Invesco Mortgage Capital Inc
For the period ended Sep 30, 2024. Filed Nov 5, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Nov 5, 2024
IVR$5.41-0.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-08.
0001437071-24-000027
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-09-30; filed 2024-11-05.
0001437071-24-000037
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 185 previous paragraphs and 186 current paragraphs.
113 unchanged; 60 reworded; 11 added; 10 removed; 2 previous and 2 current paragraphs rearranged.
Tables are not compared: 32 previous and 33 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (11)
Current report
•U.S. Treasury securities; and
Current report
Interest rates dropped sharply across the maturity spectrum, as investors reacted to potentially slower economic activity signaled by a weakening labor market. The yield on the two-year Treasury decreased 107 basis points to 3.65%, the yield on the five-year Treasury decreased 75 basis points to 3.58% and the yield on the ten-year Treasury finished at 3.80%, down 54 basis points on the quarter. Interest rate volatility increased through August before declining in the wake of the FOMC’s decision to begin easing monetary policy at their September meeting.
Current report
The recent disinflationary trend in economic data suggests that the Federal Reserve may continue to ease monetary policy in the coming months as the need for restrictive monetary policy declines. This easing should lead to a steeper yield curve and lower interest rate volatility, creating a favorable environment for Agency RMBS investments. However, if the disinflationary trend reverses and the labor market and economic growth improve, expectations for monetary policy could shift, posing a near-term risk. Additionally, short-term funding pressures into year end could reduce investor interest in the sector. Despite these near-term risks, we are constructive on the sector, as Agency mortgage performance stands to benefit from normalization of monetary policy given attractive valuations and supportive supply and demand technicals. We also remain constructive on Agency CMBS, as we expect a gradual increase in new issuance to be met with adequate investor demand, as the sector offers value relative to other fixed income investments, given its attractive prepayment protection and return profiles.
Current report
During the third quarter of 2024, we began entering into futures contracts comprised of short positions in Ultra 10 year U.S. Treasury Notes as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the quarter, we entered into futures contracts with a notional amount of $750.0 million and terminated existing futures contracts with a notional amount of $260.0 million.
Current report
As of September 30, 2024, we had 12,089,398 shares of our common stock remaining available for sale from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents. The table below shows sales of our common stock under equity distribution agreements during the three and nine months ended September 30, 2024 and 2023.
Current report
On November 5, 2024, we announced our intention to redeem all outstanding shares of our Series B Preferred Stock on December 27, 2024 for a cash redemption price of $25.00 per share, plus accrued and unpaid dividends. The redemption of the Series B Preferred Stock will help optimize our capital structure and reduce our dividend obligations moving forward.
Current report
Total average earning assets increased $68.0 million and decreased $213.9 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively. Changes in our average earning assets are a factor of our total stockholders' equity and our desired leverage levels.
Current report
Average earning asset yields decreased 16 basis points and increased 8 basis points for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively. Changes in our average earning assets yields are driven by our coupon allocation to Agency RMBS and the book prices of our securities.
Current report
Net discount accretion decreased for three months ended September 30, 2024 compared to the same period in 2023 as our portfolio was repositioned into securities with higher book prices. Net discount accretion was relatively flat for nine months ended September 30, 2024 compared to the same period in 2023 as higher discount accretion in the earlier part of 2024 was offset by our portfolio repositioning into securities with higher book prices.
Current report
Total average borrowings increased $102.1 million and decreased $250.8 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively. Changes in our average borrowings are a factor of our total stockholders' equity and our desired leverage levels.
Current report
During the third quarter of 2024, we began using futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the three and nine months ended September 30, 2024, we entered into futures contracts with a notional amount of $750.0 million and terminated existing futures contracts with a notional amount of $260.0 million. We recognized net losses of $9.9 million on futures contracts during the three and nine months ended September 30, 2024 due to changes in forward interest rate expectations.
Removed paragraphs (10)
Previous report
•Despite slowing inflation, interest rates continued to increase across the maturity spectrum as investors began to anticipate the possibility of increased Treasury issuance following this November's presidential election. The yield on the two-year Treasury increased 10 basis points to 4.72%, the yield on the five-year Treasury increased 13 basis points to 4.33% and the yield on the ten-year Treasury finished at 4.34%, up 15 basis points on the quarter. Cooling inflation and softer employment data led to a re-pricing of the market’s expectations of future monetary policy. At the end of the second quarter, the Federal Funds futures market reflected an expectation that the first cut of the benchmark rate by the Federal Open Market Committee’s (“FOMC”) would arrive in either September or November, and that the FOMC would reduce its target rate a total of five time through the end of 2025.
Previous report
•Most Agency RMBS fixed rate coupons underperformed Treasuries during the second quarter, as interest rate volatility increased given market expectations for looser monetary policy and higher uncertainty on the timing of monetary policy easing. The increase in volatility led to a softening in demand for Agency RMBS and seasonal effects increased supply in higher coupons. Coupons at the bottom of the 30-year coupon stack marginally outperformed Treasuries, given their lower sensitivity to increases in interest rate volatility, while 3.5% through 6.5% coupons underperformed.
Previous report
•Implied financing via the dollar roll market for TBA investments became attractive for select higher coupons at the beginning of the quarter as demand spiked due to CMO issuance. This specialness proved fleeting, and most dollar rolls ended the quarter relatively unattractive.
Previous report
•Agency CMBS risk premiums were unchanged over the quarter as new issuance volumes remained relatively low.
Previous report
As recent economic data indicated the disinflationary trend has continued, increasing the likelihood of an easing of monetary policy in the latter half of 2024, we are constructive on Agency MBS valuations. Agency mortgage performance has closely followed changes in expectations regarding monetary policy, outperforming when additional easing is priced in and underperforming when easing is priced out, and this relationship is likely to continue. Given the investors' expectation for two cuts or more in the Federal Funds target rate during the second half of 2024, we believe higher coupon Agency MBS will benefit from strong demand as the yield curve steepens and interest rate volatility declines.
Previous report
(1)Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs that we do not intend to physically settle on the contractual settlement date as derivative financial instruments. We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. We view our TBA dollar roll transactions as a form of off-balance sheet financing. For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below.
Previous report
We resumed investing in TBAs during the second quarter of 2024 as returns in the Agency RMBS TBA dollar roll market became more attractive for certain coupons at the beginning of the quarter. We invest in TBAs as an alternative means of investing in and financing Agency RMBS. As of June 30, 2024, our TBA holdings were comprised of 5.5% coupons in Ginnie Mae collateral and represented 4% of our investment portfolio.
Previous report
During the three months ended June 30, 2024, we sold 1,761,155 shares of common stock under our equity distribution agreement for proceeds of $16.1 million, net of approximately $210,000 in commissions and fees. During the six months ended June 30, 2024, we sold 2,126,993 shares of common stock under our equity distribution agreement for proceeds of $19.4 million, net of approximately $254,000 in commissions and fees. During the three months ended June 30, 2023, we sold 2,888,639 shares of common stock under an equity distribution agreement for proceeds of $31.0 million, net of approximately $421,000 in commissions and fees. During the six months ended June 30, 2023, we sold 5,818,708 shares of common stock under our equity distribution agreement for proceeds of $66.8 million, net of approximately $903,000 in commissions and fees. As of June 30, 2024, we had 4,173,536 shares of our common stock remaining available for sale under our current equity distribution agreement, all of which were sold in July 2024.
Previous report
Total average earning assets decreased $438.7 million and $356.0 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, due to modest declines in stockholders' equity and lower leverage. Average earning asset yields increased for the three and six months ended June 30, 2024 compared to 2023 due to our rotation into higher yielding Agency RMBS.
Previous report
The increase in net discount accretion for the three and six months ended June 30, 2024 compared to 2023 was driven by higher discount accretion on securities with lower book prices and slightly faster prepayment rates.
Reworded paragraphs (60)
Previous wording
•CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”);
Current wording
•CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”); and
Previous wording
•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”); and
Current wording
•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”).
Previous wording
During the periods presented in this Quarterly Report, we also invested in U.S. Treasury securities and other real estate-related financing arrangements in the form of unconsolidated ventures.
Current wording
During the periods presented in this Quarterly Report, we also invested in:
Previous wording
Macroeconomic factors that affect our business include interest rates, interest rate volatility, spread premiums, fiscal and monetary policy, residential and commercial real estate prices, credit availability, the health of the banking system, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.
Current wording
Macroeconomic factors that affect our business include inflation, economic growth, employment conditions, interest rates, interest rate volatility, fiscal and monetary policy, financial conditions, spread premiums, residential and commercial real estate prices, credit availability, the health of the banking system, consumer personal income and spending and corporate earnings. Of these macroeconomic factors, inflation, employment conditions, monetary policy, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the third quarter of 2024.
Previous wording
•Financial conditions remained accommodative despite tightening modestly during the second quarter, as strong equity market performance was offset by slightly wider credit spreads and increased interest rate volatility. Inflation readings trended lower during the quarter, moving closer to the Federal Reserve’s 2% inflation target. The headline consumer price index (“CPI”) ended the quarter at 3.0%, down from March’s 3.5%, while CPI (ex. food and energy) fell from 3.8% to 3.3%. Investors reacted positively to these readings, with expectations for future inflation adjusting lower and Treasury inflation-protected securities breakeven rates decreased. The two-year breakeven ended the quarter at 2.11% (down from 2.72% at the end of March) and the five-year breakeven ended at 2.28% (down from 2.44%).
Current wording
Inflation readings trended lower during the quarter, moving closer to the Federal Reserve’s 2% inflation target. The headline consumer price index (“CPI”) ended the quarter at 2.4%, down from June’s 3.0%, while CPI (ex. food and energy) remained flat at 3.3%. Investors reacted positively to these readings, with expectations for future inflation adjusting lower and Treasury inflation-protected securities breakeven rates decreased. The two-year breakeven ended the quarter at 1.77% (down from 2.11% at the end of June) and the five-year breakeven ended at 2.09% (down from 2.28%). Meanwhile, employment data released during the quarter reflected a slowing labor market, as the economy added an average of 152 thousand jobs during July and August. Following the end of the quarter, the Bureau of Labor Statistics announced the nonfarm payrolls changed to 254 thousand in September.
Previous wording
•Quantitative tightening continued in the second quarter of 2024, as the Federal Reserve passively reduced the size of its balance sheet through maturities of U.S. Treasuries and paydowns of Agency RMBS. Paydowns of Agency RMBS from the balance sheet added approximately $18 billion of net supply to the market each month, well below the Federal Reserve's monthly cap of $35 billion. Although quantitative tightening is anticipated to conclude over the next several quarters, runoff of the Agency RMBS portion of the balance sheet is expected to continue, with proceeds redeployed into Treasuries.
Current wording
Cooling inflation and softer employment data prior to the release of September payrolls led to a re-pricing of the market’s expectations of future monetary policy. Following the Federal Open Market Committee’s (“FOMC”) 50 basis point reduction of the Federal Funds target rate in September. In addition, Federal Funds futures market expectations as of September 30, 2024 reflected a further 175 to 200 basis point reduction of the target rate through the end of 2025. Quantitative tightening continued in the third quarter of 2024, as the Federal Reserve passively reduced the size of its balance sheet through maturities of U.S. Treasuries and paydowns of Agency RMBS. Paydowns of Agency RMBS from the balance sheet added approximately $17 billion of net supply to the market each month, well below the Federal Reserve's monthly cap of $35 billion. Although quantitative tightening is anticipated to conclude over the next several quarters, runoff of the Agency RMBS portion of the balance sheet is expected to continue, with proceeds redeployed into Treasuries.
Previous wording
•Prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates.
Current wording
Against this macroeconomic backdrop, Agency RMBS outperformed Treasuries during the third quarter. Lower interest rate volatility increased demand for Agency RMBS, with lower coupons performing better than higher coupons as the sharp decline in interest rates impacted coupons trading at a premium to par. Prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates. Premiums on higher coupon specified pool collateral increased modestly given the decrease in interest rates. Implied financing via the dollar roll market for TBA investments remained relatively unattractive throughout the quarter. Agency CMBS risk premiums moved modestly wider.
Previous wording
As of June 30, 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 87% of our total investment portfolio, including TBAs, versus 98% as of December 31, 2023 and June 30, 2023. Our 30 year fixed-rate Agency RMBS holdings as of June 30, 2024, December 31, 2023 and June 30, 2023 consisted of specified pools with coupon distributions as shown in the table below.
Current wording
As of September 30, 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 87% of our total investment portfolio versus 98% as of December 31, 2023 and September 30, 2023. Our 30 year fixed-rate Agency RMBS holdings as of September 30, 2024, December 31, 2023 and September 30, 2023 consisted of specified pools with coupon distributions as shown in the table below.
Previous wording
We resumed investing in fixed-rate Agency CMBS in the first quarter of 2024 because these securities benefit from prepayment protection characteristics and have an attractive return profile. Further, the hedging costs related to these holdings are economical as they are less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of June 30, 2024, our holdings of Agency CMBS represented approximately 8% of our total investment portfolio. Approximately 71% of our Agency CMBS were Fannie Mae DUS and 29% were Freddie Mac Multifamily Participation Certificates.
Current wording
We resumed investing in fixed-rate Agency CMBS in the first quarter of 2024 because these securities benefit from prepayment protection characteristics and have an attractive return profile. Further, the hedging costs related to these holdings are economical as they are less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of September 30, 2024, our holdings of Agency CMBS represented approximately 11% of our total investment portfolio, and approximately 74% of our Agency CMBS were Fannie Mae DUS and 26% were Freddie Mac Multifamily Participation Certificates.
Previous wording
As of June 30, 2024, December 31, 2023 and June 30, 2023, our holdings of non-Agency CMBS and non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs. Approximately 70% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2024.
Current wording
As of September 30, 2024, December 31, 2023 and September 30, 2023, our holdings of non-Agency CMBS and non-Agency RMBS represented less than 1% of our total investment portfolio. Approximately 68% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2024.
Previous wording
We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the six months ended June 30, 2024, we entered into interest rate swaps with a notional amount of $1.9 billion and terminated existing interest rate swaps with a notional amount of $2.0 billion. Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.
Current wording
We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the nine months ended September 30, 2024, we entered into interest rate swaps with a notional amount of $2.6 billion and terminated existing interest rate swaps with a notional amount of $2.9 billion.
Previous wording
For information on dividends declared during the six months ended June 30, 2024 and 2023, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I. Item 1 of this report on Form 10-Q.
Current wording
For information on dividends declared during the nine months ended September 30, 2024 and 2023, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I. Item 1 of this report on Form 10-Q.
Previous wording
During the six months ended June 30, 2024, we did not repurchase any shares of our common stock.
Current wording
During the nine months ended September 30, 2024, we did not repurchase any shares of our common stock.
Previous wording
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three and six months ended June 30, 2024, we repurchased and retired 44,661 and 138,008 shares of Series B Preferred Stock, respectively, and 105,492 and 201,409 shares of Series C Preferred Stock, respectively. During the three and six months ended June 30, 2023, we repurchased and retired 37,788 shares of Series B Preferred Stock and 42,696 shares of Series C Preferred Stock. As of June 30, 2024, we had authority to repurchase 1,047,989 additional shares of our Series B Preferred Stock and 844,030 additional shares of our Series C Preferred Stock under the current share repurchase program.
Current wording
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three and nine months ended September 30, 2024, we repurchased and retired no shares and 138,008 shares of Series B Preferred Stock, respectively, and 66,507 and 267,916 shares of Series C Preferred Stock, respectively. During the three and nine months ended September 30, 2023, we repurchased and retired 34,432 and 72,220 shares of Series B Preferred Stock, respectively, and 92,563 and 135,259 shares of Series C Preferred Stock, respectively. As of September 30, 2024, we had authority to repurchase 1,047,989 additional shares of our Series B Preferred Stock and 777,523 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.
Previous wording
Our book value per common share decreased 7.3% as of June 30, 2024 compared to December 31, 2023 as Agency RMBS modestly underperformed interest rate swaps. Significant changes in expectations for near term monetary policy led to persistently elevated interest rate volatility, as higher than expected inflation at the beginning of 2024 delayed the anticipated start of the easing cycle as priced in the Federal Funds futures market. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.
Current wording
Our book value per common share decreased 6.3% as of September 30, 2024 compared to December 31, 2023. The decrease in our book value per common share occurred during the first half of 2024 as Agency RMBS modestly underperformed interest rate swaps. Our book value per common share rebounded slightly during the third quarter of 2024 as interest rates declined sharply and Agency RMBS outperformed interest rate swaps. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.
Previous wording
The table below presents information from our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below presents information from our condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023.
Previous wording
The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below presents information related to our average earning assets and earning asset yields for the three and nine months ended September 30, 2024 and 2023.
Previous wording
We earned total interest income of $68.0 million and $136.6 million for the three and six months ended June 30, 2024, respectively (June 30, 2023: $71.4 million and $140.7 million). Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below.
Current wording
We earned total interest income of $73.8 million and $210.4 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023: $75.1 million and $215.8 million). Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below.
Previous wording
Interest income decreased slightly for the three and six months ended June 30, 2024 compared to 2023 as a decrease in average earning assets was largely offset by an increase in average earning asset yields.
Current wording
Our interest income was relatively flat for the three months ended September 30, 2024 compared to the same period in 2023 as a decrease in average earning asset yields was largely offset by an increase in average earning assets. Our interest income decreased $5.4 million for the nine months ended September 30, 2024 compared to the same period in 2023 as a decrease in average earning assets was partially offset by an increase in average earning asset yields.
Previous wording
The following table presents net (premium amortization) discount accretion recognized for the three and six months ended June 30, 2024 and 2023.
Current wording
The following table presents net (premium amortization) discount accretion recognized for the three and nine months ended September 30, 2024 and 2023.
Previous wording
The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below presents information related to our borrowings and cost of funds for the three and nine months ended September 30, 2024 and 2023.
Previous wording
Total average borrowings decreased $539.8 million and $428.9 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, due to modest declines in stockholders' equity and lower leverage. Our average cost of funds increased 66 and 102 basis points for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, as the FOMC has raised the Federal Funds target rate from a range of 4.25% to 4.50% as of January 1, 2023 to a range of 5.25% to 5.50% as of June 30, 2024.
Current wording
Our average cost of funds decreased 6 basis points and increased 65 basis points for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively. Changes in our costs of funds are substantially driven by the Federal Funds target rate, which the FOMC raised from a range of 4.25% to 4.50% as of January 1, 2023 to a maximum of 5.25% to 5.50%, before lowering the target rate to 4.75% to 5.00% in September 2024. Our cost of funds for the three and nine months ended September 30, 2024 was also significantly impacted by a decrease in amortization of net deferred gains on de-designated interest rate swaps. The amortization of these gains ended in December 2023.
Previous wording
The table below presents the components of interest expense for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below presents the components of interest expense for the three and nine months ended September 30, 2024 and 2023.
Previous wording
Our interest expense was relatively flat for the three months ended June 30, 2024 compared to 2023 as a decrease in contractual interest expense on our repurchase agreements was offset by a decrease in amortization of net deferred gains on de-designated interest rate swaps. Our interest expense increased $12.2 million for the six months ended June 30, 2024 compared to 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in our cost of funds that more than offset decreases in our average borrowings.
Current wording
Our interest expense was relatively flat for the three months ended September 30, 2024 compared to the same period in 2023 as a decrease in contractual interest expense on our repurchase agreements was offset by a decrease in amortization of net deferred gains on de-designated interest rate swaps. Our interest expense increased $12.8 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in borrowing rates that more than offset decreases in our average borrowings.
Previous wording
Amounts recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps were reclassified to interest expense on the condensed consolidated statements of operations as interest was accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. As of December 31, 2023, there were no net deferred gains or losses on discontinued cash flow hedges remaining in accumulated other comprehensive income.
Current wording
Amounts recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps were reclassified to interest expense on the condensed consolidated statements of operations as interest was accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.
Previous wording
The table below presents the components of net interest income for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below presents the components of net interest income for the three and nine months ended September 30, 2024 and 2023.
Previous wording
Our net interest income, which equals total interest income less total interest expense, totaled $8.6 million and $15.6 million for the three and six months ended June 30, 2024, respectively (June 30, 2023: $12.4 million and $32.0 million). The decrease in net interest income for the three months ended June 30, 2024 was due to lower average earning assets, which was partially offset by our rotation into higher yielding Agency RMBS. The decrease in net interest income for the six months ended June 30, 2024 was due to a decrease in amortization of net deferred gains on de-designated interest rate swaps, increases in the Federal Funds target rate and lower average earnings assets, which were partially offset by lower average borrowings and our rotation into higher yielding Agency RMBS.
Current wording
Our net interest income, which equals total interest income less total interest expense, totaled $7.5 million and $23.1 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023: $9.4 million and $41.4 million). The decrease in net interest income for the three months ended September 30, 2024 compared to the same period in 2023 was primarily due to lower average earning asset yields, which was partially offset by higher average earning assets. The decrease in net interest income for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in the Federal Funds target rate, which were partially offset by lower average borrowings.
Previous wording
Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds, decreased in the three and six months ended June 30, 2024 compared 2023 as increases in the Federal Funds target rate and decreases in amortization of net deferred gains on de-designated interest rate swaps more than offset our rotation into higher yielding Agency RMBS. Our cost of funds is generally more sensitive to changes in interest rates than the yield on our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.
Current wording
Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds, decreased in the three months ended September 30, 2024 compared the same period in 2023 due to decreases in average earning asset yields. Our net interest rate margin decreased in the nine months ended September 30, 2024 due to increases in the Federal Funds target rate and decreases in amortization of net deferred gains on de-designated interest rate swaps. Our cost of funds is generally more sensitive to changes in interest rates than the yield on our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.
Previous wording
The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2024 and 2023.
Current wording
The table below summarizes the components of gain (loss) on investments, net for the three and nine months ended September 30, 2024 and 2023.
Previous wording
During the three and six months ended June 30, 2024, we sold MBS and realized net losses of $6.5 million and $9.8 million, respectively (June 30, 2023: net losses of $10.5 million and $24.2 million). Net realized losses during the three and six months ended June 30, 2024 reflect sales of 4.0% to 5.0% coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS. Net realized losses during the three and six months ended June 30, 2023 primarily reflect the repositioning of Agency RMBS coupon allocations and sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS in an effort to improve the earnings power of the portfolio.
Current wording
During the three and nine months ended September 30, 2024, we sold MBS and realized net gains of $5.0 million and net losses of $4.8 million, respectively (September 30, 2023: net losses of $33.2 million and $57.4 million). Net realized gains and losses during the three and nine months ended September 30, 2024 primarily reflect sales of 4.0% to 5.0% coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS. Net realized losses during the three and nine months ended September 30, 2023 primarily reflect the repositioning of Agency RMBS coupon allocations and sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS in an effort to improve the earnings power of the portfolio.
Previous wording
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations. As of June 30, 2024, $4.8 billion (December 31, 2023: $5.0 billion) or 99.7% (December 31, 2023: 99.7%) of our MBS were accounted for under the fair value option.
Current wording
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations. As of September 30, 2024, $5.9 billion (December 31, 2023: $5.0 billion) or 99.7% (December 31, 2023: 99.7%) of our MBS were accounted for under the fair value option.
Previous wording
We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $38.7 million and $101.2 million in the three and six months ended June 30, 2024 compared to net unrealized losses of $89.2 million and $23.5 million in the three and six months ended June 30, 2023. Net unrealized losses in the three and six months ended June 30, 2024 resulted from higher interest rates and wider spreads on fixed-rate Agency RMBS as valuations declined given an increase in interest rates and elevated interest rate volatility. Net unrealized losses in the three and six months ended June 30, 2023 were primarily due to lower valuations on our Agency RMBS given higher interest rates and wider spreads on our holdings.
Current wording
We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $160.2 million and $59.0 million in the three and nine months ended September 30, 2024 compared to net unrealized losses of $191.8 million and $215.2 million in the three and nine months ended September 30, 2023. Net unrealized gains in the three and nine months ended September 30, 2024 were due to lower interest rates during the third quarter resulting in improved valuations on Agency RMBS and Agency CMBS. Net unrealized losses in the three and nine months ended September 30, 2023 were primarily due to lower valuations on our Agency RMBS given higher interest rates and wider interest rate spreads on our holdings.
Previous wording
We recorded net realized and unrealized losses of $458,000 on U.S. Treasury securities in the six months ended June 30, 2024. We did not hold any U.S. Treasury securities during the three months ended June 30, 2024 and the three and six months ended June 30, 2023.
Current wording
We recorded net realized and unrealized losses of $458,000 on U.S. Treasury securities in the nine months ended September 30, 2024. We sold the security during the first quarter of 2024.
Previous wording
As of June 30, 2024, $15.5 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2023: $15.7 million). During the three and six months ended June 30, 2024, we recorded a $263,000 and $302,000 provision for credit losses, respectively, on a single non-Agency CMBS. We recorded a $169,000 provision for credit losses during the three and six months ended June 30, 2023 on the same security.
Current wording
As of September 30, 2024, $15.4 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2023: $15.7 million). During the three and nine months ended September 30, 2024, we recorded a decrease of $80,000 and an increase of $222,000 in the provision for credit losses, respectively, on a single non-Agency CMBS. We recorded a $43,000 and $212,000 increase in the provision for credit losses during the three and nine months ended September 30, 2023, respectively, on the same security. Increases and decreases in the provision are based on a comparison of the security's amortized cost basis to discounted expected cash flows.
Previous wording
For the six months ended June 30, 2024 we recorded equity in losses of unconsolidated ventures of $193,000 (six months ended June 30, 2023: equity in earnings of $2,000). We received a final distribution from our sole remaining unconsolidated venture during the first quarter of 2024, and the venture was dissolved in April 2024.
Current wording
For the nine months ended September 30, 2024 we recorded equity in losses of unconsolidated ventures of $193,000 (three and nine months ended September 30, 2023: equity in earnings of $2,000 and $4,000, respectively). We received a final distribution from our sole remaining unconsolidated venture during the first quarter of 2024, and the venture was dissolved in April 2024.
Previous wording
During the six months ended June 30, 2024, we entered into interest rate swaps with a notional amount of $1.9 billion and terminated existing interest rate swaps with a notional amount of $2.0 billion. We recorded net gains of $29.3 million and $122.4 million on interest rate swaps for the three and six months ended June 30, 2024, respectively, (June 30, 2023: net gains of $96.6 million and $52.2 million) primarily due to changes in forward interest rate expectations.
Current wording
During the nine months ended September 30, 2024, we entered into interest rate swaps with a notional amount of $2.6 billion and terminated existing interest rate swaps with a notional amount of $2.9 billion. We recorded net losses of $119.1 million and net gains of $3.3 million on interest rate swaps for the three and nine months ended September 30, 2024, respectively, (September 30, 2023: net gains of $151.7 million and $203.9 million) primarily due to changes in forward interest rate expectations.
Previous wording
As of June 30, 2024, we had $4.3 billion of repurchase agreement borrowings with a weighted average remaining maturity of 19 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.
Current wording
As of September 30, 2024, we had $5.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 32 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.
Previous wording
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. We recorded net realized and unrealized losses of $998,000 on TBAs during the three and six months ended June 30, 2024 (six months ended June 30, 2023: $442,000).
Current wording
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. We recorded net gains of $1.6 million and $621,000 on TBAs during the three and nine months ended September 30, 2024, respectively (nine months ended September 30, 2023: net losses of $442,000).
Previous wording
Our other investment income (loss), net during the three and six months ended June 30, 2023 consisted of foreign currency transaction gains and losses. Other investment income (loss) for the six months ended June 30, 2023 also included the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023.
Current wording
Our other investment income (loss), net during the nine months ended September 30, 2023 consisted of foreign currency transaction gains and losses and the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023.
Previous wording
We incurred management fees of $2.9 million and $5.8 million for the three and six months ended June 30, 2024, respectively (June 30, 2023: $3.2 million and $6.1 million). Management fees decreased for the three and six months ended June 30, 2024 compared to the same period in 2023 due to a lower stockholders' equity management fee base. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.
Current wording
We incurred management fees of $2.9 million and $8.7 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023: $3.1 million and $9.2 million). Management fees decreased for the three and nine months ended September 30, 2024 compared to the same period in 2023 due to a lower stockholders' equity management fee base. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.
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Rearranged current paragraphs (2)
Current report — wording carried from elsewhere
•other real estate-related financing arrangements in the form of unconsolidated ventures.
Current report — wording carried from elsewhere
Daily variation margin for interest rate swaps and futures contracts is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.
Rearranged previous paragraphs (2)
Previous report — wording carried elsewhere
Of these macroeconomic factors, government policy initiatives, inflation, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the second quarter of 2024. Contributing factors included:
Previous report — wording carried elsewhere
•Premiums on higher coupon specified pool collateral decreased modestly given the increase in interest rates.