MTGE Investment Corp. - FORM 10-Q

Attached files

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EX-32 - EXHIBIT 32 - MTGE Investment Corp.	mtge2018331ex32.htm
EX-31.2 - EXHIBIT 31.2 - MTGE Investment Corp.	mtge2018331ex312.htm
EX-31.1 - EXHIBIT 31.1 - MTGE Investment Corp.	mtge2018331ex311.htm
EX-3.2 - EXHIBIT 3.2 - MTGE Investment Corp.	mtge2018331ex3_2.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 March 31, 2018

Commission file number 001-35260

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 May 1, 2018 was 45,797,687.

MTGE INVESTMENT CORP.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57
Item 4.	Controls and Procedures	61

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	62

Signatures		63

PART I

Item 1. Financial Statements

MTGE INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	March 31, 2018			December 31, 2017
	(unaudited)
Assets:
Agency securities, at fair value (including pledged securities of $3,434,631 and $3,581,868, respectively)	$	3,660,403		$	3,758,181
Non-agency securities, at fair value (including pledged securities of $760,144 and $743,278, respectively)	833,681			872,084
U.S. Treasury securities, at fair value (including pledged securities of $24,903 and $0, respectively)	24,924			—
Land	17,201			16,641
Buildings, furniture, fixtures and equipment, net of accumulated depreciation	259,775			240,352
Cash and cash equivalents	123,396			123,762
Restricted cash and cash equivalents	40,857			46,324
Interest receivable	14,919			14,608
Derivative assets, at fair value	29,726			14,712
Receivable under reverse repurchase agreements	836,901			843,130
Other assets	16,025			23,242
Total assets	$	5,857,808		$	5,953,036
Liabilities:
Repurchase agreements	$	3,743,436		$	3,863,719
Notes payable, net of deferred financing costs	201,986			186,500
Payable for securities purchased	58,182			4,357
Derivative liabilities, at fair value	—			4,454
Dividend payable	24,016			24,016
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	824,688			830,776
Accounts payable and other accrued liabilities	44,904			33,592
Total liabilities	4,897,212			4,947,414
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	1,122,797			1,122,729
Retained deficit	(216,497		)	(171,119		)
Total stockholders’ equity	959,797			1,005,107
Noncontrolling interests	799			515
Total equity	960,596			1,005,622
Total liabilities and equity	$	5,857,808		$	5,953,036

See accompanying notes to consolidated financial statements.

MTGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended March 31,
	2018			2017
Interest income:
Agency securities	$	27,511		$	17,901
Non-agency securities	11,994			15,696
Other	125			160
Interest expense	(17,053		)	(10,165		)
Net interest income	22,577			23,592

Healthcare real estate:
Healthcare real estate income	7,760			3,315
Healthcare real estate expense	(5,795		)	(2,653		)
Net healthcare investment income	1,965			662

Other gains (losses):
Realized loss on agency securities, net	(1,940		)	(212		)
Realized gain on non-agency securities, net	4,154			12,714
Realized gain (loss) on periodic settlements of interest rate swaps, net	358			(2,660		)
Realized gain on other derivatives and securities, net	2,736			2,167
Unrealized loss on agency securities, net	(76,170		)	(115		)
Unrealized gain (loss) on non-agency securities, net	(3,337		)	13,014
Unrealized gain (loss) on other derivatives and securities, net	33,457			(2,839		)
Servicing income	50			2,558
Servicing expense	(250		)	(4,985		)
Total other gains (losses), net	(40,942		)	19,642
Expenses:
Management fees	3,389			3,376
General and administrative expenses	1,578			1,719
Total expenses	4,967			5,095
Net income (loss)	(21,367		)	38,801
Dividend on preferred stock	(1,117		)	(1,117		)
Noncontrolling interest in net loss (income)	5			(2		)
Net income (loss) available to common stockholders	$	(22,479	)	$	37,682

Net income (loss) per common share — basic and diluted	$	(0.49	)	$	0.82

Weighted average common shares — basic	45,810			45,798
Weighted average common shares — diluted	45,822			45,806

Dividend declared per common share	$	0.50		$	0.45

See accompanying notes to consolidated financial statements.

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		Additional Paid-in Capital		Retained Earnings (Deficit)			Noncontrolling Interests			Total Equity
Balance, December 31, 2016	2,200	$	53,039	45,798	$	458	$	1,122,493	$	(243,260	)	$	315		$	933,045
Net income	—	—		—	—		—		38,799			2			38,801
Distribution to noncontrolling interest	—	—		—	—		—		—			(11		)	(11		)
Stock-based compensation	—	—					34		—			—			34
Preferred dividends declared							—		(1,117		)	—			(1,117		)
Common dividends declared	—	—		—	—		—		(20,609		)	—			(20,609		)
Balance, March 31, 2017	2,200	$	53,039	45,798	$	458	$	1,122,527	$	(226,187	)	$	306		$	950,143

Balance, December 31, 2017	2,200	$	53,039	45,798	$	458	$	1,122,729	$	(171,119	)	$	515		$	1,005,622
Net income	—	—		—	—		—		(21,362		)	(5		)	(21,367		)
Issuance of noncontrolling interest	—	—		—	—		—		—			293			293
Distribution to noncontrolling interest	—	—		—	—		—		—			(4		)	(4		)
Stock-based compensation	—	—		—	—		68		—			—			68
Preferred dividends declared	—	—		—	—		—		(1,117		)	—			(1,117		)
Common dividends declared	—	—		—	—		—		(22,899		)	—			(22,899		)
Balance, March 31, 2018	2,200	$	53,039	45,798	$	458	$	1,122,797	$	(216,497	)	$	799		$	960,596

See accompanying notes to consolidated financial statements.

MTGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	For the Three Months Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(21,367	)	$	38,801
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of net premium on agency securities	4,486			5,481
Accretion of net discount on non-agency securities	(3,768		)	(6,783		)
Depreciation and amortization on real estate investments	2,059			771
Realization of cash flows from MSR	—			1,089
Unrealized loss (gain) on securities, MSR and derivatives, net	46,050			(10,060		)
Realized loss (gain) on agency securities, net	1,940			212
Realized gain on non-agency securities, net	(4,154		)	(12,714		)
Realized loss (gain) on other derivatives and securities, net	(3,094		)	592
Stock-based compensation	68			34
Increase in interest receivable	(311		)	(826		)
Decrease in other assets	4,024			4,799
Increase (decrease) in operating accounts payable and other accrued liabilities	(38		)	5,511
Net cash flows from operating activities	25,895			26,907
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of agency securities	(284,077		)	(485,296		)
Purchases of non-agency securities	(65,690		)	(77,819		)
Purchases of healthcare real estate investments	(21,984		)	(26,634		)
Proceeds from sale of agency securities	220,435			208,457
Proceeds from sale of non-agency securities	89,902			260,473
Proceeds from sale of MSR	3,193			43,823
Principal collections on agency securities	107,745			85,136
Principal collections on non-agency securities	18,776			43,258
Net proceeds from (payments on) reverse repurchase agreements	6,229			(847,588		)
Purchases of U.S. Treasury securities	(141,912		)	(332,959		)
Proceeds from sale of U.S. Treasury securities	153,449			1,193,721
Payments for the termination of interest rate swaps	—			(3,841		)
Other investing cash flows, net	10,788			(12,098		)
Net cash flows from investing activities	96,854			48,633
CASH FLOWS USED IN FINANCING ACTIVITIES:
Dividends paid	(24,016		)	(19,436		)
Issuance of noncontrolling interest	293			—
Distributions to noncontrolling interest	(4		)	(11		)
Proceeds from repurchase agreements and Federal Home Loan Bank advances	5,503,995			5,987,161
Repayments on repurchase agreements and Federal Home Loan Bank advances	(5,624,278		)	(6,035,054		)
Proceeds from notes payable, net of deferred financing costs	15,938			19,774
Repayments of notes payable	(510		)	(93		)
Net cash flows used in financing activities	(128,582		)	(47,659		)
Net increase (decrease) in cash and cash equivalents and restricted cash	(5,833		)	27,881
Cash and cash equivalents and restricted cash at beginning of the period	170,086			136,645
Cash and cash equivalents and restricted cash at end of period	$	164,253		$	164,526

See accompanying notes to consolidated financial statements.

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 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.

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 income. As a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable income to the extent that we distribute all of our annual taxable income to our stockholders. It is our intention to distribute 100% of our taxable 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.

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 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 healthcare 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.

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 for impairment annually or 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.

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 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 observable market inputs, including LIBOR, swap rates and the forward yield curve, 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, including LIBOR, swap rates 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 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 gain (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 gain (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 gain (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.

Adoption of Accounting Standard Updates

As of January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), and ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. Net income was not impacted. The adoption of ASU 2016-18 resulted in the presentation of restricted cash with cash and cash equivalents on the consolidated statements of cash flows when reconciling the total beginning and ending amounts. Our prior period results have been revised to conform to the current presentation.

Note 4. Agency Securities

The following tables summarize our investments in agency RMBS as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018
	Fannie Mae			Freddie Mac			Total
Agency RMBS:
Par value	$	2,393,236		$	1,196,372		$	3,589,608
Unamortized premium	118,223			63,641			181,864
Amortized cost	2,511,459			1,260,013			3,771,472
Gross unrealized gains	688			281			969
Gross unrealized losses	(75,332		)	(36,706		)	(112,038		)
Agency RMBS, at fair value	$	2,436,815		$	1,223,588		$	3,660,403

Weighted average coupon as of March 31, 2018	3.61		%	3.73		%	3.65		%
Weighted average yield as of March 31, 2018	2.82		%	2.96		%	2.87		%
Weighted average yield for the three months ended March 31, 2018	2.94		%	3.12		%	3.00		%



	March 31, 2018
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency RMBS:
Fixed rate	$	3,698,545	$	718	$	(111,935	)	$	3,587,328
Adjustable rate	72,927		251		(103		)	73,075
Total Agency RMBS	$	3,771,472	$	969	$	(112,038	)	$	3,660,403



	December 31, 2017
	Fannie Mae			Freddie Mac			Total
Agency RMBS:
Par value	$	2,485,055		$	1,117,551		$	3,602,606
Unamortized premium	127,008			63,466			190,474
Amortized cost	2,612,063			1,181,017			3,793,080
Gross unrealized gains	3,876			1,149			5,025
Gross unrealized losses	(28,364		)	(11,560		)	(39,924		)
Agency RMBS, at fair value	$	2,587,575		$	1,170,606		$	3,758,181

Weighted average coupon as of December 31, 2017	3.63		%	3.75		%	3.67		%
Weighted average yield as of December 31, 2017	2.78		%	2.89		%	2.82		%
Weighted average yield for the year ended December 31, 2017	2.67		%	2.69		%	2.68		%



	December 31, 2017
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency RMBS:
Fixed rate	$	3,717,285	$	3,707	$	(39,924	)	$	3,681,068
Adjustable rate	75,795		1,318		—			77,113
Total Agency RMBS	$	3,793,080	$	5,025	$	(39,924	)	$	3,758,181

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 March 31, 2018 and December 31, 2017 according to their estimated weighted average life classification (dollars in thousands):



	March 31, 2018								December 31, 2017
					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	$	42,371	$	43,132	2.10	%	3.93	%	$	40,404	$	40,815	2.06	%	3.92	%
Greater than three years and less than or equal to five years	489,624		498,048		2.39	%	3.15	%	534,299		535,608		2.38	%	3.19	%
Greater than five years and less than or equal to 10 years	2,872,403		2,967,793		2.94	%	3.74	%	3,149,565		3,182,468		2.90	%	3.75	%
Greater than 10 years	256,005		262,499		3.15	%	3.55	%	33,913		34,189		2.98	%	3.50	%
Total	$	3,660,403	$	3,771,472	2.87	%	3.65	%	$	3,758,181	$	3,793,080	2.82	%	3.67	%

As of March 31, 2018 and December 31, 2017, the estimated weighted average life of our agency security portfolio was 8.0 years and 7.5 years, respectively, which incorporates anticipated future prepayment assumptions. As of March 31, 2018 and December 31, 2017, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was 7.6% and 8.4%, respectively.

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of agency RMBS during three months ended March 31, 2018 and 2017 (dollars in thousands):



	For the Three Months Ended March 31,
	2018			2017
Proceeds from agency securities sold	$	220,435		$	208,457
Less agency securities sold, at cost	(222,375		)	(208,669		)
Realized loss on agency securities, net	$	(1,940	)	$	(212	)

Gross realized gains on sale of agency securities	$	14		$	1,270
Gross realized losses on sale of agency securities	(1,954		)	(1,482		)
Realized loss on agency securities, net	$	(1,940	)	$	(212	)

Pledged Assets

The following tables summarize our agency RMBS pledged as collateral under financing and derivative agreements by type as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018
	Fannie Mae		Freddie Mac		Total
Fair Value of Agency Securities Pledged Under:
Financing agreements	$	2,294,011	$	1,140,080	$	3,434,091
Derivative agreements	80		460		540
Total fair value	2,294,091		1,140,540		3,434,631
Accrued interest on pledged agency RMBS	6,800		3,476		10,276
Total Fair Value of Agency RMBS Pledged and Accrued Interest	$	2,300,891	$	1,144,016	$	3,444,907



	December 31, 2017
	Fannie Mae		Freddie Mac		Total
Fair Value of Agency Securities Pledged Under:
Financing agreements	$	2,443,591	$	1,137,587	$	3,581,178
Derivative agreements	84		606		690
Total fair value	2,443,675		1,138,193		3,581,868
Accrued interest on pledged agency RMBS	7,132		3,399		10,531
Total Fair Value of Agency RMBS Pledged and Accrued Interest	$	2,450,807	$	1,141,592	$	3,592,399

The following table summarizes our agency RMBS pledged as collateral under financings agreements, by remaining maturity, including securities pledged related to sold but not yet settled securities, as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018						December 31, 2017
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest		Fair Value		Amortized Cost		Accrued Interest
30 days or less	$	1,102,225	$	1,136,865	$	3,262	$	940,788	$	949,282	$	2,765
31 - 59 days	985,955		1,015,732		2,974		1,298,331		1,311,882		3,818
60 - 90 days	359,108		370,094		1,096		261,823		262,908		785
Greater than 90 days	986,803		1,019,398		2,944		1,080,236		1,091,195		3,161
Total	$	3,434,091	$	3,542,089	$	10,276	$	3,581,178	$	3,615,267	$	10,529

As of March 31, 2018 and December 31, 2017, none of our repurchase agreement borrowings backed by agency RMBS had original overnight maturities.

Note 5. Non-Agency Securities

The following tables summarize our non-agency securities as of March 31, 2018 and December 31, 2017 (dollars in thousands):



March 31, 2018
	Fair Value		Gross Unrealized					Amortized Cost		Premium (Discount)			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Premium (Discount)			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime	$	139,841	$	9,529	$	(77	)	$	130,389	$	(13,262	)	$	143,651	3.86	%	5.89	%
CRT	300,338		16,465		(81		)	283,954		13,258			270,696		5.50	%	5.68	%
Alt-A	277,083		50,162		(628		)	227,549		(109,122		)	336,671		2.94	%	9.21	%
Option-ARM	84,683		12,790		—			71,893		(20,305		)	92,198		2.11	%	6.79	%
Subprime	13,337		873		—			12,464		(664		)	13,128		5.20	%	5.92	%
CMBS	18,399		171		(85		)	18,313		(187		)	18,500		5.68	%	6.04	%
Total	$	833,681	$	89,990	$	(871	)	$	744,562	$	(130,282	)	$	874,844	3.91	%	6.92	%

————————


⁽¹⁾	Coupon rates are floating, except for $11.4 million, $5.6 million, $12.0 million, $13.3 million and $18.4 million fair value of fixed-rate prime, CRT, Alt-A, subprime and CMBS non-agency securities, respectively, as of March 31, 2018.



December 31, 2017
	Fair Value		Gross Unrealized					Amortized Cost		Premium (Discount)			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Premium (Discount)			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime	$	143,329	$	9,342	$	(12	)	$	133,999	$	(13,893	)	$	147,892	3.77	%	5.66	%
CRT	322,819		18,346		—			304,473		16,011			288,462		5.34	%	5.23	%
Alt-A	286,953		51,123		(774		)	236,604		(112,305		)	348,909		2.69	%	8.93	%
Option-ARM	86,886		13,114		—			73,772		(21,044		)	94,816		1.79	%	6.58	%
Subprime	13,374		929		—			12,445		(683		)	13,128		5.20	%	5.97	%
CMBS	18,723		387		—			18,336		(164		)	18,500		5.68	%	6.03	%
Total	$	872,084	$	93,241	$	(786	)	$	779,629	$	(132,078	)	$	911,707	3.73	%	6.59	%

————————


⁽¹⁾	Coupon rates are floating, except for $11.8 million, $0.9 million,$12.2 million, $13.4 million and $18.7 million fair value of fixed-rate prime, CRT, Alt-A, subprime and CMBS non-agency securities, respectively, as of December 31, 2017.

The following table summarizes our non-agency securities at fair value, by their estimated weighted average life classifications as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018								December 31, 2017
					Weighted Average								Weighted Average
Estimated Weighted Average Life	Fair Value		Amortized Cost		Coupon		Yield		Fair Value		Amortized Cost		Coupon		Yield
≤ 5 years	$	285,566	$	244,884	3.33	%	8.44	%	$	302,797	$	258,501	3.11	%	8.31	%
> 5 to ≤ 7 years	258,753		226,721		4.17	%	7.05	%	398,712		361,649		4.33	%	5.97	%
> 7 years	289,362		272,957		4.35	%	5.43	%	170,575		159,479		3.61	%	5.18	%
Total	$	833,681	$	744,562	3.91	%	6.92	%	$	872,084	$	779,629	3.73	%	6.59	%

Our Prime non-agency securities include investments in securitization trusts collateralized by prime mortgage loans, which were originated between 2002 and 2006, a period of generally weaker underwriting standards and elevated housing prices. As a result, there is still material credit risk embedded in these loan origination vintages. As of March 31, 2018, Prime non-agency securities also include $17.2 million in fair value of securities with underlying mortgage loans that were originated with more stringent underwriting standards beginning in 2010. As of March 31, 2018, our Prime securities have both fixed and floating rate coupons ranging from 2.5% to 6.5%, with weighted average coupons of underlying collateral ranging from 3.5% to 5.0%.

Our CRT reference the performance of loans underlying agency RMBS issued by Fannie Mae or Freddie Mac, which were subject to their underwriting standards. As of March 31, 2018, our CRT securities had fixed and floating rate coupons ranging from 1.3% to 8.8%, with weighted average coupons of underlying collateral ranging from 3.6% to 4.3%. The loans underlying our CRT securities were originated between 2012 and 2018.

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 March 31, 2018, our Alt-A securities had both fixed and floating rate coupons ranging from 2.0% to 6.5% with weighted average coupons of underlying collateral ranging from 3.6% to 5.8%.

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 March 31, 2018, our Option-ARM securities had coupons ranging from 2.0% to 2.6% and have underlying collateral with weighted average coupons between 3.5% and 4.5%. 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 March 31, 2018, our Subprime securities had a fair value of $13.3 million with fixed and floating rate coupons ranging from 5.0% to 5.5% and have underlying collateral with weighted-average coupons ranging from 5.5% to 5.7%.

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 March 31, 2018, our CMBS securities had a fair market value of $18.4 million with fixed rate coupons ranging from 5.2% to 6.6% and underlying collateral with a weighted average coupon of 4.5%.

More than 87% of our non-agency RMBS are rated below investment grade or have not been rated by credit agencies as of March 31, 2018.

Realized Gains and Losses

The following table summarizes our net realized gains from the sale of non-agency securities during three months ended March 31, 2018 and 2017 (dollars in thousands):



	For the Three Months Ended March 31,
	2018			2017
Proceeds from non-agency securities sold	$	89,901		$	260,473
Increase in receivable for securities sold	—			5,748
Less: non-agency securities sold, at cost	(85,747		)	(253,507		)
Realized gain on non-agency securities, net	$	4,154		$	12,714

Gross realized gain on sale of non-agency securities	$	4,155		$	12,864
Gross realized loss on sale of non-agency securities	(1		)	(150		)
Realized gain on non-agency securities, net	$	4,154		$	12,714

Pledged Assets

Non-agency securities with a fair value of $0.8 billion and $0.7 billion were pledged as collateral under financing arrangements as of March 31, 2018 and December 31, 2017, respectively, none of which had original overnight maturities.

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 March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018						December 31, 2017
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest		Fair Value		Amortized Cost		Accrued Interest
30 days or less	$	686,521	$	614,635	$	1,052	$	585,943	$	517,750	$	815
31 - 59 days	60,500		50,754		75		97,537		82,105		145
60 - 90 days	13,123		10,311		17		59,798		58,651		135
Total	$	760,144	$	675,700	$	1,144	$	743,278	$	658,506	$	1,095

Note 6. Investments in Real Property

Investment Activity

During March 2018, CHI acquired a senior living facility located in Kansas for total consideration of $21.5 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 has been allocated to assets and liabilities based upon their respective fair values in accordance with our accounting policies. As a result of these purchase price allocations, $20.0 million was allocated to buildings, $0.9 million to furniture, fixtures and equipment and $0.6 million to land during the first quarter of 2018.

The following table summarizes our real estate investments net of accumulated depreciation as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018			December 31, 2017
Buildings and improvements	$	253,649		$	233,407
Furniture, fixtures and equipment	15,719			14,537
Less: accumulated depreciation	(9,593		)	(7,592		)
Buildings, furniture, fixtures and equipment, net of accumulated depreciation	259,775			240,352
Land	17,201			16,641
Goodwill	5,840			5,840
Net working capital ⁽¹⁾	16,369			18,994
Total real estate assets	$	299,185		$	281,827

————————


⁽¹⁾	Net working capital primarily includes $14.7 million and $16.1 million of cash and cash equivalents and $3.4 million and $2.8 million of rent receivable recorded in other assets on the consolidated balances sheets as of March 31, 2018 and December 31, 2017, respectively.

Notes Payable

CHI finances its real estate investments primarily through secured debt. As of March 31, 2018, CHI had fixed rate debt with a principal amount of $138.3 million, a weighted average maturity of 25.3 years and an interest rate of 3.81% and floating rate debt with a principal amount of $66.4 million, a weighted average maturity of 0.9 years and a weighted average interest rate of 4.63%. As of December 31, 2017, CHI had floating rate debt with a principal amount of $50.3 million, a weighted average maturity of 0.8 years and a weighted average interest rate of 4.34% and fixed rate debt with a principal amount of $138.8 million, a weighted average maturity of 25.6 years and an interest rate of 3.80%.

The following is a summary of our notes payable activity for the three months ended March 31, 2018 and 2017 (dollars in thousands):



	For the Three Months Ended March 31,
	2018			2017
Beginning balance	$	186,500		$	66,527
Debt issued and assumed, net of deferred financing costs	15,938			19,581
Amortization of deferred financing costs	58			193
Principal repayments	(510		)	(93		)
Ending balance	$	201,986		$	86,208

Our notes payable of $204.7 million, excluding $2.7 million of deferred financing costs, had a fair value of approximately $198 million as of March 31, 2018. Our notes payable of $189.0 million, excluding $2.5 million of deferred financing costs, had a fair value of approximately $190 million as of December 31, 2017.

Income from Healthcare Real Estate Investments

The following table presents the components of net income from our real property investments during the three months ended March 31, 2018 and 2017 (dollars in thousands):



	For the Three Months Ended March 31,
	2018		2017
Lease income	$	5,706	$	2,253
Rental income	2,054		1,062
Healthcare real estate income	7,760		3,315

Interest expense	2,089		1,173
Depreciation	2,001		771
Tenant expenses	1,425		709
Other	280		—
Healthcare real estate expense	5,795		2,653
Net healthcare investment income	$	1,964	$	662

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 healthcare 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.

At March 31, 2018, future minimum lease payments receivable related to our healthcare and senior living facilities are as follows (dollars in thousands):



	March 31, 2018
2018	$	15,301
2019	20,764
2020	21,191
2021	21,627
2022	22,073
Thereafter	193,233
Total	$	294,189

Note 7. Repurchase Agreements

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 March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, our borrowings under repurchase agreements had the following collateral characteristics (dollars in thousands):



	March 31, 2018					December 31, 2017
			Weighted Average					Weighted Average
Collateral Type	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Agency securities	$	3,170,784	1.78	%	106	$	3,307,662	1.54	%	114
Non-agency securities	569,380		2.93	%	18	556,057		2.72	%	24
U.S. Treasury securities	3,272		1.65	%	1	—		N/A		N/A
Total repurchase agreements	$	3,743,436	1.96	%	92	$	3,863,719	1.71	%	101

The following table summarizes our borrowings under repurchase arrangements as of March 31, 2018 and December 31, 2017 (dollars in thousands):



	March 31, 2018					December 31, 2017
			Weighted Average					Weighted Average
	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
≤ 1 month	$	1,584,501	2.09	%	14	$	1,341,712	1.91	%	17
> 1 to ≤ 2 months	955,061		1.80	%	43	1,334,493		1.55	%	40
> 2 to ≤ 3 months	342,533		1.95	%	78	295,204		1.76	%	76
> 3 to ≤ 6 months	510,378		1.71	%	155	334,372		1.51	%	123
> 6 to ≤ 12 months	85,963		2.04	%	301	292,938		1.57	%	256
> 12 months	265,000		2.18	%	568	265,000		1.80	%	658
Total repurchase agreements	$	3,743,436	1.96	%	92	$	3,863,719	1.71	%	101

We had repurchase agreements with 36 financial institutions as of March 31, 2018. Less than 4% of stockholders' equity was at risk due to collateral pledged in excess of borrowings under repurchase agreements with any one counterparty, with the top five counterparties representing approximately 17% of our stockholders' equity at risk as of March 31, 2018.

We had agency RMBS with fair values of $3.4 billion and $3.6 billion pledged as collateral against repurchase agreements as of March 31, 2018 and December 31, 2017, respectively. We had non-agency securities with fair values of $0.8 billion and $0.7 billion pledged as collateral against repurchase agreements as of March 31, 2018 and December 31, 2017, respectively.

Note 8. Derivatives and Other Securities

In connection with our risk management strategy, we mitigate our exposure to market risks, including interest rate risk, prepayment risk and credit risk, by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or sell options on TBA securities or we may invest in other types of derivative securities, including synthetic total return swaps and credit default swaps. Our risk management strategy attempts to manage the overall risk of the portfolio and reduce fluctuations in net asset value. Derivatives have not been designated as hedging instruments. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 3.

The table below presents the balance sheet location and fair value information for our derivatives outstanding as of March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018		December 31, 2017
Derivative assets:
Interest rate swaps	$	7,195	$	4,894
Interest rate swaptions	12,820		6,728
TBA securities	9,711		3,090
Derivative assets, at fair value	$	29,726	$	14,712

Derivative liabilities:
TBA securities	—		1,339
Credit default swaps	—		3,115
Derivative liabilities, at fair value	$	—	$	4,454

The following tables summarize the effect of our outstanding derivatives and other securities on our consolidated statements of operations during three months ended March 31, 2018 and 2017 (in thousands):



	For the Three Months Ended March 31,
	2018							2017
	Realized Gain on Periodic Settlements of Interest Rate Swaps, net		Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net		Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net
Interest rate swaps	$	358	$	47,929		$	2,120	$	(2,660	)	$	26,021		$	(21,830	)
Interest rate swaptions	—		—			5,322		—			—			(428		)
TBA securities	—		(43,145		)	7,959		—			(24,290		)	29,510
Short sales of U.S. Treasuries	—		(389		)	16,503		—			251			(9,641		)
Credit default swaps	—		(1,648		)	1,528		—			(43		)	(457		)
Other	—		(11		)	25		—			228			7
Total	$	358	$	2,736		$	33,457	$	(2,660	)	$	2,167		$	(2,839	)

The following tables summarize changes in notional amounts for our outstanding derivatives and other securities during three months ended March 31, 2018 and 2017 (in thousands):



	December 31, 2017 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		March 31, 2018 Notional Amount
Interest rate swaps	$	3,530,000		100,000	—		$	3,630,000
Interest rate swaptions	$	425,000		75,000	—		$	500,000
TBA securities	$	1,704,386		5,057,110	(5,174,652	)	$	1,586,844
U.S. Treasuries	$	—		119,500	(94,500	)	$	25,000
Short sales of U.S. Treasuries	$	(846,700	)	49,500	(60,500	)	$	(857,700	)
Credit default swaps	$	48,000		—	(48,000	)	$	—



	December 31, 2016 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		March 31, 2017 Notional Amount
Interest rate swaps	$	2,975,000		75,000	(75,000	)	$	2,975,000
Interest rate swaptions	$	150,000		—	—		$	150,000
TBA securities	$	886,042		7,928,617	(6,774,908	)	$	2,039,751
U.S. Treasuries	$	21,000		22,500	(43,500	)	$	—
Short sales of U.S. Treasuries	$	(511,000	)	318,500	(1,172,000	)	$	(1,364,500	)
Credit default swaps	$	49,000		—	(500	)	$	48,500

Interest Rate Swap Agreements

Our derivative portfolio includes interest rate swaps, which are used to manage our exposure to interest rate risk. Under our interest rate swaps, we typically pay a fixed rate and receive a floating rate based on LIBOR with terms usually ranging up to 15 years. As of March 31, 2018 and December 31, 2017, we had interest rate swap agreements summarized in the table below (dollars in thousands).

MTGE Investment Corp. - FORM 10-Q - May 10, 2018

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