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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-16 · 251 added, 248 removed, 372 unchanged (57% of the section changed)

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We also may opportunistically acquire other types of mortgage- and real estate-related asset classes, such as commercial mortgage-backed securities, or "CMBS," residential mortgage loans, mortgage servicing rights, or "MSRs," and credit risk transfer securities, or "CRTs." We believe that being able to combine Agency RMBS with non-Agency RMBS and other mortgage- and real estate-related asset classes enables us to balance a range of mortgage-related risks.

We were formed through an initial strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 26-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." As of December 31, 2020, the Blackstone Funds owned approximately 26.8% of our outstanding common shares.

We are externally managed and advised by our Manager, an affiliate of Ellington.

We were initially formed through a strategic venture among affiliates of Ellington Management Group, L.L.C., an investment management firm and registered investment adviser with a 27-year history of investing in a broad spectrum of residential and commercial mortgage-backed securities, or "MBS," and related derivatives, with an emphasis on the RMBS market, and the Blackstone Tactical Opportunity Funds, or the "Blackstone Funds." We are externally managed and advised by our Manager, an affiliate of Ellington.

Since our inception, the Blackstone Funds had held special non-voting membership interests in the holding company that owns our Manager.

In August 2021, an Ellington affiliate purchased these special non-voting membership interests from the Blackstone Funds.

We use leverage in our Agency RMBS strategy and, while we have not done so meaningfully to date, we may use leverage in our non-Agency RMBS strategy as well, although we expect such leverage to be lower.

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We intend to conduct our operations so that neither we nor any of our subsidiaries is required to register as an investment company under the Investment Company Act of 1940, as amended, or the "Investment Company Act."

On April 2, 2021, we commenced an "at-the-market" offering program, or "ATM program," by entering into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $75.0 million of common shares from time to time.

During the year ended December 31, 2021, we issued 163,269 common shares under the ATM program which provided $1.9 million of net proceeds after $29 thousand of agent commissions and offering costs.

On June 17, 2021, we completed a public follow-on offering of 3,250,000 common shares, of which 2,675,000 shares were sold by the Blackstone Funds and 575,000 shares were sold by us.

The offering generated net proceeds to us of $7.1 million, after underwriters' discounts and commissions and offering costs.

As of December 31, 2021, our book value per share was $11.76 as compared to $13.48 as of December 31, 2020.

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Market Overview

• After lowering the target range for the federal funds rate three times in 2019, the U.S.

Federal Reserve, or "Federal Reserve," elected to maintain its target range of 1.50%–1.75% at its January 2020 meeting, but noted concerns about the spread of the novel coronavirus disease ("COVID-19") in its minutes.

As the first quarter of 2020 progressed and COVID-19 spread, economic activity declined as countries around the world implemented social-distancing restrictions;

unemployment claims surged and GDP growth forecasts were revised downward as the market began to price in a global recession.

In March, macroeconomic conditions worsened, and financial markets experienced extreme volatility and dislocations.

In response, the Federal Reserve implemented two emergency interest rate cuts totaling 150 basis points, resumed its asset purchases at an unprecedented pace, added additional liquidity to repo markets, and formed several credit facilities to stabilize markets.

The White House and U.S.

Congress passed three rounds of stimulus packages, culminating in the $2 trillion CARES Act on March 27th, the largest emergency spending bill in history.

In April, the Federal Reserve expanded many of its stimulus programs to provide up to $2.3 trillion in additional capital.

Similarly, central banks and governments around the globe responded swiftly and aggressively with interest rate cuts, quantitative easing programs, and stimulus packages.

While these efforts were successful in stabilizing markets, the negative economic impact of COVID-19 persisted, and the Federal Reserve continued its accommodative monetary policy throughout the rest of 2020, including maintaining its target range of 0.00%–0.25% for the federal funds rate;

purchasing significant amounts of U.S.

Treasury securities, Agency RMBS, and other eligible collateral pursuant to the asset purchase programs it outlined earlier in the year;

and extending or expanding several of its liquidity support programs.

At its final meeting of 2020, in December, the Federal Reserve noted that "the COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world.

Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year." The Federal Reserve reiterated that it "is committed to using its full range of tools to support the U.S.

economy in this challenging time, thereby promoting its maximum employment and price stability goals." The Federal Reserve also directed the Open Market Desk to increase its holdings of Treasury securities by $80 billion per month, and of Agency RMBS by $40 billion per month.

Finally, just prior to year end 2020, Congress and the administration approved an additional $900 billion of COVID-related stimulus and economic aid.

• Interest rates dropped dramatically during the first quarter of 2020, as the spread of COVID-19 prompted a flight to safety.

Between February 12th and March 9th, the 10-year U.S.

Treasury yield plummeted 109 basis points to a record low of 0.54%, before rebounding to 1.19% less than two weeks later, and then declining to 0.67% as of March 31st.

Treasury yields fell across the yield curve over the course of the quarter, with yields on 3-month Treasury bills down 148 basis points, yields on the 2-year U.S.

Treasury down 132 basis points, and yields on the 10-year U.S.

Treasury down 125 basis points.

On March 9th, the MOVE index, which measures U.S.

interest rate volatility, reached its highest point since the 2008-2009 financial crisis.

During the second and third quarters, interest rate volatility subsided considerably and U.S.

Treasury yields continued to hover near all-time lows.

During this six-month period, the 10-year U.S.

Treasury yield traded in a remarkably tight 39-basis-point rage, compared to a 134-basis-point range in the first quarter.

At September 30th, the 10-year U.S.

Treasury yield was 0.68%, virtually unchanged from March 31st and only 14 basis points above the record low reached in March.

After reaching its highest point since the 2008–2009 financial crisis in March, the MOVE index had reverted to pre-COVID-19 levels by mid-April and continued to decline through the third quarter, hitting an all-time low at the end of September.

During the fourth quarter, long-term interest rates rose modestly and the U.S.

• In 2021, the U.S.

Federal Reserve, or the "Federal Reserve," maintained the target range of 0.00%—0.25% throughout the year, and for the first ten months of the year, it directed the Open Market Desk to increase its holdings of U.S.

Treasury securities by $80 billion per month, and of Agency RMBS by $40 billion per month.

This activity reflected a continuation of the Federal Reserve's response in 2020 to the negative economic effects caused by the COVID-19 pandemic when the Federal Reserve lowered the target range for the federal funds rate to 0.00%—0.25% from 1.50%—1.75%, committed to purchase U.S.

Treasury securities and Agency MBS without explicit limits on the amounts purchased, and also announced several funding and liquidity programs.

At the end of the first quarter of 2021, the U.S.

Congress passed the American Rescue Plan Act of 2021, which provided for an additional $1.9 trillion of COVID-related stimulus and economic aid.

Additionally, in July, the Federal Reserve announced the establishment of a standing repurchase agreement facility to support financing markets.

At its November 2021 meeting, citing “the substantial further progress the economy has made,” the Federal Reserve announced a tapering schedule for its asset purchases, beginning with a reduction of its monthly net asset purchases by $10 billion for U.S.

Treasury securities and by $5 billion for Agency RMBS in November;

by an additional $10 billion for U.S.

Treasury securities and $5 billion for Agency RMBS in December;

and with an increasing pace of tapering anticipated in subsequent months, until incremental monthly net purchases reach zero.

The Federal Reserve also noted that it expected elevated inflation to be “transitory.”

At its final meeting of the year, in December, “in light of inflation developments and the further improvement in the labor market,” the Federal Reserve announced that it would further accelerate the tapering of its asset purchases.

Beginning in January 2022, it would reduce the monthly pace of net asset purchases by an additional $20 billion per month for U.S.

Treasury securities and $10 billion per month for Agency RMBS, with an increasing pace of tapering in subsequent months, until incremental monthly net purchases reach zero.

In addition, given the persistently high rate of inflation, the Federal Reserve shifted to a more hawkish position on interest rates, signaling that multiple increases of the target range for the federal funds rate could be imminent, and also that it could begin to reduce the size of the Federal Reserve’s balance sheet soon (as opposed to tapering net purchases to zero, but still maintaining the size of its balance sheet).

In December 2021, US consumer prices increased by 7% year-over-year, which was the fastest pace in nearly four decades.

In a congressional hearing in January 2022, the Chairman of the Federal Reserve, Jerome Powell, discussed his focus on inflation and stated, “If we have to raise interest rates more over time, we will.

The economy no longer needs or wants the very highly accommodative policies we have had in place.”

• During the first quarter of 2021, long-term interest rates rose significantly and the U.S.

Treasury yield curve steepened, with the 10-year U.S.

Treasury yield increasing 23 basis points to finish the year at 0.91%, and the 2-year U.S.

Treasury yield up just 1 basis point to 0.12%.

Treasury yield increasing 83 basis points to finish the quarter at 1.74%, and the 2-year U.S.

Treasury yield up just 4 basis points to 0.16%.

The yield spread between the 2-year and 10-year U.S.

Treasury increased to 79 basis

points from 56 basis points at the end of the third quarter.

The MOVE index increased modestly in October, before reverting to lower levels in November and December.

• Mortgage rates declined during each quarter of 2020, setting new all-time lows at several points during the year.

Over the course of the year, the Freddie Mac survey 30-year mortgage declined 107 basis points to 2.67% at December 31, 2020.

Refinancing applications surged with the declining mortgage rates.

On March 6th, the Mortgage Bankers Association's Refinance Index, which measures refinancing application volumes, increased 79% to its highest level since April 2009.

Although refinancing applications declined after March, they remained elevated throughout the year, at levels not seen since 2013.

Overall Fannie Mae 30-year MBS prepayments increased steadily during the year, from a CPR of 17.0 in December 2019 to an 8-year high of 37.2 CPR in October 2020, before finishing the year at 35.6 CPR.

• In connection with the Federal Reserve actions, LIBOR rates, which drive many of our financing costs, declined sharply during the first half of 2020.

Between December 31, 2019, and June 30, 2020, one-month LIBOR declined 160 basis points to 0.16%, and three-month LIBOR fell 161 basis points to 0.30%.

LIBOR rates remained low during the second half of the year, with one-month LIBOR finishing the year at 0.14% and three-month LIBOR at 0.24%.

real GDP declined at an annualized rate of 5.0% in the first quarter and then 31.4% in the second quarter, reflecting the negative impact of the COVID-19 pandemic and associated measures to contain it.

The GDP growth rate bounced back in the third quarter, increasing at estimated annualized rates of 33.4%, before slowing in the fourth quarter to an estimated annualized rate of 4.1%.

• The sudden and significant decline in economic activity and implementation of social-distancing restrictions caused unemployment claims to rise significantly in 2020.

employers reported a reduction of 701,000 jobs in March, and unemployment claims surged to 38.5 million in the second quarter.

The unemployment rate spiked to 11.1% at June 30th, from 4.4% at March 31st.

Unemployment claims totaled 14.1 million in the third quarter and 10.3 million in the fourth quarter, both down significantly from the second quarter but still well above historical averages.

The unemployment rate dropped to 6.7% at December 31st, down from 7.8% at September 30th, 11.1% at June 30th and 14.8% at the April 30th peak.

However, the U.S.

lost 140,000 jobs in December, the first month of net job losses since the spring, which muddled the outlook going forward.

• With the economic slowdown and spike in unemployment, forbearance rates on residential mortgages rose during the first half of 2020.

According to the Mortgage Bankers Association, the total forbearance rate increased most significantly during the month of April, from 2.7% as of March 29th to 7.5% as of April 26th, before rising further to 8.5% as of May 31st, plateauing during June, and then finishing the second quarter at 8.4%.

Forbearance rates on residential mortgages declined steadily during the third and fourth quarters, driven by the economic recovery and an improving employment picture, even as many stimulus measures expired.

According to the Mortgage Bankers Association, the total forbearance rate decreased from 8.4% at the end of June, to 6.9% at the end of September, and to 5.5% as of January 3, 2021.

• Yield spreads on most fixed income assets widened sharply in the first half of March.

For Agency RMBS, the heightened levels of interest rate volatility, together with concerns of a liquidity crunch in the private sector, exacerbated fundamental concerns about a surge in prepayments from the decline in mortgage rates;

while for credit assets, the negative macroeconomic developments raised concerns about a potential surge in future credit losses within many sectors.

Across virtually all credit-sensitive fixed income asset classes, repo financing stresses and sharp declines in asset prices severely reduced liquidity, and prompted forced selling from many market participants experiencing liquidity problems, which further contributed to price declines and yield spread widening.

This selling was particularly acute in structured credit assets, but even Agency RMBS, despite their creditworthiness, experienced significant yield spread widening in sympathy.

As described above, central banks and governments around the globe responded swiftly and aggressively with interest rate cuts, quantitative easing programs, and stimulus packages;

these actions succeeded in stabilizing markets for the balance of 2020.

• The Bloomberg Barclays US MBS Index ("BB MBS Index") generated a positive return for each quarter of 2020, finishing the year with a 3.87% return, but a slight negative excess return (on a duration-adjusted basis) of (0.17)% relative to the Bloomberg Barclays U.S.

Treasury increased to 158 basis points, which was its widest level since 2015.

Interest rate volatility also increased in the quarter, with the MOVE Index, which measures U.S.

interest rate volatility, reaching a 10-month high in February.

In the second quarter, long-term interest rates reversed course, with the 10-year U.S.

Treasury yield falling 27 basis points to 1.47%, while the 2-year U.S.

Treasury yield increased 9 basis points to 0.25%.

The yield spread between the 2-year and 10-year U.S.

Treasury decreased to 122 basis points at June 30 th , but was still meaningfully higher than the 79 basis point spread at the start of the year.

Interest rate volatility subsided for most of the quarter, before increasing modestly during the second half of June.

In the third quarter, interest rates declined in July, before reversing course and rising in August and September.

For the quarter, the 10-year U.S.

Treasury yield rose 2 basis points to 1.49%, while the 2-year U.S.

Treasury yield increased 3 basis points to 0.28%, and the yield spread between the 2-year and 10-year U.S.

Treasury was essentially unchanged.

Interest rate volatility remained relatively elevated for much of the third quarter.

During the fourth quarter, short-term interest rates spiked, the yield curve flattened significantly, and interest rate volatility rose, as the market reacted to imminent Fed tapering, potential upcoming interest rate increases, and consistently strong inflation reports.

The 2-year U.S.

Treasury yield increased 46 basis points to 0.73%, its highest level since early March 2020, while the 10-year U.S.

Treasury yield rose just 2 basis points to 1.51%.

The spread between the 2-year and 10-year U.S.

Treasury narrowed to 78 basis points, back to about where it started the year.

Meanwhile, the MOVE Index reached its high for the year in November.

• After declining to all-time lows over the course of 2020, mortgage rates reversed course during the first quarter of 2021 as long-term interest rates rose.

The Freddie Mac survey 30-year mortgage rate rose steadily throughout the quarter, increasing to 3.18% as of April 1 st , as compared to 2.67% at year end.

Although still elevated on an historical basis, refinancing applications declined during the quarter, with the Mortgage Bankers Association's Refinance Index decreasing 21.7% between January 1 st and April 2 nd of 2021.

Still, overall Fannie Mae 30-year MBS prepayments remained well above pre-pandemic levels, declining slightly from a CPR of 35.1 in December 2020 to 30.8 in January 2021, before increasing to 31.8 in February 2021 and 35.4 in March 2021.

In the second quarter, however, mortgage rates declined as long-term interest rates fell.

The Freddie Mac survey 30-year mortgage rate decreased to 2.98% as of June 30 th , while refinancing applications continued to decline.

The Mortgage Bankers Association's Refinance Index decreased another 9% between April 2 nd and July 2 nd .

Overall Fannie Mae 30-year MBS prepayments declined from a CPR of 35.4 in March to 27.8 in April and 23.4 in May, before increasing moderately to 24.6 in June.

Mortgage rates also declined in July before reversing course and rising in August and September, in sympathy with long-term interest rates.

For the third quarter, the Freddie Mac survey 30-year mortgage rate increased by 3 basis points to 3.01%.

Refinancing applications rose modestly during the quarter, with the Mortgage Bankers Association's Refinance Index increasing by 9% between July 2 nd and October 1 st .

Overall Fannie Mae 30-year MBS prepayments decreased from a CPR of 24.6 in June 2021 to 22.2 in July, before returning to 24.6 in August and declining slightly to 24.1 in September.

Mortgage rates continued to rise in the fourth quarter as the Freddie Mac survey 30-year mortgage rate increased another 10 basis points to finish the year at 3.11%.

Refinancing applications declined during the fourth quarter, with the Mortgage Bankers Association’s Refinance Index falling 29% between September 3 rd and December 31 st .

Overall Fannie Mae 30-year MBS prepayments continued to fall throughout the quarter, declining to 22.2 in October, 20.2 in November, and 18.7 in December.

• LIBOR rates, which directly or indirectly drive most of our repo financing costs, declined modestly during the first nine months of 2021.

Between December 31, 2020 and September 30, 2021, one-month LIBOR declined 6 basis points to 0.08%, and three-month LIBOR fell 11 basis points to 0.13%.

In the fourth quarter, LIBOR ticked up slightly, with one-month LIBOR increasing 2 basis points to 0.10% and three-month LIBOR up by 8 basis points to 0.21%.

real GDP increased at an annualized rate of 6.3% in the first quarter and 6.7% in the second quarter, before slowing to 2.3% in the third quarter, but accelerating again to an estimated annualized rate of 7.0% in the fourth quarter.

• Positive economic activity drove steady growth in U.S.

employment in each quarter of 2021.

The unemployment rate dropped from 6.7% at the end of 2020, to 6.0% on March 31 st , 5.9% on June 30 th , 4.8% on September 30 th , and 3.9% at year end.

• Driven by the economic recovery and strong employment, forbearance rates on residential mortgages steadily declined throughout 2021.

According to the Mortgage Bankers Association, the total forbearance rate decreased from 5.5% as of January 3 rd , to 4.9% on March 28 th , 3.9% on June 27 th , 2.9% on September 26 th , and 1.4% on December 31 st .

• In the first quarter, the Bloomberg Barclays U.S.

MBS Index (“BB MBS Index”) generated a negative return of (1.10%), driven by rising interest rates, but a positive excess return (on a duration-adjusted basis) of 0.15% relative to the Bloomberg Barclays U.S.

Treasury Index.

Notably, during the extreme market volatility experienced in March, the intra-month negative excess return reached an extreme of (2.22)% as of March 19th, before actions by the Federal Reserve caused yield spreads on Agency RMBS to retighten.

Additionally, after underperforming in the first quarter, pay-ups on Agency specified pools performed exceptionally well during the rest of 2020.

• For the first quarter, the Bloomberg Barclays US Corporate Bond Index ("BB IG Index") generated a loss of 3.63% and a negative excess return of (13.50)%, while the Bloomberg Barclays U.S.

Corporate High Yield Bond Index ("BB HY Index") generated a loss of (12.68)% and a negative excess return of (17.03)%.

Each index generated both positive returns and positive excess returns during each of the subsequent three quarters, however.

For the full year, the BB IG

Index generated a 9.89% return, and a positive excess return of 0.49%;

while the BB HY Index generated a 7.11% return and positive excess return of 2.25%.

• During the first quarter, U.S.

equities had their worst quarter since the 2008–2009 financial crisis, with the Dow Jones Industrial Average ("DJIA") declining 23%, the S&P down 20%, and the NASDAQ down 14%.

Stock markets were highly volatile during the quarter, as the S&P 500 declined 34% between February 19th and March 23rd, and then increased 18% over the next three days.

Because of rapid price declines that tripped market "circuit breakers," trading was halted temporarily on the major U.S.

stock exchanges on four trading days during the quarter.

The CBOE Volatility Index, which measures expected moves in the S&P 500 index, registered an all-time high of 82.69 on March 16th.

London's FTSE 100 declined 25%, while the MSCI World global equity index declined 21%.

Despite the continuing negative economic impacts of COVID-19, U.S.

equities rebounded dramatically in the second quarter, with the DJIA and S&P 500 indexes posting their biggest quarterly gains since 1998 and offsetting most of the losses suffered in March, amidst optimism over the reopening of the economy, possible additional stimulus measures, and advances on COVID-19 treatments and a possible vaccine.

The DJIA rose 17.8% and the S&P 500 rose 20.0% quarter over quarter, while the tech-heavy NASDAQ composite index increased 30.6%.

Equity volatility declined during the second quarter, but remained higher than pre-COVID-19 levels.

The CBOE Volatility Index steadily declined for most of the second quarter, finishing at 30.43 at June 30th.

Meanwhile, London's FTSE 100 index increased 8.8% quarter over quarter, while the MSCI World global equity index rebounded by 18.8% over the same period.

The strong performance of equities continued into the second half of the year, driven by record-low interest rates, expectations of additional stimulus, advances on a possible COVID-19 vaccine, as well as continued outperformance by the tech sector.

In July, the tech-heavy NASDAQ composite index closed at an all-time high, while in August, the S&P 500 reversed all of its losses for the year and reached a new all-time high as well.

Performance waned in September amidst a tech selloff and dimming hopes for new stimulus, but U.S.

equities still posted a strong third quarter.

Quarter over quarter, the S&P 500 rose 8.5%, the DJIA 7.6%, and the NASDAQ 11%.

The CBOE Volatility Index, which measures expected moves in the S&P 500 index, increased moderately in September but remained at levels well below those seen in March and April.

Meanwhile, London's FTSE 100 index decreased 4.9% and the MSCI World global equity index rose 7.5%, over the same period.

In the second half of October, U.S.

equities slumped and equity volatility increased in response to fading stimulus hopes and an accelerating number of COVID-19 cases.

However, in November and December, stocks rallied following the U.S.

presidential election and in response to advances in the development of COVID-19 vaccines as well as the passage of an additional stimulus package.

During December, each of the S&P 500, DJIA, and NASDAQ indexes set fresh new highs;

and for the full year, these indexes gained 16%, 7%, and 44%, respectively.

After rising in October, the VIX volatility index declined steadily into year end.

In the second quarter, long-term interest rates declined and the BB MBS Index generated a positive return of 0.33%, but a negative excess return of (0.60%).

After generating a modest return and positive excess return in the third quarter, the BB MBS Index generated a negative return of (0.37%) and a negative excess return of (0.26%) in the fourth quarter, as volatility increased and short-term Treasury yields spiked.

For the full year 2021, the BB MBS Index generated a negative return of (1.04%), and a negative excess return of (0.68%).

• In the first quarter, the Bloomberg Barclays U.S.

Corporate Bond Index (“BB IG Index”) generated a negative return of (4.65%), but an excess return of 0.95%, and in the second quarter, a positive return of 3.38% and positive excess return of 1.09%.

In the third quarter, the BB IG Index generated a breakeven return and had a negative excess return of (0.15%), and in the fourth quarter, it generated a positive return of 0.23% but a negative excess return of (0.28%).

For the full year 2021, the BB IG Index generated a negative return of (1.04%), but an excess return of 1.61%.

Meanwhile, the Bloomberg Barclays U.S.

Corporate High Yield Bond Index (“BB HY Index”) generated positive returns and positive excess returns in each quarter of 2021.

For the year, the BB HY Index generated a gain of 5.28% and an excess return of 6.63%.

equities performed well in 2021, driven by the ongoing economic and employment recovery, continued monetary and fiscal policy support, the development and distribution of vaccines, and other positive factors, which outweighed negative factors including supply-chain challenges, uncertainty about the path of the virus, concerns about the quickening pace of inflation, rising interest rates, and the actual and anticipated removal of stimulus measures.

For the year, the S&P 500 rose 26.9%, the Dow Jones Industrial Average increased 18.7%, and the NASDAQ rose 21.4%.

Meanwhile, London's FTSE 100 index increased 14.3% and the MSCI World global equity index increased 20.1%.

The VIX volatility index remained relatively low during 2021, as compared to the months surrounding the onset of the pandemic in early 2020, although it did spike toward the end of the fourth quarter in response to the spread of a new COVID variant and a hawkish shift from the Federal Reserve.

Portfolio Overview and Outlook

As of December 31, 2020, our mortgage-backed securities portfolio consisted of $962.8 million of fixed-rate Agency "specified pools," $20.4 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $67.5 million of Agency reverse mortgage pools, $13.0 million of Agency interest only securities, or "Agency IOs," and $17.6 million of non-Agency RMBS.

As of December 31, 2021, our mortgage-backed securities portfolio consisted of $1.240 billion of fixed-rate Agency "specified pools," $12.0 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $37.3 million of Agency reverse mortgage pools, $10.3 million of Agency interest-only securities, or "Agency IOs," $9.1 million of non-Agency RMBS, and $2.8 million of non-Agency IOs.

Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics.

In March 2020, in light of the heightened levels of market volatility and systemic liquidity risk, we proactively reduced the size of our Agency portfolio, thereby bolstering our liquidity and lowering our leverage.

By reducing our Agency portfolio in an orderly and measured way, we avoided forced asset sales.

Our Agency RMBS portfolio decreased by 25% to $1.043 billion as of March 31, 2020, as compared to $1.393 billion as of December 31, 2019.

As the year progressed and economic uncertainty remained high, we maintained a smaller Agency portfolio, lower debt-to-equity ratio, and higher cash balance, relative to our historical averages.

For the full year 2020, our Agency RMBS holdings decreased approximately 24% to $1.064 billion as of December 31, 2020, from $1.393 billion as of December 31, 2019.

In contrast to our Agency RMBS portfolio, we significantly increased our non-Agency RMBS holdings following the market distress of March and April.

During the second quarter of 2020, we opportunistically purchased approximately $40 million of non-Agency RMBS at depressed prices, and as the year progressed and prices recovered, we sold the majority of

these investments at substantial gains.

For the full year 2020, our non-Agency RMBS holdings increased by 99% to $17.6 million from $8.9 million.

We expect to continue to vary our allocation to non-Agency RMBS as market opportunities change over time.

The increase in our shareholders' equity during the year, combined with the decline in the size of our overall RMBS portfolio, caused our debt-to-equity ratio, adjusted for unsettled purchases and sales, to decrease to 6.1:1 as of December 31, 2020 from 8.1:1 as of December 31, 2019.

Our Agency RMBS holdings, excluding IOs, increased by 23% to $1.289 billion as of December 31, 2021, as compared to $1.051 billion as of December 31, 2020.

Over the same period, our non-Agency RMBS, excluding IOs, decreased approximately 50% to $9.1 million as of December 31, 2021, as compared to $17.6 million as of December 31, 2020.

At December 31, 2021, we held $13.1 million of IOs, roughly unchanged as compared to December 31, 2020.

In conjunction with our larger portfolio, our debt-to-equity ratio increased to 6.9:1 as of December 31, 2021 from 6.1:1 as of December 31, 2020.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets activities, and the timing of security purchase and sale transactions.

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As of December 31, 2021, we had cash and cash equivalents of $69.0 million, along with other unencumbered assets of approximately $16.7 million.

This compares to cash and cash equivalents of $35.4 million and unencumbered assets of $53.6 million held by us at December 31, 2019.

During the first half of March, with heightened interest rate volatility and a flight to the safe haven of U.S.

Treasury securities, yield spreads on Agency RMBS widened significantly.

As a result, we received margin calls under our financing arrangements that were higher than typical historical levels.

We satisfied all of these margin calls.

Actions by the Federal Reserve during the second half of March helped stabilize the market for Agency RMBS, causing yield spreads to tighten significantly.

For the first quarter of 2020, the precipitous decline in interest rates and high levels of interest rate volatility generated net realized and unrealized losses on our hedges, and while our Agency RMBS assets did appreciate in price, they significantly underperformed our hedges.

Furthermore, TBAs outperformed specified pools, depressing pay-ups on our specified pool portfolio.

Pay-ups are price premiums for specified pools relative to their TBA counterparts, and generally reflect, among other factors, the prepayment protection that specified pools provide.

As a result, we experienced a significant net loss for the first quarter.

In the second quarter, forceful actions by the Federal Reserve continued to stabilize the market for Agency RMBS, and our Agency portfolio performed exceptionally well, driven by significantly higher pay-ups on our specified pools.

Our Agency strategy continued to perform well in the second half of 2020, driven by continued strong performance from our specified pools, and solid net interest income.

During most of 2020, mortgage rates declined and actual and expected prepayment rates rose, which benefited pay-ups on our prepayment-protected specified pools.

Average pay-ups on our specified pools increased to 2.40% as of December 31, 2020, as compared to 1.77% 1 as of December 31, 2019.

1 Conformed to current period calculation methodology.

As the year progressed, we also increased our holdings of long TBAs held for investment, which we concentrated in current coupon production.

These investments performed well, driven by Federal Reserve purchasing activity.

Finally, our opportunistic investments in non-Agency RMBS generated excellent results for the year.

With the decline in our overall RMBS portfolio and the increase in our shareholders' equity during the year, and despite a smaller net notional short TBA position, our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—was considerably lower at the end of 2020 as compared to the end of 2019.

From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio.

This compares to cash and cash equivalents of $58.2 million and unencumbered assets of $47.4 million at December 31, 2020.

Our Agency RMBS strategy generated a net loss for the year, in the face of a challenging Agency market marked by rising interest rates, widening yield spreads, and elevated interest rate volatility for much of the year.

During the first quarter of the year, long-term interest rates rose, the yield curve steepened, and interest rate volatility increased.

As a result, most Agency RMBS prices declined, with lower-coupon RMBS performing the worst in the face of heightened extension risk.

Next, in a reversal from the prior quarter, long-term interest rates declined and the yield curve flattened in the second quarter;

most Agency RMBS underperformed hedging instruments, with higher-coupon Agency RMBS faring the worst.

Moving to the third quarter, performance of Agency RMBS was again mixed, with incrementally higher mortgage rates leading to reduced expectations for prepayments, which boosted higher-coupon RMBS, while the anticipated withdrawal of Federal Reserve purchases negatively impacted lower-coupon RMBS.

As a result, higher coupons outperformed lower coupons for the third quarter.

In the fourth quarter, short-term interest rates rose sharply, actual and implied volatility increased, and the yield curve flattened as the Federal Reserve signaled that interest rate increases could be imminent.

The Federal Reserve also began the tapering of its asset purchases in November, and then accelerated the pace of that tapering starting in December.

In response to these developments, most Agency RMBS underperformed U.S.

Treasury securities during the fourth quarter, with higher-coupon specified pools and other shorter-duration RMBS particularly underperforming in light of the flattening of the yield curve.

Over the course of the year, virtually all Agency RMBS prices declined, which led to net realized and unrealized losses on our Agency RMBS portfolio.

These losses were partially offset by net interest income and net gains on our interest rate hedges.

Pay-ups on our existing specified pool investments declined during the year, while our new purchases during the year primarily consisted of pools with lower pay-ups.

As a result, the average pay-ups on our specified pools declined to 1.07% as of December 31, 2021, as compared to 2.40% as of December 31, 2020.

Pay-ups are price premiums for specified pools relative to their TBA counterparts.

Our non-Agency RMBS performed well during 2021, driven by net interest income and net realized and unrealized gains.

We decreased our non-Agency RMBS holdings over the year, and particularly in the first quarter, as we monetized gains in response to tightening yield spreads.

We expect to continue to vary our allocation to non-Agency RMBS as market opportunities change over time.

Our net mortgage assets-to-equity ratio—which we define as the net aggregate market value of our mortgage-backed securities (including the underlying market values of our long and short TBA positions) divided by total shareholders' equity—increased during the year, driven by a larger RMBS portfolio as well as a decrease in shareholders' equity year over year.

From time to time, in response to market opportunities and other factors, we increase or decrease our net mortgage assets-to-equity

ratio by varying the sizes of our net short TBA position and/or our long RMBS portfolio.

The following table summarizes our net mortgage assets-to-equity ratio and provides additional details, for the last five quarters, to illustrate this fluctuation.

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Three-Month Constant Prepayment Rates 20.7% 21.9% 22.8% 23.6% 21.0%

(1) Excludes recent purchases of fixed rate Agency specified pools with no prepayment history.

The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2021 and 2020.

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4.00–4.49 14,121 15,101 46 21,529 23,347 33

4.50–4.99 306 318 147 550 575 135

Total 15-year fixed-rate mortgages 125,033 130,710 33 77,578 83,159 42

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5.50–5.99 4,828 5,442 68 7,890 8,951 49

6.00–6.49 1,653 1,852 39 2,658 3,049 27

Total 30-year fixed-rate mortgages 1,027,843 1,072,904 33 763,563 834,881 48

Total fixed-rate Agency RMBS $ 1,188,608 $ 1,239,961 32 $ 883,700 $ 962,803 45

(1) Conformed to current period presentation.

For the year ended December 31, 2020, we had total net realized and unrealized gains on our Agency RMBS of $27.0 million, or $2.19 per share.

Our Agency RMBS portfolio turnover was 64% for the year ended December 31, 2020, and we recognized net realized gains of $11.8 million.

During the year ended December 31, 2020, we continued to hedge interest rate risk, primarily through the use of interest rate swaps, and to a lesser extent through the use of short positions in TBAs, U.S.

For the year ended December 31, 2021, we had total net realized and unrealized losses on our Agency securities of $(34.5) million, or $(2.72) per share.

Our Agency portfolio turnover was approximately 88% for the year ended December 31, 2021, and we recognized net realized gains of $1.4 million.

During the year ended December 31, 2021, we continued to hedge interest rate risk through the use of interest rate swaps, and short positions in TBAs, U.S.

Treasury securities, and futures.

We had total net realized and unrealized losses of $(21.8) million, or $(1.77) per share, on our interest rate hedging portfolio, as interest rates declined precipitously during the year.

We increased the amount of long TBAs held for investment during the year, especially in lower coupon TBAs.

In conjunction with these investments, we ended the year with a small net short overall TBA position on a notional basis but a small net long overall TBA position as measured by 10-year equivalents.

10-year equivalents for a group of positions represent the amount of 10-year U.S.

Treasury securities that would be expected to experience a similar

change in market value under a standard parallel move in interest rates.

We had total net realized and unrealized gains of $14.5 million, or $1.14 per share, on our interest rate hedging portfolio as interest rates increased during the year.

These gains were partially offset by net realized and unrealized losses of $(6.5) million, or $(0.51) per share, on our long TBAs held for investment, driven primarily by underperformance of lower-coupon TBAs.

We ended the year with a net short overall TBA position on a notional basis while maintaining a small net long overall TBA position as measured by 10-year equivalents.

Ten-year equivalents for a group of positions represent the amount of 10-year U.S.

Treasury securities that would be expected to experience a similar change in market value under a standard parallel move in interest rates.

The relative makeup of our interest rate hedging portfolio can change materially from period to period.

After giving effect to dividends during the year ended December 31, 2020 of $1.12 per share, our book value per share increased to $13.48 as of December 31, 2020, from $12.91 as of December 31, 2019, and we had an economic return of 13.1% for the year ended December 31, 2020.

Economic return is computed by adding back dividends declared to ending book value per share, and comparing that amount to book value per share as of the beginning of the quarter.

After giving effect to dividends during the year ended December 31, 2021 of $1.18 per share, our book value per share decreased to $11.76 as of December 31, 2021, from $13.48 as of December 31, 2020, and we had an economic return of (4.0)% for the year ended December 31, 2021.

Economic return for a period is computed by adding back dividends declared during the period to ending book value per share, and comparing that amount to book value per share as of the beginning of the period.

Our net Agency premium as a percentage of the fair value of our specified pool holdings is one metric that we use to measure the overall prepayment risk of our specified pool portfolio.

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We believe that our focus on purchasing pools with specific prepayment characteristics provides a measure of protection against prepayments.

We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to the COVID-19 pandemic, exhibits high levels of interest rate risk, prepayment risk, financing and liquidity risk, shifting central bank and government policies, regulatory changes, and disruptive technological developments.

For the year ended December 31, 2020, our average repo borrowing cost decreased to 0.91% as compared to 2.52% for the year ended December 31, 2019.

The year-over-year decline in average repo borrowing cost was due to a significant decrease in short-term interest rates as well as a significant decline in financing spreads as measured against LIBOR.

As of December 31, 2020, the weighted average borrowing rate on our repurchase agreements declined to 0.25% from 2.00% as of December 31, 2019.

We believe that our adaptive and active style of portfolio management is well suited to the current MBS market environment, which, especially given the current effects and future uncertainties related to the COVID-19 pandemic and to quantitative tightening, exhibits high levels of interest rate risk, prepayment risk, financing and liquidity risk, shifting central bank and government policies, regulatory changes, and disruptive technological developments.

For the year ended December 31, 2021, our average repo borrowing cost decreased to 0.19%, as compared to 0.91% for the year ended December 31, 2020, mainly as a result of decreases in short-term interest rates.

As of December 31, 2021 and 2020, the weighted average borrowing rate on our repurchase agreements was 0.18% and 0.25%, respectively.

While large banks still dominate the repo market, non-bank firms, not subject to the same regulations as banks, are active in providing repo financing.

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All inter-company balances and transactions have been eliminated.

Certain of our critical accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

The preparation of our consolidated financial statements in accordance with U.S.

GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain.

Actual results could differ from those estimates and such differences could have a material impact on our financial condition and/or results of operations.

We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made based upon information available to us at that time.

We rely on our Manager and Ellington's experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates.

See Note 2 of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a complete discussion of our significant accounting policies.

We have identified our most critical accounting policies to be the following:

We rely on the experience of our Manager and Ellington and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates.

See Note 2 of the notes to our consolidated financial statements for a complete discussion of our significant accounting policies.

We have identified our most critical accounting estimates to be the following:

We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825").

Electing the fair value option allows us to

record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner.

As such, the mortgage-backed securities are recorded at fair value on our Consolidated Balance Sheet and the period change in fair value is recorded in current period earnings on our Consolidated Statement of Operations as a component of Change in net unrealized gains (losses) on securities.

Purchase and sales transactions are generally recorded on trade date.

Realized and unrealized gains and losses are calculated based on identified cost.

For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price.

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If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology.

Summary descriptions, for the various categories of financial

instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements.

Summary descriptions, for the various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements.

Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument.

See the notes to our consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities.

Accounting for Securities :

Investments in mortgage-backed securities are recorded on trade date.

We have chosen to make a fair value election pursuant to ASC 825-10, Financial Instruments , for our mortgage-backed securities portfolio.

Electing the fair value option allows us to record changes in fair value in our Consolidated Statement of Operations, which, in our view, more appropriately reflects the results of our operations for a particular reporting period as all securities activities will be recorded in a similar manner.

Realized gains or losses on sales of mortgage-backed securities are included in Net realized gains (losses) on securities on the Consolidated Statement of Operations, and are recorded at the time of disposition.

The cost of positions sold is calculated based on identified cost.

Principal write-offs are generally treated as realized losses.

Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements.

The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both macroeconomic and microeconomic assumptions and/or inputs, which are generally based on current market and economic conditions.

Changes in market and/or economic conditions could have a significant adverse effect on the estimated fair value of our financial instruments.

Changes to assumptions, including assumed market yields, may significantly impact the estimated fair value of our investments.

Our valuations are sensitive to changes in interest rates;

see the interest rate sensitivity analysis included in Item 7A.

Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K for further information.

Interest Income :

Coupon interest income on investment securities is accrued based on the outstanding principal balance and the current coupon rate on each security.

We amortize purchase premiums and accrete purchase discounts on our fixed income investments using the effective interest method.

We generally amortize premiums and accrete discounts on our fixed-income investments using the effective interest method.

For certain of our securities, for purposes of estimating future expected cash flows, management uses assumptions including, but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macroeconomic assumptions, such as future housing prices, GDP growth rates, and unemployment rates).

These assumptions require the use of a significant amount of judgment.

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.

The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments.

Future prepayment rates are difficult to predict.

We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors.

We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase.

When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment, or "Catch-up Premium Amortization Adjustment," is made to interest income to reflect the cumulative impact of the changes in effective yields.

For the years ended December 31, 2021 and 2020, we recognized a Catch-up Premium Amortization Adjustment of $1.7 million and $(4.6) million, respectively, which is reflected as an increase (decrease) to interest income on the Consolidated Statement of Operations.

Our accretion of discounts and amortization of premiums on securities for U.S.

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We made an election to be taxed as a REIT for U.S.

federal income tax purposes.

As a REIT, we generally are not subject to corporate-level federal and state income tax on net income we distribute to our shareholders within the prescribed timeframes.

To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of our taxable income to our shareholders.

Even if we qualify as a REIT, we may be subject to certain federal, state, local and foreign taxes on our income and property, and to federal income and excise taxes on our undistributed taxable income.

If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S.

federal, state, and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which we fail to qualify as a REIT.

We follow the authoritative guidance on accounting for and disclosure of uncertainty on tax positions, which requires management to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.

For uncertain tax positions, the tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We did not have any unrecognized tax benefits resulting from tax positions related to the current period or our open tax years.

In the normal course of business, we may be subject to examination by federal, state, local, and foreign jurisdictions, where applicable, for the current period and our open tax years.

We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations.

federal income tax purposes and are generally not subject to corporate-level federal and state income tax on net income we distribute to our shareholders within the prescribed timeframes.

We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable

tax regulations.

Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements.

Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof.

There were no amounts accrued for penalties or interest as of or during the periods presented in the consolidated financial statements included in this Annual Report on Form 10-K.

See Note 2 and Note 12 to our consolidated financial statements for additional details on income taxes.

Recent Accounting Pronouncements

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Non-Agency RMBS (2)

10,672 9,056 84.86 7,234 67.78 23,140 17,612 76.11 15,369 66.42

Total RMBS (2)

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Agency IOs n/a 10,289 n/a 12,983 n/a n/a 13,049 n/a 15,434 n/a

Non-Agency IOs n/a 2,798 n/a 2,684 n/a n/a — n/a — n/a

Total mortgage-backed securities $ 1,311,361 $ 1,306,244 $ 1,081,380 $ 1,040,029

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(1) Represents the dollar amount (not shown in thousands) per $100 of current principal of the price or cost for the security.

(2) Excludes Agency IOs.

(2) Excludes IOs.

The majority of our capital is allocated to our Agency RMBS strategy, which includes investments in Agency pools and Agency collateralized mortgage obligations, or "CMOs." As of both December 31, 2021 and 2020, investments in non-Agency RMBS constituted a relatively small portion of our total investments.

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We generally enter into these transactions to offset the potential adverse effects of rising interest rates on short-term repurchase agreements.

Our repurchase agreements generally have maturities of up to 180 days and carry interest rates that are determined by reference to LIBOR or correlated benchmark rates for those same periods.

Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as LIBOR or the Secured Overnight Financing Rate, or "SOFR," for those same periods.

As each then-existing fixed-rate repo borrowing matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates established at that future date.

In the case of interest rate swaps, most of our agreements are structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate.

The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for LIBOR.

To the extent that our future repo borrowing costs continue to be highly correlated with LIBOR, our LIBOR-based interest rate swap agreements help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.

While for the time being we are continuing to enter into LIBOR-based interest rate swap agreements, we are currently considering entering into SOFR-based interest rate swap agreements as well.

In the case of TBAs, most of our positions are short TBA positions with negative duration, meaning that should interest rates rise, the value of the short position would be expected to increase.

In the case of interest rate swaps, most of our contracts are structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate.

The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for a benchmark rate such as LIBOR or SOFR.

To the extent that the benchmark rates used to calculate the payments we receive on our interest rate swaps continue to be highly correlated with our repo borrowing costs, our interest rate swap contracts should help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.

While for the time being the majority of our interest rate swaps are LIBOR-based interest rate swap contracts, we have entered into interest rate swap contracts based on other benchmark rates, such as SOFR.

In the case of TBAs, many of our positions are short TBA positions with negative duration, meaning that should interest rates rise, the value of the short position would be expected to increase.

This expected increase in value would then serve to offset corollary expected increases in our current and/or future borrowing costs under our repurchase agreements, and so in this manner our short TBA positions serve as a hedge against potential increases in interest rates.

While we use TBAs to hedge interest rate risk, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

As of December 31, 2019, we held short positions in U.S.

Treasury securities, with a total principal amount of $2.1 million and a fair value of $2.1 million;

we did not hold short positions in U.S.

Treasury securities as of December 31, 2020.

While we use TBAs to hedge interest rate risk and certain other risks, we also hold net long positions in certain TBA securities as a means of acquiring exposure to Agency RMBS.

The composition and relative mix of our hedging instruments may vary from period to period given the amount of our liabilities outstanding or anticipated to be entered into, the overall market environment and our view as to which instruments best enable us to execute our hedging goals.

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151-180 days 56,337 0.15 163 53,150 0.32 162

181-364 days 242,941 0.19 238 18,762 0.26 257

Total $ 1,064,835 0.18 % 111 $ 1,015,245 0.25 % 48

We finance our assets with what we believe to be a prudent amount of leverage, which will vary from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions.

In response to the significant volatility of the first quarter caused by the COVID-19 pandemic, we strategically reduced the size of our portfolio in order to lower our leverage and enhance our liquidity position, and have continued to maintain a leverage ratio lower than we have historically.

As of December 31, 2021 and 2020, our total debt-to-equity ratio was 6.9:1 and 6.1:1, respectively.

Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of December 31, 2020 and 2019 had an aggregate fair value of $1.1 billion and $1.3 billion, respectively.

Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of both December 31, 2021 and 2020 had an aggregate fair value of $1.1 billion.

Our debt-to-equity ratio may fluctuate period over period based on portfolio management decisions, market conditions, capital markets conditions, and the timing of security purchase and sale transactions.

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Shareholders' Equity

As of December 31, 2020, our shareholders' equity increased to $166.4 million from $160.8 million as of December 31, 2019.

This increase principally consisted of net income of $20.1 million, partially offset by dividends declared of $(13.8) million and common shares repurchased of $(1.0) million.

As of December 31, 2021, our shareholders' equity decreased to $154.2 million from $166.4 million as of December 31, 2020.

This decrease principally consisted of dividends declared of $15.1 million and a net loss of $(6.3) million, partially offset by net proceeds from the issuances of common shares of $9.0 million.

As of December 31, 2021, our book value per share was $11.76, as compared to $13.48 as of December 31, 2020.

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Change in net unrealized gains (losses) on accrued periodic settlements of interest rate swaps

Deferred offering costs expensed 351 —

Non-recurring expenses 58 351

Negative (positive) component of interest income represented by Catch-up Premium Amortization Adjustment (1,662) 4,619

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Net income (loss) for the year ended December 31, 2021 was $(6.3) million, as compared to $20.1 million for the year ended December 31, 2020.

The decrease in net income year over year was primarily due to a decrease in total other income partially offset by an increase in net interest income.

The reversal in our results of operations year over year was primarily due to total other losses for the year ended December 31, 2021, as compared to total other gains for the year ended December 31, 2020, partially offset by an increase in net interest income.

Interest Income

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Before interest expense, we earned approximately $28.3 million and $26.9 million in interest income on these securities for the years ended December 31, 2021 and 2020, respectively.

The year-over-year decrease in interest income primarily resulted from lower average holdings in our Agency RMBS portfolio and lower overall average asset yields.

The year-over-year increase in interest income primarily resulted from higher yields and a larger Agency RMBS portfolio in 2021.

The Catch-up Premium Amortization Adjustment causes variability in our interest income and portfolio yields.

For the years ended December 31, 2020 and 2019, we had a negative Catch-up Premium Amortization Adjustment of approximately $(4.6) million and $(5.9) million, respectively, which decreased interest income.

For the year ended December 31, 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $1.7 million, which increased interest income.

For the year ended December 31, 2020, we had a negative Catch-up Premium Amortization Adjustment of approximately $(4.6) million, which decreased interest income.

Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.36% and 2.82% for the years ended December 31, 2021 and 2020, respectively.

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(In thousands) Interest Income Average Holdings Yield Interest Income Average Holdings Yield Interest Income Average Holdings Yield

Year ended December 31, 2020 $ 25,337 $ 1,095,537 2.31 % $ 1,552 $ 20,837 7.45 % $ 26,889 $ 1,116,374 2.41 %

Year ended December 31, 2019 $ 41,487 $ 1,461,487 2.84 % $ 892 $ 7,763 11.49 % $ 42,379 $ 1,469,250 2.88 %

December 31, 2021 $ 27,497 $ 1,118,346 2.46 % $ 757 $ 8,485 8.91 % $ 28,254 $ 1,126,831 2.51 %

December 31, 2020 $ 25,337 $ 1,095,537 2.31 % $ 1,552 $ 20,837 7.45 % $ 26,889 $ 1,116,374 2.41 %

(1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long U.S.

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Treasury securities as well as on our counterparties' cash collateral held by us.

Our total interest expense for the year ended December 31, 2020 was $10.0 million, of which $9.7 million represented interest expense on our repo borrowings and $0.2 million represented interest expense related primarily to our short positions in U.S.

Our total interest expense for the year ended December 31, 2021 was $2.7 million, which primarily consisted of $2.1 million of interest expense on our repo borrowings, and $0.6 million of interest expense related to our short positions in U.S.

Treasury securities.

Our total interest expense for the year ended December 31, 2019 was $35.3 million, of which $34.6 million represented interest expense on our repo borrowings and $0.6 million represented interest expense related primarily to our short positions in U.S.

Our total interest expense for the year ended December 31, 2020 was $10.0 million, consisting primarily of $9.7 million of interest expense on our repo borrowings, and $0.2 million of interest expense related primarily to our short positions in U.S.

Treasury securities.

The year-over-year decrease in our total interest expense resulted mainly from lower rates on our repo borrowings stemming from the decrease in short-term interest rates, as well as lower average outstanding borrowings.

The year-over-year decrease in our total interest expense resulted mainly from significantly lower rates on our repo borrowings stemming from the decrease in short-term interest rates.

The following table shows information related to our average cost of funds (1) for the years ended December 31, 2021 and 2020:

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Average Borrowed Funds Interest Expense Average

Funds Net periodic expense paid or payable Average

Funds Interest expense Average

Funds Interest and net periodic expense paid or payable Average

Funds Net periodic expense paid or payable Adjustment to Average

Funds Interest expense Adjustment to Average

Funds Interest and net periodic expense paid or payable Adjusted Average

(In thousands)

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Treasury securities, and express the total as a percentage of our average outstanding repurchase agreement borrowings.

(3) Includes interest expense on reverse repurchase agreements with negative interest rates, which can occur when we borrow certain bonds that we have sold short.

For the years ended December 31, 2021 and 2020, average one-month LIBOR was 0.10% and 0.52%, respectively.

For the years ended December 31, 2021 and 2020, average six-month LIBOR was 0.20% and 0.69%, respectively.

For the year ended December 31, 2020, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.82%, while our total average cost of funds, including interest rate swaps and short U.S.

For the year ended December 31, 2021, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.36%, while our total adjusted average cost of funds, including interest rate swaps and short U.S.

Treasury securities, was 0.44%, resulting in a net interest margin of 1.92%.

By comparison, for the year ended December 31, 2019, the weighted average yield of our Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 3.29%, while our average cost of funds, including interest rate swaps and short U.S.

By comparison, for the year ended December 31, 2020, the weighted average yield of our Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.82%, while our total adjusted average cost of funds, including interest rate swaps and short U.S.

Treasury securities, was 1.01%, resulting in a net interest margin of 1.81%.

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For the years ended December 31, 2021 and 2020, our other operating expenses were approximately $3.4 million and $3.5 million, respectively.

The increase in other operating expenses for the year ended December 31, 2020 was primarily due to an increase in professional fees resulting from deferred offering costs that were expensed during the year as well as an increase in compensation expense.

The decrease in other operating expenses for the year ended December 31, 2021 was primarily due to a decrease in professional fees partially offset by an increase in compensation expense.

Other Income (Loss)

Other income (loss) consists of net realized and net change in unrealized gains (losses) on securities and financial derivatives.

For the year ended December 31, 2021, Other income (loss) was $(26.2) million, consisting primarily of net realized and unrealized losses of $(32.3) million on securities, partially offset by net realized and unrealized gains of $6.1 million on our financial derivatives.

Net realized and unrealized losses of $(32.3) million on securities primarily consisted of $(34.5) million of net realized and unrealized losses on our Agency RMBS which were partially offset by net realized gains of

$1.9 million on our short U.S.

Treasury securities.

Net realized and unrealized gains of $6.1 million on our financial derivatives primarily consisted of $7.7 million of net realized and unrealized gains on our swaps and futures partially offset by net realized and unrealized losses of $(1.6) million on our TBAs, where net gains on our higher-coupon short holdings were exceeded by net losses on our lower-coupon long holdings.

During 2021, interest rate volatility and long-term interest rates increased during much of the year.

Yield spreads on most of our Agency RMBS holdings widened and their prices declined, leading to net realized and unrealized losses.

For the year ended December 31, 2021, net realized and unrealized gains of $1.9 million and $6.1 million on our short U.S.

Treasury securities and our financial derivatives, respectively, were primarily the result of the increase in long-term interest rates.

For the year ended December 31, 2020, Other income (loss) was $8.6 million, consisting primarily of net realized and change in net unrealized gains of $27.0 million on our Agency RMBS and $3.2 million on our non-Agency RMBS, which were partially offset by net realized and change in net unrealized losses of $(2.7) million on our short U.S.

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The gains on our Agency RMBS holdings were mainly driven by appreciation of our fixed rate specified pools in response to declining interest rates.

For the year ended December 31, 2020, as measured by

sales and excluding paydowns, we turned over approximately 64% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $11.8 million on our Agency RMBS portfolio.

For the year ended December 31, 2020, as measured by sales and excluding paydowns, we turned over approximately 64% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $11.8 million on our Agency RMBS portfolio.

For the year ended December 31, 2020, we had net realized and change in net unrealized losses on our financial derivatives of $(19.2) million, which consisted of net realized and change in net unrealized losses of $(16.9) million on our interest rate swaps and $(6.6) million on our futures, which were partially offset by net realized and change in net unrealized gains of $4.4 million on our TBAs.

The net losses on our financial derivatives were largely incurred during the three-month period ended March 31, 2020, when interest rates declined sharply and were highly volatile during the market stresses caused by the spread of the COVID-19 pandemic.

Other income (loss) for the year ended December 31, 2019 was $19.0 million, consisting of net realized and change in net unrealized gains of $51.5 million on our securities, primarily our Agency RMBS, partially offset by net realized and change in net unrealized losses of $(32.5) million on our financial derivatives.

The increase in prices on our Agency RMBS holdings, primarily as a result of the decrease in interest rates during the year ended December 31, 2019, led to significant gains on our securities portfolio.

The decrease in interest rates also led to losses on our interest rate hedges, including net realized and unrealized losses of $(21.5) million on our interest rate swaps, $(5.8) million on our futures, and $(5.1) million on our TBAs.

For the year ended December 31, 2019, as measured by sales and excluding paydowns, we turned over approximately 52% of our Agency RMBS portfolio and, as a result of these sales, we generated net realized gains of $2.8 million on our Agency RMBS portfolio.

Liquidity and Capital Resources

Liquidity refers to our ability to meet our cash needs, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs.

Our short-term (one year or less) and long-term liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses.

Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining RMBS and other assets, paying dividends, and other general business needs.

Our short-term (the 12 months ending December 31, 2022) and long-term (beyond December 31, 2022) liquidity requirements include acquisition costs for assets we acquire, payment of our management fee, compliance with margin requirements under our repurchase agreements, TBA and other financial derivative contracts, repayment of repurchase agreement borrowings to the extent we are unable or unwilling to extend our repurchase agreements, the payment of dividends, and payment of our general operating expenses.

Our capital resources primarily include cash on hand, cash flow from our investments (including monthly principal and interest payments received on our RMBS and proceeds from the sale of RMBS), borrowings under repurchase agreements, and proceeds from equity offerings.

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March 31, 2021 1,106,724 1,040,521 1,106,724

1,109,342 1,281,507 1,308,377

December 31, 2020 1,015,245 1,033,128 1,050,840

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March 31, 2020 (1)

1,109,342 1,281,507 1,308,377

December 31, 2019 1,296,272 1,301,270 1,319,839

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Amounts at risk under our repurchase agreements as of December 31, 2021 and 2020 does not include $2.6 million and $2.9 million, respectively, of net accrued interest receivable, which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.

Our derivatives are predominantly subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act." We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions.

Our derivatives are predominantly subject to bilateral master trade agreements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act." We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions.

Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral.

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As of December 31, 2021, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with two counterparties of approximately $11.3 million.

We also had $3.9 million of initial margin for cleared over-the-counter, or "OTC," derivatives posted to central clearinghouses as of that date.

As of December 31, 2020, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with two counterparties of approximately $5.1 million.

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As of December 31, 2021, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $4.1 million.

As of December 31, 2019, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with five counterparties of approximately $1.2 million.

Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any,

for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

As of December 31, 2020, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $3.5 million.

Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling securities plus our collateral held directly by the counterparty

less the counterparty's collateral held by us.

If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling securities plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

Earlier this year, in response to the significant volatility caused by the COVID-19 pandemic, we strategically reduced the size of our portfolio in order to lower our leverage and enhance our liquidity position.

As of December 31, 2020, the size of our portfolio and our debt-to-equity ratio remained lower than our historical averages, while our cash and cash equivalents remained higher than our historical averages.

We held cash and cash equivalents of approximately $58.2 million and $35.4 million as of December 31, 2020 and 2019, respectively.

We may declare dividends based on, among other things, our earnings, our financial condition, the REIT qualification requirements of the Internal Revenue Code of 1986, as amended, our working capital needs and new opportunities.

We held cash and cash equivalents of $69.0 million and $58.2 million as of December 31, 2021 and 2020, respectively.

The timing and frequency of distributions will be determined by our Board of Trustees based upon a variety of factors deemed relevant by our trustees, including restrictions under applicable law, our capital requirements, and the REIT requirements of the Code.

The declaration of dividends to our shareholders and the amount of such dividends are at the discretion of our Board of Trustees.

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Year Ended December 31, 2021

Per Share Dividend Amount Declaration Date Record Date Payment Date

Per Share Dividend

Amount Declaration Date Record Date Payment Date

(In thousands)

First Quarter $ 0.28 $ 3,449 March 4, 2020 March 31, 2020 April 27, 2020

Second Quarter 0.28 3,450 June 10, 2020 June 30, 2020 July 27, 2020

Third Quarter 0.28 3,454 September 10, 2020 September 30, 2020 October 26, 2020

Fourth Quarter 0.28 3,456 December 17, 2020 December 31, 2020 January 25, 2021

$ 0.10 1,311 December 7, 2021 December 30, 2021 January 25, 2022

0.10 1,310 November 5, 2021 November 30, 2021 December 27, 2021

0.10 1,294 October 7, 2021 October 29, 2021 November 26, 2021

0.30 3,881 September 14, 2021 September 30, 2021 October 25, 2021

0.30 3,876 June 9, 2021 June 30, 2021 July 26, 2021

0.28 3,456 March 3, 2021 March 31, 2021 April 26, 2021

Year Ended December 31, 2020

Per Share Dividend Amount Declaration Date Record Date Payment Date

Per Share Dividend

Amount Declaration Date Record Date Payment Date

(In thousands)

First Quarter $ 0.34 $ 4,239 March 4, 2019 March 29, 2019 April 25, 2019

Second Quarter 0.28 3,491 June 11, 2019 June 28, 2019 July 25, 2019

Third Quarter 0.28 3,485 September 11, 2019 September 30, 2019 October 25, 2019

Fourth Quarter 0.28 3,488 December 13, 2019 December 31, 2019 January 27, 2020

For the year ended December 31, 2020, our operating activities provided net cash of $24.4 million and our investing activities provided net cash of $304.1 million.

Our repo activity used to finance our purchase of securities (including repayments, in conjunction with the sales of securities, of amounts borrowed under our repurchase agreements as well as collateral posted in connection with our repo activity) used net cash of $290.8 million.

$ 0.28 $ 3,456 December 17, 2020 December 31, 2020 January 25, 2021

0.28 3,454 September 10, 2020 September 30, 2020 October 26, 2020

0.28 3,450 June 10, 2020 June 30, 2020 July 27, 2020

0.28 3,449 March 4, 2020 March 31, 2020 April 27, 2020

On January 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on February 25, 2022 to shareholders of record as of January 31, 2022.

On February 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on March 25, 2022 to shareholders of record as of February 28, 2022.

On March 7, 2022, the Board of Trustees approved a monthly dividend in the amount of $0.10 per share payable on April 25, 2022 to shareholders of record as of March 31, 2022.

For the year ended December 31, 2021, our operating activities provided net cash of $27.9 million and our investing activities used net cash of $15.2 million.

Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $19.2 million.

We used $13.8 million to pay dividends and $1.0 million to repurchase common shares.

We also received proceeds, net of offering costs paid, from the issuances of common shares of $8.9 million.

We used $17.3 million to pay dividends.

As a result of these activities, there was an increase in our cash holdings of $10.9 million, from $58.2 million as of December 31, 2020 to $69.0 million as of December 31, 2021.

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As a result of these activities, there was an increase in our cash holdings of $22.8 million, from $35.4 million as of December 31, 2019 to $58.2 million as of December 31, 2020.

During the year ended December 31, 2021, we issued 163,269 common shares under the ATM program which provided $1.9 million of net proceeds after $29 thousand of agent commissions and offering costs.

As of December 31, 2021, the Company had $73.0 million of common shares available to be issued remaining under the ATM program.

On June 17, 2021, the Company sold 575,000 of its common shares as part of a follow-on offering, which generated net proceeds, after underwriters' discounts and commissions and offering costs, of $7.1 million.

On June 13, 2018, our Board of Trustees approved the adoption of a share repurchase program under which we are authorized to repurchase up to 1.2 million common shares.

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Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations.

During the year ended December 31, 2020, we repurchased 136,142 common shares at an average price

per share of $7.24 and a total cost of $1.0 million.

Under the current repurchase program adopted on June 13, 2018, we have repurchased 434,171 common shares through March 4, 2022 at an average price per share of $9.45 and an aggregate cost of $4.1 million, and have authorization to repurchase an additional 765,829 common shares.

We did not purchase any shares under this program during the year ended December 31, 2021.

Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements.

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Repurchase agreements and reverse repurchase agreements that are conducted with the same counterparty may be reported on a net basis if they meet the requirements of ASC 210-20, Balance Sheet, Offsetting .

As of both December 31, 2020 and 2019, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated Balance Sheet.

As of both December 31, 2021 and December 31, 2020, there were no repurchase agreements and reverse repurchase agreements reported on a net basis on the Consolidated Balance Sheet.

As of December 31, 2021, we had $1.1 billion of outstanding borrowings with 15 counterparties.

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Virtually all of our assets and liabilities are interest rate-sensitive in nature.

As a result, interest rates and other factors influence our performance far more so than does inflation.

As a result, interest rates and other factors

influence our performance far more so than does inflation.

Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis