,724) (29.00) % 21,089 13.67 % 41,331 26.80 % Repurchase and Reverse Repurchase Agreements (600) (0.39) % (588) (0.38) % 1,708 1.11 % 3,416 2.21 % Total $ (3,082) (2.00) % $ (11,907) (7.72) % $ (2,165) (1.40) % $ (10,684) (6.93) % Our analysis of interest rate risk is derived from Ellington's proprietary models as well as third-party information and analytics.
Treasury Securities, Interest Rate Swaps, and Futures (16,442) (14.62) % (33,653) (29.94) % 15,674 13.94 % 30,579 27.20 % Repurchase and Reverse Repurchase Agreements (248) (0.22) % (492) (0.44) % 248 0.22 % 495 0.44 % Total $ 20 0.02 % $ (1,981) (1.76) % $ (2,045) (1.82) % $ (6,114) (5.44) % Our analysis of interest rate risk is derived from Ellington's proprietary models as well as third-party information and analytics.
(In thousands) Estimated Change for a Decrease in Interest Rates by Estimated Change for an Increase in Interest Rates by 50 Basis Points 100 Basis Points 50 Basis Points 100 Basis Points Category of Instruments Market Value % of Total Equity Market Value % of Total Equity Market Value % of Total Equity Market Value % of Total Equity Agency RMBS, excluding TBAs $ 19,736 12.80 % $ 34,020 22.06 % $ (25,187) (16.33) % $ (55,825) (36.20) % Long TBAs 3,906 2.53 % 6,472 4.20 % (5,246) (3.40) % (11,832) (7.67) % Short TBAs (3,574) (2.32) % (5,802) (3.76) % 4,920 3.19 % 11,186 7.25 % Non-Agency RMBS (612) (0.40) % (1,285) (0.84) % 551 0.36 % 1,040 0.68 % U.S.
(In thousands) Estimated Change for a Decrease in Interest Rates by Estimated Change for an Increase in Interest Rates by 50 Basis Points 100 Basis Points 50 Basis Points 100 Basis Points Category of Instruments Market Value % of Total Equity Market Value % of Total Equity Market Value % of Total Equity Market Value % of Total Equity Agency RMBS, excluding TBAs $ 21,696 19.30 % $ 42,287 37.62 % $ (22,804) (20.28) % $ (46,713) (41.56) % Long TBAs 1,927 1.71 % 3,628 3.23 % (2,152) (1.91) % (4,529) (4.03) % Short TBAs (6,949) (6.18) % (13,662) (12.15) % 7,186 6.39 % 14,610 13.00 % Non-Agency RMBS 36 0.03 % (89) (0.08) % (197) (0.18) % (556) (0.49) % U.S.
Removed
In general, such hedging instruments are used to mitigate the interest rate risk arising from the mismatch between the duration of our financed Agency RMBS and the duration of the liabilities used to finance such assets.
Added
The above analysis utilizes assumptions and estimates based on management's judgment and experience, and relies on financial models, which are inherently imperfect; in fact, different models can produce different results for the same securities.
Added
Most significantly, our portfolio is exposed to the risk of changes in prepayment rates of the mortgage loans underlying our RMBS. This rate of prepayment is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors.
Added
Mortgage prepayment rates can be highly sensitive to changes in interest rates, but they are also affected by housing turnover, which can be driven by factors other than interest rates, including worker mobility and home price appreciation.
Added
Conversely, decreases in prepayment rates on our securities with below-market interest rates may cause the duration of such securities to extend, which may cause us to experience unrealized losses on such securities. Prepayment rates, 70 besides being subject to interest rates and borrower behavior, are also substantially affected by government policy and regulation.

Other EARN 10-K year-over-year comparisons