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EX-32 - EXHIBIT 32 - MTGE Investment Corp.mtge2017630ex32.htm
EX-31.2 - EXHIBIT 31.2 - MTGE Investment Corp.mtge2017630ex312.htm
EX-31.1 - EXHIBIT 31.1 - MTGE Investment Corp.mtge2017630ex311.htm
EX-14 - EXHIBIT 14 - MTGE Investment Corp.mtge2017630ex14.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2017

Commission file number 001-35260
mtgeinvestmentcorplogoa03.jpg

MTGE INVESTMENT CORP.
(Exact name of registrant as specified in its charter)
Maryland
 
45-0907772
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2 Bethesda Metro Center
12th Floor
Bethesda, Maryland 20814
(Address of principal executive offices)
 
(301) 968-9220
(Registrant's telephone number, including area code)

 
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ.        No ¨.
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ.        No ¨.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller Reporting Company
o
Emerging growth company
o
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No þ

The number of shares of the issuer’s common stock outstanding as of August 1, 2017 was 45,797,687





MTGE INVESTMENT CORP.
TABLE OF CONTENTS
 

PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
 
 
Signatures
 


1



PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MTGE INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 
June 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
Assets:
 
 
 
Agency securities, at fair value (including pledged securities of $3,496,012 and $2,713,274, respectively)
$
3,657,947

 
$
2,803,168

Non-agency securities, at fair value (including pledged securities of $759,354 and $1,019,834, respectively)
884,986

 
1,134,469

U.S. Treasury securities, at fair value (including pledged securities of $0 and $20,209, respectively)

 
20,209

Land
16,641

 
5,646

Buildings, furniture, fixtures and equipment, net of accumulated depreciation
244,159

 
81,780

Cash and cash equivalents
155,541

 
123,640

Restricted cash and cash equivalents
40,424

 
13,005

Interest receivable
12,667

 
9,767

Derivative assets, at fair value
15,518

 
29,048

Receivable for securities sold
105,656

 

Receivable under reverse repurchase agreements
857,368

 
487,469

Mortgage servicing rights, at fair value

 
49,776

Other assets
19,994

 
39,178

Total assets
$
6,010,901

 
$
4,797,155

Liabilities:
 
 
 
Repurchase agreements
$
3,805,778

 
$
2,970,816

Federal Home Loan Bank advances

 
273,700

Notes payable, net of deferred financing costs
186,924

 
66,527

Payable for securities purchased
149,141

 

Derivative liabilities, at fair value
10,554

 
27,820

Dividend payable
21,726

 
19,436

Obligation to return securities borrowed under reverse repurchase agreements, at fair value
839,419

 
474,935

Accounts payable and other accrued liabilities
26,030

 
30,876

Total liabilities
5,039,572

 
3,864,110

Equity:
 
 
 
Preferred stock, $0.01 par value; 50,000 shares authorized:
 
 
 
8.125% Series A Cumulative Redeemable Preferred Stock; 2,200 shares issued and outstanding (aggregate liquidation preference of $55,000)
53,039

 
53,039

Common stock, $0.01 par value; 300,000 shares authorized, 45,798 issued and outstanding
458

 
458

Additional paid-in capital
1,122,593

 
1,122,493

Retained deficit
(205,294
)
 
(243,260
)
Total stockholders’ equity
970,796

 
932,730

Noncontrolling interests
533

 
315

Total equity
971,329

 
933,045

Total liabilities and equity
$
6,010,901

 
$
4,797,155

See accompanying notes to consolidated financial statements.

2



MTGE INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Interest income:
 
 
 
 
 
 
 
 
Agency securities
 
$
22,010

 
$
18,303

 
$
39,911

 
$
35,676

Non-agency securities
 
13,478

 
16,986

 
29,174

 
36,720

Other
 
245

 
165

 
405

 
330

Interest expense
 
(12,344
)
 
(9,576
)
 
(22,509
)
 
(19,356
)
Net interest income
 
23,389

 
25,878

 
46,981

 
53,370

 
 
 
 
 
 
 
 
 
Servicing:
 
 
 
 
 
 
 
 
Servicing income
 
75

 
4,166

 
2,633

 
13,815

Servicing expense
 
(1,915
)
 
(9,949
)
 
(6,900
)
 
(27,854
)
Net servicing loss
 
(1,840
)
 
(5,783
)
 
(4,267
)
 
(14,039
)
 
 
 
 
 
 
 
 
 
Healthcare:
 
 
 
 
 
 
 
 
Healthcare real estate income
 
5,754

 
914

 
9,069

 
914

Healthcare real estate expense
 
(4,373
)
 
(1,103
)
 
(7,026
)
 
(1,103
)
Net healthcare real estate income
 
1,381

 
(189
)
 
2,043

 
(189
)
 
 
 
 
 
 
 
 
 
Other gains (losses):
 
 
 
 
 
 
 
 
Realized gain (loss) on agency securities, net
 
(489
)
 
2,668

 
(701
)
 
3,088

Realized gain on non-agency securities, net
 
14,481

 
3,644

 
27,195

 
2,009

Realized loss on periodic settlements of interest rate swaps, net
 
(2,281
)
 
(2,531
)
 
(4,941
)
 
(6,361
)
Realized gain (loss) on other derivatives and securities, net
 
4,745

 
(9,724
)
 
6,912

 
(46,296
)
Unrealized gain on agency securities, net
 
9,146

 
25,098

 
9,031

 
74,978

Unrealized gain on non-agency securities, net
 
11,219

 
15,854

 
24,233

 
4,530

Unrealized loss on other derivatives and securities, net
 
(11,718
)
 
(3,290
)
 
(14,557
)
 
(25,570
)
Loss on mortgage servicing rights
 

 
(3,788
)
 

 
(12,815
)
Total other gains (losses), net
 
25,103

 
27,931

 
47,172

 
(6,437
)
Expenses:
 
 
 
 
 
 
 
 
Management fees
 
3,488

 
3,659

 
6,864

 
7,474

General and administrative expenses
 
1,933

 
3,771

 
3,652

 
5,813

Total expenses
 
5,421

 
7,430

 
10,516

 
13,287

Income before provision for income tax
 
42,612

 
40,407

 
81,413

 
19,418

Provision for excise and income tax
 

 
(281
)
 

 
(589
)
Net income
 
42,612

 
40,126

 
81,413

 
18,829

Dividend on preferred stock
 
(1,117
)
 
(1,117
)
 
(2,234
)
 
(2,234
)
Noncontrolling interest in net income
 
7

 
6

 
5

 
6

Net income available to common stockholders
 
$
41,502

 
$
39,015

 
$
79,184

 
$
16,601

 
 
 
 
 
 
 
 
 
Net income per common share — basic and diluted
 
$
0.91

 
$
0.85

 
$
1.73

 
$
0.36

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — basic
 
45,803

 
45,777

 
45,800

 
46,214

Weighted average number of common shares outstanding — diluted
 
45,804

 
45,778

 
45,802

 
46,215

 
 
 
 
 
 
 
 
 
Dividend declared per common share
 
$
0.45

 
$
0.40

 
$
0.90

 
$
0.80

See accompanying notes to consolidated financial statements.

3



MTGE INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
(unaudited)


 
Preferred Stock
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings (Deficit)
 
Noncontrolling Interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 31, 2015
2,200

 
$
53,039

 
47,626

 
$
476

 
$
1,146,797

 
$
(209,200
)
 
$

 
$
991,112

Net income

 

 

 

 

 
18,835

 
(6
)
 
18,829

Issuance of noncontrolling interest

 

 

 

 

 

 
328

 
328

Repurchase of common stock

 

 
(2,003
)
 
(20
)
 
(26,432
)
 

 

 
(26,452
)
Stock-based compensation

 

 
175

 
2

 
2,060

 

 

 
2,062

Preferred dividends declared

 

 

 

 

 
(2,234
)
 

 
(2,234
)
Common dividends declared

 

 

 

 

 
(36,623
)
 

 
(36,623
)
Balance, June 30, 2016
2,200

 
$
53,039

 
45,798

 
$
458

 
$
1,122,425

 
$
(229,222
)
 
$
322

 
$
947,022

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
2,200

 
$
53,039

 
45,798

 
$
458

 
$
1,122,493

 
$
(243,260
)
 
$
315

 
$
933,045

Net income

 

 

 

 

 
81,418

 
(5
)
 
81,413

Issuance of noncontrolling interest

 

 

 

 

 

 
245

 
245

Distribution to noncontrolling interest

 

 

 

 

 

 
(22
)
 
(22
)
Stock-based compensation

 

 

 

 
100

 

 

 
100

Preferred dividends declared

 

 

 

 

 
(2,234
)
 

 
(2,234
)
Common dividends declared

 

 

 

 

 
(41,218
)
 

 
(41,218
)
Balance, June 30, 2017
2,200

 
$
53,039

 
45,798

 
$
458

 
$
1,122,593

 
$
(205,294
)
 
$
533

 
$
971,329

See accompanying notes to consolidated financial statements.


4



MTGE INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
For the Six Months Ended June 30,
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
81,413

 
$
18,829

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Amortization of net premium on agency securities
12,103

 
17,331

Accretion of net discount on non-agency securities
(11,883
)
 
(15,193
)
Depreciation and amortization on real estate investments
2,737

 
211

Realization of cash flows from MSR
1,089

 
4,721

Unrealized gain on securities, MSR and derivatives, net
(18,707
)
 
(41,123
)
Realized loss (gain) on agency securities, net
701

 
(3,088
)
Realized gain on non-agency securities, net
(27,195
)
 
(2,009
)
Realized loss (gain) on other derivatives and securities, net
(1,842
)
 
53,201

Stock-based compensation
100

 
2,062

Decrease (increase) in interest receivable
(2,900
)
 
1,095

Decrease in other assets
12,559

 
12,575

Increase (decrease) in operating accounts payable and other accrued liabilities
5,928

 
(3,714
)
Net cash flows from operating activities
54,103

 
44,898

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
 
 
 
Purchases of agency securities
(1,303,488
)
 
(529,637
)
Purchases of non-agency securities
(221,717
)
 
(324,305
)
Purchases of healthcare real estate investments
(99,719
)
 
(70,365
)
Proceeds from sale of agency securities
309,727

 
585,213

Proceeds from sale of non-agency securities
440,867

 
547,530

Proceeds from sale of MSR
43,823

 

Principal collections on agency securities
183,237

 
204,711

Principal collections on non-agency securities
88,525

 
97,103

Net proceeds from (payments on) reverse repurchase agreements
(369,899
)
 
230,462

Purchases of U.S. Treasury securities
(991,237
)
 
(971,922
)
Proceeds from sale of U.S. Treasury securities
1,356,834

 
714,704

Payments for the termination of interest rate swaps
(3,841
)
 
(38,350
)
Increase in restricted cash and cash equivalents
(28,932
)
 
(1,749
)
Other investing cash flows, net
(3,712
)
 
(8,176
)
  Net cash flows from (used in) investing activities
(599,532
)
 
435,219

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
 
 
 
Dividends paid
(41,162
)
 
(39,588
)
Net payments for repurchase of common shares

 
(26,452
)
Issuance of noncontrolling interest
245

 
328

Distributions to noncontrolling interest
(22
)
 

Proceeds from repurchase agreements and Federal Home Loan Bank advances
13,210,534

 
14,201,919

Repayments on repurchase agreements and Federal Home Loan Bank advances
(12,636,270
)
 
(14,725,794
)
Proceeds from notes payable, net of deferred financing costs
44,325

 
49,330

Repayments of notes payable
(320
)
 
(30
)
Net cash from (used in) financing activities
577,330

 
(540,287
)
Net increase (decrease) in cash and cash equivalents
31,901

 
(60,170
)
Cash and cash equivalents at beginning of the period
123,640

 
169,319

Cash and cash equivalents at end of period
$
155,541

 
$
109,149

Supplemental disclosure of non-cash information:
 
 
 
 Assumption of notes payable
$
75,952

 
$

See accompanying notes to consolidated financial statements.

5


MTGE INVESTMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Unaudited Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of MTGE Investment Corp. (referred to throughout this report as the “Company”, “we”, “us” and “our”) are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the 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 income and expenses during the reporting period. Actual results could differ from those estimates.

Our unaudited interim consolidated financial statements include the accounts of all of our wholly-owned subsidiaries. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.
Note 2. Organization
We were incorporated in Maryland and commenced operations in 2011 following the completion of our initial public offering (“IPO”). We are externally managed by MTGE Management, LLC (our “Manager”), an affiliate of AGNC Investment Corp. (“AGNC”). Our common stock is traded on the NASDAQ Global Select Market under the symbol “MTGE.”

We invest in, finance and manage a leveraged portfolio of real estate-related investments, which include agency residential mortgage-backed securities (“agency RMBS”), non-agency securities, other mortgage-related investments and other real estate investments. Agency RMBS include residential mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”) structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored enterprise (“GSE”), such as Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as Government National Mortgage Association (“Ginnie Mae”). Non-agency securities include securities backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency and credit risk transfer securities (“CRT”). Other mortgage-related investments may include mortgage servicing rights (“MSR”), commercial mortgage-backed securities (“CMBS”), prime and non-prime residential mortgage loans, commercial mortgage loans and mortgage-related derivatives. Other real estate investments include equity investments in healthcare and senior living facilities that are leased to or operated by third parties who conduct all business operations of the facilities and debt investments secured by such facilities.
Our objective is to provide attractive risk-adjusted returns to our stockholders through a combination of dividends and net asset value appreciation. In pursuing this objective, we rely on our Manager’s expertise to construct and manage a diversified investment portfolio by selecting assets that, when properly financed and hedged, are expected to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, we are required to distribute annually at least 90% of our taxable net income. As long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.


6


Note 3. Summary of Significant Accounting Policies

Fair Value of Financial Assets

We have elected the option to account for all of our financial assets, including all mortgage-related investments, at estimated fair value, with changes in fair value reflected in income during the period in which they occur. In management's view, this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of hedging instruments. See Note 10 - Fair Value Measurements.

Interest Income

Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums or discounts associated with the purchase of agency RMBS and non-agency securities of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method.

We estimate long-term prepayment speeds using a third-party service and market data. Actual and anticipated prepayment experience is reviewed at least quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts actually received plus currently anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

At the time we purchase non-agency securities that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on inputs and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.

Real Property Owned

Tangible assets primarily consist of land, buildings and furniture, fixtures and equipment. Depreciable tangible assets are depreciated on a straight-line basis over their estimated useful lives, which can range from 3 years for furniture, fixtures and equipment to 40 years for buildings.

On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which provides a framework to determine whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the transaction should not be considered a business combination. The ASU also clarifies the requirements for a set of activities to be considered a business and narrows the definition of outputs that would lead to business combination accounting treatment. As a result of these changes, the Company expects that a majority of its future real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. For asset acquisitions subsequent to January 1, 2017, the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis, with no goodwill recognized and third-party transaction costs capitalized.
 
The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that depreciable lives may need to be changed. We consider external factors relating to each asset and the existence of a master lease that may link the cash flows of an individual asset to a larger portfolio of assets leased to the same tenant. If these factors and the projected undiscounted cash flows of the asset over the remaining depreciation period indicate that the asset will not be recoverable, the carrying value is reduced to the estimated fair market value. In addition, we are exposed to the risks inherent in investments in real estate, and in particular, the senior housing and health care industries. A downturn in these industries or in the real estate markets in which our properties are located could adversely affect the value of our properties and our ability to sell properties for a price or terms acceptable to us.

7


Intangible Assets
Intangible assets can include goodwill and identifiable intangible assets such as above or below market component of in-place leases and the value associated with the presence of in-place tenants or residents. Goodwill is calculated as the excess of consideration transferred over the estimated fair value of net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill and intangible assets are included in other assets on the consolidated balance sheets and tested annually for impairment and more frequently if events and circumstances indicate that the asset might be impaired.
Healthcare Real Estate Income

Healthcare real estate income consists primarily of lease and rental income. For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight line basis over the lease term when collectability is reasonably assured. Recognizing lease income on a straight line basis results in a difference in the timing of revenue amounts from what is contractually due. If the Company determines that collectability of straight line lease income is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established.

Resident rental income is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care-related services is recognized as the services are provided.

Noncontrolling Interests
    
Arrangements with noncontrolling interest holders are reported as a component of equity separate from the Company’s stockholders' equity, recorded at the initial carrying amount, and increased or decreased for the noncontrolling interest’s share of net income or loss. Net income attributable to a noncontrolling interest is included in net income on the consolidated statements of operations.

Deferred Loan Expenses

We amortize deferred financing costs, which are reported within notes payable, net of deferred financing costs on our consolidated balance sheets, as a component of interest expense of the debt over the terms of the related borrowings using a method that approximates a level yield.

Repurchase Agreements

We finance the acquisition of agency RMBS and non-agency securities through repurchase transactions under master repurchase agreements. We account for repurchase transactions as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. The contractual amounts approximate fair value due to their short-term maturities or floating rate coupons.

Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements

We borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see Derivatives below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. The fair value of our reverse repurchase agreements is assumed to equal cost as they generally mature daily or have interest rates that are reset daily.
Derivatives
We utilize a risk management strategy, under which we may use a variety of derivative instruments to mitigate our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. The objective of our risk management strategy is to reduce fluctuations in net asset value over a range of market conditions. The principal instruments that we currently use are interest rate swaps and options to enter into interest rate swaps (“interest rate swaptions”). We also utilize forward contracts for the purchase or sale of agency RMBS, or to-be-announced forward (“TBA”) contracts, and short sales of U.S. Treasury securities and U.S. Treasury futures contracts. We may also purchase or sell options on TBA securities and utilize other types of derivative instruments.

8


We also enter into TBA contracts as a means of investing in and financing agency RMBS (thereby increasing our “at
risk” leverage) or as a means of disposing of or reducing our exposure to agency RMBS (thereby reducing our “at risk” leverage). Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, agency RMBS with certain principal and interest terms and certain types of collateral, but the particular agency RMBS to be delivered are not identified until shortly before the TBA settlement date. We may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a “pair off”), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a “dollar roll.” The agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to agency RMBS for settlement in the current month. This difference (or discount) is referred to as the “price drop.” The price drop is the economic equivalent of net interest carry income on the underlying agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as “dollar roll income (loss).” Consequently, forward purchases of agency RMBS and dollar roll transactions represent a form of off-balance sheet financing.
We present all derivative instruments as either assets or liabilities at fair value on our consolidated balance sheets and report all changes in fair value in earnings in our consolidated statements of operations in unrealized gain (loss) on other derivatives and securities, net during the period in which they occur. Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.
Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with each counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets.

The use of derivative instruments creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. Our derivative agreements require that we post or receive collateral based on daily market value changes. We also attempt to minimize our risk of loss by limiting our counterparties to major financial institutions with acceptable credit ratings, monitoring positions with individual counterparties and adjusting posted collateral as required.

Interest rate swap agreements

We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement and other financing facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR (“payer swaps”) with terms up to 15 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over-the-counter (“OTC”) market. Swap agreements entered into subsequent to May 2013 are centrally cleared through the Chicago Mercantile Exchange (“CME”), a registered commodities exchange.
    
We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying rates, including the overnight index swap rate and LIBOR forward rate, to produce the daily settlement price.

Our centrally cleared swaps require that we post an “initial margin” to our counterparties for an amount determined by the CME, which is generally intended to be set at a level sufficient to protect the CME from the maximum estimated single-day price movement in that market participant’s contracts. We also exchange cash “variation margin” with our counterparties on our centrally cleared swaps based upon daily changes in the fair value as measured by the CME. Beginning in the first quarter of 2017, as a result of a CME amendment to its rule book governing central clearing activities, the daily exchange of variation margin associated with a CME centrally cleared derivative instrument is legally characterized as the daily settlement of the derivative instrument itself, as opposed to a pledge of collateral. Accordingly, beginning in 2017, we account for the daily receipt or payment of variation margin associated with our centrally cleared interest rate swaps as a direct reduction to the carrying value of the interest rate swap derivative asset or liability, respectively. Beginning in 2017, the carrying amount of centrally cleared interest rate swaps reflected in our consolidated balance sheets is equal to the unsettled fair value of such instruments.

We estimate the fair value of our “non-centrally cleared” interest rate swaps based on valuations obtained from third-party pricing services and the swap counterparty (collectively, “third-party valuations”). The third-party valuations are model-driven using observable inputs consisting of LIBOR and the forward yield curve. We also consider the creditworthiness of both us and our counterparties and the impact of netting and credit enhancement provisions contained in each derivative agreement, such as

9


collateral postings. All of our “non-centrally cleared” interest rate swaps are subject to bilateral collateral arrangements. Consequently, no credit valuation adjustment was made in determining the fair value of such instruments.

The payment of periodic settlements of net interest on interest rate swaps is reported in realized loss on periodic settlements of interest rate swaps, net in our consolidated statements of operations. Cash payments received or paid for the early termination of an interest rate swap agreement are recorded as realized loss on other derivatives and securities, net in our consolidated statements of operations. Changes in fair value of our interest rate swap agreements are reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

Interest rate swaptions

We purchase interest rate swaptions to help mitigate the potential impact of larger, more rapid changes in interest rates
on the performance of our investment portfolio. The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay or receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. The difference between the premium and the fair value of the swaption is reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid and reported in realized loss on other derivatives and securities, net in our consolidated statements of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized loss on other derivatives and securities, net in our consolidated statements of operations.

Interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of our interest rate swaption agreements based on model-driven valuations obtained from third-party
pricing services and the swaption counterparty. These estimates incorporate observable inputs and include the fair value of the future interest rate swaps that we have the option to enter into, as well as the remaining length of time that we have to exercise the options, adjusted for non-performance risk, if any.

TBA securities

TBA securities are forward contracts for the purchase (“long position”) or sale (“short position”) of agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency RMBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging against short-term changes in interest rates. We may also enter into TBA dollar roll transactions to finance agency RMBS purchases.

We account for all TBA contracts as derivatives since we cannot assert that it is probable at the inception and throughout the term of the contract that it will not settle net and will result in physical delivery of an agency security when it is issued. A TBA dollar roll transaction is a series of derivative transactions. The net settlement of a TBA contract is reported as realized loss on other derivatives and securities, net and changes in the fair value of our TBA contracts are reported as unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

We estimate the fair value of TBA securities based on similar methods used to value our agency RMBS.

U.S. Treasury securities

We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. Realized gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in realized loss on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.

10


Note 4. Agency Securities
The following tables summarize our investments in agency RMBS as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
June 30, 2017
 
Fannie Mae
 
Freddie Mac
 
Total
Agency RMBS:
 
 
 
 
 
Par value
$
2,703,389

 
$
804,750

 
$
3,508,139

Unamortized premium
128,323

 
45,851

 
174,174

Amortized cost
2,831,712

 
850,601

 
3,682,313

Gross unrealized gains
8,158

 
2,168

 
10,326

Gross unrealized losses
(25,076
)
 
(9,616
)
 
(34,692
)
Agency RMBS, at fair value
$
2,814,794

 
$
843,153

 
$
3,657,947

 
 
 
 
 
 
Weighted average coupon as of June 30, 2017
3.61
%
 
3.69
%
 
3.63
%
Weighted average yield as of June 30, 2017
2.81
%
 
2.82
%
 
2.81
%
Weighted average yield for the three months ended June 30, 2017
2.68
%
 
2.58
%
 
2.66
%
Weighted average yield for the six months ended June 30, 2017
2.65
%
 
2.56
%
 
2.63
%

 
 
June 30, 2017
 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Agency RMBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
3,598,532

 
$
8,015

 
$
(34,692
)
 
$
3,571,855

Adjustable rate
 
83,781

 
2,311

 

 
86,092

Total Agency RMBS
 
$
3,682,313

 
$
10,326

 
$
(34,692
)
 
$
3,657,947


 
December 31, 2016
 
Fannie Mae

Freddie Mac

Total
Agency RMBS:





Par value
$
2,103,244


$
600,640


$
2,703,884

Unamortized premium
98,580


34,100


132,680

Amortized cost
2,201,824


634,740


2,836,564

Gross unrealized gains
6,350


1,887


8,237

Gross unrealized losses
(30,657
)

(10,976
)

(41,633
)
Agency RMBS, at fair value
$
2,177,517


$
625,651


$
2,803,168

 
 
 
 



Weighted average coupon as of December 31, 2016
3.49
%

3.60
%

3.52
%
Weighted average yield as of December 31, 2016
2.71
%

2.69
%

2.71
%
Weighted average yield for the year ended December 31, 2016
2.56
%
 
2.60
%
 
2.57
%


11


 
 
December 31, 2016
 
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Fair Value
Agency RMBS:
 
 
 
 
 
 
 
 
Fixed rate
 
$
2,747,165

 
$
6,003

 
$
(41,633
)
 
$
2,711,535

Adjustable rate
 
89,399

 
2,234

 

 
91,633

Total Agency RMBS
 
$
2,836,564

 
$
8,237

 
$
(41,633
)
 
$
2,803,168


Actual maturities of agency RMBS are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments.

The following table summarizes our agency RMBS as of June 30, 2017 and December 31, 2016 according to their estimated weighted average life classification (dollars in thousands):

 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
Weighted Average
 
 
 
 
 
Weighted Average
Estimated Weighted
Average Life
 
Fair
Value
 
Amortized
Cost
 
Yield
 
Coupon
 
Fair
Value
 
Amortized
Cost
 
Yield
 
Coupon
Less than or equal to three years
 
$
26,314

 
$
26,437

 
1.89
%
 
4.03
%
 
$
10,061

 
$
10,101

 
1.97
%
 
4.07
%
Greater than three years and less than or equal to five years
 
607,751


604,945


2.37
%

3.21
%

602,705


600,979


2.32
%

3.24
%
Greater than five years and less than or equal to 10 years
 
2,943,242


2,969,945


2.90
%

3.72
%

1,985,654


2,021,474


2.78
%

3.65
%
Greater than 10 years
 
80,640


80,985


3.07
%

3.57
%

204,748


204,010


3.10
%

3.01
%
Total
 
$
3,657,947


$
3,682,313


2.81
%

3.63
%

$
2,803,168


$
2,836,564


2.71
%

3.52
%
As of June 30, 2017 and December 31, 2016, the estimated weighted average life of our agency security portfolio was 7.2 years and 7.4 years, respectively, which incorporates anticipated future prepayment assumptions. As of June 30, 2017 and December 31, 2016, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was 8.8% and 8.1%, respectively.
Realized Gains and Losses
The following table summarizes our net realized gains and losses from the sale of agency RMBS during the three and six months ended June 30, 2017 and 2016 (dollars in thousands): 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016

2017
 
2016
Proceeds from agency securities sold
 
$
101,270

 
$
450,164


$
309,727

 
$
585,213

Less agency securities sold, at cost
 
(101,759
)
 
(447,496
)

(310,428
)
 
(582,125
)
Realized gain (loss) on agency securities, net
 
$
(489
)
 
$
2,668


$
(701
)
 
$
3,088

 
 
 
 
 
 
 
 
 
Gross realized gains on sale of agency securities
 
$
494

 
$
2,670


$
1,764

 
$
3,372

Gross realized losses on sale of agency securities
 
(983
)
 
(2
)

(2,465
)
 
(284
)
Realized gain (loss) on agency securities, net
 
$
(489
)
 
$
2,668


$
(701
)
 
$
3,088


12


Pledged Assets
The following tables summarize our agency RMBS pledged as collateral under repurchase agreements, derivative agreements and FHLB advances by type as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
Agency RMBS Pledged:
 
Fannie Mae
 
Freddie Mac
 
Total
Under Repurchase Agreements
 
 
 
 
 
 
Fair value
 
$
2,669,512

 
$
825,736

 
$
3,495,248

Accrued interest on pledged agency RMBS
 
7,712

 
2,423

 
10,135

Under Derivative Agreements
 
 
 
 
 
 
Fair value
 
116

 
648

 
764

Accrued interest on pledged agency RMBS
 

 
2

 
2

Total Fair Value of Agency RMBS Pledged and Accrued Interest
 
$
2,677,340

 
$
828,809

 
$
3,506,149


 
 
December 31, 2016
Agency RMBS Pledged:
 
Fannie Mae
 
Freddie Mac
 
Total
Under Repurchase Agreements
 
 
 
 
 
 
Fair value
 
$
1,911,218

 
$
514,082

 
$
2,425,300

Accrued interest on pledged agency RMBS
 
5,375

 
1,483

 
6,858

Under Derivative Agreements
 
 
 
 
 
 
Fair value
 
605

 
671

 
1,276

Accrued interest on pledged agency RMBS
 
1

 
2

 
3

Under FHLB Advances
 
 
 
 
 
 
Fair value
 
184,488

 
102,210

 
286,698

Accrued interest on pledged agency RMBS
 
516

 
290

 
806

Total Fair Value of Agency RMBS Pledged and Accrued Interest
 
$
2,102,203

 
$
618,738

 
$
2,720,941

The following table summarizes our agency RMBS pledged as collateral under repurchase agreements and FHLB advances, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
Remaining Maturity
 
Fair Value
 
Amortized
Cost
 
Accrued Interest
 
Fair Value
 
Amortized
Cost
 
Accrued Interest
30 days or less
 
$
1,765,721

 
$
1,775,187

 
$
5,125

 
$
672,749

 
$
681,287

 
$
1,887

31 - 59 days
 
694,070

 
696,586

 
2,041

 
1,061,202

 
1,074,283

 
3,030

60 - 90 days
 
245,766

 
249,130

 
716

 
496,562

 
500,517

 
1,363

Greater than 90 days
 
789,691

 
798,059

 
2,253

 
481,485

 
488,344

 
1,384

Total
 
$
3,495,248

 
$
3,518,962

 
$
10,135

 
$
2,711,998

 
$
2,744,431

 
$
7,664


As of June 30, 2017 and December 31, 2016, none of our repurchase agreement borrowings backed by agency RMBS were due on demand or mature overnight. All of our FHLB advances backed by agency RMBS matured during the first quarter. As a result, we had no outstanding secured FHLB advances as of June 30, 2017.

13


Note 5. Non-Agency Securities
The following tables summarize our non-agency securities as of June 30, 2017 and December 31, 2016 (dollars in thousands):
June 30, 2017
 
 
Fair
  Value
 
Gross Unrealized
 
Amortized Cost
 
Premium (Discount)
 
Par/ Current Face
 
Weighted Average
Category
 
 
Gains
 
Losses
 
 
 
 
Coupon (1)
 
Yield
Prime
 
$
146,997

 
$
7,175

 
$
(305
)
 
$
140,127

 
$
(14,136
)
 
$
154,263

 
3.53
%
 
5.55
%
CRT
 
275,036

 
16,771

 
(3
)
 
258,268

 
14,145

 
244,123

 
5.37
%
 
5.46
%
Alt-A
 
328,774

 
46,417

 
(1,483
)
 
283,840

 
(121,202
)
 
405,042

 
2.43
%
 
7.91
%
Option-ARM
 
100,432

 
9,661

 

 
90,771

 
(23,878
)
 
114,649

 
1.49
%
 
5.98
%
Subprime
 
15,824

 
994

 

 
14,830

 
(749
)
 
15,579

 
5.27
%
 
5.98
%
CMBS
 
17,923

 
111

 

 
17,812

 
(188
)
 
18,000

 
5.65
%
 
6.02
%
Total
 
$
884,986

 
$
81,129

 
$
(1,791
)
 
$
805,648

 
$
(146,008
)
 
$
951,656

 
3.39
%
 
6.42
%
————————
(1)
Coupon rates are floating, except for $13.5 million, $19.7 million and $13.4 million fair value of fixed-rate prime, Alt-A and subprime non-agency securities, respectively, as of June 30, 2017.
December 31, 2016
 
 
Fair
  Value
 
Gross Unrealized
 
Amortized Cost
 
Premium (Discount)
 
Par/ Current Face
 
Weighted Average
Category
 
 
Gains
 
Losses
 
 
 
 
Coupon (1)
 
Yield
Prime
 
$
181,267

 
$
5,945

 
$
(2,402
)
 
$
177,724

 
$
(17,672
)
 
$
195,396

 
3.18
%
 
5.61
%
CRT
 
317,532

 
18,029

 
(1,012
)
 
300,515

 
2,362

 
298,153

 
5.26
%
 
6.37
%
Alt-A
 
345,586

 
33,702

 
(3,330
)
 
315,214

 
(130,714
)
 
445,928

 
2.05
%
 
7.58
%
Option-ARM
 
180,169

 
8,075

 
(4,357
)
 
176,451

 
(38,787
)
 
215,238

 
1.00
%
 
5.64
%
Subprime
 
92,195

 
781

 
(252
)
 
91,666

 
(659
)
 
92,325

 
4.05
%
 
4.38
%
CMBS
 
17,720

 

 
(73
)
 
17,793

 
(207
)
 
18,000

 
5.65
%
 
6.02
%
Total
 
$
1,134,469

 
$
66,532

 
$
(11,426
)
 
$
1,079,363

 
$
(185,677
)
 
$
1,265,040

 
3.00
%
 
6.31
%
————————
(1)
Coupon rates are floating, except for $11.8 million, $22.3 million and $57.5 million fair value of fixed-rate prime, Alt-A and subprime non-agency securities, respectively, as of December 31, 2016.
The following table summarizes our non-agency securities at fair value, by their estimated weighted average life classifications as of June 30, 2017 and December 31, 2016 (dollars in thousands): 
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
 
 
Weighted Average
 
 
 
 
 
Weighted Average
Estimated Weighted
Average Life
 
Fair Value
 
Amortized
Cost
 
Coupon
 
Yield
 
Fair
Value
 
Amortized
Cost
 
Coupon
 
Yield
≤ 5 years
 
$
259,256

 
$
230,087

 
2.69
%
 
7.70
%
 
$
330,507

 
$
322,535

 
3.20
%
 
5.75
%
> 5 to ≤ 7 years
 
374,139

 
339,472

 
3.62
%
 
6.19
%
 
487,540

 
455,263

 
2.27
%
 
6.72
%
> 7 years
 
251,591

 
236,089

 
3.86
%
 
5.51
%
 
316,422

 
301,565

 
4.10
%
 
6.28
%
Total
 
$
884,986

 
$
805,648

 
3.39
%
 
6.42
%
 
$
1,134,469

 
$
1,079,363

 
3.00
%
 
6.31
%

Our Prime non-agency RMBS include investments in securitization trusts collateralized by prime mortgage loans, which are residential mortgage loans that are considered to have been originated with relatively stringent underwriting standards at the time of origination. Our Prime securities collateralized by loans that were originated between 2002 and 2006, a period of generally weaker underwriting standards and elevated housing prices, had a combined fair value of $128.2 million as of June 30, 2017. As a result, there is still material credit risk embedded in these loan origination vintages. As of June 30, 2017, Prime securities also include $18.8 million in fair value of securities with underlying mortgage loans that were originated with more stringent underwriting standards beginning in 2010. As of June 30, 2017, our Prime securities have both fixed and

14


floating rate coupons ranging from 1.8% to 6.5%, and have underlying collateral with weighted average coupons ranging from 3.3% to 5.2%.

Our CRT securities reference the performance of loans underlying agency RMBS issued by Fannie Mae and Freddie Mac which were subject to their underwriting standards. As of June 30, 2017, our CRT securities have fixed and floating rate coupons ranging from 1.3% to 7.6%, with weighted average coupons of underlying collateral ranging from 3.6% to 4.4%. The loans underlying our CRT securities were originated between 2012 and 2016.

Our Alt-A non-agency RMBS are collateralized by Alt-A mortgage loans that were originated from 2002 to 2007. Alt-A, or alternative A-paper, mortgage loans are considered to have more credit risk than prime mortgage loans and less credit risk than sub-prime mortgage loans. Alt-A loans are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. As of June 30, 2017, our Alt-A securities have both fixed and floating rate coupons ranging from 1.3% to 6.5% with weighted average coupons of underlying collateral ranging from 3.4% to 5.9%.

Our Option-ARM non-agency RMBS include senior tranches in securitization trusts that are collateralized by residential mortgages that have origination and underwriting characteristics similar to Alt-A mortgage loans, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. As of June 30, 2017, our Option-ARM securities have coupons ranging from 1.4% to 2.0% and have underlying collateral with weighted average coupons between 3.3% and 4.3%. The loans underlying our Option-ARM securities were originated between 2004 and 2007.

Our Subprime non-agency RMBS include investments in securitization trusts collateralized by residential mortgages originated during or before 2005 that were originally considered to be of lower credit quality. As of June 30, 2017, our Subprime securities have a fair value of $15.8 million with fixed and floating rate coupons ranging from 5.0% to 5.6% and have underlying collateral with weighted-average coupons ranging from 5.6% to 6.0%.

Our CMBS are collateralized by a commercial mortgage loan originated in 2016 that is secured by first priority liens on 64 skilled nursing facilities. As of June 30, 2017, our CMBS securities have a fair market value of $17.9 million with fixed rate coupons ranging from 5.2% to 6.6% and underlying collateral with a coupon of 4.5%.

More than 95% of our non-agency RMBS are rated below investment grade or have not been rated by credit agencies as of June 30, 2017.
Realized Gains and Losses
The following table summarizes our net realized gains from the sale of non-agency securities during the three and six months ended June 30, 2017 and 2016 (dollars in thousands): 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Proceeds from non-agency securities sold
 
$
180,394

 
$
131,912

 
$
440,867

 
$
547,530

Increase (decrease) in receivable for securities sold
 
(629
)
 
(4,595
)
 
5,119

 
(2,565
)
Less: non-agency securities sold, at cost
 
(165,284
)
 
(123,673
)
 
(418,791
)
 
(542,956
)
Realized gain on non-agency securities, net
 
$
14,481

 
$
3,644

 
$
27,195

 
$
2,009

 
 
 
 
 
 
 
 
 
Gross realized gain on sale of non-agency securities
 
$
14,489

 
$
3,838

 
$
27,353

 
$
7,765

Gross realized loss on sale of non-agency securities
 
(8
)
 
(194
)
 
(158
)
 
(5,756
)
Realized gain on non-agency securities, net
 
$
14,481

 
$
3,644

 
$
27,195

 
$
2,009


Pledged Assets
Non-agency securities with a fair value of $0.8 billion and $1.0 billion were pledged as collateral under financing arrangements as of June 30, 2017 and December 31, 2016, respectively, none of which were due on demand or mature overnight.

15


The following table summarizes our non-agency securities pledged as collateral under repurchase agreements, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
Remaining Maturity
 
Fair Value
 
Amortized
Cost
 
Accrued Interest
 
Fair Value
 
Amortized
Cost
 
Accrued Interest
30 days or less
 
$
615,379

 
$
563,218

 
$
808

 
$
859,046

 
$
814,457

 
$
1,142

31 - 59 days
 
99,736

 
81,351

 
134

 
109,057

 
103,483

 
83

60 - 90 days
 
44,239

 
41,139

 
112

 
51,731

 
49,043

 
136

Total
 
$
759,354

 
$
685,708

 
$
1,054

 
$
1,019,834

 
$
966,983

 
$
1,361


Note 6. Investments in Real Property
Investment Activity

During the three months ended March 31, 2017, CHI invested in two assisted living and memory care facilities located in Utah for total consideration of $26.5 million. These facilities have been leased to an operator pursuant to a triple net lease for a term of 10 years with two 5-year extensions.

During May 2017, CHI acquired a portfolio of nine skilled nursing facilities located in Virginia for total consideration of $130.0 million. These facilities have been leased to an operator pursuant to a triple net lease for a term of 15 years with two 5-year extensions.
    
During June 2017, CHI acquired an assisted living facility located in Georgia for total consideration of $17.1 million through an existing joint venture structured in a manner intended to comply with the REIT Income Diversification and Empowerment Act (“RIDEA”).

The total purchase price for all properties acquired has been allocated to tangible and intangible assets and liabilities based upon their respective fair values in accordance with our accounting policies. The following table summarizes our real estate investments net of accumulated depreciation as of June 30, 2017 and December 31, 2016 (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
Buildings and improvements
 
$
230,747

 
$
77,438

Land
 
16,641

 
5,646

Furniture, fixtures and equipment
 
13,412

 
4,342

Goodwill
 
5,840

 
5,840

Working capital (1)
 
13,487

 
9,602

Total real estate assets
 
$
280,127

 
$
102,868

————————
(1) 
Working capital primarily includes $11.6 million and $6.6 million of cash and cash equivalents and $1.3 million and $0.5 million of rent receivable recorded in other assets on the consolidated balances sheets as of June 30, 2017 and December 31, 2016, respectfully.

Notes Payable

CHI finances its real estate investments primarily through secured debt. As of June 30, 2017, CHI had floating rate debt with a principal amount of $70.7 million, a weighted average maturity of 0.7 years and a weighted average interest rate of 4.92% and fixed rate debt with a principal amount of $118.2 million, a weighted average maturity of 17.0 years and an interest rate of 4.12%. CHI's floating rate debt consists of bridge loans entered into at the closing of the transactions, and CHI intends to refinance such bridge loans with long-term fixed rate financings under GSE or HUD programs. As of December 31, 2016, CHI had floating rate debt with a principal amount of $51.0 million, a weighted average maturity of 1.2 years and a weighted average interest rate of 4.74% and fixed rate debt with a principal amount of $16.7 million, a weighted average maturity of 9.5 years and an interest rate of 4.58%.


16


The following is a summary of our notes payable activity for the six months ended June 30, 2017 and 2016 (dollars in thousands):
 
 
For the Six Months Ended June 30,
 
 
2017
 
2016
Beginning balance
 
$
66,527

 
$

Debt issued and assumed, net of deferred financing costs
 
120,277

 
49,291

Amortization of deferred financing costs
 
440

 
39

Principal repayments
 
(320
)
 
(30
)
Ending balance
 
$
186,924

 
$
49,300

————————
(1) 
Includes $76.0 million of notes payable assumed through acquisitions of our portfolio of skilled nursing facilities in Virginia.

Our notes payable of $189 million, excluding deferred financing costs, had a fair value of approximately $190 million as of June 30, 2017.

Income from Healthcare Real Estate Investments

The following table presents the components of net income from our real property investments for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Lease income
 
$
4,615

 
$
666

 
$
6,868

 
$
666

Rental income
 
1,139

 
248

 
2,201

 
248

Healthcare real estate income
 
5,754

 
914

 
9,069

 
914

 
 
 
 
 
 
 
 
 
Interest expense
 
1,887

 
294

 
3,060

 
294

Depreciation
 
1,526

 
211

 
2,297

 
211

Transaction expenses
 

 
538

 

 
538

Tenant expenses
 
848

 
60

 
1,557

 
60

Other
 
112

 

 
112

 

Healthcare real estate expense
 
4,373

 
1,103

 
7,026

 
1,103

Net healthcare real estate income (loss)
 
$
1,381

 
$
(189
)
 
$
2,043

 
$
(189
)

Healthcare lease income is derived from our real property investments subject to triple net lease arrangements, and rental income relates to investments made through RIDEA joint ventures. Under RIDEA, a REIT may lease “qualified health care properties” on an arm’s-length basis to a taxable REIT subsidiary (“TRS”) if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” Generally, the rent received from the TRS will meet the related party rent exception and will be treated as “rents from real property.” Resident level rents and related operating expenses are subject to federal and state income taxes as the operations of such facilities are included in a TRS.


17


At June 30, 2017, future minimum lease payments receivable are as follows (dollars in thousands):
 
 
June 30, 2017
2017
 
$
10,009

2018
 
20,345

2019
 
20,764

2020
 
21,191

2021
 
21,627

Thereafter
 
215,306

Total
 
$
309,242

Note 7. Repurchase Agreements and Federal Home Loan Bank Advances

We pledge certain of our securities as collateral under repurchase and other financing arrangements with financial institutions and the terms and conditions are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of June 30, 2017 and December 31, 2016, we have met all margin call requirements and had no agency or non-agency repurchase agreements with original overnight maturities. Repurchase agreements are carried at cost, which approximates fair value due to their short-term maturities or floating rate coupons.

As of June 30, 2017 and December 31, 2016, our borrowings under repurchase agreements had the following collateral characteristics (dollars in thousands):
 
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Weighted Average
 
 
 
Weighted Average
Collateral Type
 
Borrowings
Outstanding
 
Interest Rate
 
Days
to Maturity
 
Borrowings
Outstanding
 
Interest Rate
 
Days
to Maturity
Agency securities
 
$
3,238,144

 
1.28
%
 
107
 
$
2,215,151

 
1.00
%
 
159
Non-agency securities
 
567,634

 
2.56
%
 
23
 
755,665

 
2.23
%
 
23
Total repurchase agreements
 
$
3,805,778

 
1.47
%
 
94
 
$
2,970,816

 
1.31
%
 
125
The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of June 30, 2017 and December 31, 2016 (dollars in thousands):