UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2022
OR
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ________to ________
Commission file number 001-36099
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.)
|
|
|
|
|
|
|
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(877 ) 870 – 7005
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
☐
|
|
☒
|
|
|
|
|
|
|
Non-accelerated filer
|
☐
|
Smaller reporting company
|
|
|
|
|
|
|
|
Emerging growth company
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 3, 2022, there were 19,647,945 outstanding
shares of common stock, $0.01 par value per share, of Cherry Hill Mortgage Investment Corporation.
CHERRY HILL MORTGAGE INVESTMENT CORPORATION
|
|
|
Page
|
|
|
|
|
|
6
|
||
|
|
|
|
|
PART I.
|
8
|
|
|
|
|
|
|
Item 1.
|
8
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
Item 2.
|
50
|
|
|
|
|
|
|
Item 3.
|
74
|
|
|
|
|
|
|
Item 4.
|
78
|
|
|
|
|
|
|
PART II.
|
79
|
|
|
|
|
|
|
Item 1.
|
79
|
|
|
|
|
|
|
Item 1A.
|
79
|
|
|
|
|
|
|
Item 2.
|
79
|
|
|
|
|
|
|
Item 3.
|
79
|
|
|
|
|
|
|
Item 4.
|
79
|
|
|
|
|
|
|
Item 5.
|
79
|
|
|
|
|
|
|
Item 6.
|
80
|
|
GLOSSARY
This glossary defines some, but not all, of the terms that we use elsewhere in this
Quarterly Report on Form 10-Q. In this Quarterly Report on Form 10-Q, unless specifically stated otherwise or the context
otherwise indicates, references to “we,” “us,” “our,” the “Company” or “CHMI” refer to Cherry Hill Mortgage Investment Corporation, a Maryland corporation, together with its consolidated subsidiaries; references to the “Manager” refer to Cherry
Hill Mortgage Management, LLC, a Delaware limited liability company; and references to the “Operating Partnership” refer to Cherry Hill Operating Partnership, LP, a Delaware limited partnership.
“Agency” means a U.S. Government
agency, such as Ginnie Mae, or a GSE.
“Agency RMBS” means RMBS issued by
an Agency or for which an Agency guarantees payments of principal and interest on the securities.
“ASC” means an Accounting Standards
Codification.
“ARM” means an adjustable-rate
residential mortgage loan.
“CFTC” means the U.S. Commodity
Futures Trading Commission.
“CMO” means a collateralized
mortgage obligation. CMOs are either loss share securities issued by a GSE or structured debt instruments representing interests in specified pools of mortgage loans subdivided into multiple classes, or tranches, of securities, with each tranche
having different maturities or risk profiles.
“Code” means the
Internal Revenue Code of 1986, as amended.
“credit enhancement” means
techniques to improve the credit ratings of securities, including overcollateralization, creating retained spread, creating subordinated tranches and insurance.
“Excess MSR” means an interest in
an MSR, representing a portion of the interest payment collected from a pool of mortgage loans, net of a basic servicing fee paid to the mortgage servicer.
“Fannie Mae” means the Federal
National Mortgage Association.
“FHA” means the Federal Housing
Administration.
“Freddie Mac” means the Federal
Home Loan Mortgage Corporation.
“FRM” means a fixed-rate
residential mortgage loan.
“GAAP” means U.S. generally
accepted accounting principles.
“Ginnie Mae” means the
Government National Mortgage Association, a wholly-owned corporate instrumentality of the United States of America within HUD.
“GSE” means a
government-sponsored enterprise. When we refer to GSEs, we mean Fannie Mae or Freddie Mac.
“HUD” means the U.S. Department of
Housing and Urban Development.
“hybrid ARM” means a residential
mortgage loan that has an interest rate that is fixed for a specified period of time (typically three, five, seven or ten years) and thereafter adjusts to an increment over a specified interest rate index.
“inverse IO” means an inverse
interest-only security, which is a type of stripped security. These debt securities receive no principal payments and have a coupon rate which has an inverse relationship to its reference index.
“IO” means an interest-only
security, which is a type of stripped security. IO strips receive a specified portion of the interest on the underlying assets.
“MBS” means mortgage-backed
securities.
“MSR” means a mortgage servicing
right. An MSR provides a mortgage servicer with the right to service a mortgage loan or a pool of mortgages in exchange for a portion of the interest payments made on the mortgage or the underlying mortgages. An MSR is made up of two components:
a basic servicing fee and an Excess MSR. The basic servicing fee is the amount of compensation for the performance of servicing duties.
“mortgage loan” means a loan
secured by real estate together with the right to receive the payment of principal and interest on the loan (including the servicing fee).
“non-Agency RMBS” means CMOs that
either are loss share securities issued by a GSE or are not issued or guaranteed by an Agency, including investment grade (AAA through BBB rated) and non-investment grade (BB rated through unrated) classes.
“non-conforming loan” means a
residential mortgage loan that does not conform to the Agency underwriting guidelines and does not meet the funding criteria of Fannie Mae and Freddie Mac.
“non-QM loan” means a mortgage
loan that does not satisfy the requirements for a qualified mortgage.
“prime mortgage loan” means a
mortgage loan that generally conforms to GSE underwriting guidelines or is a non-QM loan with a FICO score generally above 700.
“qualified mortgage” means a
mortgage that complies with the ability to repay rule and related requirements in Regulation Z.
“REIT” means a real estate
investment trust under the Code.
“residential mortgage pass-through certificate” is a MBS that represents an interest in a “pool” of mortgage loans secured by residential real property where payments of both interest and principal (including principal prepayments) on the underlying
residential mortgage loans are made monthly to holders of the security, in effect “passing through” monthly payments made by the individual borrowers on the mortgage loans that underlie the security, net of fees paid to the issuer/guarantor and
servicer.
“RMBS” means a residential Agency
RMBS or a non-Agency RMBS.
“Servicing Related Assets” means
Excess MSRs and MSRs.
“SIFMA” means the Securities
Industry and Financial Markets Association.
“stripped security” is an RMBS
structured with two or more classes that receives different distributions of principal or interest on a pool of RMBS. Stripped securities include IOs and inverse IOs.
“TBA” means a forward-settling
Agency RMBS where the pool is “to-be-announced.” In a TBA, a buyer will agree to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be
delivered is not identified until shortly before the TBA settlement date.
“TRS” means a taxable REIT
subsidiary.
“UPB” means unpaid principal
balance.
“U.S. Treasury” means the U.S.
Department of Treasury.
“VA” means the Department of
Veterans Affairs.
“VA mortgage loan” means a
mortgage loan that is partially guaranteed by the VA in accordance with its regulations.
Cherry Hill Mortgage Investment Corporation (together with its consolidated
subsidiaries, the “Company,” “we,” “our” or “us”) makes forward-looking statements in this Quarterly Report on Form 10-Q within the meaning of the Private Securities Litigation Reform Act of 1995 (as set forth in Section 27A of the Securities Act
of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). For these statements, the Company claims the protections of the safe harbor for forward-looking statements
contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information
about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,”
“intend,” “should,” “could,” “would,” “may,” “potential” or the negative of these terms or other comparable terminology, the Company intends to identify forward-looking statements. Forward-looking statements involve numerous risks and
uncertainties. Our actual results may differ materially from our beliefs, expectations, estimates and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Statements regarding the following subjects, among others, may be forward-looking:
| • |
the Company’s investment objectives and business strategy;
|
| • |
the Company’s ability to raise capital through the sale of its equity and debt securities and to invest the net proceeds of any such offering in the target assets, if any, identified at the time of the offering;
|
| • |
the Company’s ability to obtain future financing arrangements and refinance existing financing arrangements as they mature;
|
| • |
the Company’s expected leverage;
|
| • |
the Company’s expected investments and the timing thereof;
|
| • |
the Company’s ability to acquire Servicing-Related Assets and mortgage and real estate-related securities;
|
| • |
estimates and statements relating to, and the Company’s ability to make, future distributions to holders of the Company’s securities;
|
| • |
the Company’s ability to compete in the marketplace;
|
| • |
market, industry and economic trends;
|
| • |
recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Treasury and the Board of Governors of the Federal Reserve System, Fannie Mae, Freddie Mac, Ginnie Mae and the U.S.
Securities and Exchange Commission (“SEC”), including actions such as forbearance programs and prohibitions on foreclosures taken in response to the ongoing coronavirus (“COVID-19”) pandemic;
|
| • |
mortgage loan modification programs and future legislative actions;
|
| • |
the Company’s ability to qualify and to maintain its qualification as a REIT under the Code and limitations on the Company’s business due to compliance with requirements for maintaining its qualification as a
REIT under the Code;
|
| • |
the Company’s ability to maintain an exception from the definitions of “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”), or otherwise not fall within those
definitions;
|
| • |
projected capital and operating expenditures;
|
| • |
availability of qualified personnel; and
|
| • |
projected prepayment and/or default rates.
|
The Company’s beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to it or are within its control. If any such change occurs, the
Company’s business, financial condition, liquidity and results of operations may vary materially from those expressed in, or implied by, the Company’s forward-looking statements. Important factors, among others, that may cause the Company’s actual
results, performance, liquidity or achievements to differ materially from those expressed or implied by the Company’s forward-looking statements include:
| • |
the factors discussed under “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q and “Part I, Item 1A. Risk Factors” in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2021;
|
| • |
the uncertainty and economic impact of the COVID-19 pandemic and of responsive measures implemented by various governmental authorities, businesses and other third parties;
|
| • |
general volatility of the capital markets;
|
| • |
accelerating inflationary trends, spurred by multiple factors including high commodity prices, a tight labor market, and low residential vacancy rates, may result
further in interest rate increases and lead to increased market volatility;
|
| • |
changes in the Company’s investment objectives and business strategy;
|
| • |
availability, terms and deployment of capital;
|
| • |
availability of suitable investment opportunities;
|
| • |
the Company’s dependence on its external manager, Cherry Hill Mortgage Management, LLC, and the Company’s ability to find a suitable replacement if the Company or the Manager were to terminate the management
agreement the Company has entered into with the Manager;
|
| • |
changes in the Company’s assets, interest rates or the general economy;
|
| • |
increased rates of default and/or decreased recovery rates on the Company’s investments, including as a result of the effects of more severe weather and changes in traditional weather patterns;
|
| • |
the ultimate geographic spread, severity and duration of pandemics, such as the outbreak of the COVID-19 pandemic and the emergence of new variants of the virus, actions that may be taken by governmental
authorities to contain or address the impact of such pandemics, and the potential negative impacts of such pandemics on the U.S. and global economy generally and the U.S. residential mortgage market and our financial condition and results
of operations specifically;
|
| • |
changes in interest rates, interest rate spreads, the yield curve, prepayment rates or recapture rates;
|
| • |
limitations on the Company’s business due to compliance with requirements for maintaining its qualification as a REIT under the Code and the Company’s exception from the definitions of “investment company” under
the Investment Company Act (or of otherwise not falling within those definitions);
|
| • |
the degree and nature of the Company’s competition, including competition for the residential mortgage assets in which the Company invests; and
|
| • |
other risks associated with acquiring, investing in and managing residential mortgage assets.
|
Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this Quarterly Report on Form 10-Q. Except as otherwise may be required by law, the Company undertakes no obligation to update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise.
| Item 1. |
Consolidated Financial Statements
|
Cherry Hill Mortgage Investment Corporation and Subsidiaries
(in thousands — except share and par value data)
|
(unaudited)
|
||||||||
|
June 30, 2022
|
December 31, 2021
|
|||||||
|
Assets
|
||||||||
|
RMBS, available-for-sale, at fair value (including pledged assets of $
|
$
|
|
$
|
|
||||
|
Investments in Servicing Related Assets, at fair value (including pledged assets of $
|
|
|
||||||
|
Cash and cash equivalents
|
|
|
||||||
|
Restricted cash
|
|
|
||||||
|
Derivative assets
|
|
|
||||||
|
Receivables from unsettled trades
|
||||||||
|
Receivables and other assets
|
|
|
||||||
|
Total Assets
|
$
|
|
$
|
|
||||
|
Liabilities and Stockholders’ Equity
|
||||||||
|
Liabilities
|
||||||||
|
Repurchase agreements
|
$
|
|
$
|
|
||||
|
Derivative liabilities
|
|
|
||||||
|
Notes payable
|
|
|
||||||
|
Dividends payable
|
|
|
||||||
|
Due to manager
|
|
|
||||||
|
Payables for unsettled trades
|
||||||||
|
Accrued expenses and other liabilities
|
|
|
||||||
|
Total Liabilities
|
$
|
|
$
|
|
||||
|
Stockholders’ Equity
|
||||||||
|
Series A Preferred stock, $
|
$
|
|
$
|
|
||||
|
Series B Preferred stock, $
|
|
|
||||||
|
Common stock, $
|
|
|
||||||
|
Additional paid-in capital
|
|
|
||||||
|
Accumulated Deficit
|
(
|
)
|
(
|
)
|
||||
|
Accumulated other comprehensive income (loss)
|
(
|
)
|
|
|||||
|
Total Cherry Hill Mortgage Investment Corporation Stockholders’ Equity
|
$
|
|
$
|
|
||||
|
Non-controlling interests in Operating Partnership
|
|
|
||||||
|
Total Stockholders’ Equity
|
$
|
|
$
|
|
||||
|
Total Liabilities and Stockholders’ Equity
|
$
|
|
$
|
|
||||
See accompanying notes to consolidated financial statements.
Cherry Hill Mortgage Investment Corporation and Subsidiaries
(Unaudited)
(in thousands — except share and per share data)
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Income
|
||||||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest expense
|
|
|
|
|
||||||||||||
|
Net interest income
|
|
|
|
|
||||||||||||
|
Servicing fee income
|
|
|
|
|
||||||||||||
|
Servicing costs
|
|
|
|
|
||||||||||||
|
Net servicing income
|
|
|
|
|
||||||||||||
|
Other income (loss)
|
||||||||||||||||
|
Realized gain (loss) on RMBS, available-for-sale, net
|
(
|
)
|
|
(
|
)
|
|
||||||||||
|
Realized loss on derivatives, net
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Realized gain on acquired assets, net
|
|
|
|
|
||||||||||||
|
Unrealized gain (loss) on derivatives, net
|
|
|
|
(
|
)
|
|||||||||||
|
Unrealized gain (loss) on investments in Servicing Related Assets
|
|
(
|
)
|
|
|
|||||||||||
|
Total Income (Loss)
|
(
|
)
|
(
|
)
|
|
|
||||||||||
|
Expenses
|
||||||||||||||||
|
General and administrative expense
|
|
|
|
|
||||||||||||
|
Management fee to affiliate
|
|
|
|
|
||||||||||||
|
Total Expenses
|
|
|
|
|
||||||||||||
|
Income (Loss) Before Income Taxes
|
(
|
)
|
(
|
)
|
|
|
||||||||||
|
Provision for (Benefit from) corporate business taxes
|
|
(
|
)
|
|
|
|||||||||||
|
Net Income (Loss)
|
(
|
)
|
(
|
)
|
|
|
||||||||||
|
Net (income) loss allocated to noncontrolling interests in Operating Partnership
|
|
|
(
|
)
|
(
|
)
|
||||||||||
|
Dividends on preferred stock
|
|
|
|
|
||||||||||||
|
Net Income (Loss) Applicable to Common Stockholders
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Net Income (Loss) Per Share of Common Stock
|
||||||||||||||||
|
Basic
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Diluted
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Weighted Average Number of Shares of Common Stock Outstanding
|
||||||||||||||||
|
Basic
|
|
|
|
|
||||||||||||
|
Diluted
|
|
|
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
Cherry Hill Mortgage Investment Corporation and Subsidiaries
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Other comprehensive income (loss):
|
||||||||||||||||
|
Unrealized gain (loss) on RMBS, available-for-sale, net
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||
|
Net other comprehensive income (loss)
|
|
(
|
)
|
(
|
)
|
(
|
)
|
|||||||||
|
Comprehensive loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Comprehensive loss attributable to noncontrolling interests in Operating Partnership
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Dividends on preferred stock
|
|
|
|
|
||||||||||||
|
Comprehensive loss attributable to common stockholders
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
See accompanying notes to consolidated financial statements.
Cherry Hill Mortgage Investment Corporation and Subsidiaries
(Unaudited)
(in thousands — except share and per share data)
|
|
Common
Stock
Shares
|
Common
Stock
Amount
|
Preferred
Stock
Shares
|
Preferred
Stock
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Retained
Earnings
(Deficit)
|
Non-
Controlling
Interest in
Operating
Partnership
|
Total
Stockholders’
Equity
|
|||||||||||||||||||||||||||
|
Balance, December 31, 2020
|
|
$
|
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Conversion of OP units
|
-
|
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Net Income before dividends on preferred stock
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Other Comprehensive Loss
|
-
|
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||||||
|
LTIP-OP Unit awards
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Distribution paid on LTIP-OP Units
|
-
|
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Common dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series A dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series B dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Balance, March 31, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Redemption of OP units for cash
|
- | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||
|
Net Loss before dividends on preferred stock
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||
|
Other Comprehensive Loss
|
-
|
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||||||
|
LTIP-OP Unit awards
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Distribution paid on LTIP-OP Units
|
-
|
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Common dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series A dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series B dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Balance, June 30, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||||
|
Balance, December 31, 2021
|
|
$
|
|
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Net Income before dividends on preferred stock
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Other Comprehensive Loss
|
-
|
|
-
|
|
|
(
|
)
|
|
|
(
|
)
|
|||||||||||||||||||||||||
|
LTIP-OP Unit awards
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Distribution paid on LTIP-OP Units
|
-
|
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Common dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series A dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series B dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Balance, March 31, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||||
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Net Income before dividends on preferred stock
|
-
|
|
-
|
|
|
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||||||||||||||||||
|
Other Comprehensive Income
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
LTIP-OP Unit awards
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
|
Distribution paid on LTIP-OP Units
|
-
|
|
-
|
|
|
|
|
(
|
)
|
(
|
)
|
|||||||||||||||||||||||||
|
Common dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series A dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Preferred Series B dividends declared, $
|
-
|
|
-
|
|
|
|
(
|
)
|
|
(
|
)
|
|||||||||||||||||||||||||
|
Balance, June 30, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||||||||||||||
See accompanying notes to consolidated financial statements.
Cherry Hill Mortgage Investment Corporation and Subsidiaries
|
|
Six Months Ended June 30,
|
|||||||
|
|
2022
|
2021
|
||||||
|
Cash Flows From Operating Activities
|
||||||||
|
Net income
|
$
|
|
$
|
|
||||
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||
|
Realized (gain) loss on RMBS, available-for-sale, net
|
|
(
|
)
|
|||||
|
Unrealized gain on investments in Servicing Related Assets
|
(
|
)
|
(
|
)
|
||||
|
Realized gain on acquired assets, net
|
(
|
)
|
(
|
)
|
||||
|
Realized loss on derivatives, net
|
|
|
||||||
|
Unrealized (gain) loss on derivatives, net
|
(
|
)
|
|
|||||
|
Amortization of premiums on RMBS, available-for-sale
|
|
|
||||||
|
Amortization of deferred financing costs
|
|
|
||||||
|
LTIP-OP Unit awards
|
|
|
||||||
|
Changes in:
|
||||||||
|
Receivables and other assets, net
|
|
|
||||||
|
Due to affiliates
|
|
|
||||||
|
Accrued expenses and other liabilities, net
|
|
(
|
)
|
|||||
|
Net cash provided by operating activities
|
$
|
|
$
|
|
||||
|
Cash Flows From Investing Activities
|
||||||||
|
Purchase of RMBS
|
(
|
)
|
(
|
)
|
||||
|
Principal paydown of RMBS
|
|
|
||||||
|
Proceeds from sale of RMBS
|
|
|
||||||
|
Acquisition of MSRs
|
(
|
)
|
(
|
)
|
||||
|
Payments for settlement of derivatives
|
(
|
)
|
(
|
)
|
||||
|
Net cash provided by investing activities
|
$
|
|
$
|
|
||||
|
Cash Flows From Financing Activities
|
||||||||
|
Borrowings under repurchase agreements
|
|
|
||||||
|
Repayments of repurchase agreements
|
(
|
)
|
(
|
)
|
||||
|
Proceeds from derivative financing
|
|
(
|
)
|
|||||
|
Proceeds from bank loans
|
|
|
||||||
|
Dividends paid
|
(
|
)
|
(
|
)
|
||||
|
LTIP-OP Units distributions paid
|
(
|
)
|
(
|
)
|
||||
|
Conversion of OP units
|
|
(
|
)
|
|||||
|
Redemption of OP units for cash
|
( |
) | ||||||
|
Issuance of common stock, net of offering costs
|
|
|
||||||
|
Net cash used in financing activities
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
|
$
|
|
$
|
(
|
)
|
|||
|
Cash, Cash Equivalents and Restricted Cash, Beginning of Period
|
|
|
||||||
|
Cash, Cash Equivalents and Restricted Cash, End of Period
|
$
|
|
$
|
|
||||
|
Supplemental Disclosure of Cash Flow Information
|
||||||||
|
Cash paid during the period for interest expense
|
$
|
|
$
|
|
||||
|
Cash paid during the period for income taxes
|
$
|
|
$
|
|
||||
|
Supplemental Schedule of Non-Cash Investing and Financing Activities
|
||||||||
|
Dividends declared but not paid
|
$
|
|
$
|
|
||||
|
Sale of RMBS, settled after period end
|
( |
) | ||||||
|
Purchase of RMBS, settled after period end
|
$
|
|
$
|
|
||||
See accompanying notes to consolidated financial statements.
Cherry Hill Mortgage Investment Corporation and Subsidiaries
June 30, 2022
(Unaudited)
Note 1 — Organization and Operations
Cherry Hill Mortgage Investment Corporation (together with its consolidated subsidiaries, the “Company”) was incorporated in Maryland on October 31, 2012 and was
organized to invest in residential mortgage assets in the United States. Under the Company’s charter, the Company is authorized to issue up to 500,000,000
shares of common stock and 100,000,000 shares of preferred stock, each with a par value of $0.01
The accompanying consolidated financial statements include the accounts of the Company’s subsidiaries, Cherry Hill Operating Partnership, LP (the “Operating
Partnership”), CHMI Sub-REIT, Inc. (the “Sub-REIT”), Cherry Hill QRS I, LLC, Cherry Hill QRS II, LLC, Cherry Hill QRS III, LLC (“QRS III”), Cherry Hill QRS IV, LLC (“QRS IV”), Cherry Hill QRS V, LLC (“QRS V”), CHMI Solutions, Inc. (“CHMI
Solutions”) and Aurora Financial Group, Inc. (“Aurora”).
The Company is party to a management agreement (the “Management Agreement”) with Cherry Hill Mortgage Management, LLC (the “Manager”), a Delaware limited liability
company established by Mr. Stanley Middleman. The Manager is a party to a services agreement (the “Services Agreement”) with Freedom Mortgage Corporation (“Freedom Mortgage”) (in such capacity, the “Services Provider”), which is owned and
controlled by Mr. Middleman. The Manager is owned by a “blind trust” for the benefit of Mr. Middleman. For a further discussion of the Management Agreement, see Note 7.
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with its short taxable year ended December 31, 2013. As long as the Company
continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income
to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income that will not be qualifying income for REIT purposes.
Effective January 1, 2020, the Operating Partnership, owned 97.8 %
by the Company, contributed substantially all of its assets to the Sub-REIT in exchange for all of the common stock of the Sub-REIT. As a result of this contribution, the Sub-REIT is a wholly-owned subsidiary of the Operating Partnership and
operations formerly conducted by the Operating Partnership through its subsidiaries are now conducted by the Sub-REIT through those same subsidiaries. The Sub-REIT elected to be taxed as a REIT under the Code commencing with the taxable year ended
December 31, 2020.
Note 2 — Basis of Presentation and Significant Accounting Policies
Basis of Accounting
The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) for financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The consolidated financial statements include the accounts of the Company and its consolidated
subsidiaries. All significant intercompany transactions and balances have been eliminated. The Company consolidates those entities in which it has an investment of 50% or more and has control over significant operating, financial and investing
decisions of the entity. The consolidated financial statements reflect all necessary and recurring adjustments for fair presentation of the results for the periods presented herein.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make a number of significant estimates and assumptions. These include estimates of
the fair value of Servicing Related Assets, RMBS and derivatives, estimates of credit losses and other estimates that affect the reported amounts of certain assets, revenues, liabilities and expenses as of the date of, and for the periods covered
by, the consolidated financial statements. It is likely that changes in these estimates will occur in the near term. The Company’s estimates are inherently subjective. Actual results could differ from the Company’s estimates, and the differences
may be material.
Risks and Uncertainties
In the normal course of business, the Company encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on the
Company’s investments in RMBS, Servicing Related Assets and derivatives that results from a borrower’s or derivative counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of
investments in RMBS, Servicing Related Assets and derivatives due to changes in interest rates, spreads or other market factors, including prepayment speeds on the Company’s RMBS and Servicing Related Assets. The Company is subject to the risks
involved with real estate and real estate-related debt instruments. These include, among others, the risks normally associated with changes in the general economic climate, changes in the mortgage market, changes in tax laws, interest rate levels,
and the availability of financing.
The Company also is subject to certain risks relating to its status as a REIT for U.S. federal income tax purposes. If the Company were to fail to qualify as a REIT in
any taxable year, the Company would be subject to U.S. federal income tax on its REIT income, which could be material. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification is lost.
The COVID-19 pandemic continues to create substantial uncertainty for government policy makers and the
Federal Reserve Board with consequent effects of the economy in the United States. While the economy has largely reopened, the increased presence of highly contagious variants of the virus has exacerbated supply chain issues that arose during the
shutdown of various economies. Certain forbearance programs and prohibitions on foreclosures have been extended while others have expired adding to the concern of the consequences once all such programs end. As of June 30, 2022, 0.9 % of borrowers on loans underlying the MSRs owned by Aurora are reflected as being in an active forbearance program, with 17.9 % of those borrowers continuing to make their regular scheduled monthly payment. The Company continues to maintain an elevated level of
unrestricted cash due to the continuing uncertainty regarding government policy and the economy. Based on information currently available to the Company, the Company continues to believe that it will be able to satisfy all of its servicing
obligations for the next twelve months.
Investments in RMBS
Classification – The Company
classifies its investments in RMBS as securities available for sale. Although the Company generally intends to hold most of its securities until maturity, it may, from time to time, sell any of its securities as part of its overall management of
its portfolio. Available-for-sale securities are carried at fair value.
Fair value is determined under the guidance of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). Management’s judgment is used to arrive at the fair value of the Company’s RMBS investments, taking into account prices obtained from third-party pricing providers and other
applicable market data. The third-party pricing providers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected
life of the security. The Company’s application of ASC 820 guidance is discussed in further detail in Note 9.
Investment securities transactions are recorded on the trade date. At disposition, the net realized gain or loss is determined on the basis of the cost of the specific
investment and is included in earnings. RMBS with a fair value of $67.7 million were sold during the six-month period ended June 30, 2022
and were settled after period end. RMBS with a fair value of $56.4 million were purchased during the six-month period ended June 30, 2022
and were settled after period end. All RMBS purchased and sold during the year ended December 31, 2021 were settled prior to year-end.
Revenue Recognition – Interest income from coupon payments is accrued based on the
outstanding principal amount of the RMBS and their contractual terms. Premiums and discounts associated with the purchase of the RMBS are amortized and accreted, respectively, into interest income over the projected lives of the securities using
the effective interest method. The Company’s policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus on prepayment speeds, and current market conditions. Adjustments are made for
actual prepayment activity. We recognized interest receivable of approximately $2.4 million and $2.3 million at June 30, 2022 and December 31, 2021, respectively. Interest income receivable has been classified within “Receivables and other assets” on the consolidated
balance sheets. For further discussion of Receivables and other assets, see Note 13.
Impairment – When the fair
value of a security is less than its amortized cost basis as of the balance sheet date, the security’s cost basis is considered impaired. If the Company determines that it intends to sell the security or it is more likely than not that it will be
required to sell before recovery, the Company recognizes the difference between the fair value and amortized cost as a loss in the consolidated statements of income (loss). If the Company determines it does not intend to sell the security or it
is not more likely than not it will be required to sell the security before recovery, the Company must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit
related factors. In its assessment of whether a credit loss exists, the Company performs a qualitative assessment around whether a credit loss exists and if necessary, it compares the present value of estimated future cash flows of the impaired
security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant” would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default
rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to
accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in provision for credit losses on securities in the consolidated
statements of income (loss).
Investments in MSRs
Classification – MSRs represent the contractual right to service mortgage loans. The Company
has elected the fair value option to record its investments in MSRs in order to provide users of the consolidated financial statements with better information regarding the effects of prepayment risk and other market factors on the MSRs. Under this
election, the Company records a valuation adjustment on its investments in MSRs on a quarterly basis to recognize the changes in fair value of its MSRs in net income as described below.
Although transactions in MSRs are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to
service and discount rates). Changes in the fair value of MSRs are reported on the consolidated statements of income (loss). Fluctuations in the fair value of MSRs are recorded within “Unrealized gain (loss) on investments in Servicing Related
Assets” on the consolidated statements of income (loss). Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the MSRs and,
therefore, may differ from their effective yields. In determining the valuation of MSRs in accordance with ASC 820, management uses internally developed pricing models that are based on certain unobservable market-based inputs. The Company
classifies these valuations as Level 3 in the fair value hierarchy. The Company’s application of ASC 820 guidance is discussed in further detail in Note 9.
Revenue Recognition – Mortgage servicing fee income represents revenue earned for servicing
mortgage loans. The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred. Servicing fee income
received and servicing expenses incurred are reported on the consolidated statements of income (loss). Float income from custodial accounts associated with MSRs is included in “Net interest income” on the consolidated statements of income (loss).
Late fees and ancillary income are included in “Servicing fee income” on the consolidated statements of income (loss).
As an owner of MSRs, the Company may
be obligated to fund advances of principal and interest payments due to third-party owners of the loans underlying the MSRs, but not yet received from the individual borrowers. These advances are reported as servicing advances within the
“Receivables and other assets” line item on the consolidated
balance sheets. Reimbursable servicing advances, other than principal and interest advances, also have been classified within “Receivables and other assets” on the consolidated balance sheets. Advances on Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) MSRs made in accordance with the relevant guidelines are generally recoverable. The Company’s servicing related assets were composed entirely of Fannie Mae and Freddie
Mac MSRs as of June 30, 2022 and December 31, 2021. As a result, the Company has determined that no reserves for unrecoverable advances for the related underlying loans are necessary at June 30, 2022 and December 31, 2021. For
further discussion on the Company’s receivables and other assets, including the Company’s servicing advances, see Note 13.
Derivatives and Hedging Activities
Derivative transactions include swaps, swaptions, U.S.
treasury futures and “to-be-announced” securities (“TBAs”). A TBA contract is an agreement to purchase or sell, for future delivery, an Agency RMBS with a specified issuer, term and coupon. Swaps
and swaptions are entered into by the Company solely for interest rate risk management purposes. TBAs and U.S. treasury futures are used to manage duration risk as well as basis risk and pricing risk on the Company’s financing facilities for
MSRs. The decision as to whether or not a given transaction/position (or portion thereof) is economically hedged is made on a case-by-case basis, based on the risks involved and other factors as determined by senior management, including
restrictions imposed by the Code on REITs. In determining whether to economically hedge a risk, the Company may consider whether other assets, liabilities, firm commitments and anticipated transactions already offset or reduce the risk. All
transactions undertaken as economic hedges are entered into with a view towards minimizing the potential for economic losses that could be incurred by the Company. Generally, derivatives entered into are not intended to qualify as hedges under
GAAP, unless specifically stated otherwise.
From time to time, the Company
enters into a TBA dollar roll which represents a transaction where TBA contracts with the same terms but different settlement dates are simultaneously bought and sold. The TBA contract settling in the later month typically prices at a discount
to the earlier month contract with the difference in price commonly referred to as the “drop”. The drop is a reflection of the expected net interest income from an investment in similar Agency RMBS, net of an implied financing cost, that would
be foregone as a result of settling the contract in the later month rather than in the earlier month. The drop between the current settlement month price and the forward settlement month price occurs because in the TBA dollar roll market, the
party providing the financing is the party that would retain all principal and interest payments accrued during the financing period. Accordingly, drop income on TBA dollar rolls generally represents the economic equivalent of the net interest
income earned on the underlying Agency RMBS less an implied financing cost. TBA dollar roll transactions are accounted for under GAAP as a series of derivatives transactions.
The Company’s bi-lateral derivative financial instruments contain credit risk to the extent that its counterparties may be unable to meet the terms of the agreements.
The Company reduces such risk by limiting its exposure to any one counterparty. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored. The Company’s interest rate swaps and U.S. treasury
futures are required to be cleared on an exchange, which further mitigates, but does not eliminate, credit risk. Management does not expect any material losses as a result of default by other parties to its derivative financial instruments.
Classification – All derivatives, including TBAs, are
recognized as either assets or liabilities on the consolidated balance sheets and measured at fair value. The fair value of TBA derivatives is determined using methods similar to those used to value
Agency RMBS. Due to the nature of these instruments, they may be in a receivable/asset position or a payable/liability position at the end of an accounting period. Derivative amounts payable to, and receivable from, the same party
under a contract may be offset as long as the following conditions are met: (i) each of the two parties owes the other determinable amounts; (ii) the reporting party has the right to offset the amount owed with the amount owed by the other
party; (iii) the reporting party intends to offset; and (iv) the right to offset is enforceable by law. The Company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements, and fair
value may be reflected on a net counterparty basis when the Company believes a legal right of offset exists under an enforceable master netting agreement. For further discussion on offsetting assets and liabilities, see Note 8.
Revenue Recognition – With respect to derivatives that have not been designated as hedges, any payments under, or fluctuations in the fair value of, such
derivatives have been recognized currently in “Realized gain (loss) on derivatives, net” and “Unrealized gain (loss) on derivatives, net”, respectively, in the consolidated statements of income (loss). Interest rate swap periodic interest
income (expense) is included in “Realized loss on derivatives, net” in the consolidated statements of income (loss).
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid short-term investments with maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on
deposit with major financial institutions exceed insured limits. Restricted cash represents the Company’s cash held by counterparties (i) as collateral against the Company’s derivatives (approximately $2.2 million and $664,000 at June 30, 2022 and December 31, 2021,
respectively) and (ii) as collateral for borrowings under its repurchase agreements (approximately $13.8 million and $12.2 million at June 30, 2022 and December 31, 2021, respectively).
The Company’s centrally cleared interest rate swaps require that the Company post an “initial margin” amount determined by the clearing exchange, which is generally
intended to be set at a level sufficient to protect the exchange from the interest rate swap’s maximum estimated single-day price movement. The Company also exchanges “variation margin” based upon daily changes in fair value, as measured by the
exchange. As a result of amendments to rules governing certain central clearing activities, the exchange of variation margin is a settlement of the interest rate swap, as opposed to pledged collateral. The Company has accounted for the receipt or
payment of variation margin on interest rate swaps as a direct reduction or increase to the carrying value of the interest rate swap asset or liability. At June 30, 2022 and December 31, 2021, approximately $80.8 million and $45.6 million, respectively, of variation margin
was reported as a decrease to the interest rate swap asset, at fair value.
Due to Manager
The sum under “Due to manager” on the consolidated balance sheets represents amounts due to the Manager
pursuant to the Management Agreement. For further information on the Management Agreement, see Note 7.
Income Taxes
The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short
taxable year ended December 31, 2013. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and
that it pay tax at regular corporate income tax rates to the extent that it annually distributes less than 100% of its taxable income. The Company’s TRS, CHMI Solutions, as well as CHMI Solutions’ wholly-owned subsidiary, Aurora, are subject to
U.S. federal income taxes on their taxable income. To maintain qualification as a REIT, the Company must distribute at least 90% of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold,
income it may generate and its stockholder composition. In 2017, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs to make elective stock dividends (i.e., dividends paid in a mixture of stock and cash),
with at least 20% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. In December 2021, the Internal Revenue Service issued a revenue procedure that temporarily reduced the minimum amount of the total
distribution that must be paid in cash to 10% for distributions declared on or after November 1, 2021, and on or before June 30, 2022, provided certain other parameters detailed in the Revenue Procedure are satisfied. Pursuant to these revenue procedures, the
Company has in the past elected to make distributions of its taxable income in a mixture of stock and cash.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes.
ASC 740 requires the recording of deferred income taxes that reflect the net tax effect of temporary differences between the carrying amounts of the Company’s assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes, including operating loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. The Company assesses its tax positions for all open tax years and determines if it has any
material unrecognized liabilities in accordance with ASC 740. The Company records these liabilities to the extent it deems them more-likely-than-not to be incurred. The Company records interest and penalties related to income taxes within the
provision for income taxes in the consolidated statements of income (loss). The Company has not incurred any interest or penalties.
Realized Gain (Loss) on RMBS
The following table presents realized gains and losses on RMBS for the periods indicated (dollars in thousands):
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Realized gain (loss) on RMBS, net
|
||||||||||||||||
|
Gain on RMBS
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Loss on RMBS
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Net realized gain (loss) on RMBS (A)
|
$ |
(
|
)
|
$ |
|
$ |
(
|
)
|
$ |
|
||||||
|
(A)
|
|
Repurchase Agreements and Interest Expense
The Company finances its investments in RMBS with short-term borrowings under master repurchase agreements. Borrowings under the repurchase agreements are generally
short-term debt due within one year. These borrowings generally bear interest rates offered by the “lending” counterparty from time to time for the term of the proposed repurchase transaction (e.g. 30 days, 60 days etc.) of a specified margin over
one-month LIBOR. The repurchase agreements represent uncommitted financing. Borrowings under these agreements are treated as collateralized financing transactions and are carried at their contractual amounts, as specified in the respective
agreements. Interest is recorded at the contractual amount on an accrual basis.
Dividends Payable
Because the Company is organized as a REIT under the Code, it is required by law to distribute annually at least 90% of its REIT taxable income, which it does in the form
of quarterly dividend payments. The Company accrues the dividend payable on outstanding shares on the accounting date, which causes an offsetting reduction in retained earnings.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For the Company’s purposes, comprehensive income represents net income (loss), as presented in the consolidated statements of income (loss), adjusted for unrealized gains or losses on
RMBS, which are designated as available for sale.
Recent Accounting Pronouncements
Reference Rate Reform - In March
2020, the FASB issued ASU 2020-04, Reference Rate Reform, which provides optional
expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to
contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. While the Company currently does not have any hedging relationships within the
meaning of ASU 2020-04, the Company’s debt facilities incorporate LIBOR as the reference rate. Certain of these facilities mature prior to the phase out of LIBOR while others have provisions in place that provide for an alternative to LIBOR upon
its phase out. If a facility is silent on a fall back, the transition will be governed by market approaches prevailing at the time. The ASU was effective immediately for all entities and expires after December 31, 2022. The Company’s adoption of
this ASU did not have an impact on the Company’s financial condition, results of operations or financial statement disclosures.
Changes in Presentation
Certain prior period amounts have been reclassified to conform to current period presentation.
Note 3 — Segment Reporting
The Company conducts its business through the following segments: (i) investments in RMBS; (ii) investments in Servicing Related Assets; and (iii) “All Other,” which
consists primarily of general and administrative expenses, including fees paid to the Company’s directors and management fees and reimbursements paid to the Manager pursuant to the Management Agreement (see Note 7). For segment reporting purposes,
the Company does not allocate interest income on short-term investments or general and administrative expenses.
Summary financial data with respect to the Company’s segments is given below, together with the data for the Company as a whole (dollars in thousands):
|
Servicing
Related Assets
|
RMBS
|
All Other
|
Total
|
|||||||||||||
|
Income Statement
|
||||||||||||||||
|
Three Months Ended June 30, 2022
|
||||||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest expense
|
|
|
|
|
|
|||||||||||
|
Net interest income (expense)
|
(
|
)
|
|
|
|
|||||||||||
|
Servicing fee income
|
|
|
|
|
|
|||||||||||
|
Servicing costs
|
|
|
|
|
|
|
||||||||||
|
Net servicing income
|
|
|
|
|
||||||||||||
|
Other expense
|
(
|
)
|
(
|
)
|
|
(
|
)
|
|||||||||
|
Other operating expenses
|
|
|
|
|
||||||||||||
|
Provision for corporate business taxes
|
|
|
|
|
||||||||||||
|
Net Income (Loss)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
|||||
|
Three Months Ended June 30, 2021
|
||||||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest expense
|
|
|
|
|
|
|||||||||||
|
Net interest income (expense)
|
(
|
)
|
|
|
|
|||||||||||
|
Servicing fee income
|
|
|
|
|
|
|||||||||||
|
Servicing costs
|
|
|
|
|
||||||||||||
|
Net servicing income
|
|
|
|
|
||||||||||||
|
Other expense
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
||||||||
|
Other operating expenses
|
|
|
|
|
|
|||||||||||
|
Benefit from corporate business taxes
|
(
|
)
|
|
|
(
|
)
|
||||||||||
|
Net Loss
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Six Months Ended June 30, 2022
|
||||||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest expense
|
|
|
|
|
||||||||||||
|
Net interest income (expense)
|
(
|
)
|
|
|
|
|||||||||||
|
Servicing fee income
|
|
|
|
|
||||||||||||
|
Servicing costs
|
|
|
|
|
||||||||||||
|
Net servicing income
|
|
|
|
|
||||||||||||
|
Other income (expense)
|
(
|
)
|
|
|
(
|
)
|
||||||||||
|
Other operating expenses
|
|
|
|
|
||||||||||||
|
Provision for corporate business taxes
|
|
|
|
|
||||||||||||
|
Net Income (Loss)
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||||
|
Six Months Ended June 30, 2021
|
||||||||||||||||
|
Interest income
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Interest expense
|
|
|
|
|
||||||||||||
|
Net interest income (expense)
|
(
|
)
|
|
|
|
|||||||||||
|
Servicing fee income
|
|
|
|
|
||||||||||||
|
Servicing costs
|
|
|
|
|
||||||||||||
|
Net servicing income
|
|
|
|
|
||||||||||||
|
Other income (expense)
|
(
|
)
|
|
|
(
|
)
|
||||||||||
|
Other operating expenses
|
|
|
|
|
||||||||||||
|
Provision for corporate business taxes
|
|
|
|
|
||||||||||||
|
Net Income (Loss)
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
|
||||||
|
|
Servicing
Related Assets
|
RMBS
|
All Other
|
Total
|
||||||||||||
|
Balance Sheet
|
||||||||||||||||
|
June 30, 2022
|
||||||||||||||||
|
Investments
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other assets
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Debt
|
|
|
|
|
||||||||||||
|
Other liabilities
|
|
|
|
|
||||||||||||
|
Total liabilities
|
|
|
|
|
||||||||||||
|
Net assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
December 31, 2021
|
||||||||||||||||
|
Investments
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Other assets
|
|
|
|
|
||||||||||||
|
Total assets
|
|
|
|
|
||||||||||||
|
Debt
|
|
|
|
|
||||||||||||
|
Other liabilities
|
|
|
|
|
||||||||||||
|
Total liabilities
|
|
|
|
|
||||||||||||
|
Net assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Note 4 — Investments in RMBS
At June 30, 2022, the Company’s investments in RMBS consist solely of Agency RMBS. The Company’s investments in RMBS may also include, from time
to time, any of the following: CMOs, which are either loss share securities issued by Fannie Mae or Freddie Mac; or non-Agency RMBS, sometimes called “private label MBS,” which are structured debt instruments representing interests in specified
pools of mortgage loans subdivided into multiple classes, or tranches, of securities, with each tranche having different maturities or risk profiles and different ratings by one or more nationally recognized statistical rating organizations. All of the Company’s RMBS are classified as available-for-sale and are, therefore, reported at fair value. Credit related impairment, if any, is included in
provision (reversal) for credit losses on securities in the consolidated statements of income (loss). All other changes in fair value are recorded in other comprehensive income (loss).
The following is a summary of the Company’s investments in RMBS as of the dates indicated (dollars in
thousands):
Summary of RMBS Assets
As of June 30, 2022
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Asset Type
|
Original
Face
Value
|
Book
Value
|
Gains
|
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
|||||||||||||||||||||||||||
|
RMBS
|
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
(B)
|
|
%
|
|
%
|
|
|||||||||||||||||||
|
Freddie Mac
|
|
|
|
(
|
)
|
|
|
(B)
|
|
%
|
|
%
|
|
||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||||
As of December 31, 2021
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Asset Type
|
Original
Face
Value
|
Book
Value
|
Gains
|
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
|||||||||||||||||||||||||||
|
RMBS
|
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
(B)
|
|
%
|
|
%
|
|
|||||||||||||||||||
|
Freddie Mac
|
|
|
|
(
|
)
|
|
|
(B)
|
|
%
|
|
%
|
|
||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||||
| (A) |
|
| (B) |
|
| (C) |
|
Summary of RMBS Assets by Maturity
As of June 30, 2022
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Years to Maturity
|
Original
Face
Value
|
Book
Value
|
Gains
|
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
|||||||||||||||||||||||||||
| Over 10 Years |
$ |
$ |
$ |
$ |
( |
) | $ |
(B) | % | % | |||||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||||
As of December 31, 2021
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Years to Maturity
|
Original
Face
Value
|
Book
Value
|
Gains
|
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
|||||||||||||||||||||||||||
|
Over 10 Years
|
$ |
|
$ |
|
$ |
|
$ |
(
|
)
|
$ |
|
|
(B)
|
|
%
|
|
%
|
|
|||||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||||
| (A) |
|
| (B) |
|
| (C) |
|
At June 30, 2022 and December 31, 2021, the Company pledged Agency RMBS with a carrying value of approximately $640.7 million and $892.9 million, respectively, as collateral for borrowings
under repurchase agreements. At June 30, 2022 and December 31, 2021, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers
and Servicing, to be considered linked transactions and, therefore, classified as derivatives.
Based on management’s analysis of the Company’s securities, the performance of the
underlying loans and changes in market factors, management determined that unrealized losses as of the balance sheet date on the Company’s securities were primarily the result of changes in market factors, rather than issuer-specific credit
impairment. The Company performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected
holding periods. Such market factors include changes in market interest rates and credit spreads and certain macroeconomic events, none of which will directly impact the Company’s ability to collect amounts contractually due. Management
continually evaluates the credit status of each of the Company’s securities and the collateral supporting those securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the
security (if applicable), the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans,
including the effect of local, industry and broader economic trends and factors. Significant judgment is required in this analysis for investments in non-Agency RMBS. At June 30, 2022 and at December 31, 2021, all of the Company’s investments in RMBS consist of Agency RMBS.
Both credit related and non-credit related unrealized losses on securities that the
Company (i) intends to sell, or (ii) will more likely than not be required to sell before recovering their cost basis, are recognized in earnings. The Company did not record an allowance for credit losses on the balance sheet at June 30, 2022 and December 31, 2021, or any impairment charges in earnings during the three and six-month periods ended June 30, 2022 and June 30, 2021.
The following tables summarize the Company’s securities in an unrealized loss position as of the dates indicated (dollars in thousands):
RMBS Unrealized Loss Positions
As of June 30, 2022
|
Weighted Average
|
|||||||||||||||||||||||||||||||||
|
Duration in
Loss Position
|
Original
Face
Value
|
Book
Value
|
Gross
Unrealized
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
||||||||||||||||||||||||
|
Less than Twelve Months
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
(B)
|
|
%
|
|
%
|
|
|||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||
As of December 31, 2021
|
Weighted Average
|
|||||||||||||||||||||||||||||||||
|
Duration in
Loss Position
|
Original
Face
Value
|
Book
Value
|
Gross
Unrealized
Losses
|
Carrying
Value(A)
|
Number of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
||||||||||||||||||||||||
|
Less than Twelve Months
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
(B)
|
|
%
|
|
%
|
|
|||||||||||||||||
| Twelve or More Months |
( |
) | (B) |
% | % | ||||||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
|
|
|
%
|
|
%
|
|
|||||||||||||||||
| (A) |
|
|
(B)
|
|
| (C) |
|
Note 5 — Investments in Servicing Related Assets
Aurora’s portfolio of Servicing Related Assets consists of Fannie Mae and Freddie Mac MSRs with an aggregate UPB of approximately $20.7 billion as of June 30, 2022.
The following is a summary of the Company’s Servicing Related Assets as of the dates indicated (dollars in thousands):
Servicing Related Assets Summary
As of June 30, 2022
|
Unpaid
Principal
Balance
|
Carrying
Value(A)
|
Weighted
Average
Coupon
|
Weighted
Average
Maturity
(Years)(B)
|
Year to Date
Changes in Fair
Value Recorded
in Other Income
(Loss)
|
||||||||||||||||
|
MSRs
|
$
|
|
$
|
|
|
%
|
|
$
|
|
|||||||||||
|
MSR Total/Weighted Average
|
$
|
|
$
|
|
|
%
|
|
$
|
|
|||||||||||
As of December 31, 2021
|
Unpaid
Principal
Balance
|
Carrying
Value(A)
|
Weighted
Average
Coupon
|
Weighted
Average
Maturity
(Years)(B)
|
Year to Date
Changes in Fair
Value Recorded
in Other Income
(Loss)
|
||||||||||||||||
|
MSRs
|
$
|
|
$
|
|
|
%
|
|
$
|
(
|
)
|
||||||||||
|
MSR Total/Weighted Average
|
$
|
|
$
|
|
|
%
|
|
$
|
(
|
)
|
||||||||||
| (A) |
|
| (B) |
|
The tables below summarize the geographic distribution for the states representing 5% or greater of the aggregate UPB of the residential mortgage loans underlying the
Servicing Related Assets as of the dates indicated:
Geographic Concentration of Servicing Related Assets
As of June 30, 2022
|
|
Percentage of Total Outstanding
Unpaid Principal Balance
|
|||
|
California
|
|
%
|
||
|
Virginia
|
|
%
|
||
|
New York
|
|
%
|
||
|
Maryland
|
|
%
|
||
|
Texas
|
|
%
|
||
|
North Carolina
|
|
%
|
||
|
All other
|
|
%
|
||
|
Total
|
|
%
|
||
As of December 31, 2021
|
|
Percentage of Total Outstanding
Unpaid Principal Balance
|
|||
|
California
|
|
%
|
||
|
Virginia
|
|
%
|
||
|
New York
|
|
%
|
||
|
Maryland
|
|
%
|
||
|
Texas
|
|
%
|
||
|
North Carolina
|
|
%
|
||
|
All other
|
|
%
|
||
|
Total
|
|
%
|
||
Geographic concentrations of investments expose the Company to the risk of economic downturns within the relevant states. Any such downturn in a state where the Company
holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and, therefore, could have a meaningful, negative impact on the Company’s Servicing Related Assets.
Note 6 — Equity and Earnings per Common Share
Common and Preferred Stock
On October 9, 2013 , the Company completed an initial
public offering (the “IPO”) and a concurrent private placement of its common stock. The Company did not conduct any activity prior to the IPO and the concurrent private placement.
The Company’s 8.20 % Series A Cumulative Redeemable
Preferred Stock, par value $0.01 per share (the “Series A Preferred Stock”) ranks senior to the Company’s common stock with respect to
rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will
remain outstanding indefinitely unless repurchased or redeemed by the Company or converted by the holders of the Series A Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series A Preferred Stock is
not redeemable by the Company prior to August 17, 2022, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and
after August 17, 2022, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the
Series A Preferred Stock upon certain changes in control, the holders of the Series A Preferred Stock have the right to convert some or all of their shares of Series A Preferred Stock into a number of shares of the Company’s common stock based on a
defined formula, subject to a share cap, or alternative consideration. The share cap on each share of Series A Preferred Stock is 2.62881
shares of common stock, subject to certain adjustments. The Company pays cumulative cash dividends at the rate of 8.20 % per annum of the
$25.00 per share liquidation preference (equivalent to $2.05 per annum per share) on the Series A Preferred Stock, in arrears, on or about the 15th day of January, April, July and October of each year.
The Company’s 8.250 % Series B Fixed-to-Floating Rate Cumulative
Redeemable Stock, par value $0.01 per share (the “Series B Preferred Stock”) ranks senior to the Company’s common stock with respect
to rights to the payment of dividends and the distribution of assets upon the Company’s liquidation, dissolution or winding up, and on parity with the Company’s Series A Preferred Stock with respect to rights to the payment of dividends and the
distribution of assets upon the Company’s liquidation, dissolution or winding up. The Series B Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless
repurchased or redeemed by the Company or converted by the holders of the Series B Preferred Stock into the Company’s common stock in connection with certain changes of control. The Series B Preferred Stock is not redeemable by the Company
prior to April 15, 2024, except under circumstances intended to preserve the Company’s qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of certain changes of control. On and after April 15, 2024, the
Company may, at its option, redeem the Series B Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulated and unpaid dividends to, but not including, the date fixed for redemption. If the Company does not exercise its rights to redeem the Series B Preferred Stock upon certain
changes in control, the holders of the Series B Preferred Stock have the right to convert some or all of their shares of Series B Preferred Stock into a number of shares of the Company’s common stock based on a defined formula, subject to a
share cap, or alternative consideration. The share cap on each share of Series B Preferred Stock is 2.68962 shares of common stock,
subject to certain adjustments. Holders of Series B Preferred Stock will be entitled to receive cumulative cash dividends (i) from and including February 11, 2019 to, but excluding, April 15, 2024 at a fixed rate equal to 8.250 % per annum of the $25.00 per
share liquidation preference (equivalent to $2.0625 per annum per share) and (ii) from and including April 15, 2024, at a floating
rate equal to three-month LIBOR plus a spread of 5.631 % per annum. Because LIBOR will have ceased publication at the beginning of the floating rate period, under the terms of the Series B Preferred Stock, the Company will
appoint a calculation agent and the calculation agent will consult with an investment bank of national standing to determine whether there is an industry accepted substitute or successor base rate to USD LIBOR. If, after such consultation,
the calculation agent determines that there is an industry accepted substitute or successor base rate, the calculation agent will use such substitute or successor base rate. In such case, the calculation agent in its sole discretion may also
implement other technical changes to the Series B Preferred Stock in a manner that is consistent with industry accepted practices for such substitute or successor base rate. It is currently anticipated that the successor rate to be chosen by
the calculation agent during the floating rate period will be the secured overnight financing rate, or “SOFR”. Dividends on the Series A and B are payable quarterly in arrears on the 15th day of each January, April, July and October, when and as authorized by the Company’s board of directors and declared by the Company.
Common Stock ATM Program
In August 2018, the Company instituted an at-the-market offering program (the “Common Stock ATM Program”) of up to $50.0
million of its common stock, of which, approximately $10.1
million was remaining as of June 30, 2022. Under the Common Stock ATM Program, the Company may, but is not obligated to, sell shares of common stock from time to time through one or more selling agents. The Common Stock ATM Program has no set expiration date and may be renewed or terminated by the Company at any time. During the three-month period ended June 30, 2022, the Company issued and sold 847,656 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $6.98 per share for gross proceeds of approximately $5.9 million before fees of approximately $118,000 . During the six-month period ended June 30, 2022, the Company issued and sold 1,352,656 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $7.43 per share for gross proceeds of approximately $10.1
million before fees of approximately $201,000 . During the year ended December 31, 2021, the Company issued and sold 1,148,398 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.88 per share for gross proceeds of approximately $10.2 million before fees of approximately $200,000 .
Preferred Stock ATM Program
In April 2018, the Company instituted an at-the-market offering program (the “Preferred Series A ATM Program”) of up to $35.0
million of its Series A Preferred Stock. Under the Preferred Series A ATM Program, the Company may, but is not obligated to, sell shares of Series A Preferred
Stock from time to time through one or more selling agents. The Preferred Series A ATM Program has no set expiration date and may be renewed or
terminated by the Company at any time. During the three and six-month periods ended June 30, 2022 and the year ended
December 31, 2021, the Company did no
Share Repurchase Program
In September 2019, the Company instituted a share repurchase program that allows for the repurchase of up to an aggregate of $10.0
million of the Company’s common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant
to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The
share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. During the three and six-month periods ended June 30, 2022 and the year ended December 31, 2021, the Company did no
Equity Incentive Plan
During 2013, the board of directors approved and the Company adopted the Cherry Hill Mortgage Investment Corporation 2013 Equity Incentive Plan (the “2013 Plan”). The
2013 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock awards, stock appreciation rights, performance units, incentive awards and other equity-based awards, including long term incentive plan units
(“LTIP-OP Units”) of the Operating Partnership.
LTIP-OP Units are a special class of partnership interest in the Operating Partnership. LTIP-OP Units may be issued to eligible participants for the performance of
services to or for the benefit of the Operating Partnership. Initially, LTIP-OP Units do not have full parity with the Operating Partnership’s common units of limited partnership interest (“OP Units”) with respect to liquidating distributions;
however, LTIP-OP Units receive, whether vested or not, the same per-unit distributions as OP Units and are allocated their pro-rata share of the Operating Partnership’s net income or loss. Under the terms of the LTIP-OP Units, the Operating
Partnership will revalue its assets upon the occurrence of certain specified events, and any increase in the Operating Partnership’s valuation from the time of grant of the LTIP-OP Units until such event will be allocated first to the holders of
LTIP-OP Units to equalize the capital accounts of such holders with the capital accounts of the holders of OP Units. Upon equalization of the capital accounts of the holders of LTIP-OP Units with the other holders of OP Units, the LTIP-OP Units
will achieve full parity with OP Units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP-OP Units may be converted into an equal number of OP Units at any time and, thereafter, enjoy all
the rights of OP Units, including redemption rights. Each LTIP-OP Unit awarded is deemed equivalent to an award of one share of the
Company’s common stock under the 2013 Plan and reduces the 2013 Plan’s share authorization for other awards on a one-for-one basis.
An LTIP-OP Unit and a share of common stock of the Company have substantially the
same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Holders of LTIP-OP Units that have reached parity with OP Units have the right to redeem their LTIP-OP Units,
subject to certain restrictions. The redemption is required to be satisfied in cash, or at the Company’s option, the Company may purchase the OP Units for common stock, calculated as follows: one share of the Company’s common stock, or cash equal to the fair value of a share of the Company’s common stock at the time of redemption, for each LTIP-OP Unit. When an LTIP-OP Unit holder
redeems an OP Unit (as described above), non-controlling interest in the Operating Partnership is reduced and the Company’s equity is increased.
LTIP-OP Units vest ratably over the first annual
anniversaries of the grant date. The fair value of each LTIP-OP Unit was determined based on the closing price of the Company’s common stock on the applicable grant date in all other cases.
The following table sets forth the number of shares of the Company’s common stock as
well as LTIP-OP Units and the values thereof (based on the closing prices on the respective dates of grant) granted under the 2013 Plan. Except as
otherwise indicated, all shares are fully vested.
Equity Incentive Plan Information
|
|
LTIP-OP Units
|
Shares of Common Stock
|
Number of Securities
Remaining Available
For Future Issuance
Under Equity
|
Weighted
Average
Issuance
|
||||||||||||||||||||||||||||
|
|
Issued
|
Forfeited
|
Converted
|
Redeemed
|
Issued
|
Forfeited
|
Compensation Plans |
Price
|
||||||||||||||||||||||||
|
December 31, 2020
|
(
|
)
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||||||||
|
Number of securities issued or to be issued upon exercise
|
(
|
) (A)
|
|
|
|
|
|
(
|
)
|
$
|
|
|||||||||||||||||||||
|
Number of securities issued or to be issued upon exercise
|
|
|
|
|
(
|
)
|
|
|
$
|
|
||||||||||||||||||||||
|
March 31, 2021
|
(
|
)
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||||||||
|
Number of securities redeemed
|
|
|
|
|
|
|
|
$
|
|
|||||||||||||||||||||||
|
Number of securities redeemed
|
|
|
|
|
|
|
|
$
|
|
|||||||||||||||||||||||
|
Number of securities issued or to be issued upon exercise
|
(
|
)
|
(
|
)
|
$ |
|
||||||||||||||||||||||||||
|
June 30, 2021
|
(
|
)
|
|
|
(
|
)
|
|
|
||||||||||||||||||||||||
|
December 31, 2021
|
(
|
)
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||||||||
|
Number of securities issued or to be issued upon exercise
|
(
|
) (B)
|
|
|
|
|
(
|
)
|
$
|
|
||||||||||||||||||||||
|
March 31, 2022
|
(
|
)
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||||||||
|
Number of securities forfeited
|
||||||||||||||||||||||||||||||||
|
Number of securities issued or to be issued upon exercise
|
|
|
|
(
|
) (C)
|
|
(
|
)
|
$
|
|
||||||||||||||||||||||
|
June 30, 2022
|
(
|
)
|
|
|
(
|
)
|
|
|
||||||||||||||||||||||||
| (A) |
|
| (B) |
|
| (C) |
|
The Company recognized share-based compensation of approximately $162 ,000 and $333 ,000 in the three-month periods ended June 30, 2022 and
June 30, 2021, respectively and $382 ,000 and $626 ,000 in the six-month periods ended June 30, 2022 and
June 30, 2021, respectively. There was approximately $871 ,000 of total unrecognized share-based compensation expense as of
June 30, 2022, which was related to unvested LTIP-OP Units and
directors compensation paid in stock subject to forfeiture. This unrecognized share-based compensation expense is expected to be recognized ratably over the remaining vesting period of up to three years . The aggregate expense related to the LTIP-OP Unit grants is presented as
“General and administrative expense” in the Company’s consolidated statements of income (loss).
Non-Controlling Interests in Operating Partnership
Non-controlling interests in the Operating Partnership in the accompanying consolidated financial statements relate to LTIP-OP Units and OP Units issued upon conversion
of LTIP-OP Units, in either case, held by parties other than the Company.
As of June 30, 2022, the non-controlling interest holders in the Operating Partnership owned 402,697 LTIP-OP Units, or approximately 2.16 % of the units of
the Operating Partnership. Pursuant to ASC 810, Consolidation, changes in a parent’s ownership interest (and transactions with non-controlling interest unit
holders in the Operating Partnership) while the parent retains its controlling interest in its subsidiary should be accounted for as equity transactions. The carrying amount of the non-controlling interest will be adjusted to reflect the change in
its ownership interest in the subsidiary, with the offset to equity attributable to the Company.
Earnings per Common Share
The Company is required to present both basic and diluted earnings per common share (“EPS”). Basic EPS is calculated by dividing net income applicable to common
stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted EPS is calculated by dividing net income applicable to common stockholders by the weighted average number of shares of common stock
outstanding plus the additional dilutive effect of common stock equivalents during each period. In accordance with ASC 260, Earnings Per Share, if there is a
loss from continuing operations, the common stock equivalents are deemed anti-dilutive and earnings (loss) per share is calculated excluding the potential common shares.
The following table presents basic and diluted earnings per share of common stock for the periods indicated (dollars in thousands, except per share data):
Earnings per Common Share Information
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Numerator:
|
||||||||||||||||
|
Net income (loss)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Net (income) loss allocated to noncontrolling interests in Operating Partnership
|
|
|
(
|
)
|
(
|
)
|
||||||||||
|
Dividends on preferred stock
|
|
|
|
|
||||||||||||
|
Net income (loss) applicable to common stockholders
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Denominator:
|
||||||||||||||||
|
Weighted average common shares outstanding
|
|
|
|
|
||||||||||||
|
Weighted average diluted shares outstanding
|
|
|
|
|
||||||||||||
|
Basic and Diluted EPS:
|
||||||||||||||||
|
Basic
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
|
Diluted
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$
|
|
||||||
There were no
Note 7 — Transactions with Related Parties
Manager
The Company has entered into the Management Agreement with the Manager, pursuant to which the Manager provides for the day-to-day management of the Company’s operations.
The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the policies that are approved and monitored by the Company’s board of directors. Pursuant to the Management Agreement, the Manager, under the
supervision of the Company’s board of directors, formulates investment strategies, arranges for the acquisition of assets, arranges for financing, monitors the performance of the Company’s assets and provides certain advisory, administrative and
managerial services in connection with the operations of the Company. For performing these services, the Company pays the Manager the management fee which is payable in cash quarterly in arrears, in an amount equal to 1.5 % per annum of the Company’s stockholders’ equity (as defined in the Management Agreement). The term of the Management Agreement expires on October
22, 2022 and will be automatically renewed for a one-year term on such date and on each anniversary of such date thereafter unless
terminated or not renewed as described below. Either the Company or the Manager may elect not to renew the Management Agreement upon expiration of its initial term or any renewal term by providing written notice of non-renewal at least 180 days, but not more than 270 days,
before expiration. No such written notice of non-renewal was provided in 2022. In the event the Company elects not to renew the term, the Company will be required to pay the Manager a termination fee equal to three times the average annual
management fee amount earned by the Manager during the two four-quarter periods ending as of the end of the most recently completed fiscal quarter prior to the non-renewal. The Company may terminate the Management Agreement at any time for cause
effective upon 30 days prior written notice of termination from the Company to the Manager, in which case no termination fee would be
due. The Company’s board of directors will review the Manager’s performance prior to the automatic renewal of the Management Agreement and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of the Company’s
board of directors or of the holders of a majority of the Company’s outstanding common stock, the Company may terminate the Management Agreement based upon unsatisfactory performance by the Manager that is materially detrimental to the Company or a
determination by the Company’s independent directors that the management fees payable to the Manager are not fair, subject to the right of the Manager to prevent such a termination by agreeing to a reduction of the management fees payable to the
Manager. Upon any termination of the Management Agreement based on unsatisfactory performance or unfair management fees, the Company would be required to pay the Manager the termination fee described above. The Manager may terminate the Management
Agreement in the event that the Company becomes regulated as an investment company under the Investment Company Act of 1940, as amended, in which case the Company would not be required to pay the termination fee described above. The Manager may
also terminate the Management Agreement upon 60 days’ written notice if the Company defaults in the performance of any material term of
the Management Agreement and the default continues for a period of 30 days after written notice to the Company, whereupon the Company
would be required to pay the Manager the termination fee described above.
The Manager is a party to the Services Agreement with the Services Provider, pursuant to which the Services Provider provides to the Manager personnel and payroll and
benefits administration services as needed by the Manager to carry out its obligations and responsibilities under the Management Agreement. The Company is a named third-party beneficiary to the Services Agreement and, as a result, has, as a
non-exclusive remedy, a direct right of action against the Services Provider in the event of any breach by the Manager of any of its duties, obligations or agreements under the Management Agreement that arise out of or result from any breach by the
Services Provider of its obligations under the Services Agreement. The Services Agreement will terminate upon the termination of the Management Agreement.
The Management Agreement between the Company and the Manager was negotiated between related parties, and the terms, including fees payable, may not be as favorable to the
Company as if it had been negotiated with an unaffiliated third party. At the time the Management Agreement was negotiated, both the Manager and the Services Provider were controlled by Mr. Stanley Middleman. In 2016, ownership of the Manager was
transferred to CHMM Blind Trust, a grantor trust for the benefit of Mr. Middleman.
The Management Agreement provides that the Company will reimburse the Manager for (i) various expenses incurred by the Manager or its officers, and agents on the
Company’s behalf, including costs of software, legal, accounting, tax, administrative and other similar services rendered for the Company by providers retained by the Manager and (ii) an agreed upon portion of the compensation paid to specified
officers of the Company. The amounts under “Due to Manager” on the consolidated balance sheets consisted of the following for the periods indicated (dollars in thousands):
Management Fees and Compensation Reimbursement to Manager
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Management fees
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Compensation reimbursement
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
Subservicing Agreements
In August 2020, Freedom Mortgage acquired RoundPoint Mortgage Servicing Corporation (“RoundPoint”), one of Aurora’s subservicers and a seller of Fannie Mae and Freddie
Mac MSRs pursuant to a flow purchase agreement with Aurora. The subservicing agreement with RoundPoint had an initial term of two years
and is subject to automatic renewal for additional terms equal to the initial term unless either party chooses not to renew. The subservicing agreement may be terminated without cause by either party by giving notice as specified in the agreement.
If the agreement is not renewed by Aurora or terminated by Aurora without cause, de-boarding fees will be due to the subservicer. Under the subservicing agreement, the sub-servicer agrees to service the applicable mortgage loans in accordance with
applicable law. Aurora paid RoundPoint servicing costs of $1.2 million and $2.5 million during the three-month periods ended June 30, 2022 and June 30, 2021, respectively and $3.0 million and $3.8 million during the six-month periods ended
June 30, 2022 and June 30, 2021, respectively. Aurora had servicing receivables of $3.4 million and $493,000 from RoundPoint as of June 30, 2022 and December 31, 2021, respectively. The flow purchase agreement provides that RoundPoint may offer, and
Aurora may purchase mortgage servicing rights from time to time on loans originated through RoundPoint’s network of loan sellers. RoundPoint’s sellers sell the loans to Fannie Mae or Freddie Mac and sell the mortgage servicing rights to RoundPoint
which sells the MSR to Aurora. RoundPoint then subservices the loans for Aurora pursuant to the subservicing agreement.
During the three-month periods ended June 30, 2022 and June 30, 2021, Aurora purchased MSRs with an aggregate UPB of approximately $141.4 million and $711.9 million,
respectively from RoundPoint pursuant to the flow agreement for purchase prices of $1.6 million and $6.3 million, respectively. During the six-month periods ended June 30, 2022 and June 30, 2021, Aurora purchased MSRs with an aggregate UPB of
approximately $198.7 million and $2.5
billion, respectively from RoundPoint pursuant to the flow agreement for purchase prices of $2.2 million and $20.4 million, respectively.
Joint Marketing Recapture Agreements
In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned subsidiary of
Freedom Mortgage. Pursuant to this agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, Freedom Mortgage will sell the loan to
Fannie Mae or Freddie Mac, as applicable, retain the sale proceeds and transfer the related MSR to Aurora. The agreement continues in effect while the subservicing agreement remains in effect.
Other Transactions with Related Parties
Aurora leases three employees from Freedom Mortgage and
reimburses Freedom Mortgage on a monthly basis.
Note 8 — Derivative Instruments
Interest Rate Swap Agreements, Swaptions, TBAs and U.S. Treasury Futures
In order to help mitigate exposure to higher short-term interest rates in connection with borrowings under its repurchase agreements, the Company enters into interest
rate swap agreements and swaption agreements. Interest rate swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on
the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest
rate swap agreements and actual borrowing rates. A swaption is an option granting its owner the right but not the obligation to enter into an underlying swap. The Company’s interest rate swap agreements and swaptions have not been designated as
qualifying hedging instruments for GAAP purposes.
In order to help mitigate duration risk and manage basis risk and the pricing risk under the Company’s financing facilities, the Company utilizes U.S. treasury futures
and forward-settling purchases and sales of RMBS where the underlying pools of mortgage loans are TBAs. Pursuant to these TBA transactions, the Company agrees to purchase or sell, for future delivery, Agency RMBS with certain principal and interest
terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. Unless otherwise indicated, references to U.S. treasury futures include options on U.S.
treasury futures.
The following table summarizes the outstanding notional amounts of derivative instruments as of the dates indicated (dollars in thousands):
|
Derivatives
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Notional amount of interest rate swaps
|
$
|
|
$
|
|
||||
|
Notional amount of swaptions
|
|
|
||||||
|
Notional amount of TBAs, net
|
|
|
||||||
|
Notional amount of U.S. treasury futures
|
(
|
)
|
(
|
)
|
||||
|
Total notional amount
|
$
|
|
$
|
|
||||
The following table presents information about the Company’s interest rate swap agreements as of the dates indicated (dollars in thousands):
|
|
Notional
Amount
|
Fair Value
|
Weighted
Average Pay
Rate
|
Weighted
Average
Receive
Rate
|
Weighted
Average
Years to
Maturity
|
|||||||||||||||
|
June 30, 2022
|
$
|
|
$
|
|
|
%
|
|
%
|
|
|||||||||||
|
December 31, 2021
|
$
|
|
$
|
|
|
%
|
|
%
|
|
|||||||||||
The Company did not have any interest rate swaption agreements as of June 30, 2022. The following table presents information about the Company’s interest rate swaption
agreements as of the dates indicated (dollars in thousands):
|
|
Notional
Amount
|
Fair Value
|
Weighted
Average
Underlying Pay
Rate
|
Weighted
Average
Underlying
Receive Rate(A)
|
Weighted
Average
Underlying
Years to
Maturity(B)
|
Weighted
Average
Years to
Expiration
|
|||||||||||||||
|
December 31, 2021
|
$
|
|
$
|
|
|
%
|
|
% |
|
|
|||||||||||
| (A) |
|
| (B) |
|
The following tables present information about the Company’s TBA derivatives as of the dates indicated
(dollars in thousands):
As June 30, 2022
|
Purchase and sale contracts for derivative TBAs
|
Notional
|
Implied Cost
Basis
|
Implied Fair
Value
|
Net
Carrying
Value
|
||||||||||||
|
Purchase contracts
|
$
|
|
$
|
|
$
|
|
$ |
|
||||||||
|
Sale contracts
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
Net TBA derivatives
|
$
|
|
$
|
|
$
|
|
$ |
(
|
)
|
|||||||
As of December 31, 2021
|
Purchase and sale contracts for derivative TBAs
|
Notional
|
Implied Cost
Basis
|
Implied Fair
Value
|
Net
Carrying
Value
|
||||||||||||
|
Purchase contracts
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||||
|
Sale contracts
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|||||||||
|
Net TBA derivatives
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||||
The following tables present information about the Company’s U.S. treasury futures agreements as of the dates indicated (dollars in thousands):
As of June 30, 2022
|
Maturity
|
Notional
Amount -
Long
|
Notional
Amount -
Short
|
Fair Value
|
|||||||||
| 3 years | $ | $ | $ | ( |
) | |||||||
|
10 years
|
|
(
|
)
|
|
||||||||
|
Total
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
As of December 31, 2021
|
Maturity
|
Notional
Amount -
Long
|
Notional
Amount -
Short
|
Fair Value
|
|||||||||
| 2 years | $ | $ | ( |
) | $ | |||||||
|
5 years
|
|
(
|
)
|
(
|
)
|
|||||||
|
10 years
|
|
|
(
|
)
|
||||||||
|
Total
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
The following table presents information about the Company’s U.S. treasury futures options agreements as of the dates indicated (dollars in thousands):
As of June 30, 2022
|
Maturity
|
Notional
Amount -
Long
|
Notional
Amount -
Short
|
Fair Value
|
|||||||||
|
10 years
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Total
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
As of December 31, 2021
|
Maturity
|
Notional
Amount -
Long
|
Notional
Amount -
Short
|
Fair Value
|
|||||||||
|
10 years
|
$
|
|
$
|
(
|
)
|
$
|
|
|||||
|
Total
|
$
|
|
$
|
(
|
)
|
$ |
|
|||||
The following table presents information about realized gain (loss) on derivatives, which is included on the consolidated statements of income (loss) for the periods
indicated (dollars in thousands):
Realized Gains (Losses) on Derivatives
|
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
||||||||||||||
|
Derivatives
|
2022
|
2021
|
2022
|
2021
|
||||||||||||
|
Interest rate swaps(A)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
|
Swaptions
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
TBAs
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||||
|
U.S. Treasury futures
|
|
(
|
)
|
|
(
|
)
|
||||||||||
| U.S. treasury futures options | ( |
) | ( |
) | ||||||||||||
|
Total
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
||||
| (A) |
|
Offsetting Assets and Liabilities
The Company has netting arrangements in place with all of its derivative counterparties pursuant to standard documentation developed by the International Swaps and
Derivatives Association and the Securities Industry and Financial Markets Association. Under GAAP, if the Company has a valid right of offset, it may offset the related asset and liability and report the net amount. The Company presents interest
rate swaps, swaptions and U.S. treasury futures assets and liabilities on a gross basis in its consolidated balance sheets, but in the case of interest rate swaps, net of variation margin. The Company presents TBA assets and liabilities on a net
basis in its consolidated balance sheets. The Company presents repurchase agreements in this section even though they are not derivatives because they are subject to master netting arrangements. However, repurchase agreements are presented on a
gross basis. Additionally, the Company does not offset financial assets and liabilities with the associated cash collateral on the consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can
potentially be offset on the Company’s consolidated balance sheets as of the dates indicated (dollars in thousands):
Offsetting Assets and Liabilities
As of June 30, 2022
|
Net Amounts
of Assets and
|
Gross Amounts Not Offset in the
Consolidated Balance Sheet
|
|||||||||||||||||||||||
|
Gross
Amounts of
Recognized
Assets or
Liabilities
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
Liabilities
Presented in
the
Consolidated
Balance Sheet
|
Financial
Instruments
|
Cash
Collateral
Received
(Pledged)(A)
|
Net Amount
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||
|
TBAs
|
|
(
|
)
|
|
|
|
|
|||||||||||||||||
|
U.S. treasury futures
|
|
|
|
|
(
|
)
|
||||||||||||||||||
|
U.S. treasury futures options
|
|
|
|
(
|
)
|
|
||||||||||||||||||
|
Total Assets
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Repurchase agreements
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||||||||
|
Interest rate swaps
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
TBAs
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||
|
Total Liabilities
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||
As of December 31, 2021
|
Net Amounts
of Assets and
|
Gross Amounts Not Offset in the
Consolidated Balance Sheet
|
|||||||||||||||||||||||
|
Gross
Amounts of
Recognized
Assets or
Liabilities
|
Gross
Amounts
Offset in the
Consolidated
Balance Sheet
|
Liabilities
Presented in
the
Consolidated
Balance Sheet
|
Financial
Instruments
|
Cash
Collateral
Received
(Pledged)(A)
|
Net Amount
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest rate swaps
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||||||
|
Interest rate swaptions
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
TBAs
|
|
(
|
)
|
|
|
|
|
|||||||||||||||||
|
U.S. treasury futures options
|
( |
) | ||||||||||||||||||||||
|
Total Assets
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Repurchase agreements
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
||||||||||
|
Interest rate swaps
|
|
|
|
(
|
)
|
|
|
|||||||||||||||||
|
TBAs
|
|
(
|
)
|
|
(
|
)
|
|
|
||||||||||||||||
|
U.S. treasury futures
|
( |
) | ||||||||||||||||||||||
|
Total Liabilities
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
|||||||||
| (A) |
|
Note 9 – Fair Value
Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820
requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based
on the lowest level of significant input to its valuation. Following is a description of the three levels:
| • |
Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must
have the ability to access the active market and the quoted prices cannot be adjusted by the entity.
|
| • |
Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or
inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.
|
| • |
Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use
to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.
|
Recurring Fair Value Measurements
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as
well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and
liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected
relevant market conditions.
RMBS
The Company holds a portfolio of RMBS that are classified as available for sale
and are carried at fair value in the consolidated balance sheets. The Company determines the fair value of its RMBS based upon prices obtained from third-party pricing providers. The third-party pricing providers develop their pricing based on
transaction prices of recent trades for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, which utilize observable inputs.
As a result, the Company classified 100
MSRs
The Company, through its subsidiary Aurora, holds a portfolio of MSRs that are reported at fair value in the consolidated balance sheets. The Company uses a discounted
cash flow model to estimate the fair value of these assets. Although MSR transactions are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount
rates). As a result, the Company classified 100
Derivative Instruments
The Company enters into a variety of derivative instruments as part of its economic hedging strategies. The Company executes interest
rate swaps, swaptions, TBAs and U.S. treasury futures. The Company utilizes third-party pricing providers to value its derivative instruments. The third-party pricing providers develop their pricing based on transaction prices of recent trades
for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, which utilize observable inputs. As a result, the Company classified
100
Both the Company and the derivative counterparties under their netting arrangements are required to post cash collateral based upon the net underlying market value of the
Company’s open positions with the counterparties. Posting of cash collateral typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateral posting at low posting
thresholds, credit exposure to the Company and/or counterparties is considered materially mitigated. The Company’s interest rate swaps and U.S. treasury futures are required to be cleared on an exchange, which further mitigates, but does not
eliminate, credit risk. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated (dollars in thousands).
Recurring Fair Value Measurements
As of June 30, 2022
|
|
Level 1
|
Level 2
|
Level 3
|
Carrying Value
|
||||||||||||
|
Assets
|
||||||||||||||||
|
RMBS
|
||||||||||||||||
|
Fannie Mae
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Freddie Mac
|
|
|
|
|
||||||||||||
|
RMBS total
|
|
|
|
|
||||||||||||
|
Derivative assets
|
||||||||||||||||
|
Interest rate swaps
|
|
|
|
|
||||||||||||
| U.S. treasury futures | ||||||||||||||||
|
U.S. treasury futures options
|
|
|
|
|
||||||||||||
|
Derivative assets total
|
|
|
|
|
||||||||||||
|
Servicing related assets
|
|
|
|
|
||||||||||||
|
Total Assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative liabilities
|
||||||||||||||||
|
Interest rate swaps
|
|
|
|
|
||||||||||||
|
TBAs, net
|
||||||||||||||||
|
Derivative liabilities total
|
|
|
|
|
||||||||||||
|
Total Liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
As of December 31, 2021
|
|
Level 1
|
Level 2
|
Level 3
|
Carrying Value
|
||||||||||||
|
Assets
|
||||||||||||||||
|
RMBS
|
||||||||||||||||
|
Fannie Mae
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Freddie Mac
|
|
|
|
|
||||||||||||
|
RMBS total
|
|
|
|
|
||||||||||||
|
Derivative assets
|
||||||||||||||||
|
Interest rate swaps
|
|
|
|
|
||||||||||||
|
Interest rate swaptions
|
|
|
|
|
||||||||||||
|
U.S. treasury futures options
|
|
|
|
|
||||||||||||
|
Derivative assets total
|
|
|
|
|
||||||||||||
|
Servicing related assets
|
|
|
|
|
||||||||||||
|
Total Assets
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative liabilities
|
||||||||||||||||
|
Interest rate swaps
|
|
|
|
|
||||||||||||
| TBAs, net | ||||||||||||||||
|
U.S. treasury futures
|
||||||||||||||||
|
Derivative liabilities total
|
|
|
|
|
||||||||||||
|
Total Liabilities
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application
of certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of June 30, 2022 and December 31, 2021, the Company did not have any assets or liabilities measured at fair value on a
nonrecurring basis in the periods presented.
Level 3 Assets and Liabilities
The valuation of Level 3 assets and liabilities requires significant judgment by management. The Company estimates the fair value of its Servicing Related Assets based on
internal pricing models rather than quotations and compares the results of these internal models against the results from models generated by third-party pricing providers. The third-party pricing providers and management rely on inputs such as
market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3
instruments may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by third-party pricing providers and management in the absence of market information. Assumptions used by third-party
pricing providers and management due to lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s consolidated financial statements. The Company’s management reviews all valuations that are based on
pricing information received from third-party pricing providers. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is
reasonable.
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair
values. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or
estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of June 30, 2022 and December 31, 2021 and do not take into consideration the effects of subsequent changes in
market or other factors.
The tables below present the reconciliation for the Company’s Level 3 assets (Servicing Related Assets) measured at fair value on a recurring basis as of the dates
indicated (dollars in thousands):
Level 3 Fair Value Measurements
As of June 30, 2022
|
|
Level 3
|
|||
|
|
MSRs
|
|||
|
Balance at December 31, 2021
|
$
|
|
||
|
Purchases and sales:
|
||||
|
Purchases
|
|
|||
|
Other changes (A)
|
(
|
)
|
||
|
Purchases and sales:
|
$
|
|
||
|
Changes in Fair Value due to:
|
||||
|
Changes in valuation inputs or assumptions used in valuation model
|
|
|||
|
Other changes in fair value (B)
|
(
|
)
|
||
|
Unrealized gain (loss) included in Net Income
|
$
|
|
||
|
Balance at June 30, 2022
|
$
|
|
||
As of December 31, 2021
|
|
Level 3
|
|||
|
|
MSRs
|
|||
|
Balance at December 31, 2020
|
$
|
|
||
|
Purchases and sales:
|
||||
|
Purchases
|
|
|||
|
Other changes (A)
|
(
|
)
|
||
|
Purchases and sales:
|
$
|
|
||
|
Changes in Fair Value due to:
|
||||
|
Changes in valuation inputs or assumptions used in valuation model
|
|
|||
|
Other changes in fair value (B)
|
(
|
)
|
||
|
Unrealized gain (loss) included in Net Income
|
$
|
(
|
)
|
|
|
Balance at December 31, 2021
|
$
|
|
||
| (A) |
|
| (B) |
|
The tables below present information about the significant unobservable inputs used in the fair value measurement of the Company’s Servicing Related Assets classified
as Level 3 fair value assets as of the dates indicated (dollars in thousands):
Fair Value Measurements
As of June 30, 2022
|
|
Fair Value
|
Valuation Technique
|
Unobservable Input (A)
|
Range
|
Weighted
Average (B)
|
||||||||
|
MSRs
|
$
|
|
Discounted cash flow
|
Constant prepayment speed
|
|
%
|
|
%
|
|||||
|
|
|
|
Uncollected payments
|
|
%
|
|
%
|
||||||
|
|
|
|
Discount rate
|
|
|
%
|
|||||||
|
|
|
|
Annual cost to service, per loan
|
|
$
|
|
|||||||
|
TOTAL
|
$
|
|
|
|
|
|
|||||||
As of December 31, 2021
|
|
Fair Value
|
Valuation Technique
|
Unobservable Input (A)
|
Range
|
Weighted
Average (B)
|
||||||||
|
MSRs
|
$
|
|
Discounted cash flow
|
Constant prepayment speed
|
|
%
|
|
%
|
|||||
|
|
|
|
Uncollected payments
|
|
%
|
|
%
|
||||||
|
|
|
|
Discount rate
|
|
|
%
|
|||||||
|
|
|
|
Annual cost to service, per loan
|
|
$
|
|
|||||||
|
TOTAL
|
$
|
|
|
|
|
|
|||||||
| (A) |
|
| (B) |
|
Fair Value of Financial Assets and Liabilities
In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the
consolidated balance sheets, for which fair value can be estimated. The following describes the Company’s methods for estimating the fair value for financial instruments.
| • |
RMBS available for sale securities, Servicing Related Assets, derivative assets and derivative liabilities are recurring fair value measurements; carrying value equals fair value.
See discussion of valuation methods and assumptions within the “Fair Value Measurements” section of this footnote.
|
| • |
Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments.
|
| • |
The carrying value of servicing receivables, repurchase agreements and corporate debt that mature in less than one year generally approximates fair value due to the short
maturities. The Company does not hold any repurchase agreements that are considered long-term.
|
Corporate debt that matures in more than one year consists solely of financing secured by Aurora’s Servicing Related Assets. All of the Company’s debt is revolving and
bears interest at adjustable rates. The Company considers that the amount of the corporate debt generally approximates fair value.
Note 10 — Commitments and Contingencies
The commitments and contingencies of the Company as of June 30, 2022 and December 31, 2021 are described below.
Management Agreement
The Company pays the Manager a quarterly management fee, calculated and payable quarterly in arrears, equal to the product of one quarter of the 1.5 % management fee annual rate and the stockholders’ equity, adjusted as set forth in
the Management Agreement as of the end of such fiscal quarter. The Manager relies on the Services Provider to provide the Manager with the necessary resources and personnel to conduct the Company’s operations. For further discussion regarding the
management fee, see Note 7.
Legal and Regulatory
From time to time, the Company may be subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary
course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower
than the amounts established for those claims. The Company has established immaterial reserves for these possible matters. Based on information currently available, management is not aware of any legal or regulatory claims that would have a
material effect on the Company’s consolidated financial statements.
Commitments to Purchase/Sell RMBS
As of June 30, 2022 and December 31, 2021, the Company held forward TBA purchase and sale commitments, respectively, with counterparties, which are forward Agency RMBS
trades, whereby the Company committed to purchasing or selling a pool of securities at a particular interest rate. As of the date of the trade, the mortgage-backed securities underlying the pool that will be delivered to fulfill a TBA trade are not
yet designated. The securities are typically “to be announced” 48 hours prior to the established trade settlement date.
See Note 2 — Basis of Presentation and Significant Accounting Policies for details of unsettled RMBS trades as of June 30, 2022 and December 31, 2021.
Acknowledgment Agreements
In connection with the Fannie Mae MSR Financing Facility (as defined below in Note 12), entered into by Aurora and QRS III, those parties also entered into an
acknowledgment agreement with Fannie Mae. Pursuant to that agreement, Fannie Mae consented to the pledge by Aurora and QRS III of their respective interests in MSRs for loans owned or securitized by Fannie Mae, and acknowledged the security
interest of the lender in those MSRs. See Note 12—Notes Payable for a description of the Fannie Mae MSR Financing Facility and the financing facility it replaced.
In connection with the Freddie Mac MSR Revolver (as defined below in Note 12), Aurora, QRS V, and the lender, with a limited joinder by the Company, entered into an
acknowledgement agreement with Freddie Mac pursuant to which Freddie Mac consented to the pledge of the Freddie Mac MSRs securing the Freddie Mac MSR Revolver. Aurora and the lender also entered into a consent agreement with Freddie Mac pursuant to
which Freddie Mac consented to the pledge of Aurora’s rights to reimbursement for advances on the underlying loans. See Note 12—Notes Payable for a description of the Freddie Mac MSR Revolver.
Note 11 – Repurchase Agreements
The Company had outstanding approximately $683.2 million
and $865.5 million of borrowings under its repurchase agreements as of June 30, 2022 and December 31, 2021, respectively. The Company’s
obligations under these agreements had weighted average remaining maturities of 16 days and 38 days as of June 30, 2022 and December 31, 2021. RMBS and cash have been pledged as collateral under these repurchase agreements (see Note 4).
The repurchase agreements had the following remaining maturities and weighted average rates as of the dates indicated (dollars in thousands):
Repurchase Agreements Characteristics
As of June 30, 2022
|
|
Repurchase
Agreements
|
Weighted Average
Rate
|
||||||
|
Less than one month
|
$
|
|
|
%
|
||||
|
One to three months
|
|
|
%
|
|||||
|
Total/Weighted Average
|
$
|
|
|
%
|
||||
As of December 31, 2021
|
|
Repurchase
Agreements |
Weighted Average
Rate
|
||||||
|
Less than one month
|
$
|
|
|
%
|
||||
|
One to three months
|
|
|
%
|
|||||
|
Total/Weighted Average
|
$
|
|
|
%
|
||||
There were no
Note 12 – Notes Payable
As of June 30, 2022, the Company had two separate MSR financing facilities: (i) the Freddie Mac MSR Revolver, which is revolving credit facility for up to $100.0 million that is secured by all Freddie Mac MSRs owned by Aurora; and (ii) the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora. Both financing facilities are available for MSRs as well as certain servicing
related advances associated with MSRs.
Freddie Mac MSR Revolver. In July
2018, the Company, Aurora and QRS V (collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0 million revolving
credit facility (the “Freddie Mac MSR Revolver”) pursuant to which Aurora pledged all of its existing and future MSRs on loans owned or securitized by Freddie Mac. The term of the Freddie Mac MSR Revolver is 364 days with the Borrowers’ option for two renewals for similar terms followed by a one-year term out feature with a 24 -month amortization schedule. The Freddie Mac MSR Revolver was upsized to $45.0 million in September 2018. The Company also has the ability to request up to an additional $5.0 million of borrowings. On April 2, 2019, Aurora and QRS V entered into an amendment that increased the maximum amount of the Freddie Mac MSR Revolver to $100.0 million. In June 2022, the Borrowers entered into an amendment to the Freddie Mac MSR Revolver that extended the revolving period for an
additional 364 days with the option for one
more renewals of 364 days each. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan. Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. At June 30, 2022 and December 31, 2021, approximately $66.0
million and $63.0 million, respectively, was outstanding under the Freddie Mac MSR Revolver.
Fannie Mae MSR Revolving Facility. In
October 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), to replace the Prior Fannie Mae MSR Financing Facility. Under the Fannie Mae MSR Revolving Facility, Aurora and QRS III pledged
their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the Fannie Mae MSR Revolving
Facility is $150.0 million. The revolving period is 24 months which may be extended by agreement with the lender. During the revolving period, borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. At the end of the revolving period, the outstanding amount will be converted to a three-year term loan that will bear interest at a rate calculated at a spread over the rate for one-year interest rate swaps. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Revolving Facility. At June 30, 2022 and December 31, 2021,
approximately $113.0 million and $83.0
million, respectively, was outstanding under the Fannie Mae MSR Revolving Facility.
As noted above, the Fannie Mae MSR Revolving Facility replaced the Prior Fannie
Mae MSR Financing Facility. In September 2019, Aurora and QRS III entered into a loan and security agreement (the “Prior Fannie Mae MSR Financing Facility”). Under the Prior Fannie Mae MSR Facility, Aurora and QRS III pledged their respective
rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The maximum credit amount outstanding at any one time under the facility was $200 million, of which $100 million was
committed. Borrowings bore interest at a rate equal to a spread over one-month LIBOR subject to a floor. This facility was terminated
and replaced in October 2021 with the Fannie Mae MSR Revolving Facility (as defined and discussed above). As a result, there was no outstanding balance under the Prior Fannie Mae MSR Financing Facility at June 30, 2022 and December 31, 2021.
The outstanding borrowings had the following remaining maturities as of the dates indicated (dollars in thousands):
Notes Payable Repayment Characteristics
As of June 30, 2022
|
|
2022
|
2023
|
2024
|
2025
|
2026
|
Total
|
||||||||||||||||||
|
Freddie Mac MSR Revolver
|
||||||||||||||||||||||||
|
Borrowings under Freddie Mac MSR Revolver
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Fannie Mae MSR Revolving Facility
|
||||||||||||||||||||||||
|
Borrowings under Fannie Mae MSR Revolving Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
As of December 31, 2021
|
|
2022
|
2023
|
2024
|
2025
|
2026
|
Total
|
||||||||||||||||||
|
Freddie Mac MSR Revolver
|
||||||||||||||||||||||||
|
Borrowings under Freddie Mac MSR Revolver
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
|
Fannie Mae MSR Revolving Facility
|
||||||||||||||||||||||||
|
Borrowings under Fannie Mae MSR Revolving Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||||||
Note 13 – Receivables and Other Assets
The assets comprising “Receivables and other assets” as of June 30, 2022 and December 31, 2021 are summarized in the following table (dollars in thousands):
Receivables and Other Assets
|
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Servicing advances
|
$
|
|
$
|
|
||||
|
Interest receivable
|
|
|
||||||
|
Deferred tax asset
|
|
|
||||||
|
Other receivables
|
|
|
||||||
|
Total other assets
|
$
|
|
$
|
|
||||
The Company only records as an asset those servicing advances that the Company deems recoverable.
Note 14 – Accrued Expenses and Other Liabilities
The liabilities comprising “Accrued expenses and other liabilities” as of June 30, 2022 and December 31, 2021 are summarized in the following table (dollars in
thousands):
Accrued Expenses and Other Liabilities
|
|
June 30, 2022
|
December 31, 2021
|
||||||
| Accrued interest on repurchase agreements |
$ | $ | ||||||
|
Accrued interest on notes payable
|
|
|
|
|
||||
|
Accrued expenses
|
|
|
||||||
|
Total accrued expenses and other liabilities
|
$
|
|
$
|
|
||||
Note 15 – Income Taxes
The Company elected to be taxed as a REIT under Code Sections 856 through 860 beginning with its short taxable year ended December 31, 2013. As a REIT, the Company
generally will not be subject to U.S. federal income tax to the extent that it distributes its taxable income to its stockholders. To maintain qualification as a REIT, the Company must distribute at least 90 % of its annual REIT taxable income to its stockholders and meet certain other requirements such as assets it may hold, income it may generate and its stockholder
composition. It is the Company’s policy to distribute all or substantially all of its REIT taxable income. To the extent there is any undistributed REIT taxable income at the end of a year, the Company can elect to distribute such shortfall within
the next year as permitted by the Code.
Effective January 1, 2014, CHMI Solutions elected to be taxed as a corporation for U.S. federal income tax purposes; prior to this date, CHMI Solutions was a disregarded
entity for U.S. federal income tax purposes. CHMI Solutions has jointly elected with the Company, the ultimate beneficial owner of the Sub-REIT to be treated as a TRS of the Company, and all activities conducted through CHMI Solutions and its
wholly-owned subsidiary, Aurora, are subject to federal and state income taxes. CHMI Solutions files a consolidated tax return with Aurora and is fully taxed as a U.S. C-Corporation.
The state and local tax jurisdictions for which the Company is subject to tax filing obligations recognize the Company’s status as a REIT, and therefore, the Company
generally does not pay income tax in such jurisdictions. CHMI Solutions and Aurora are subject to U.S. federal, state and local income taxes.
The components of the Company’s income tax expense (benefit) are as follows for the periods indicated below (dollars in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
|
|
2022 | 2021 | 2022 | 2021 | ||||||||||||
|
Current federal income tax benefit
|
$
|
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||||
|
Deferred federal income tax expense
|
|
(
|
)
|
|
|
|||||||||||
|
Deferred state income tax expense
|
|
(
|
)
|
|
|
|||||||||||
|
Provision for Corporate Business Taxes
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
|||||||
The following is a reconciliation of the statutory federal rate to the effective rate, for the periods indicated below (dollars in thousands):
|
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
|
|
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
|
Computed income tax expense at federal rate
|
$
|
(
|
)
|
|
%
|
$
|
(
|
)
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
||||||||||||||
|
State tax expense, net of federal tax, if applicable
|
|
(
|
)%
|
(
|
)
|
|
%
|
|
|
%
|
|
|
%
|
|||||||||||||||||||
|
Permanent differences in taxable income from GAAP pre-tax income
|
|
|
% |
|
(
|
)%
|
|
|
|
% |
|
|
%
|
|||||||||||||||||||
|
REIT income not subject to tax (benefit)
|
|
(
|
)%
|
|
(
|
)%
|
|
|
%
|
(
|
)
|
(
|
)%
|
|||||||||||||||||||
|
Provision for Corporate Business Taxes/Effective Tax Rate(A)
|
$
|
|
(
|
)%
|
$
|
(
|
)
|
|
%
|
$
|
|
|
%
|
$
|
|
|
%
|
|||||||||||||||
| (A) |
|
The Company’s consolidated balance sheets contain the following income taxes recoverable and deferred tax assets, which are recorded at the TRS level (dollars in
thousands):
|
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Income taxes recoverable
|
||||||||
|
Federal income taxes recoverable
|
$
|
|
$
|
|
||||
|
Income taxes recoverable
|
$
|
|
$
|
|
||||
|
|
June 30, 2022
|
December 31, 2021
|
||||||
|
Deferred tax assets
|
||||||||
|
Deferred tax - mortgage servicing rights
|
$
|
|
$
|
|
||||
|
Deferred tax - net operating loss
|
|
|
||||||
|
Total net deferred tax assets
|
$
|
|
$
|
|
||||
In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences become deductible. The Company had net operating losses (“NOLs”) of $50.5 million as
of June 30, 2022, which were created subsequent to 2017 and can be carried forward indefinitely pursuant to the Tax Cuts and Jobs Act passed on December 22, 2017 (“2017 Tax Act”). As of June 30, 2022, the Company believes it is more likely than
not that it will fully realize its deferred tax assets. Deferred tax assets are included in “Receivables and other assets” in the consolidated balance sheets.
Based on the Company’s evaluation, the Company has concluded that there are no
significant liabilities for unrecognized tax benefits required to be reported in the Company’s consolidated financial statements. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these
consolidated financial statements.
The Company’s 2020, 2019 and 2018 federal, state and local income tax returns
remain open for examination by the relevant authorities.
Distributions to stockholders generally will be primarily taxable as ordinary
income, although a portion of such distributions may be designated as qualified dividend income or may constitute a return of capital. The Company furnishes annually to each stockholder a statement setting forth distributions paid during the
preceding year and their U.S. federal income tax treatment.
Note 16 – Subsequent Events
Events subsequent to June 30, 2022 were evaluated and no additional events were identified requiring further disclosure in the consolidated financial statements.
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included in “Part I, Item 1. Consolidated Financial Statements” of this
Quarterly Report on Form 10-Q.
This section discusses our results of operations for the current quarter ended June 30, 2022 compared to the immediately preceding prior quarter ended March 31, 2022.
General
We are a public residential real estate finance company focused on acquiring, investing in and managing residential mortgage assets in the United States. We were incorporated in Maryland on October 31, 2012, and we
commenced operations on or about October 9, 2013 following the completion of our initial public offering and a concurrent private placement. Our common stock, our 8.20% Series A Cumulative Redeemable Preferred Stock (our “Series A Preferred Stock”)
and our 8.250% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (our “Series B Preferred Stock”) are listed and traded on the New York Stock Exchange under the symbols “CHMI,” “CHMI-PRA” and “CHMI-PRB,” respectively. We are
externally managed by our Manager, Cherry Hill Mortgage Management, LLC, an SEC-registered investment adviser.
Our principal objective is to generate attractive current yields and risk-adjusted total returns for our stockholders over the long term, primarily through dividend distributions and secondarily through capital
appreciation. We attempt to attain this objective by selectively constructing and actively managing a portfolio of Servicing Related Assets (as defined below) and residential mortgage-backed securities (“RMBS”) and, subject to market conditions,
other cash flowing residential mortgage assets.
We are subject to the risks involved with real estate and real estate-related debt instruments. These include, among others, the risks normally associated with changes in the general economic climate, changes in the
mortgage market, changes in tax laws, interest rate levels, and the availability of financing.
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our short taxable year ended December 31, 2013. We operate so as to continue to qualify to be taxed as a REIT. Our asset acquisition
strategy focuses on acquiring a diversified portfolio of residential mortgage assets that balances the risk and reward opportunities our Manager observes in the marketplace. Aurora has or is in the process of obtaining the licenses necessary to
invest in mortgage servicing rights (“MSRs”) on a nationwide basis and is an approved seller/servicer for Fannie Mae and Freddie Mac.
In addition to Servicing Related Assets, we invest in RMBS, primarily those backed by 30-, 20- and 15-year fixed rate mortgages that offer what we believe to be favorable prepayment and duration characteristics. Our
RMBS consist primarily of Agency RMBS on which the payments of principal and interest are guaranteed by an Agency. In the past, we have invested in collateralized mortgage obligations guaranteed by an Agency (“Agency CMOs”) consisting of interest
only securities (“IOs”) as well as non-Agency RMBS and may do so in the future subject to market conditions and availability of capital. We finance our RMBS with an amount of leverage, that varies from time to time depending on the particular
characteristics of our portfolio, the availability of financing and market conditions. We do not have a targeted leverage ratio for our RMBS. Our borrowings for RMBS consist of short-term borrowings under master repurchase agreements.
Subject to maintaining our qualification as a REIT, we utilize derivative financial instruments (or hedging instruments) to hedge our exposure to potential interest rate mismatches between the interest we earn on our
assets and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives include, where desirable, locking in, on a long-term basis, a spread between the yield on our assets
and the cost of our financing in an effort to improve returns to our stockholders.
We also seek to operate our business in a manner that does not require us to register as an investment company under the Investment Company Act.
Effective January 1, 2020, the Operating Partnership contributed substantially all of its assets to the Sub-REIT in exchange for all of the common stock of the Sub-REIT. As a result of this contribution, the Sub-REIT
is a wholly-owned subsidiary of the Operating Partnership and operations formerly conducted by the Operating Partnership through its subsidiaries are now conducted by the Sub-REIT through those same subsidiaries. The Sub-REIT has elected to be
taxed as a REIT under the Code commencing with its taxable year ended December 31, 2020.
From time to time, we may issue and sell shares of our common stock or preferred stock, including additional shares of our Class A Preferred Stock or Class B Preferred Stock. See “Item 1. Consolidated Financial
Statements—Note 6. Equity and Earnings per Common Share—Common and Preferred Stock.”
The Company has an at-the-market offering program for its common stock (the “Common Stock ATM Program” and, together with the Preferred Series A ATM Program, as defined below, the “ATM Programs”) pursuant to which it
may offer through one or more sales agents and sell from time to time up to $50.0 million of its common stock at prices prevailing at the time, subject to volume and other regulatory limitations. As of June 30, 2022, approximately $10.1 million was
remaining under the Common Stock ATM Program. During the three-month period ended June 30, 2022, the Company issued and sold 847,656 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of
$6.98 per share for gross proceeds of approximately $5.9 million before fees of approximately $118,000. During the six-month period ended June 30, 2022, the Company issued and sold 1,352,656 shares of common stock under the Common Stock ATM
Program. The shares were sold at a weighted average price of $7.43 per share for gross proceeds of approximately $10.1 million before fees of approximately $201,000. During the year ended December 31, 2021, the Company issued and sold
1,148,398 shares of common stock under the Common Stock ATM Program. The shares were sold at a weighted average price of $8.88 per share for gross proceeds of approximately $10.2 million before fees of approximately $200,000.
The Company also has an at-the-market offering program for its Series A Preferred Stock (the “Preferred Series A ATM Program”) pursuant to which it may offer through one or more sales agents and sell from time to time
up to $35.0 million of its Series A Preferred Stock at prices prevailing at the time, subject to volume and other regulatory limitations. During the three and six-month periods ended June 30, 2022 and the year ended December 31, 2021, the Company
did not issue and sell any shares of Series A Preferred Stock pursuant to the Preferred Series A ATM Program.
In September 2019, the Company initiated a share repurchase program that allows for the repurchase of up to an aggregate of $10.0 million of its common stock. Shares may be repurchased from time to time through
privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Exchange Act or by any combination of such methods. The manner, price, number and timing of share
repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced
or suspended at any time without prior notice. During the three and six-month periods ended June 30, 2022 and the year ended December 31, 2021, the Company did not repurchase any common stock pursuant to the repurchase program.
Effects of COVID-19 on the Company
The COVID-19 pandemic continues to create substantial uncertainty for government policy makers and the Federal Reserve Board with
consequent effects on the economy in the United States. While the economy has largely reopened, the increased presence of highly contagious variants of the virus has exacerbated supply chain issues that arose during the shutdown of various
economies, contributing to the increase in inflation in the United States. Certain forbearance programs and prohibitions on foreclosures have been extended while others have
expired adding to the concern of the consequences once all such programs end. As of June 30, 2022, 0.9% of borrowers on loans underlying the MSRs owned by Aurora are reflected as being in an active forbearance program, with 17.9% of those
borrowers continuing to make their regular scheduled monthly payment. The number of borrowers in active forbearance programs have consistently declined since the beginning of such programs.
Effects of Federal Reserve Policy on the Company
Since the beginning of 2022, the Federal Reserve has raised the federal funds rate 225 basis points to a range of between 2.25% and 2.50% and has signaled that further rate increases are
likely over the course of the year in response to the sharp increase in inflation in the United States. In June, the consumer price index rose 9.1 percent on an annual basis. In
March, the Federal Reserve also ended its monthly asset purchases, including its purchases of Agency RMBS. With these actions, the Federal Reserve reversed its policy stance from the highly accommodative polices it adopted in 2020 in response to
the macro-economic effects of the COVID-19 pandemic. In response to the COVID-19 pandemic, the Federal Reserve adopted a policy of quantitative easing whereby it purchased each month significant amounts of U.S. Treasury securities and Agency
RMBS. The Federal Reserve also reduced the federal funds rate target to 0 to 0.25 percent, established a series of emergency lending programs, reduced the discount rate and encouraged depository institutions to borrow from the discount window,
and took regulatory actions to ease capital and liquidity requirements at depository institutions. The purpose of these actions was to stabilize financial markets and reduce both interest rates generally and the spread between long-term and
short-term interest rates. The Federal Reserve’s balance sheet increased by more than $4.5 trillion to nearly $9 trillion, including $2.5 trillion in Agency RMBS. Due to the reduction in interest rates, prepayment speeds and mortgage refinancing
activity increased. The Federal Reserve took similar actions during the 2008 financial crisis.
The ending of the Federal Reserve’s highly accommodative polices and initiation of a series of increases in the federal funds rate has resulted in higher interest rates across asset classes, including for Agency RMBS. These actions also may reduce
economic activity in the United States, as well as decrease spreads on interest rates, reducing our net interest income. They may also negatively impact our results as we have certain assets and liabilities that are sensitive to changes
in interest rates. In addition, lower net interest income resulting from higher rates is expected to be partially offset by lower prepayments which extends the length of cash flows from the MSRs and slows the premium amortization on the RMBS
portfolio. Any benefit we expect to receive from lower prepayments on the mortgages underlying our MSRS and RMBS could be offset by increased volatility in the market and increased hedging costs attributable to such volatility.
We cannot predict or control the impact future actions by the Federal Reserve will have on the overall economy or on our business. Accordingly, future actions by the Federal Reserve could have a material and adverse effect on our business, financial condition and results of operations and our
ability to pay distributions to our stockholders.
Factors Impacting our Operating Results
Our income is generated primarily by the net spread between the income we earn on our assets and the cost of our financing and hedging activities as well as the amortization of any purchase premiums or the accretion of
discounts. Our net income includes the actual interest payments we receive on our RMBS, the net servicing fees we receive on our MSRs and the accretion/amortization of any purchase discounts/premiums. Changes in various factors such as market
interest rates, prepayment speeds, estimated future cash flows, servicing costs and credit quality could affect the amount of premium to be amortized or discount to be accreted into interest income for a given period. Prepayment speeds vary
according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be affected by credit losses in excess of initial
anticipations or unanticipated credit events experienced by borrowers whose mortgage loans underlie the MSRs held by Aurora or the non-Agency RMBS held in our portfolio.
Set forth below is the positive net spread between the yield on RMBS and our costs of funding those assets at the end of each of the quarters indicated below:
Average Net Yield Spread at Period End
|
Quarter Ended
|
Average
Asset Yield |
Average
Cost of Funds
|
Average Net
Interest Rate
Spread
|
|||||||||
|
June 30, 2022
|
3.56
|
%
|
0.32
|
%
|
3.25
|
%
|
||||||
|
March 31, 2022
|
2.98
|
%
|
0.49
|
%
|
2.49
|
%
|
||||||
|
December 31, 2021
|
2.93
|
%
|
0.62
|
%
|
2.31
|
%
|
||||||
|
September 30, 2021
|
2.94
|
%
|
0.63
|
%
|
2.31
|
%
|
||||||
The Average Cost of Funds also includes the benefits of related swaps.
Changes in the Market Value of Our Assets
We hold our Servicing Related Assets as long-term investments. Our MSRs are carried at their fair value with changes in their fair value recorded in other income or loss in our consolidated statements of income (loss).
Those values may be affected by events or headlines that are outside of our control, such as the COVID-19 pandemic and other events impacting the U.S. or global economy generally or the U.S. residential market specifically, and events or headlines
impacting the parties with which we do business. See “Part I, Item 1A. Risk Factors – Risks Related to Our Business” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Our RMBS are carried at their fair value, as available-for-sale in accordance with ASC 320, Investments – Debt and Equity Securities. We evaluate the cost basis of our RMBS on
a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet
date, the security’s cost basis is considered impaired. If we determine that we intend to sell the security or it is more likely than not that we will be required to sell before recovery, we recognize the difference between the fair value and
amortized cost as a loss in the consolidated statements of income (loss). If we determine we do not intend to sell the security or it is not more likely than not we will be required to sell the security before recovery, we must evaluate the
decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we perform a qualitative assessment around whether a
credit loss exists and if necessary, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a “market participant”
would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well as incorporating observations of current
market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an
expected credit loss exists and is included in provision (reversal) for credit losses on securities in the consolidated statements of income (loss). If it is determined as of the financial reporting date that all or a portion of a security’s cost
basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security’s cost basis. This adjustment to the amortized cost basis of the security is reflected in realized gain (loss) on RMBS,
available-for-sale, net in the consolidated statements of income (loss).
Impact of Changes in Market Interest Rates on Our Assets
The value of our assets may be affected by prepayment speeds on mortgage loans. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance (“UPB”) of their loans or how quickly
loans are otherwise liquidated or charged off. Generally, in a declining interest rate environment, prepayment speeds tend to increase. Conversely, in an increasing interest rate environment, prepayment speeds tend to decrease. When we acquire
Servicing Related Assets or RMBS, we anticipate that the underlying mortgage loans will prepay at a projected rate generating an expected cash flow (in the case of Servicing Related Assets) and yield. If we purchase assets at a premium to par value
and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on our assets may reduce the expected yield on such assets because we will have to amortize the related premium on an accelerated basis. In addition, we
will have to reinvest the greater amounts of prepayments in that lower rate environment, thereby affecting future yields on our assets. If we purchase assets at a discount to par value, and borrowers prepay their mortgage loans slower than
expected, the decrease in corresponding prepayments may reduce the expected yield on assets because we will not be able to accrete the related discount as quickly as originally anticipated.
If prepayment speeds are significantly greater than expected, the fair value of the Servicing Related Assets could be less than their fair value as previously reported on our consolidated balance sheets. Such a
reduction in the fair value of the Servicing Related Assets would have a negative impact on our book value. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from the Servicing
Related Assets, and we could receive substantially less than what we paid for such assets. Our balance sheet, results of operations and cash flows are susceptible to significant volatility due to changes in the fair value of, or cash flows from,
the Servicing Related Assets as interest rates change.
A slower than anticipated rate of prepayment due to an increase in market interest rates also will cause the life of the related RMBS to extend beyond that which was projected. As a result, we would have an asset with
a lower yield than current investments for a longer period of time. In addition, if we have hedged our interest rate risk, extension may cause the security to be outstanding longer than the related hedge, thereby reducing the protection intended to
be provided by the hedge.
Voluntary and involuntary prepayment rates may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of, or natural disasters affecting,
the area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors,
none of which can be predicted with any certainty.
We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers. Under these agreements, the subservicer attempts to refinance specified
mortgage loans. The subservicer sells the new mortgage loan to the applicable Agency, transfers the related MSR to Aurora and then subservices the new mortgage loan on behalf of Aurora. See “Part I, Item 1. Notes to Consolidated Financial
Statements—Note 7. Transactions with Related Parties” for information regarding Aurora’s recapture agreements.
With respect to our business operations, increases in interest rates, in general, may over time cause:
| • |
the interest expense associated with our borrowings to increase;
|
| • |
the value of our assets to fluctuate;
|
| • |
the coupons on any adjustable-rate and hybrid RMBS we may own to reset, although on a delayed basis, to higher interest rates;
|
| • |
prepayments on our RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and
|
| • |
an increase in the value of any interest rate swap agreements we may enter into as part of our hedging strategy.
|
Conversely, decreases in interest rates, in general, may over time cause:
| • |
prepayments on our RMBS to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts;
|
| • |
the interest expense associated with our borrowings to decrease;
|
| • |
the value of our assets to fluctuate;
|
| • |
a decrease in the value of any interest rate swap agreements we may enter into as part of our hedging strategy; and
|
| • |
coupons on any adjustable-rate and hybrid RMBS assets we may own to reset, although on a delayed basis, to lower interest rates.
|
Effects of Spreads on our Assets
The spread between the yield on our assets and our funding costs affects the performance of our business. Wider spreads imply the potential for greater income on new asset purchases but may have a negative impact on
our stated book value. Wider spreads may also negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling
assets. Conversely, tighter spreads imply the potential for lower income on new asset purchases but may have a positive impact on stated book value of our existing assets. In this case, we may be able to reduce the amount of collateral required to
secure borrowings.
Credit Risk
We are subject to varying degrees of credit risk in connection with our assets. Although we expect relatively low credit risk with respect to our portfolios of Agency RMBS, we are subject to the credit risk of
borrowers under the loans backing any CMOs that we may own and to the credit enhancements built into the CMO structure. We also are subject to the credit risk of the borrowers under the mortgage loans underlying the MSRs that Aurora owns. Through
loan level due diligence, we attempt to mitigate this risk by seeking to acquire high quality assets at appropriate prices given anticipated and unanticipated losses. We also conduct ongoing monitoring of acquired MSRs. Nevertheless, unanticipated
credit losses could occur which could adversely impact our operating results.
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with US GAAP, which requires the use of estimates that involve the exercise of judgment and the use of assumptions as to future uncertainties. Our most critical
accounting policies involve decisions and assessments that could affect our reported amounts of assets and liabilities, as well as our reported amounts of revenues and expenses. We believe that the decisions and assessments upon which our financial
statements are based were reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates may change over time as we diversify our portfolio. The material accounting
policies and estimates that we expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below. For additional information on our material accounting
policies and estimates, see “Item 1. Consolidated Financial Statements – Note 2. Basis of Presentation and Significant Accounting Policies”.
Investments in Securities
We have elected to classify our investments in RMBS as available-for-sale. Although we may hold most of our securities until maturity, we may, from time to time, sell any of our securities as part of our overall
management of our asset portfolio. All assets classified as available-for-sale will be reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. Fair value of our
investments in RMBS is determined based upon prices obtained from third-party pricing providers. Changes in underlying assumptions used in estimating fair value impact the carrying value of the investments in RMBS as well as their yield. For
additional information on our assessment of credit-related impairment and our fair value methodology, see “Item 1. Consolidated Financial Statements – Note 4. Investments in RMBS and Note 9. Fair Value”.
Revenue Recognition on Securities
Interest income from coupon payments is accrued based on the outstanding principal amount of the RMBS and their contractual terms. Premiums and discounts associated with the purchase of the RMBS are amortized or
accreted into interest income over the projected lives of the securities using the effective interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, consensus
prepayment speeds, and current market conditions. Adjustments are made for actual prepayment activity. For information on how interest rates effect net interest income, see “Item 3. Quantitative and Qualitative Disclosures about Market Risk –
Interest Rate Effect on Net Interest Income”.
Investments in MSRs
We have elected the fair value option to record our investments in MSRs in order to provide users of our consolidated financial statements with better information regarding the effects of prepayment risk and other
market factors on the MSRs. Under this election, we record a valuation adjustment on our investments in MSRs on a quarterly basis to recognize the changes in fair value of our MSRs in net income as described below. Although transactions in MSRs are
observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, delinquency levels, costs to service and discount rates). The change in fair value of is recorded within “Unrealized gain (loss) on
investments in Servicing Related Assets” on the consolidated statements of income (loss). Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium
specific to the MSRs and, therefore, may differ from their effective yields. In determining the valuation of MSRs, management uses internally developed pricing models that are based on certain unobservable market-based inputs. The Company
classifies these valuations as Level 3 in the fair value hierarchy. For additional information on our fair value methodology, see “Item 1. Consolidated Financial Statements – Note 9. Fair Value”.
Revenue Recognition on Investments in MSRs
Mortgage servicing fee income represents revenue earned from the ownership of MSRs. The servicing fees are based on a contractual percentage of the outstanding principal balance and are recognized as revenue as the
related mortgage payments are collected. Corresponding costs to service are charged to expense as incurred. Servicing fee income received and servicing expenses incurred are reported on the consolidated statements of income (loss).
Repurchase Transactions
We finance the acquisition of our RMBS for our portfolio through repurchase transactions under master repurchase agreements. Repurchase transactions are treated as collateralized financing transactions and are carried
at their contractual amounts as specified in the respective transactions. Accrued interest payable is included in “Accrued expenses and other liabilities” on the consolidated balance sheets. Securities financed through repurchase transactions
remain on our consolidated balance sheet as an asset and cash received from the purchaser is recorded on our consolidated balance sheet as a liability. Interest paid in accordance with repurchase transactions is recorded in interest expense on the
consolidated statements of income (loss).
Income Taxes
We elected to be taxed as a REIT under the Code commencing with our short taxable year ended December 31, 2013. We expect to continue to qualify to be treated as a REIT. U.S. federal income tax law generally requires
that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate income tax rates to the extent that it annually
distributes less than 100% of its taxable income. Our taxable REIT subsidiary, Solutions, and its wholly-owned subsidiary, Aurora, are subject to U.S. federal income taxes on their taxable income.
We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 requires the recording of deferred income taxes that reflect the net tax effect of temporary
differences between the carrying amounts of our assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, including operating loss carry forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in
the period that includes the enactment date. For information on our assessment of the realizability of deferred tax assets, see “Item 1. Consolidated Financial Statements – Note 15. Income Taxes”. We assess our tax positions for all open tax years
and determine if we have any material unrecognized liabilities in accordance with ASC 740. We record these liabilities to the extent we deem them more-likely-than-not to be incurred. We record interest and penalties related to income taxes within
the provision for income taxes in the consolidated statements of income (loss). We have not incurred any interest or penalties.
Results of Operations
Presented below is a comparison of the Company’s results of operations for the periods indicated (dollars in thousands):
Results of Operations
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
March 31, 2022
|
June 30, 2022
|
June 30, 2021
|
|||||||||||||
|
Income
|
||||||||||||||||
|
Interest income
|
$
|
6,004
|
$
|
5,519
|
$
|
11,523
|
$
|
6,827
|
||||||||
|
Interest expense
|
2,502
|
1,640
|
4,142
|
2,795
|
||||||||||||
|
Net interest income
|
3,502
|
3,879
|
7,381
|
4,032
|
||||||||||||
|
Servicing fee income
|
13,188
|
13,116
|
26,304
|
27,288
|
||||||||||||
|
Servicing costs
|
2,615
|
3,193
|
5,808
|
7,154
|
||||||||||||
|
Net servicing income
|
10,573
|
9,923
|
20,496
|
20,134
|
||||||||||||
|
Other income (loss)
|
||||||||||||||||
|
Realized gain (loss) on RMBS, available-for-sale, net
|
(46,036
|
)
|
(13,222
|
)
|
(59,258
|
)
|
3,077
|
|||||||||
|
Realized loss on derivatives, net
|
(2,730
|
)
|
(10,638
|
)
|
(13,368
|
)
|
(6,071
|
)
|
||||||||
|
Realized gain on acquired assets, net
|
-
|
12
|
12
|
34
|
||||||||||||
|
Unrealized gain (loss) on derivatives, net
|
17,613
|
24,456
|
42,069
|
(4,511
|
)
|
|||||||||||
|
Unrealized gain (loss) on investments in Servicing Related Assets
|
6,150
|
21,731
|
27,881
|
1,963
|
||||||||||||
|
Total Income (Loss)
|
(10,928
|
)
|
36,141
|
25,213
|
18,658
|
|||||||||||
|
Expenses
|
||||||||||||||||
|
General and administrative expense
|
1,499
|
1,744
|
3,243
|
3,500
|
||||||||||||
|
Management fee to affiliate
|
1,614
|
1,793
|
3,407
|
3,910
|
||||||||||||
|
Total Expenses
|
3,113
|
3,537
|
6,650
|
7,410
|
||||||||||||
|
Income (Loss) Before Income Taxes
|
(14,041
|
)
|
32,604
|
18,563
|
11,248
|
|||||||||||
|
Provision for (Benefit from) corporate business taxes
|
1,423
|
3,875
|
5,298
|
1,633
|
||||||||||||
|
Net Income (Loss)
|
(15,464
|
)
|
28,729
|
13,265
|
9,615
|
|||||||||||
|
Net (income) loss allocated to noncontrolling interests in Operating Partnership
|
347
|
(633
|
)
|
(286
|
)
|
(194
|
)
|
|||||||||
|
Dividends on preferred stock
|
2,465
|
2,463
|
4,928
|
4,928
|
||||||||||||
|
Net Income (Loss) Applicable to Common Stockholders
|
$
|
(17,582
|
)
|
$
|
25,633
|
$
|
8,051
|
$
|
4,493
|
|||||||
Presented below is summary financial data on our segments together with the data for the Company as a whole, for the periods indicated (dollars in thousands):
Segment Summary Data
|
Servicing Related
Assets
|
RMBS
|
All Other
|
Total
|
|||||||||||||
|
Income Statement
|
||||||||||||||||
|
Three Months Ended June 30, 2022
|
||||||||||||||||
|
Interest income
|
$
|
-
|
$
|
6,004
|
$
|
-
|
$
|
6,004
|
||||||||
|
Interest expense
|
1,131
|
|
1,371
|
|
-
|
2,502
|
||||||||||
|
Net interest income (expense)
|
(1,131
|
)
|
4,633
|
-
|
3,502
|
|||||||||||
|
Servicing fee income
|
13,188
|
|
-
|
|
-
|
13,188
|
||||||||||
|
Servicing costs
|
2,615
|
|
-
|
|
-
|
2,615
|
||||||||||
|
Net servicing income
|
10,573
|
-
|
-
|
10,573
|
||||||||||||
|
Other expense
|
(5,530
|
)
|
|
(19,473
|
)
|
|
-
|
(25,003
|
)
|
|||||||
|
Other operating expenses
|
510
|
|
151
|
|
2,452
|
3,113
|
||||||||||
|
Provision for corporate business taxes
|
1,423
|
|
-
|
|
-
|
1,423
|
||||||||||
|
Net Income (Loss)
|
$
|
1,979
|
$
|
(14,991
|
)
|
$
|
(2,452
|
)
|
$
|
(15,464
|
)
|
|||||
|
Three Months Ended March 31, 2022
|
||||||||||||||||
|
Interest income
|
$
|
-
|
$
|
5,519
|
$
|
-
|
$
|
5,519
|
||||||||
|
Interest expense
|
1,253
|
387
|
-
|
1,640
|
||||||||||||
|
Net interest income (expense)
|
(1,253
|
)
|
5,132
|
-
|
3,879
|
|||||||||||
|
Servicing fee income
|
13,116
|
-
|
-
|
13,116
|
||||||||||||
|
Servicing costs
|
3,193
|
-
|
-
|
3,193
|
||||||||||||
|
Net servicing income
|
9,923
|
-
|
-
|
9,923
|
||||||||||||
|
Other income (expense)
|
(3,366
|
)
|
25,705
|
-
|
22,339
|
|||||||||||
|
Other operating expenses
|
522
|
228
|
2,787
|
3,537
|
||||||||||||
|
Provision for corporate business taxes
|
3,875
|
-
|
-
|
3,875
|
||||||||||||
|
Net Income (Loss)
|
$
|
907
|
$
|
30,609
|
$
|
(2,787
|
)
|
$
|
28,729
|
|||||||
|
Six Months Ended June 30, 2022
|
||||||||||||||||
|
Interest income
|
$
|
-
|
$
|
11,523
|
$
|
-
|
$
|
11,523
|
||||||||
|
Interest expense
|
2,384
|
1,758
|
-
|
4,142
|
||||||||||||
|
Net interest income (expense)
|
(2,384
|
)
|
9,765
|
-
|
7,381
|
|||||||||||
|
Servicing fee income
|
26,304
|
-
|
-
|
26,304
|
||||||||||||
|
Servicing costs
|
5,808
|
-
|
-
|
5,808
|
||||||||||||
|
Net servicing income
|
20,496
|
-
|
-
|
20,496
|
||||||||||||
|
Other income (expense)
|
(8,896
|
)
|
6,232
|
-
|
(2,664
|
)
|
||||||||||
|
Other operating expenses
|
1,032
|
379
|
5,239
|
6,650
|
||||||||||||
|
Provision for corporate business taxes
|
5,298
|
-
|
-
|
5,298
|
||||||||||||
|
Net Income (Loss)
|
$
|
2,886
|
$
|
15,618
|
$
|
(5,239
|
)
|
$
|
13,265
|
|||||||
|
Six Months Ended June 30, 2021
|
||||||||||||||||
|
Interest income
|
$
|
226
|
$
|
6,601
|
$
|
-
|
$
|
6,827
|
||||||||
|
Interest expense
|
2,006
|
789
|
-
|
2,795
|
||||||||||||
|
Net interest income (expense)
|
(1,780
|
)
|
5,812
|
-
|
4,032
|
|||||||||||
|
Servicing fee income
|
27,288
|
-
|
-
|
27,288
|
||||||||||||
|
Servicing costs
|
7,154
|
-
|
-
|
7,154
|
||||||||||||
|
Net servicing income
|
20,134
|
-
|
-
|
20,134
|
||||||||||||
|
Other income (expense)
|
(15,909
|
)
|
10,401
|
-
|
(5,508
|
)
|
||||||||||
|
Other operating expenses
|
1,412
|
329
|
5,669
|
7,410
|
||||||||||||
|
Provision for corporate business taxes
|
1,633
|
-
|
-
|
1,633
|
||||||||||||
|
Net Income (Loss)
|
$
|
(600
|
)
|
$
|
15,884
|
$
|
(5,669
|
)
|
$
|
9,615
|
|
|
Servicing
Related Assets
|
RMBS
|
All Other
|
Total
|
||||||||||||
|
Balance Sheet
|
||||||||||||||||
|
June 30, 2022
|
||||||||||||||||
|
Investments
|
$
|
263,578
|
$
|
728,825
|
$
|
-
|
$
|
992,403
|
||||||||
|
Other assets
|
30,284
|
114,913
|
61,817
|
207,014
|
||||||||||||
|
Total assets
|
293,862
|
843,738
|
61,817
|
1,199,417
|
||||||||||||
|
Debt
|
178,308
|
683,173
|
-
|
861,481
|
||||||||||||
|
Other liabilities
|
14,268
|
57,817
|
10,767
|
82,852
|
||||||||||||
|
Total liabilities
|
192,576
|
740,990
|
10,767
|
944,333
|
||||||||||||
|
Net assets
|
$
|
101,286
|
$
|
102,748
|
$
|
51,050
|
$
|
255,084
|
||||||||
|
December 31, 2021
|
||||||||||||||||
|
Investments
|
$
|
218,727
|
$
|
953,496
|
$
|
-
|
$
|
1,172,223
|
||||||||
|
Other assets
|
44,506
|
21,611
|
64,522
|
130,639
|
||||||||||||
|
Total assets
|
263,233
|
975,107
|
64,522
|
1,302,862
|
||||||||||||
|
Debt
|
145,268
|
865,494
|
-
|
1,010,762
|
||||||||||||
|
Other liabilities
|
1,847
|
1,411
|
10,026
|
13,284
|
||||||||||||
|
Total liabilities
|
147,115
|
866,905
|
10,026
|
1,024,046
|
||||||||||||
|
Net assets
|
$
|
116,118
|
$
|
108,202
|
$
|
54,496
|
$
|
278,816
|
||||||||
Interest Income
Interest income for the three-month period ended June 30, 2022 was $6.0 million as compared to $5.5 million for the three-month period ended March 31, 2022. The increase of $485,000 in interest income was substantially
due to a decrease in price premium amortization, which was partially offset by a decrease in interest income as a result of RMBS sales.
Interest income for the six-month period ended June 30, 2022 was $11.5 million as compared to $6.8 million for the six-month period ended June 30, 2021. The increase of $4.7 million in interest income was substantially
due to a decrease in price premium amortization, which was partially offset by a decrease in interest income as a result of RMBS sales.
Interest Expense
Interest expense for the three-month period ended June 30, 2022 was $2.5 million as compared to $1.6 million for the three-month period ended March 31, 2022. The increase of $856,000 in interest expense was due to a
rise in interest rates as well as a higher notes payable balance.
Interest expense for the six-month period ended June 30, 2022 was $4.1 million as compared to $2.8 million for the six-month period ended June 30, 2021. The increase of $1.3 million in interest expense was due to a
rise in interest rates as well as a higher notes payable balance.
Servicing Fee Income
Servicing fee income for the three-month period ended June 30, 2022 was $13.2 million as compared to $13.1 million for the three-month period ended March 31, 2022.
Servicing fee income for the six-month period ended June 30, 2022 was $26.3 million as compared to $27.3 million for the six-month period ended June 30, 2021. The decrease of $984,000 in servicing fee income resulted
from a decline in the size of the MSR portfolio.
Servicing Costs
Servicing costs for the three-month period ended June 30, 2022 was $2.6 million as compared to $3.2 million for the three-month period ended March 31, 2022. The decrease of $580,000 in servicing costs was due to timing
of eligibility for certain payments as well as changes in the size of the MSR portfolio.
Servicing costs for the six-month period ended June 30, 2022 was $5.8 million as compared to $7.2 million for the six-month period ended June 30, 2021. The decrease of $1.3 million in servicing costs was due to timing
of eligibility for certain payments as well as changes in the size of the MSR portfolio.
Realized Gain (Loss) on RMBS, Available-For-Sale, Net
Realized loss on RMBS for the three-month period ended June 30, 2022 was approximately $46.0 million as compared to $13.2 million for the three-month period ended March 31, 2022. The increase of $32.8 million in
realized loss on RMBS was due to the sale of RMBS securities in response to rising interest rates and an effort to reinvest in higher yielding RMBS securities.
Realized loss on RMBS for the six-month period ended June 30, 2022 was approximately $59.3 million as compared to a gain of $3.1 million for the six-month period ended June 30, 2021. The increase of $62.3 million in
realized loss on RMBS was due to the sale of RMBS securities in response to rising interest rates and an effort to reinvest in higher yielding RMBS securities.
Realized Loss on Derivatives, Net
Realized loss on derivatives for the three-month period ended June 30, 2022 was approximately $2.7 million as compared to $10.6 million for the three-month period ended March 31, 2022. The decrease of $7.9 million in
realized loss on derivatives was substantially comprised of a decrease of $3.7 million in losses on TBAs and an increase of $7.9 million in gains on U.S. Treasury futures, offset by an increase of $3.7 million in losses on interest rate swaps due
to changes in interest rates.
Realized loss on derivatives for the six-month period ended June 30, 2022 was approximately $13.4 million as compared to $6.1 million for the six-month period ended June 30, 2021. The increase of $7.3 million in
realized loss on derivatives was substantially comprised of an increase of $22.7 million in losses on TBAs and an increase of $6.1 million in losses on interest rate swaps, offset by an increase of $21.4 million in gains on U.S. Treasury futures
due to changes in interest rates.
Unrealized Gain (Loss) on Derivatives
Unrealized gain on derivatives for the three-month period ended June 30, 2022 was approximately $17.6 million as compared to $24.5 million for the three-month period ended March 31, 2022. The decrease of $6.9 million
in unrealized gain on derivatives was primarily due to changes in interest rates and the composition of our derivatives relative to the prior period.
Unrealized gain on derivatives for the six-month period ended June 30, 2022 was approximately $42.1 million as compared to a loss of $4.5 million for the six-month period ended June 30, 2021. The increase of $46.6
million in unrealized gain on derivatives was primarily due to changes in interest rates and the composition of our derivatives relative to the prior period.
Unrealized Gain (Loss) on Investments in Servicing Related Assets
Unrealized gain on our investments in Servicing Related Assets for the three-month period ended June 30, 2022 was approximately $6.2 million as compared to $21.7 million for the three-month period ended March 31, 2022.
The decrease of $15.5 million in unrealized gain on our investments in Servicing Related Assets was primarily due to changes in valuation inputs or assumptions.
Unrealized gain on our investments in Servicing Related Assets for the six-month period ended June 30, 2022 was approximately $27.9 million as compared to $2.0 million for the six-month period ended June 30, 2021. The
increase of $25.9 million in unrealized gain on our investments in Servicing Related Assets was primarily due to changes in valuation inputs or assumptions.
General and Administrative Expense
General and administrative expense for the three-month period ended June 30, 2022 was $1.5 million as compared to $1.7 million for the three-month period ended March 31, 2022. The decrease of $243,000 in general and
administrative expense was primarily due to lower professional fees.
General and administrative expense for the six-month period ended June 30, 2022 was $3.2 million as compared to $3.5 million for the six-month period ended June 30, 2021. The decrease of $258,000 in general and
administrative expense was primarily due to lower professional fees.
Net Income Allocated to Noncontrolling Interests in Operating Partnership
Net income allocated to noncontrolling interests in the Operating Partnership, which are LTIP-OP Units owned by directors and officers of the Company and by certain other individuals who provide services to us through
the Manager, represented approximately 2.1%,and 2.2% of net income for the three-month periods ended June 30, 2022 and March 31, 2022, respectively, and 2.1% and 2.0% for the six-month periods ended June 30, 2022 and June 30, 2021, respectively.
The decrease for the three-month periods ended June 30, 2022 and March 31, 2022 was due to the issuance of common stock pursuant to our Common Stock ATM program. The increase for the six-month period ended June 30, 2022 and June 30, 2021 was due to
the issuance of LTIP-OP Units during the six-months ended June 30, 2022.
For the periods indicated below, our accumulated other comprehensive income (loss) changed as a result of the indicated gains and losses (dollars in thousands):
Accumulated Other Comprehensive Income (Loss)
|
Three Months Ended
June 30, 2022
|
||||
|
Accumulated other comprehensive loss, March 31, 2022
|
$
|
(37,008
|
)
|
|
|
Other comprehensive loss
|
12,841
|
|||
|
Accumulated other comprehensive loss, June 30, 2022
|
$
|
(24,167
|
)
|
|
|
Three Months Ended
March 31, 2022
|
||||
|
Accumulated other comprehensive gain, December 31, 2021
|
$
|
7,527
|
||
|
Other comprehensive loss
|
(44,535
|
)
|
||
|
Accumulated other comprehensive loss, March 31, 2022
|
$
|
(37,008
|
)
|
|
|
Six Months Ended
June 30, 2022
|
||||
|
Accumulated other comprehensive gain, December 31, 2021
|
$
|
7,527
|
||
|
Other comprehensive loss
|
(31,694
|
)
|
||
|
Accumulated other comprehensive loss, June 30, 2022
|
$
|
(24,167
|
)
|
|
|
Six Months Ended
June 30, 2021
|
||||
|
Accumulated other comprehensive gain, December 31, 2020
|
$
|
35,594
|
||
|
Other comprehensive loss
|
(21,353
|
)
|
||
|
Accumulated other comprehensive gain, June 30, 2021
|
$
|
14,241
|
||
Our GAAP equity changes as the values of our RMBS are marked to market each quarter, among other factors. The primary causes of mark to market changes are changes in interest rates and nominal spreads. During the
periods ended June 30, 2022 and March 31, 2022, volatility and increases in the 10 Year U.S. Treasury rate caused a net unrealized loss on our RMBS in each of those periods, which is recorded in accumulated other comprehensive income (loss).
Non-GAAP Financial Measures
This Management’s Discussion and Analysis of Financial Condition and Results of Operations section contains analysis and discussion of non-GAAP financial measures, including:
| • |
earnings available for distribution; and
|
| • |
earnings available for distribution per average common share.
|
Earnings available for distribution (“EAD”) is a non-GAAP financial measure that we define as GAAP net income (loss), excluding realized gain (loss) on RMBS, realized and unrealized gain (loss) on derivatives, realized
gain (loss) on acquired assets, realized and unrealized gain (loss) on investments in MSRs (net of any estimated MSR amortization) and any tax expense (benefit) on realized and unrealized gain (loss) on MSRs. MSR amortization refers to the portion
of the change in fair value of the MSR that is primarily due to the realization of cashflows, runoff resulting from prepayments and an adjustment for any gain or loss on the capital used to purchase the MSR. EAD also includes interest rate swap
periodic interest income (expense) and drop income on TBA dollar roll transactions, which are included in “Realized loss on derivatives, net” on the consolidated statements of income (loss). EAD is adjusted to exclude outstanding LTIP-OP Units in
our Operating Partnership and dividends paid on our preferred stock.
EAD is provided for purposes of potential comparability to other issuers that invest in residential mortgage-related assets. We believe providing investors with EAD, in addition to related GAAP financial measures, may
provide investors some insight into our ongoing operational performance. However, the concept of EAD does have significant limitations, including the exclusion of realized and unrealized gains (losses), and given the apparent lack of a consistent
methodology among issuers for defining EAD, it may not be comparable to similarly titled measures of other issuers, which define EAD differently from us and each other. As a result, EAD should not be considered a substitute for our GAAP net income
(loss) or as a measure of our liquidity. While EAD is one indicia of the Company’s earnings capacity, it is not the only factor considered in setting a dividend and is not the same as REIT taxable income
which is calculated in accordance with the rules of the IRS.
Earnings Available for Distribution
EAD for the three-month period ended June 30, 2022 as compared to the three month period ended March 31, 2022, decreased by approximately $932,000 or $0.06 per average common share, substantially due to changes in
interest rates and sale of RMBS securities.
EAD for the six-month period ended June 30, 2022 as compared to the six-month period ended June 30, 2021, increased by approximately $3.2 million or $0.13 per average
common share, substantially due to changes in interest rates and a decrease in price premium amortization on the Company's RMBS driven by lower prepayment speeds.
The following table reconciles the GAAP measure of net income (loss) to EAD and related per average common share amounts, for the periods indicated (dollars in thousands):
|
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
|
June 30, 2022
|
March 31, 2022
|
June 30, 2022
|
June 30, 2021(B)
|
|||||||||||||
|
Net Income (Loss)
|
$
|
(15,464
|
)
|
$
|
28,729
|
$
|
13,265
|
$
|
9,615
|
|||||||
|
Realized loss (gain) on RMBS, net
|
46,036
|
13,222
|
59,258
|
(3,077
|
)
|
|||||||||||
|
Realized loss on derivatives, net (A)
|
5,952
|
14,422
|
20,374
|
14,880
|
||||||||||||
|
Realized gain on acquired assets, net
|
-
|
(12
|
)
|
(12
|
)
|
(34
|
)
|
|||||||||
|
Unrealized loss (gain) on derivatives, net
|
(17,613
|
)
|
(24,456
|
)
|
(42,069
|
)
|
4,511
|
|||||||||
|
Unrealized gain on investments in MSRs, net of estimated MSR amortization
|
(13,375
|
)
|
(28,011
|
)
|
(41,386
|
)
|
(15,828
|
)
|
||||||||
|
Tax benefit of realized and unrealized loss on MSRs
|
2,336
|
4,937
|
7,273
|
3,390
|
||||||||||||
|
Total EAD:
|
$
|
7,872
|
$
|
8,831
|
$
|
16,703
|
$
|
13,457
|
||||||||
|
EAD attributable to noncontrolling interests in Operating Partnership
|
(166
|
)
|
(195
|
)
|
(361
|
)
|
(272
|
)
|
||||||||
|
Dividends on preferred stock
|
2,465
|
2,463
|
4,928
|
4,928
|
||||||||||||
|
EAD Attributable to Common Stockholders
|
$
|
5,241
|
$
|
6,173
|
$
|
11,414
|
$
|
8,257
|
||||||||
|
EAD Attributable to Common Stockholders, per Diluted Share
|
$
|
0.28
|
$
|
0.34
|
$
|
0.61
|
$
|
0.48
|
||||||||
|
GAAP Net Income (Loss) Per Share of Common Stock, per Diluted Share
|
$
|
(0.92
|
)
|
$
|
1.40
|
$
|
0.43
|
$
|
0.26
|
|||||||
| (A) |
Excludes drop income on TBA dollar rolls of $1.9 million and $2.9 million and interest rate swap periodic interest income of $1.4 million and $915,000, for the three-month periods ended June 30, 2022 and March 31, 2022, respectively.
Excludes drop income on TBA dollar rolls of $4.7 million and $6.2 million and interest rate swap periodic interest income of $2.3 million and $2.2 million, for the six-month periods ended June 30, 2022 and June 30, 2021, respectively, and
includes trading expenses of $333,000 for the six-month period ended June 30, 2021.
|
| (B) |
Commencing with the three-month period ended December 31, 2021, the Company has enhanced the calculation of unrealized gain (loss) on investments in MSRs used to determine EAD. EAD for the six-month period ended June 30, 2021 has not
been adjusted to reflect the Company’s enhanced calculation of unrealized loss (gain) on investments in MSRs, net of estimated MSR amortization. If the enhanced calculation had been applied retroactively to the six-month period ended June
30, 2021, the Company would have reported EAD attributable to common stockholders of $8.6 million and EAD attributable to common stockholders per share of $0.50.
|
Our Portfolio
MSRs
Aurora’s portfolio of Fannie Mae and Freddie Mac MSRs have an aggregate UPB of approximately $20.7 billion as of June 30, 2022.
The following tables set forth certain characteristics of the mortgage loans underlying those MSRs as of the dates indicated (dollars in thousands):
MSR Collateral Characteristics
As of June 30, 2022
|
Collateral Characteristics
|
||||||||||||||||||||||||||||
|
Current
Carrying
Amount
|
Current
Principal
Balance
|
WA Coupon(A)
|
WA
Servicing
Fee(A)
|
WA
Maturity
(months)(A)
|
WA Loan
Age (months)(A)
|
ARMs %(B)
|
||||||||||||||||||||||
|
MSRs
|
$
|
263,578
|
$
|
20,721,685
|
3.46
|
%
|
0.25
|
%
|
314
|
27
|
0.1
|
%
|
||||||||||||||||
|
MSR Total/Weighted Average
|
$
|
263,578
|
$
|
20,721,685
|
3.46
|
%
|
0.25
|
%
|
314
|
27
|
0.1
|
%
|
||||||||||||||||
As of December 31, 2021
|
Collateral Characteristics
|
||||||||||||||||||||||||||||
|
Current
Carrying
Amount
|
Current
Principal
Balance
|
WA Coupon(A)
|
WA
Servicing
Fee(A)
|
WA
Maturity
(months)(A)
|
WA Loan
Age
(months)(A)
|
ARMs %(B)
|
||||||||||||||||||||||
|
MSRs
|
$
|
218,727
|
$
|
20,773,278
|
3.51
|
%
|
0.25
|
%
|
316
|
25
|
0.1
|
%
|
||||||||||||||||
|
MSR Total/Weighted Average
|
$
|
218,727
|
$
|
20,773,278
|
3.51
|
%
|
0.25
|
%
|
316
|
25
|
0.1
|
%
|
||||||||||||||||
| (A) |
Weighted average coupon, servicing fee, maturity and loan age of the underlying residential mortgage loans in the pool are based on the unpaid principal balance.
|
| (B) |
ARMs % represents the percentage of the total principal balance of the pool that corresponds to ARMs and hybrid ARMs.
|
RMBS
The following tables summarize the characteristics of our RMBS portfolio and certain characteristics of the collateral underlying our RMBS as of the dates indicated (dollars in thousands):
RMBS Characteristics
As of June 30, 2022
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Asset Type
|
Original
Face
Value
|
Book
Value
|
Gains
|
Losses
|
Carrying
Value(A)
|
Number
of
Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years)
|
|||||||||||||||||||||||||||
|
RMBS
|
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$
|
532,173
|
$
|
391,342
|
$
|
323
|
$
|
(12,070
|
)
|
$
|
379,595
|
52
|
(B)
|
3.69
|
%
|
3.66
|
%
|
28
|
|||||||||||||||||||
|
Freddie Mac
|
457,156
|
361,532
|
183
|
(12,485
|
)
|
349,230
|
39
|
(B)
|
3.45
|
%
|
3.46
|
%
|
28
|
||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
989,329
|
$
|
752,874
|
$
|
506
|
$
|
(24,555
|
)
|
$
|
728,825
|
91
|
3.57
|
%
|
3.56
|
%
|
28
|
||||||||||||||||||||
As of December 31, 2021
|
Gross Unrealized
|
Weighted Average
|
||||||||||||||||||||||||||||||||||||
|
Asset Type
|
Original
Face Value |
Book
Value |
Gains
|
Losses
|
Carrying Value(A)
|
Number of Securities
|
Rating
|
Coupon
|
Yield(C)
|
Maturity
(Years) |
|||||||||||||||||||||||||||
|
RMBS
|
|
||||||||||||||||||||||||||||||||||||
|
Fannie Mae
|
$
|
772,607
|
$
|
554,151
|
$
|
9,276
|
$
|
(3,650
|
)
|
$
|
559,777
|
76
|
(B)
|
3.09
|
%
|
2.96
|
%
|
27
|
|||||||||||||||||||
|
Freddie Mac
|
484,479
|
391,700
|
5,260
|
(3,241
|
)
|
393,719
|
45
|
(B)
|
3.02
|
%
|
2.89
|
%
|
28
|
||||||||||||||||||||||||
|
Total/Weighted Average
|
$
|
1,257,086
|
$
|
945,851
|
$
|
14,536
|
$
|
(6,891
|
)
|
$
|
953,496
|
121
|
3.06
|
%
|
2.93
|
%
|
28
|
||||||||||||||||||||
|
|
(A) |
See “Part I, Item 1. Notes to Consolidated Financial Statements—Note 9. Fair Value” regarding the estimation of fair value, which approximates carrying value for all securities.
|
|
|
(B)
|
The Company used an implied AAA rating for the Agency RMBS.
|
|
|
(C) |
The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.
|
The following table summarizes the net interest spread of our RMBS portfolio as of the dates indicated:
Net Interest Spread
|
|
June 30, 2022 | December 31, 2021 |
||||||
|
Weighted Average Asset Yield
|
4.01
|
%
|
3.19
|
%
|
||||
|
Weighted Average Interest Expense
|
0.55
|
%
|
0.73
|
%
|
||||
|
Net Interest Spread
|
3.46
|
%
|
2.46
|
%
|
||||
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs. Additionally, to
maintain our status as a REIT under the Code, we must distribute annually at least 90% of our REIT taxable income. In 2017, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs to make elective stock dividends
(i.e., dividends paid in a mixture of stock and cash), with at least 20% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. In December 2021, the Internal Revenue Service issued a revenue procedure that
temporarily reduced the minimum amount of the total distribution that must be paid in cash to 10% for distributions declared on or after November 1, 2021, and on or before June 30, 2022, provided certain other parameters detailed in the Revenue
Procedure are satisfied. Pursuant to these revenue procedures, the Company has in the past elected to make distributions of its taxable income in a mixture of stock and cash.
Our primary sources of funds for liquidity consist of cash provided by operating activities (primarily income from our investments in RMBS and net servicing income from our MSRs), sales or repayments of RMBS and
borrowings under repurchase agreements and our MSR financing arrangements. We may also change our asset or funding mix, issue equity or undertake other capital enhancing actions to maintain adequate levels of liquidity and capital resources. There
are various risks and uncertainties that can impact our liquidity, such as those described in Item 1A. Risk Factors of our most recent Annual Report on Form 10-K and Item 3. Quantitative and Qualitative Disclosures of Market Risks in this Form
10-Q. In assessing our liquidity, we consider a number of factors, including our current leverage, collateral levels, access to capital markets, overall market conditions, and the sensitivity of our book value over a range of scenarios. We believe
that we have sufficient liquidity and capital resources available to meet our obligations and execute our business strategy. The COVID-19 pandemic has not adversely affected our ability to access traditional sources of funds on the same or
reasonably similar terms as available before the pandemic.
In the future, sources of funds for liquidity may include additional MSR financing, warehouse agreements, securitizations and the issuance of equity or debt securities, when feasible, including, without limitation, the issuance of
shares of our common stock pursuant to our Common Stock ATM program or any other ATM program we have in place. For more information regarding issuances of our securities pursuant to our ATM programs, including our Common Stock ATM Program, please
refer to “—General” above. In the past we have used, and we anticipate that in the future we will use a significant portion of the paydowns of the RMBS to purchase MSRs. We may also sell certain RMBS and deploy the net proceeds from such sales to
the extent necessary to fund the purchase price of MSRs.
Our primary uses of funds are the payment of interest, management fees, outstanding commitments, other operating expenses, investments in new or replacement assets, margin calls and the repayment of borrowings, as well
as dividends. Although we continue to maintain a higher level of unrestricted cash than prior to the pandemic, we expect to invest more of that unrestricted cash in our targeted assets if normalization of the economy continues. We may also use
capital resources to repurchase additional shares of common stock under our stock repurchase program when we believe such repurchases are appropriate and/or the stock is trading at a significant discount to net asset value. We seek to maintain
adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.
As of the date of this filing, we believe we have sufficient liquid assets to satisfy all of our short-term recourse liabilities and to satisfy covenants in our financing documents. With respect to the next twelve
months, we expect that our cash on hand combined with the cash flow provided by our operations will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential
margin calls and operating expenses. While it is inherently more difficult to forecast beyond the next twelve months, we currently expect to meet our long-term liquidity requirements through our cash on hand and, if needed, additional borrowings,
proceeds received from repurchase agreements and similar financings, proceeds from equity offerings and the liquidation or refinancing of our assets.
Our operating cash flow differs from our net income due primarily to: (i) accretion of discount or premium on our RMBS, (ii) unrealized gains or losses on our Servicing Related Assets, and (iii) impairment on our
securities, if any.
Repurchase Agreements
As of June 30, 2022, we had repurchase agreements with 34 counterparties and approximately $683.2 million of outstanding repurchase agreement borrowings from 13 of those counterparties, which were used to finance RMBS.
As of June 30, 2022, our exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of
the Company’s equity. Under these agreements, which are uncommitted facilities, we sell a security to a counterparty and concurrently agree to repurchase the same security at a later date at the same price that we initially sold the security plus
the interest charged. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the
security less a discount or “haircut.” The weighted average haircut on our repurchase debt at June 30, 2022 was approximately 4.1%. During the term of the repurchase transaction, which can be as short as a few days, the counterparty holds the
security and posts margin as collateral. The counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the transaction. If this value declines by more than a de minimis threshold, the counterparty
requires us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we are, from time to time, a
party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments.
Set forth below is the average aggregate balance of borrowings under the Company’s repurchase agreements for each of the periods shown and the aggregate balance as of the end of each such period (dollars in thousands):
Repurchase Agreement Average and Maximum Amounts
|
Quarter Ended
|
Average Monthly
Amount
|
Maximum Month-End
Amount
|
Quarter Ending
Amount
|
|||||||||
|
June 30, 2022
|
$
|
679,702
|
$
|
702,130
|
$
|
683,173
|
||||||
|
March 31, 2022
|
$
|
820,270
|
$
|
859,726
|
$
|
764,885
|
||||||
|
December 31, 2021
|
$
|
830,099
|
$
|
865,494
|
$
|
865,494
|
||||||
|
September 30, 2021
|
$
|
790,587
|
$
|
821,540
|
$
|
777,416
|
||||||
|
June 30, 2021
|
$
|
858,269
|
$
|
897,047
|
$
|
897,047
|
||||||
|
March 31, 2021
|
$
|
1,012,389
|
$
|
1,118,231
|
$
|
934,001
|
||||||
|
December 31, 2020
|
$
|
1,303,927
|
$
|
1,465,037
|
$
|
1,149,978
|
||||||
|
September 30, 2020
|
$
|
1,374,041
|
$
|
1,419,991
|
$
|
1,365,471
|
||||||
The decrease in the Company’s borrowings under its repurchase agreements was primarily due to the sale of RMBS securities.
These short-term borrowings were used to finance certain of our investments in RMBS. The RMBS repurchase agreements are guaranteed by the Company. The weighted average difference between the market value of the assets
and the face amount of available financing for the RMBS repurchase agreements, or the haircut, was 4.1% and 4.6% as of June 30, 2022 and December 31, 2021, respectively. The following tables provide additional information regarding borrowings under
our repurchase agreements (dollars in thousands):
Repurchase Agreement Characteristics
As of June 30, 2022
|
RMBS Market Value
|
Repurchase
Agreements
|
Weighted Average
Rate
|
||||||||||
|
Less than one month
|
$
|
669,163
|
$
|
651,904
|
1.19
|
%
|
||||||
|
One to three months
|
31,940
|
31,269
|
1.29
|
%
|
||||||||
|
Total/Weighted Average
|
$
|
701,103
|
$
|
683,173
|
1.20
|
%
|
||||||
As of December 31, 2021
|
RMBS Market Value
|
Repurchase
Agreements
|
Weighted Average
Rate
|
||||||||||
|
Less than one month
|
$
|
297,720
|
$
|
291,007
|
0.13
|
%
|
||||||
|
One to three months
|
595,168
|
574,487
|
0.14
|
%
|
||||||||
|
Total/Weighted Average
|
$
|
892,888
|
$
|
865,494
|
0.14
|
%
|
||||||
The amount of collateral as of June 30, 2022 and December 31, 2021, including cash, was $714.9 million and $905.1 million, respectively.
The weighted average term to maturity of our borrowings under repurchase agreements as of June 30, 2022 and December 31, 2021 was 16 days and 38 days, respectively.
MSR Financing
As of June 30, 2022, the Company had two separate MSR financing facilities: (i) the Freddie Mac MSR Revolver, which is a revolving credit facility for up to $100.0 million that is secured by all Freddie Mac MSRs owned
by Aurora; and (ii) the Fannie Mae MSR Revolving Facility, which is a revolving credit facility for up to $150.0 million, that is secured by all Fannie Mae MSRs owned by Aurora. Both financing facilities are available for MSRs as well as certain
servicing related advances associated with MSRs.
Freddie Mac MSR Revolver. In July 2018, the Company, Aurora and QRS V (collectively with Aurora and the Company, the “Borrowers”) entered into a $25.0 million
revolving credit facility (the “Freddie Mac MSR Revolver”) pursuant to which Aurora pledged all of its existing and future MSRs on loans owned or securitized by Freddie Mac. The term of the Freddie Mac MSR Revolver is 364 days with the Borrowers’
option for two renewals for similar terms followed by a one-year term out feature with a 24-month amortization schedule. The Freddie Mac MSR Revolver was upsized to $45.0 million in September 2018. The Company also has the ability to request up to
an additional $5.0 million of borrowings. On April 2, 2019, Aurora and QRS V entered into an amendment that increased the maximum amount of the Freddie Mac MSR Revolver to $100.0 million. In June 2022, the Borrowers entered into an amendment to the
Freddie Mac MSR Revolver that extended the revolving period for an additional 364 days with the option for one more renewals of 364 days each. At the end of the revolving period, the outstanding amount will be converted to a one-year term loan.
Amounts borrowed bear interest at an adjustable rate equal to a spread above one-month LIBOR. At June 30, 2022 and December 31, 2021, approximately $66.0 million and $63.0 million, respectively, was outstanding under the Freddie Mac MSR Revolver.
Fannie Mae MSR Revolving Facility. In October 2021, Aurora and QRS III entered into a loan and security agreement (the “Fannie Mae MSR Revolving Facility”), to
replace the Prior Fannie Mae MSR Financing Facility. Under the Fannie Mae MSR Revolving Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings
outstanding from time to time. The maximum credit amount outstanding at any one time under the Fannie Mae MSR Revolving Facility is $150.0 million. The revolving period is 24 months which may be extended by agreement with the lender. During the
revolving period, borrowings bear interest at a rate equal to a spread over one-month LIBOR subject to a floor. At the end of the revolving period, the outstanding amount will be converted to a three-year term loan that will bear interest at a rate
calculated at a spread over the rate for one-year interest rate swaps. The Company has guaranteed repayment of all indebtedness under the Fannie Mae MSR Revolving Facility. At June 30, 2022 and December 31, 2021, approximately $113.0 million and
$83.0 million, respectively, was outstanding under the Fannie Mae MSR Revolving Facility.
As noted above, the Fannie Mae MSR Revolving Facility replaced the Prior Fannie Mae MSR Financing Facility. In September 2019, Aurora and QRS III entered into a loan and security agreement (the “Prior Fannie Mae MSR
Financing Facility”). Under the Prior Fannie Mae MSR Facility, Aurora and QRS III pledged their respective rights in all existing and future MSRs for loans owned or securitized by Fannie Mae to secure borrowings outstanding from time to time. The
maximum credit amount outstanding at any one time under the facility was $200.0 million, of which $100.0 million was committed. Borrowings bore interest at a rate equal to a spread over onemonth LIBOR subject to a floor. This facility was
terminated and replaced in October 2021 with the Fannie Mae MSR Revolving Facility (as defined and discussed above). As a result, there was no outstanding balance under the Prior Fannie Mae MSR Financing Facility at June 30, 2022 and December 31,
2021.
Cash Flows
Operating and Investing Activities
Our operating activities provided cash of approximately $29.5 million and our investing activities provided cash of approximately $94.8 million for the six-month period ended June 30, 2022.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it
pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common
and preferred stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our
operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash
distributions, or, with respect to our common stock, we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We will make distributions only upon the authorization of our
board of directors. The amount, timing and frequency of distributions will be authorized by our board of directors based upon a variety of factors, including:
| • |
actual results of operations;
|
| • |
our level of retained cash flows;
|
| • |
our ability to make additional investments in our target assets;
|
| • |
restrictions under Maryland law;
|
| • |
the terms of our preferred stock;
|
| • |
any debt service requirements;
|
| • |
our taxable income;
|
| • |
the annual distribution requirements under the REIT provisions of the Code; and
|
| • |
other factors that our board of directors may deem relevant.
|
Our ability to make distributions to our stockholders will depend upon the performance of our investment portfolio, and, in turn, upon our Manager’s management of our business. Distributions will be made quarterly in
cash to the extent that cash is available for distribution. We may not be able to generate sufficient cash available for distribution to pay distributions to our stockholders. In addition, our board of directors may change our distribution policy
with respect to our common stock in the future. No assurance can be given that we will be able to make any other distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will
achieve a market yield or increase or even be maintained over time.
We make distributions based on a number of factors, including an estimate of taxable earnings. Dividends distributed and taxable income will typically differ from GAAP earnings due to items such as fair value
adjustments, differences in premium amortization and discount accretion, and nondeductible general and administrative expenses. Our common dividend per share may be substantially different than our taxable earnings and GAAP earnings per share. Our
GAAP loss per diluted share for the three-month period ended June 30, 2022 was $0.92 and our GAAP income per diluted share for the three-month period ended March 31, 2022 was $1.40.
Contractual Obligations
Our contractual obligations as of June 30, 2022 and December 31, 2021 included repurchase agreements, borrowings under our MSR financing arrangements, our Management Agreement with our Manager, and our subservicing
agreements.
The following table summarizes our contractual obligations for borrowed money as of the dates indicated (dollars in thousands):
Contractual Obligations Characteristics
As of June 30, 2022
|
Less than
1 year |
1 to 3
years
|
3 to 5
years
|
More than
5 years
|
Total
|
||||||||||||||||
|
Repurchase agreements
|
||||||||||||||||||||
|
Borrowings under repurchase agreements
|
$
|
683,173
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
683,173
|
||||||||||
|
Interest on repurchase agreement borrowings(A)
|
$
|
743
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
743
|
||||||||||
|
Freddie Mac MSR Revolver
|
||||||||||||||||||||
|
Borrowings under Freddie Mac MSR Revolver
|
$
|
-
|
$
|
66,000
|
$
|
-
|
$
|
-
|
$
|
66,000
|
||||||||||
|
Interest on Freddie Mac MSR Revolver borrowings
|
$
|
3,336
|
$
|
459
|
$
|
-
|
$
|
-
|
$
|
3,795
|
||||||||||
|
Fannie Mae MSR Revolving Facility
|
||||||||||||||||||||
|
Borrowings under Fannie Mae MSR Revolving Facility
|
$
|
-
|
$
|
13,473
|
$
|
99,527
|
$
|
-
|
$
|
113,000
|
||||||||||
|
Interest on Fannie Mae MSR Revolving Facility
|
$
|
5,146
|
$
|
12,947
|
$
|
8,426
|
$
|
-
|
$
|
26,519
|
||||||||||
As of December 31, 2021
|
Less than
1 year |
1 to 3
years |
3 to 5
years |
More than
5 years |
Total
|
||||||||||||||||
|
Repurchase agreements
|
||||||||||||||||||||
|
Borrowings under repurchase agreements
|
$
|
865,494
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
865,494
|
||||||||||
|
Interest on repurchase agreement borrowings(A)
|
$
|
135
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
135
|
||||||||||
|
Freddie Mac MSR Revolver
|
||||||||||||||||||||
|
Borrowings under Freddie Mac MSR Revolver
|
$
|
63,000
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
63,000
|
||||||||||
|
Interest on Freddie Mac MSR Revolver borrowings
|
$
|
1,954
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
1,954
|
||||||||||
|
Fannie Mae MSR Revolving Facility
|
||||||||||||||||||||
|
Borrowings under Fannie Mae MSR Revolving Facility
|
$
|
-
|
$
|
7,566
|
$
|
75,434
|
$
|
-
|
$
|
83,000
|
||||||||||
|
Interest on Fannie Mae MSR Revolving Facility
|
$
|
3,156
|
$
|
6,127
|
$
|
4,941
|
$
|
-
|
$
|
14,224
|
||||||||||
| (A) |
Interest expense is calculated based on the interest rate in effect at June 30, 2022 and December 31, 2021, respectively, and includes all interest expense incurred through those dates.
|
Management Agreement
The Management Agreement with our Manager provides that our Manager is entitled to receive a management fee, the reimbursement of certain expenses and, in certain circumstances, a termination fee. The management fee is
an amount equal to 1.5% per annum of our stockholders’ equity, adjusted as set forth in the Management Agreement, and calculated and payable quarterly in arrears. We will also be required to pay a termination fee equal to three times the average
annual management fee earned by our Manager during the two four-quarter periods ending as of the end of the most recently completed fiscal quarter prior to the effective date of the termination. Such termination fee will be payable upon termination
or non-renewal of the Management Agreement by us without cause or by our Manager if we materially breach the Management Agreement.
We pay all of our direct operating expenses, except those specifically required to be borne by our Manager under the Management Agreement. Our Manager is responsible for all costs incident to the performance of its
duties under the Management Agreement. We believe that our Manager uses the proceeds from its management fee in part to pay the Services Provider for services provided under the Services Agreement. Our officers receive no cash compensation directly
from us. Our Manager provides us with our officers. Our Manager is entitled to be reimbursed for an agreed upon portion of the costs of the wages, salary and other benefits with respect to our chief financial officer, and, prior to January 1, 2022,
our general counsel, originally based on the percentages of their working time and efforts spent on matters related to the Company. The amount of the wages, salary and benefits reimbursed with respect to the officers our Manager provides to us is
subject to the approval of the compensation committee of our board of directors.
The term of the Management Agreement expired on October 22, 2021 and was automatically renewed for a one-year term on such date and will be automatically renewed for a one-year term on each anniversary of such date
thereafter unless terminated or not renewed as described below. Either we or our Manager may elect not to renew the Management Agreement upon expiration of its initial term or any renewal term by providing written notice of non-renewal at least 180
days, but not more than 270 days, before expiration. No such written notice of non-renewal was provided in 2021 and the Management Agreement’s term was automatically extended until October 22, 2022. In the event we elect not to renew the term, we
will be required to pay our Manager the termination fee described above. We may terminate the Management Agreement at any time for cause effective upon 30 days prior written notice of termination from us to our Manager, in which case no termination
fee would be due. Our board of directors will review our Manager’s performance prior to the automatic renewal of the Management Agreement and, as a result of such review, upon the affirmative vote of at least two-thirds of the members of our board
of directors or of the holders of a majority of our outstanding common stock, we may terminate the Management Agreement based upon unsatisfactory performance by our Manager that is materially detrimental to us or a determination by our independent
directors that the management fees payable to our Manager are not fair, subject to the right of our Manager to prevent such a termination by agreeing to a reduction of the management fees payable to our Manager. Upon any termination of the
Management Agreement based on unsatisfactory performance or unfair management fees, we are required to pay our Manager the termination fee described above. Our Manager may terminate the Management Agreement, without payment of the termination fee,
in the event we become regulated as an investment company under the Investment Company Act. Our Manager may also terminate the Management Agreement upon 60 days’ written notice if we default in the performance of any material term of the Management
Agreement and the default continues for a period of 30 days after written notice to us, whereupon we would be required to pay our Manager the termination fee described above.
Subservicing Agreements
As of June 30, 2022, Aurora had four subservicing agreements in place, one of which is with Freedom Mortgage. Following the sale of the Ginnie Mae MSRs to Freedom Mortgage in June 2020, Freedom Mortgage continued to
subservice certain loans that had been purchased from Ginnie Mae pools due to delinquency or default. Freedom Mortgage ceased subservicing these loans during 2021 because these loans and any related advance claims had been rehabilitated or
liquidated. One of the other subservicing agreements is with RoundPoint. Freedom Mortgage acquired RoundPoint and it became a wholly-owned subsidiary of Freedom Mortgage in August 2020. The agreements have varying initial terms (three years, for
Freedom Mortgage, and two years for the other three sub-servicers) and are subject to automatic renewal for additional terms equal to the applicable initial term unless either party chooses not to renew. Each agreement may be terminated without
cause by either party by giving notice as specified in the agreement. If an agreement is not renewed by the Company or terminated by the Company without cause, de-boarding fees will be due to the subservicer. Under each agreement, the subservicer
agrees to service the applicable mortgage loans in accordance with applicable law and the requirements of the applicable Agency and the Company pays customary fees to the applicable subservicer for specified services.
Joint Marketing Recapture Agreement
We attempt to reduce the exposure of our MSRs to voluntary prepayments through the structuring of recapture agreements with Aurora’s subservicers.
In May 2018, Aurora entered into a recapture purchase and sale agreement with RoundPoint, one of Aurora’s subservicers and since August 2020, a wholly-owned subsidiary of Freedom Mortgage. Pursuant to this
agreement, RoundPoint attempts to refinance certain mortgage loans underlying Aurora’s MSR portfolio subserviced by RoundPoint as directed by Aurora. If a loan is refinanced, Freedom Mortgage will sell the loan to Fannie Mae or Freddie Mac, as
applicable, retain the sale proceeds and transfer the related MSR to Aurora. The agreement continues in effect while the subservicing agreement remains in effect.
Inflation
Substantially all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our
performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. As discussed above under “—Effects of Federal
Reserve Policy on the Company”, the Federal Reserve has raised interest rates this year in response to the sharp increase in inflation and has indicated that it foresees further interest rate increases throughout the year and into 2023 and
2024. Higher interest rates imposed by the Federal Reserve to address inflation may increase our interest expense, which expense may not be fully offset by any resulting increase in our interest income. Furthermore, our financial
statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our REIT taxable income, and, in each case, our activities and balance sheet are measured with reference to
historical cost and/or fair market value without considering inflation.
| Item 3. |
Quantitative and Qualitative Disclosures about Market Risk
|
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to
realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn
sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are
subject to interest rate risk in connection with our assets and our related financing obligations. In general, we finance the acquisition of certain of our assets through financings in the form of repurchase agreements and bank facilities. We
expect to make use of additional MSR financing, as well as possibly warehouse facilities, securitizations, re-securitizations, and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. In
addition, the values of our Servicing Related Assets are highly sensitive to changes in interest rates, historically increasing when rates rise and decreasing when rates decline. Subject to maintaining our qualification as a REIT, we attempt to
mitigate interest rate risk and financing pricing risk through utilization of hedging instruments, primarily interest rate swap agreements and U.S. treasury futures, respectively. We may also use financial futures, options, interest rate cap
agreements, and forward sales. These instruments are intended to serve as a hedge against future interest rate or pricing changes on our borrowings.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The costs of our borrowings are generally based on prevailing market
interest rates. During a period of rising interest rates, our borrowing costs generally will increase (1) while the yields earned on our leveraged fixed-rate mortgage assets will remain static and (2) at a faster pace than the yields earned on our
leveraged adjustable-rate and hybrid adjustable-rate RMBS, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as
the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets, other than our Servicing Related Assets. A decrease in interest rates
could have a negative impact on the market value of our Servicing Related Assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and
results of operations.
Hedging techniques are partly based on assumed levels of prepayments of our assets, specifically our RMBS. If prepayments are slower or faster than assumed, the life of the investment will be longer or shorter, which
would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivatives are highly complex and may produce volatile returns.
Interest Rate Cap Risk
Any adjustable-rate RMBS that we acquire 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. This issue will be magnified to the extent we acquire adjustable-rate and hybrid adjustable-rate RMBS that are not based on mortgages which are fully indexed. In addition, adjustable-rate and hybrid adjustable-rate
RMBS may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the
interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “—Interest Rate Risk.” Actual economic conditions or implementation of decisions by our Manager may produce
results that differ significantly from the estimates and assumptions used in our models.
Prepayment Risk; Extension Risk
The following tables summarize the estimated change in fair value of our MSRs as of the dates indicated given several parallel shifts in the discount rate and voluntary prepayment rate (dollars in thousands):
MSR Fair Value Changes
As of June 30, 2022
|
(20)%
|
|
(10)%
|
|
-%
|
|
10%
|
|
20%
|
|
|||||||||||
|
Discount Rate Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
286,829
|
$
|
274,752
|
$
|
263,578
|
$
|
253,216
|
$
|
243,587
|
||||||||||
|
Change in FV
|
$
|
23,251
|
$
|
11,174
|
$
|
-
|
$
|
(10,362
|
)
|
$
|
(19,991
|
)
|
||||||||
|
% Change in FV
|
9
|
%
|
4
|
%
|
-
|
(4
|
)%
|
(8
|
)%
|
|||||||||||
|
Voluntary Prepayment Rate Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
281,735
|
$
|
272,628
|
$
|
263,578
|
$
|
254,822
|
$
|
246,478
|
||||||||||
|
Change in FV
|
$
|
18,157
|
$
|
9,050
|
$
|
-
|
$
|
(8,755
|
)
|
$
|
(17,100
|
)
|
||||||||
|
% Change in FV
|
7
|
%
|
3
|
%
|
-
|
(3
|
)%
|
(6
|
)%
|
|||||||||||
|
Servicing Cost Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
271,434
|
$
|
267,506
|
$
|
263,578
|
$
|
259,649
|
$
|
255,721
|
||||||||||
|
Change in FV
|
$
|
7,856
|
$
|
3,928
|
$
|
-
|
$
|
(3,928
|
)
|
$
|
(7,856
|
)
|
||||||||
|
% Change in FV
|
3
|
%
|
1
|
%
|
-
|
(1
|
)%
|
(3
|
)%
|
|||||||||||
As of December 31, 2021
|
(20)%
|
|
(10)%
|
|
-%
|
|
10%
|
|
20%
|
|
|||||||||||
|
Discount Rate Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
233,342
|
$
|
225,813
|
$
|
218,727
|
$
|
212,050
|
$
|
205,749
|
||||||||||
|
Change in FV
|
$
|
14,614
|
$
|
7,085
|
$
|
-
|
$
|
(6,677
|
)
|
$
|
(12,979
|
)
|
||||||||
|
% Change in FV
|
7
|
%
|
3
|
%
|
-
|
(3
|
)%
|
(6
|
)%
|
|||||||||||
|
Voluntary Prepayment Rate Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
244,460
|
$
|
231,026
|
$
|
218,727
|
$
|
207,458
|
$
|
197,103
|
||||||||||
|
Change in FV
|
$
|
25,732
|
$
|
12,298
|
$
|
-
|
$
|
(11,270
|
)
|
$
|
(21,624
|
)
|
||||||||
|
% Change in FV
|
12
|
%
|
6
|
%
|
-
|
(5
|
)%
|
(10
|
)%
|
|||||||||||
|
Servicing Cost Shift in %
|
||||||||||||||||||||
|
Estimated FV
|
$
|
225,480
|
$
|
222,104
|
$
|
218,727
|
$
|
215,351
|
$
|
211,975
|
||||||||||
|
Change in FV
|
$
|
6,752
|
$
|
3,376
|
$
|
-
|
$
|
(3,376
|
)
|
$
|
(6,752
|
)
|
||||||||
|
% Change in FV
|
3
|
%
|
2
|
%
|
-
|
(2
|
)%
|
(3
|
)%
|
|||||||||||
The following tables summarize the estimated change in fair value of our RMBS as of the dates indicated given several parallel shifts in interest rates (dollars in thousands):
RMBS Fair Value Changes
As of June 30, 2022
|
Fair Value Change
|
||||||||||||||||||||||||
|
June 30, 2022
|
+25 Bps
|
+50 Bps
|
+75 Bps
|
+100 Bps
|
+150 Bps
|
|||||||||||||||||||
|
RMBS Portfolio
|
||||||||||||||||||||||||
|
RMBS, available-for-sale, net of swaps
|
$
|
938,914
|
||||||||||||||||||||||
|
RMBS Total Return (%)
|
(0.03
|
)%
|
(0.11
|
)%
|
(0.25
|
)%
|
(0.45
|
)%
|
(0.99
|
)%
|
||||||||||||||
|
RMBS Dollar Return
|
$
|
(246
|
)
|
$
|
(1,058
|
)
|
$
|
(2,390
|
)
|
$
|
(4,213
|
)
|
$
|
(9,316
|
)
|
|||||||||
As of December 31, 2021
|
Fair Value Change
|
||||||||||||||||||||||||
|
December 31, 2021
|
+25 Bps
|
+50 Bps
|
+75 Bps
|
+100 Bps
|
+150 Bps
|
|||||||||||||||||||
|
RMBS Portfolio
|
||||||||||||||||||||||||
|
RMBS, available-for-sale, net of swaps
|
$
|
1,429,335
|
||||||||||||||||||||||
|
RMBS Total Return (%)
|
(0.18
|
)%
|
(0.49
|
)%
|
(0.92
|
)%
|
(1.44
|
)%
|
(2.74
|
)%
|
||||||||||||||
|
RMBS Dollar Return
|
$
|
(2,584
|
)
|
$
|
(7,016
|
)
|
$
|
(13,110
|
)
|
$
|
(20,635
|
)
|
$
|
(39,125
|
)
|
|||||||||
The sensitivity analysis is hypothetical and is presented solely to assist an analysis of the possible effects on the fair value under various scenarios. It is not a prediction of the amount or likelihood of a change
in any particular scenario. In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption. In practice, changes in one factor may result in changes in another, which might
counteract or amplify the sensitivities. In addition, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not
be linear.
Counterparty Risk
When we engage in repurchase transactions, we generally sell securities to lenders (i.e., the repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same
securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the
lender defaults on its obligation to resell the same securities back to us we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). As of June 30, 2022, the Company’s
exposure (defined as the amount of cash and securities pledged as collateral, less the borrowing under the repurchase agreement) to any of the counterparties under the repurchase agreements did not exceed five percent of the Company’s equity.
Our interest rate swaps and U.S. treasury futures contracts are required to be cleared on an exchange which greatly mitigates, but does not entirely eliminate, counterparty risk.
Our investments in Servicing Related Assets are dependent on the applicable mortgage sub-servicer to perform its sub-servicing obligations. If our sub-servicer fails to perform its obligations and is terminated by one
or more Agencies as an approved servicer, the value of the MSRs being subserviced by that sub-servicer may be adversely affected. In addition, when we purchase MSRs from third parties, we rely, to a certain extent, on the ability and willingness of
the sellers to perform their contractual obligations to remedy breaches of representations and warranties or to repurchase the affected loan and indemnify us for any losses.
Funding Risk
To the extent available on desirable terms, we expect to continue to finance our RMBS with repurchase agreement financing. We also anticipate continuing to finance our MSRs with bank loans secured by a pledge of those
MSRs. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Weakness in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of
our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.
Liquidity Risk
Our Servicing Related Assets, as well as some of the assets that may in the future comprise our portfolio, are not publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or
will otherwise be less liquid than publicly traded securities. The illiquidity of these assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.
Credit Risk
Although we expect relatively low credit risk with respect to our portfolio of Agency RMBS, our investments in MSRs and any CMOs we may acquire expose us to the credit risk of borrowers.
Inflation Risk
Almost all of our assets and liabilities are financial in nature. As a result, changes in interest rates and other factors drive our
performance more directly than does inflation. However, changes in interest rates generally correlate with inflation rates or changes in inflation rates, and therefore adverse changes in inflation or changes in inflation expectations can lead to
lower returns on our investments than originally anticipated. Our consolidated financial statements are prepared in accordance with GAAP. Our activities and consolidated balance sheets are measured primarily with reference to fair value without
considering inflation.
| Item 4. |
Controls and Procedures
|
Disclosure Controls and Procedures. The Company’s President and Chief Executive Officer and the Company’s Chief Financial Officer have evaluated the effectiveness
of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d -15(e) under the Exchange Act as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed
to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s President and Chief Executive Officer and the Company’s Chief Financial
Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of June 30, 2022, the Company is not aware of any material legal or regulatory claims or
proceedings.
We are highly dependent on information systems and third parties, and systems failures or cybersecurity incidents could
significantly disrupt our business, which may, in turn, negatively affect the market price of our securities and our ability to operate our business.
Our business is highly dependent on communications and information systems. Any failure or interruption of those systems or cyber-attacks or security breaches of our
networks or systems could cause delays or other problems in our securities trading activities, including MBS trading activities. A disruption or breach could also lead to unauthorized access to and release, misuse, loss or destruction of our
confidential information or personal or confidential information of third parties, which could lead to regulatory fines, costs associated with remediating the breach, reputational harm, financial losses, litigation. In addition, we also face the
risk of operational failure, termination or capacity constraints of any of the third parties with which we do business or that facilitate our business activities, including clearing agents or other financial intermediaries we use to facilitate
our securities transactions, if their respective systems experience failure, interruption, cyber-attacks or security breaches. The costs and losses associated with these risks are difficult to predict and quantify but could have a significant
adverse effect on our operating results. Additionally, the legal and regulatory environment surrounding information privacy and security in the U.S. and international jurisdictions is constantly evolving.
Computer malware, viruses, computer hacking, and phishing attacks have become more prevalent in our industry. Although we have not detected a material cybersecurity
breach of our networks or systems to date, other financial services institutions have reported material breaches of their systems, some of which have been significant. For example, on March 5, 2021, one of the Company's subservicers informed the
Company that a third-party vendor, Accellion, used by the subservicer experienced an information security breach. As a consequence of that breach, the personally identifiable information of certain mortgage loan borrowers underlying the Company's
mortgage servicing rights portfolio was accessed by an unauthorized third party. The subservicer has notified all impacted individuals in accordance with state and federal regulations and has offered those individuals impacted free credit
monitoring services for an extended period of time. The subservicer has represented to the Company that the breach does not have a material impact on its ability to perform under its contract with the Company. The subservicer notified the Company
in June 2022 that it had a similar breach of its systems in December 2021. These breaches did not have an operational impact on the Company's systems or network environment.
Even with all reasonable security efforts, not every breach can be prevented or even detected. There is no assurance that we, or the third parties that facilitate our
business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative impact may directly result from any specific interruption or cyber-attacks or security breaches of the networks or systems of third
parties that facilitate our business activities, but such computer malware, viruses, and computer hacking and phishing attacks may disrupt our business and negatively affect our financial condition, results of operations, the market value of our
common or preferred stock, and our ability to make distributions to our stockholders.
None.
None.
Not Applicable.
Not Applicable.
| Item 6. |
Exhibits
|
|
Exhibit
Number
|
|
Description
|
|
31.1*
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
|
|
|
|
|
|
31.2*
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
|
|
|
|
|
|
32.1**
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2**
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
101.INS*
|
|
Inline XBRL Instance Document
|
|
|
|
|
|
101.SCH*
|
|
Inline XBRL Taxonomy Extension Schema
|
|
|
|
|
|
101.CAL*
|
|
Inline XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
101.DEF*
|
|
Inline XBRL Taxonomy Definition Linkbase
|
|
|
|
|
|
101.LAB*
|
|
Inline XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
|
101.PRE*
|
|
Inline XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
104*
|
|
Cover Page Interactive Data File - cover page XBRL tags are embedded within the Inline XBRL document
|
*Filed herewith.
**Furnished herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
CHERRY HILL MORTGAGE INVESTMENT CORPORATION
|
|
|
|
|
|
|
August 3, 2022
|
By:
|
/s/ Jeffrey Lown II
|
|
|
Jeffrey Lown II
|
|
|
|
President and Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
|
|
August 3, 2022
|
By:
|
/s/ Michael Hutchby
|
|
|
Michael Hutchby
|
|
|
|
Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer)
|
|
CHERRY HILL MORTGAGE INVESTMENT CORPORATION
FORM 10-Q
June 30, 2022
INDEX OF EXHIBITS
|
Exhibit
Number
|
|
Description
|
|
|
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
|
|
|
|
|
|
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
101.INS*
|
|
Inline XBRL Instance Document
|
|
|
|
|
|
101.SCH*
|
|
Inline XBRL Taxonomy Extension Schema
|
|
|
|
|
|
101.CAL*
|
|
Inline XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
101.DEF*
|
|
Inline XBRL Taxonomy Definition Linkbase
|
|
|
|
|
|
101.LAB*
|
|
Inline XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
|
101.PRE*
|
|
Inline XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
104*
|
|
Cover Page Interactive Data File - cover page XBRL tags are embedded within the Inline XBRL document
|
*Filed herewith.
**Furnished herewith.
82
Exhibit 31.1
Certification
I, Jeffrey Lown II, certify that:
| 1. |
I have reviewed this Form 10-Q of Cherry Hill Mortgage Investment Corporation;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
| a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
|
| b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 3, 2022
|
By:
|
/s/ Jeffrey Lown II
|
|
|
|
Jeffrey Lown II
|
|
|
|
President and Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
Exhibit 31.2
Certification
I, Michael Hutchby, certify that:
| 1. |
I have reviewed this Form 10-Q of Cherry Hill Mortgage Investment Corporation;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
|
| d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
|
| a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
|
| b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
Date: August 3, 2022
|
By:
|
/s/ Michael Hutchby
|
|
|
|
Michael Hutchby
|
|
|
|
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
|
|
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for
the quarter ended June 30, 2022 of Cherry Hill Mortgage Investment Corporation (the “Company”).
I, Jeffrey Lown II, the President and Chief Executive Officer (Principal Executive Officer) of the Company, certify that:
| 1. |
the Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
|
| 2. |
the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Dated: August 3, 2022
|
By:
|
/s/ Jeffrey Lown II
|
|
|
|
Jeffrey Lown II
|
|
|
|
President and Chief Executive Officer
|
|
|
|
(Principal Executive Officer)
|
|
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for
the quarter ended June 30, 2022 of Cherry Hill Mortgage Investment Corporation (the “Company”).
I, Michael Hutchby, the Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer) of the Company, certify that:
| 1. |
the Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
|
| 2. |
the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Dated: August 3, 2022
|
By:
|
/s/ Michael Hutchby
|
|
|
|
Michael Hutchby
|
|
|
|
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
|
|