What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-06-22 · 286 added, 383 removed, 493 unchanged (58% of the section changed)

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governmental agencies and changes to U.S.

government policies in response to the COVID-19 pandemic, mortgage loan modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and the continuation of re-investment of principal payments, and our ability to respond to and comply with such actions, initiatives and changes;

government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and our ability to respond to and comply with such actions, initiatives and changes;

• the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements;

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• changes in prepayment rates on our target assets;

• the impact of any deficiencies in foreclosure practices of third parties and related uncertainty in the timing of collateral disposition;

• the impact of any deficiencies in loss mitigation of third parties and related uncertainty in the timing of collateral disposition;

• our reliance on third parties in connection with services related to our target assets;

• disruption of our information technology system;

• disruption of our information technology systems;

• effects of hedging instruments on our target assets;

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federal income tax purposes;

• our ability to maintain our exception from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”);

• our ability to maintain our exemption from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”);

• availability of investment opportunities in mortgage-related, real estate-related and other securities;

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We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd.

During the quarter ended March 31, 2020, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic.

During the six months ended June 30, 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic.

Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties.

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We engaged third party financial and legal advisors to assist us in restructuring our debt with our financing counterparties.

To generate liquidity and reduce leverage,we sold MBS and GSE CRTs for cash proceeds of $16.2 billion and repaid $11.2 billion of our repurchase agreements during the quarter ended March 31, 2020.

We also terminated our entire interest rate swap portfolio as our exposure to interest rate risk decreased as we sold Agency assets.

We have continued to focus on generating liquidity and reducing leverage in the second quarter of 2020.

As of May 31, 2020, we have a cash balance of $327.8 million, approximately $55.3 million of which is posted with FHLBI as collateral for our remaining secured loans.

Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and our loan participation interest for cash proceeds of $21.6 million.

As of May 31, 2020, we have a total investment portfolio, excluding cash and Agency CMBS purchase commitments, of approximately $1.6 billion consisting of 92% commercial credit investments, 7% residential credit investments, and 1% Agency mortgage-backed securities.

To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $23.1 billion and repaid $17.5 billion of our repurchase agreement s and $ 910.0 million o f our secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements during the six months ended June 30, 2020.

As of June 30, 2020, our total borrowings consist of $740.0 million of secured loans that are due by December 2020.

We intend to repay our secured loans with proceeds from sales of non-Agency CMBS assets that are currently collateralizing these loans.

We repaid an additional $435.0 million of our secured loans in July 2020.

Invesco, including our Manager, is committed to helping its employees, clients and communities navigate the challenges presented by the spread of COVID-19.

The primary focus of Invesco's efforts is to ensure the health and safety of its employees while preserving its ability to serve clients and manage assets in a highly dynamic market environment.

To help ensure it can continue to meet client needs, such as those of our Company, a significant number of our Manager’s employees are working remotely, with small select teams working at alternate sites or operating in split shifts to mitigate the risks associated with the virus.

Portfolio managers, research analysts and traders are successfully working remotely or in secure locations with access to all systems necessary to fulfill their responsibilities and an ability to connect with their teams in managing client assets.

Additionally, our Manager’s operational, control and support teams have successfully transitioned to a remote working environment.

In July 2020, we resumed investing in Agency securities and financed these securities with repurchase agreement borrowings.

As of July 31, 2020, we have a total investment portfolio, excluding cash, of approximately $3.3 billion consisting of 68% of Agency RMBS, 30% commercial credit investments and 2% residential credit investments.

Approximately $473 million of our investment portfolio is unencumbered.

We have elected to hold our remaining non-Agency CMBS and GSE CRTs for a period of time given our view that these investments could benefit from actions taken by the federal government to stimulate the economy and the market for these securities.

Our investment portfolio has not materially changed between May 31, 2020 and the filing date of this Quarterly Report.

In addition, we have not entered into any interest rate swap contracts during the second quarter as of the filing date of this Quarterly Report

Between April 1, 2020 and May 31, 2020, we repaid the outstanding balance of our repurchase agreements (approximately $6.3 billion as of March 31, 2020).

In addition, we repaid $512.5 million of our secured loans, reducing the outstanding balance of our secured loans to $837.5 million as of the filing date of this Quarterly Report.

We also paid our dividends that were in arrears on our Series A Preferred, Series B Preferred, and Series C Preferred Stock on May 22, 2020.

We will pay our first quarter 2020 common stock dividend of $0.50 per share on June 30, 2020 in a combination of cash and common shares.

In addition, on June 17, 2020, we declared a second quarter 2020 common stock cash dividend of $0.02 per common share that will be paid on July 28, 2020.

While the Federal Reserve (the “Fed”) has taken a number of proactive measures to bolster liquidity in the second quarter of 2020, we expect market conditions for the mortgage REIT industry to continue to be challenging.

We believe our current cash balances and cash flows from operations will meet our near-term liquidity requirements.

Our secured loans are due by December 2020, and we intend to repay our secured loans with proceeds from sa les of non-Agency CMBS assets that are currently collateralizing these loans.

In the near-term, we intend to deploy capital into attractive opportunities in Agency securities and seek to finance these securities with prudent levels of debt.

Further, we will evaluate potential credit investments that do not rely on short-term or mark-to-market financing.

As of July 31, 2020, we have a cash balance of $230.3 million, approximately $89.5 million of which is posted as collateral for derivatives and our remaining secured loans.

Our total debt consisted of $2.1 billion of repurchase agreement borrowings that are collateralized by Agency RMBS and $305.0 million of secured loans that are collateralized by non-Agency CMBS and cash as of July 31, 2020.

We continue to evaluate potential credit investments that do not rely on short-term or mark-to-market financing.

To further strengthen our balance sheet and position ourselves for future investment opportunities, we have explored and will continue to explore additional sources of financing including issuances of debt and equity securities and other forms of long-term financing arrangements.

However, no assurance can be given that we will be able to access any additional sources of financing.

We paid our first quarter 2020 common stock dividend of $0.50 per share on June 30, 2020 in a combination of cash and common shares.

In addition, on June 17, 2020, we declared a second quarter 2020 common stock cash dividend of $0.02 per common share that was paid in cash on July 28, 2020.

Dividends on our Series A Preferred, Series B Preferred and Series C Preferred Stock are current.

Market Conditions

Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.

During the first quarter of 2020 and continuing into the second quarter, financial markets experienced significant volatility as a result of the COVID-19 pandemic.

On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic, and on March 13, 2020 a national emergency in the United States was declared.

Economic activity has been severely impacted as the pandemic resulted in stay-at-home orders and widespread business shutdowns.

The precipitous decline in business activity has substantially increased unemployment levels and driven a sharp contraction in GDP to levels not seen in decades.

Reactions to the impacts of the pandemic led to swift and severe financial market dislocations during the first quarter.

During the first quarter, the significant dislocation in the financial markets caused, among other things, credit spread widening, a marked decrease in interest rates and unprecedented illiquidity in Agency and non-Agency MBS trading and financing markets.

We ex pect this volatility to persist in the near term due to the continued uncertainty around the COVID-19 pandemic duration and ultimate impact.

Further, we expect the COVID-19 pandemic to negatively impact real estate markets.

The lodging and retail property markets are likely to experience the greatest impact due to travel restrictions and a sharp slowdown in discretionary consumption.

In the retail sector, despite long-term leases, tenants that are not open for business may find it difficult to meet rent obligations, and may forego payments or seek relief in the months ahead.

Real estate loans are likely to experience increased delinquencies and defaults, which could impact the fundamental performance of our investments.

The Fed responded to the COVID-19 pandemic with a series of measures aimed at returning stability to the financial markets and fostering economic recovery.

These measures included cutting the federal funds target rate by 150 basis points to 0%-0.25% on March 15, 2020 and committing to purchases of U.S.

Treasuries and Agency MBS.

These actions helped improve Agency RMBS and Agency CMBS liquidity and, eventually, market prices.

Additionally, on March 23, 2020, the Fed announced it would purchase debt issued by U.S.

investment grade rated companies and established the Term Asset-Backed Securities Loan Facility (“TALF”) to support the flow of credit to consumers and businesses.

Initially, the TALF provided financing for asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration.

Subsequently, the Fed expanded the TALF to cover secondary market triple-A rated conduit non-Agency CMBS.

Since their inclusion, triple-A rated non-Agency CMBS has recorded some recovery of the spread widening experienced in March.

We expect this trend to continue as investors look to capitalize on favorable financing made available by the Fed.

We also believe bonds rated below triple-A have the potential to benefit from increased investor demand as more senior bonds experience price appreciation.

In addition to the Fed purchases and facilities mentioned above, the repurchase financing markets for high-quality assets such as Treasuries and Agency RMBS continued to be supported by substantial Fed action in the form of upsized open market operations, both in the overnight and term markets.

These facilities were established in late 2019 and were significantly increased in the first quarter of 2020.

Congress has also responded to the COVID-19 pandemic by passing three rounds of fiscal stimulus measures, the most notable being the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included relief measures for households and businesses directly or indirectly impacted by the virus.

Financial conditions rebounded sharply during the second quarter of 2020 as equities and most credit sectors reacted favorably to the massive government action taken in response to the COVID-19 pandemic as well as the re-opening of parts of the economy.

This rebound can be seen across a number of economic measures, as economic activity picked up after an unprecedented drop during the first quarter.

For example, nonfarm payrolls, retail sales and consumer confidence data showed record drops during March and April, followed by record recoveries during May and June.

While the increase in economic activity is encouraging, we remain cautious about the pace of future gains as COVID-19 case numbers continue to grow in the U.S., and some states are re-instituting partial economic shutdowns.

Interest rates were little changed during the quarter, with the yield on the 2 year Treasury note falling 10 basis points to 0.15% and the yield on the 10 year Treasury bond falling a basis point to 0.66%.

The short end of the yield curve remains pinned close to zero, as the Federal Funds target rate is at the lower bound, and the futures market is forecasting no change for the next several years.

Interest rate volatility measures also reflect the view that rates will remain low, as these have fallen to multi-year lows.

Price data has been subdued, as both the consumer price index (0.1% in May) and price consumption expenditure index (1.0% in May) measures have fallen over the past several months.

Breakeven rates on inflation protected Treasuries reflect low expectations for inflation, as the inflation rate implied by 2 year and 5 year TIPs was 0.88% and 1.17%, respectively, at quarter end.

Most risk markets have rallied off of the March lows.

Equity markets showed remarkable resilience despite continued economic uncertainty, as the S&P 500 was up 20% during the second quarter after dropping 20% during the first quarter.

The NASDAQ index fared even better, as it returned 30.6% during the second quarter after dropping 14.2% during the first quarter.

The broader credit markets also rallied during the quarter, buoyed by support from the Federal Reserve.

In particular, spreads on investment grade and high yield corporate credits have tightened notably during the quarter as those sectors have received direct support from the Federal Reserve.

Covid-19 has negatively impacted commercial real estate fundamentals.

The lodging and retail sectors have been the most impacted due to travel restrictions and a slowdown in discretionary consumption.

In the retail sector, despite long-term leases, tenants that are not open for business are finding it difficult to meet rent obligations and, in some instances, are foregoing payments or seeking forbearance relief.

Real estate loans are experiencing growing delinquencies and are at greater risk of default which could impact the fundamental performance of our investments.

Despite fundamental deterioration, CMBS risk premiums contracted in the second quarter due to relatively minimal new issuance supply and increased investor demand.

The United States Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), which provides financing for triple-A rated conduit non-Agency CMBS, has also helped provide stability to the CMBS market.

We believe TALF, along with slowly renewed economic activity, will continue to assist in creating renewed investor interest in CMBS.

While there has been a partial recovery in residential mortgage credit spreads, particularly in higher rated securities, valuations continue to reflect an uncertain outlook for borrowers, and the sector has not benefited from direct support from the Federal Reserve.

Congress responded to the COVID-19 pandemic by passing three rounds of fiscal stimulus measures, the most notable being the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included relief measures for households and businesses directly or indirectly impacted by the virus.

The CARES Act includes provisions for COVID-19 related temporary forbearance on federally backed mortgage loans, which allows borrowers of loans guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to suspend making principal and interest payments for a period of up to 360 days if they are facing hardship.

Following the temporary forbearance period, mortgage servicers have to provide several options to impacted borrowers, including a repayment schedule or loan modification, depending on the borrowers’ circumstances.

Following the temporary forbearance period, mortgage servicers must provide several options to impacted borrowers, including a repayment schedule or loan modification, depending on the borrowers’ circumstances.

We believe the provision of forbearance and loan modifications will substantially reduce borrower defaults and loan losses relative to levels that would have likely occurred without these actions.

Despite the unprecedented measures discussed above, market conditions continue to be challenging for asset classes that have not been directly targeted by government intervention.

While the markets for Agency RMBS and Agency CMBS have largely recovered in response to large-scale purchases by the Fed, the markets for non-Agency CMBS, non-Agency RMBS and GSE CRTs have yet to fully recover as the ultimate impact of the COVID-19 pandemic on these credit assets remains unclear.

The performance of Agency RMBS was strong during the second quarter as that sector benefited directly from unprecedented purchases by the Federal Reserve.

Spreads on Agency RMBS and pay-ups on specified pool collateral have completely recovered from their March lows despite an uptick in prepayment risk due to lower rates.

We expect the market for Agency RMBS to continue to be constructive as the level of support from the Federal Reserve remains strong.

Proposed Changes to LIBOR

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This announcement indicates that the continuation of LIBOR will not be guaranteed after 2021.

The Alternative Reference Rates Committee (“ARRC”), which was convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR.

The Alternative Reference Rates Committee (“ARRC”), which was convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition

from LIBOR, has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR.

ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.

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Investment Activities

As previously discussed, the COVID-19 pandemic caused unprecedented market disruption in the three months ended March 31, 2020.

As previously discussed, the COVID-19 pandemic caused unprecedented market disruption in the six months ended June 30, 2020.

To raise liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $23.1 billion .

Our equity allocation and investment portfolio composition as of March 31, 2020 were directly impacted by these sales as detailed in the tables below.

The table below shows the allocation of our stockholders' equity as of March 31, 2020, December 31, 2019 and March 31, 2019:

$ in thousands March 31, 2020 December 31, 2019 March 31, 2019

Agency RMBS 30 % 44 % 45 %

Agency CMBS 20 % 16 % 5 %

Commercial Credit (1)

38 % 28 % 32 %

Residential Credit (2)

12 % 12 % 18 %

Total 100 % 100 % 100 %

(1) Commercial credit includes non-Agency CMBS, Multifamily GSE CRTs, commercial loans and investments in unconsolidated ventures.

(2) Residential credit includes non-Agency RMBS, Single Family GSE CRTs and a loan participation interest.

The table below shows the breakdown of our investment portfolio as of March 31, 2020, December 31, 2019 and March 31, 2019:

$ in thousands March 31, 2020 December 31, 2019 March 31, 2019

The table below shows the breakdown of our investment portfolio as of June 30, 2020, December 31, 2019 and June 30, 2019:

$ in thousands June 30, 2020 December 31, 2019 June 30, 2019

30 year fixed-rate, at fair value 6,828 10,524,220 12,077,091

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Total investment portfolio 1,625,196 21,862,493 21,633,928

Prior to disruption in the financial markets caused by the COVID-19 pandemic, we purchased $4.3 billion of fixed rate Agency RMBS, $435.5 million of Agency CMBS, $56.6 million of non-Agency CMBS and $99.0 million of GSE CRTs during the three months ended March 31, 2020.

We funded these purchases by leveraging the proceeds of our February 2020 common stock issuance and with cash proceeds from paydowns and sales of securities.

As of March 31, 2020, our holdings of 30 year fixed-rate Agency RMBS represented approximately 18% of our total investment portfolio versus 48% as of December 31, 2019 and 60% as of March 31, 2019.

We have historically focused our purchases of 30 year fixed-rate Agency RMBS on specified pools priced at modest pay-ups to generic Agency RMBS because those securities have characteristics that reduce prepayment risk.

We hold approximately $10.1 million of Agency RMBS as of May 31, 2020.

As of March 31, 2020, our holdings of Agency CMBS represented approximately 28% of our total investment portfolio versus 22% as of December 31, 2019 and 9% as of March 31, 2019.

Our Agency CMBS holdings as of March 31, 2020 include approximately $507.2 million (December 31, 2019:

$96.2 million;

March 31, 2019:

$221.9 million ) of A gency CMBS purchase commitments.

We have historically focused our investments in Agency CMBS issued by Freddie Mac, Fannie Mae and Ginnie Mae that have characteristics that reduce prepayment risk.

Our hedging costs for Agency CMBS are relatively low because they are less sensitive to interest rate risk given limited extension beyond initial expected maturity dates and underlying loan prepayment protection.

We hold approximately $192.4 million of Agency CMBS as of May 31, 2020, including $191.6 million of Agency CMBS purchase commitments.

We have sold our Agency CMBS holdings as of the filing date of this Quarterly Report.

Our investments that have credit exposure include non-Agency CMBS, non-Agency RMBS, GSE CRTs, a commercial real estate loan, and a loan participation interest.

As of June 30, 2020, our holdings of 30-year fixed-rate Agency RMBS represented less than 1% of our total investment portfolio versus 48% as of December 31, 2019 and 56% as of June 30, 2019.

We historically focused our purchases of 30 year fixed-rate Agency RMBS on specified pools priced at modest pay-ups to generic Agency RMBS because those securities have characteristics that reduce prepayment risk.

We resumed investing in 30-year fixed-rate Agency RMBS in July 2020.

As of June 30, 2020, we sold all of our holdings of Agency CMBS.

Agency CMBS represented approximately 22% of our holdings as of December 31, 2019 and 14% of our holdings as of June 30, 2019.

We historically focused our Agency CMBS investments in securities issued by Freddie Mac, Fannie Mae and Ginnie Mae that have characteristics that reduce prepayment risk.

Our investments that have credit exposure include non-Agency CMBS, non-Agency RMBS, GSE CRTs and a commercial real estate loan.

Rather than relying on the rating agencies, we utilize proprietary models as well as third party applications to quantify and monitor the credit risk associated with these holdings.

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We perform this detailed credit analysis at the time of initial purchase and regularly throughout the holding period of each investment.

As of March 31, 2020 our holdings of non-Agency CMBS represented approximately 35% of our total investment portfolio versus 17% as of December 31, 2019 and 16% as of March 31, 2019.

As of June 30, 2020, our holdings of non-Agency CMBS represented approximately 90% of our total investment portfolio versus 17% as of December 31, 2019 and 17% as of June 30, 2019.

Our non-Agency CMBS portfolio is collateralized by loans secured by various property types located across the United States including office, retail, multifamily, industrial warehouses and hotels.

The largest property geographic locations are in New York, California, Texas, Florida and Illinois as detailed in the tables below.

The largest property geographic locations are in California, New York, Texas, Florida and Illinois as detailed in the tables below.

The majority of our non-Agency CMBS portfolio is comprised of fixed rate credits that are rated investment grade by a nationally recognized statistical rating organizati on.

Th e remainder of our assets were originated during and after 2017.

We hold approximately $1.5 billion of non-Agency CMBS as of May 31, 2020.

Over 87% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of May 31, 2020.

Further, over 75% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of May 31, 2020.

As of March 31, 2020, our holdings of non-Agency RMBS represented approximately 7% of our total investment portfolio versus 4% as of December 31, 2019 and 6% as of March 31, 2019.

Approximately 87% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2020.

Further, approximately 74% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2020.

As of June 30, 2020, our holdings of non-Agency RMBS represented approximately 1% of our total investment portfolio versus 4% as of December 31, 2019 and 5% as of June 30, 2019.

We primarily hold non-Agency RMBS securities collateralized by prime and Alt-A loans.

In addition, we have invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage loans that we expect to provide attractive risk adjusted returns.

We hold approximately $13.2 million of no n-Agency RMBS as of May 31, 2020.

As of March 31, 2020, our holdings of GSE CRTs represented approximately 7% of our total investment portfolio versus 4% as of December 31, 2019 and 4% as of March 31, 2019.

GSE CRTs are unsecured general obligations of the GSEs that are structured to provide credit protection to the issuer with respect to defaults and other credit events within pools of mortgage loans secured by single family properties that collateralize Agency RMBS issued and guaranteed by the GSEs ("Single Family GSE CRT") or within pools of mortgage loans secured by multifamily properties that collateralize Agency CMBS issued and guaranteed by the GSEs ("Multifamily GSE CRT").

In addition, we have invested in re-securitizations of real estate mortgage investment

conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage loans that we expect to provide attractive risk adjusted returns.

As of June 30, 2020, our holdings of GSE CRTs represented approximately 6% of our total investment portfolio versus 4% as of December 31, 2019 and 4% as of June 30, 2019.

The majority of our GSE CRT holdings are concentrated in 2013 and 2014 vintages, where reference loans have significant embedded home price appreciation.

GSE CRTs have the added benefit of paying a floating rate coupon that reduces our need to hedge interest rate risk.

We hold approximately $94.7 million of GSE CRTs as of May 31, 2020.

We had funded $25.4 million of a participation interest in a secured loan collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans as of March 31, 2020.

We sold our loan participation interest on April 1, 2020.

As of March 31, 2020, we held an investment in one commercial real estate mezzanine loan that matures in 2021 and has a loan-to-value ratio of approximately 68.3%.

We continue to hold this investment as of the filing date of this Quarterly Report.

As of March 31, 2020, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

As of June 30, 2020, we held an investment in one commercial real estate mezzanine loan that matures in 2021 and has a loan-to-value r atio of approxim ately 68.3%.

As of June 30, 2020, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

The unconsolidated ventures invest in our target assets.

We continue to hold these investments as of the filing date of this Quarterly Report.

We are committed to invest $6.5 million in additional capital in these unconsolidated ventures to fund future investments and cover future expenses should they occur.

Portfolio Characteristics

The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2020 as a percentage of the fair value:

The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of June 30, 2020 as a percentage of the fair value:

2003-2007 2008-2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total

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Alt-A 30.5 % — % — % — % — % — % — % — % — % — % — % — % 30.5 %

0.9 % 5.9 % 2.5 % 1.8 % 0.8 % — % — % — % — % — % — % — % 11.9 %

Subprime/RPL 0.1 % — % — % — % — % — % — % — % — % — % — % — % 0.1 %

Re-REMIC — % 0.9 % — % — % — % — % — % — % — % — % — % — % 0.9 %

Total Non-Agency RMBS 31.4 % 0.9 % — % — % 57.6 % 2.8 % 0.1 % — % — % 7.2 % — % — % 100.0 %

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Non-Agency CMBS — % 2.7 % 14.5 % 8.9 % 9.0 % 52.1 % 3.7 % — % 0.9 % 3.5 % 3.8 % 0.9 % 100.0 %

(1) Reflects the year in which the re-securitizations were issued.

The vintage distribution of the securities that collateralize our Re-REMIC investments is 0.4% for 2006, and 99.6% for 2007.

The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2020.

The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of June 30, 2020.

The geographic markets that we invest in have been and continue to be severely impacted by the ongoing COVID-19 pandemic.

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State Percentage

California 44.2 % California 16.5 % New York 15.3 %

New York 8.7 % Texas 7.0 % California 14.5 %

Florida 6.5 % Florida 5.5 % Texas 8.7 %

New Jersey 3.3 % New York 4.5 % Florida 6.1 %

Colorado 3.1 % Illinois 3.8 % Illinois 4.8 %

Washington 3.1 % Virginia 3.7 % New Jersey 3.9 %

Virgina 3.0 % Washington 3.5 % Pennsylvania 3.4 %

Massachusetts 2.7 % New Jersey 3.2 % Virginia 3.2 %

Texas 2.7 % Colorado 3.2 % Michigan 3.1 %

Maryland 2.5 % Pennsylvania 3.1 % Ohio 3.1 %

California 46.4 % California 22.6 % California 15.4 %

New York 8.5 % Texas 5.5 % New York 15.2 %

Massachusetts 5.3 % New York 4.6 % Texas 9.0 %

Virginia 4.5 % Illinois 4.2 % Florida 5.7 %

Maryland 4.0 % Florida 4.0 % Illinois 4.6 %

Florida 3.8 % Virginia 4.0 % New Jersey 4.1 %

Texas 3.2 % Washington 3.6 % Pennsylvania 3.7 %

New Jersey 3.2 % Massachusetts 3.6 % Virginia 3.6 %

Illinois 3.0 % New Jersey 3.5 % Ohio 3.5 %

Colorado 2.8 % Colorado 3.1 % Michigan 3.3 %

Other 15.3 % Other 41.3 % Other 31.9 %

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Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that have historically moved in close relationship to LIBOR.

As of March 31, 2020, we had entered into repurchase agreements totaling $6.3 billion (December 31, 2019:

$17.5 billion ) that were secured by our mortgage-backed and credit risk transfer securities and an investment in a loan participation interest.

We repaid all of our repurchase agreements as of May 7, 2020 with proceeds from asset sales and the return of cash margin previously pledged on our repurchase agreements.

Our wholly-owned subsidiary, IAS Services LLC, is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and has borrowed funds from the FHLBI in the form of secured loans.

As of March 31, 2020, IAS Services LLC had $1.35 billion in outstanding secured loans that are due by December 2020.

As of May 31, 2020, we reduced the balance of

our secured loans to $837.5 million.

We intend to repay the remaining balance of our secured loans with proceeds from sales of assets collateralizing the secured loans.

As of June 30, 2020, IAS Services LLC had $740.0 million in outstanding secured loans that are due by December 2020.

As of July 31, 2020, we reduced the balance of our secured loans to $305.0 million.

We intend to repay the remaining balance of our secured loans with proceeds from sales of assets collateralizing the secured loans by December 2020.

As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI.

FHLBI redeemed a portion of our stock in connection with the repayment of our secured loans discussed above.

The balance of our FHLBI stock is $37.7 million as of the filing date of this Quarterly Report.

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:

$ in thousands Collateralized borrowings under repurchase agreements and secured loans

Quarter Ended Quarter-end balance Average quarterly balance Maximum balance

March 31, 2019 18,474,387 17,229,809 18,474,387

Quarter Ended Quarter-end balance Average quarterly balance (1)

Maximum balance (2)

June 30, 2019 18,725,065 19,019,503 19,365,413

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March 31, 2020 7,637,746 16,673,939 23,132,234

We have committed to invest up to $125.1 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

As of March 31, 2020, $118.7 million of our commitment to these unconsolidated ventures has been called.

We are committed to fund $6.4 million in additional capital to fund future investments and cover future expenses should they occur.

June 30, 2020 740,000 983,599 1,373,296

(1) Average quarterly balance for each period is based on month-end balances.

(2) Amount represents the maximum borrowings at month-end during each of the respective periods.

Hedging Instruments

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We actively manage our swap portfolio by terminating and entering into new swaps as the size and composition of our investment portfolio changes.

During the three months ended March 31, 2020, we terminated existing swaps with a notional amount of $107.7 billion and entered into new swaps with a notional amount of $93.7 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS an d Agency CMBS securities.

We terminated all of our remaining interest rate swaps in March 2020 as we positioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

We realized a net loss of $904.7 million on interest rate swaps during the three months ended March 31, 2020 primarily due to falling interest rates in 2020.

We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies.

As of March 31, 2020, we had €20.8 million or $22.7 million (December 31, 2019:

We terminated all of our interest rate swaps in March 2020 as we positioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pande mic.

W e did not enter into new swaps during the three months ended June 30, 2020 because our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

We realized a net loss of $904.7 million on interest rate swaps during the six months ended June 30, 2020 primarily due to falling interest rates.

We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign curr encies.

As of June 30, 2020, we had €20.8 million or $22.9 million (December 31, 2019:

€20.8 million or $23.1 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture.

During the three months ended March 31, 2020, we settled currency forward contracts of €20.8 million or $23.1 million (March 31, 2019:

€20.3 million or $23.1 million) in notional amount and realized a net gain of $484,000 (March 31, 2019:

During the six months ended June 30, 2020, we settled currency forward contracts of €41.7 million or $45.8 million (June 30, 2019:€42.6 million or $48.7 million) in notional amount and realized a net gain of $346,000 (June 30, 2019:

$738,000 net gain).

Capital Activities

On February 6, 2020, we completed a public offering of 20,700,000 shares of common stock at the price of $16.78 per share.

Total net proceeds were approximately $347.0 million after deducting estimated offering costs.

We may sell up to 17,000,000 shares of our common stock and 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreements.

We did not sell any shares under these agreements during the quarter ended March 31, 2020.

On February 18, 2020, we declared the following dividends:

• a dividend of $0.4844 per share of Series B Preferred Stock.

On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity.

On May 9, 2020 we announced that we would pay this dividend on May 22, 2020 to stockholders of record as of the close of business on March 5, 2020;

• a dividend of $0.46875 per share of Series C Preferred Stock.

On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity.

On May 9, 2020 we announced that we would pay this dividend on May 22, 2020 to stockholders of record as of the close of business on March 5, 2020.

On March 17, 2020, we declared the following dividends:

• a dividend of $0.50 per share of common stock.

On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity.

On May 9, 2020 we announced that we would pay this dividend on June 30, 2020 in a combination of cash and common shares to stockholders of record as of the close of business on May 21, 2020;

• a dividend of $0.4844 per share of Series A Preferred Stock paid.

On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity.

On May 9, 2020, we announced that we would pay this dividend on May 22, 2020 to stockholders of record as of the close of business on April 1, 2020.

On May 9, 2020, we declared the following dividends:

• a dividend of $0.4844 per share of Series B Preferred Stock to be paid on June 29, 2020 to stockholders of record as of the close of business on June 5, 2020;

• a dividend of $0.46875 per share of Series C Preferred Stock to be paid on June 29, 2020 to stockholders of record as of the close of business on June 5, 2020.

On June 17, 2020, we declared the following dividends:

• a dividend of $0.02 per share of common stock to be paid on July 28, 2020 to stockholders of record as of the close of business on July 6, 2020;

• a dividend of $0.4844 per share of Series A Preferred Stock to be paid on July 27, 2020 to stockholders of record as of the close of business on July 1, 2020.

During the three months ended March 31, 2020, we did not repurchase any shares of our common stock.

We did not sell any shares under these agreements during the six months ended June 30, 2020.

For information on dividends declared and paid during the six months ended June 30, 2020, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

Item 1 of this report on Form 10-Q.

During the six months ended June 30, 2020, we did not repurchase any shares of our common stock.

Book Value per Common Share

We calculate book value per common share as follows:

$ in thousands except per share amounts March 31, 2020 December 31, 2019

$ in thousands except per share amounts June 30, 2020 December 31, 2019

Numerator (adjusted equity):

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Book value per common share 3.17 16.29

Our book value per common share decreased 69.2% as of March 31, 2020 compared to December 31, 2019 primarily due to significant interest rate spread widening in both Agency and non-Agency assets.

In particular, premiums over generic collateral on our Agency MBS specified pools decreased 2 to 4 points, as rapid deleveraging in the sector, given its relative liquidity, impacted valuations.

In addition, prices of our credit holdings were severely impacted by the lack of liquidity and uncertainty surrounding the economic impact of the COVID-19 pandemic.

Lastly, forced selling in order to fund margin calls was a significant detriment to book value as sales were executed at distressed levels.

”Refer to Item 3.

Our book value per common share decreased 80.5% as of June 30, 2020 compared to December 31, 2019 primarily due to realized and unrealized losses on derivatives and investments in the six months ended June 30, 2020 resulting from the unprecedented market disruption caused by the COVID-19 pandemic.

”Re fer to Item 3.

"Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value.

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Results of Operations

The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The table below presents certain information from our condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30, Six Months Ended June 30,

$ in thousands, except share data 2020 2019 2020 2019

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Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2020 and 2019.

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

Average earning assets (1)

15 year fixed-rate, at amortized cost 232,551 371,228

30 year fixed-rate, at amortized cost 8,422,795 11,780,005

Hybrid ARM, at amortized cost 35,768 243,813

Agency - CMO, at amortized cost 365,936 291,914

Agency CMBS, at amortized cost 3,543,594 1,129,227

Non-Agency CMBS, at amortized cost 3,552,164 3,361,132

Non-Agency RMBS, at amortized cost 751,090 1,084,721

GSE CRT, at amortized cost 876,341 808,296

Loan participation interest 33,545 54,763

Commercial loans, at amortized cost 23,965 27,375

Average earning assets 17,837,749 19,152,474

Average Earning Asset Yields (2) :

15 year fixed-rate 3.74 % 3.50 %

30 year fixed-rate 3.75 % 3.38 %

Hybrid ARM 4.35 % 3.48 %

Agency - CMO 3.74 % 3.56 %

Agency CMBS 3.65 % 3.52 %

Non-Agency CMBS 5.32 % 4.98 %

Non-Agency RMBS 7.17 % 6.71 %

1,905,555 20,803,193 9,871,653 19,982,393

Loan participation interest 5.95 % 6.14 %

Commercial loans 10.31 % 11.08 %

Average earning asset yields (2)

6.33 % 3.89 % 4.39 % 3.90 %

(1) Average balances for each period are based on weighted month-end average earning assets.

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All yields are annualized.

(3) GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S.

Our primary source of income is interest earned on our investment portfolio.

We had average earning assets of approximately $17.8 billion for the three months ended March 31, 2020 (March 31, 2019:

We had average earning assets of approximately $1.9 billion for the three months ended June 30, 2020 (June 30, 2019:

$20.8 billion) and $9.9 billion for the six months ended June 30, 2020 (June 30, 2019:

$20.0 billion).

Average earning assets decreased for the three months ended March 31, 2020 primarily due to the sale of MBS and GSE CRTs for cash proceeds of $16.2 billion as previously discussed in the Executive Summary section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our average earning assets for the three months ended March 31, 2020 are not indicative of our future ability to generate interest income because the sales referred to above primarily occurred during the latter part of March 2020, and we sold additional MBS and GSE CRTs with a fair value of $6.2 billion as of March 31, 2020 for cash proceeds of $5.9 billion between April 1, 2020 and May 31, 2020.

We earned total interest income of $186.7 million (March 31, 2019:

$187.1 million) for the three months ended March 31, 2020.

Average earning assets decreased for the three and six months ended June 30, 2020 primarily due to the sale of MBS and GSE CRTs for cash proceeds of $6.9 billion and $23.1 billion in the three and six months ended June 30, 2020, respectively.

Due to the magnitude of the reduction in our investment portfolio since December 31, 2019, our average earning assets and asset yields for the three and six months ended June 30, 2020 are not indicative of our future ability to generate interest income.

We earned total interest income of $30.2 million and $216.9 million (June 30, 2019:

$202.2 million and $389.3 million) for the three and six months ended June 30, 2020, respectively.

Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.

Three Months Ended March 31,

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Total interest income 30,173 202,221 216,872 389,295

MBS and GSE CRT interest income increased $44,000 for the three months ended March 31, 2020 compared to 2019 primarily due to a $9.7 million increase in coupon interest reflecting a 28 basis point increase in average earning asset yields.

Average earnings asset yields rose due to purchases of 30 year fixed-rate Agency RMBS securities at higher yields.

Higher coupon interest was offset by a $9.6 million increase in net premium amortization due to faster prepayment speeds driven by cuts in the federal funds interest rate over the past twelve months.

Interest income on our commercial and other loans decreased $419,000 during the three months ended March 31, 2020 primarily due to principal payments on commercial loans totaling $7.1 million in 2019.

MBS and GSE CRT interest income decreased $171.1 million in both the three and six months ended June 30, 2020, compared to the same periods in 2019 primarily due to a $187.7 million and $178.0 million decrease in coupon interest reflecting lower average earning assets.

Lower coupon interest was offset by a $16.6 million and $6.9 million decrease in net premium amortization during the three and six months ended June 30, 2020, respectively, due to sales of assets purchased at premiums.

Interest income on our commercial and other loans decreased $939,000 and $1.4 million during the three and six months ended June 30, 2020, respectively, due to the sale of our loan participation interest in April 2020 and principal payments on commercial loans totaling $7.3 million in the six months ended June 30, 2019.

Prepayment Speeds

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The standard measure of prepayment speeds is the constant prepayment rate, also known as the conditional prepayment rate or "CPR".

The table below provides the three month constant prepayment rate for our RMBS and GSE CRTs as of March 31, 2020, December 31, 2019, and March 31, 2019.

March 31, 2020 December 31, 2019 March 31, 2019

The table below provides the three month constant prepayment rate for our RMBS and GSE CRTs as of June 30, 2020, December 31, 2019, and June 30, 2019.

June 30, 2020 December 31, 2019 June 30, 2019

15 year fixed-rate Agency RMBS 7.4 12.5 11.1

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Weighted average CPR 21.0 18.1 9.0

The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three and six months ended June 30, 2020 and 2019.

Three months ended June 30, Six Months Ended June 30,

$ in thousands, except share data 2020 2019 2020 2019

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Net (premium amortization) discount accretion 2,787 (13,764) (13,786) (20,714)

Net premium amortization increased $9.6 million for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to faster prepayment speeds on Agency RMBS.

Higher premium amortization was partially offset by discount accretion on purchases of non-Agency CMBS over the last twelve months.

Net premium amortization decreased $16.6 million and $6.9 million for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019 primarily due to sales of assets purchased at premiums.

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

The table below presents the components of interest expense for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The table below presents the components of interest expense for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time.

Our interest expense on repurchase agreement borrowings decreased $18.6 million for the three months ended March 31, 2020 compared to 2019 due to lower average borrowings and a lower average cost of funds reflecting decreases in the federal funds interest rate.

Our interest expense on repurchase agreement borrowings decreased $120.7 million and $139.3 million for the three and six months ended June 30, 2020, respectively, compared to 2019 due to lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds interest rate.

Average borrowings decreased primarily due to repayment of $17.5 billion of repurchase agreements with proceeds from asset sales due to financial market disruption caused by the COVID-19 pandemic as previously discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Average borrowings also decreased due to repayment of $300.0 million of secured loans in February 2020 due to a scheduled maturity.

Average borrowings also decreased due to repayment of $910.0 million of secured loans during the six months ended June 30, 2020.

Our repurchase agreement interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $10.1 million during the three months ended March 31, 2020 and $5.9 million during the three months ended March 31, 2019.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $4.5 million and $14.6 million during the three and six months ended June 30, 2020, respectively, and $5.9 million and $11.8 million during the three and six months ended June 30, 2019, respectively.

Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

We increased the amount of gains and losses reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $4.2 million because it is probable that the original forecasted repurchase agreement transactions will not occur by the end of the originally specified time period .

We increased the amount of gains and losses reclassified as a decrease to interest expense during the six months ended June 30, 2020 by $2.7 million because it is probable the original forecasted transactions will not occur by the end of the originally specified time period.

During the next twelve months, we estimate that $20.0 million of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.

During the three months ended March 31, 2020, interest expense for our secured loans decreased $4.5 million compared to the same period in 2019 due to lower borrowing rates and repayment of $300.0 million of secured loans in February 2020.

Borrowing rates on our secured loans are based on the three-month FHLB swap rate plus a spread.

For the three months ended March 31, 2020, the weighted average borrowing rate on our secured loans was 1.83% as compared to 2.70% for the three months ended March 31, 2019.

Our total interest expense during the three months ended March 31, 2020 decreased $27.3 million from the same period in 2019 primarily due to the $23.1 million decrease in interest expense on repurchase agreements borrowings and secured loans in the 2020 period as discussed above.

The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

During the three and six months ended June 30, 2020, interest expense for our secured loans decreased $9.5 million and $14.0 million, respectively, compared to the same periods in 2019 due to repayment of $910.0 million of secured loans during the six months ended June 30, 2020 and lower borrowing rates.

Borrowing rates on our secured loans are based on FHLBI's short-term cost of funds.

For the three and six months ended June 30, 2020, the weighted average borrowing rate on our secured loans was 0.85% and 1.48%, as compared to 2.73% and 2.72% for the three and six months ended June 30, 2019, respectively.

Our total interest expense during the three and six months ended June 30, 2020 decreased $128.8 million and $156.1 million, respectively, from the same periods in 2019 primarily due to the $130.2 million and $153.3 million decrease in interest expense on repurchase agreements borrowings and secured loans in the 2020 periods as discussed above.

The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

Average Borrowings (1) :

Agency RMBS (2)

8,521,865 11,664,156

3,523,998 1,074,917

Non-Agency CMBS (2)

3,049,547 2,663,941

Non-Agency RMBS 689,249 886,554

GSE CRT 722,179 717,482

Loan participation interest 25,159 41,072

Total average borrowings (1)

Maximum borrowings during the period (3)

981,992 18,908,927 8,756,995 17,983,666

Average Cost of Funds (4) :

Agency RMBS (2)

2.30 % 2.59 %

Agency CMBS 2.17 % 2.64 %

Non-Agency CMBS (2)

Maximum borrowings during the period (2)

1,373,296 19,365,413 23,132,234 19,365,413

Non-Agency RMBS 2.67 % 3.54 %

GSE CRT 2.54 % 3.49 %

Loan participation interest 3.52 % 4.15 %

Cost of funds (3)

Effective cost of funds (non-GAAP measure) (5)

0.18 % 2.73 % 1.97 % 2.69 %

(1) Average borrowings for each period are based on weighted month-end balances.

(2) Agency RMBS and non-Agency CMBS average borrowings and average cost of funds include borrowings under repurchase agreements and secured loans.

(2) Amount represents the maximum borrowings at month-end during each of the respective periods.

(3) Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.

(5) For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."

Total average borrowings decreased $516.1 million in the three months ended March 31, 2020 compared to 2019 primarily because we repaid $11.2 billion of repurchase agreements and $300.0 million of secured loans in the three months ended March 31, 2020 as discussed above.

Our average cost of funds decreased 58 basis points for three months ended March 31, 2020 versus 2019 primarily due to decreases in the federal funds rate over the past twelve months.

Our average borrowings for the three months ended March 31, 2020 are not indicative of our future interest expense because we repaid the $11.2 billion of repurchase agreements referred to above during the latter part of March 2020.

In addition, we repaid the balance of our repurchase agreements on May 7, 2020 and an additional $512.5 million of secured loans as of April 30, 2020.

All percentages are annualized.

Total average borrowings decreased $17.9 billion and $9.2 billion in the three and six months ended June 30, 2020, respectively, compared to 2019 primarily because we repaid $17.5 billion of repurchase agreements and $910.0 million of secured loans during the six months ended June 30, 2020 as discussed above.

Our average cost of funds decreased 255 basis points and 72 basis points for three and six months ended June 30, 2020, respectively, versus 2019 primarily due to decreases in the Federal Funds rate over the past twelve months.

Our average borrowings for the three and six months ended June 30, 2020 are not indicative of our future interest expense because we repaid $17.5 billion of repurchase agreements and $910.0 million of secured loans during the six months ended June 30, 2020.

Net Interest Income

The table below presents the components of net interest income for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The table below presents the components of net interest income for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Net interest rate margin 6.15 % 1.16 % 2.42 % 1.21 %

Our net interest income, which equals interest income less interest expense, totaled $101.0 million (March 31, 2019:

$74.1 million) for the three months ended March 31, 2020.

The increase in net interest income for the three months ended March 31, 2020 was primarily due to a lower cost of funds driven by cuts in the federal funds interest rate as discussed above.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 2.12% (March 31, 2019:

1.26%) for the three months ended March 31, 2020.

The increase in net interest rate margin for the three months ended March 31, 2020 compared to the same period in 2019 was primarily due to decreases in the federal funds rate throughout 2019 that had a greater impact on our average cost of funds than on our average earning asset yields.

Our cost of funds on all of our borrowings is influenced by changes in short term interest rates, whereas approximately 86% o f the Company’s investments were fixed rate assets as of March 31, 2020.

Our net interest income, which equals interest income less interest expense, totaled $29.7 million and $130.7 million (June 30, 2019:

$73.0 million and $147.0 million) for the three and six months ended June 30, 2020, respectively.

in net interest income for the three and six months ended June 30, 2020 was primarily due the sale of MBS and GSE CRTs to generate liquidity and reduce leverage as previously discussed.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 6.15% and 2.42% (June 30, 2019:

1.16% and 1.21%) for the three and six months ended June 30, 2020, respectively.

The increase in net interest rate margin for the three and six months ended June 30, 2020 compared to the same periods in 2019 was primarily due to the change in our portfolio composition due to assets sales and decreases in the Federal Funds rate throughout 2019 that had a greater impact on our average cost of funds than on our average earning asset yields.

Our cost of funds on all of our borrowings is influenced by changes in short-term interest rates, whereas approximately 92% o f the Company’s investments were fixed rate assets as of June 30, 2020.

Gain (Loss) on Investments, net

The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Net unrealized gains (losses) on commercial loan and loan participation interest 3,023 — (2,469) —

Realized loss on loan participation interest (3,808) — (3,808) —

Total gain (loss) on investments, net (306,366) 302,182 (1,061,849) 570,564

As previously discussed, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic during the three months ended March 31, 2020.

To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $16.2 billion (March 31, 2019:

$734.8 million) and realized net losses of $4.3 million (March 31, 2019:

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic during the six months ended June 30, 2020.

To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $23.1 billion (June 30, 2019:

$1.7 billion) and realized net losses of $409.0 million (June 30, 2019:

net losses of $9.1 million).

A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our repurchase agreement counterparties seized and sold our securities when we were unable to meet margin calls on March 23, 2020.

We recorded $78.8 million of impairment on non-Agency RMBS and CMBS securities during the three months ended March 31, 2020 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

We still held these securities as of March 31, 2020 .

We assess our investment securities for credit losses

and impairment on a quarterly basis.

Sales prices of our holdings were severely impacted by the lack of liquidity and uncertainty surrounding the economic impact of the COVID-19 pandemic.

We recorded $6.3 million and $85.1 million of impairment on non-Agency RMBS and CMBS securities during the three and six months ended June 30, 2020, respectively, because we intended to sell or more likely than not would be required to sell these securities before recovery of their amortized cost basis.

We assess our investment securities for credit losses and impairment on a quarterly basis.

For additional information regarding our accounting policy for credit losses and impairment, refer to Note 2 – “Summary of Significant Accounting Policies” of our condensed consolidated financial statements included in Part I.

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Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net.

As of March 31, 2020, $5.3 billion (December 31, 2019:

As of June 30, 2020, $230.9 million (December 31, 2019:

$17.4 billion) or 15% (December 31, 2019:

80%) of our MBS and GSE CRT are accounted for under the fair value option.

Our percentage of MBS and GSE CRTs accounted for under the fair value option declined as of March 31, 2020 due to sales of securities accounted for under the fair value option during the three months ended March 31, 2020.

We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $514.5 million in the three months ended March 31, 2020 compared to net unrealized gains of $280.0 million in the three months ended March 31, 2019.

Net unrealized losses in the three months ended March 31, 2020 reflect lower interest rates and wider interest rate spreads on our Agency and non-Agency assets.

We also recorded net unrealized losses on our GSE CRT portfolio accounted for under the fair value option of $152.4 million in the three months ended March 31, 2020 compared to net unrealized gains of $1.2 million in the three months ended March 31, 2019.

Net unrealized losses in the three months ended March 31, 2020 reflect declines in valuations due to wider interest rate spreads.

We recorded an unrealized loss of $3.8 million on our loan participation interest and an unrealized loss of $1.7 million on our commercial loan in the three months ended March 31, 2020.

We valued our loan participation interest based on the price that we sold the participation interest for on April 1, 2020.

Our percentage of MBS and GSE CRTs accounted for under the fair value option declined as of June 30, 2020 due to sales of securities accounted for under the fair value option during the six months ended June 30, 2020.

We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $34.5 million and $549.0 million in the three and six months ended June 30, 2020, respectively, compared to net unrealized gains of $304.7 million and $584.7 million in the three and six months ended June 30, 2019, respectively.

Net unrealized losses in the three and six months ended June 30, 2020 reflect lower interest rates and wider interest rate spreads on our Agency and non-Agency

We also recorded net unrealized gains on our GSE CRT portfolio accounted for under the fair value option of $139.9 million and $12.4 million net unrealized losses in the three and six months ended June 30, 2020, respectively, compared to net unrealized losses of $3.3 million and $2.1 million in the three and six months ended June 30, 2019, respectively.

Net unrealized losses in the six months ended June 30, 2020 reflect declines in valuations due to wider interest rate spreads.

We recorded a realized loss of $3.8 million on our loan participation interest during the three and six months ended June 30, 2020 and unrealized losses of $785,000 and $2.5 million on our commercial loan during the three and six months ended June 30, 2020, respectively.

We sold the loan participation interest on April 1, 2020.

We valued our commercial loan based upon a valuation from an independent pricing service.

Equity in Earnings (Losses) of Unconsolidated Ventures

For the three months ended March 31, 2020, we recorded equity in earnings of unconsolidated ventures of $170,000 (March 31, 2019:

equity in earnings of $692,000).

We recorded equity in earnings for the three months ended March 31, 2020 and 2019 primarily due to realized and unrealized gains on the underlying portfolio investments.

For the three and six months ended June 30, 2020, we recorded equity in earnings of unconsolidated ventures of $318,000 and $488,000 (June 30, 2019:

equity in earnings of $702,000 and $1.4 million), respectively.

We recorded equity in earnings for the three and six months ended June 30, 2020 and 2019 primarily due to realized and unrealized gains on the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net

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The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods:

$ in thousands Three months ended June 30, 2020

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Currency Forward Contracts (138) — (205) (343)

Total (138) — (205) (343)

$ in thousands Three months ended June 30, 2019

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps (241,839) 7,525 (39,922) (274,236)

Futures Contracts (65,953) — (4,490) (70,443)

Currency Forward Contracts 553 — (607) (54)

Total (307,239) 7,525 (45,019) (344,733)

$ in thousands

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

not designated as

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$ in thousands

Three Months Ended March 31, 2019

Six Months Ended June 30, 2019

not designated as

4 unchanged sentences

Total (539,626) 12,034 (18,601) (546,193)

We did not have any interest rate swap contracts as of March 31, 2020.

We terminated all of our remaining interest rate swaps in March 2020 as we positioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

During the six months ended June 30, 2020, we terminated existing swaps with a notional amount of $106.2 billion and entered into new swaps with a notional amount of $92.2 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities.

We terminated all outstanding interest rate swaps in March 2020 as we positioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic and did not have any swaps outstanding as of June 30, 2020.

Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

We realized a net loss of $904.7 million for the three months ended March 31, 2020, respectively, on interest rate swaps primarily due to falling interest rates.

We realized a net loss of $904.7 million on the termination of interest rate swaps during the six months ended June 30, 2020 primarily due to falling interest rates.

As of December 31, 2019, we held the following interest rate swaps whereby we receive interest at a one-month and three-month LIBOR rate:

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Interest Rate Swaps 14,000,000 1.47 % 1.79 % 5.2

We were not a party to any futures contracts in the three months ended March 31, 2020.

During the three months ended March 31, 2019, we settled futures contracts with a notional amount of $1.7 billion.

We realized a net loss of $66.7 million on the settlement of futures contracts for the three months ended March 31, 2019 due to falling interest rates.

We were not a party to any futures contracts during the six months ended June 30, 2020.

During the six months ended June 30, 2019, we settled futures contracts with a notional amount of $4.3 billion.

We realized a net loss of $132.6 million on the settlement of futures contracts during the six months ended June 30, 2019 due to falling interest rates.

Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.

Realized and Unrealized Credit Derivative Income (Loss), net

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three months ended March 31, 2020 and 2019.

Three Months Ended March 31,

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three and six months ended June 30, 2020 and 2019.

Three months ended June 30, Six Months Ended June 30,

$ in thousands 2020 2019 2020 2019

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Total realized and unrealized credit derivative income (loss), net (2,738) (2,438) (35,790) 5,446

In the three months ended March 31, 2020, we recorded a decrease of $40.9 million in realized and unrealized credit derivative income (loss), net compared to the same periods in 2019.

The decrease was primarily driven by a decline in the fair value of our GSE CRT embedded derivatives in the three months ended March 31, 2020 as asset prices dropped due to spread widening.

Net Loss on Extinguishment of Debt

In the three and six months ended June 30, 2020, we recorded a decrease of $300,000 and $41.2 million in realized and unrealized credit derivative income (loss), net compared to the same periods in 2019.

The decrease was primarily driven by a decline in the fair value of our GSE CRT embedded derivatives in the three and six months ended June 30, 2020 as asset prices declined due to spread widening.

Net Gain (Loss) on Extinguishment of Debt

As discussed in Note 6 - "Borrowings" of our condensed consolidated financial statements include in Part I.

of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements between March 23, 2020 and March 31, 2020.

of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt and settlements of counterparty claims for less than the principal balance of our repurchase agreements as a gain on extinguishment of debt in our condensed consolidated statement of operations.

Other Investment Income (Loss), net

Our other investment income (loss), net during the three months ended March 31, 2020 and 2019 primarily consists of quarterly dividends from FHLBI stock.

Our other investment income (loss), net during the three and six months ended June 30, 2020 and 2019 primarily consists of quarterly dividends from FHLBI stock.

We are required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured advances from the FHLBI.

We earn dividend income on our investment in FHLBI stock, and the amount of our dividend income varies based upon the number of shares that we are required to own and the dividend declared per share.

We incurred management fees of $11.0 million (March 31, 2019:

$9.5 million) for the three months ended March 31, 2020.

Management fees increased for the three months ended March 31, 2020 compared to the same period in 2019 due to a higher management fee base.

We incurred management fees of $9.8 million and $20.7 million (June 30, 2019:

$9.4 million and $18.9 million) for the three and six months ended June 30, 2020, respectively.

Management fees increased for the three and six months ended June 30, 2020 compared to the same period in 2019 due to a higher management fee base.

Our management fees are calculated quarterly in arrears.

Our management fee will be lower in the three months ended June 30, 2020 because the majority of realized losses on our derivative contracts and unrealized losses on our investments due to spread widening did not occur until March 2020.

Realized losses on sales of investments in the three months ended June 30, 2020 will further reduce the management fee base in the three months ended September 30, 2020.

Our management fee will be lower in the three months ended September 30, 2020 because our average month-end stockholders' equity decreased during the three months ended June 30, 2020 primarily due to realized losses on sales of investments.

Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.

Our general and administrative expenses not covered under our management agreement amounted to $3.1 million (March 31, 2019:

$2.3 million) for the three months ended March 31, 2020.

Our general and administrative expenses not covered under our management agreement amounted to $4.1 million and $7.2 million (June 30, 2019:

$2.0 million and $4.3 million) for the three and six months ended June 30, 2020, respectively.

General and administrative expenses primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees, and miscellaneous general and administrative costs.

General and administrative costs were higher for the three months ended March 31, 2020 compared to the same period in 2019 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $1.1 million.

General and administrative costs were higher for the three and six months ended June 30, 2020 compared to the same periods in 2019 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $1.5 million and $2.6 million, respectively.

Net Income (Loss) attributable to Common Stockholders

For the three months ended March 31, 2020, our net loss attributable to common stockholders was $1.6 billion (March 31, 2019:

$127.7 million net income attributable to common stockholders) or $10.38 basic and diluted net loss per average share available to common stockholders (March 31, 2019:

For the three months ended June 30, 2020, our net loss attributable to common stockholders was $299.9 million (June 30, 2019:

$7.2 million net income attributable to common stockholders) or $1.80 basic and diluted net loss per average share available to common stockholders (June 30, 2019:

$0.06 basic and diluted net income per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on derivative instruments of $910.8 million in the 2020 period compared to net losses on derivative instruments of $201.5 million in the 2019 period;

(ii) a net loss on investments of $755.5 million in the 2020 period compared to a net gains on investments of $268.4 million in the 2019 period;

(iii) credit derivative net losses of $33.1 million in the 2020 period compared to credit derivative net income of $7.9 million in the 2019 period;

and (iv) a $27.0 million increase in net interest income.

For further information on the changes in net gains (loss) on derivative instruments, net gain (loss) on investments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income."

The change in net income (loss) attributable to common stockholders was primarily due to (i) a net loss on derivative instruments of $343,000 in the 2020 period compared to a net loss on derivative instruments of $344.7 million in the 2019 period;

(ii) a net loss on investments of $306.4 million in the 2020 period compared to a net gain on investments of $302.2 million in the 2019 period;

and (iii) a $43.3 million decrease in net interest income.

For the six months ended June 30, 2020, our net loss attributable to common stockholders was $1.9 billion (June 30, 2019:

$134.9 million net income attributable to common stockholders) or $11.91 basic and diluted net loss per average share available to common stockholders (June 30, 2019:

$1.08 basic and diluted net income per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) a net loss on derivative instruments of $911.1 million in the 2020 period compared to a net loss on derivative instruments of $546.2 million in the 2019 period;

(ii) a net loss on investments of $1.1 billion in the 2020 period compared to a net gain on investments of $570.6 million in the 2019 period;

(iii) a credit derivative net loss of $35.8 million in the 2020 period compared to credit derivative net income of $5.4 million in the 2019 period;

and (iv) a $16.3 million decrease in net interest income.

For further information on the changes in net gain (loss) on derivative instruments, net gain (loss) on investments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income."

Non-GAAP Financial Measures

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• debt-to-equit y ratio.

We are not presenting core earnings for the three months ended March 31, 2020 ("first quarter 2020 core earnings") because core earnings excludes the material adverse impact that the market disruption caused by the COVID-19 pandemic has had on our financial condition.

In addition, first quarter 2020 core earnings are not indicative of the reduced earnings potential of our current investment portfolio.

We are not presenting core earnings for the three and six months ended June 30, 2020 because core earnings excludes the material adverse impact that the market disruption caused by the COVID-19 pandemic has had on our financial condition.

In addition, core earnings for the three and six months ended June 30, 2020 are not indicative of the reduced earnings potential of our current investment portfolio.

We intend to resume reporting core earnings when its presentation provides a useful measure of our portfolio’s earning capacity.

We are also not presenting a repurchase agreement debt-to-equity ratio because this ratio as of March 31, 2020 is not indicative of how we have historically managed our business prior to the market disruption caused by the COVID-19 pandemic.

In addition, we do not have any repurchase agreements as of the date of this release.

The non-GAAP financial measures used by management should be analyzed in conjunction with U.S.

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We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S.

GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S.

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The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:

Three Months Ended March 31,

Three months ended June 30,

$ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield

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31,300 6.57 % 207,521 3.99 %

Our effective interest income decreased $1.0 million in the three months ended March 31, 2020 versus the same period in 2019 due to lower average earning assets.

Our average earning assets decreased to $17.8 billion for the three months ended March 31, 2020 from $19.2 billion primarily because we sold MBS and GSE CRTs in March 2020 for cash proceeds of $16.2 billion due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed.

Six Months Ended June 30,

$ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield

Total interest income 216,872 4.39 % 389,295 3.90 %

GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net 5,845 0.12 % 10,650 0.10 %

Effective interest income 222,717 4.51 % 399,945 4.00 %

Our effective interest income decreased $176.2 million and $177.2 million in the three and six months ended June 30, 2020, respectively, versus the same period in 2019 due to lower average earning assets.

Our average earning assets decreased to $1.9 billion and $9.9 billion from $20.8 billion and $20.0 billion for three and six months ended June 30, 2020, respectively, primarily because we sold MBS and GSE CRT or cash proceeds of $23.1 billion during the six months ended June 30, 2020 due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed.

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods.

Three Months Ended March 31,

Three months ended June 30,

$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds

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4,945 2.01 % 127,627 2.70 %

Our effective interest expense and effective cost of funds decreased during the three months ended March 31, 2020 compared to the same period in 2019 primarily due to lower interest expense paid on our repurchase agreements as well as higher net interest income earned on our interest rate swaps.

We paid interest expense of $85.7 million during the three months ended March 31, 2020 compared to $113.0 million for the same period in 2019 due to lower average borrowings and a lower federal funds target interest rate.

We earned contractual net interest income on interest rate swaps of $11.9 million during the three months ended March 31, 2020 compared to $4.5 million for the same period in 2019.

Our higher contractual net interest income on interest rate swaps was driven by falling interest rates.

For further information on interest expense and cost of funds, see the preceding discussion under "Interest Expense and Cost of Funds".

Six Months Ended June 30,

$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds

Total interest expense 86,130 1.97 % 242,255 2.69 %

Amortization of net deferred gain (loss) on de-designated interest rate swaps

14,570 0.33 % 11,767 0.13 %

Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net

(11,924) (0.27) % (12,034) (0.13) %

Effective interest expense 88,776 2.03 % 241,988 2.69 %

Our effective interest expense and effective cost of funds decreased during the three and six months ended June 30, 2020 compared to the same period in 2019 primarily due to lower interest expense paid on our repurchase agreements.

We paid interest expense of $442,000 and $86.1 million during the three and six months ended June 30, 2020, respectively, compared to $129.2 million and $242.3 million for the same periods in 2019, respectively, due to lower average borrowings and a lower Federal Funds target interest rate.

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.

Three Months Ended March 31,

Six Months Ended June 30,

$ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin

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26,355 4.56 % 79,894 1.29 %

Effective net interest income and effective interest rate margin for the three months ended March 31, 2020 increased from the same period in 2019 primarily due to lower average borrowings, lower effective interest expense driven by cuts in the federal funds interest rate and higher contractual net interest income on interest rate swaps as previously discussed.

Six Months Ended June 30,

$ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin

Net interest income 130,742 2.42 % 147,040 1.21 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps

(14,570) (0.33) % (11,767) (0.13) %

GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

5,845 0.12 % 10,650 0.10 %

Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net

11,924 0.27 % 12,034 0.13 %

Effective net interest income 133,941 2.48 % 157,957 1.31 %

Effective net interest income decreased during the three and six months ended June 30, 2020 compared to the same periods in 2019 primarily due to lower average earning asset balances that were partially offset by lower average borrowings and a lower effective cost of funds driven by cuts in the Federal Funds interest rate.

Liquidity and Capital Resources

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In addition, our lenders have the contractual right to increase the "haircut", or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile.

As a result of significant spread widening in both Agency and non-Agency securities in March 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls.

As a result of significant spread widening in both Agency and non-Agency securities in the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls.

Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs.

We sold portfolio assets in order to generate liquidity, in many cases at significantly distressed market prices.

These events have required us to maintain higher levels of cash and unencumbered assets.

These events have led us to seek to maintain higher levels of cash and unencumbered assets.

Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II.

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Risk Factors in this Quarterly Report for more information on how the COVID-19 pandemic has impacted and may continue to impact our liquidity and capital resources.

We held cash, cash equivalents and restricted cash of $365.0 million at March 31, 2020 (March 31, 2019:

We held cash, cash equivalents and restricted cash of $271.6 million at June 30, 2020 (June 30, 2019:

$154.9 million).

As previously discussed, we increased our cash, cash equivalents and restricted cash balances at March 31, 2020 to improve our liquidity in light of market disruption created by the COVID-19 pandemic.

Our operating activities provided net cash of $110.0 million for the three months ended March 31, 2020 (March 31, 2019:

As previously discussed, we increased our cash, cash equivalents and restricted cash balances at June 30, 2020 to improve our liquidity in light of market disruption created by the COVID-19 pandemic.

Our operating activities provided net cash of $130.6 million for the six months ended June 30, 2020 (June 30, 2019:

$157.0 million).

Our investing activities provided net cash of $11.6 billion in the three months ended March 31, 2020 compared to net cash used by investing activities of $3.5 billion in the three months ended March 31, 2019.

Our primary source of cash from investing activities for the three months ended March 31, 2020 was proceeds from sales of MBS and GSE CRTs of $16.2 billion (March 31, 2019:

$734.8 million) to improve liquidity.

We also generated $636.5 million from principal payments of MBS and GSE CRTs during the three months ended March 31, 2020 (March 31, 2019:

Our investing activities provided net cash of $18.0 billion in the six months ended June 30, 2020 compared to net cash used by investing activities of $3.7 billion in the six months ended June 30, 2019.

Our primary source of cash from investing activities for the six months ended June 30, 2020 was proceeds from sales of MBS and GSE CRTs of $23.1 billion (June 30, 2019:

$1.7 billion) to improve liquidity.

We also generated $690.1 million from principal payments of MBS and GSE CRTs during the six months ended June 30, 2020 (June 30, 2019:

$760.6 million).

Prior to disruption in the financial markets caused by the COVID-19 pandemic, we invested $4.4 billion in MBS and GSE CRTs during the three months ended March 31, 2020 (2019:

Prior to disruption in the financial markets caused by the COVID-19 pandemic, we invested $5.0 billion in MBS and GSE CRTs during the six months ended June 30, 2020 (June 30, 2019:

$5.6 billion).

We used cash of $904.2 million to terminate derivative contracts in the three months ended March 31, 2020 (March 31, 2019:

We used cash of $904.4 million to terminate derivative contracts in the six months ended June 30, 2020 (June 30, 2019:

$539.6 million) as we sold our Agency securities and our sensitivity to interest rates decreased.

Our financing activities used net cash of $11.6 billion for the three months ended March 31, 2020 primarily because we repaid our repurchase agreement borrowings with proceeds from asset sales (2019:

net cash provided by financing activities of $3.4 billion).

We repaid net repurchase agreement borrowing of $11.2 billion (March 31, 2019:

Our financing activities used net cash of $18.2 billion for the six months ended June 30, 2020 primarily because we repaid our repurchase agreement borrowings with proceeds from asset sales (June 30, 2019:

net cash provided by financing

activities of $3.6 billion).

We repaid net repurchase agreement borrowing of $17.5 billion (June 30, 2019:

net proceeds provided $3.5 billion).

In addition, we repaid $300.0 million of secured loans from the FHLBI upon their maturity on February 11, 2020.

We also used cash of $74.8 million for the three months ended March 31, 2020 (March 31, 2019:

In addition, we repaid $910.0 million of secured loans from the FHLBI.

We also used cash of $102.6 million for the six months ended June 30, 2020 (June 30, 2019:

$126.8 million) to pay dividends.

Proceeds from issuance of common stock provided $347.3 million for the three months ended March 31, 2020 (March 31, 2019:

Proceeds from issuance of common stock provided $347.1 million for the six months ended June 30, 2020 (June 30, 2019:

$266.9 million).

As of March 31, 2020, the average margin requirement (weighted by borrowing amount), or the percentage amount by which the collateral value must exceed the loan amount (also referred to as the "haircut") under our repurchase agreements was 5.2% for Agency RMBS, 5.4% for Agency CMBS, 17.1% for non-Agency RMBS, 20.7% for GSE CRT and 21.0% for non-Agency CMBS.

Across our repurchase agreement facilities, the haircuts ranged from a low of 5.0% to a high of 8.0% for Agency RMBS, a low of 5.0% to a high of 10.0% for Agency CMBS, a low of 8.0% to a high of 35.0% for non-Agency RMBS, a low of 13.0% to a high of 50.0% for GSE CRT and a low of 10.0% to a high of 40.0% for non-Agency CMBS.

Our repurchase agreement counterparties increased haircuts during the three months ended March 31, 2020 as financial conditions deteriorated and the fair value of our securities became more difficult to determine.

Forward-Looking Statements Regarding Liquidity

As previously discussed, we repaid all of our repurchase agreement borrowings on May 7, 2020 and reduced the balance of our secured loans from $1.35 billion at March 31, 2020 to $837.5 million as of May 31, 2020.

As of May 31, 2020, our investment portfolio is primarily composed of credit assets that are financed by FHLBI.

As of June 30, 2020, our investment portfolio is primarily composed of credit assets that are financed by FHLBI.

Our secured loans are due by December 2020, and we intend to repay FHLBI with proceeds from sales of assets that are currently collateralizing our secured loans.

We have approximately $540 million of unencumbered securities as of May 31, 2020 and unrestricted cash of $272.5 million.

We intend to finance the purchase of new Agency investments with a moderate amount of repurchase agreement borrowings or other financing arrangements.

We will determine the amount of leverage on new investments based upon the type of investment and market conditions at the time of investment.

We repaid $435.0 million of our secured loans in July 2020.

We have approximately $554.3 million of unencumbered investments as of June 30, 2020 and unrestricted cash of $270.2 million.

We resumed investing in Agency RMBS in July 2020 and financed the purchase of these Agency investments with a moderate amount of repurchase agreement borrowings.

We determine the amount of leverage on new investments based upon the type of investment and market conditions at the time of investment.

Based upon our current portfolio, existing borrowing arrangements and anticipated proceeds from sales of assets that are currently collateralizing our secured loans, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.

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Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager.

As of March 31, 2020, we had the following contractual obligations:

As of June 30, 2020, we had the following contractual obligations:

Payments Due by Period

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year 1-3 years 3-5 years After 5

Repurchase agreements (1)

6,287,746 6,287,746 — — —

Secured loans 740,000 740,000 — — —

1,350,000 100,000 — — 1,250,000

Interest expense on repurchase agreements (3)

11,596 11,596 — — —

Interest expense on secured loans (1)

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742,141 742,141 — — —

(1) We repaid all of our repurchase agreements as of May 7, 2020.

(2) The FHLB I modified the terms of our secured loans in the second quarter of 2020 as discussed in Note 15 - "Subsequent Events".

The balance of our secured loans is due by December 2020.

(3) Interest expense is calculated based on variable rates in effect at March 31, 2020 .

(1) Interest expense is calculated based on variable rates in effect at June 30, 2020 .

(2) Excluded from total contractual obligations are the amounts due to our Manager under the management agreement, as those obligations do not have fixed and determinable payments.

The above table does not include total commitments of approximately $510.2 million to fund the purchase of Agency CMBS securities because those securities are reported as an investment related payable in our condensed consolidated balance sheet as of March 31, 2020.

We have sold our Agency CMBS holdings as of the filing date of this Quarterly Report.

Off-Balance Sheet Arrangements

We have committed to invest up to $125.1 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

As of March 31, 2020, $118.7 million of our commitment to these unconsolidated ventures had been called.

We are committed to fund $6.4 million in additional capital to fund future investments and cover future expenses should they occur.

As of March 31, 2020, we had an unfunded commitment on a loan participation interest in a secured loan of $49.6 million.

We sold our loan participation interest on April 1, 2020 and no longer have any future financing commitments related to this loan participation interest.

As of June 30, 2020, we held investments in two unconsolidated joint ventures that are managed by an affiliate of our Manager.

We are committed to invest $6.5 million in these unconsolidated joint ventures to fund future investments and cover future expenses should they occur.

To maintain our qualification as a REIT, U.S.

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We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.

Exposure to Financial Counterparties

We historically finance a substantial portion of our investment portfolio through repurchase agreements.

Under these agreements, we pledge assets from our investment portfolio as collateral.

Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio.

If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.

As of March 31, 2020, two counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $70.5 million, or 5% of our stockholders' equity.

We repaid all of our repurchase agreement borrowings in May 2020 and do not have any repurchase agreement borrowings as of the filing date of this Quarterly Report.

The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2020.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 10 3,763,424 440,519

Europe (excluding United Kingdom) 5 1,140,260 137,350

Asia 3 447,803 43,529

United Kingdom 4 936,259 115,482

Total 22 6,287,746 736,880

Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2020, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2020.

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended June 30, 2020, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2020.

At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act.

12 unchanged sentences

(Medidentic Mortgage Investors, SEC No-Action Letter (May 23, 1984)).

In light of this analysis, we believe that as of March 31, 2020, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

In light of this analysis, we believe that as of June 30, 2020, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

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-Q

Item 2. Management’s Discussion and Analysis