Market Overview

Anworth Reports Second Quarter 2018 Financial Results

Share:

Anworth Mortgage Asset Corporation (NYSE:ANH) (the "Company") today
reported its financial results for the second quarter ended June 30,
2018.

Earnings

The following table summarizes the Company's core earnings, GAAP net
income to common stockholders, and comprehensive income for the three
months ended June 30, 2018:

 
Three Months Ended
June 30, 2018
(unaudited)
Earnings   Per

Weighted

Share

(in thousands)
Core earnings $ 12,289 $ 0.13
GAAP net income to common stockholders $ 12,636 $ 0.13
Comprehensive income $ 533 $ 0.01
 

Core earnings is a non-GAAP financial measure, which is explained and
reconciled to GAAP net income to common stockholders in the section
entitled "Non-GAAP Financial Measures Related to Operating Results" near
the end of this earnings release. Comprehensive income is shown on the
consolidated statements of comprehensive income, which is included in
this earnings release. Comprehensive income consists of the net income
to all stockholders (including the amounts paid to preferred
stockholders) and the change in other comprehensive income.

Portfolio

At June 30, 2018 and December 31, 2017, the composition of the Company's
portfolio at fair value was as follows (dollar amounts in thousands):

   
June 30, 2018 December 31, 2017
Dollar Amount   Percentage Dollar Amount   Percentage
(unaudited)
Agency MBS:
ARMS and hybrid ARMs $ 1,840,218 30.8 % $ 2,136,543 33.1 %
Fixed-rate Agency MBS 1,994,126 33.4 % 2,142,254 33.3 %
TBA Agency MBS   762,330 12.7 %   756,701 11.7 %
Total Agency MBS $ 4,596,674 76.9 % $ 5,035,498 78.1 %
Non-Agency MBS 779,995 13.1 % 760,825 11.8 %
Residential mortgage loans(1) 585,020 9.8 % 639,351 9.9 %
Residential real estate   13,987 0.2 %   14,143 0.2 %
Total Portfolio $ 5,975,676 100.0 % $ 6,449,817 100.0 %
Total Assets(2) $ 6,079,377 $ 6,522,242
____________________
(1)   Residential mortgage loans owned by consolidated variable interest
entities ("VIEs") can only be used to settle obligations and
liabilities of the VIEs for which creditors do not have recourse to
the Company.
(2) Includes TBA Agency MBS.
 

Agency MBS

At June 30, 2018, the allocation of the Company's agency mortgage-backed
securities ("Agency MBS") was approximately 39% adjustable-rate and
hybrid adjustable-rate Agency MBS, 44% fixed-rate Agency MBS, and 17%
fixed-rate TBA Agency MBS. At December 31, 2017, the allocation of the
Company's Agency MBS was approximately 42% adjustable-rate and hybrid
adjustable-rate Agency MBS, 43% fixed-rate Agency MBS, and 15%
fixed-rate TBA Agency MBS, both periods of which are detailed below
(dollar amounts in thousands):

   
June 30,

2018

December 31,

2017

(unaudited)
Fair value of Agency MBS and TBA Agency MBS $ 4,596,674 $ 5,035,498
Adjustable-rate Agency MBS coupon reset (less than 1 year) 23 % 24 %
Hybrid adjustable-rate Agency MBS coupon reset (1-2 years) 4 3
Hybrid adjustable-rate Agency MBS coupon reset (2-3 years) 3 4
Hybrid adjustable-rate Agency MBS coupon reset (3-4 years) - 1
Hybrid adjustable-rate Agency MBS coupon reset (4-5 years) 6 3
Hybrid adjustable-rate Agency MBS coupon reset (5-7 years) - 4
Hybrid adjustable-rate Agency MBS coupon reset (greater than 7 years)   3   3
Total adjustable-rate Agency MBS   39 %   42 %
15-year fixed-rate TBA Agency MBS 17 15
15-year fixed-rate Agency MBS 25 25
20-year and 30-year fixed-rate Agency MBS   19   18
Total fair value of Agency MBS and TBA Agency MBS   100 %   100 %
 

At June 30, 2018 and December 31, 2017, the summary statistics of the
Company's Agency MBS portfolio were as follows:

June 30,

2018

  December 31,

2017

(unaudited)
Weighted Average Agency MBS Coupon:
Adjustable-rate Agency MBS 3.71 % 3.45 %
Hybrid adjustable-rate Agency MBS 2.46 2.44
15-year fixed-rate Agency MBS 2.91 2.79
15-year fixed-rate TBA Agency MBS 3.67 2.75
20-year and 30-year fixed-rate Agency MBS 3.81 3.53
Total Agency MBS: 3.26 % 3.02 %
Average Amortized Cost:
Adjustable-rate Agency MBS 102.80 % 102.81 %
Hybrid adjustable-rate Agency MBS 102.65 102.67
15-year fixed-rate Agency MBS 102.27 102.40
15-year fixed-rate TBA Agency MBS 101.39 101.06
20-year and 30-year fixed-rate Agency MBS 103.56 103.62
Total Agency MBS: 102.55 % 102.56 %
Average asset yield (weighted average coupon divided by average
amortized cost)
3.18 % 2.94 %
Unamortized premium $104.9 million $117.5 million
Unamortized premium as a percentage of par value 2.55 % 2.56 %
Premium amortization expense on Agency MBS for the respective quarter $6.3 million $8.0 million
 

At June 30, 2018 and December 31, 2017, the constant prepayment rate
("CPR") and weighted average term to next interest rate reset of our
Agency MBS were as follows:

   
June 30,

2018

December 31,

2017

(unaudited)
Constant prepayment rate (CPR) of Agency MBS 16% 15%
Constant prepayment rate (CPR) of adjustable-rate and hybrid
adjustable-rate Agency MBS
21% 18%
Weighted average term to next interest rate reset on Agency MBS 26 months 27 months
 

Non-Agency MBS

Our Non-Agency MBS were either issued before 2008 or were recently
issued and are collateralized by currently non-performing residential
mortgage loans that were originated before 2008. The following tables
summarize the Company's Non-Agency MBS at June 30, 2018 and December 31,
2017 (dollar amounts in thousands):

           
June 30, 2018
(unaudited)
Weighted Average
Mortgage Loan Type Fair

Value

Amortized

Cost

Contractual

Principal

Amortized

Cost

Coupon Yield
Prime $ 39,026 $ 37,697 $ 47,076 80.08% 5.07% 5.88%
Alt-A 544,950 520,465 696,716 74.70% 5.64% 5.32%
Subprime 19,972 18,924 20,821 90.89% 4.25% 5.74%
Non-performing 130,063 130,040 130,199 99.88% 5.20% 5.44%
Agency Risk Transfer 45,956 43,489 49,050 88.66% 4.16% 5.85%
Paydowns receivable 28 - - - - -
Total Non-Agency MBS $ 779,995 $ 750,615 $ 943,862 79.53% 5.45% 5.41%
 
 
 
December 31, 2017
Weighted Average
Mortgage Loan Type Fair

Value

Amortized

Cost

Contractual

Principal

Amortized

Cost

Coupon Yield
Prime $ 42,381 $ 41,378 $ 50,820 81.42% 4.75% 5.56%
Alt-A 569,979 544,948 714,396 76.28% 5.56% 5.41%
Subprime 20,998 19,610 21,654 90.56% 4.03% 5.39%
Non-performing 94,245 93,715 94,228 99.46% 5.20% 5.71%
Agency Risk Transfer 33,222 30,973 35,750 86.64% 4.14% 5.94%
Total Non-Agency MBS $ 760,825 $ 730,624 $ 916,848 79.69% 5.39% 5.48%
 

Residential Mortgage Loans

The following table summarizes the Company's residential mortgage loans
held-for-investment at June 30, 2018 and December 31, 2017 (in
thousands):

   
June 30,

2018

December 31,

2017

(unaudited)
Residential mortgage loans held-for-investment $ 585,020 $ 639,351
Asset-backed securities issued by securitization trusts   575,653   629,984
Retained interest in loans held in securitization trusts $ 9,367 $ 9,367
 

Residential Real Estate

At June 30, 2018 and December 31, 2017, Anworth Properties Inc. owned 88
single-family residential rental properties located in Southeastern
Florida that were carried at a total cost, net of accumulated
depreciation, of $14.0 million and $14.1 million, respectively.

MBS Portfolio Financing

 
June 30, 2018
Agency

MBS

  Non-Agency

MBS

  Total

MBS

(dollar amounts in thousands)
(unaudited)
Repurchase Agreements:
Outstanding repurchase agreement balance $ 3,475,000 $ 543,480 $ 4,018,480
Average interest rate 2.07 % 3.35 % 2.24 %
Average maturity 39 days 14 days 35 days
Average interest rate after adjusting for interest rate swaps 1.97 %
Average maturity after adjusting for interest rate swaps 1,122 days
 
 
December 31, 2017
Agency

MBS

Non-Agency

MBS

Total

MBS

(dollar amounts in thousands)
Repurchase Agreements:
Outstanding repurchase agreement balance $ 3,845,000 $ 520,695 $ 4,365,695
Average interest rate 1.47 % 2.87 % 1.64 %
Average maturity 33 days 14 days 31 days
Average interest rate after adjusting for interest rate swaps 1.77 %
Average maturity after adjusting for interest rate swaps 674 days
 

Portfolio Leverage

At June 30, 2018, the Company's leverage multiple was 5.92x. The
leverage multiple is calculated by dividing the Company's repurchase
agreements outstanding by the aggregate of common stockholders' equity
plus preferred stock and junior subordinated notes. The Company's
effective leverage, which includes the effect of TBA dollar roll
financing, was 7.04x at June 30, 2018. At December 31, 2017, the
Company's leverage multiple was 5.94x and the effective leverage was
6.97x.

Interest Rate Swaps

At June 30, 2018 and December 31, 2017, the Company's interest rate swap
agreements ("Swaps") had the following notional amounts, weighted
average fixed rates, and remaining terms (dollar amounts in thousands):

     
June 30, 2018 December 31, 2017
Maturity Notional

Amount

  Weighted

Average

Fixed

Rate

  Remaining

Term in

Months

  Remaining

Term in

Years

Notional

Amount

  Weighted

Average

Fixed

Rate

  Remaining

Term in

Months

  Remaining

Term in

Years

(unaudited)
Less than 12 months $ 250,000 1.55 % 5 0.4 $ 410,000 0.96 % 4 0.3
1 year to 2 years 766,000 1.62 16 1.4 725,000 1.60 19 1.6
2 years to 3 years 550,000 1.78 28 2.4 516,000 1.62 33 2.8
3 years to 4 years 300,000 1.87 39 3.3 350,000 1.90 43 3.6
4 years to 5 years 170,000 1.83 52 4.3 220,000 1.92 56 4.7
5 years to 7 years 485,000 2.32 73 6.1 260,000 1.98 74 6.2
7 years to 10 years   625,000 2.63 105 8.8   200,000 2.08 101 8.4
$ 3,146,000 1.99 % 48 4.0 $ 2,681,000 1.65 % 37 3.1
 

Effective Net Interest Rate Spread

   
June 30,

2018

December 31,

2017

(unaudited)
Average asset yield, including TBA dollar roll income 3.31 % 3.16 %
Effective cost of funds 2.19 1.92
Effective net interest rate spread 1.12 % 1.24 %
 

Certain components of the effective net interest rate spread are
non-GAAP financial measures, which are explained and reconciled to the
nearest comparable GAAP financial measures in the section entitled
"Non-GAAP Financial Measures Related to Operating Results" at the end of
this earnings release.

Dividend

On June 15, 2018, the Company declared a quarterly common stock dividend
of $0.14 per share for the second quarter ended June 30, 2018. Based
upon the closing price of $4.97 on June 29, 2018, the annualized
dividend yield on the Company's common stock at June 30, 2018 was 11.3%.

Book Value per Common Share

At June 30, 2018, the Company's book value was $5.33 per share of common
stock, which was a decrease of $0.15 from the book value of $5.48 for
the prior quarter.

The $0.14 quarterly dividend, less the decrease in book value of $0.15,
resulted in a negative return on book value per common share of (0.18)%
for the three months ended June 30, 2018.

Subsequent Events

Effective July 2, 2018, the conversion rate of our Series B Preferred
Stock increased from 5.0453 shares of our common stock to 5.1021 shares
of our common stock, based upon the common stock dividend of $0.14 that
was declared on June 15, 2018.

From July 2, 2018 through August 2, 2018, no interest rate swaps matured
and we added two new interest rate swaps with an aggregate notional
amount of $50 million.

Conference Call

The Company will host a conference call on Friday, August 3, 2018 at
1:00 PM Eastern Time, 10:00 AM Pacific Time, to discuss its second
quarter 2018 financial results. The dial-in number for the conference
call is 877-504-2731 for U.S. callers (international callers should dial
412-902-6640 and Canadian callers should dial 855-669-9657). When
dialing in, participants should ask to be connected to the Anworth
Mortgage earnings call. Replays of the call will be available for a
7-day period commencing at 3:00 PM Eastern Time on August 3, 2018. The
dial-in number for the replay is 877-344-7529 for U.S. callers (Canadian
callers should dial 855-669-9658 and international callers should dial
412-317-0088) and the conference number is 10122821. The conference call
will also be webcast live over the Internet, which can be accessed on
the Company's website at http://www.anworth.com
through the corresponding link located at the top of the home page.

Investors interested in participating in the Company's Dividend
Reinvestment and Stock Purchase Plan (the "DRP Plan") or receiving a
copy of the DRP Plan's prospectus may do so by contacting the Plan
Administrator, American Stock Transfer & Trust Company, at 877-248-6410.
For more information about the DRP Plan, interested investors may also
visit the Plan Administrator's website at http://www.amstock.com/investpower/new_dp.asp
or the Company's website at http://www.anworth.com.

About Anworth Mortgage Asset Corporation

Anworth is an externally-managed mortgage real estate investment trust.
We invest primarily in mortgage-backed securities that are either rated
"investment grade" or are guaranteed by federally sponsored enterprises,
such as Fannie Mae or Freddie Mac. We seek to generate income for
distribution to our shareholders primarily based on the difference
between the yield on our mortgage assets and the cost of our borrowings.
We are managed by Anworth Management LLC (our "Manager"), pursuant to a
management agreement. Our Manager is subject to the supervision and
direction of our Board of Directors and is responsible for (i) the
selection, purchase, and sale of our investment portfolio; (ii) our
financing and hedging activities; and (iii) providing us with management
services and other services and activities relating to our assets and
operations as may be appropriate. Our common stock is traded on the New
York Stock Exchange under the symbol "ANH." Anworth is a component of
the Russell 2000® Index.

Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995

This news release may contain forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based upon
our current expectations and speak only as of the date hereof.
Forward-looking statements, which are based on various assumptions (some
of which are beyond our control) may be identified by reference to a
future period or periods or by the use of forward-looking terminology,
such as "may, " "will, " "believe, " "expect, " "anticipate, " "assume,"
"estimate," "intend," "continue, " or other similar terms or variations
on those terms or the negative of those terms. Our actual results may
differ materially and adversely from those expressed in any
forward-looking statements as a result of various factors and
uncertainties, including but not limited to, changes in interest rates;
changes in the market value of our mortgage-backed securities; changes
in the yield curve; the availability of mortgage-backed securities for
purchase; increases in the prepayment rates on the mortgage loans
securing our mortgage-backed securities; our ability to use borrowings
to finance our assets and, if available, the terms of any financing;
risks associated with investing in mortgage-related assets; changes in
business conditions and the general economy; implementation of or
changes in government regulations affecting our business; our ability to
maintain our qualification as a real estate investment trust for federal
income tax purposes; our ability to maintain an exemption from the
Investment Company Act of 1940, as amended; risks associated with our
home rental business; and the Manager's ability to manage our growth.
Our Annual Report on Form 10-K and other SEC filings discuss the most
significant risk factors that may affect our business, results of
operations and financial condition. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason.

   

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 
June 30, December 31,
2018 2017
(unaudited)
ASSETS
Agency MBS at fair value (including $3,691,061 and $4,073,852
pledged to counterparties at June 30, 2018

and December 31, 2017, respectively)

$ 3,834,344 $ 4,278,797
Non-Agency MBS at fair value (including $686,962 and $661,445
pledged to counterparties at June 30, 2018

and December 31, 2017, respectively)

779,995 760,825
Residential mortgage loans held-for-investment(1) 585,020 639,351
Residential real estate 13,987 14,143
Cash and cash equivalents 12,593 12,273
Restricted cash 11,157
Interest and dividends receivable 17,272 18,091
Derivative instruments at fair value 69,639 27,793
Prepaid expenses and other   6,100   3,111
Total Assets $ 5,318,950 $ 5,765,541
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accrued interest payable $ 21,881 $ 15,835
Repurchase agreements 4,018,480 4,365,695
Asset-backed securities issued by securitization trusts(1) 575,653 629,984
Junior subordinated notes 37,380 37,380
Derivative instruments at fair value 652 1,335
Dividends payable on preferred stock 2,292 2,272
Dividends payable on common stock 13,763 14,721
Accrued expenses and other   7,548   897
Total Liabilities $ 4,677,649 $ 5,068,119
Series B Cumulative Convertible Preferred Stock: par value $0.01 per
share; liquidating preference $25.00

per share ($19,494 and $19,494, respectively); 780 and 780 shares
issued and outstanding at

June 30, 2018 and December 31, 2017, respectively)

$ 19,455 $ 19,455
Stockholders' Equity:
Series A Cumulative Preferred Stock: par value $0.01 per share;
liquidating preference $25.00 per share

($47,984 and $47,984, respectively); 1,919 and 1,919 shares issued
and outstanding at June 30, 2018

and December 31, 2017, respectively)

$ 46,537 $ 46,537
Series C Cumulative Preferred Stock: par value $0.01 per share;
liquidating preference $25.00 per share

($50,257 and $49,725, respectively); 2,010 and 1,989 shares issued
and outstanding at June 30, 2018

and December 31, 2017, respectively)

48,944 48,420
Common Stock: par value $0.01 per share; authorized 200,000 shares,
98,304 shares issued and

outstanding at June 30, 2018 and 98,137 shares issued and
outstanding at December 31, 2017,

respectively)

983 981
Additional paid-in capital 981,087 980,243
Accumulated other comprehensive income consisting of unrealized
gains and losses
(19,460) 17,021
Accumulated deficit   (436,245)   (415,235)
Total Stockholders' Equity $ 621,846 $ 677,967
Total Liabilities and Stockholders' Equity $ 5,318,950 $ 5,765,541
____________________
(1)   The consolidated balance sheets include assets of consolidated
variable interest entities ("VIEs") that can only be used to settle
obligations and liabilities of the VIEs for which creditors do not
have recourse to the Company. At June 30, 2018 and December 31,
2017, total assets of the consolidated VIEs were $587 million and
$641 million, respectively (including accrued interest receivable of
$1.9 million and $2.1 million, respectively) (which is recorded
above in the line item entitled "Interest and dividends
receivable"), and total liabilities were $578 million and $632
million, respectively (including accrued interest payable of $1.9
million and $2.0 million, respectively) (which is recorded above in
the line item entitled "Accrued interest payable").

 
ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
(unaudited)
 
Three Months Ended Six Months Ended
June 30, June 30,
  2018       2017     2018       2017  
Interest and other income:
Interest-Agency MBS $ 24,814 $ 15,771 $ 48,871 $ 32,873
Interest-Non-Agency MBS 9,902 9,738 19,910 19,306
Interest-residential mortgage loans 5,955 7,060 12,194 14,411
Other interest income   44     31     72     58  
  40,715     32,600     81,047     66,648  
Interest expense:
Interest expense on repurchase agreements 22,028 11,421 41,122 21,832
Interest expense on asset-backed securities 5,797 6,892 11,867 13,966
Interest expense on junior subordinated notes   504     401     951     785  
  28,329     18,714     53,940     36,583  
Net interest income   12,386     13,886     27,107     30,065  
Operating expenses:
Management fee to related party (1,666 ) (1,876 ) (3,403 ) (3,697 )
Rental properties depreciation and expenses (405 ) (347 ) (792 ) (676 )
General and administrative expenses   (1,324 )   (968 )   (2,434 )   (2,122 )
Total operating expenses   (3,395 )   (3,191 )   (6,629 )   (6,495 )
Other income (loss):
Income-rental properties 445 451 897 900
Realized gain (loss) on sales of available-for-sale MBS - 176 (19,314 ) 108
Impairment charge on Non-Agency MBS (1,757 ) (905 ) (1,757 ) (1,637 )
Unrealized (loss) gain on Agency MBS held as trading investments (2,677 ) 4,101 (11,567 ) 4,222
Gain on sales of residential mortgage loans held-for-investment - - - 378
Gain (loss) on derivatives, net 9,930 (4,422 ) 23,342 (2,044 )
Recovery on Non-Agency MBS   1     1     1     1  
Total other income (loss)   5,942     (598 )   (8,398 )   1,928  
Net income $ 14,933   $ 10,097   $ 12,080   $ 25,498  
Dividends on preferred stock   (2,297 )   (2,025 )   (4,595 )   (3,780 )
Net income to common stockholders $ 12,636   $ 8,072   $ 7,485   $ 21,718  
Basic earnings per common share $ 0.13 $ 0.08 $ 0.08 $ 0.23
Diluted earnings per common share $ 0.13 $ 0.08 $ 0.08 $ 0.22
Basic weighted average number of shares outstanding 98,271 95,696 98,228 95,701
Diluted weighted average number of shares outstanding 102,205 100,590 102,132 100,567
 

   
ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except for per share amounts)
(unaudited)
 
Three Months Ended Six Months Ended
June 30, June 30,
  2018       2017     2018       2017  
Net income $ 14,933   $ 10,097   $ 12,080   $ 25,498  
Available-for-sale Agency MBS, fair value adjustment (13,847 ) (4,746 ) (49,328 ) (2,411 )

Reclassification adjustment for (gain) loss on sales of Agency MBS
included in net income

- (176 ) 11,945 (108 )
Available-for-sale Non-Agency MBS, fair value adjustment (1,558 ) 8,819 (891 ) 18,333

Reclassification adjustment for loss on sales of Non-Agency MBS
included in net income

- - 42 -

Amortization of unrealized gains on interst rate swaps remaining
in other comprehensive income swaps included in net income

1,023 450 1,963 990

Reclassification adjustment for interest expense on interest rate
swaps included in net income

  (18 )   114     (212 )   188  
Other comprehensive (loss) income   (14,400 )   4,461     (36,481 )   16,992  
Comprehensive income (loss) $ 533   $ 14,558   $ (24,401 ) $ 42,490  

Non-GAAP Financial Measures Related to Operating Results

In addition to the Company's operating results presented in accordance
with GAAP, the following tables include the following non-GAAP financial
measures: core earnings (including per common share), total interest
income, and average asset yield, including TBA dollar roll income,
paydown expense on Agency MBS, and effective total interest expense and
effective cost of funds. The first table below reconciles the Company's
"net income to common stockholders" for the three months ended June 30,
2018 to "core earnings" for the same period. Core earnings represents
"net income to common stockholders" (which is the nearest comparable
GAAP measure), adjusted for the items shown in the table below. The
second table below reconciles the Company's total interest and other
income for the three months ended June 30, 2018 (which is the nearest
comparable GAAP measure) to the total interest income and average asset
yield, including TBA dollar roll income and paydown expense on Agency
MBS, and shows the annualized amounts as a percentage of the Company's
average earning assets and also reconciles the Company's total interest
expense (which is the nearest comparable GAAP measure) to the effective
total interest expense and effective cost of funds and shows the
annualized amounts as a percentage of the Company's average borrowings.

The Company's management believes that:

  • these non-GAAP financial measures are useful because they provide
    investors with greater transparency to the information that the
    Company uses in its financial and operational decision-making process;
  • the inclusion of paydown expense on Agency MBS is more indicative of
    the current earnings potential of the Company's investment portfolio,
    as it reflects the actual principal paydowns which occurred during the
    period. Paydown expense on Agency MBS is not dependent on future
    assumptions on prepayments or the cumulative effect from prior periods
    of any current changes to those assumptions, as is the case with the
    GAAP measure, "Premium amortization on MBS";
  • the adjustment for an impairment charge on Non-Agency MBS is more
    reflective of current core earnings, as this charge represents future
    loss expectations;
  • the adjustment for depreciation expense on residential rental
    properties is a non-cash item and is added back by other companies to
    derive core earnings or funds from operations; and
  • the presentation of these measures, when analyzed in conjunction with
    the Company's GAAP operating results, allows investors to more
    effectively evaluate the Company's performance to that of its peers,
    particularly those that have discontinued hedge accounting and those
    that have used similar portfolio and derivative strategies.

These non-GAAP financial measures should not be used as a substitute for
the Company's operating results for the three months ended June 30,
2018. An analysis of any non-GAAP financial measure should be used in
conjunction with results presented in accordance with GAAP.

Core Earnings

 
Three Months Ended
June 30, 2018
Amount   Per Share
(in thousands)    
(unaudited)
Net income to common stockholders $ 12,636 $ 0.13
Adjustments to derive core earnings:
Unrealized loss on Agency MBS held as trading investments 2,677 $ 0.03
Impairment charge on Non-Agency MBS(1) 1,757 $ 0.02
Gain on interest rate swaps, net (13,857 ) $ (0.14 )
Loss on derivatives-TBA Agency MBS, net 3,927 $ 0.04
Amortization of other comprehensive income on de-designated interest
rate swaps(2)
(19 ) $ -
Periodic net settlement on interest rate swaps after de-designation(3) 2,275 $ 0.02
Dollar roll income on TBA Agency MBS(4) 3,009 $ 0.03
Premium amortization on MBS 6,354 $ 0.07
Paydown expense(5) (6,588 ) $ (0.07 )
Depreciation expense on residential rental properties(6)   118   $ -  
Core earnings $ 12,289   $ 0.13  
Basic weighted average number of shares outstanding 98,271
____________________
(1)   Impairment charge on Non-Agency MBS represents the amount applied
against current GAAP earnings when future loss expectations exceed
previously existing loss expectations. When future loss expectations
become less than previously existing loss expectations, the
difference would be amortized into earnings over the life of the
security.
(2) This amount represents the amortization of the balance remaining in
"accumulated other comprehensive income" as a result of the
Company's discontinuation of hedge accounting in August 2014 and is
recorded in its statements of operations as a portion of interest
expense in accordance with GAAP.
(3) Net settlements on interest rate swaps after de-designation include
all subsequent net payments made or received on interest rate swaps
which were de-designated as hedges in August 2014 and also on any
new interest rate swaps entered into after that date. These amounts
are recorded in "Gain on interest rate swaps, net."
(4) Dollar roll income on TBA Agency MBS is the income resulting from
the price discount typically obtained by extending the settlement of
TBA Agency MBS to a later date. This is a component of the "Gain on
derivatives, net" that is shown on the Company's statements of
operations.
(5) Paydown expense on Agency MBS represents the proportional expense of
Agency MBS purchase premiums relative to the Agency MBS principal
payments and prepayments which occurred during the three-month
period.
(6) Depreciation expense is added back in the core earnings calculation,
as it is a non-cash item, and it is similarly added back in other
companies' calculation of core earnings or funds from operations.
 

Effective Net Interest Rate Spread

  Three Months Ended
June 30, 2018
(unaudited)
 

Amount

  Annualized

Percentage

(in thousands)    
Average Asset Yield, Including TBA Dollar Roll Income:
Total interest income $ 40,715 3.07 %
Income-rental properties 445 0.03 %
Dollar roll income on TBA Agency MBS(1) 3,009 0.23 %
Premium amortization on MBS 6,354 0.48 %
Paydown expense(2)   (6,588 ) -0.50 %
Total interest and other income and average asset yield, including
TBA dollar roll income
$ 43,935   3.31 %
Effective Cost of Funds:
Total interest expense $ 28,329 2.38 %
Periodic net settlement on interest rate Swaps after de-designation(3) (2,275 ) -0.19 %
Amortization of other comprehensive income on de-designated Swaps(4)   19   -  
Effective total interest expense and effective cost of funds $ 26,073   2.19 %
Effective net interest rate spread 1.12 %
Average earning assets $ 5,309,921  
Average borrowings $ 4,773,354  
____________________
(1)   Dollar roll income on TBA Agency MBS is the income resulting from
the price discount typically obtained by extending the settlement of
TBA Agency MBS to a later date. This is a component of the "Gain on
derivatives, net" that is shown on the Company's statements of
operations.
(2) Paydown expense on Agency MBS represents the proportional expense of
Agency MBS purchase premiums relative to the Agency MBS principal
payments and prepayments which occurred during the three-month
period.
(3) Net settlements on interest rate swaps after de-designation include
all subsequent net payments made or received on interest rate swaps
which were de-designated as hedges in August 2014 and also on any
new interest rate swaps entered into after that date. These amounts
are recorded in "Gain on interest rate swaps, net."
(4) This amount represents the amortization of the balance remaining in
"Accumulated other comprehensive income" as a result of the
Company's discontinuation of hedge accounting and is recorded in its
statements of operations as a portion of interest expense in
accordance with GAAP.

View Comments and Join the Discussion!