Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in future filings with the SEC or in press releases or other written or oral communications issued or made by us, statements which are not historical in nature, including those containing words such as “will,” “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “could,” “would,” “should,” “may,” or similar expressions, are intended to identify “forward-looking statements” within the meaning of 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”), and, as such, may involve known and unknown risks, uncertainties and assumptions.
Forward-looking statements are based on estimates, projections, beliefs and assumptions of management of the Company at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties in predicting future results and conditions. Actual results and outcomes could differ materially from those projected in these forward-looking statements due to a variety of factors, including, without limitation:
•changes in our business and investment strategy;
•inflation and changes in interest rates and the fair market value of our assets, including negative changes resulting in margin calls relating to the financing of our assets;
•changes in credit spreads;
•changes in the long-term credit ratings of the U.S., Fannie Mae, Freddie Mac, and Ginnie Mae;
•general volatility of the markets in which we invest;
•changes in prepayment rates on the loans we own or that underlie our investment securities;
•increased rates of default, delinquency or vacancy and/or decreased recovery rates on or at our assets;
•our ability to identify and acquire our targeted assets, including assets in our investment pipeline;
•our ability to dispose of assets from time to time on terms favorable to us, including the disposition over time of our joint venture equity investments;
•changes in our relationships with our financing counterparties and our ability to borrow to finance our assets and the terms thereof;
•changes in our relationships with and/or the performance of our operating partners;
•our ability to predict and control costs;
•changes in laws, regulations or policies affecting our business;
•our ability to make distributions to our stockholders in the future;
•our ability to maintain our qualification as a real estate investment trust ("REIT") for federal tax purposes;
•our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
•impairments in the value of the collateral underlying our investments;
•our ability to manage or hedge credit risk, interest rate risk, and other financial and operational risks;
•our exposure to liquidity risk, risks associated with the use of leverage, and market risks; and
•risks associated with investing in real estate assets, including changes in business conditions and the general economy, the availability of investment opportunities and the conditions in the market for investment securities, residential loans, structured multi-family investments and other mortgage-, residential housing- and credit-related assets.
These and other risks, uncertainties and factors, including the risk factors described in our most recent Annual Report on Form 10-K, as updated by those risks described in our subsequent filings with the SEC under the Exchange Act, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Defined Terms
In this Quarterly Report on Form 10-Q we refer to New York Mortgage Trust, Inc., together with its consolidated subsidiaries, as “we,” “us,” “Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise, and we refer to our wholly-owned taxable REIT subsidiaries as “TRSs” and our wholly-owned qualified REIT subsidiaries as “QRSs.” In addition, the following defines certain of the commonly used terms in this report:
•“ABS” refers to debt and/or equity tranches of securitizations backed by various asset classes including, but not
limited to, automobiles, aircraft, credit cards, equipment, franchises, recreational vehicles and student loans;
•“Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;
•“Agency fixed-rate RMBS” refers to Agency RMBS comprised of fixed-rate RMBS;
•“Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of residential loans guaranteed by the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or an agency of the U.S. government, such as the Governmental National Mortgage Association (“Ginnie Mae”);
•“ARMs” refers to adjustable-rate residential loans;
•“business purpose loans” refers to (i) short-term loans that are collateralized by residential properties and are made to investors who intend to rehabilitate and sell the residential property for a profit or (ii) loans that finance (or refinance) non-owner occupied residential properties that are rented to one or more tenants;
•“CDO” refers to collateralized debt obligation and includes debt that permanently finances the residential loans held in Consolidated SLST, the Company's residential loans held in securitization trusts and a non-Agency RMBS re-securitization that we consolidate, or consolidated, in our financial statements in accordance with GAAP;
•“CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities issued by a government sponsored enterprise ("GSE"), as well as PO, IO or mezzanine securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans;
•“Consolidated SLST” refers to Freddie Mac-sponsored residential loan securitizations, comprised of seasoned re-performing and non-performing residential loans, of which we own the first loss subordinated securities and certain IOs that we consolidate in our financial statements in accordance with GAAP;
•“Consolidated Real Estate VIEs” refers to Consolidated VIEs that own multi-family properties;
•“Consolidated VIEs” refers to VIEs where the Company is the primary beneficiary, as it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE and that we consolidate in our financial statements in accordance with GAAP;
•“excess mortgage servicing spread” or “excess MSR” refers to the difference between the contractual servicing fee with Fannie Mae, Freddie Mac or Ginnie Mae and the base servicing fee that is retained as compensation for servicing or subservicing the related mortgage loans pursuant to the applicable servicing contract;
•“GAAP” refers to generally accepted accounting principles within the United States;
•“IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans;
•“MBS” refers to mortgage-backed securities;
•"Mezzanine Lending" refers, collectively, to preferred equity and mezzanine loan investments;
•“multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties;
•“non-Agency RMBS” refers to RMBS that are not guaranteed by any agency of the U.S. Government or GSE;
•“POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;
•“RMBS” refers to residential mortgage-backed securities backed by adjustable-rate, hybrid adjustable-rate or fixed-rate residential loans;
•“second mortgages” refers to liens on residential properties that are subordinate to more senior mortgages or loans; and
•“Variable Interest Entity” or “VIE” refers to an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
Portfolio Update
During the three months ended September 30, 2024, we continued to expand our investment securities and residential loan portfolios. Our investment activity was offset primarily by prepayments, distributions received from sales of consolidated multi-family properties and sales of joint venture equity ownership interests and residential loans. The following table presents the activity for our investment portfolio for the three months ended September 30, 2024 (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | Acquisitions (1) | | Repayments (2) | | Sales | | Transfers to Disposal Group Held for Sale (3) | | Fair Value Changes and Other (4) | | September 30, 2024 |
Residential loans | $ | 2,498,247 | | | $ | 624,163 | | | $ | (267,832) | | | $ | (117,915) | | | $ | — | | | $ | 31,898 | | | $ | 2,768,561 | |
| Investment securities | | | | | | | | | | | | | |
| Agency RMBS | 2,613,842 | | | 372,162 | | | (79,321) | | | — | | | — | | | 61,283 | | | 2,967,966 | |
| Non-Agency RMBS | 58,237 | | | 11,023 | | | (585) | | | — | | | — | | | (459) | | | 68,216 | |
U.S. Treasury securities | — | | | 352,850 | | | — | | | — | | | — | | | (3,762) | | | 349,088 | |
| Total investment securities available for sale | 2,672,079 | | | 736,035 | | | (79,906) | | | — | | | — | | | 57,062 | | | 3,385,270 | |
Consolidated SLST (5) | 155,965 | | | — | | | (4,769) | | | — | | | — | | | 6,300 | | | 157,496 | |
| Total investment securities | 2,828,044 | | | 736,035 | | | (84,675) | | | — | | | — | | | 63,362 | | | 3,542,766 | |
| Preferred equity investments, mezzanine loans and equity investments | 235,912 | | | — | | | (5,100) | | | — | | | — | | | 3,635 | | | 234,447 | |
Equity investments in consolidated multi-family properties (6) | 171,406 | | | 873 | | | (15,011) | | | — | | | (203) | | | (2,603) | | | 154,462 | |
Equity investments in disposal group held for sale (3) | 30,434 | | | 405 | | | (21,075) | | | 2,393 | | | 203 | | | 5,471 | | | 17,831 | |
| Single-family rental properties | 147,494 | | | 462 | | | — | | | (2,734) | | | — | | | (486) | | | 144,736 | |
| Total investment portfolio | $ | 5,911,537 | | | $ | 1,361,938 | | | $ | (393,693) | | | $ | (118,256) | | | $ | — | | | $ | 101,277 | | | $ | 6,862,803 | |
(1)Includes draws funded for business purpose bridge loans and existing equity investments in consolidated multi-family properties and capitalized costs for single-family rental properties.
(2)Includes principal repayments and return of invested capital.
(3)In September 2022, the Company announced a repositioning of its business through the opportunistic disposition over time of the Company's joint venture equity investments in multi-family properties and reallocation of its capital away from such assets to its targeted assets. Accordingly, the real estate, net related to certain joint venture equity investments in multi-family properties is included in assets of disposal group held for sale on the accompanying condensed consolidated balance sheets as of September 30, 2024 and June 30, 2024. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated balance sheets.
(4)Primarily includes net realized gains or losses, changes in net unrealized gains or losses (including reversals of previously recognized net unrealized gains or losses on sales or redemptions), net amortization/accretion/depreciation and net loss from real estate attributable to the Company.
(5)Consolidated SLST is primarily presented on our condensed consolidated balance sheets as residential loans, at fair value and collateralized debt obligations, at fair value. A reconciliation to our condensed consolidated financial statements as of September 30, 2024 and June 30, 2024, respectively, follows (dollar amounts in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | June 30, 2024 |
| Residential loans, at fair value | $ | 1,008,583 | | | $ | 1,004,944 | |
Deferred interest (a) | (5,276) | | | (4,947) | |
| Less: Collateralized debt obligations, at fair value | (845,811) | | | (844,032) | |
| Consolidated SLST investment securities owned by NYMT | $ | 157,496 | | | $ | 155,965 | |
(a)Included in other liabilities on our condensed consolidated balance sheets.
(6)See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated balance sheets.
General
We are an internally-managed REIT for U.S. federal income tax purposes, in the business of acquiring, investing in, financing and managing primarily mortgage-related single-family and multi-family residential assets. Our objective is to deliver long-term stable distributions to our stockholders over changing economic conditions through a combination of net interest spread and capital gains from a diversified investment portfolio. Our current investment portfolio includes credit sensitive single-family and multi-family assets, as well as more traditional types of fixed-income investments that provide coupon income, such as Agency RMBS.
We have elected to be taxed as a REIT for U.S. federal income tax purposes and have complied, and intend to continue to comply, with the provisions of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), with respect thereto. Accordingly, we do not expect to be subject to federal income tax on our REIT taxable income that we currently distribute to our stockholders if certain asset, income, distribution and ownership tests and record keeping requirements are fulfilled. Even if we maintain our qualification as a REIT, we expect to be subject to some federal, state and local taxes on income generated in our TRSs.
Executive Summary
Beginning in the second quarter of 2023, after significantly curtailing our investment activity and pipeline in 2022 in anticipation of a recession to conserve capital, preserve liquidity and limit what we believed was material credit risk from investments underwritten to peak real estate valuations in 2022, we began stabilizing our investment portfolio holdings through greater investment activity. Since that time, we have focused, in large part, on acquiring assets with less price sensitivity to credit deterioration that could expand our interest income levels, like Agency RMBS. We believe that Agency RMBS is a compelling asset class to invest in over the near term, as the sector is trading at historically wide spread levels resulting from volatility in interest rates and reduced demand from regional banks and the Federal Reserve. Recognizing that a recession call was premature, but still concerned about market liquidity due to, among other things, growing commercial real estate risks, we also remained selective in adding credit-related assets in our portfolio. Specifically, we have targeted low duration, high-coupon business purpose loans while remaining selective on credit profile and worked to optimize financing of the loans we acquire. During this time, we continued to drive higher business purpose loan acquisition volumes through ongoing partnerships with numerous originators. Over the course of the past six quarters, we have experienced solid momentum in our portfolio acquisition activities and increased adjusted interest income, a supplemental non-GAAP financial measure, by more than 70% as compared to the same period last year. On a net basis, our investment portfolio increased by approximately $3.1 billion between December 31, 2022 and September 30, 2024, with repayments received from our short-duration business purpose loans, opportunistic sales of residential loans and investment securities, redemptions of our mezzanine lending investments, return of capital from our joint venture equity investments, and impairments offsetting some of our investment activity.
In September 2022, we announced that our Board of Directors approved a strategic repositioning of our business through the opportunistic disposition over time of our joint venture equity investments in multi-family properties and reallocation of the returned capital from such investments to our targeted assets. In 2023, joint venture entities in which we held a common equity interest sold five multi-family properties, representing total net equity investments of $43.2 million and recognizing a net gain attributable to the Company totaling $1.7 million. Throughout most of 2023 and continuing into 2024, certain of the multi-family properties held by our joint venture equity investments experienced declines in estimated fair value primarily due to widening cap rates and lower net operating income driven, in large part, by higher interest and operating expenses at the properties which resulted in significant impairment losses. We have exited seven additional joint venture equity investments in multi-family properties year to date, received net proceeds of $21.8 million and realized $12.4 million of net gains attributable to us. As of September 30, 2024, we continue to market for sale our joint venture equity investments in four multi-family properties. We can provide no assurance of the timing or success of our ultimate exit from our joint venture equity investments in multi-family properties or that the value of our interests in joint ventures will not decline further.
We intend to focus on our core portfolio strengths of single-family and multi-family residential assets, which we believe will deliver better risk adjusted returns over time. Our targeted investments include (i) residential loans, including business purpose loans, (ii) Agency RMBS, (iii) non-Agency RMBS, (iv) structured multi-family property investments such as preferred equity in, and mezzanine loans to, owners of multi-family properties, (v) CMBS and (vi) certain other mortgage-, residential housing- and credit-related assets and strategic investments in companies from which we purchase, or may in the future purchase, our targeted assets. Subject to maintaining our qualification as a REIT and the maintenance of our exclusion from registration as an investment company under the Investment Company Act, we also may opportunistically acquire and manage various other types of mortgage-, residential housing- and other credit-related or alternative investments that we believe will compensate us appropriately for the risks associated with them, including, without limitation, collateralized mortgage obligations, mortgage servicing rights, excess mortgage servicing spreads, securities issued by newly originated securitizations, including credit sensitive securities from these securitizations, ABS and debt or equity investments in alternative assets or businesses.
As of September 30, 2024, the Company’s Recourse Leverage Ratio and Portfolio Recourse Leverage Ratio (as defined in footnotes 4 and 5 to the table under "— Capital Allocation") increased to 2.6x and 2.5x, respectively, from 1.6x and 1.5x, respectively, as of December 31, 2023, primarily due to the financing of highly liquid U.S. Treasury securities and Agency RMBS. As of September 30, 2024, 62% of our debt, excluding mortgages payable on real estate and Consolidated SLST CDOs, is subject to mark-to-market margin calls, with 46% of that debt collateralized by Agency RMBS, 6% collateralized by U.S. Treasury securities and 10% collateralized by residential credit assets. The remaining 38% has no exposure to collateral repricing by our counterparties. Although we expect our leverage to continue to move higher as we access additional liquidity and grow our investment portfolio further, we intend to continue to focus on procuring longer-term and non-mark-to-market financing arrangements for certain parts of our credit portfolio. We believe that this will allow us to better manage our liquidity risk and better insulate our business from extreme market dislocations. To this end, we completed a non-Agency RMBS re-securitization and four new, non-recourse securitizations of residential loans and redeemed two existing residential loan securitizations during the nine months ended September 30, 2024. We also completed the issuance of $60.0 million of our 9.125% Senior Notes due 2029 in an underwritten public offering in the second quarter of 2024. We received $57.5 million in net proceeds from the issuance and utilized the proceeds to purchase Agency RMBS.
We expect to continue to opportunistically dispose of assets from our portfolio, including our joint venture equity investments, and generate higher portfolio turnover in order to pursue investments across the residential housing sector with a focus on acquiring assets capable of growing our interest income. We expect to remain selective in acquiring single-family and multi-family residential credit assets and remain committed to prudently managing our liabilities. Our investment and capital allocation decisions depend on prevailing market conditions, among other factors, and may change over time in response to opportunities available in different economic and capital market environments.
Current Market Conditions and Commentary
The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets, which is driven by numerous factors including changes in interest rates and the supply and demand for mortgage, housing and credit assets in the marketplace, our ability to identify and acquire assets on favorable terms, our ability to dispose of assets from time to time on favorable terms, the ability of our operating partners, tenants and borrowers of our loans and those that underlie our investment securities to meet their payment obligations, the terms and availability of adequate financing and capital, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate, mortgage, credit and financial markets, and the credit performance of our credit sensitive assets.
Financial and mortgage-related markets experienced strong positive performance during the third quarter of 2024, spurred in part by the Federal Reserve’s first cut to the target range for the federal funds rate in approximately four and a half years. The Dow Jones Industrial Average finished the third quarter of 2024 up 8.21% and grew 12.31% over the first nine months of 2024, closing off the third quarter at a then all‑time high. However, interest rate and monetary policy uncertainty, inflation and geopolitical instability have cautioned some economic outlooks. We anticipate that due to uncertainty related to inflation, interest rates, monetary policy, the imminent U.S. presidential election and upcoming change in U.S. presidential administration in January 2025, markets and the pricing for many of our assets will continue to experience volatility in the remainder of 2024.
The market conditions discussed below significantly influence our investment strategy and results:
Select U.S. Financial and Economic Data. The U.S. economy grew modestly in the third quarter of 2024 with real gross domestic product (“GDP”) increasing by 2.8% (advanced estimate) annualized rate, as compared to the annualized 3.0% GDP growth in the second quarter of 2024 and annualized 1.6% GDP growth in the first quarter of 2024. The third quarter 2024 GDP increase marks ten straight quarters of GDP growth. While GDP growth continued in the first nine months of 2024, inflation remains persistently above the Federal Reserve’s target of two percent and job growth remains robust, uncertainty about how the Federal Reserve may adjust its monetary policy or the target range for the federal funds rate in response to such macroeconomic trends may limit or undermine business activity and the potential for future GDP growth, which could negatively impact the value of credit investments.
After moderating in the first half of 2024, the U.S. labor market tightened during the third quarter of 2024 in contrast to many market commentators’ expectations. According to the U.S. Department of Labor, the U.S. unemployment rate was 4.1% at the end of September 2024, finishing flat to the unemployment rate of 4.1% as of the end of June 2024 and standing in contrast to the general trend of unemployment rate growth seen in the first six months of 2024. The number of unemployed persons increased by 0.5 million year-over-year to 6.8 million as of September 2024. There continues to be a wide disparity between the number of available job openings, 8.0 million as of the end of August 2024, and the number of unemployed persons, resulting in a competitive labor market and rising wages. As of September 2024, average hourly earnings for all employees on non-farm payrolls rose 4.0% year-over-year.
After raising the target range for the federal funds rate a total of 5.25% in 2022 and 2023, bringing the range to its highest level in over 22 years, and holding the range at that target for 14 months, the Federal Reserve cut the target range by 50 basis points in September 2024, the first such cut since March 2020. In September 2024, the Federal Reserve announced the 50 basis points rate cut after acknowledging that inflation appears to be moving sustainably toward the Federal Reserve’s target of two percent. In considering additional adjustments to the target range for the federal funds rate, the Federal Reserve stated that it will carefully assess incoming data, the evolving outlook, and the balance of risks to the Federal Reserve’s dual mandate of achieving maximum employment and inflation at the rate of two percent over the longer run. Changing expectations with respect to the Federal Reserve’s actions regarding the target range for the federal funds rate after quarter end contributed to an uncertain interest rate environment. Higher interest rates tend to put pressure on our investments, mortgage borrowers, tenants, our operating partners and economic growth generally.
The fears of an economic recession in the U.S. that were prevalent last year have receded in connection with the consistent U.S. GDP growth seen in 2024, although some economists and market commentators have expressed lower expectations for U.S. GDP growth in 2025. The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” An economic recession or stagnating economic growth may put pressure on the ability of our operating partners, joint ventures, tenants and borrowers to meet their obligations to us, and would likely adversely impact the value of our assets, among other things, any of which could materially adversely affect our results of operations and financial condition.
Single-Family Homes and Residential Mortgage Market. Over the first nine months of 2024, the residential real estate market remained competitive for home buyers. Data released by the S&P Dow Jones Indices for their S&P CoreLogic Case-Shiller National Home Price NSA Indices for July 2024 showed that, on average, home prices increased 5.9% for the 20-City Composite over July 2024. Additionally, according to the National Association of Realtors (“NAR”), existing home sales in August 2024 were down 2.5% month-over-month and 4.2% year-over-year. NAR also reported that the median existing-home sales price for all housing types in August 2024 was $416,700, up 3.1% from $404,200 in August 2023. According to data provided by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, privately-owned housing starts for single-family homes averaged a seasonally adjusted annual rate of 962,667 and 1,009,556 for the three and nine months ended September 30, 2024, respectively, as compared to 948,500 for the year ended December 31, 2023. Overall, existing home inventory for sale at the end of August 2024 amounted to 4.2 months of supply, up from 4.1 months of supply in July 2024 and 3.3 months of supply in August 2023, according to the NAR. According to Freddie Mac, the weekly average 30-year fixed-rate mortgage was down 1.25% year-over-year to 6.32% as of October 10, 2024. Declining single-family housing fundamentals may adversely impact the overall credit profile and value of our existing portfolio of single-family residential credit investments and the value of our single-family rental properties, as well as the availability of certain of our targeted assets.
Rental Housing. According to data provided by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, starts on multi-family homes containing five or more units averaged a seasonally adjusted annual rate of 341,667 and 331,889 for the three and nine months ended September 30, 2024, respectively, as compared to 459,417 for the year ended December 31, 2023. According to RealPage Analytics, rents for professionally managed apartments grew modestly in the third quarter of 2024 with rents growing 30 basis points in July, 40 basis points in August and 20 basis points in September, each as compared to the same period year-over-year. The CoStar Group notes that, while apartment demand remains high, asking rents were likely dampened by the increased supply from the completion of approximately 178,000 apartment units in the third quarter of 2024 and that rents will likely continue to be dampened in the immediate term by the expected completion of approximately 636,000 new apartment units total in the full year 2024, which the CoStar Group notes would amount to the most units delivered in a single year in four decades. Weakening multi-family housing fundamentals, including, among other things, increasing supply of apartments and declining rents in the markets or submarkets in which we invest, increasing interest rates, widening capitalization rates and reduced liquidity for owners of multi-family properties, may cause our operating partners to fail to meet their obligations to us and/or contribute to reduced cash flows from and/or valuation declines for multi-family properties, and in turn, many of the multi-family investments that we own.
Additionally, multi-family investments face growing regulatory and political headwinds. In January 2023, the White House Domestic Policy Council and National Economic Council released a white paper entitled the “Blueprint for a Renters Bill of Rights” (the “Blueprint”). The Blueprint discusses potential tenant protections regarding leasing and management of rental properties, tenant organizing, evictions and rent increases, among other potential protections. Although the Blueprint is non-binding, several federal agencies, including Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development, have announced actions that seek to further some of the principles set forth in the Blueprint. In July 2023, President Biden announced an initiative to promote the disclosure and reduction of rental housing fees such as application fees, payment fees, and other mandatory fees. Further, in August 2023, the White House announced a series of initiatives to build on the Blueprint such as providing funding to support tenant organizing efforts. In July 2024, the White House also called on the U.S. Congress to pass a form of nationwide rent control that would place a cap on yearly rent increases. Policies, regulations or laws implemented to further the principles discussed in the Blueprint, reduce or limit fees or limit rent increases could lead to increased costs, decreased revenue and reduced operational flexibility for multi-family and single-family rental properties, which could contribute to reduced cash flows from and/or valuation declines for multi-family and single-family rental properties, and in turn, many of the multi-family investments and single-family rentals that we own.
Credit Spreads. Investment grade and high-yield credit spreads experienced volatility in August 2024 as markets reacted to, among other factors, a below-expectation July 2024 employment report and uncertainty over the Federal Reserve’s actions with respect to the target range for the federal funds rate. Ultimately, both investment grade and high-yield credit spreads experienced modest tightening at the end of the third quarter of 2024 with investment grade spreads finishing 4 basis points lower than the start of the third quarter of 2024 and high-yield spreads finishing 18 basis points lower than the start of the third quarter of 2024. Tightening credit spreads generally increase the value of many of our credit sensitive assets, while widening credit spreads tend to have a negative impact on the value of many of our credit sensitive assets.
Financing Markets. For the first time since June 2022, the Treasury curve uninverted at the end of August 2024 marking the end of the longest inverted Treasury curve on record. This normalization of the Treasury curve was driven in part by investors’ expectations of the Federal Reserve’s cuts to the target range for the federal funds rate. Inversions and subsequent normalizations of this spread are generally considered to be indicators of a recession in the near term, although some market commentators have cautioned against August 2024’s uninversion being such an indicator. On September 30, 2024, the spread between the 2-Year U.S. Treasury yield and the 10-Year U.S. Treasury yield closed at 15 basis points, as compared to a negative 35 basis point spread on December 29, 2023. This spread is important as it is indicative of opportunities for investing in levered assets. Increases in interest rates raise the costs of many of our liabilities, while overall interest rate volatility generally increases the costs of hedging and may place downward pressure on some of our strategies.
Monetary Policy and Recent Regulatory Developments. The Federal Reserve took a number of actions to stabilize markets during the COVID-19 pandemic. From March 2020 until March 2022, the Federal Reserve implemented an asset purchase program aimed at providing liquidity to the U.S. Treasury and Agency RMBS markets. Under the Federal Reserve’s asset purchase program, the Federal Reserve’s balance sheet grew from about $4.2 trillion in assets at the start of March 2020 to about $8.9 trillion in assets at the end of the program in March 2022. On June 1, 2022, the Federal Reserve shifted course and began shrinking its balance sheet by reducing its holdings of U.S. Treasuries and Agency RMBS by $47.5 billion per month. In September 2022, the Federal Reserve increased its efforts to reduce its balance sheet by doubling the amount of U.S. Treasuries and Agency RMBS it rolls off its balance sheet to $95 billion each month. On June 1, 2024, the Federal Reserve reduced from $60 billion to $25 billion the amount of U.S. Treasuries it rolls off its balance sheet each month while continuing to reduce its holdings of Agency RMBS by $35 billion per month. As of October 7, 2024, the Federal Reserve held about $7.05 trillion in assets. Sales or reductions in the pace of purchasing of Agency RMBS by the Federal Reserve could create headwinds in the market for Agency RMBS where increased supply could drive prices lower and interest rates higher.
From March 2020 to March 2022, the Federal Reserve maintained a target range for the federal funds rate of 0% to 0.25% in view of the COVID-19 pandemic and to foster maximum employment and price stability. Then, from March 2022 through July 2023, the Federal Reserve increased the federal funds rate eleven times to bring the target range for the federal funds rate to 5.25% to 5.50% where it remained until September 19, 2024 when the Federal Reserve implemented a 50 basis point cut to the target range. When announcing the 50 basis point rate cut in September 2024, the Federal Reserve stated that inflation had made progress toward the Federal Reserve’s objective of achieving an inflation rate of two percent over the longer run and that, in light of this progress on inflation and considering the risks to the Federal Reserve’s second objective of achieving maximum employment, a cut to the target range was appropriate. The Federal Reserve further noted in its September 2024 statement that any future cuts to the target range for the federal funds rate will depend on a careful assessment of incoming data, the evolving outlook, and the balance of risks to its dual mandate of achieving maximum employment and an inflation rate of two percent. As reflected on the “dot plot” included in the projection materials from the Federal Reserve’s September 2024 meeting, most Federal Reserve officials indicated that an additional 25 or 50 basis point cut to the target range for the federal funds rate by the end of 2024 would be appropriate. However, recent economic data since the Federal Reserve’s September 2024 meeting showing strong job growth, among other data points, along with the Federal Reserve’s September 2024 statement emphasizing the consideration that will be given to evolving economic data has cautioned some market commentators’ expectations of further cuts to the target range for the federal funds rate in 2024.
The scope and nature of the actions the Federal Reserve and other governmental authorities will ultimately undertake are unknown and will continue to evolve. There can be no assurance as to how, in the long term, these and other actions, as well as the negative impacts from ongoing geopolitical instability and uncertainty surrounding inflation, interest rates and the outlook for the U.S. and global economies, will affect the efficiency, liquidity and stability of the financial, credit and mortgage markets, and thus, our business. Greater uncertainty frequently leads to wider asset spreads or lower prices and higher hedging costs.
Third Quarter 2024 Summary
Earnings and Return Metrics
The following table presents key earnings and return metrics for the three and nine months ended September 30, 2024 (dollar amounts in thousands, except per share data):
| | | | | | | | | | | |
| Three Months Ended September 30, 2024 | | Nine Months Ended September 30, 2024 |
Net income (loss) attributable to Company's common stockholders | $ | 32,410 | | | $ | (61,957) | |
Net income (loss) attributable to Company's common stockholders per share (basic) | $ | 0.36 | | | $ | (0.68) | |
Undepreciated earnings (loss) (1) | $ | 34,941 | | | $ | (54,372) | |
Undepreciated earnings (loss) per common share (1) | $ | 0.39 | | | $ | (0.60) | |
Comprehensive income (loss) attributable to Company's common stockholders | $ | 32,410 | | | $ | (61,953) | |
Comprehensive income (loss) attributable to Company's common stockholders per share (basic) | $ | 0.36 | | | $ | (0.68) | |
Yield on average interest earning assets (1) (2) | 6.69 | % | | 6.52 | % |
| Interest income | $ | 108,361 | | | $ | 283,027 | |
| Interest expense | $ | 88,124 | | | $ | 225,883 | |
| Net interest income | $ | 20,237 | | | $ | 57,144 | |
Net interest spread (1) (3) | 1.32 | % | | 1.31 | % |
| Book value per common share at the end of the period | $ | 9.83 | | | $ | 9.83 | |
Adjusted book value per common share at the end of the period (1) | $ | 10.87 | | | $ | 10.87 | |
Economic return on book value (4) | 3.51 | % | | (7.78) | % |
Economic return on adjusted book value (5) | 0.45 | % | | (9.40) | % |
| Dividends per common share | $ | 0.20 | | | $ | 0.60 | |
(1)Represents a non-GAAP financial measure. A reconciliation of the Company's non-GAAP financial measures to their most directly comparable GAAP measure is included in "Non-GAAP Financial Measures" elsewhere in this section.
(2)Calculated as the quotient of our adjusted interest income and our average interest earning assets and excludes all Consolidated SLST assets other than those securities owned by the Company.
(3)Our calculation of net interest spread may not be comparable to similarly-titled measures of other companies who may use a different calculation.
(4)Economic return on book value is based on the periodic change in GAAP book value per common share plus dividends declared per common share, if any, during the period.
(5)Economic return on adjusted book value is based on the periodic change in adjusted book value per common share, a non-GAAP financial measure, plus dividends declared per common share, if any, during the period.
Key Developments During Third Quarter 2024
Investing Activities
•A joint venture in which we held a common equity investment sold its multi-family apartment community for approximately $56.4 million. The sale generated a net gain attributable to the Company's common stockholders of approximately $8.7 million.
•A joint venture in which we hold a combined preferred equity and common equity investment sold a multi-family apartment community for approximately $43.5 million. The sale generated a net gain attributable to the Company's common stockholders of approximately $1.5 million.
•Purchased approximately $372.2 million of Agency RMBS with an average coupon of 5.33%.
•Purchased approximately $624.2 million in residential loans with an average gross coupon of 9.72%.
Financing Activities
•Completed a securitization of business purpose loans, resulting in approximately $235.8 million in net proceeds to us after deducting expenses associated with the transaction. We utilized a portion of the net proceeds to repay approximately $184.6 million on outstanding repurchase agreements related to residential loans.
•Completed a re-securitization of our investment in certain subordinated securities issued by Consolidated SLST, resulting in approximately $73.0 million in net proceeds to us after deducting expenses associated with the transaction. We utilized a portion of the net proceeds to repay approximately $48.8 million on outstanding repurchase agreement financing related to our investment in Consolidated SLST.
Capital Allocation
The following provides an overview of the allocation of our total equity as of September 30, 2024 and December 31, 2023, respectively. We fund our investing and operating activities with a combination of cash flow from operations, proceeds from common and preferred equity and debt securities offerings, including senior unsecured notes and subordinated debentures, short-term and longer-term repurchase agreements and CDOs. A detailed discussion of our liquidity and capital resources is provided in “Liquidity and Capital Resources” elsewhere in this section.
The following tables set forth our allocated capital by investment category at September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands).
At September 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Single-Family | | Multi-
Family | | Corporate/Other | | Total |
| Residential loans | | | $ | 3,777,144 | | | $ | — | | | $ | — | | | $ | 3,777,144 | |
| Consolidated SLST CDOs | | | (845,811) | | | — | | | — | | | (845,811) | |
| Investment securities available for sale | | | 3,036,182 | | | — | | | 349,088 | | | 3,385,270 | |
| Multi-family loans | | | — | | | 87,614 | | | — | | | 87,614 | |
| Equity investments | | | — | | | 100,378 | | | 46,455 | | | 146,833 | |
Equity investments in consolidated multi-family properties (1) | | | — | | | 154,462 | | | — | | | 154,462 | |
Equity investments in disposal group held for sale (2) | | | — | | | 17,831 | | | — | | | 17,831 | |
| Single-family rental properties | | | 144,736 | | | — | | | — | | | 144,736 | |
| Total investment portfolio carrying value | | | 6,112,251 | | | 360,285 | | | 395,543 | | | 6,868,079 | |
| Liabilities: | | | | | | | | | |
| Repurchase agreements | | | (3,258,175) | | | — | | | (352,940) | | | (3,611,115) | |
Collateralized debt obligations | | | | | | | | | |
| Residential loan securitization CDOs | | | (1,883,817) | | | — | | | — | | | (1,883,817) | |
Non-Agency RMBS re-securitization | | | (72,638) | | | — | | | — | | | (72,638) | |
| Senior unsecured notes | | | — | | | — | | | (159,587) | | | (159,587) | |
| Subordinated debentures | | | — | | | — | | | (45,000) | | | (45,000) | |
Cash, cash equivalents and restricted cash (3) | | | 104,220 | | | — | | | 221,582 | | | 325,802 | |
| Cumulative adjustment of redeemable non-controlling interest to estimated redemption value | | | — | | | (48,282) | | | — | | | (48,282) | |
| Other | | | 111,504 | | | (1,306) | | | (39,493) | | | 70,705 | |
| Net Company capital allocated | | | $ | 1,113,345 | | | $ | 310,697 | | | $ | 20,105 | | | $ | 1,444,147 | |
| | | | | | | | | |
Company Recourse Leverage Ratio (4) | | | | | | | | | 2.6 | x |
Portfolio Recourse Leverage Ratio (5) | | | | | | | | | 2.5 | x |
(1)Represents the Company's equity investments in consolidated multi-family properties that are not in disposal group held for sale. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated financial statements.
(2)Represents the Company's equity investments in consolidated multi-family properties that are held for sale in disposal group. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated financial statements.
(3)Excludes cash in the amount of $9.2 million held in the Company's equity investments in consolidated multi-family properties and equity investments in consolidated multi-family properties in disposal group held for sale. Restricted cash of $136.9 million is included in the Company’s accompanying condensed consolidated balance sheets in other assets.
(4)Represents the Company's total outstanding recourse repurchase agreement financing, subordinated debentures and senior unsecured notes divided by the Company's total stockholders' equity. Does not include non-recourse repurchase agreement financing amounting to $34.6 million, Consolidated SLST CDOs amounting to $845.8 million, residential loan securitization CDOs amounting to $1.9 billion, non-Agency RMBS re-securitization CDOs amounting to $72.6 million and mortgages payable on real estate, including mortgages payable on real estate of disposal group held for sale, totaling $662.6 million as they are non-recourse debt.
(5)Represents the Company's outstanding recourse repurchase agreement financing divided by the Company's total stockholders' equity.
At December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Single-Family | | Multi-
Family | | Corporate/Other | | Total |
| Residential loans | $ | 3,084,303 | | | $ | — | | | $ | — | | | $ | 3,084,303 | |
| Consolidated SLST CDOs | (593,737) | | | — | | | — | | | (593,737) | |
| Investment securities available for sale | 2,013,817 | | | — | | | — | | | 2,013,817 | |
| Multi-family loans | — | | | 95,792 | | | — | | | 95,792 | |
| Equity investments | — | | | 109,962 | | | 37,154 | | | 147,116 | |
Equity investments in consolidated multi-family properties (1) | — | | | 211,214 | | | — | | | 211,214 | |
Equity investments in disposal group held for sale (2) | — | | | 36,815 | | | — | | | 36,815 | |
| Single-family rental properties | 151,885 | | | — | | | — | | | 151,885 | |
| Total investment portfolio carrying value | 4,656,268 | | | 453,783 | | | 37,154 | | | 5,147,205 | |
| Liabilities: | | | | | | | |
| Repurchase agreements | (2,471,113) | | | — | | | — | | | (2,471,113) | |
| Residential loan securitization CDOs | (1,276,780) | | | — | | | — | | | (1,276,780) | |
| Senior unsecured notes | — | | | — | | | (98,111) | | | (98,111) | |
| Subordinated debentures | — | | | — | | | (45,000) | | | (45,000) | |
Cash, cash equivalents and restricted cash (3) | 139,562 | | | — | | | 175,468 | | | 315,030 | |
| Cumulative adjustment of redeemable non-controlling interest to estimated redemption value | — | | | (30,062) | | | — | | | (30,062) | |
| Other | 74,716 | | | (1,352) | | | (34,921) | | | 38,443 | |
| Net Company capital allocated | $ | 1,122,653 | | | $ | 422,369 | | | $ | 34,590 | | | $ | 1,579,612 | |
| | | | | | | |
Company Recourse Leverage Ratio (4) | | | | | | | 1.6x |
Portfolio Recourse Leverage Ratio (5) | | | | | | | 1.5x |
(1)Represents the Company's equity investments in consolidated multi-family properties that are not in disposal group held for sale. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated financial statements.
(2)Represents the Company's equity investments in consolidated multi-family properties that are held for sale in disposal group. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Analysis—Equity Investments in Multi-Family Entities" for a reconciliation of equity investments in consolidated multi-family properties and disposal group held for sale to the Company's condensed consolidated financial statements.
(3)Excludes cash in the amount of $21.3 million held in the Company's equity investments in consolidated multi-family properties and equity investments in consolidated multi-family properties in disposal group held for sale. Restricted cash of $143.5 million is included in the Company’s accompanying condensed consolidated balance sheets in other assets.
(4)Represents the Company's total outstanding recourse repurchase agreement financing, subordinated debentures and senior unsecured notes divided by the Company's total stockholders' equity. Does not include non-recourse repurchase agreement financing amounting to $149.7 million, Consolidated SLST CDOs amounting to $593.7 million, residential loan securitization CDOs amounting to $1.3 billion and mortgages payable on real estate, including mortgages payable on real estate of disposal group held for sale, totaling $1.2 billion as they are non-recourse debt.
(5)Represents the Company's outstanding recourse repurchase agreement financing divided by the Company's total stockholders' equity.
Results of Operations
The following discussion provides information regarding our results of operations for the three and nine months ended September 30, 2024 and 2023, including a comparison of year-over-year results and related commentary. A number of the tables contain a “change” column that indicates the amount by which results from the three and nine months ended September 30, 2024 are greater or less than the results from the respective period in 2023. Unless otherwise specified, references in this section to increases or decreases in the "three-month periods" refer to the change in results for the three months ended September 30, 2024 when compared to the three months ended September 30, 2023 and increases or decreases in the "nine-month periods" refer to the change in results for the nine months ended September 30, 2024 when compared to the nine months ended September 30, 2023.
The following table presents the main components of our net income (loss) for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| Interest income | $ | 108,361 | | | $ | 65,195 | | | $ | 43,166 | | | $ | 283,027 | | | $ | 179,871 | | | $ | 103,156 | |
| Interest expense | 88,124 | | | 48,406 | | | 39,718 | | | 225,883 | | | 130,145 | | | 95,738 | |
| Net interest income | 20,237 | | | 16,789 | | | 3,448 | | | 57,144 | | | 49,726 | | | 7,418 | |
| Net loss from real estate | (7,495) | | | (7,788) | | | 293 | | | (36,968) | | | (24,494) | | | (12,474) | |
Total other income (loss) | 52,875 | | | (85,943) | | | 138,818 | | | (10,527) | | | (80,115) | | | 69,588 | |
| General and administrative expenses | 11,941 | | | 11,826 | | | 115 | | | 36,643 | | | 37,824 | | | (1,181) | |
| Portfolio operating expenses | 8,531 | | | 5,161 | | | 3,370 | | | 23,672 | | | 17,882 | | | 5,790 | |
Debt issuance costs | 2,354 | | | — | | | 2,354 | | | 10,452 | | | — | | | 10,452 | |
Income (loss) from operations before income taxes | 42,791 | | | (93,929) | | | 136,720 | | | (61,118) | | | (110,589) | | | 49,471 | |
Income tax expense (benefit) | 2,325 | | | (56) | | | 2,381 | | | 2,556 | | | (59) | | | 2,615 | |
| Net loss attributable to non-controlling interests | 2,383 | | | 9,364 | | | (6,981) | | | 33,034 | | | 19,957 | | | 13,077 | |
Net income (loss) attributable to Company | 42,849 | | | (84,509) | | | 127,358 | | | (30,640) | | | (90,573) | | | 59,933 | |
Preferred stock dividends | (10,439) | | | (10,435) | | | (4) | | | (31,317) | | | (31,394) | | | 77 | |
| Gain on repurchase of preferred stock | — | | | 125 | | | (125) | | | — | | | 467 | | | (467) | |
Net income (loss) attributable to Company's common stockholders | 32,410 | | | (94,819) | | | 127,229 | | | (61,957) | | | (121,500) | | | 59,543 | |
Basic earnings (loss) per common share | $ | 0.36 | | | $ | (1.04) | | | $ | 1.40 | | | $ | (0.68) | | | $ | (1.33) | | | $ | 0.65 | |
Diluted earnings (loss) per common share | $ | 0.36 | | | $ | (1.04) | | | $ | 1.40 | | | $ | (0.68) | | | $ | (1.33) | | | $ | 0.65 | |
Interest Income and Interest Expense
During the three and nine months ended September 30, 2024, interest income increased primarily due to increased investment in Agency RMBS and business purpose loans. The increase in interest expense during the three and nine months ended September 30, 2024 was due primarily to an increase in repurchase agreement financing of our Agency RMBS portfolio and additional securitization financings completed in 2024.
Net Loss from Real Estate
The following table presents the components of net loss from real estate for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| Income from real estate | $ | 31,903 | | | $ | 42,391 | | | $ | (10,488) | | | $ | 106,446 | | | $ | 128,913 | | | $ | (22,467) | |
| Expenses related to real estate: | | | | | | | | | | | |
| Interest expense, mortgages payable on real estate | (12,676) | | | (21,604) | | | 8,928 | | | (49,996) | | | (68,158) | | | 18,162 | |
| Depreciation expense on operating real estate | (8,131) | | | (6,204) | | | (1,927) | | | (30,564) | | | (18,371) | | | (12,193) | |
| Amortization of lease intangibles related to operating real estate | — | | | — | | | — | | | (2,378) | | | — | | | (2,378) | |
Other real estate expenses | (18,591) | | | (22,371) | | | 3,780 | | | (60,476) | | | (66,878) | | | 6,402 | |
| Total expenses related to real estate | (39,398) | | | (50,179) | | | 10,781 | | | (143,414) | | | (153,407) | | | 9,993 | |
Net loss from real estate | $ | (7,495) | | | $ | (7,788) | | | $ | 293 | | | $ | (36,968) | | | $ | (24,494) | | | $ | (12,474) | |
Income from real estate decreased in the three-month and nine-month periods primarily due to a decrease in rental income as a result of the sale or de-consolidation since September 30, 2023 of certain multi-family real estate assets owned by entities in which we had joint venture equity investments.
Expenses related to real estate decreased in the three-month and nine-month periods due to a decrease in interest expense on mortgages payable and a decrease in operating expenses due to the aforementioned sales or de-consolidation of multi-family real estate assets. This decrease was partially offset by an increase in depreciation expense and amortization of lease intangibles as a result of the return of certain multi-family real estate assets owned by entities in which we have joint venture equity investments to held and used since September 30, 2023.
Other Income (Loss)
Realized Losses, Net
The following table presents the components of realized losses, net recognized for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
Residential loans and real estate owned | $ | (958) | | | $ | (1,638) | | | $ | 680 | | | $ | (18,492) | | | $ | 150 | | | $ | (18,642) | |
Investment securities | (422) | | | (2,041) | | | 1,619 | | | (912) | | | (2,370) | | | 1,458 | |
Total realized losses, net | $ | (1,380) | | | $ | (3,679) | | | $ | 2,299 | | | $ | (19,404) | | | $ | (2,220) | | | $ | (17,184) | |
The Company recognized net realized losses on residential loans and real estate owned during the three and nine months ended September 30, 2024, respectively, primarily related to losses incurred on foreclosed properties which were partially offset by net realized gains recognized on the sale and payoff of residential loans. The Company also recognized net realized losses on write-downs of non-Agency RMBS during the three and nine months ended September 30, 2024.
During the three months ended September 30, 2023, the Company recognized net realized losses on residential loans and real estate owned primarily due to losses incurred on foreclosed properties and net realized losses recognized on the sale of residential loans. During the nine months ended September 30, 2023, the Company recognized net realized gains related to our residential loan portfolio, primarily as a result of loan payoff activity. The Company also recognized net realized losses related to the sale of CMBS and write down of non-Agency RMBS during the three and nine months ended September 30, 2023.
Unrealized Gains (Losses), Net
The following table presents the components of unrealized gains (losses), net recognized for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| Residential loans | $ | 52,165 | | | $ | (21,418) | | | $ | 73,583 | | | $ | 46,929 | | | $ | 858 | | | $ | 46,071 | |
| Consolidated SLST | 6,753 | | | (9,325) | | | 16,078 | | | 7,259 | | | (19,354) | | | 26,613 | |
CDOs at fair value | (19,533) | | | — | | | (19,533) | | | (18,032) | | | — | | | (18,032) | |
Senior unsecured notes at fair value | (900) | | | — | | | (900) | | | (900) | | | — | | | (900) | |
| Preferred equity and mezzanine loan investments | 213 | | | (17) | | | 230 | | | (4,581) | | | 949 | | | (5,530) | |
Investment securities | 58,251 | | | (30,535) | | | 88,786 | | | 10,371 | | | (38,191) | | | 48,562 | |
Total unrealized gains (losses), net | $ | 96,949 | | | $ | (61,295) | | | $ | 158,244 | | | $ | 41,046 | | | $ | (55,738) | | | $ | 96,784 | |
The Company recognized net unrealized gains for the three and nine months ended September 30, 2024, primarily due to improved pricing on our credit assets and Agency RMBS as a result of a decrease in interest rates. The unrealized gains were partially offset by unrealized losses recognized on CDOs and senior unsecured notes reported at fair value due to the same movement in interest rates.
The Company recognized net unrealized losses for the three and nine months ended September 30, 2023, primarily due to decreased pricing on our first loss subordinated securities that we own in Consolidated SLST and Agency RMBS as a result of an increase in interest rates.
(Losses) Gains on Derivative Instruments, Net
The following table presents the components of (losses) gains on derivative investments, net for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
Unrealized (losses) gains on derivative instruments | $ | (56,282) | | | $ | 20,555 | | | $ | (76,837) | | | $ | (5,739) | | | $ | 34,553 | | | $ | (40,292) | |
Realized (losses) gains on derivative instruments | (4,358) | | | 438 | | | (4,796) | | | 9,781 | | | 3,651 | | | 6,130 | |
Total (losses) gains on derivative instruments, net | $ | (60,640) | | | $ | 20,993 | | | $ | (81,633) | | | $ | 4,042 | | | $ | 38,204 | | | $ | (34,162) | |
During the three months ended September 30, 2024, the Company recognized unrealized losses on derivative investments primarily due to decreases in interest rates which resulted in lower valuations of our interest rate swaps. The Company also recognized realized losses on the settlement of U.S. Treasury futures and interest rate swaps. The Company recognized net gains on derivative instruments during the three months ended September 30, 2023 primarily as a result of increases in interest rates which resulted in higher valuations of our interest rate swaps.
During the nine months ended September 30, 2024, the Company recognized net realized gains on derivative instruments, primarily due to the settlement of interest rate swaps. These gains were partially offset by net unrealized losses on derivative instruments due to decreases in interest rates in the third quarter of 2024, which resulted in lower valuations of our interest rate swaps. During the nine months ended September 30, 2023, the Company recognized net gains on derivative instruments, primarily as a result of increases in interest rates which resulted in higher valuations and unrealized gains on our interest rate swaps.
Income from Equity Investments
The following table presents the components of income from equity investments for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| Preferred return on preferred equity investments accounted for as equity | $ | 3,401 | | | $ | 4,484 | | | $ | (1,083) | | | $ | 10,440 | | | $ | 14,823 | | | $ | (4,383) | |
Unrealized (losses) gains on preferred equity investments accounted for as equity | (4,537) | | | 194 | | | (4,731) | | | (5,230) | | | 837 | | | (6,067) | |
Loss from unconsolidated joint venture equity investments in multi-family properties | (421) | | | (2,622) | | | 2,201 | | | (4,485) | | | (3,937) | | | (548) | |
Income (loss) from entity that originates residential loans | 7,611 | | | — | | | 7,611 | | | 9,301 | | | (2,500) | | | 11,801 | |
Total income from equity investments | $ | 6,054 | | | $ | 2,056 | | | $ | 3,998 | | | $ | 10,026 | | | $ | 9,223 | | | $ | 803 | |
Income from equity investments increased for the three-month and nine-month periods primarily due to increased profitability of an entity that originates residential loans. The increase was partially offset by unrealized losses recognized on a preferred equity investment accounted for as equity due to property performance and decreases in preferred return on preferred equity investments accounted for as equity in the current period as a result of redemptions that have occurred since September 30, 2023.
Income from equity investments increased during the nine months ended September 30, 2024, primarily due to increased income from an entity that originates residential loans. The increase in total income from equity investments in the nine-month periods was partially offset by 1) decreases in preferred return on preferred equity investments accounted for as equity as a result of redemptions that have occurred since September 30, 2023 and 2) unrealized losses recognized on preferred equity investments accounted for as equity and unconsolidated joint venture equity investments in multi-family properties as a result of property performance and wider cap rates during the current period.
Impairment of Real Estate
The following table presents impairment of real estate for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| Impairment of real estate | $ | (7,823) | | | $ | (44,157) | | | $ | 36,334 | | | $ | (48,142) | | | $ | (71,296) | | | $ | 23,154 | |
During the three and nine months ended September 30, 2024 and 2023, we recognized impairment losses on certain multi-family real estate assets due to lower valuations driven by a decrease in net operating income estimates and wider cap rates. During the three and nine months ended September 30, 2024, we also recognized impairment losses on certain single-family rental properties transferred to held for sale as a result of the remeasurement of those assets to estimated fair value less costs to sell.
The decrease in impairment of real estate for the three-month and nine-month periods can be attributed to slowing cap rate widening as compared to prior periods as well as the sale or de-consolidation of certain multi-family real estate assets since September 30, 2023.
Loss on Reclassification of Disposal Group
The following table presents loss on reclassification of disposal group for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
Loss on reclassification of disposal group | $ | — | | | $ | — | | | $ | — | | | $ | (14,636) | | | $ | — | | | $ | (14,636) | |
During the three months ended September 30, 2024, no joint venture equity investments were reclassified from disposal group held for sale.
One joint venture equity investment was reclassified from disposal group held for sale during the nine months ended September 30, 2024. As a result of this transfer, we adjusted the carrying value of the long-lived assets in the Consolidated Real Estate VIE to the lower of the carrying amount before the assets were classified as held for sale adjusted for depreciation and amortization expense that would have been recognized had the assets been continuously classified as held and used and the fair value of the assets at the date of the transfer and recognized an approximately $14.6 million loss on reclassification of disposal group during the nine months ended September 30, 2024.
Other Income
The following table presents the components of other income (loss) for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
Gain on sale of real estate | $ | 17,903 | | | $ | — | | | $ | 17,903 | | | $ | 18,164 | | | $ | 1,879 | | | $ | 16,285 | |
Gain on de-consolidation of joint venture equity investment in Consolidated VIEs | 3,393 | | | — | | | 3,393 | | | 3,703 | | | — | | | 3,703 | |
Preferred equity and mezzanine loan premiums resulting from early redemption | 28 | | | 128 | | | (100) | | | 127 | | | 315 | | | (188) | |
Loss on extinguishment of collateralized debt obligations and mortgages payable on real estate | (1,699) | | | — | | | (1,699) | | | (2,391) | | | (693) | | | (1,698) | |
| Provision for uncollectible accounts receivable | — | | | — | | | — | | | (3,207) | | | — | | | (3,207) | |
Miscellaneous income | 90 | | | 11 | | | 79 | | | 145 | | | 211 | | | (66) | |
Total other income | $ | 19,715 | | | $ | 139 | | | $ | 19,576 | | | $ | 16,541 | | | $ | 1,712 | | | $ | 14,829 | |
The net increase in other income during the three- and nine- month periods is primarily due to gains recognized on the sales of certain multi-family properties in consolidated joint venture equity investments and sale of our membership interests in consolidated joint venture equity investments during the quarter ended September 30, 2024.
Expenses
The following tables present the components of general and administrative expenses, portfolio operating expenses, and debt issuance costs for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
General and Administrative Expenses | | | | | | | | | | | |
Salaries, benefits and directors’ compensation | $ | 8,736 | | | $ | 8,649 | | | $ | 87 | | | $ | 26,340 | | | $ | 27,836 | | | $ | (1,496) | |
| Professional fees | 1,212 | | | 1,175 | | | 37 | | | 4,327 | | | 3,854 | | | 473 | |
| | | | | | | | | | | |
| Other | 1,993 | | | 2,002 | | | (9) | | | 5,976 | | | 6,134 | | | (158) | |
| Total general and administrative expenses | $ | 11,941 | | | $ | 11,826 | | | $ | 115 | | | $ | 36,643 | | | $ | 37,824 | | | $ | (1,181) | |
The decrease in general and administrative expenses in the nine-month periods is primarily related to decreases in salary and stock compensation expenses.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Portfolio operating expenses | $ | 8,531 | | | $ | 5,161 | | | $ | 3,370 | | | $ | 23,672 | | | $ | 17,882 | | | $ | 5,790 | |
The increase in portfolio operating expenses in the three- and nine- month periods is primarily related to an increase in expenses related to management of the business purpose loan portfolio and increased due diligence expenses related to loan purchases, partially offset by a decrease in residential loan servicing fees.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Securitization transaction costs | $ | 2,354 | | | $ | — | | | $ | 2,354 | | | $ | 7,972 | | | $ | — | | | $ | 7,972 | |
Senior unsecured notes transaction costs | — | | | — | | | — | | | 2,480 | | | — | | | 2,480 | |
Total debt issuance costs | $ | 2,354 | | | $ | — | | | $ | 2,354 | | | $ | 10,452 | | | $ | — | | | $ | 10,452 | |
During the three and nine months ended September 30, 2024, we recognized debt issuance costs related to residential loan securitization and non-Agency RMBS re-securitization CDOs that were expensed as incurred as a result of the fair value option election. Additionally, during the nine months ended September 30, 2024, we recognized debt issuance costs related to senior unsecured notes issued by the Company that were expensed as incurred as a result of the fair value option election.
Comprehensive Income (Loss)
The main components of comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023, respectively, are detailed in the following table (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | $ Change | | 2024 | | 2023 | | $ Change |
NET INCOME (LOSS) ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS | $ | 32,410 | | | $ | (94,819) | | | $ | 127,229 | | | $ | (61,957) | | | $ | (121,500) | | | $ | 59,543 | |
OTHER COMPREHENSIVE (LOSS) INCOME | | | | | | | | | | | |
Decrease (increase) in fair value of available for sale securities | | | | | | | | | | | |
| Non-Agency RMBS | — | | | (65) | | | 65 | | | — | | | 143 | | | (143) | |
| Total | — | | | (65) | | | 65 | | | — | | | 143 | | | (143) | |
Reclassification adjustment for net loss included in net loss | — | | | — | | | — | | | 4 | | | — | | | 4 | |
TOTAL OTHER COMPREHENSIVE (LOSS) INCOME | — | | | (65) | | | 65 | | | 4 | | | 143 | | | (139) | |
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS | $ | 32,410 | | | $ | (94,884) | | | $ | 127,294 | | | $ | (61,953) | | | $ | (121,357) | | | $ | 59,404 | |
Beginning in the fourth quarter of 2019, the Company’s newly purchased investment securities are presented at fair value as a result of a fair value election made at the time of acquisition pursuant to ASC 825, Financial Instruments (“ASC 825”). The fair value option was elected for these investment securities to provide stockholders and others who rely on our financial statements with a more complete and accurate understanding of our economic performance. Changes in the market values of investment securities where the Company elected the fair value option are reflected in earnings instead of in OCI. As of September 30, 2024, all of the Company's investment securities are accounted for using the fair value option.
Analysis of Changes in GAAP Book Value
The following table analyzes the changes in GAAP book value of our common stock for the three and nine months ended September 30, 2024, respectively (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2024 | | Nine Months Ended September 30, 2024 |
| Amount | | Shares | | Per Share (1) | | Amount | | Shares | | Per Share (1) |
| Beginning Balance | $ | 877,800 | | | 90,592 | | | $ | 9.69 | | | $ | 1,025,502 | | | 90,675 | | | $ | 11.31 | |
Common stock issuance, net (2) | 2,435 | | | (13) | | | | | 3,501 | | | 491 | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Common stock repurchases | — | | | — | | | | | (3,493) | | | (587) | | | |
| | | | | | | | | | | |
| Balance after share activity | 880,235 | | | 90,579 | | | 9.72 | | | 1,025,510 | | | 90,579 | | | 11.32 | |
| Adjustment of redeemable non-controlling interest to estimated redemption value | (4,230) | | | | | (0.05) | | | (18,221) | | | | | (0.20) | |
| Dividends and dividend equivalents declared | (18,378) | | | | | (0.20) | | | (55,299) | | | | | (0.61) | |
| Net change in accumulated other comprehensive loss: | | | | | | | | | | | |
Investment securities available for sale (3) | — | | | | | — | | | 4 | | | | | — | |
Net income (loss) attributable to Company's common stockholders | 32,410 | | | | | 0.36 | | | (61,957) | | | | | (0.68) | |
| Ending Balance | $ | 890,037 | | | 90,579 | | | $ | 9.83 | | | $ | 890,037 | | | 90,579 | | | $ | 9.83 | |
(1)Outstanding shares used to calculate book value per common share for the three and nine months ended September 30, 2024 are 90,579,449.
(2)Includes amortization of stock based compensation.
(3)The net increase relates to the reclassification of unrealized loss to net loss during the period.
Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, this Quarterly Report on Form 10-Q includes certain non-GAAP financial measures, including adjusted interest income, adjusted interest expense, adjusted net interest income (loss), yield on average interest earning assets, average financing cost, net interest spread, undepreciated earnings (loss) and adjusted book value per common share. Our management team believes that these non-GAAP financial measures, when considered with our GAAP financial statements, provide supplemental information useful for investors as it enables them to evaluate our current performance and trends using the metrics that management uses to operate our business. Our presentation of non-GAAP financial measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. Because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. Our GAAP financial results and the reconciliations of the non-GAAP financial measures included in this Quarterly Report on Form 10-Q to the most directly comparable financial measures prepared in accordance with GAAP should be carefully evaluated.
Adjusted Net Interest Income (Loss) and Net Interest Spread
Financial results for the Company during a given period include the net interest income earned on our investment portfolio of residential loans, investment securities and preferred equity investments and mezzanine loans, where the risks and payment characteristics are equivalent to and accounted for as loans (collectively, our “interest earning assets”). Adjusted net interest income (loss) and net interest spread (both supplemental non-GAAP financial measures) are impacted by factors such as our cost of financing, including our hedging costs, and the interest rate that our investments bear. Furthermore, the amount of premium or discount paid on purchased investments and the prepayment rates on investments will impact adjusted net interest income (loss) as such factors will be amortized over the expected term of such investments.
We provide the following non-GAAP financial measures, in total and by investment category, for the respective periods:
•adjusted interest income – calculated as our GAAP interest income reduced by the interest expense recognized on Consolidated SLST CDOs,
•adjusted interest expense – calculated as our GAAP interest expense reduced by the interest expense recognized on Consolidated SLST CDOs and adjusted to include the net interest component of interest rate swaps,
•adjusted net interest income (loss) – calculated by subtracting adjusted interest expense from adjusted interest income,
•yield on average interest earning assets – calculated as the quotient of our adjusted interest income and our average interest earning assets and excludes all Consolidated SLST assets other than those securities owned by the Company,
•average financing cost – calculated as the quotient of our adjusted interest expense and the average outstanding balance of our interest bearing liabilities, excluding Consolidated SLST CDOs and mortgages payable on real estate, and
•net interest spread – calculated as the difference between our yield on average interest earning assets and our average financing cost.
These measures remove the impact of Consolidated SLST that we consolidate in accordance with GAAP and include the net interest component of interest rate swaps utilized to hedge the variable cash flows associated with our variable-rate borrowings, which is included in (losses) gains on derivative instruments, net in the Company's condensed consolidated statements of operations. With respect to Consolidated SLST, we only include the interest income earned by the Consolidated SLST securities that are actually owned by the Company as the Company only receives income or absorbs losses related to the Consolidated SLST securities actually owned by the Company. We include the net interest component of interest rate swaps in these measures to more fully represent the cost of our financing strategy.
We provide the non-GAAP financial measures listed above because we believe these non-GAAP financial measures provide investors and management with additional detail and enhance their understanding of our interest earning asset yields, in total and by investment category, relative to the cost of our financing and the underlying trends within our portfolio of interest earning assets. In addition to the foregoing, our management team uses these measures to assess, among other things, the performance of our interest earning assets in total and by asset, possible cash flows from our interest earning assets in total and by asset, our ability to finance or borrow against the asset and the terms of such financing and the composition of our portfolio of interest earning assets, including acquisition and disposition determinations.
The following tables set forth certain information about our interest earning assets by category and their related adjusted interest income, adjusted interest expense, adjusted net interest income (loss), yield on average interest earning assets, average financing cost and net interest spread for the three and nine months ended September 30, 2024 and 2023, respectively (dollar amounts in thousands):
Three Months Ended September 30, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Single-Family (8) | | Multi-
Family | | Corporate/Other | | Total |
Adjusted Interest Income (1) (2) | | | $ | 97,233 | | | $ | 2,699 | | | $ | 1,054 | | | $ | 100,986 | |
Adjusted Interest Expense (1) | | | (66,297) | | | — | | | (5,999) | | | (72,296) | |
Adjusted Net Interest Income (Loss) (1) | | | $ | 30,936 | | | $ | 2,699 | | | $ | (4,945) | | | $ | 28,690 | |
| | | | | | | | | |
Average Interest Earning Assets (3) | | | $ | 5,841,444 | | | $ | 91,164 | | | $ | 103,275 | | | $ | 6,035,883 | |
Average Interest Bearing Liabilities (4) | | | $ | 4,976,522 | | | $ | — | | | $ | 379,590 | | | $ | 5,356,112 | |
| | | | | | | | | |
Yield on Average Interest Earning Assets (1) (5) | | | 6.66 | % | | 11.84 | % | | 4.08 | % | | 6.69 | % |
Average Financing Cost (1) (6) | | | (5.30) | % | | — | | | (6.29) | % | | (5.37) | % |
Net Interest Spread (1) (7) | | | 1.36 | % | | 11.84 | % | | (2.21) | % | | 1.32 | % |
Three Months Ended September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Single-Family (8) | | Multi-
Family | | Corporate/Other | | Total |
Adjusted Interest Income (1) (2) | | | $ | 55,389 | | | $ | 3,849 | | | $ | — | | | $ | 59,238 | |
Adjusted Interest Expense (1) | | | (35,150) | | | — | | | (3,433) | | | (38,583) | |
Adjusted Net Interest Income (Loss) (1) | | | $ | 20,239 | | | $ | 3,849 | | | $ | (3,433) | | | $ | 20,655 | |
| | | | | | | | | |
Average Interest Earning Assets (3) | | | $ | 3,801,646 | | | $ | 127,909 | | | $ | 1,000 | | | $ | 3,930,555 | |
Average Interest Bearing Liabilities (4) | | | $ | 2,764,496 | | | $ | — | | | $ | 221,534 | | | $ | 2,986,030 | |
| | | | | | | | | |
Yield on Average Interest Earning Assets (1) (5) | | | 5.83 | % | | 11.94 | % | | — | | | 6.03 | % |
Average Financing Cost (1) (6) | | | (5.04) | % | | — | | | (6.15) | % | | (5.13) | % |
Net Interest Spread (1) (7) | | | 0.79 | % | | 11.94 | % | | (6.15) | % | | 0.90 | % |
Nine Months Ended September 30, 2024
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Single-Family (8) | | Multi-
Family | | Corporate/Other | | Total |
Adjusted Interest Income (1) (2) | | | $ | 253,966 | | | $ | 8,072 | | | $ | 1,061 | | | $ | 263,099 | |
Adjusted Interest Expense (1) | | | (168,109) | | | — | | | (12,771) | | | (180,880) | |
Adjusted Net Interest Income (Loss) (1) | | | $ | 85,857 | | | $ | 8,072 | | | $ | (11,710) | | | $ | 82,219 | |
| | | | | | | | | |
Average Interest Earning Assets (3) | | | $ | 5,248,626 | | | $ | 94,306 | | | $ | 34,425 | | | $ | 5,377,357 | |
Average Interest Bearing Liabilities (4) | | | $ | 4,368,101 | | | $ | — | | | $ | 273,195 | | | $ | 4,641,296 | |
| | | | | | | | | |
Yield on Average Interest Earning Assets (1) (5) | | | 6.45 | % | | 11.41 | % | | 4.11 | % | | 6.52 | % |
Average Financing Cost (1) (6) | | | (5.14) | % | | — | | | (6.24) | % | | (5.21) | % |
Net Interest Spread (1) (7) | | | 1.31 | % | | 11.41 | % | | (2.13) | % | | 1.31 | % |
Nine Months Ended September 30, 2023
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Single-Family (8) | | Multi-
Family | | Corporate/Other | | Total |
Adjusted Interest Income (1) (2) | | | $ | 150,535 | | | $ | 11,036 | | | $ | 62 | | | $ | 161,633 | |
Adjusted Interest Expense (1) | | | (97,224) | | | — | | | (9,287) | | | (106,511) | |
Adjusted Net Interest Income (Loss) (1) | | | $ | 53,311 | | | $ | 11,036 | | | $ | (9,225) | | | $ | 55,122 | |
| | | | | | | | | |
Average Interest Earning Assets (3) | | | $ | 3,399,554 | | | $ | 127,746 | | | $ | 1,352 | | | $ | 3,528,652 | |
Average Interest Bearing Liabilities (4) | | | $ | 2,406,727 | | | $ | — | | | $ | 190,736 | | | $ | 2,597,463 | |
| | | | | | | | | |
Yield on Average Interest Earning Assets (1) (5) | | | 5.90 | % | | 11.52 | % | | 6.12 | % | | 6.11 | % |
Average Financing Cost (1) (6) | | | (5.40) | % | | — | | | (6.51) | % | | (5.48) | % |
Net Interest Spread (1) (7) | | | 0.50 | % | | 11.52 | % | | (0.39) | % | | 0.63 | % |
(1)Represents a non-GAAP financial measure.
(2)Includes interest income earned on cash accounts held by the Company.
(3)Average Interest Earning Assets for the respective periods include residential loans, multi-family loans and investment securities and exclude all Consolidated SLST assets other than those securities owned by the Company. Average Interest Earning Assets is calculated based on the daily average amortized cost for the respective periods.
(4)Average Interest Bearing Liabilities for the respective periods include repurchase agreements, residential loan securitization and non-Agency RMBS re-securitization CDOs, senior unsecured notes and subordinated debentures and exclude Consolidated SLST CDOs and mortgages payable on real estate as the Company does not directly incur interest expense on these liabilities that are consolidated for GAAP purposes. Average Interest Bearing Liabilities is calculated based on the daily average outstanding balance for the respective periods.
(5)Yield on Average Interest Earning Assets is calculated by dividing our annualized adjusted interest income relating to our portfolio of interest earning assets by our Average Interest Earning Assets for the respective periods.
(6)Average Financing Cost is calculated by dividing our annualized adjusted interest expense by our Average Interest Bearing Liabilities.
(7)Net Interest Spread is the difference between our Yield on Average Interest Earning Assets and our Average Financing Cost.
(8)The Company has determined it is the primary beneficiary of Consolidated SLST and has consolidated Consolidated SLST into the Company's condensed consolidated financial statements. Our GAAP interest income includes interest income recognized on the underlying seasoned re-performing and non-performing residential loans held in Consolidated SLST. Our GAAP interest expense includes interest expense recognized on the Consolidated SLST CDOs that permanently finance the residential loans in Consolidated SLST and are not owned by the Company. We calculate adjusted interest income by reducing our GAAP interest income by the interest expense recognized on the Consolidated SLST CDOs and adjusted interest expense by excluding, among other things, the interest expense recognized on the Consolidated SLST CDOs, thus only including the interest income earned by the SLST securities that are actually owned by the Company in adjusted net interest income.
For the three- and nine- month periods, adjusted interest income increased by approximately $41.7 million and $101.5 million, respectively, primarily due to an increase in interest earnings assets driven by increased investment in Agency RMBS since September 30, 2023. Yield on average interest earnings assets also increased, primarily due to an increase in the average coupon rate of our single-family portfolio driven by our continued investment in higher yielding business purpose loans.
Adjusted interest expense increased for the three- and nine- month periods by approximately $33.7 million and $74.4 million, respectively, as a result of increased repurchase agreement financing obtained on investment securities. Average financing cost increased for the three-month period primarily due to base interest rate movements. Average financing cost decreased for the nine-month period primarily due to the benefit of our in-the-money interest rate swaps.
A reconciliation of GAAP interest income to adjusted interest income, GAAP interest expense to adjusted interest expense and GAAP total net interest income (loss) to adjusted net interest income (loss) for the three and nine months ended September 30, 2024 and 2023, respectively, is presented below (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2024 | | 2023 |
| Single-Family | | Multi-Family | | Corporate/Other | | Total | | Single-Family | | Multi-Family | | Corporate/Other | | Total |
GAAP interest income | $ | 104,608 | | | $ | 2,699 | | | $ | 1,054 | | | $ | 108,361 | | | $ | 61,346 | | | $ | 3,849 | | | $ | — | | | $ | 65,195 | |
| GAAP interest expense | (81,214) | | | — | | | (6,910) | | | (88,124) | | | (44,101) | | | — | | | (4,305) | | | (48,406) | |
GAAP total net interest income (loss) | $ | 23,394 | | | $ | 2,699 | | | $ | (5,856) | | | $ | 20,237 | | | $ | 17,245 | | | $ | 3,849 | | | $ | (4,305) | | | $ | 16,789 | |
| | | | | | | | | | | | | | | |
| GAAP interest income | $ | 104,608 | | | $ | 2,699 | | | $ | 1,054 | | | $ | 108,361 | | | $ | 61,346 | | | $ | 3,849 | | | $ | — | | | $ | 65,195 | |
| Adjusted for: | | | | | | | | | | | | | | | |
| Consolidated SLST CDO interest expense | (7,375) | | | — | | | — | | | (7,375) | | | (5,957) | | | — | | | — | | | (5,957) | |
| Adjusted interest income | $ | 97,233 | | | $ | 2,699 | | | $ | 1,054 | | | $ | 100,986 | | | $ | 55,389 | | | $ | 3,849 | | | $ | — | | | $ | 59,238 | |
| | | | | | | | | | | | | | | |
| GAAP interest expense | $ | (81,214) | | | $ | — | | | $ | (6,910) | | | $ | (88,124) | | | $ | (44,101) | | | $ | — | | | $ | (4,305) | | | $ | (48,406) | |
| Adjusted for: | | | | | | | | | | | | | | | |
| Consolidated SLST CDO interest expense | 7,375 | | | — | | | — | | | 7,375 | | | 5,957 | | | — | | | — | | | 5,957 | |
| Net interest benefit of interest rate swaps | 7,542 | | | — | | | 911 | | | 8,453 | | | 2,994 | | | — | | | 872 | | | 3,866 | |
| Adjusted interest expense | $ | (66,297) | | | $ | — | | | $ | (5,999) | | | $ | (72,296) | | | $ | (35,150) | | | $ | — | | | $ | (3,433) | | | $ | (38,583) | |
| | | | | | | | | | | | | | | |
Adjusted net interest income (loss) (1) | $ | 30,936 | | | $ | 2,699 | | | $ | (4,945) | | | $ | 28,690 | | | $ | 20,239 | | | $ | 3,849 | | | $ | (3,433) | | | $ | 20,655 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2024 | | 2023 |
| Single-Family | | Multi-Family | | Corporate/Other | | Total | | Single-Family | | Multi-Family | | Corporate/Other | | Total |
GAAP interest income | $ | 273,894 | | | $ | 8,072 | | | $ | 1,061 | | | $ | 283,027 | | | $ | 168,773 | | | $ | 11,036 | | | $ | 62 | | | $ | 179,871 | |
| GAAP interest expense | (210,387) | | | — | | | (15,496) | | | (225,883) | | | (119,402) | | | — | | | (10,743) | | | (130,145) | |
GAAP total net interest income (loss) | $ | 63,507 | | | $ | 8,072 | | | $ | (14,435) | | | $ | 57,144 | | | $ | 49,371 | | | $ | 11,036 | | | $ | (10,681) | | | $ | 49,726 | |
| | | | | | | | | | | | | | | |
| GAAP interest income | $ | 273,894 | | | $ | 8,072 | | | $ | 1,061 | | | $ | 283,027 | | | $ | 168,773 | | | $ | 11,036 | | | $ | 62 | | | $ | 179,871 | |
| Adjusted for: | | | | | | | | | | | | | | | |
| Consolidated SLST CDO interest expense | (19,928) | | | — | | | — | | | (19,928) | | | (18,238) | | | — | | | — | | | (18,238) | |
| Adjusted interest income | $ | 253,966 | | | $ | 8,072 | | | $ | 1,061 | | | $ | 263,099 | | | $ | 150,535 | | | $ | 11,036 | | | $ | 62 | | | $ | 161,633 | |
| | | | | | | | | | | | | | | |
| GAAP interest expense | $ | (210,387) | | | $ | — | | | $ | (15,496) | | | $ | (225,883) | | | $ | (119,402) | | | $ | — | | | $ | (10,743) | | | $ | (130,145) | |
| Adjusted for: | | | | | | | | | | | | | | | |
| Consolidated SLST CDO interest expense | 19,928 | | | — | | | — | | | 19,928 | | | 18,238 | | | — | | | — | | | 18,238 | |
| Net interest benefit of interest rate swaps | 22,350 | | | — | | | 2,725 | | | 25,075 | | | 3,940 | | | — | | | 1,456 | | | 5,396 | |
| Adjusted interest expense | $ | (168,109) | | | $ | — | | | $ | (12,771) | | | $ | (180,880) | | | $ | (97,224) | | | $ | — | | | $ | (9,287) | | | $ | (106,511) | |
| | | | | | | | | | | | | | | |
Adjusted net interest income (loss) (1) | $ | 85,857 | | | $ | 8,072 | | | $ | (11,710) | | | $ | 82,219 | | | $ | 53,311 | | | $ | 11,036 | | | $ | (9,225) | | | $ | 55,122 | |
(1)Adjusted net interest income (loss) is calculated by subtracting adjusted interest expense from adjusted interest income.
Undepreciated Earnings (Loss)
Undepreciated earnings (loss) is a supplemental non-GAAP financial measure defined as GAAP net income (loss) attributable to Company's common stockholders excluding the Company's share in depreciation expense and lease intangible amortization expense, if any, related to operating real estate, net for which an impairment has not been recognized. By excluding these non-cash adjustments from our operating results, we believe that the presentation of undepreciated earnings (loss) provides a consistent measure of our operating performance and useful information to investors to evaluate the effective net return on our portfolio. In addition, we believe that presenting undepreciated earnings (loss) enables our investors to measure, evaluate, and compare our operating performance to that of our peers.
A reconciliation of net income (loss) attributable to Company's common stockholders to undepreciated earnings (loss) for the three and nine months ended September 30, 2024 and 2023, respectively, is presented below (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
Net income (loss) attributable to Company's common stockholders | $ | 32,410 | | | $ | (94,819) | | | $ | (61,957) | | | $ | (121,500) | |
| Add: | | | | | | | |
| Depreciation expense on operating real estate | 2,531 | | | 2,182 | | | 7,585 | | | 6,482 | |
| | | | | | | |
Undepreciated earnings (loss) | $ | 34,941 | | | $ | (92,637) | | | $ | (54,372) | | | $ | (115,018) | |
| | | | | | | |
| Weighted average shares outstanding - basic | 90,582 | | | 90,984 | | | 90,895 | | | 91,163 | |
Undepreciated earnings (loss) per common share | $ | 0.39 | | | $ | (1.02) | | | $ | (0.60) | | | $ | (1.26) | |
Adjusted Book Value Per Common Share
Adjusted book value per common share is a supplemental non-GAAP financial measure calculated by making the following adjustments to GAAP book value: (i) exclude the Company's share of cumulative depreciation and lease intangible amortization expenses related to real estate held at the end of the period for which an impairment has not been recognized, (ii) exclude the cumulative adjustment of redeemable non-controlling interests to estimated redemption value and (iii) adjust our amortized cost liabilities that finance our investment portfolio to fair value.
Our rental property portfolio includes fee simple interests in single-family rental homes and joint venture equity interests in multi-family properties owned by Consolidated Real Estate VIEs. By excluding our share of cumulative non-cash depreciation and amortization expenses related to real estate held at the end of the period for which an impairment has not been recognized, adjusted book value reflects the value, at their undepreciated basis, of our single-family rental properties and joint venture equity investments that the Company has determined to be recoverable at the end of the period.
Additionally, in connection with third party ownership of certain of the non-controlling interests in certain of the Consolidated Real Estate VIEs, we record redeemable non-controlling interests as mezzanine equity on our condensed consolidated balance sheets. The holders of the redeemable non-controlling interests may elect to sell their ownership interests to us at fair value once a year, subject to annual minimum and maximum amount limitations, resulting in an adjustment of the redeemable non-controlling interests to fair value that is accounted for by us as an equity transaction in accordance with GAAP. A key component of the estimation of fair value of the redeemable non-controlling interests is the estimated fair value of the multi-family apartment properties held by the applicable Consolidated Real Estate VIEs. However, because the corresponding real estate assets are not reported at fair value and thus not adjusted to reflect unrealized gains or losses in our condensed consolidated financial statements, the cumulative adjustment of the redeemable non-controlling interests to fair value directly affects our GAAP book value. By excluding the cumulative adjustment of redeemable non-controlling interests to estimated redemption value, adjusted book value more closely aligns the accounting treatment applied to these real estate assets and reflects our joint venture equity investment at its undepreciated basis.
The substantial majority of our remaining assets are financial or similar instruments that are carried at fair value in accordance with the fair value option in our condensed consolidated financial statements. However, unlike our use of the fair value option for the assets in our investment portfolio, certain CDOs issued by our residential loan securitizations, certain senior unsecured notes and subordinated debentures that finance our investment portfolio assets are carried at amortized cost in our condensed consolidated financial statements. By adjusting these financing instruments to fair value, adjusted book value reflects the Company's net equity in investments on a comparable fair value basis.
We believe that the presentation of adjusted book value per common share provides a useful measure for investors and us as it provides a consistent measure of our value, allows management to effectively consider our financial position and facilitates the comparison of our financial performance to that of our peers.
A reconciliation of GAAP book value to adjusted book value and calculation of adjusted book value per common share as of September 30, 2024 and December 31, 2023, respectively, is presented below (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| September 30, 2024 | | | | | | | | December 31, 2023 |
| Company's stockholders' equity | $ | 1,444,147 | | | | | | | | | $ | 1,579,612 | |
| Preferred stock liquidation preference | (554,110) | | | | | | | | | (554,110) | |
| GAAP book value | 890,037 | | | | | | | | | 1,025,502 | |
| Add: | | | | | | | | | |
Cumulative depreciation expense on real estate (1) | 19,180 | | | | | | | | | 21,801 | |
Cumulative amortization of lease intangibles related to real estate (1) | 4,903 | | | | | | | | | 14,897 | |
| Cumulative adjustment of redeemable non-controlling interest to estimated redemption value | 48,282 | | | | | | | | | 30,062 | |
| Adjustment of amortized cost liabilities to fair value | 21,961 | | | | | | | | | 55,271 | |
| Adjusted book value | $ | 984,363 | | | | | | | | | $ | 1,147,533 | |
| | | | | | | | | |
| Common shares outstanding | 90,579 | | | | | | | | | 90,675 | |
GAAP book value per common share (2) | $ | 9.83 | | | | | | | | | $ | 11.31 | |
Adjusted book value per common share (3) | $ | 10.87 | | | | | | | | | $ | 12.66 | |
(1)Represents cumulative adjustments for the Company's share of depreciation expense and amortization of lease intangibles related to real estate held as of the end of the period presented for which an impairment has not been recognized.
(2)GAAP book value per common share is calculated using the GAAP book value and the common shares outstanding for the periods indicated.
(3)Adjusted book value per common share is calculated using the adjusted book value and the common shares outstanding for the periods indicated.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as of September 30, 2024 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income (loss) at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income (loss) during the periods presented.
Changes in the estimates and assumptions could have a material effect on these consolidated financial statements. Accounting policies and estimates related to specific components of our consolidated financial statements are disclosed in the notes to our consolidated financial statements. There have been no material changes to our critical accounting estimates as previously described under Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. For a discussion of our critical accounting estimates and the possible effects of changes in estimates on our consolidated financial statements, please see Part II., Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements and the possible effects on our consolidated financial statements is included in “Note 2 — Summary of Significant Accounting Policies” included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Balance Sheet Analysis
As of September 30, 2024, we had approximately $8.9 billion of total assets. Included in this amount is approximately $1.0 billion of assets held in Consolidated SLST and $0.8 billion of assets related to Consolidated Real Estate VIEs, both of which we consolidate in accordance with GAAP. As of December 31, 2023, we had approximately $7.4 billion of total assets. Included in this amount is approximately $0.8 billion of assets held in Consolidated SLST and $1.5 billion of assets related to Consolidated Real Estate VIEs, both of which we consolidate in accordance with GAAP. For a reconciliation of our actual interests in Consolidated SLST, see “Portfolio Update” above. For a reconciliation of our investments in Consolidated Real Estate VIEs, see “Equity Investments in Multi-Family Entities” below.
Residential Loans
The following table presents the Company’s residential loans, which include acquired residential loans held by the Company and residential loans held in Consolidated SLST, as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | |
| September 30, 2024 | | December 31, 2023 |
| Acquired residential loans | $ | 2,768,561 | | | $ | 2,329,443 | |
| Consolidated SLST | 1,008,583 | | | 754,860 | |
| Total | $ | 3,777,144 | | | $ | 3,084,303 | |
Acquired Residential Loans
The Company’s acquired residential loans, including performing, re-performing, and non-performing residential loans and business purpose loans, are presented at fair value on our condensed consolidated balance sheets. Subsequent changes in fair value are reported in current period earnings and presented in unrealized gains (losses), net on the Company’s condensed consolidated statements of operations.
The following tables detail our acquired residential loans by strategy at September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 |
| Number of Loans | | Unpaid Principal | | Fair Value | | Weighted Average FICO | | Weighted Average LTV (1) | | Weighted Average Coupon |
| Re-performing residential loan strategy | 3,534 | | | $ | 469,526 | | | $ | 460,815 | | | 637 | | 54% | | 5.2% |
| Performing residential loan strategy | 2,671 | | | 615,689 | | | 548,786 | | | 740 | | 59% | | 4.2% |
| Business purpose bridge loan strategy | 2,205 | | | 1,179,617 | | | 1,157,493 | | | 742 | | 64% | | 10.4% |
| Business purpose rental loan strategy | 2,563 | | | 603,515 | | | 601,467 | | | 744 | | 72% | | 6.7% |
| Total | 10,973 | | | $ | 2,868,347 | | | $ | 2,768,561 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Number of Loans | | Unpaid Principal | | Fair Value | | Weighted Average FICO | | Weighted Average LTV (1) | | Weighted Average Coupon |
| Re-performing residential loan strategy | 4,687 | | | $ | 626,316 | | | $ | 601,239 | | | 630 | | 60% | | 5.1% |
| Performing residential loan strategy | 2,803 | | | 642,320 | | | 548,736 | | | 717 | | 62% | | 4.0% |
| Business purpose bridge loan strategy | 1,720 | | | 919,990 | | | 896,988 | | | 735 | | 65% | | 9.6% |
| Business purpose rental loan strategy | 1,111 | | | 311,663 | | | 282,480 | | | 749 | | 68% | | 5.1% |
| Total | 10,321 | | | $ | 2,500,289 | | | $ | 2,329,443 | | | | | | | |
(1)For second mortgages (included in performing residential loan strategy), the Company calculates the combined loan-to-value ("LTV"). For business purpose bridge loans, the Company calculates LTV as the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan.
Characteristics of Our Acquired Residential Loans:
| | | | | | | | | | | |
Loan to Value at Purchase (1) | September 30, 2024 | | December 31, 2023 |
| 50% or less | 9.6 | % | | 13.6 | % |
| >50% - 60% | 10.5 | % | | 10.9 | % |
| >60% - 70% | 22.3 | % | | 22.4 | % |
| >70% - 80% | 35.9 | % | | 29.5 | % |
| >80% - 90% | 12.6 | % | | 11.8 | % |
| >90% - 100% | 4.8 | % | | 6.0 | % |
| >100% | 4.3 | % | | 5.8 | % |
| Total | 100.0 | % | | 100.0 | % |
(1)For second mortgages, the Company calculates the combined LTV. For business purpose bridge loans, the Company calculates LTV as the ratio of the maximum unpaid principal balance of the loan, including unfunded commitments, to the estimated “after repaired” value of the collateral securing the related loan.
| | | | | | | | | | | |
| FICO Scores at Purchase | September 30, 2024 | | December 31, 2023 |
| 550 or less | 6.0 | % | | 9.1 | % |
| 551 to 600 | 5.2 | % | | 7.9 | % |
| 601 to 650 | 5.7 | % | | 8.3 | % |
| 651 to 700 | 15.2 | % | | 15.6 | % |
| 701 to 750 | 26.4 | % | | 24.0 | % |
| 751 to 800 | 33.4 | % | | 28.0 | % |
| 801 and over | 8.1 | % | | 7.1 | % |
| Total | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | |
| Current Coupon | September 30, 2024 | | December 31, 2023 |
| 3.00% or less | 5.8 | % | | 7.6 | % |
| 3.01% - 4.00% | 12.6 | % | | 16.5 | % |
| 4.01% - 5.00% | 15.3 | % | | 20.9 | % |
| 5.01% - 6.00% | 6.4 | % | | 9.3 | % |
| 6.01% - 7.00% | 5.1 | % | | 7.2 | % |
| 7.01% - 8.00% | 9.4 | % | | 8.1 | % |
| 8.01% and over | 45.4 | % | | 30.4 | % |
| Total | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | |
| Delinquency Status | September 30, 2024 | | December 31, 2023 |
| Current | 91.0 | % | | 88.0 | % |
| 31 – 60 days | 1.6 | % | | 2.2 | % |
| 61 – 90 days | 0.9 | % | | 1.0 | % |
| 90+ days | 6.5 | % | | 8.8 | % |
| Total | 100.0 | % | | 100.0 | % |
| | | | | | | | | | | |
| Origination Year | September 30, 2024 | | December 31, 2023 |
| 2007 or earlier | 14.8 | % | | 22.4 | % |
| 2008 - 2016 | 3.0 | % | | 4.4 | % |
2017 - 2020 | 12.2 | % | | 15.7 | % |
2021 | 12.1 | % | | 19.3 | % |
2022 | 13.0 | % | | 21.4 | % |
2023 | 11.4 | % | | 16.8 | % |
2024 | 33.5 | % | | — | % |
| Total | 100.0 | % | | 100.0 | % |
As of September 30, 2024 and December 31, 2023, the Company had an investment in an entity that originates residential loans. The Company purchased $30.2 million and $137.6 million of residential loans from the entity during the three and nine months ended September 30, 2024, respectively, and $15.3 million and $55.2 million of residential loans from the entity during the three and nine months ended September 30, 2023, respectively.
Consolidated SLST
The Company owns first loss subordinated securities and certain IOs issued by Freddie Mac-sponsored residential loan securitizations. In accordance with GAAP, the Company has consolidated the underlying seasoned re-performing and non-performing residential loans of the securitizations and the CDOs issued to permanently finance these residential loans, representing Consolidated SLST.
During the nine months ended September 30, 2024, the Company invested in subordinated securities issued by a Freddie Mac-sponsored residential loan securitization, resulting in the initial consolidation of $285.1 million of residential loans and $275.2 million of CDOs in the VIE. Our investment in Consolidated SLST as of September 30, 2024 and December 31, 2023 was limited to the RMBS comprised of first loss subordinated securities and certain IOs issued by the respective securitizations with an aggregate net carrying value of $157.5 million and $157.2 million, respectively. For more information on investment securities held by the Company within Consolidated SLST, refer to the "Investment Securities" section below.
The following table details the loan characteristics of the underlying residential loans that back our first loss subordinated securities issued by Consolidated SLST as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands, except current average loan size):
| | | | | | | | | | | |
| | | |
| September 30, 2024 | | December 31, 2023 |
| Current fair value | $ | 1,008,583 | | | $ | 754,860 | |
| Current unpaid principal balance | $ | 1,133,826 | | | $ | 892,546 | |
| Number of loans | 7,373 | | | 5,813 | |
| Current average loan size | $ | 153,781 | | | $ | 153,543 | |
| Weighted average original loan term (in months) at purchase | 347 | | | 352 | |
| Weighted average LTV at purchase | 62 | % | | 68 | % |
| Weighted average credit score at purchase | 769 | | | 701 | |
| | | |
| Current Coupon: | | | |
| 3.00% or less | 5.1 | % | | 2.5 | % |
| 3.01% – 4.00% | 35.6 | % | | 38.5 | % |
| 4.01% – 5.00% | 40.5 | % | | 39.5 | % |
| 5.01% – 6.00% | 11.1 | % | | 11.8 | % |
| 6.01% and over | 7.7 | % | | 7.7 | % |
| | | |
| Delinquency Status: | | | |
| Current | 69.6 | % | | 72.6 | % |
| 31 - 60 | 13.9 | % | | 12.9 | % |
| 61 - 90 | 6.2 | % | | 5.0 | % |
| 90+ | 10.3 | % | | 9.5 | % |
| | | |
| Origination Year: | | | |
| 2005 or earlier | 27.4 | % | | 31.1 | % |
| 2006 | 14.4 | % | | 15.7 | % |
| 2007 | 19.8 | % | | 21.5 | % |
| 2008 or later | 38.4 | % | | 31.7 | % |
| | | |
| Geographic state concentration (greater than 5.0%): | | | |
| California | 11.6 | % | | 10.7 | % |
New York | 10.7 | % | | 10.0 | % |
Florida | 9.1 | % | | 10.3 | % |
| New Jersey | 6.7 | % | | 7.6 | % |
| Illinois | 6.4 | % | | 7.2 | % |
Residential Loans, Real Estate Owned and Single-Family Rental Property Financing
Repurchase Agreements
As of September 30, 2024, the Company had repurchase agreements with six third-party financial institutions to finance residential loans, real estate owned and single-family rental properties. As of September 30, 2024, the Company's only repurchase agreement exposure where the amount of collateral at risk was in excess of 5% of the Company's stockholders’ equity was to Atlas SP at 6.84%. The amount at risk is defined as the fair value of assets pledged as collateral to the financing arrangement in excess of the financing arrangement liability.
The following table presents detailed information about these repurchase agreements and associated assets pledged as collateral at September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maximum Aggregate Uncommitted Principal Amount | | Outstanding Repurchase Agreements (1) | | Net Deferred Finance Costs (2) | | Carrying Value of Repurchase Agreements | | Carrying Value of Assets Pledged (3) | | Weighted Average Rate | | Weighted Average Months to Maturity (4) |
| September 30, 2024 | $ | 2,775,000 | | | $ | 566,621 | | | $ | (1,103) | | | $ | 565,518 | | | $ | 750,346 | | | 7.19 | % | | 6.39 |
| December 31, 2023 | $ | 2,225,000 | | | $ | 611,055 | | | $ | (2,005) | | | $ | 609,050 | | | $ | 805,082 | | | 7.87 | % | | 13.89 |
(1)Includes non-mark-to-market repurchase agreements with an aggregate outstanding balance of $39.8 million, a weighted average rate of 7.95%, and weighted average months to maturity of 6 months as of September 30, 2024. Includes non-mark-to-market repurchase agreements with an aggregate outstanding balance of $179.1 million, a weighted average rate of 8.19%, and weighted average months to maturity of 14 months as of December 31, 2023.
(2)Costs related to the repurchase agreements which include commitment, underwriting, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets and are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.
(3)Includes residential loans and real estate owned with an aggregate carrying value of $610.5 million and single-family rental properties with a net carrying value of $139.9 million as of September 30, 2024. Includes residential loans with an aggregate fair value of $658.3 million and single-family rental properties with a net carrying value of $146.7 million as of December 31, 2023.
(4)The Company expects to roll outstanding amounts under these repurchase agreements into new repurchase agreements or other financings, or to repay outstanding amounts, prior to or at maturity.
The following table details the quarterly average balance, ending balance and maximum balance at any month-end during each quarter in 2024, 2023 and 2022 for our repurchase agreements secured by residential loans and single-family rental properties (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Quarterly Average
Balance | | End of Quarter
Balance | | Maximum Balance
at any Month-End |
| September 30, 2024 | | $ | 656,976 | | | $ | 566,621 | | | $ | 812,828 | |
| June 30, 2024 | | 521,269 | | | 505,542 | | | 576,119 | |
| March 31, 2024 | | 437,826 | | | 456,038 | | | 456,038 | |
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| December 31, 2023 | | 559,118 | | | 611,055 | | | 611,055 | |
| September 30, 2023 | | 469,393 | | | 505,477 | | | 505,477 | |
| June 30, 2023 | | 524,264 | | | 481,947 | | | 579,475 | |
| March 31, 2023 | | 579,271 | | | 562,371 | | | 609,885 | |
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| December 31, 2022 | | 833,517 | | | 688,487 | | | 1,076,747 | |
| September 30, 2022 | | 1,324,819 | | | 1,163,408 | | | 1,554,993 | |
| June 30, 2022 | | 1,386,714 | | | 1,566,926 | | | 1,566,926 | |
| March 31, 2022 | | 682,867 | | | 783,168 | | | 783,168 | |
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Collateralized Debt Obligations
Included in our portfolio are residential loans that are pledged as collateral for CDOs issued by the Company or by Consolidated SLST. The Company had a net investment in Consolidated SLST and other residential loan securitizations of $158.8 million and $296.2 million, respectively, as of September 30, 2024. As of December 31, 2023, the Company had a net investment in Consolidated SLST and other residential loan securitizations of $158.4 million and $315.2 million, respectively.
The following tables present a summary of Consolidated SLST CDOs and CDOs issued by the Company's residential loan securitizations as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2024 |
| | Outstanding Face Amount | | Carrying Value | | Weighted Average Interest Rate (1)(2) | | Stated Maturity (3) |
Consolidated SLST (4) (5) | | $ | 884,509 | | | $ | 845,811 | | | 3.64 | % | | 2059 - 2064 |
Residential loan securitizations at fair value (4) | | $ | 994,220 | | | $ | 981,779 | | | 5.72 | % | | 2029 - 2068 |
| Residential loan securitizations at amortized cost, net | | $ | 912,260 | | | $ | 902,038 | | | 4.34 | % | | 2027 - 2062 |
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| | December 31, 2023 |
| | Outstanding Face Amount | | Carrying Value | | Weighted Average Interest Rate (1) | | Stated Maturity (3) |
Consolidated SLST (4) | | $ | 652,933 | | | $ | 593,737 | | | 2.75 | % | | 2059 |
| Residential loan securitizations at amortized cost, net | | $ | 1,292,015 | | | $ | 1,276,780 | | | 4.00 | % | | 2026 - 2062 |
(1)Weighted average interest rate is calculated using the outstanding face amount and stated interest rate of notes issued by the securitization and not owned by the Company.
(2)Certain of the Company's CDOs contain interest rate step-up features whereby the interest rate increases if the outstanding notes are not redeemed by expected redemption dates, as defined in the respective governing documents. The following table presents a summary of CDO interest rate step-up features as of September 30, 2024 (dollar amounts in thousands):
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| Outstanding Balance | | Step-Up | | Step-Up Date | | Additional Step-Up | | | | Additional Step-Up Date |
| $ | 194,836 | | | 3.00% | | July 2025 | | 1.00% | | | | July 2026 |
| $ | 1,149,882 | | | 1.00%, 1.50% or 2.00% | | January 2025 - March 2027 | | N/A | | | | N/A |
(3)The actual maturity of the Company's CDOs are primarily determined by the rate of principal prepayments on the assets of the issuing entity. The CDOs are also subject to redemption prior to the stated maturity according to the terms of the respective governing documents. As a result, the actual maturity of the CDOs may occur earlier than the stated maturity.
(4)The Company has elected the fair value option for CDOs issued by Consolidated SLST and residential loan securitizations completed after January 1, 2024 (see Note 16). See Note 7 for unrealized gains or losses recognized on CDOs issued by Consolidated SLST. For the three and nine months ended September 30, 2024, the Company recognized $18.8 million and $17.3 million in net unrealized losses, respectively, on residential loan securitizations at fair value, which are included in unrealized gains (losses), net on the accompanying condensed consolidated statements of operations.
(5)During the nine months ended September 30, 2024, the Company invested in subordinated securities issued by a Freddie Mac-sponsored residential loan securitization, resulting in the initial consolidation of $285.1 million of residential loans and $275.2 million of CDOs in the VIE.
Investment Securities
At September 30, 2024, our investment securities portfolio included Agency RMBS, non-Agency RMBS and U.S. Treasury securities, which are classified as investment securities available for sale. Our investment securities also include first loss subordinated securities and certain IOs issued by Consolidated SLST. At September 30, 2024, we had no investment securities in a single issuer or entity that had an aggregate book value in excess of 5% of our total assets. The increase in the carrying value of our investment securities as of September 30, 2024 as compared to December 31, 2023 is primarily due to purchases of Agency RMBS, non-Agency RMBS and U.S. Treasury securities and an increase in the fair value of a number of our investment securities during the period.
The following tables summarize our investment securities portfolio as of September 30, 2024 and December 31, 2023 (dollar amounts in thousands):
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| September 30, 2024 |
| | | | | Unrealized | | | | Weighted Average | | |
| Investment Securities | Current Par Value | | Amortized Cost | | Gains | | Losses | | Fair Value | | Coupon (1) | | Yield (2) | | Outstanding Repurchase Agreements |
Available for Sale (“AFS”) | | | | | | | | | | | | | | | |
Agency RMBS | | | | | | | | | | | | | | | |
Fixed rate | $ | 2,699,210 | | | $ | 2,705,816 | | | $ | 49,119 | | | $ | (215) | | | $ | 2,754,720 | | | 5.86 | % | | 5.76 | % | | $ | 2,461,995 | |
Adjustable rate | 136,998 | | | 135,430 | | | 2,892 | | | — | | | 138,322 | | | 5.47 | % | | 5.51 | % | | 131,752 | |
IO | 1,302,584 | | | 85,357 | | | 2,526 | | | (12,959) | | | 74,924 | | | 0.78 | % | | 12.54 | % | | 44,713 | |
Total Agency RMBS | 4,138,792 | | | 2,926,603 | | | 54,537 | | | (13,174) | | | 2,967,966 | | | 4.17 | % | | 5.93 | % | | 2,638,460 | |
| Non-Agency RMBS | | | | | | | | | | | | | | | |
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Senior | 40,284 | | | 40,284 | | | 197 | | | — | | | 40,481 | | | 8.07 | % | | 8.03 | % | | 29,105 | |
| Subordinated | 11,836 | | | 11,190 | | | 65 | | | (2,836) | | | 8,419 | | | 4.07 | % | | 4.72 | % | | 2,940 | |
| IO | 354,368 | | | 13,524 | | | 5,792 | | | — | | | 19,316 | | | 1.51 | % | | 28.86 | % | | — | |
| Total Non-Agency RMBS | 406,488 | | | 64,998 | | | 6,054 | | | (2,836) | | | 68,216 | | | 1.88 | % | | 14.74 | % | | 32,045 | |
U.S. Treasury securities | 344,572 | | | 352,829 | | | 678 | | | (4,419) | | | 349,088 | | | 4.30 | % | | 4.08 | % | | 352,940 | |
| Total - AFS | $ | 4,889,852 | | | 3,344,430 | | | 61,269 | | | (20,429) | | | 3,385,270 | | | 3.94 | % | | 6.04 | % | | 3,023,445 | |
| Consolidated SLST | | | | | | | | | | | | | | | |
| Non-Agency RMBS | | | | | | | | | | | | | | | |
| Subordinated | $ | 247,065 | | | $ | 185,540 | | | $ | 5,146 | | | $ | (47,928) | | | $ | 142,758 | | | 4.57 | % | | 5.14 | % | | $ | 22,152 | |
| IO | 132,339 | | | 15,442 | | | — | | | (704) | | | 14,738 | | | 3.50 | % | | 8.48 | % | | — | |
| Total Non-Agency RMBS | 379,404 | | | 200,982 | | | 5,146 | | | (48,632) | | | 157,496 | | | 4.18 | % | | 5.41 | % | | 22,152 | |
| Total - Consolidated SLST | $ | 379,404 | | | $ | 200,982 | | | $ | 5,146 | | | $ | (48,632) | | | $ | 157,496 | | | 4.18 | % | | 5.41 | % | | $ | 22,152 | |
| Total Investment Securities | $ | 5,269,256 | | | $ | 3,545,412 | | | $ | 66,415 | | | $ | (69,061) | | | $ | 3,542,766 | | | 3.96 | % | | 6.00 | % | | $ | 3,045,597 | |
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| December 31, 2023 | | |
| | | | | Unrealized | | | | Weighted Average | | |
| Investment Securities | Current Par Value | | Amortized Cost | | Gains | | Losses | | Fair Value | | Coupon (1) | | Yield (2) | | Outstanding Repurchase Agreements (3) |
Available for Sale (“AFS”) | | | | | | | | | | | | | | | |
| Agency RMBS | | | | | | | | | | | | | | | |
Fixed rate | $ | 1,756,343 | | | $ | 1,761,138 | | | $ | 21,581 | | | $ | (1,829) | | | $ | 1,780,890 | | | 5.74 | % | | 5.64 | % | | $ | 1,602,695 | |
| Adjustable rate | 149,052 | | | 147,460 | | | 1,741 | | | — | | | 149,201 | | | 5.48 | % | | 5.35 | % | | 137,084 | |
IO | 1,139,828 | | | 52,623 | | | 6,813 | | | (203) | | | 59,233 | | | 0.76 | % | | 14.81 | % | | 31,657 | |
| Total Agency RMBS | 3,045,223 | | | 1,961,221 | | | 30,135 | | | (2,032) | | | 1,989,324 | | | 4.34 | % | | 5.79 | % | | 1,771,436 | |
Non-Agency RMBS | | | | | | | | | | | | | | | |
Senior | 35 | | | 35 | | | — | | | (4) | | | 31 | | | 3.65 | % | | 3.60 | % | | — | |
| Subordinated | 8,164 | | | 7,526 | | | — | | | (4,281) | | | 3,245 | | | 4.61 | % | | 7.39 | % | | — | |
| IO | 375,563 | | | 14,571 | | | 6,646 | | | — | | | 21,217 | | | 1.63 | % | | 27.42 | % | | — | |
| Total Non-Agency RMBS | 383,762 | | | 22,132 | | | 6,646 | | | (4,285) | | | 24,493 | | | 1.70 | % | | 20.27 | % | | — | |
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| Total - AFS | $ | 3,428,985 | | | $ | 1,983,353 | | | $ | 36,781 | | | $ | (6,317) | | | $ | 2,013,817 | | | 3.64 | % | | 6.20 | % | | $ | 1,771,436 | |
| Consolidated SLST | | | | | | | | | | | | | | | |
| Non-Agency RMBS | | | | | | | | | | | | | | | |
| Subordinated | $ | 238,017 | | | $ | 189,962 | | | $ | — | | | $ | (49,684) | | | $ | 140,278 | | | 4.44 | % | | 4.01 | % | | $ | 55,881 | |
| IO | 139,914 | | | 17,937 | | | — | | | (1,061) | | | 16,876 | | | 3.50 | % | | 7.43 | % | | — | |
| Total Non-Agency RMBS | 377,931 | | | 207,899 | | | — | | | (50,745) | | | 157,154 | | | 4.09 | % | | 4.32 | % | | 55,881 | |
| Total - Consolidated SLST | $ | 377,931 | | | $ | 207,899 | | | $ | — | | | $ | (50,745) | | | $ | 157,154 | | | 4.09 | % | | 4.32 | % | | $ | 55,881 | |
| Total Investment Securities | $ | 3,806,916 | | | $ | 2,191,252 | | | $ | 36,781 | | | $ | (57,062) | | | $ | 2,170,971 | | | 3.74 | % | | 5.80 | % | | $ | 1,827,317 | |
(1)Our weighted average coupon was calculated by dividing our annualized coupon income by our weighted average current par value for the respective periods.
(2)Our weighted average yield was calculated by dividing our annualized interest income by our weighted average amortized cost for the respective periods.
(3)Outstanding repurchase agreements as of December 31, 2023 do not include $34.7 million of repurchase agreement financing for CDOs repurchased from our residential loan securitizations. Repurchased CDOs are eliminated in consolidation in accordance with GAAP.
As of September 30, 2024, Agency RMBS with a fair value of $33.9 million were pledged as initial margin for outstanding interest rate swaps.
As of September 30, 2024, Consolidated SLST subordinated bonds with a fair value of $117.4 million were held in a non-Agency RMBS re-securitization (see “Investment Securities Financing—Collateralized Debt Obligations” below).
Investment Securities Financing
Repurchase Agreements
As of September 30, 2024, the Company had $3.0 billion outstanding under repurchase agreements with third-party financial institutions to fund a portion of its investment securities available for sale and certain securities owned in Consolidated SLST. These repurchase agreements are short-term financings that bear interest rates typically based on a spread to SOFR and are secured by the investment securities which they finance. Upon entering into a financing transaction, our counterparties negotiate a “haircut”, which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will advance to us. The size of the haircut represents the counterparty’s perceived risk associated with holding the investment securities as collateral. The haircut provides counterparties with a cushion for daily market value movements that reduce the need for margin calls or margins to be returned as normal daily changes in investment security market values occur. The Company expects to roll outstanding amounts under its repurchase agreements into new repurchase agreements or other financings, or to repay outstanding amounts, prior to or at maturity.
As of September 30, 2024, the Company had no repurchase agreement exposure where the amount of investment securities at risk was in excess of 5% of the Company's stockholders’ equity. As of September 30, 2024, the weighted average interest rate for repurchase agreements secured by investment securities was 5.23%.
The following table details the quarterly average balance, ending balance and maximum balance at any month-end during each quarter in 2024, 2023 and 2022 for our repurchase agreements secured by investment securities (dollar amounts in thousands):
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| Quarter Ended | | Quarterly Average
Balance | | End of Quarter
Balance | | Maximum Balance
at any Month-End |
| September 30, 2024 | | $ | 2,772,203 | | | $ | 3,045,597 | | | $ | 3,045,597 | |
| June 30, 2024 | | 2,202,770 | | | 2,447,851 | | | 2,447,851 | |
| March 31, 2024 | | 2,078,041 | | | 2,057,361 | | | 2,126,993 | |
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| December 31, 2023 | | 1,851,577 | | | 1,862,063 | | | 1,870,941 | |
| September 30, 2023 | | 1,184,714 | | | 1,490,996 | | | 1,490,996 | |
| June 30, 2023 | | 492,473 | | | 664,459 | | | 664,459 | |
| March 31, 2023 | | 131,174 | | | 226,778 | | | 226,778 | |
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| December 31, 2022 | | 50,077 | | | 50,077 | | | 50,077 | |
| September 30, 2022 | | 53,159 | | | 53,159 | | | 53,159 | |
| June 30, 2022 | | 132,712 | | | 129,331 | | | 138,301 | |
| March 31, 2022 | | 116,766 | | | 144,852 | | | 144,852 | |
Collateralized Debt Obligations
During the nine months ended September 30, 2024, the Company completed a re-securitization of its investment in certain subordinated securities issued by Consolidated SLST, which we refer to as our non-Agency RMBS re-securitization. The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse, longer-term financing on a portion of its investment in Consolidated SLST. The Company remains economically exposed to the subordinated positions in the portion of Consolidated SLST transferred to the securitization and continues to consolidate Consolidated SLST.
The following table presents a summary of CDOs issued by our non-Agency RMBS re-securitization as of September 30, 2024:
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| | September 30, 2024 |
| | Outstanding Face Amount | | Carrying Value | | Interest Rate (1)(2) | | Stated Maturity (3) |
Non-Agency RMBS re-securitization at fair value (4) | | $ | 72,221 | | | $ | 72,638 | | | 7.38 | % | | 2064 |
(1)Interest rate is calculated using the outstanding face amount and stated interest rate of notes issued by the securitization and not owned by the Company.
(2)The Company's non-Agency RMBS re-securitization CDOs contain an interest rate step-up feature whereby the interest rate increases if the outstanding notes are not redeemed by an expected redemption date, as defined in the governing documents. The following table presents a summary of the interest rate step-up feature as of September 30, 2024 (dollar amounts in thousands):
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| Outstanding Balance | | Step-Up | | Step-Up Date |
| $ | 72,221 | | | 3.00% | | July 2027 |
(3)The actual maturity of the Company's CDOs is primarily determined by the rate of principal prepayments on the assets of the issuing entity. The CDOs are also subject to redemption prior to the stated maturity according to the terms of the governing documents. As a result, the actual maturity of the CDOs may occur earlier than the stated maturity.
(4)The Company has elected the fair value option for CDOs issued by its non-Agency RMBS re-securitization (see Note 16). For the three and nine months ended September 30, 2024, the Company recognized $0.7 million in net unrealized losses on its non-Agency RMBS re-securitization, which are included in unrealized gains (losses), net on the accompanying condensed consolidated statements of operations.
Mezzanine Lending
The Company's Mezzanine Lending strategy may include preferred equity in, and mezzanine loans to, entities that have multi-family real estate assets. A preferred equity investment is an equity investment in the entity that owns the underlying property and mezzanine loans are secured by a pledge of the borrower’s equity ownership in the property. We evaluate our Mezzanine Lending investments for accounting treatment as loans versus equity investments. Mezzanine Lending investments for which the characteristics, facts and circumstances indicate that loan accounting treatment is appropriate are included in multi-family loans on our condensed consolidated balance sheets.
Mezzanine Lending investments where the risks and payment characteristics are equivalent to an equity investment are accounted for using the equity method of accounting and are included in equity investments on our condensed consolidated balance sheets. The Company records its equity in earnings or losses from these Mezzanine Lending investments under the hypothetical liquidation of book value method of accounting due to the structures and the preferences it receives on the distributions from these entities pursuant to the respective agreements. Under this method, the Company recognizes income or loss in each period based on the change in liquidation proceeds it would receive from a hypothetical liquidation of its investment.
During the year ended December 31, 2023, the Company reconsidered its evaluation of its variable interest in a VIE that owned a multi-family apartment community and in which the Company holds a preferred equity investment. The Company determined that it gained the power to direct the activities, and became primary beneficiary, of the VIE and consolidated the VIE into its consolidated financial statements.
During the three months ended September 30, 2024, the Company negotiated a short-term maturity extension on one preferred equity investment that included an increase in preferred return rate to a current market rate. During the nine months ended September 30, 2024, the Company reduced the fair value of one defaulted preferred equity investment to zero as a result of developments with respect to the property, its financing and market conditions. This investment represents 1.6% of the total investment amount of the Mezzanine Lending portfolio. Also during the nine months ended September 30, 2024, the Company evaluated the recoverability of the preferred returns on one preferred equity investment and its preferred equity investment in a Consolidated VIE and ceased further accruals. These investments represent 16.8% of the total investment amount of the Mezzanine Lending portfolio.
The following tables summarize our Mezzanine Lending portfolio as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
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| September 30, 2024 |
| Count | | Fair Value (1) (2) | | Investment Amount (2) | | Weighted Average Preferred Return Rate (3) | | Weighted Average Remaining Life (Years) |
| Preferred equity investments | 19 | | | $ | 186,757 | | | $ | 196,967 | | | 12.75 | % | | 3.7 | |
Preferred equity investment in Consolidated VIE (4) | 1 | | | 16,267 | | | 16,291 | | | 13.82 | % | | 7.3 | |
| Total | 20 | | | $ | 203,024 | | | $ | 213,258 | | | 12.83 | % | | 3.9 | |
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| December 31, 2023 |
| Count | | Fair Value (1) (2) | | Investment Amount (2) | | Weighted Average Preferred Return Rate (3) | | Weighted Average Remaining Life (Years) |
| Preferred equity investments | 21 | | | $ | 200,034 | | | $ | 200,690 | | | 12.40 | % | | 4.2 | |
Preferred equity investment in Consolidated VIE (4) | 1 | | | 11,706 | | | 11,732 | | | 13.50 | % | | 8.0 | |
| Total | 22 | | | $ | 211,740 | | | $ | 212,422 | | | 12.46 | % | | 4.4 | |
(1)Preferred equity investments in the amounts of $87.6 million and $95.8 million are included in multi-family loans on the accompanying condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively. Preferred equity investments in the amounts of $99.1 million and $104.2 million are included in equity investments on the accompanying condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively.
(2)The difference between the fair value and investment amount consists of any unrealized gain or loss.
(3)Based upon investment amount and contractual preferred return rate.
(4)Represents the Company's preferred equity investment in a Consolidated VIE that owns a multi-family apartment community. A reconciliation of our preferred equity investment in the Consolidated VIE to our condensed consolidated financial statements as of September 30, 2024 and December 31, 2023, respectively, is shown below (dollar amounts in thousands):
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| | September 30, 2024 | | December 31, 2023 |
Cash and cash equivalents | | $ | 623 | | | $ | 1,300 | |
Real estate, net | | 53,716 | | | 54,439 | |
Lease intangible, net (a) | | — | | | 2,378 | |
| Other assets | | 5,165 | | | 4,722 | |
| Total assets | | 59,504 | | | 62,839 | |
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Mortgage payable on real estate, net | | 45,118 | | | 45,142 | |
| Other liabilities | | 1,628 | | | 2,403 | |
| Total liabilities | | 46,746 | | | 47,545 | |
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| Non-controlling interest in Consolidated VIE | | (3,509) | | | 3,588 | |
| Preferred equity investment in Consolidated VIE | | $ | 16,267 | | | $ | 11,706 | |
(a)Included in other assets in the accompanying condensed consolidated balance sheets.
Mezzanine Lending Characteristics:
The following tables present characteristics of our Mezzanine Lending portfolio summarized by geographic concentrations of credit risk exceeding 5% of our total investment amount as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
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| | September 30, 2024 | |
| State | | Count | | Investment Amount | | % Total | | Weighted Average Coupon | | Weighted Average LTV (1) | | Weighted Average DSCR (2) | |
| Florida | | 3 | | $ | 53,001 | | | 24.8 | % | | 13.1 | % | | 82 | % | | 0.76x | (3) |
| Texas | | 6 | | 48,524 | | | 22.7 | % | | 12.4 | % | | 84 | % | | 1.09x | |
| Utah | | 1 | | 23,142 | | | 10.9 | % | | 12.0 | % | | 69 | % | | N/A | (4) |
| Arizona | | 1 | | 19,573 | | | 9.2 | % | | 14.0 | % | | 89 | % | | 1.62x | |
| Tennessee | | 1 | | 15,063 | | | 7.1 | % | | 14.0 | % | | 89 | % | | 0.63x | (5) |
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| Other | | 8 | | 53,955 | | | 25.3 | % | | 12.6 | % | | 83 | % | | 1.28x | |
| Total | | 20 | | $ | 213,258 | | | 100.0 | % | | 12.8 | % | | 82 | % | | 1.14x | |
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| | December 31, 2023 | |
| State | | Count | | Investment Amount | | % Total | | Weighted Average Coupon | | Weighted Average LTV (1) | | Weighted Average DSCR (2) | |
| Florida | | 4 | | $ | 55,753 | | | 26.3 | % | | 13.0 | % | | 77 | % | | 1.27x | |
| Texas | | 6 | | 42,854 | | | 20.2 | % | | 11.9 | % | | 92 | % | | 1.21x | |
| Utah | | 1 | | 21,970 | | | 10.3 | % | | 12.0 | % | | 68 | % | | N/A | (4) |
| Arizona | | 1 | | 17,811 | | | 8.4 | % | | 14.0 | % | | 85 | % | | 0.45x | (6) |
| Tennessee | | 1 | | 14,525 | | | 6.8 | % | | 11.0 | % | | 90 | % | | 1.27x | |
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| Other | | 9 | | 59,509 | | | 28.0 | % | | 12.5 | % | | 83 | % | | 1.36x | |
| Total | | 22 | | $ | 212,422 | | | 100.0 | % | | 12.5 | % | | 83 | % | | 1.24x | |
(1)Represents the weighted average LTV utilizing combined senior and mezzanine loans and combined origination appraisal and capital expenditure budget.
(2)Represents the weighted average debt service coverage ratio ("DSCR") of the underlying properties and excludes properties that are subject to a senior construction loan agreement.
(3)DSCR affected by non-recurring expenses during the three months ended September 30, 2024.
(4)Not applicable as the underlying property is subject to a senior construction loan agreement.
(5)DSCR for this property affected by recent senior loan and mezzanine lending modifications.
(6)DSCR for this property affected by low occupancy as of December 31, 2023.
Equity Investments in Multi-Family Entities
The Company owns joint venture equity investments in entities that own multi-family properties. The Company determined that these joint venture entities are VIEs and that the Company is the primary beneficiary of all but two of these VIEs, resulting in consolidation of the VIEs where we are the primary beneficiary, including their assets, liabilities, income and expenses, in our condensed consolidated financial statements in accordance with GAAP. We receive a preferred return and/or pro rata variable distributions from these investments and, in certain cases, management fees based upon property performance. We also will participate in allocation of excess cash upon sale of the multi-family real estate assets.
In September 2022, the Company announced a repositioning of its business through the opportunistic disposition over time of the Company's joint venture equity investments in multi-family properties and reallocation of the returned capital from such investments to its targeted assets. Accordingly, the Company determined that certain joint venture equity investments met the criteria to be classified as held for sale and the assets and liabilities of the respective Consolidated VIEs are included in assets and liabilities of disposal group held for sale on the accompanying condensed consolidated balance sheets as of September 30, 2024 and December 31, 2023. See Note 9 for additional information. The Company's net equity in consolidated joint venture equity investments ("Consolidated JVs") and disposal group held for sale totaled $156.0 million and $236.3 million as of September 30, 2024 and December 31, 2023, respectively.
A reconciliation of our net equity investments in Consolidated JVs and disposal group held for sale, including one preferred equity investment in a Consolidated VIE, to our condensed consolidated financial statements as of September 30, 2024 and December 31, 2023, respectively, is shown below (dollar amounts in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2024 | | December 31, 2023 |
| Cash and cash equivalents | | $ | 6,194 | | | $ | 15,612 | |
Real estate, net (1) | | 610,967 | | | 979,934 | |
Lease intangible, net (2) | | — | | | 2,378 | |
Assets of disposal group held for sale (3) | | 197,665 | | | 426,017 | |
| Other assets | | 21,981 | | | 34,657 | |
| Total assets | | $ | 836,807 | | | $ | 1,458,598 | |
| | | | |
Mortgages payable on real estate, net (4) | | $ | 492,321 | | | $ | 784,421 | |
Liabilities of disposal group held for sale (3) | | 177,869 | | | 386,024 | |
| Other liabilities | | 14,917 | | | 21,797 | |
| Total liabilities | | $ | 685,107 | | | $ | 1,192,242 | |
| | | | |
| Redeemable non-controlling interest in Consolidated VIEs | | $ | 21,826 | | | $ | 28,061 | |
| Less: Cumulative adjustment of redeemable non-controlling interest to estimated redemption value | | (48,282) | | | (30,062) | |
| Non-controlling interest in Consolidated VIEs | | 3,899 | | | 17,150 | |
| Non-controlling interest in disposal group held for sale | | 1,964 | | | 3,178 | |
Net equity investment (5) | | $ | 172,293 | | | $ | 248,029 | |
Less: Net equity in preferred equity investment in Consolidated VIE (6) | | (16,267) | | | (11,706) | |
Net equity investment in Consolidated JVs and disposal group held for sale | | $ | 156,026 | | | $ | 236,323 | |
(1)Includes real estate held for sale in the amount of $23.6 million as of September 30, 2024.
(2)Included in other assets in the accompanying condensed consolidated balance sheets.
(3)See Note 9 in the Notes to Condensed Consolidated Financial Statements for further information regarding our assets and liabilities of disposal group held for sale.
(4)See Note 14 in the Notes to Condensed Consolidated Financial Statements for further information regarding our mortgages payable on real estate.
(5)The Company's net equity investment as of September 30, 2024 consists of $154.5 million of net equity investments in consolidated multi-family properties (including its preferred equity investment in a Consolidated VIE) and $17.8 million of net equity investments in disposal group held for sale. The Company's net equity investment as of December 31, 2023 consists of $211.2 million of net equity investments in consolidated multi-family properties (including its preferred equity investment in a Consolidated VIE) and $36.8 million of net equity investments in disposal group held for sale.
(6)See "Mezzanine Lending" above for description of preferred equity investment in Consolidated VIE.
Unconsolidated Multi-Family Joint Venture Equity Investments
The Company owns equity interests in two additional joint venture entities that own multi-family apartment communities. The Company determined that these joint venture entities are VIEs but that the Company is not the primary beneficiary, resulting in the Company recording its equity investments at fair value. We receive variable distributions from these investments on a pro rata basis and management fees based upon property performance. We also will participate in allocation of excess cash upon sale of the multi-family real estate assets. The following tables summarize our unconsolidated multi-family joint venture equity investments as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | | | | | |
| State | | Property Count | | Ownership Interest | | Fair Value |
| Texas | | 2 | | 70% | | $ | 1,235 | |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | |
| State | | Property Count | | Ownership Interest | | Fair Value |
| Texas | | 2 | | 70% | | $ | 5,720 | |
Joint Venture Equity Investments in Consolidated Multi-Family Properties not in Disposal Group Held for Sale
As of September 30, 2024, the Company's net joint venture equity investments in consolidated multi-family properties not in disposal group held for sale of $138.2 million consists of one joint venture equity investment in a multi-family property and a combined preferred equity and common equity investment in one joint venture entity that do not meet the criteria to be classified as disposal group held for sale. One of the joint venture entities has third-party investors that have the ability to sell their ownership interests to us, at their election once a year subject to annual minimum and maximum amount limitations, and we are obligated to purchase, subject to certain conditions, such interests for cash, representing redeemable non-controlling interests of approximately $21.8 million as of September 30, 2024.
The geographic concentrations in joint venture equity investments in consolidated multi-family properties exceeding 5% of our joint venture equity investments in consolidated multi-family properties not in disposal group held for sale as of September 30, 2024 and December 31, 2023, respectively, are shown below (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2024 | | | | | | | | |
| State | | Property Count | | Total Equity Ownership Interest | | Net Equity Investment (1) | | Percentage of Total Net Equity Investment |
| Texas | | 5 | | 70% | | $ | 46,868 | | | 52.1 | % |
| Florida | | 1 | | 50% | | $ | 14,815 | | | 16.5 | % |
| Kentucky | | 1 | | 70% | | $ | 10,534 | | | 11.7 | % |
| Alabama | | 2 | | 70% - 80% | | $ | 6,655 | | | 7.4 | % |
| Tennessee | | 2 | | 65% - 70% | | $ | 5,122 | | | 5.7 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 | | | | | | | | |
| State | | Property Count | | Total Equity Ownership Interest | | Net Equity Investment (1) | | Percentage of Total Net Equity Investment |
| Florida | | 5 | | 50% - 95% | | $ | 56,607 | | | 33.4 | % |
| Texas | | 5 | | 70% | | $ | 49,727 | | | 29.4 | % |
| Tennessee | | 2 | | 65% - 70% | | $ | 18,131 | | | 10.7 | % |
| South Carolina | | 2 | | 67% - 70% | | $ | 13,561 | | | 8.0 | % |
| Alabama | | 2 | | 70% - 80% | | $ | 11,737 | | | 6.9 | % |
| Kentucky | | 1 | | 70% | | $ | 10,979 | | | 6.5 | % |
(1)Represents our joint venture equity investment in consolidated multi-family properties net of redeemable non-controlling interest at its estimated redemption value.
Property Data for Joint Venture Equity Investments in Multi-Family Properties not in Disposal Group Held for Sale
The following table provides summary information regarding our joint venture equity investments in multi-family properties that are not in disposal group held for sale as of September 30, 2024.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market | | Property Count | | Occupancy % | | Units | | Rent per Unit (1) | | LTV (2) |
| Birmingham, AL | | 1 | | 96.7 | % | | 429 | | $ | 1,343 | | | 75.9 | % |
| Collierville, TN | | 1 | | 93.2 | % | | 324 | | 1,550 | | | 88.5 | % |
| Columbia, SC | | 1 | | 96.7 | % | | 276 | | 1,234 | | | 83.5 | % |
| Dallas, TX | | 2 | | 91.3 | % | | 401 | | 1,911 | | | 83.7 | % |
| Houston, TX | | 2 | | 93.6 | % | | 392 | | 1,205 | | | 77.6 | % |
| Little Rock, AR | | 1 | | 96.5 | % | | 202 | | 1,380 | | | 88.6 | % |
| Louisville, KY | | 1 | | 96.0 | % | | 300 | | 1,471 | | | 82.5 | % |
| Memphis, TN | | 1 | | 65.3 | % | (3) | 242 | | 1,092 | | | 74.7 | % |
| Montgomery, AL | | 1 | | 96.4 | % | | 252 | | 1,054 | | | 76.8 | % |
| San Antonio, TX | | 2 | | 91.4 | % | | 684 | | 1,285 | | | 86.9 | % |
| St Petersburg, FL | | 1 | | 95.4 | % | | 326 | | 2,529 | | | 73.0 | % |
| Webster, TX | | 1 | | 94.3 | % | | 366 | | 968 | | | 78.2 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| Total Count/Average | | 15 | | 92.6 | % | | 4,194 | | | $ | 1,428 | | | 80.7 | % |
(1)Represents average monthly rent per unit.
(2)Represents the weighted average LTV of the underlying properties utilizing combined maximum senior committed mortgage amount and preferred equity balances, if any, and the combined origination appraisal and capital expenditure budget or the most recent appraisal, as applicable.
(3)Property incurred a loss due to fire, affecting occupancy until units are returned to service.
Property Data for Joint Venture Equity Investments in Multi-Family Properties in Disposal Group Held for Sale
The following table provides summary information regarding the multi-family properties in the disposal group held for sale as of September 30, 2024.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market | | Property Count | | Occupancy % | | Units | | Rent per Unit (1) | | LTV (2) |
| Fort Myers, FL | | 1 | | 90.8 | % | | 338 | | $ | 1,569 | | | 77.3 | % |
| Oklahoma City, OK | | 2 | | 90.4 | % | | 957 | | 736 | | | 75.8 | % |
| Tampa, FL | | 1 | | 93.0 | % | | 400 | | 1,610 | | | 77.6 | % |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total Count/Average | | 4 | | 91.1 | % | | 1,695 | | | $ | 1,113 | | | 76.7 | % |
(1)Represents average monthly rent per unit.
(2)Represents the weighted average LTV of the underlying properties utilizing maximum senior committed mortgage amount and combined origination appraisal and capital expenditure budget.
Equity Investment in Entity that Originates Residential Loans
As of September 30, 2024 and December 31, 2023, the Company had an investment in an entity that originates residential loans. The Company accounts for this investment using the equity method and has elected the fair value option. The following table summarizes our ownership interest in the entity that originates residential loans as of September 30, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2024 | | December 31, 2023 |
| | Strategy | | Ownership Interest | | Fair Value | | Ownership Interest | | Fair Value |
Constructive Loans, LLC | | Residential Loans | | 50% | | $ | 46,455 | | | 50% | | $ | 37,154 | |
| Total | | | | | | $ | 46,455 | | | | | $ | 37,154 | |
Derivative Assets and Liabilities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company enters into derivative financial instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, interest rate caps, credit default swaps, futures and options contracts such as options on credit default swap indices, equity index options, swaptions and options on futures. The Company may also pursue forward-settling purchases or sales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced,” or TBAs, purchase options on U.S. Treasury futures or invest in other types of mortgage derivative securities. The Company elected not to apply hedge accounting for its derivative instruments.
The Company and Consolidated Real Estate VIEs are required by lenders on certain repurchase agreement financing and variable-rate mortgages payable on real estate to enter into interest rate cap contracts. These interest rate cap contracts are with a counterparty that involve the receipt of variable-rate amounts from the counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the period these contracts are open, changes in the value of the contract are recognized as gains or losses on derivative instruments.
The Company uses interest rate swaps to hedge the variable cash flows associated with our variable-rate borrowings. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty, based on SOFR, in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its position with regard to its liabilities, the Company may also enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments, based on SOFR, over the life of the interest rate swap without exchange of the underlying notional amount. The variable rate we pay or receive under our swap agreements has the effect of offsetting the repricing characteristics and cash flows of the Company's financing arrangements.
The Company may purchase equity index put options that give the Company the right to sell or buy the underlying index at a specified strike price and U.S. Treasury future contracts that obligate the Company to sell or buy U.S. Treasury securities for future delivery. The Company has purchased credit default swap index contracts under which a counterparty, in exchange for a premium, agrees to compensate the Company for the financial loss associated with the occurrence of a credit event in relation to a notional value of an index. The Company may also purchase credit default swap index options that allow the Company to enter into a fixed rate payor position in the underlying credit default swap index at the agreed strike level.
Debt
The Company's debt as of September 30, 2024 included senior unsecured notes and subordinated debentures.
9.125% Senior Notes due 2029
On June 28, 2024, the Company completed the issuance of $60.0 million in aggregate principal amount of its 9.125% Senior Notes due 2029 (the "9.125% Senior Notes") in an underwritten public offering. The 9.125% Senior Notes were issued at par, bear interest at a rate equal to 9.125% per year and mature on July 1, 2029, unless earlier redeemed.
5.75% Senior Notes due 2026
As of September 30, 2024, the Company had $100.0 million aggregate principal amount of its 5.75% Senior Notes due 2026 (the "5.75% Senior Notes") outstanding. The 5.75% Senior Notes were issued at par and carry deferred charges resulting in a total cost to the Company of approximately 6.64%. The Company's 5.75% Senior Notes, which mature on April 30, 2026, contain various covenants including the maintenance of a minimum net asset value, ratio of unencumbered assets to unsecured indebtedness and senior debt service coverage ratio and limit the amount of leverage the Company may utilize and its ability to transfer the Company’s assets substantially as an entirety or merge into or consolidate with another person.
Subordinated Debentures
As of September 30, 2024, certain of our wholly-owned subsidiaries had trust preferred securities outstanding of $45.0 million with a weighted average interest rate of 8.99% which are due in 2035. The securities are fully guaranteed by us with respect to distributions and amounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of our condensed consolidated balance sheets.
