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Item 7. Management’s Discussion and Analysis

2023-03-10 compared with 2022-03-11 · 192 added, 220 removed, 403 unchanged (51% of the section changed)

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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.

We have financed our purchases of Agency RMBS exclusively through repurchase agreements, which we account for as collateralized borrowings.

As of December 31, 2021, we had outstanding borrowings under repurchase agreements in the amount of $1.1 billion with 15 counterparties.

We use leverage in both our Agency and non-Agency RMBS strategies, although we expect leverage in our non-Agency strategy to be significantly lower.

We have financed our RMBS exclusively through repurchase agreements, which we account for as collateralized borrowings.

As of December 31, 2022, we had outstanding borrowings under repurchase agreements in the amount of $842.5 million with 16 counterparties.

We have elected to be taxed as a REIT for U.S.

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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, 2022, our book value per share was $8.40 as compared to $11.76 as of December 31, 2021.

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Market Overview

• 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 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 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.

• After maintaining its target range of 0.00%–0.25% for the federal funds rate throughout 2021 and at its first meeting of 2022 in January, the U.S.

Federal Reserve, or the "Federal Reserve," rapidly tightened its monetary policy to combat elevated inflation through the rest of 2022.

At its March and May meetings, the Federal Reserve increased the target range by 0.25% and 0.50%, respectively, and then implemented rate hikes of 0.75% at each of its next four meetings, increasing the target range to 3.75%-4.00% in November.

At its December meeting, the Federal Reserve announced another interest rate hike, this time by 0.50%, increasing the target range of the federal funds rate to 4.25%-4.50%, its highest level since 2007.

Minutes of the December meeting noted that despite "welcome reductions" in inflation in October and November, "it would take substantially more evidence of progress to be confident that inflation was on a sustained downward path."

After initiating the tapering of its asset purchases in the fourth quarter of 2021, the Federal Reserve announced plans for reducing the size of its balance sheet at its May 2022 meeting, whereby it would only reinvest principal payments that exceeded monthly caps of $30 billion for Treasury securities and $17.5 billion for Agency MBS, beginning in June.

Those monthly caps increased in September to $60.0 billion and $35.0 billion, respectively, where they remained through year end.

Similarly, other central banks around the globe continued to tighten their monetary policies during 2022.

• Interest rates rose sharply in 2022, particularly short-term interest rates, with various segments of the yield curve inverting during the year.

Over the course of the year, the yield on the 2-year U.S.

Treasury increased by 369 basis

points to 4.43% as of December 31, 2022, while the 10-year U.S.

Treasury increased by 236 basis points to 3.87%.

Meanwhile, interest rate volatility was elevated through much of the year, with the MOVE Index in October reaching its highest point since the COVID-related market volatility of March 2020, before subsiding somewhat into year end.

• Mortgage rates also rose sharply during much of 2022, in sympathy with the increase in interest rates.

After starting the year at 3.11%, the Freddie Mac survey 30-year mortgage rate increased by at least a full percentage point in each of the first three quarters, rising a cumulative 359 basis points to 6.70% as of September 29th.

Mortgage rates continued to rise in October, with the Freddie Mac 30-year mortgage rate exceeding 7.00% in late October and early November for the first time since April 2002, before declining to 6.41% as of December 29, 2022.

Driven by higher mortgage rates, the Mortgage Bankers Association's Refinance Index fell precipitously throughout the year, declining by 87% year over year to its lowest level since May 1997.

Fannie Mae 30-year MBS prepayments dropped steadily as well, declining from a CPR of 18.7% in December of 2021 to 4.5% in December of 2022.

Despite the sharply higher mortgage rates, home prices continued to appreciate during the first half of the year, with the S&P CoreLogic Case-Schiller US National Home Price NSA Index rising 10.7%, after increasing by 18.9% in 2021.

The index reversed course from there, however, declining by 4.4% during the second half of the year, but was still up by 5.8% for the full year.

The combination of drastically higher mortgage rates and substantial home price appreciation put significant downward pressure on housing affordability, with the National Association of Realtors Housing Affordability Index declining by 28.8% for the year through December.

• LIBOR rates and the Secured Overnight Financing Rate, or "SOFR," also rose significantly during the year, increasing during each quarter of 2022.

For the year, one-month LIBOR increased a cumulative 429 basis points to 4.39% as of December 31, 20222, while three-month LIBOR increased by 456 basis points to 4.77%.

In anticipation of additional interest rate increases by the Federal Reserve, the spread between one- and three-month LIBOR widened during the first nine months of the year, reaching 61 basis points as of September 30, 2022, compared to just 11 basis points at the start of the year.

During the fourth quarter, as the Fed began to slow the pace of its interest rate hikes, the spread tightened to 38 basis points.

SOFR increased as well;

one-month SOFR rose by 430 basis points to 4.36% at year end, and three-month SOFR rose by 450 basis points to 4.59%.

LIBOR and SOFR drive many of our financing costs.

• After positive GDP growth in each quarter of 2021, U.S.

real GDP contracted at an estimated annualized rate of 1.6% in the first quarter and 0.6% in the second quarter of 2022.

Real GDP then reversed course during the second half of 2022, expanding at an estimated annualized rate of 3.2% in the third quarter and 2.9% in the fourth quarter of 2022.

Meanwhile, the unemployment rate remained low throughout 2022, dropping from 3.9% at the end of 2021, to 3.6% as of both March 31st and June 30th, and to 3.5% as of both September 30th and December 31st.

• Inflation increased steadily during the first six months of 2022.

The 12-month percentage change in the Consumer Price Index for All Urban Consumers ("CPI-U"), not seasonally adjusted, increased from 7.5% in January to 9.1% in June, which was the highest reading since November 1981.

While still elevated, inflation did subside over the second half of the year, with the 12-month percentage change in CPI-U registering 6.5% in December 2022.

• Elevated volatility, rising interest rates, and yield spread widening drove underperformance of Agency MBS during the first nine months of 2022, and despite a rebound in the fourth quarter, for the year overall.

For the first nine months of the year, the Bloomberg Barclays U.S.

MBS Index ("BB MBS Index") generated a negative return of (13.66%), and a negative excess return (on a duration-adjusted basis) of (3.11%) relative to the Bloomberg Barclays U.S.

Treasury Index.

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.

In the fourth quarter, the BB MBS Index generated a positive return of 1.85%, as interest rate volatility moderated and yield spreads tightened, and a positive excess return of 0.88%.

For the full year 2022, the BB MBS index generated a negative return of (11.81%), which was its worst performance on record, and a negative excess return of (2.23%), its second-worst performance on record.

• Similarly, the Bloomberg Barclays U.S.

Corporate Bond Index ("BB IG Index") and the Bloomberg Barclays U.S.

Corporate High Yield Bond Index ("BB HY Index") generated negative returns during the first three quarters of 2022, before rebounding in the fourth quarter, but still finished the year with significant negative performance on both an absolute and relative basis.

For the full year, the BB IG Index generated a negative return of (15.76%) and a negative excess return of (1.25%), while the BB HY Index generated a negative return of (11.19%) and a negative excess return of (3.71%).

equities experienced significant losses in 2022 as well, with the Dow Jones Industrial Average declining by 8.8%, the S&P 500 falling by 19.4%, and the NASDAQ down 33.1%.

Meanwhile, London's FTSE 100 index increased by 0.9% for the year, and the MSCI World global equity index decreased 19.5%.

Similar to the MOVE index, the VIX volatility index was elevated throughout much of the year.

Portfolio Overview and Outlook

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.

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.

As of December 31, 2022, our mortgage-backed securities portfolio consisted of $836.8 million of fixed-rate Agency "specified pools," $8.7 million of Agency RMBS backed by adjustable rate mortgages, or "Agency ARMs," $17.9 million of Agency reverse mortgage pools, $9.3 million of Agency interest-only securities, or "Agency IOs," $12.6 million of non-Agency RMBS, and $8.1 million of non-Agency interest-only securities, or "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 government-sponsored refinancing programs, and mortgages with various other characteristics.

Our Agency RMBS holdings decreased by 33% to $863.3 million as of December 31, 2022, as compared to $1.289 billion as of December 31, 2021.

The decrease was driven by net sales, paydowns, and net losses.

Over the same period, our holdings of non-Agency RMBS increased by 39% to $12.6 million, and our holdings of interest-only securities increased by 33% to $17.5 million driven by a larger portfolio of non-Agency IOs.

Our debt-to-equity ratio, adjusted for unsettled purchases and sales, increased to 7.6:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021.

The increase was driven by lower shareholders’ equity year over year, partially offset by a decline in borrowings on our smaller Agency RMBS portfolio.

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.

As of December 31, 2021, substantially all of our borrowings were secured by specified pools.

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 $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.

As of December 31, 2022, the majority of our borrowings were secured by specified pools.

As of December 31, 2022, we had cash and cash equivalents of $34.8 million, in addition to other unencumbered assets of $2.9 million.

This compares to cash and cash equivalents of $69.0 million and other unencumbered assets of $16.7 million as of December 31, 2021.

During the first nine months of 2022, interest rates rose rapidly and volatility was elevated, as the Federal Reserve tightened its monetary policy to combat elevated inflation.

Agency RMBS durations extended in response to the higher interest rates, while the elevated volatility contributed to substantial yield spread widening.

As a result, net losses on our Agency RMBS significantly exceeded net gains on our interest rate hedges and net interest income for the period.

In the fourth quarter, inflation moderated and the Federal Reserve ratcheted back the pace of its interest rate hikes.

Volatility declined incrementally and investor demand for Agency RMBS increased;

together, this drove Agency RMBS yield spreads tighter, while pay-ups also increased.

For the quarter, significant net gains on our specified pools exceeded net losses on our interest rate hedges, and we generated an overall net gain.

Despite the strong fourth quarter, however, we had a significant net loss in our Agency strategy, and overall, for the full year.

In the current higher interest rate environment, the specified pool market has become less focused on prepayment protection, and more focused on extension protection.

Many of our specified pools are considered to offer significant extension protection relative to their TBA counterparts.

Thus despite higher mortgage rates, average pay-ups on our specified pool portfolio actually increased during the year, as the increase in the value of the extension protection provided by these specified pools more than offset the reduction in the value of the prepayment protection.

In addition, the pools that we sold during the year had lower average pay-ups than the held population.

Due to the combination of these factors, overall pay-ups on our specified pools increased to 1.26% as of December 31, 2022, as compared to 1.07% as of December 31, 2021.

Our non-Agency RMBS portfolio generated strong results in 2022, as net interest income exceeded modest net mark-to-market losses.

During the course of the year, w e increased our allocation to non-Agency RMBS and expect to continue to do so given current market opportunities.

The decrease was driven by a smaller Agency RMBS portfolio, partially offset by lower shareholder's equity and a smaller net short TBA position.

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 Period Ended

December 31, 2021 September 30,

2021 June 30, 2021 March 31, 2021 December 31, 2020

December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31,

Three-Month Constant Prepayment Rates 6.1% 9.8% 13.9% 17.0% 20.7%

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4.00–4.49 11,712 11,539 52 14,121 15,101 46

4.50–4.99 146 145 155 306 318 147

Total 15-year fixed-rate mortgages 47,453 45,324 56 125,033 130,710 33

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6.00–6.49 10,610 10,887 7 1,653 1,852 39

6.50–6.99 2,147 2,239 — — — —

Total 30-year fixed-rate mortgages 841,823 781,754 44 1,027,843 1,072,904 33

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For the year ended December 31, 2022, we had total net realized and unrealized losses on our Agency securities of $(156.2) million, or $(11.86) 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.

Our Agency portfolio turnover was approximately 147% for the year ended December 31, 2022, and we recognized net realized losses of $(77.2) million.

For the year ended December 31, 2022, 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 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.

We had total net realized and unrealized gains of $122.6 million, or $9.31 per share, on our interest rate hedging portfolio, as interest rates increased significantly during the year.

were partially offset by net realized and unrealized losses of $(11.7) million, or $(0.89) per share, on our long TBAs held for investment.

We ended the year with a net short TBA position, both on a notional basis and as measured by 10-year equivalents.

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

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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, 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.

After giving effect to dividends declared during the year ended December 31, 2022 of $1.04 per share, our book value per share decreased to $8.40 as of December 31, 2022, from $11.76 as of December 31, 2021, and we had a negative economic return of (19.7%) for the year ended December 31, 2022.

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.

Net Agency premium represents the total premium (excess of market value over outstanding principal balance) on our specified pool holdings less the total premium on net short TBA positions.

The lower our net Agency premium, the less we believe that our specified pool portfolio is exposed to market-wide increases in Agency RMBS prepayments.

As of December 31, 2021 and 2020, our net Agency premium as a percentage of fair value of our specified pool holdings was approximately 2.8% and 6.8%, respectively.

Excluding TBA positions, our Agency premium as a percentage of fair value was approximately 4.2% and 8.2% as of December 31, 2021 and 2020, respectively.

Our Agency premium percentage and net Agency premium percentage may fluctuate from period to period based on a variety of factors, including market factors such as interest rates and mortgage rates, and, in the case of our net Agency premium percentage, based on the degree to which we hedge prepayment risk with short TBAs.

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 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.

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 quantitative tightening, shifting central bank and government policies, regulatory changes, and disruptive technological developments, exhibits high levels of interest rate risk, prepayment risk (including extension risk), financing and liquidity risk.

For the year ended December 31, 2022, our average repo borrowing cost increased to 1.40%, as compared to 0.19% for the year ended December 31, 2021.

This increase in average repo borrowing cost was the result of significant increases in short-term interest rates during the year ended December 31, 2022.

As of December 31, 2022 and December 31, 2021, the weighted average borrowing rate on our repurchase agreements was 3.70% and 0.18%, 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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Our debt-to-equity ratio was 7.5:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021.

Adjusted for unsettled purchases and sales, our debt-to equity ratio was 7.6:1 as of December 31, 2022, as compared to 6.9:1 as of December 31, 2021.

The increase was primarily due to lower shareholders’ equity, partially offset by a decrease in borrowings on the Company's smaller Agency RMBS portfolio.

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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.

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.

unrealized gains (losses) on securities.

Purchase and sales transactions are generally recorded on trade date.

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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.

For the years ended December 31, 2022 and 2021, we recognized a Catch-up Premium Amortization Adjustment of $3.1 million and $1.7 million, respectively.

The Catch-up Premium Amortization Adjustment 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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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.

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.

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

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.

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

Recent Accounting Pronouncements

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(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.

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, 2022 and 2021, investments in non-Agency RMBS constituted a relatively small portion of our total investments, although we expect to increase our portfolio of non-Agency RMBS given current market opportunities.

Our most prevalent method of financing RMBS is through short-term repos, which generally have maturities of 364 days or less.

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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 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.

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 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.

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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.

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As of December 31, 2022 and 2021, our total debt-to-equity ratio was 7.5:1 and 6.9:1, 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.

Collateral transferred with respect to our outstanding repo borrowings, including net cash collateral posted, as of December 31, 2022 and 2021 had an aggregate fair value of $0.9 billion and $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.

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.

Shareholders' Equity

As of December 31, 2022, our shareholders' equity decreased to $112.4 million from $154.2 million as of December 31, 2021.

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.

This decrease principally consisted of a net loss of $(30.2) million and dividends declared of $13.7 million, partially offset by net proceeds from the issuance of common shares of $2.0 million.

As of December 31, 2022, our book value per share was $8.40, as compared to $11.76 as of December 31, 2021.

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Net Income (Loss) Per Common Share $ (2.29) $ (0.50)

Core Earnings

Core Earnings consists of net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding, if applicable, any non-recurring items of income or loss.

Core Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income.

Adjusted Distributable Earnings

Beginning with the financial results for the quarter ended June 30, 2022, the supplemental non-GAAP financial measure that we previously referred to as "Core Earnings," we now refer to as "Adjusted Distributable Earnings." We calculate Adjusted Distributable Earnings (formerly referred to as Core Earnings) as net income (loss), excluding realized and change in net unrealized gains and (losses) on securities and financial derivatives, and excluding other income or loss items that are of a non-recurring nature.

Adjusted Distributable Earnings also excludes the effect of the Catch-up Premium Amortization Adjustment on interest income.

The Catch-up Premium Amortization Adjustment is a quarterly adjustment to premium amortization triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses).

The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from period to period.

Core Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

Core Earnings is a supplemental non-GAAP financial measure.

We believe that Core Earnings provides information useful to investors because it is a metric that we use to assess our performance and to evaluate the effective net yield provided by the portfolio.

Moreover, one of our objectives is to generate income from the net interest margin on the portfolio, and Core Earnings is used to help measure the extent to which this objective is being achieved.

In addition, we believe that presenting Core Earnings enables our investors to measure, evaluate and compare our operating performance to that of our peer companies.

However, because Core Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with GAAP, it should be considered as supplementary to, and not as a substitute for, net income (loss) computed in accordance with GAAP.

The following table reconciles, for the years ended December 31, 2021 and 2020, Core Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cashflows and prepayments, and can vary significantly from quarter to quarter.

Adjusted Distributable Earnings includes net realized and change in net unrealized gains (losses) associated with periodic settlements on interest rate swaps.

Adjusted Distributable Earnings is a supplemental non-GAAP financial measure.

We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because:

(i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability;

(ii) we use it to evaluate the effective net yield provided by our portfolio, after the effects of financial leverage;

and (iii) we believe that presenting Adjusted Distributable Earnings assists our investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT peers.

Please note, however, that:

(I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable;

and (II) Adjusted Distributable Earnings excludes certain items, such as most realized and unrealized gains and losses, that may impact the amount of cash that is actually available for distribution.

In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S.

GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S.

Furthermore, Adjusted Distributable Earnings is different from REIT taxable income.

As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to its shareholders, in order to maintain qualification as a REIT, is not based on whether we have distributed 90% of our Adjusted Distributable Earnings.

In setting our dividend, our Board of Trustees considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Trustees may deem relevant from time to time.

The following table reconciles, for the years ended December 31, 2022 and 2021, Adjusted Distributable Earnings to the line on the Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable GAAP measure:

Year Ended December 31,

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Subtotal 44,020 22,383

Core Earnings $ 16,074 $ 15,555

Adjusted Distributable Earnings $ 13,822 $ 16,074

Weighted Average Shares Outstanding 13,163,106 12,683,761

Core Earnings Per Share $ 1.27 $ 1.26

Adjusted Distributable Earnings Per Share $ 1.05 $ 1.27

Results of Operations for the Years Ended December 31, 2022 and 2021

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Net income (loss) for the year ended December 31, 2022 was $(30.2) million, as compared to $(6.3) million for the year ended December 31, 2021.

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.

The period-over-period decline in our results of operations was primarily due to an increase in total other loss and a decrease in net interest income.

Interest Income

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Before interest expense, we earned approximately $33.4 million and $28.3 million in interest income on these securities for the years ended December, 2022 and 2021, respectively.

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

The period-over-period increase in interest income primarily resulted from higher asset yields on both our Agency and non-Agency RMBS, in addition to higher average holdings on our non-Agency RMBS portfolio, partially offset by lower average holdings on our Agency RMBS portfolio.

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

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.

For the years ended December 31, 202, and 2021, we had a positive Catch-up Premium Amortization Adjustment of approximately $3.1 million and $1.7 million, respectively, which increased interest income.

Excluding the Catch-up Premium Amortization Adjustments, the weighted average yield of our overall portfolio was 2.80% and 2.36% for the years ended December 31, 2022 and 2021, respectively.

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Treasury securities.

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.

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.

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:

The period-over-period increase in our total interest expense resulted mainly from higher rates on our repo borrowings stemming from the significant increase in short-term interest rates.

The following tables shows information related to our average cost of funds (1) on repurchase agreements for the years ended December 31, 2022 and 2021:

December 31, 2022 Year Ended

December 31, 2021

Average Borrowed Funds Interest Expense Average

Funds Average Borrowed Funds Interest Expense Average

(In thousands)

Agency RMBS $ 982,375 $ 13,398 1.36 % $ 1,094,419 $ 2,128 0.19 %

Non-Agency RMBS 9,686 313 3.23 % — — —

Treasury Securities 15,246 394 2.58 % 3,374 2 0.06 %

Total $ 1,007,307 $ 14,105 1.40 % $ 1,097,793 $ 2,130 0.19 %

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

Among other instruments, we use interest rate swaps and short U.S.

Treasury securities to hedge against the risk of rising interest rates.

The following table shows information related to the components of our average cost of funds including the amortization of upfront payments and the actual and accrued periodic payments on our interest rate swaps and interest expense on short U.S.

Treasury securities for the years ended December 31, 2022 and 2021:

Agreements Interest Rate

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Year ended December 31, 2021 $ 1,097,793 $ 2,130 0.19 % $ 2,149 0.20 % $ 561 0.05 % $ 4,840 0.44 %

(1) This metric does not take into account other instruments that we use to hedge interest rate risk, such as TBAs, swaptions, and futures.

(1) As an alternative cost of funds measure, we add to our repo borrowing cost the net periodic amounts paid or payable by us on our interest rate swaps and the interest expense we incur on our short positions in U.S.

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(2) 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, 2022, the weighted average yield of our portfolio of Agency and non-Agency RMBS excluding the impact of the Catch-up Premium Amortization Adjustment was 2.80%, while our total adjusted average cost of funds, including interest rate swaps and short U.S.

Treasury securities, was 1.25%, resulting in a net interest margin of 1.55%.

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.

By comparison, 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%.

Management Fees

For each of the years ended December 31, 2021 and 2020, our management fee expense was approximately $2.4 million.

For the years ended December 31, 2022 and 2021, our management fee expense was approximately $1.8 million and $2.4 million, respectively.

Management fees are calculated based on our shareholders' equity at the end of each quarter.

The decrease in the management fee year over year was due to a smaller capital base at each quarter end in 2022, as compared to the respective quarter ends in 2021.

Other Operating Expenses

Other operating expenses, as presented above, include professional fees, compensation expense, insurance expense, and various other expenses incurred in connection with the operation of our business.

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

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.

For both of the years ended December 31, 2022 and 2021, our other operating expenses were approximately $3.4 million.

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, 2022, Other income (loss) was $(45.3) million, consisting primarily of net realized and unrealized losses of $(152.8) million on our securities, which were partially offset by net realized and unrealized gains of $107.5 million on our financial derivatives.

Net realized and unrealized losses of $(152.8) million on our securities consists primarily of net realized and unrealized losses of $(156.2) million on our Agency RMBS, driven by significantly lower asset prices year over year due to rising interest rates and widening yield spreads.

The net realized and unrealized gains on our financial derivatives of $107.5 million consisted of net realized and unrealized gains of $64.4 million on our interest rate swaps, $22.2 million on our net short positions in TBAs, and $20.9 million on our U.S.

Treasury futures.

The net gains on our financial derivatives were primarily the result of the significant increase in interest rates, and in the case of short positions in TBAs, also of widening yields spreads.

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.

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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.

Treasury securities and $(19.2) million on our financial derivatives.

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, 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.

Liquidity and Capital Resources

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 short-term (the 12 months following period end) and long-term (beyond 12 months from period end) 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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These provisions may differ for each of our lenders.

As of December 31, 2021 and 2020, we had $1.1 billion and $1.0 billion outstanding under our repurchase agreements, respectively.

As of December 31, 2022 and December 31, 2021, we had $0.8 billion and $1.1 billion outstanding under our repurchase agreements, respectively.

As of December 31, 2022, our outstanding repurchase agreements were with 16 counterparties.

The amounts borrowed under our repurchase agreements are generally subject to the application of "haircuts." A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized.

As of December 31, 2021 and 2020, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.2% and 5.3%, respectively.

As of December 31, 2022 and December 31, 2021, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 5.5% and 5.2%, respectively.

The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under repurchase agreements for the past twelve quarters.

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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) For the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.

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

(1) During the quarter ended March 31, 2020 in response to significant volatility and heightened risks in the financial markets as a result of the spread of COVID-19, we significantly reduced our outstanding borrowings to lower leverage and increase our liquidity.

As of December 31, 2022, we had an aggregate amount at risk under our repurchase agreements with 17 counterparties of $49.8 million.

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If the amounts outstanding under repurchase agreements with a particular counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty.

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.

Amounts at risk under our repurchase agreements as of December 31, 2022 and December 31, 2021 does not include $1.5 million and $2.6 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 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.

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In the case of cleared derivatives, the clearinghouse becomes our counterparty and the future commission merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral.

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.

As of December 31, 2022, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with three counterparties of approximately $24.5 million.

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

We also had $3.9 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date.

Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us.

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We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis.

The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.

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.

delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties.

As of December 31, 2022, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with eight counterparties of approximately $4.6 million.

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.

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.

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

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 contracts 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 contracts plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.

As of December 31, 2022, we had cash and cash equivalents of $34.8 million.

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.

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0.08 1,060 September 8, 2022 September 30, 2022 October 25, 2022

0.08 1,058 August 4, 2022 August 31, 2022 September 26, 2022

0.08 1,046 July 8, 2022 July 29, 2022 August 25, 2022

0.08 1,046 June 7, 2022 June 30, 2022 July 25, 2022

0.08 1,049 May 2, 2022 May 31, 2022 June 27, 2022

0.10 1,311 April 7, 2022 April 29, 2022 May 25, 2022

0.10 1,311 March 7, 2022 March 31, 2022 April 25, 2022

0.10 1,311 February 7, 2022 February 28, 2022 March 25, 2022

0.10 1,311 January 7, 2022 January 31, 2022 February 25, 2022

Year Ended December 31, 2021:

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$ 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

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On March 7, 2023, the Board of Trustees approved a monthly dividend in the amount of $0.08 per share payable on April 25, 2023 to shareholders of record as of March 31, 2023.

For the year ended December 31, 2022, our operating activities provided net cash of $22.4 million and our investing activities provided net cash of $110.5 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 $155.0 million.

Thus our operating and investing activities, when combined with our net repo financing activities, used net cash of $22.0 million.

We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid of $2.0 million.

We used $13.9 million to pay dividends, and $0.3 million to repurchase common shares.

As a result of these activities, there was a decrease in our cash holdings of $34.2 million, from $69.0 million as of December 31, 2021 to $34.8 million as of December 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.

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

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

We also received proceeds from the issuance of common shares, net of agent commissions and offering costs paid 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.

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.

Thus our operating and investing activities, when combined with our net repo financing activities, provided net cash of $37.6 million.

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

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.

During the year ended December 31, 2022, we issued 268,780 common shares under the ATM program which provided $2.0 million of net proceeds after $38 thousand of agent commissions and $86 thousand of offering costs.

From December 31, 2022 through March 3, 2023, we issued 406,760 common shares under the ATM program, which provided $3.1 million of net proceeds after $0.1 million of agent commissions and offering costs.

From commencement of the ATM program through March 3, 2023, we issued 838,809 common shares under the ATM program, which provided $7.1 million of net proceeds after $0.1 million of agent commissions and $0.1 million of offering costs.

As of December 31, 2022, we had $67.7 million of common shares available to be issued remaining under the ATM program.

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, 2022, we repurchased 40,021 common shares at an aggregate cost of $0.3 million, and an average price per share of $6.56.

Under the current repurchase program adopted on June 13, 2018, we have repurchased 474,192 common shares through March 3, 2023 at an average price per share of $9.21 and an aggregate cost of $4.4 million, and have authorization to repurchase an additional 725,808 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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We may enter into reverse repurchase agreements with third-party broker-dealers whereby we purchase securities under agreements to resell at an agreed-upon price and date.

In general, we most often will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities.

In general, we most often

will enter into reverse repurchase agreement transactions in order to effectively borrow securities that we can then deliver to counterparties to whom we have made short sales of the same securities.

The implied interest rates on the repurchase agreements and reverse repurchase agreements we enter into are based upon competitive market rates at the time of initiation.

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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 generally influence our performance more than does inflation.

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

1 unchanged sentence

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