Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Total stockholders’ equity
|
|
|
$264,145
|
|
|
$262,569
|
|
|
$257,556
|
|
|
$258,375
|
|
Less: Non-controlling interests in Operating Partnership
|
|
|
($3,112)
|
|
|
($3,134)
|
|
|
($3,485)
|
|
|
($2,899)
|
|
Less: Aggregate liquidation preference of Series A and B Preferred Stock
|
|
|
($119,541)
|
|
|
($119,541)
|
|
|
($119,541)
|
|
|
($119,541)
|
|
Common CHMI stockholders’ equity
|
|
|
$141,492
|
|
|
$139,894
|
|
|
$134,530
|
|
|
$135,935
|
|
Common stock outstanding (period end)
|
|
|
25,648,130
|
|
|
26,978,077
|
|
|
26,978,077
|
|
|
30,019,969
|
|
GAAP BVPS
|
|
|
$5.52
|
|
|
$5.19
|
|
|
$4.99
|
|
|
$4.53
|
|
Quarterly common dividend per share
|
|
|
$0.27
|
|
|
$0.15
|
|
|
$0.15
|
|
|
$0.15
|
|
GAAP BVPS plus quarterly common dividend
|
|
|
$5.79
|
|
|
$5.34
|
|
|
$5.14
|
|
|
$4.68
|
|
Quarterly economic return (loss) on GAAP BVPS*
|
|
|
(4.5%)
|
|
|
(3.3%)
|
|
|
(1.0%)
|
|
|
(6.2%)
|
|
|
*
|
GAAP BVPS plus quarterly common dividend for the period divided by GAAP BVPS at the end of the prior period minus one.
|
Quarterly economic return (loss) on GAAP BVPS for each quarterly period in 2022 is calculated as follows (dollars in thousands except per share amounts):
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Total stockholders’ equity
|
|
|
$259,651
|
|
|
$255,084
|
|
|
$250,801
|
|
|
$265,516
|
|
Less: Non-controlling interests in Operating Partnership
|
|
|
($3,666)
|
|
|
($3,315)
|
|
|
($4,182)
|
|
|
($3,481)
|
|
Less: Aggregate liquidation preference of Series A and B Preferred Stock
|
|
|
($119,541)
|
|
|
($119,541)
|
|
|
($119,541)
|
|
|
($119,541)
|
|
Common CHMI stockholders’ equity
|
|
|
$136,444
|
|
|
$132,228
|
|
|
$127,078
|
|
|
$142,494
|
|
Common stock outstanding (period end)
|
|
|
18,766,848
|
|
|
19,647,945
|
|
|
20,989,030
|
|
|
23,508,130
|
|
GAAP BVPS
|
|
|
$7.27
|
|
|
$6.73
|
|
|
$6.05
|
|
|
$6.06
|
|
Quarterly common dividend per share
|
|
|
$0.27
|
|
|
$0.27
|
|
|
$0.27
|
|
|
$0.27
|
|
GAAP BVPS plus quarterly common dividend
|
|
|
$7.54
|
|
|
$7.00
|
|
|
$6.32
|
|
|
$6.33
|
|
Quarterly economic return (loss) on GAAP BVPS*
|
|
|
(11.9%)
|
|
|
(3.7%)
|
|
|
(6.1%)
|
|
|
4.6%
|
|
|
*
|
GAAP BVPS plus quarterly common dividend for the period divided by GAAP BVPS minus one.
|
TABLE OF CONTENTS
|
(4)
|
Total economic return (loss) on NAV for the years ended December 31, 2023 and 2022 is the compounded quarterly economic return (loss) on NAV for each quarterly period in 2023 and 2022, as applicable.
|
Quarterly economic return (loss) on NAV for each quarterly period in 2023 is calculated as follows (dollars in thousands except per share amounts):
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Total stockholders’ equity
|
|
|
$264,145
|
|
|
$262,569
|
|
|
$257,556
|
|
|
$258,375
|
|
Less: Non-controlling interests in Operating Partnership
|
|
|
($3,112)
|
|
|
($3,134)
|
|
|
($3,485)
|
|
|
($2,899)
|
|
Common and preferred CHMI stockholders’ equity
(a)
|
|
|
$261,033
|
|
|
$259,435
|
|
|
$254,071
|
|
|
$255,476
|
|
Common stock outstanding (period end)
|
|
|
25,648,130
|
|
|
26,978,077
|
|
|
26,978,077
|
|
|
30,019,969
|
|
Adjustment for Series A and B preferred stock
(b)
|
|
|
19,726,217
|
|
|
21,655,956
|
|
|
23,032,924
|
|
|
23,956,087
|
|
Adjusted shares of common stock outstanding (period end)
|
|
|
45,374,347
|
|
|
48,634,033
|
|
|
50,011,001
|
|
|
53,976,056
|
|
NAV per adjusted share of common stock
|
|
|
$5.75
|
|
|
$5.33
|
|
|
$5.08
|
|
|
$4.73
|
|
Quarterly common dividends
|
|
|
$6,925
|
|
|
$4,047
|
|
|
$4,047
|
|
|
$4,503
|
|
Quarterly preferred dividends
|
|
|
$2,466
|
|
|
$2,466
|
|
|
$2,466
|
|
|
$2,466
|
|
Quarterly cash dividends (common and preferred)
|
|
|
$9,391
|
|
|
$6,512
|
|
|
$6,512
|
|
|
$6,969
|
|
Quarterly cash dividend per adjusted share of common stock outstanding
|
|
|
$0.21
|
|
|
$0.13
|
|
|
$0.13
|
|
|
$0.13
|
|
NAV and quarterly cash dividend per adjusted share of common stock outstanding
|
|
|
$5.96
|
|
|
$5.46
|
|
|
$5.21
|
|
|
$4.86
|
|
Quarterly economic return (loss) on NAV*
|
|
|
(1.7%)
|
|
|
(1.0%)
|
|
|
0.4%
|
|
|
(2.6%)
|
|
|
*
|
NAV and quarterly cash dividend per adjusted share of common stock outstanding divided by NAV per adjusted share of common stock at the end of the prior period minus one.
|
|
(a)
|
Includes aggregate liquidation preference of Series A and B preferred stock of $119,541.
|
|
(b)
|
Aggregate liquidation preference of Series A and B preferred stock divided by GAAP BVPS as of the prior quarter end.
|
Quarterly economic return (loss) on NAV for each quarterly period in 2022 is calculated as follows (dollars in thousands except per share amounts):
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
Total stockholders’ equity
|
|
|
$259,651
|
|
|
$255,084
|
|
|
$250,801
|
|
|
$265,516
|
|
Less: Non-controlling interests in Operating Partnership
|
|
|
($3,666)
|
|
|
($3,315)
|
|
|
($4,182)
|
|
|
($3,481)
|
|
Common and preferred CHMI stockholders’ equity
(a)
|
|
|
$255,985
|
|
|
$251,769
|
|
|
$246,619
|
|
|
$262,035
|
|
Common stock outstanding (period end)
|
|
|
18,766,848
|
|
|
19,647,945
|
|
|
20,989,030
|
|
|
23,508,130
|
|
Adjustment for Series A and B preferred stock
(b)
|
|
|
13,965,055
|
|
|
16,443,036
|
|
|
17,762,389
|
|
|
19,758,822
|
|
Adjusted shares of common stock outstanding (period end)
|
|
|
32,731,903
|
|
|
36,090,981
|
|
|
38,751,419
|
|
|
43,266,952
|
|
NAV per adjusted share of common stock
|
|
|
$7.82
|
|
|
$6.98
|
|
|
$6.36
|
|
|
$6.06
|
|
Quarterly common dividends
|
|
|
$5,067
|
|
|
$5,305
|
|
|
$5,667
|
|
|
$6,347
|
|
Quarterly preferred dividends
|
|
|
$2,466
|
|
|
$2,466
|
|
|
$2,466
|
|
|
$2,466
|
|
Quarterly cash dividends (common and preferred)
|
|
|
$7,533
|
|
|
$7,771
|
|
|
$8,133
|
|
|
$8,813
|
|
Quarterly cash dividend per adjusted share of common stock outstanding
|
|
|
$0.23
|
|
|
$0.22
|
|
|
$0.21
|
|
|
$0.20
|
|
NAV and quarterly cash dividend per adjusted share of common stock outstanding
|
|
|
$8.05
|
|
|
$7.20
|
|
|
$6.57
|
|
|
$6.26
|
|
Quarterly economic return (loss) on NAV
|
|
|
(6.0%)
|
|
|
(1.0%)
|
|
|
(2.4%)
|
|
|
3.5%
|
|
|
*
|
NAV and quarterly cash dividend per adjusted share of common stock outstanding divided by NAV per adjusted share of common stock at the end of the prior period minus one.
|
|
(a)
|
Includes aggregate liquidation preference of Series A and B preferred stock of $119,541.
|
|
(b)
|
Aggregate liquidation preference of Series A and B preferred stock divided by GAAP BVPS as of the prior quarter end.
|
|
(5)
|
Calculated as the average of our quarter end common stock price divided by our quarter end GAAP book value per share of common stock for the four quarterly periods ended December 31, 2023 and 2022, as applicable.
|
TABLE OF CONTENTS
We believe that our Manager uses payments made by us under the management agreement in part to pay for the services it receives under the services agreement with Freedom Mortgage, including the payroll and benefits received by Mr. Lown, our President and Chief Executive Officer, and the payroll and benefits received by Mr. Evans, our Chief Investment Officer. However, our Manager is not required to do so, and it is not required to provide us with information regarding the portion, if any, of the management fee so used. Our Manager itself has no formal compensation program. We do not pay or accrue any salaries to our NEOs. However, under the management agreement, we reimburse our Manager for the cash compensation paid to Mr. Hutchby, our Chief Financial Officer, Treasurer and Secretary, as reflected in “Executive Compensation—Summary Compensation Table” below.
Based on conversations with our Manager, the aggregate compensation of our NEOs that may reasonably be associated with their management of our company totaled approximately $2.6 million for 2023 (88.3% of which was fixed base salary and 11.7% of which was variable/incentive pay). The aggregate compensation of our NEOs represents approximately 38.2% of the $6.8 million in total management fees and reimbursements paid by us to our Manager for 2023. No specific metrics are utilized by our Manager or its affiliates for purposes of measuring performance to determine our NEOs’ variable/incentive pay.
The Compensation Committee is responsible for overseeing the equity compensation component of our executive compensation program and approves and recommends all equity awards granted pursuant to our equity incentive plan, which awards are then ratified by the Board.
Equity Compensation Objectives and Philosophy
The equity compensation paid to our NEOs is designed to drive and reward corporate performance. We believe our equity compensation program reflects good governance practices and the best interests of our stockholders, while striving to meet the following core objectives:
|
•
|
Strengthen our Ability to Retain our Work Force
. We are a specialized company operating in a highly competitive industry, and our continued success depends on retaining our talented executive team. Our equity compensation program is designed to attract and retain highly qualified executives whose abilities and expertise are critical to our long-term success and our competitive advantage. The LTIP Units awarded to our NEOs vest over a three-year period which is particularly important for the Compensation Committee since these individuals do not have employment contracts, and the Compensation Committee does not have control over the level of cash compensation received by these individuals.
|
|
•
|
Align Risk and Reward
. We are committed to creating an environment that encourages increased profitability for our company without undue risk-taking. We strive to focus our NEOs’ decisions on goals that are consistent with our overall business strategy without threatening the long-term viability of our company.
|
|
•
|
Align NEOs’ Interests with Interests of Stockholders
. We are committed to using our equity compensation program to focus our NEOs’ attention on creating value for our stockholders. We believe that the use of LTIP Units for our equity compensation program directly aligns the interests of our NEOs with those of our stockholders since the LTIP Units only receive payments if and to the extent cash dividends are paid on shares of our common stock, and encourages our NEOs to focus on creating long-term stockholder value.
|
Form of Equity Compensation Awarded to Our NEOs
Pursuant to our equity incentive plan, the Compensation Committee may grant equity awards to our NEOs in the form of LTIP Units, options, stock awards, stock appreciation rights, performance units, incentive awards or other equity-based awards. Although our equity incentive plan provides for the use of these types of instruments, we have used LTIP Units with time-based vesting exclusively as the form of equity awarded to our NEOs.
Initially, LTIP Units do not have full parity with our operating partnership’s common units of limited partnership interest (“Common Units”) with respect to liquidating distributions. Under the terms of our operating partnership’s partnership agreement, our operating partnership revalues its assets upon the occurrence of certain
TABLE OF CONTENTS
specified events, and any increase in our operating partnership’s valuation from the time of grant of LTIP Units until such event is allocated first to the holders of LTIP Units to equalize the capital accounts of such holders with the capital accounts of holders of Common Units.
Upon equalization of the capital accounts of the holders of LTIP Units with the holders of Common Units, the LTIP Units achieve full parity with the Common Units for all purposes, including with respect to liquidating distributions. If such parity is reached, vested LTIP Units may be converted into an equal number of Common Units at any time, and thereafter are entitled to all the rights of Common Units, including the right to cause our operating partnership to redeem their Common Units for cash or, at our option, shares of our common stock on a one-for-one basis. However, there are circumstances under which such parity would not be reached.
The grant of LTIP Units does not trigger a tax event for either us or our NEOs and limits the financial statement impact due to the three-year vesting feature. LTIP Units also provide an immediate reward to the recipients because LTIP Units receive distributions as and when dividends are paid on our common stock, whether or not the LTIP Units have fully vested. This form of reward also creates an incentive that is fully aligned with that of our stockholders since distributions are only made if and to the extent holders of our common stock receive cash dividends.
We believe our compensation policies are particularly appropriate since we are an externally managed REIT. To qualify as a REIT for federal income tax purposes, regulations require us to distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. As a result, we believe that our stockholders are principally interested in receiving attractive risk-adjusted dividends and stability in book value. Accordingly, we want to provide an incentive to our personnel that rewards success in achieving these goals and efforts to build the business over time. We believe that this alignment of interests provides an incentive to our personnel to implement strategies that will enhance our long-term performance and promote growth in dividends while preserving book value.
January 2023 LTIP Awards
On January 10, 2023, the Compensation Committee and the Board approved the grant of an aggregate of 43,700 LTIP Units under our 2013 Plan to our NEOs (the “January 2023 LTIP Awards”). The January 2023 LTIP Awards had an aggregate grant date fair value of $264,822 based on our closing stock price on January 10, 2023 of $6.06. The January 2023 LTIP Awards are set forth in more detail under the heading “Executive Compensation – Grants of Plan-Based Awards”. The individual grants made to each of our NEOs on January 10, 2023 are set forth below:
|
|
|
|
Number of
|
|
Aggregate Grant
Date Fair Value of
|
|
Year-over-Year
Percentage Increase in
Aggregate Grant
Date Fair Value
(2)
|
|
Fair Value of LTIP
|
Jeffrey B. Lown II
|
|
|
19,100
|
|
|
$
115,746
|
|
|
10.2%
|
|
|
$
77,164
|
|
Michael A. Hutchby
|
|
|
12,300
|
|
|
$
74,538
|
|
|
10.9%
|
|
|
$
49,692
|
|
Julian B. Evans
|
|
|
12,300
|
|
|
$
74,538
|
|
|
10.9%
|
|
|
$
49,692
|
|
Total/Average
|
|
|
43,700
|
|
|
$264,822
|
|
|
10.6%
|
|
|
$176,548
|
|
(1)
|
Based on our closing stock price on January 10, 2023 of $6.06.
|
|
(2)
|
On January 3, 2022, our NEOs received an aggregate of 28,500 LTIP Units with an aggregate grant date fair value of $239,400 based on our closing stock price on January 3, 2022 of $8.40. Mr. Lown was granted 12,500 LTIP Units with an aggregate grant date fair value of $105,000. Mr. Hutchby was granted 8,000 LTIP Units with an aggregate grant date fair value of $67,200. Mr. Evans was granted 8,000 LTIP Units with an aggregate grant date fair value of $67,200.
|
|
(3)
|
Based on our closing stock price on December 29, 2023 of $4.04.
|
Based on a recommendation made by Mr. Lown to the members of the Compensation Committee in the fourth quarter of 2022, the Compensation Committee determined that a 10.6% year-over-year increase in the aggregate grant date fair value of the LTIP Units awarded to our NEOs compared to the aggregate grant date fair value of the LTIP Units awarded to our NEOs in January 2022 was warranted. This determination was made by the Compensation Committee at its discretion and no formulas or specific weightings were assigned to any factor in reaching this determination. The Compensation Committee considered a number of key company results and
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developments relating to strategic and operational goals in determining whether it was appropriate to grant equity awards to our NEOs in January 2023, including, among other things, that our company:
|
•
|
Continued dividend payments throughout 2022 and delivered value to stockholders through total cash dividends of $1.08 per share of common stock in 2022, equivalent to an average dividend yield of 18.6%;
|
|
•
|
Developed reliable performance metrics for the Board to assess our absolute performance and our relative performance in our respective peer group;
|
|
•
|
Enhanced our internal portfolio and financial reporting metrics to provide the Board with a better understanding of our performance at any point in time; and
|
|
•
|
Remained compliant with GSE covenants and regulation at our licensed mortgage servicing subsidiary, Aurora Financial Group, Inc. (“Aurora”).
|
In addition to the strategic and operational goals noted above, the Compensation Committee considered certain financial performance metrics included the following:
|
•
|
Total Economic Return (Loss) on NAV vs. Average Peer Group Total Economic Return (Loss) on NAV
. Over a performance period beginning on October 1, 2021 and ending on September 30, 2022, we achieved a total economic return on NAV of (9.8%), compared to an average total economic return on NAV for a peer group of 13 externally and internally managed public mortgage REITs (the “Peer Group”) of (21.1%) over the same period. For an explanation of how we calculate total economic return (loss) on NAV please see “—Overview of Our Business; Company Performance Highlights—Company Performance Highlights”. Total economic return (loss) on NAV for the companies in the Peer Group was determined based on publicly available information. While certain companies in the Peer Group have considerably larger market capitalizations than us, we focused on companies that have investment strategies comparable to ours and companies that are similar to us in asset management and investment complexity. The Peer Group is used by us to assess our financial performance relative to the Peer Group and not for benchmarking purposes. The Peer Group was recommended by our NEOs and approved by the Compensation Committee and consisted of the following companies:
|
Two Harbors Investment Corp.
Ellington Residential Mortgage REIT
AG Mortgage Investment Trust, Inc.
Chimera Investment Corporation
Dynex Capital, Inc.
|
|
Ellington Financial Inc.
Annaly Capital Management, Inc.
AGNC Investment Corp.
MFA Financial, Inc.
|
|
Armour Residential REIT, Inc.
New York Mortgage Trust, Inc.
Orchid Island Capital, Inc.
Invesco Mortgage Capital, Inc.
|
•
|
Total Economic Return (Loss) on GAAP BVPS vs. Average Peer Group Total Economic Return (Loss) on GAAP BVPS
. Over a performance period beginning on October 1, 2021 and ending on September 30, 2022, we achieved a total economic return (loss) on GAAP BVPS of (22.4%), compared to an average total economic return (loss) on GAAP BVPS for the Peer Group of (27.0%) over the same period. For an explanation of how we calculate total economic return (loss) on GAAP BVPS, please see “—Overview of Our Business; Company Performance Highlights—Company Performance Highlights”. Total economic return (loss) on GAAP BVPS for companies in the Peer Group was determined based on publicly available information.
|
|
•
|
Price to Book Ratio vs. Average Peer Group Price to Book Ratio
. Over a performance period beginning on October 1, 2021 and ending on September 30, 2022, we achieved a price to book ratio of 94.7% compared to an average price to book ratio for the Peer Group of 87.1% over the same period. For an explanation of how we calculate price to book ratio, please see “—Overview of Our Business; Company Performance Highlights—Company Performance Highlights”. Price to book ratio for the companies in the Peer Group was determined based on publicly available information.
|
When determining the number of LTIP Units granted to each of our NEOs, the Compensation Committee took into account the factors described above, as well as the individual’s role and responsibility in attaining the results listed above, the individual’s expected and actual job performance, the individual’s ability to influence the outcome of our company’s future performance, the value of the award in retaining and motivating key personnel and economic and market conditions generally. The Compensation Committee considered all of these factors in exercising its discretion to determine the January 2023 LTIP Awards.
|
TABLE OF CONTENTS
The Compensation Committee’s decision on whether to approve any equity awards in future periods will depend on a number of factors, including our company’s performance, market trends and practices, expense implications, tax efficiencies or other considerations in the Compensation Committee’s sole discretion.
Role of Our President and CEO in Equity Compensation Decisions
The Compensation Committee makes all equity compensation decisions related to our NEOs. The Compensation Committee receives input from Mr. Lown, our President and Chief Executive Officer, regarding the equity compensation and performance of our NEOs other than himself, including recommendations as to the equity compensation levels that he believes are commensurate with an individual’s job performance, skills, experience, qualifications, criticality to our company, as well as with our compensation philosophy, external market data and considerations of internal equity. Mr. Lown regularly attends meetings of the Compensation Committee, except when the Compensation Committee is meeting in executive session or when his own equity compensation arrangements are being considered. The Compensation Committee communicates its views and decisions regarding equity compensation arrangements for our NEOs to Mr. Lown, who is generally responsible for implementing such arrangements.
Compensation Policies and Practices as They Relate to Risk Management
The management fee under the management agreement is calculated based on a fixed percentage of stockholders’ equity, as adjusted and defined in that agreement, and is payable quarterly in arrears. Calculation of the management fee is not dependent upon our financial performance or the performance of our NEOs. Thus, the management fee does not create an incentive for our NEOs to take excessive or unnecessary risks. Specifically, the use of stockholders’ equity to calculate the management fee does not result in leveraged pay-out curves, steep pay-out cliffs, or set unreasonable goals and thresholds, each of which can promote excessive and unnecessary risks. The members of the Compensation Committee are provided with the management fees and expenses each quarter, providing a check upon any improper effort by our Manager to increase compensation payments indirectly via the pass-through of costs. We will continue to have certain costs allocated to us by our Manager for data services and proprietary technology and other costs, including the compensation paid to Mr. Hutchby, our Chief Financial Officer, Treasurer and Secretary, but most expenses we incur with third-party vendors are paid directly by us. The management fee itself cannot be increased or revised without the approval of our independent directors.
We believe this management fee is not likely to create risks that are reasonably likely to have a material adverse effect on us. We have designed the incentives and rewards related to grants of LTIP Units under our 2023 Plan, as such policies and practices relate to or affect risk taking on our behalf, in a manner that we believe will not cause our NEOs to seek to make higher risk investments. We have designed the equity compensation portion of the compensation program in an attempt to align the efforts of our NEOs to meet specified short-term and strategic goals with the long-term best interests of our stockholders.
Compensation Clawback Policy
In 2023, we adopted a new clawback policy as required by the requirements of Rule 10D-1 under the Securities Exchange Act of 1934, as amended, and the requirements of the New York Stock Exchange Listed Company Manual listing standards adopted pursuant to Rule 10D-1. The new clawback policy requires us to clawback erroneously awarded incentive compensation paid to current and former executive officers in the event of a restatement of our financial statements (without regard to the fault of the executive). Restatements that trigger such recoupment are restatements due to material noncompliance with any financial reporting requirement applicable to us under the federal securities laws, including restatements to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. Except in very limited circumstances, in the event of such a restatement, the new clawback policy requires the recoupment of incentive compensation paid to the executive officer in excess of the amount that would have been paid if the amount of such incentive compensation had been based on the restated financial statements.
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On January 16, 2024, the Compensation Committee and the Board approved the grant of an aggregate of 41,925 LTIP Units under our 2023 Plan to our NEOs (the “January 2024 LTIP Awards”). The January 2024 LTIP Awards had an aggregate grant date fair value of $164,346 based on our closing stock price on January 16, 2024 of $3.92.
The January 2024 LTIP Awards do not appear in the stock awards column of the summary compensation table or the grants of plan-based awards table appearing under the heading “Executive Compensation – Summary Compensation Table” and “– Grants of Plan Based Awards”.
The individual grants made to each of our NEOs on January 16, 2024 are set forth below:
|
|
|
|
Number of
LTIP Units Granted
|
|
|
Aggregate Grant Date
Fair Value of
LTIP Units Granted
(1)
|
|
Year-over-Year
Percentage Decrease in
Aggregate Grant Date
Fair Value
(2)
|
Jeffrey B. Lown II
|
|
|
11,700
|
|
|
$
45,864
|
|
|
60.3%
|
|
Michael A. Hutcbhy
|
|
|
15,600
|
|
|
$
61,152
|
|
|
18.0%
|
|
Julian B. Evans
|
|
|
14,625
|
|
|
$
57,330
|
|
|
23.1%
|
|
Total/Average
|
|
|
41,925
|
|
|
$164,346
|
|
|
37.9%
|
|
(1)
|
Based on our closing stock price on January 16, 2024 of $3.92.
|
|
(2)
|
As described in more detail above, our NEOs received an aggregate of 43,700 LTIP Units on January 10, 2023. These LTIP Units had an aggregate grant date fair value of $264,822 based on our closing stock price on January 10, 2023 of $6.06. Mr. Lown was granted 19,100 LTIP Units with an aggregate grant date fair value of $115,746. Mr. Hutchby was granted 12,300 LTIP Units with an aggregate grant date fair value of $74,538. Mr. Evans was granted 12,300 LTIP Units with an aggregate grant date fair value of $74,538.
|
In December 2023, the Compensation Committee exercised discretion and determined the overall size of the pool of LTIP Units to be awarded in January 2024 (the “2024 LTIP Unit Pool”) to our NEOs and other personnel who support us. The overall size of the 2024 LTIP Unit Pool was set at $436,668, or 80% of the overall size of the pool of LTIP Units awarded in January 2023 to our NEOs and other personnel who support us (the “2023 LTIP Unit Pool”). The Compensation Committee determined that an increase in the overall size of the 2024 LTIP Unit Pool was not warranted because our say-on-pay proposal at the 2023 annual meeting received less than 70% support from our stockholders. The Compensation Committee set the overall size of the 2024 LTIP Unit pool at 80% of the overall size of the 2023 LTIP Unit Pool based on our achievement of certain strategic and operational goals and certain company-specific financial performance metrics. The Compensation Committee assigned a 30% weighting to the strategic and operational goals and a 70% weighting to the company-specific financial performance metrics. The Compensation Committee then determined that the strategic and operational goals had been earned at the 100% level and the company-specific financial performance metrics had been achieved on a weighted average basis of 70%. Based on the achievement of the strategic and operational goals and the company-specific financial performance metrics, and after considering the results of the 2023 say-on-pay advisory vote, the Compensation Committee established the overall size of the January 2024 Pool at $436,668 (80% of the overall size of the January 2023 LTIP Unit Pool). After establishing the overall size of the January 2024 LTIP Unit Pool, the Compensation Committee authorized Mr. Lown to allocate the LTIP Units to the NEOs and other personnel who support us at his discretion, with the final allocation subject to approval by the Compensation Committee. The Compensation Committee approved the final allocation of the LTIP Units in January 2024.
In December 2023, the Compensation Committee determined that we had achieved the following strategic and operational goals, which had been assigned a 30% weighting, at the 100% level:
|
•
|
We maintained funding diversification to ensure sufficient availability and capacity maintenance.
|
|
•
|
We provided comprehensive and transparent public financial disclosure and enhanced operational efficiencies by developing new tools and processes across all investment ventures with the intention of modernizing and streamlining our systems and operations.
|
|
•
|
We took steps to improve our capital structure through various mechanisms to enhance return potential to our common stockholders. These steps included publicly announcing our intention to repurchase shares of our outstanding preferred stock through a $50 million preferred stock repurchase program. We
|
TABLE OF CONTENTS
intend to fund these repurchases with net proceeds from the issuance and sale of our common stock pursuant to our existing at-the-market offering program. During the year ended December 31, 2023, we issued and sold 6,470,004 shares of common stock under our at-the-market offering program. The shares were sold at a weighted average price of $4.87 per share for aggregate gross proceeds of approximately $31.5 million before fees of approximately $631,000.
|
•
|
We identified and integrated a new sub-servicer to replace Roundpoint Mortgage Servicing Corporation due to its recent acquisition by Matrix Financial Services Corporation, a wholly owned subsidiary of another publicly traded REIT, to ensure consistent and independent servicing quality to our portfolio of servicing-related assets.
|
|
•
|
We continued building on our advances with respect corporate social responsibility initiatives in the previous year and taking further steps to improve our corporate governance profile with institutional investors.
|
|
•
|
We minimized any material adverse audit issues, remained compliance with GSE covenants and regulation at Aurora, adhered to our investment risk reporting framework in order to mitigate exposure to market volatility and reduced liquidity in a rising interest rate environment.
|
|
•
|
We took steps to fortify our information technology infrastructure to bolster information security and resilience and our ability to respond to threats from material cybersecurity incidents.
|
|
•
|
We leveraged innovative data analytics tools to extract valuable insights from business and market data to enhance our decision-making processes and facilitate insightful strategic resolutions.
|
In December 2023, the Compensation Committee determined that we had achieved certain company-specific financial performance metrics, which had been assigned a weighting of 70%, over a performance period beginning on October 1, 2022 and ending on September 30, 2023, on weighted average basis of 70%. The Compensation Committee exercised discretion and determined that financial performance should be measured over the four-quarter period ended September 30, 2023 because these metrics were used by the Compensation Committee in December 2023 to establish the overall size of the January 2024 LTIP Unit Pool. The company-specific financial metrics considered by the Compensation Committee consisted of the following:
|
Performance Metric
|
|
|
|
|
|
|
|
|
Threshold
|
|
|
Target
|
|
|
|
|
|
Actual
Performance
(October 1,
|
Economic Return on NAV vs. Peer Group
(1)
|
|
|
40%
|
|
|
-0.25
|
|
|
-0.25
|
|
|
0.25
|
|
|
0.50
|
|
|
0.13
|
|
Economic Return on GAAP BVPS vs. Peer Group
(1)
|
|
|
25%
|
|
|
-0.25
|
|
|
-0.25
|
|
|
0.25
|
|
|
0.50
|
|
|
-0.39
|
|
Absolute Economic Return on NAV
|
|
|
20%
|
|
|
0.0%
|
|
|
0.0%
|
|
|
9.0%
|
|
|
15.0%
|
|
|
1.2%
|
|
Price to Book Ratio vs. Peer Group
(1)
|
|
|
15%
|
|
|
-0.25
|
|
|
-0.25
|
|
|
0.25
|
|
|
0.50
|
|
|
0.39
|
|
|
|
|
Payout Continuum (% of Target)
|
|
|
|
|
100%
|
|
|
0%
|
|
|
50%
|
|
|
100%
|
|
|
200%
|
|
|
70.0%
|
|
(1)
|
The peer group for purposes of the January 2024 LTIP Awards was the same as the Peer Group used for purposes of the January 2023 LTIP Awards. For an explanation of how we calculate economic return (loss) on GAAP BVPS, economic return (loss) on NAV and price to book ratio, please see “—Overview of Our Business; Company Performance Highlights—Company Performance Highlights”.
|
Based on our actual performance and the actual performance of the peer group over the period from October 1, 2022 to September 30, 2023 and applying linear interpolation, the Compensation Committee determined that we earned the relative economic return on NAV component between threshold and target at 88.0%, the relative economic return on GAAP BVPS component at below threshold, the absolute economic return on NAV component between threshold and target at 56.8% and the relative price to book ratio component between target and out-performance at 156.6%. This resulted in achievement of the company-specific financial metrics on a weighted average basis of 70.0%.
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COMPENSATION COMMITTEE REPORT
In accordance with and to the extent permitted by applicable law or regulation, the information contained in this Compensation Committee Report is not “soliciting material”, is not deemed to be “filed” with the SEC and is not to be incorporated by reference into any future filing under the Securities Act or under the Exchange Act, except to the extent that the Company specifically incorporates such information by reference in such filing.
The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.
|
|
|
|
Submitted By the Compensation Committee:
|
|
|
|
|
|
|
|
|
|
Sharon L. Cook, Chairperson
|
|
|
|
|
Joseph P. Murin
|
|
|
|
|
Robert C. Mercer, Jr.
|
TABLE OF CONTENTS
Summary Compensation Table
The following table sets forth information concerning the compensation of our NEOs for the past three fiscal years.
|
Name
|
|
|
Year
|
|
|
Salary
(1)
|
|
|
|
|
|
Total
|
Jeffrey B. Lown II
President and Chief Executive Officer
(Principal Executive Officer)
|
|
2023
|
|
|
__
|
|
|
$
115,746
|
|
|
$
115,746
|
|
|
2022
|
|
|
__
|
|
|
$105,000
|
|
|
$105,000
|
|
|
2021
|
|
|
__
|
|
|
__
|
|
|
__
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. Hutchby
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
|
|
2023
|
|
|
$580,000
|
|
|
$
74,538
|
|
|
$654,538
|
|
|
2022
|
|
|
$510,000
|
|
|
$
67,200
|
|
|
$577,200
|
|
|
2021
|
|
|
$450,000
|
|
|
$
61,670
|
|
|
$
511,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Julian B. Evans
Chief Investment Officer
|
|
2023
|
|
|
__
|
|
|
$
74,538
|
|
|
$
74,538
|
|
|
|
2022
|
|
|
__
|
|
|
$
67,200
|
|
|
$
67,200
|
|
|
2021
|
|
|
__
|
|
|
$
59,908
|
|
|
$
59,908
|
|
|
(1)
|
Amounts in this column represent the costs of the salary paid to Mr. Hutchby and reimbursed by us to our Manager.
|
|
(2)
|
Effective January 10, 2023, (a) Mr. Lown was granted 19,100 LTIP Units, (b) Mr. Hutchby was granted 12,300 LTIP Units and (c) Mr. Evans was granted 12,300 LTIP Units. These LTIP Units were granted pursuant to our 2013 Plan and vest ratably over a three-year period beginning on the one-year anniversary of the grant date, subject to continued employment. With respect to the LTIP Units, the dollar amounts indicated in the table under “Stock Awards” represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718, disregarding estimated forfeitures. For additional information regarding the valuation of LTIP Units, see Note 6 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
|
Grants of Plan-Based Awards
The following table summarizes each equity award granted to our NEOs pursuant to our 2013 Plan during the fiscal year ended December 31, 2023:
|
Name
|
|
|
Grant Date
|
|
|
All Other Stock Awards:
Number of Shares of
Stock or Units
(1)
|
|
Grant Date Fair Value
of Stock and Option
Awards
(2)
|
|
Jeffrey B. Lown II
|
|
|
1/10/2023
|
|
|
19,100
|
|
|
$115,746
|
|
Michael A. Hutchby
|
|
|
1/10/2023
|
|
|
12,300
|
|
|
$
74,538
|
|
Julian B. Evans
|
|
|
1/10/2023
|
|
|
12,300
|
|
|
$
74,538
|
|
|
(1)
|
See also “Summary Compensation Table” above. The LTIP Units were granted pursuant to our 2013 Plan and will vest in three equal annual installments beginning on the first anniversary of the grant date, so long as the named executive officer remains employed and complies with the terms and conditions of his LTIP Unit award agreement.
|
|
(2)
|
The amounts in this column represent the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718, disregarding estimated forfeitures. For additional information regarding the valuation of LTIP Units, see Note 6 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.
|
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
The LTIP Units described above were granted to our NEOs pursuant to the 2013 Plan. Our Manager, our operating partnership and Freedom Mortgage were not eligible to participate in the 2013 Plan because participation in the 2013 Plan is limited to individuals.
The 2013 Plan was administered by the Compensation Committee, except that the 2013 Plan was administered by the Board with respect to awards made to directors who are not employees. Our officers, employees and directors and the officers and employees of our affiliates were eligible to participate in the 2013 Plan. In addition, individuals who provide services to us or an affiliate through our Manager were eligible to receive awards under the 2013 Plan.
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The 2013 Plan expired by its terms in October 2023. Our stockholders approved the adoption of the 2023 Plan at the 2023 Annual Meeting and the 2023 Plan became effective on June 15, 2023 and no new awards were to be granted under the 2013 Plan after that date.
Outstanding Equity Awards at December 31, 2023
The following table sets forth information concerning equity incentive plan awards for each of our NEOs outstanding at December 31, 2023.
|
Name
|
|
|
Number of Shares That
Have Not Vested
(1)
|
|
|
Market Value of Share
That Have Not Vested
(2)
|
|
Jeffrey B. Lown II
|
|
|
27,433
|
|
|
$110,829
|
|
Michael A. Hutchby
|
|
|
19,965
|
|
|
$
80,659
|
|
Julian B. Evans
|
|
|
19,899
|
|
|
$
80,392
|
|
(1)
|
Represents shares of common stock underlying unvested LTIP Units granted to our NEOs pursuant to our 2013 Plan. The LTIP Units will vest ratably over the three-year period beginning on the one-year anniversary of the grant date, subject to continued employment. Vesting dates of these shares are January 3, 2024, January 4, 2024, January 10, 2024, January 3, 2025, January 10, 2025 and January 10, 2026.
|
|
(2)
|
Pursuant to SEC rules, for purposes of this table the market value per share of common stock underlying unvested LTIP Units is assumed to be $4.04, which was the closing market price per share of our common stock on December 31, 2023.
|
|
Name
|
|
|
Number of Shares
Acquired on Vesting
(1)
|
|
|
Value Realized in
Vesting
|
|
Jeffrey B. Lown II
|
|
|
6,667
|
|
|
$39,083
|
|
Michael A. Hutchby
|
|
|
6,583
|
|
|
$38,590
|
|
Julian B. Evans
|
|
|
6,517
|
|
|
$38,199
|
|
(1)
|
This number represents the vesting during 2023 of previously granted service-based LTIP Units. An individual, upon the vesting of an equity award, does not receive cash equal to the amount contained in the Value Realized on Vesting column of this table. Instead, the amounts contained in the Value Realized on Vesting column reflect the market value of our common stock on the applicable vesting date. For purposes of this table, it is assumed that one LTIP Unit represents the economic equivalent of one share of Common Stock. The LTIP Units do not realize their full economic value until certain conditions are met as described in this proxy statement under the caption “—Compensation Discussion and Analysis—Equity-Based Compensation”.
|
Pension Benefits and Nonqualified Deferred Compensation
We do not provide any of our NEOs with pension benefits or nonqualified deferred compensation.
Potential Payments Upon Termination or Change in Control
We do not have any employment agreements with any of our NEOs and are not obligated to make any payments to them upon termination of employment. None of our NEOs have the right to receive severance payments from us, and we are not required to make payments to any named executive officer upon a change of control of our company. However, all LTIP Units granted pursuant to our 2013 Plan and 2023 Plan vest immediately upon a change of control if the recipient of such LTIP Units is still performing services for us at the time of such change of control. The value, based on the closing price of our common stock on December 31, 2023, as reported by the NYSE of the LTIP Units held by our NEOs as of December 31, 2023 that would be accelerated assuming a change in control was approximately $1.1 million of which approximately $455,000, $290,000 and $319,000 would be allocated to Messrs. Lown, Hutchby and Evans, respectively.
TABLE OF CONTENTS
As required by Item 402(v) of Regulation S-K, we are providing the information below regarding the relationship between executive compensation and our financial performance for each of 2023, 2022 and 2021. The table below summarizes the (i) compensation values reported in the Summary Compensation Table for our President and Chief Executive Officer, and average for our other NEOs excluding the Chief Executive Officer (our “Non-CEO NEOs”) as compared to the “Compensation Actually Paid”, calculated pursuant to the applicable rules and (ii) our financial performance for the years ended December 31, 2023, 2022 and 2021.
|
Year
|
|
|
Summary
Compensation
Total for
Chief
|
|
Compensation
Actually Paid
to Chief
|
|
Average
Summary
Compensation
Table Total for
Named Executive
Officers
Excluding Chief
|
|
Average
Compensation
Actually Paid
to Named
Executive
Officers
Excluding
Chief Executive
Officer
(2)(3)
|
|
Total
|
|
|
|
2023
|
|
|
$115,746
|
|
|
$62,915
|
|
|
$364,538
|
|
|
$326,665
|
|
|
$67.66
|
|
|
($35,455,000)
|
|
2022
|
|
|
$105,000
|
|
|
$67,170
|
|
|
$322,200
|
|
|
$286,871
|
|
|
$84.75
|
|
|
$22,189,000
|
|
2021
|
|
|
—
|
|
|
($6,178)
|
|
|
$285,789
|
|
|
$278,052
|
|
|
$101.61
|
|
|
$12,530,000
|
|
(1)
|
For each of the years included above, our Chief Executive Officer was Mr. Lown. We are an externally managed company, and we did not pay any cash compensation to Mr. Lown. Accordingly, compensation information for Mr. Lown is limited to stock awards.
|
|
(2)
|
As required by Item 402(v) of Regulation S-K, reconciliation tables illustrating the calculation of Compensation Actually Paid are presented under “Pay versus Performance Supplemental Information – Reconciliation of Summary Compensation to Compensation Actually Paid” immediately below.
|
|
(3)
|
Individuals comprising our Non-CEO NEOs are Mr. Hutchby, our Chief Financial Officer, Treasurer and Secretary, and Mr. Evans, our Chief Investment Officer. Compensation information for our Non-CEO NEOs includes stock awards and the costs of the salary paid to Mr. Hutchby and reimbursed by us to our Manager.
|
|
(4)
|
Total Shareholder Return assumes $100 invested at December 31, 2021 in our common stock and the reinvestment of dividends.
|
|
(5)
|
Represents GAAP net income before allocation to noncontrolling interests as reported in our Annual Report on Form 10-K for the year ended December 31, 2023.
|
Pay versus Performance Supplemental Information – Reconciliation of Summary Compensation to Compensation Actually Paid
“Compensation actually paid” represents totals from the Summary Compensation Table above, adjusted for certain items as detailed in the following table for the years ended December 31, 2023, 2022 and 2021:
|
Adjustments to Summary Compensation Tables to Determine Compensation Actually Paid to Chief Executive Officer
|
|
|
2023
|
|
|
2022
|
|
|
2021
|
|
Reported Summary Compensation Table for Chief Executive Officer
|
|
|
$115,746
|
|
|
$105,000
|
|
|
—
|
|
Deduction of Amounts Reported under the “Stock Awards” column in the Summary Compensation Table
|
|
|
($115,746)
|
|
|
($105,000)
|
|
|
—
|
|
Equity Award Adjustments
|
|
|
|
|
|
|
|
|
|
|
Year End Fair Value of Unvested Equity Awards Granted in the Covered Year
|
|
|
$
77,164
|
|
|
$
72,500
|
|
|
—
|
|
Year over Year Change in Fair Value of Outstanding and Unvested Equity Awards
|
|
|
($
14,666)
|
|
|
($
6,175)
|
|
|
($7,830)
|
|
Year over Year Change in Fair Value of Equity Awards Granted in Prior Years that Vested in the Covered Year
|
|
|
$
417
|
|
|
$
845
|
|
|
$1,652
|
|
Compensation Actually Paid to Chief Executive Officer
|
|
|
$
62,915
|
|
|
$
67,170
|
|
|
($6,178)
|
TABLE OF CONTENTS
|
Adjustments to Summary Compensation Tables to Determine Average Compensation Actually Paid to Non-CEO NEOs
|
|
|
2023
|
|
|
2022
|
|
|
2021
|
|
Average Reported Summary Compensation Table for Non-CEO NEOs
|
|
|
$364,538
|
|
|
$322,200
|
|
|
$285,789
|
|
Deduction of Average Amounts Reported under the “Stock Awards” Column in the Summary Compensation Table
|
|
|
($
74,538)
|
|
|
($
67,200)
|
|
|
$
(60,789)
|
|
Equity Award Adjustments
|
|
|
|
|
|
|
|
|
|
|
Average Year End Fair Value of Unvested Equity Awards Granted in the Covered Year
|
|
|
$
49,692
|
|
|
$
46,400
|
|
|
$
57,063
|
|
Average Year over Year Change in Fair Value of Outstanding and Unvested Equity Awards
|
|
|
($
13,432)
|
|
|
($
15,268)
|
|
|
$
(4,784)
|
|
Average Year over Year Change in Fair Value of Equity Awards Granted in Prior Years and Vested in the Covered Year
|
|
|
$
405
|
|
|
$
739
|
|
|
$
773
|
|
Average Compensation Actually Paid to Non-CEO NEOs
|
|
|
$326,665
|
|
|
$286,871
|
|
|
$278,052
|
Relationship Between “Compensation Actually Paid” and Performance Measures
The graph below illustrates the relationship of “compensation actually paid” to our Chief Executive Officer and “average compensation actually paid” to our Non-CEO NEOs, in either case, to total shareholder return for the years ended December 31, 2021, 2022 and 2023.
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The graph below illustrates the relationship of “compensation actually paid” to our Chief Executive Officer and “average compensation actually paid” to our Non-CEO NEOs, in either case, to net income (loss) for the years ended December 31, 2021, 2022 and 2023.
The SEC has issued final rules implementing the provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) that require U.S. publicly-traded companies to disclose the ratio of their chief executive officer’s compensation to that of their median employee. As noted above, our President and Chief Executive Officer does not receive any direct cash compensation or benefits from us, and we do not reimburse our Manager for the cash compensation and benefits paid to Mr. Lown. Because we do not pay, or provide reimbursement for, any direct cash compensation to Mr. Lown and we have no employees, we are not able to calculate and provide a ratio of the median employee’s annual total compensation to the total annual compensation of Mr. Lown.
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APPROVAL, ON A NON-BINDING ADVISORY BASIS, OF THE COMPENSATION OF THE COMPANY’S NAMED EXECUTIVE OFFICERS
Pursuant to Section 14A of the Exchange Act and Section 951 of the Dodd-Frank Act, we are providing stockholders with an opportunity to vote, on a non-binding advisory basis, on the compensation of our NEOs as disclosed in this Proxy Statement in accordance with SEC rules. The advisory vote on executive compensation described in this proposal is commonly referred to as a “say-on-pay vote”.
As described under “Compensation Discussion and Analysis” above, we are externally managed and advised by our Manager. We do not have any agreements with our NEOs with respect to their cash compensation and do not intend to directly pay any cash compensation to them. We reimburse our Manager for the cash compensation that is paid to Mr. Hutchby, our Chief Financial Officer, Treasurer and Secretary. We believe that our Manager uses payments made by us under the management agreement in part to pay for the services it receives under the services agreement, including payroll and benefits services received by our NEOs. However, our Manager is not required to do so, and it is not required to provide us with information regarding the portion, if any, of the management fee so used. Our NEOs also receive equity awards granted by the Compensation Committee.
This proposal gives our stockholders the opportunity to express their views on the overall compensation of our NEOs and the philosophy, policies and practices described in this Proxy Statement. This vote is not intended to address any specific item of the compensation and is not a vote on our general compensation policies, compensation of the Board or our compensation policies as they relate to risk management. For the reasons discussed above, we are asking our stockholders to indicate their support for our named executive officer compensation by voting for the following resolution at the Annual Meeting:
“RESOLVED, that the compensation of the Company’s NEOs, as disclosed in this Proxy Statement pursuant to Item 402 of Regulation S-K (which disclosure includes the Compensation Discussion and Analysis, compensation tables and any related narrative discussion disclosed in this Proxy Statement), is hereby approved.”
The say-on-pay vote is advisory only, and therefore it will not bind us or the Board. The Board and the Compensation Committee will consider the voting results as appropriate when making future decisions regarding executive compensation.
The Board recommends a vote “FOR” the approval, on a non-binding advisory basis, of the compensation of our named executive officers as disclosed in this Proxy Statement.
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Each of the members of the Audit Committee (Mr. Mercer (chairperson), Mr. Murin and Ms. Cook) has been determined to be “independent” within the meaning of the applicable standards of the NYSE and Rule 10A-3 of the Exchange Act. In addition, each of these members meets the financial literacy requirements for audit committee membership under the NYSE’s rules and the rules and regulations of the SEC. The Board has determined that each of Mr. Mercer and Mr. Murin is an “audit committee financial expert” as such term is defined in Item 407(d)(5)(ii) of Regulation S-K. No member of the Audit Committee serves on the audit committee of more than three public companies. The Board has adopted, and annually reviews, the charter of the Audit Committee, which sets forth the Audit Committee’s responsibilities and how it carries out those responsibilities.
The Audit Committee oversees our company’s financial reporting process on behalf of the Board, in accordance with the charter of the Audit Committee. Pursuant to its charter, the primary purpose of the Audit Committee is to assist the Board in fulfilling its oversight responsibility relating to: (i) the integrity of the company’s financial statements and financial reporting process, our systems of internal accounting and financial controls and other financial information we provide; (ii) the performance of the internal audit services function; (iii) the annual independent audit of our financial statements and internal control over financial reporting, the engagement of the independent auditors and the evaluation of the independent auditors’ qualifications, independence and performance; (iv) our compliance with legal and regulatory requirements, including our disclosure controls and procedures; and (v) the evaluation of risk assessment and risk management policies. Our registered independent public accounting firm, EY, is responsible for expressing an opinion on (a) the conformity of our company’s audited financial statements with generally accepted accounting principles and (b) our company’s maintenance of internal control over financial reporting based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework).
In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management and EY the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, and discussed with management and EY the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. The Audit Committee also reviewed and discussed with management and EY the EY report on our internal controls over financial reporting set forth in our Annual Report on Form 10-K for the year ended December 31, 2023. In addition, the Audit Committee has discussed with EY the critical accounting matter included in their report as well as the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (“PCAOB”) and the SEC. The Audit Committee has received the written disclosures and the letter from EY required by applicable requirements of the PCAOB regarding EY’s communications with the Audit Committee concerning independence, and has discussed with EY its independence. In addition, the Audit Committee has evaluated and concluded the non-audit services provided by EY to our company comply with SEC independence rules.
Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board (and the Board approved) that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2023 for filing with the SEC.
The members of the Audit Committee are not professionally engaged in the practice of auditing or accounting. Members of the Audit Committee rely, without independent verification, on the information provided to them and on the representations made by management and the registered independent public accountants. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not assure that the audit of our financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that EY is in fact “independent”.
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In accordance with and to the extent permitted by applicable law or regulation, the information contained in the foregoing Audit Committee Report is not “soliciting material,” is not deemed to be “filed” with the SEC and is not to be incorporated by reference into any future filing under the Securities Act or under the Exchange Act.
Submitted by the Audit Committee:
Robert C. Mercer, Jr., Chairperson
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