What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-09 compared with 2020-08-06 · 484 added, 304 removed, 475 unchanged (62% of the section changed)

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• our expected book value per common share;

• our intention and ability to pay dividends;

• interest rate mismatches between our target assets and our borrowings used to fund such investments;

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Our objective is to provide attractive risk-adjusted returns to our investors, primarily through dividends and secondarily through capital appreciation.

To achieve this objective, we have historically invested in the following:

To achieve this objective, we have invested in the following:

• Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S.

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• Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT");

• To-be-announced securities forward contracts ("TBAs") to purchase Agency MBS;

• Residential and commercial mortgage loans;

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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 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.

On March 23, 2020, we notified our financing counterparties that we were not in a position to fund the margin calls we received on March 23, 2020, and that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic.

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 $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.

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.

In the first half of 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 in the latter part of March.

We notified our financing counterparties that we were not in a position to fund the margin calls we received on March 23, 2020, and that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements.

To generate liquidity and reduce leverage in the first half of 2020, we sold a substantial portion of our MBS and GSE CRT portfolio.

In the nine months ended September 30, 2020, we repaid all of our repurchase agreements that may not have been in compliance under our borrowing agreements and repaid our secured borrowings from the Federal Home Bank of Indianapolis ("FHLBI").

We resumed investing in Agency RMBS in July 2020 and began investing in TBAs.

We are financing our purchases of Agency RMBS with repurchase agreements and are in compliance with the terms of our financing arrangements as of September 30, 2020.

We continue to hold unencumbered credit assets and 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.

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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.

We paid a cash dividend of $0.02 on our common stock for the second quarter on July 28, 2020 and a cash dividend of $0.05 on our common stock for the third quarter on October 27, 2020.

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

While the Federal Reserve has taken a number of proactive measures to bolster liquidity, we expect market conditions to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic.

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, the majority 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.

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

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.

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.

Financial conditions continued to improve during the third quarter, albeit at a much slower pace than during the second quarter.

Equities and most credit sectors continued to react favorably to the massive government action taken in response to the

COVID-19 pandemic, as well as to the continued re-opening of many parts of the economy.

Gains in nonfarm payrolls averaged 1.3 million per month during the third quarter, and the unemployment rate ended the quarter at 7.9%, down from the peak of 14.7% that was recorded in April.

The continued rebound in economic activity can be seen across a number of measures, as consumer activity has remained positive as evidenced by gains in spending, retail sales and consumer confidence metrics.

While the continued economic recovery is encouraging, we remain cautious about the pace of future gains as the number of COVID-19 cases has begun trending upwards again and uncertainty remains surrounding the amount and timing of any further stimulus.

Interest rates were little changed during the third quarter, with the yield on the 2 year Treasury note falling 2 basis points to 0.13% and the yield on the 10 year Treasury bond increasing by 2 basis points to 0.68%.

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 continues to forecast no change for the next several years.

Interest rate volatility measures also reflect the view that rates will stay contained, as these remain near multi-year lows.

While price data has broadly shown a rebound off the lows of March and April, most measures still show that inflation remains subdued.

The consumer price index was 1.4% in September, well off the low of 0.1% in May, but still lower than pre-COVID levels.

The personal consumption expenditure index (1.6% in September) has also increased this quarter, but remains close to pre-COVID lows.

The story is similar in breakeven rates on inflation protected Treasuries, as expectations for inflation increased during the quarter but still remained quite low.

The inflation rate implied by 2 year and 5 year TIPs was 1.14% and 1.49%, respectively, at quarter end.

Risk markets across both equities and fixed income continued to rally during the third quarter.

Equity markets followed their strong second quarter performance with additional gains, as the S&P 500 was up 8.5% and the NASDAQ index returned 11% during the third quarter.

The broader credit markets also rallied during the quarter, as spreads on investment grade and high yield corporate credits tightened notably as optimism about the path of the economic recovery began to take hold.

The COVID-19 pandemic has negatively impacted most commercial real estate property types.

The lodging and retail sectors have been the most impacted due to travel restrictions and accelerated growth in e-commerce.

In the retail sector, 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.

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

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

While residential real estate fundamentals deteriorated significantly at the onset of the pandemic, low mortgage rates and tight housing supply have driven a dramatic recovery in recent months.

Demographic trends and changes in housing preferences shaped by the COVID-19 pandemic have combined with improved affordability to generate robust demand, especially for single family homes.

This strength is also reflected in higher home price appreciation.

Meanwhile, credit spreads on residential mortgage backed securities have recovered much of the widening that occurred at the onset of the pandemic, though premiums on lower rated classes still reflect elevated uncertainty regarding long term credit implications.

Nevertheless, many individual homeowners have been adversely impacted by the economic consequences of the pandemic.

Congress has responded 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.

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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.

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.

The performance of Agency RMBS was mixed during the third quarter as the benefit of Federal Reserve purchases was offset by increased prepayment risk brought on by the low interest rate environment.

Lower coupon mortgages were the beneficiary of the Fed buying program, as those bonds experienced spread tightening and a favorable dollar roll environment.

Higher coupon mortgages did not fare as well, as their relatively high dollar prices exacerbate the impact of increasing prepayment rates.

Pay-ups on specified pool collateral increased during the quarter, again reflecting the heightened prepayment environment.

We expect the market for Agency RMBS to remain mixed, as the level of support from the Federal Reserve remains strong but prepayment concerns remain.

Proposed Changes to LIBOR

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Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021.

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.

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.

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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However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.

Our Manager is finalizing its global assessment of exposure in relation to our LIBOR-based instruments and benchmarks and is prioritizing the mitigation of risks associated with the forecasted changes to financial instruments and performance benchmarks referencing existing LIBOR rates.

Our Manager finalized its global assessment of exposure in relation to our LIBOR-based instruments and benchmarks and is prioritizing the mitigation of risks associated with the forecasted changes to financial instruments and performance benchmarks referencing existing LIBOR rates.

In October 2019, the IRS and Treasury proposed regulations that are expected to provide taxpayers relief from adverse impacts resulting from the transition away from LIBOR to an alternative reference rate.

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Investment Activities

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 .

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

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

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

30 year fixed-rate, at fair value 5,536,103 10,524,220 12,044,907

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Loan participation interest, at fair value — 44,654 45,115

Commercial loan, at amortized cost 21,792 24,055 24,321

Commercial loan 21,777 24,055 24,188

Investments in unconsolidated ventures 19,975 21,998 23,305

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

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.

Subtotal 6,023,209 21,862,493 23,692,107

TBAs, at implied cost basis (1)

Total investment portfolio, including TBAs 6,955,522 21,862,493 23,692,107

(1) TBAs that we do not intend to physically settle on the contractual settlement date are accounted for as derivative financial instruments and recorded on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs.

Refer to Note 8 "Derivatives and Hedging Activities" in Part I.

of this report on Form 10-Q.

As of September 30, 2020, our holdings of 30-year fixed-rate Agency RMBS represented approximately 80% of our total investment portfolio, including TBAs, versus 48% as of December 31, 2019 and 51% as of September 30, 2019.

As previously discussed, we sold substantially all of our Agency RMBS portfolio in the first half of 2020 to generate liquidity and reduce leverage.

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.

Our analysis generally begins at the underlying asset level, where we gather detailed information on loan, borrower, and property characteristics that inform our expectations for future performance.

In addition to base case cash flow projections, we perform a range of scenario stresses to gauge the sensitivity of returns to potential deviations in underlying asset behavior.

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

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 Agency RMBS holdings as of September 30, 2020 consist of newly issued specified pools with coupon distributions as shown in the table below.

$ in thousands Principal/Notional Balance Amortized Cost Fair Value

1.5% 106,685 108,760 108,171

2.0% 2,090,689 2,176,469 2,175,905

2.5% 2,480,370 2,626,751 2,626,529

3.0% 582,457 626,759 625,498

Total Agency RMBS 5,260,201 5,538,739 5,536,103

Our purchases of Agency RMBS have been primarily focused on specified pools with prepayment protection, as low mortgage rates and a robust housing market have increased borrower incentives to prepay their mortgage loans.

We seek to mitigate the negative impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that diminish borrower incentive to prepay, such as a lower loan balance, higher loan-to-value ( “ LTV ” ), lower FICO score, higher percentage of non-owner occupied loans (investment and vacation properties) and newly originated loans.

In addition, we focus a significant amount of purchases in specified pools that have higher geographic concentrations in states that exhibit slower prepayments such as New York, Florida and Texas.

We began investing in TBAs in the third quarter of 2020.

As of September 30, 2020, the implied cost basis of TBAs represented approximately 13% of our total investment portfolio.

Our investments consist of 30-year Agency MBS TBAs with coupons that range from 2.0% to 2.5% in conventional (uniform mortgage-backed securities) and Ginnie Mae collateral.

We intend to maintain a meaningful allocation to TBAs given attractive implied financing rates in the Agency MBS TBA dollar roll market.

Implied financing rates in the dollar roll market were substantially below those available in the repurchase market due to the magnitude and persistence of the Federal Reserve's MBS purchase program, which began to increase holdings in March of this year.

We expect the purchase program to continue in the fourth quarter of 2020, as the Federal Reserve views the program as a key component of its stated objectives.

We sold all of our holdings of Agency CMBS in the first half of 2020.

Agency CMBS represented approximately 22% of our investment portfolio as of December 31, 2019 and 21% as of September 30, 2019.

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

As of September 30, 2020, our holdings of non-Agency CMBS represented approximately 6% of our total investment portfolio, including TBAs, versus 17% as of December 31, 2019 and 16% as of September 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 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.

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.

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.

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 that collateralize MBS issued and guaranteed by the GSEs.

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.

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 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 June 30, 2020 as a percentage of the fair value:

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

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

Approximately 71% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2020.

Further, approximately 51% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2020.

The table below illustrates the vintage distribution of our non-Agency CMBS portfolio as of September 30, 2020 as a percentage of the fair value:

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

Prime 0.9 % — % — % — % 57.6 % 2.8 % 0.1 % — % — % 7.2 % — % — % 68.6 %

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

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

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

GSE CRT — % — % — % — % 45.5 % 29.1 % — % — % — % — % 4.7 % 20.7 % 100.0 %

Non-Agency CMBS 5.9 % 28.5 % 11.0 % 7.9 % 30.1 % 7.0 % — % 2.1 % 3.3 % 4.2 % — % 100.0 %

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 table below represent the geographic concentration of the underlying collateral for our non-Agency CMBS portfolio as of September 30, 2020.

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

Non-Agency RMBS

State Percentage GSE CRT

State Percentage Non-Agency CMBS

Non-Agency CMBS

State Percentage

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 %

Total 100.0 % Total 100.0 % Total 100.0 %

California 13.2 %

New York 10.5 %

New Jersey 7.0 %

Illinois 6.1 %

Virginia 4.7 %

Florida 4.6 %

Pennsylvania 4.0 %

North Carolina 3.4 %

Total 100.0 %

As of September 30, 2020, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs, versus 4% as of December 31, 2019 and 4% as of September 30, 2019.

We historically held non-Agency RMBS securities collateralized by prime and Alt-A loans and invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage loans.

As of September 30, 2020, we held one GSE CRT that represented less than 1% of our total investment portfolio, including TBAs.

Our holdings of GSE CRTs represented approximately 4% of our total investment portfolio, including TBAs, as of December 31, 2019 and 4% as of September 30, 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 that collateralize MBS issued and guaranteed by the GSEs.

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

As of September 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 are committed to invest $6.7 million in additional capital in these unconsolidated ventures to fund future investments and cover future expenses should they occur.

Financing and Other Liabilities

We have historically used repurchase agreements to finance the majority of our target assets and expect to use repurchase agreements to finance Agency investments in the future.

We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future.

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.

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 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.

We also used secured loans from the FHLBI to finance a portion of our investment portfolio.

We repaid our secured loans during 2020 with proceeds from sales of assets that collateralized the secured loans.

We terminated our membership in FHLBI in the third quarter of 2020.

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:

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Maximum balance (2)

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

September 30, 2019 19,722,032 19,535,263 19,898,863

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

September 30, 2020 5,243,288 3,373,356 5,243,288

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

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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.

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

We realized a net loss of $904.7 million on these swaps during the first half of 2020 due to falling interest rates.

W e entered into new swaps during the three months ended September 30, 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

As of September 30, 2020, we had $4.6 billion of notional amount of interest rate swaps.

All of these interest rate swaps are centrally cleared by a registered clearing organization.

We pay fixed rate interest on these swaps and receive a variable payment based on one-month LIBOR.

We realized a net loss of $4.7 million on these swaps in the three months ended September 30, 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 curr encies.

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

As of September 30, 2020, we had €20.8 million or $24.6 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 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).

During the nine months ended September 30, 2020, we settled currency forward contracts of €41.7 million or $68.8 million (September 30, 2019:

€66.2 million or $75.3 million) in notional amount and realized a net loss of $1.3 million (September 30, 2019:

$1.1 million net gain).

Capital Activities

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 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.

We sold 25,431 shares of common stock under these agreements during the three and nine months ended September 30, 2020.

For information on dividends declared and paid during the nine months ended September 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.

During the nine months ended September 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 June 30, 2020 December 31, 2019

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

Numerator (adjusted equity):

7 unchanged sentences

Book value per common share 3.47 16.29

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.

Our book value per common share decreased 79% as of September 30, 2020 compared to December 31, 2019 primarily due to realized and unrealized losses on derivatives and investments in the nine months ended September 30, 2020 resulting from the unprecedented market disruption caused by the COVID-19 pandemic.

Re fer to Item 3.

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Critical Accounting Policies

There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, 2019 except as discussed in Note 2 - "Summary of Significant Accounting Polices" to our condensed consolidated financial statements included in Part I, Item 1 of this report on Form 10-Q.

of this report on Form 10-Q.

Recent Accounting Standards

See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Adopted".

Financial Statements Note 2 - "Accounting Pronouncements Recently Adopted".

Results of Operations

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands, except share data 2020 2019 2020 2019

5 unchanged sentences

Repurchase agreements (1)

(1,713) 112,851 76,059 332,704

Secured loans 297 10,413 8,655 32,815

6 unchanged sentences

Realized and unrealized credit derivative income (loss), net 478 1 (35,312) 5,447

Net loss on extinguishment of debt 3,701 — (1,107) —

Net gain (loss) on extinguishment of debt 15,849 — 14,742 —

Other investment income (loss), net 402 1,005 1,936 3,041

13 unchanged sentences

Diluted 181,360,432 135,812,019 168,402,130 128,585,623

(1) Negative interest expense on repurchase agreements for the three months ended September 30, 2020 consists of $1.5 million of current period interest expense on repurchase agreements and $3.2 million of amortization of net deferred gains on de-designated interest rate swaps.

For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity" in Part I.

of this report on Form 10-Q.

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 and six months ended June 30, 2020 and 2019.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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

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:

We had average earning assets of approximately $4.2 billion for the three months ended September 30, 2020 (September 30, 2019:

$21.0 billion) and $8.0 billion for the nine months ended September 30, 2020 (September 30, 2019:

$20.3 billion).

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.

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic and sold a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage.

Average earning assets decreased for the three and nine months ended September 30, 2020 compared to the same periods in 2019 primarily due to these asset sales.

We resumed investing in Agency RMBS in July 2020.

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

We earned total interest income of $27.4 million and $244.3 million (September 30, 2019:

$196.3 million and $585.6 million) for the three and nine months ended September 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 June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

5 unchanged sentences

Total interest income 27,436 196,291 244,308 585,586

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.

MBS and GSE CRT interest income decreased $168.0 million and $339.1 million in the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019 primarily due to a $186.1 million and $364.1 million decrease in coupon interest reflecting lower average earning assets.

Lower coupon interest was offset by a $18.0 million and $25.0 million decrease in net premium amortization during the three and nine months ended September 30, 2020, respectively, due to sales of assets purchased at premiums.

Interest income on our commercial and other loans decreased $824,000 and $2.2 million during the three and nine months ended September 30, 2020, respectively, primarily due to the sale of our loan participation interest in April 2020 and principal payments on commercial loans totaling $7.4 million in the nine months ended September 30, 2019.

Prepayment Speeds

Our RMBS and GSE CRT portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Expected future prepayment speeds on our RMBS and GSE CRT portfolio are estimated on a quarterly basis.

Our Agency RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Expected future prepayment speeds on our Agency RMBS are estimated on a quarterly basis.

Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate.

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Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected.

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 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

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 Agency RMBS as of September 30, 2020, December 31, 2019, and September 30, 2019.

September 30, 2020 December 31, 2019 September 30, 2019

30 year fixed-rate Agency RMBS 1.8 18.1 13.8

Hybrid ARM Agency RMBS — 28.7 18.2

Non-Agency RMBS 29.5 17.2 11.4

GSE CRT 21.1 20.1 9.8

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 and six months ended June 30, 2020 and 2019.

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

The three month CPR as of September 30, 2020 is not indicative of the future CPR because our Agency RMBS holdings consist of newly issued securities that are expected to experience increases in prepayment speeds.

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands, except share data 2020 2019 2020 2019

5 unchanged sentences

Net (premium amortization) discount accretion (559) (18,608) (14,345) (39,322)

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.

Net premium amortization decreased $18.0 million and $25.0 million for the three and nine months ended September 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.

2 unchanged sentences

Interest Expense and Cost of Funds

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,

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

Three Months Ended September 30, Nine Months Ended September 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 $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 $910.0 million of secured loans during the six months ended June 30, 2020.

Our interest expense on repurchase agreement borrowings decreased $117.3 million and $256.6 million for the three and nine months ended September 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 repayments of repurchase agreements in the first half of 2020 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 $1.65 billion of secured loans during the nine months ended September 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 $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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $3.2 million and $17.8 million during the three and nine months ended September 30, 2020, respectively, and $6.0 million and $17.7 million during the three and nine months ended September 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 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 $22.4 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 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,

During the three and nine months ended September 30, 2020, interest expense for our secured loans decreased $10.1 million and $24.2 million, respectively, compared to the same periods in 2019 due to repayment of $1.65 billion of secured loans during the nine months ended September 30, 2020 and lower borrowing rates.

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

For the three and nine months ended September 30, 2020, the weighted average borrowing rate on our secured loans was 1.16% and 1.47%, as compared to 2.52% and 2.65% for the three and nine months ended September 30, 2019, respectively.

Our total interest expense during the three and nine months ended September 30, 2020 decreased $124.7 million and $280.8 million, respectively, from the same periods in 2019 primarily due to the $127.4 million and $280.7 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 nine months ended September 30, 2020 and 2019:

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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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.

Total average borrowings decreased $16.0 billion and $11.5 billion in the three and nine months ended September 30, 2020, respectively, compared to 2019 primarily because we repaid $12.3 billion of net repurchase agreements and $1.65 billion of secured loans during the nine months ended September 30, 2020 as discussed above.

Our average cost of funds decreased 272 basis points and 101 basis points for three and nine months ended September 30, 2020, respectively, versus 2019 primarily due to decreases in the Federal Funds rate.

Our average borrowings for the three and nine months ended September 30, 2020 are not indicative of our future interest expense because we repaid $12.3 billion of net repurchase agreements and $1.65 billion of secured loans during the nine months ended September 30, 2020.

Net Interest Income

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

11 unchanged sentences

Net interest rate margin 2.79 % 1.20 % 2.46 % 1.20 %

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.

Our net interest income, which equals interest income less interest expense, totaled $28.9 million and $159.6 million (September 30, 2019:

$73.0 million and $220.1 million) for the three and nine months ended September 30, 2020, respectively.

The decrease in net interest income for the three and nine months ended September 30, 2020 was primarily due the sale of MBS and GSE CRTs in the first half of 2020 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 2.79% and 2.46% for the three and nine months ended September 30, 2020, respectively (September 30, 2019:

1.20% and 1.20%).

The increase in net interest rate margin for the three and nine months ended September 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 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 substantially all of the Company’s investments were fixed rate assets as of September 30, 2020.

Gain (Loss) on Investments, net

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,

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

2 unchanged sentences

Other-than-temporary impairment losses — (1,826) — (4,802)

Net unrealized gains (losses) on MBS accounted for under the fair value option (34,498) 304,692 (549,001) 584,731

Net unrealized gains (losses) on GSE CRT accounted for under the fair value option 139,943 (3,339) (12,426) (2,105)

Net unrealized gains and losses on MBS and GSE CRT accounted for under the fair value option 23,994 201,702 (537,433) 784,328

Net unrealized gains (losses) on commercial loan and loan participation interest (15) — (2,484) —

1 unchanged sentence

Total gain (loss) on investments, net 65,106 202,413 (996,743) 772,977

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:

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic in 2020.

During the nine months ended September 30, 2020, we sold MBS and GSE CRTs for cash proceeds of $24.3 billion (September 30, 2019:

$2.4 billion) and realized net losses of $358.9 million (September 30, 2019:

net losses of $6.5 million).

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

Sales prices of our holdings were severely impacted by the lack of liquidity and uncertainty surrounding the economic impact of the COVID-19 pandemic, particularly during the first half of 2020.

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 in March 2020.

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 recorded $9.0 million and $94.1 million of impairment on non-Agency RMBS and non-Agency CMBS during the three and nine months ended September 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.

3 unchanged sentences

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

As of September 30, 2020, $5.6 billion (December 31, 2019:

$17.4 billion) or 94% (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 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.

Our percentage of MBS and GSE CRTs accounted for under the fair value option increased as of September 30, 2020 due to a change in portfolio composition.

During the first half of 2020, we sold MBS and GSE CRTs previously accounted for as available-for-sale securities primarily to generate liquidity and reduce leverage given unprecedented market conditions as a result of the COVID-19 pandemic.

We resumed investing in Agency RMBS in July 2020 and elected the fair value option for these securities.

We recorded net unrealized gains on our MBS and GSE CRT portfolio accounted for under the fair value option of $24.0 million in the three months ended September 30, 2020 and net unrealized losses of $537.4 million in the nine months ended September 30, 2020, compared to net unrealized gains of $201.7 million and $784.3 million in the three and nine months ended September 30, 2019, respectively.

Net unrealized gains in the three months ended September 30, 2020 primarily reflect recoveries in certain credit assets from declines in valuations in the first half of 2020.

Net unrealized losses in the nine months ended September 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 nine months ended September 30, 2020 and unrealized losses of $15,000 and $2.5 million on our commercial loan during the three and nine months ended September 30, 2020, respectively.

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

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Equity in Earnings (Losses) of Unconsolidated Ventures

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:

For the three and nine months ended September 30, 2020, we recorded equity in earnings of unconsolidated ventures of $332,000 and $820,000 (September 30, 2019:

equity in earnings of $403,000 and $1.8 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.

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

Gain (Loss) on Derivative Instruments, net

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements on our floating rate repurchase agreements and secured loans.

To accomplish these objectives, we primarily use interest rate derivative instruments, including interest rate swaps and U.S.

Treasury futures contracts as part of our interest rate risk management strategy.

We also use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our unconsolidated joint venture investment denominated in Euros.

We record all derivatives on our condensed consolidated balance sheets at fair value.

Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.

Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.

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

$ in thousands Three Months Ended September 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

Interest Rate Swaps (4,662) (555) 5,266 49

Currency Forward Contracts (1,643) — 675 (968)

TBAs 1,227 — 2,578 3,805

Total (5,078) (555) 8,519 2,886

$ in thousands Three months ended June 30, 2019

$ in thousands Three Months Ended September 30, 2019

not designated as

5 unchanged sentences

$ in thousands

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

not designated as

2 unchanged sentences

Currency Forward Contracts (1,297) — 519 (778)

TBAs 1,227 — 2,578 3,805

Total (909,436) 11,369 (10,169) (908,236)

$ in thousands

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2019

not designated as

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Total (713,233) 23,749 (33,953) (723,437)

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.

We terminated all of our outstanding interest rate swaps in March 2020 as we repositioned 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 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:

$ in thousands As of December 31, 2019

Derivative instrument Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years)

We realized a net loss of $904.7 million on these interest rate swaps during the first half of 2020 primarily due to falling interest rates.

We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

As of September 30, 2020, we had $5.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 14 days.

We typically refinance each repurchase agreement at market interest rates upon maturity.

We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.

As of September 30, 2020 and December 31, 2019, we held the following interest rate swaps whereby we receive interest at a one-month or three-month LIBOR rate:

$ in thousands As of September 30, 2020 As of December 31, 2019

Derivative instrument Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Notional Amounts Average Fixed Pay Rate Average Receive Rate Average Maturity (Years)

Interest Rate Swaps 4,550,000 0.34 % 0.15 % 6.3 14,000,000 1.47 % 1.79 % 5.2

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.

We also use futures contracts to manage our exposure to changing interest rates.

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

During the nine months ended September 30, 2019, we settled futures contracts with a notional amount of $4.8 billion and realized a net loss of $169.3 million 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.

We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates.

As of September 30, 2020, we had $24.6 million (December 31, 2019:

$23.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.

We use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency MBS.

As of September 30, 2020, we had $900.0 million notional amount of TBAs and recorded $3.8 million of realized and unrealized gains during the three and nine months ended September 30, 2020.

We were not party to any TBAs during the three and nine months ended September 30, 2019.

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 and six months ended June 30, 2020 and 2019.

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

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

Three Months Ended September 30, Nine Months Ended September 30,

$ in thousands 2020 2019 2020 2019

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Total realized and unrealized credit derivative income (loss), net 478 1 (35,312) 5,447

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.

In the three and nine months ended September 30, 2020, we recorded an increase of $477,000 and decrease of $40.8 million, respectively, in realized and unrealized credit derivative income (loss), net compared to the same periods in 2019.

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

We sold all of our GSE CRTs that were accounted for as hybrid financial instruments with embedded derivatives during the nine months ended September 30, 2020.

Net Gain (Loss) on Extinguishment of Debt

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Other Investment Income (Loss), net

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

The amount of our dividend income varied based upon the number of shares that we were required to own and the dividend declared per share.

FHLBI redeemed our stock at cost during 2020.

We terminated our FHLBI membership in the third quarter 2020.

We incurred management fees of $4.1 million and $24.9 million (September 30, 2019:

$8.7 million and $27.6 million) for the three and nine months ended September 30, 2020, respectively.

Management fees decreased for the three and nine months ended September 30, 2020 compared to the same period in 2019 due to a lower management fee base.

Our management fees are calculated quarterly in arrears.

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 $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.

Our general and administrative expenses not covered under our management agreement amounted to $1.8 million and $9.0 million (September 30, 2019:

$1.9 million and $6.1 million) for the three and nine months ended September 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 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.

General and administrative costs were higher for the nine months ended September 30, 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 $2.6 million.

Net Income (Loss) attributable to Common Stockholders

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:

For the three months ended September 30, 2020, our net income attributable to common stockholders was $96.9 million (September 30, 2019:

$77.9 million) or $0.53 basic and diluted net income per average share available to common stockholders (September 30, 2019:

$0.57 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 $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:

The change in net income (loss) attributable to common stockholders was primarily due to (i) a net gain on derivative instruments of $2.9 million in the 2020 period compared to a net loss on derivative instruments of $177.2 million in the 2019 period;

(ii) a net gain on investments of $65.1 million in the 2020 period compared to a net gain on investments of $202.4 million in the 2019 period;

(iii) a $44.2 million decrease in net interest income;

and (iv) a $15.8 million net gain (loss) on extinguishment of debt in the 2020 period.

For the nine months ended September 30, 2020, our net loss attributable to common stockholders was $1.8 billion (September 30, 2019:

$212.8 million net income attributable to common stockholders) or $10.87 basic and diluted net loss per average share available to common stockholders (September 30, 2019:

$1.66 basic and $1.65 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;

The change in net income (loss) attributable to common stockholders was primarily due to (i) a net loss on investments of $996.7 million in the 2020 period compared to a net gain on investments of $773.0 million in the 2019 period;

(ii) a net loss on derivative instruments of $908.2 million in the 2020 period compared to a net loss on derivative instruments of $723.4 million in the 2019 period;

(iii) a credit derivative net loss of $35.3 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."

(iv) a $60.5 million decrease in net interest income;

and (v) a $14.7 million net gain (loss) on extinguishment of debt in the 2020 period.

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, and net gain (loss) on extinguishment of debt see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," "Net Interest Income," and "Net Gain (Loss) on Extinguishment of Debt".

Non-GAAP Financial Measures

We have historically used the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below:

We are presenting the following non-GAAP financial measures because we use these financial measures to analyze our operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below:

• core earnings (and by calculation, core earnings per common share),

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• effective net interest income (and by calculation, effective interest rate margin), and

• repurchase agreement debt-to-equity ratio.

• economic debt-to-equity ratio.

The most directly comparable U.S.

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• debt-to-equit y ratio.

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 did not present core earnings for the three and six months ended June 30, 2020 because core earnings excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

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

We commenced rebuilding our investment portfolio in July 2020 and are resuming reporting core earnings for the three months ended September 30, 2020 because we believe that core earnings provides a useful measure of our current investment portfolio’s earning capacity.

We began investing in TBAs during the three months ended September 30, 2020 and are adjusting our core earnings calculation to include the impact of TBA dollar roll income.

A TBA dollar roll is a series of derivative transactions where TBAs

with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold.

The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month.

TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement.

We include TBA dollar roll income in core earnings because it is the economic equivalent of interest income on the underlying Agency securities, less an implied financing cost, over the forward settlement period.

We are also presenting an economic debt-to-equity ratio as of September 30, 2020, a new non-GAAP financial measure, that considers the impact of TBAs on leverage as discussed further below.

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

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In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.

Core Earnings

We calculate core earnings as U.S.

GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net;

realized (gain) loss on derivative instruments, net;

unrealized (gain) loss on derivative instruments, net;

TBA dollar roll income;

realized and unrealized (gain) loss on GSE CRT embedded derivatives, net;

(gain) loss on foreign currency transactions, net;

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

net (gain) loss on extinguishment of debt;

and cumulative adjustments attributable to non-controlling interest.

We may add and have added additional reconciling items to our core earnings calculation as appropriate.

We believe the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results.

We exclude the impact of gains and losses because gains and losses are not accounted for consistently under U.S.

GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income.

For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our consolidated balance sheets.

We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our consolidated statements of operations.

In addition, certain gains and losses represent one-time events.

We believe that providing transparency into core earnings enables our investors to consistently measure, evaluate and compare our operating performance to that of our peers over multiple reporting periods.

However, we caution that core earnings should not be considered as an alternative to net income (determined in accordance with U.S.

GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S.

GAAP), a measure of our liquidity, or as an indication of amounts available to fund our cash needs, including our ability to make cash distributions.

The table below provides a reconciliation of U.S.

GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:

Three Months Ended September 30,

$ in thousands, except per share data 2020 2019

Net income (loss) attributable to common stockholders 96,859 77,896

(Gain) loss on investments, net (65,106) (202,413)

Realized (gain) loss on derivative instruments, net (1)

5,078 173,607

Unrealized (gain) loss on derivative instruments, net (1)

(8,519) 15,352

TBA dollar roll income (2)

Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (3)

(Gain) loss on foreign currency transactions, net (4)

Amortization of net deferred (gain) loss on de-designated interest rate swaps (5)

(3,243) (5,981)

Net (gain) loss on extinguishment of debt (15,849) —

Subtotal (85,584) (14,226)

Core earnings attributable to common stockholders 11,275 63,670

Basic income (loss) per common share 0.53 0.57

Core earnings per share attributable to common stockholders (6)

GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components:

Three Months Ended September 30,

$ in thousands 2020 2019

Realized gain (loss) on derivative instruments, net (5,078) (173,607)

Unrealized gain (loss) on derivative instruments, net 8,519 (15,352)

Contractual net interest income (expense) on interest rate swaps (555) 11,715

Gain (loss) on derivative instruments, net 2,886 (177,244)

(2) TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement.

TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations.

GAAP realized and unrealized credit derivative income (loss), net on the condensed consolidated statements of operations includes the following components:

Three Months Ended September 30,

$ in thousands 2020 2019

Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net — (5,195)

GSE CRT embedded derivative coupon interest 478 5,196

Realized and unrealized credit derivative income (loss), net 478 1

GAAP other investment income (loss) net on the condensed consolidated statements of operations includes the following components:

Three Months Ended September 30,

$ in thousands 2020 2019

Dividend income 402 1,019

Gain (loss) on foreign currency transactions, net — (14)

Other investment income (loss), net 402 1,005

GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components:

Three Months Ended September 30,

$ in thousands 2020 2019

Interest expense on repurchase agreements borrowings 1,530 118,832

Amortization of net deferred (gain) loss on de-designated interest rate swaps (3,243) (5,981)

Repurchase agreements interest expense (1,713) 112,851

(6) Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

The components of core income for the following periods are:

Three Months Ended September 30,

$ in thousands 2020 2019

Effective net interest income (1)

25,532 83,957

TBA dollar roll income 2,055 —

Dividend income 402 1,019

Equity in earnings (losses) of unconsolidated ventures 332 403

Total expenses (5,939) (10,602)

Total core earnings 22,382 74,777

Dividends to preferred stockholders (11,107) (11,107)

Core earnings attributable to common stockholders 11,275 63,670

(1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.

Core earnings decreased $52.4 million in the three months ended September 30, 2020 compared to the same period in 2019 primarily due to a $58.4 million decrease in effective net interest income in the first quarter of 2020.

See below for a discussion of the decrease in effective net interest income in the three months ended September 30, 2020 compared to the same period in 2019.

Effective Interest Income / Effective Yield / Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin

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We add back GSE CRT embedded derivative coupon interest to our total interest income because we consider GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

We did not hold any GSE CRTs accounted for as hybrid financial instruments as of September 30, 2020.

We calculate effective interest expense (and by calculation, effective cost of funds) as 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.

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, net;

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.

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 June 30,

Three Months Ended September 30,

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

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Effective interest income 27,914 2.67 % 201,487 3.84 %

31,300 6.57 % 207,521 3.99 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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

6,323 0.11 % 15,846 0.11 %

Effective interest income 250,631 4.20 % 601,432 3.95 %

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.

Our effective interest income decreased $173.6 million and $350.8 million in the three and nine months ended September 30, 2020, respectively, versus the same period in 2019 primarily due to lower average earning assets.

Our average earning assets decreased to $4.2 billion and $8.0 billion from $21.0 billion and $20.3 billion for three and nine months ended September 30, 2020, respectively, primarily because we sold a substantial portion of our MBS and GSE CRT portfolio during the first half of 2020 due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed.

Changes in our yields and effective yields in the three and nine months ended September 30, 2020 versus the same period in 2019 are primarily due to changes in our portfolio composition as discussed in Investment Activities above.

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 June 30,

Three Months Ended September 30,

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

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Effective interest expense 2,382 0.29 % 117,530 2.43 %

4,945 2.01 % 127,627 2.70 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

5 unchanged sentences

Effective interest expense 91,158 1.75 % 359,518 2.60 %

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.

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

We recorded negative interest expense of $1.4 million and interest expense of $84.7 million during the three and nine months ended September 30, 2020, respectively, compared to interest expense of $123.3 million and $365.5 million for the same periods in 2019 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.

Six Months Ended June 30,

Three Months Ended September 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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25,532 2.38 % 83,957 1.41 %

Six Months Ended June 30,

Nine Months Ended September 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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Effective net interest income 159,473 2.45 % 241,914 1.35 %

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.

Effective net interest income decreased during the three and nine months ended September 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.

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of September 30, 2020 and December 31, 2019.

Our debt-to-equity ratio is calculated in accordance with U.S.

GAAP and is the ratio of total debt to total stockholders' equity.

As of September 30, 2020, approximately 60% of our equity is allocated to Agency RMBS.

We intend to increase our equity allocation to Agency RMBS in the fourth quarter of 2020.

We are also presenting an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our new investments in TBAs.

We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency MBS in the TBA market carries similar risks to Agency MBS purchased in the cash market and funded with on-balance sheet liabilities.

Similarly, a contract for the forward sale of Agency MBS has substantially the same effect as selling the underlying Agency MBS and reducing our on-balance sheet funding commitments.

We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S.

GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

September 30, 2020

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed and credit risk transfer securities 5,536,104 445,353 5,981,457

Cash and cash equivalents (2)

258,905 — 258,905

Restricted cash (3)

166,193 — 166,193

Derivative assets, at fair value (3)

8,234 168 8,402

Other assets 16,834 44,204 61,038

Total assets 5,986,270 489,725 6,475,995

Repurchase agreements 5,243,288 — 5,243,288

Derivative liabilities, at fair value (3)

Other liabilities 10,824 10,352 21,176

Total liabilities 5,254,503 10,352 5,264,855

Total stockholders' equity (allocated) 731,767 479,373 1,211,140

Debt-to-equity ratio (4)

Economic debt-to-equity ratio (5)

(1) Investments in non-Agency CMBS, non-Agency RMBS, GSE CRT, commercial loans and unconsolidated joint ventures are included in credit portfolio.

(2) Cash and cash equivalents are allocated based on our financing strategy for each asset class.

(3) Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($932.3 million as of September 30, 2020 ) to total stockholders' equity.

December 31, 2019

$ in thousands Agency RMBS Agency CMBS Credit Portfolio (1)

Mortgage-backed and credit risk transfer securities 11,301,037 4,767,930 5,702,819 21,771,786

Cash and cash equivalents (2)

73,927 27,881 70,699 172,507

Restricted cash 81,830 34,441 724 116,995

Derivative assets, at fair value (3)

13,034 5,499 — 18,533

Other assets 94,525 12,460 159,739 266,724

Total assets 11,564,353 4,848,211 5,933,981 22,346,545

Repurchase agreements 9,666,964 4,246,359 3,618,980 17,532,303

Secured loans (4)

540,299 — 1,109,701 1,650,000

Derivative liabilities, at fair value (3)

Other liabilities 65,353 124,305 42,333 231,991

Total liabilities 10,272,616 4,370,664 4,771,366 19,414,646

Total stockholders' equity (allocated) 1,291,737 477,547 1,162,615 2,931,899

Debt-to-equity ratio (5)

7.9 8.9 4.1 6.5

Economic debt-to-equity ratio (6)

7.9 8.9 4.1 6.5

(1) Investments in non-Agency RMBS, non-Agency CMBS, GSE CRT, commercial loans, unconsolidated joint ventures and loan participation interest are included in credit portfolio.

(2) Cash and cash equivalents are allocated based on a percentage of stockholders' equity for each asset class.

(3) Restricted cash, derivative assets and derivative liabilities are allocated based on the hedging strategy for each class.

(4) Secured loans are allocated based on amount of collateral pledged.

(5) Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total stockholders' equity.

(6) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements, secured loans and TBAs at implied cost basis to total stockholders' equity.

Liquidity and Capital Resources

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Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.

The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets have negatively affected and are expected to continue to negatively affect our liquidity.

Under the terms of our repurchase agreements and secured loans, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion.

The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets negatively affected our liquidity during the nine months ended September 30, 2020.

Under the terms of our repurchase agreements, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion.

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 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.

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

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

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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 $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 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:

We held cash, cash equivalents and restricted cash of $425.1 million at September 30, 2020 (September 30, 2019:

$206.0 million).

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:

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

Our operating activities provided net cash of $143.7 million for the nine months ended September 30, 2020 (September 30, 2019:

$217.9 million).

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:

Our investing activities provided net cash of $13.7 billion in the nine months ended September 30, 2020 compared to net cash used by investing activities of $4.9 billion in the nine months ended September 30, 2019.

Our primary source of cash from investing activities for the nine months ended September 30, 2020 was proceeds from sales of MBS and GSE CRTs of $24.3 billion (September 30, 2019:

$2.4 billion).

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

We also generated $730.3 million from principal payments of MBS and GSE CRTs during the nine months ended September 30, 2020 (September 30, 2019:

$1.4 billion).

We invested $10.5 billion in MBS and GSE CRTs during the nine months ended September 30, 2020 (September 30, 2019:

$8.0 billion).

We used cash of $909.4 million to terminate derivative contracts in the nine months ended September 30, 2020 (September 30, 2019:

$713.2 million) as we sold our Agency securities and our sensitivity to interest rates decreased.

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:

Our financing activities used net cash of $13.7 billion for the nine months ended September 30, 2020 primarily because we reduced repurchase agreement borrowings with proceeds from asset sales (September 30, 2019:

net cash provided by financing activities of $4.8 billion).

During the nine months ended September 30, 2020, we repaid net repurchase agreement borrowings of $12.3 billion (September 30, 2019:

net proceeds provided $4.5 billion).

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:

In addition, we repaid $1.65 billion of secured loans from the FHLBI during the nine months ended September 30, 2020.

We also used cash of $117.3 million for the nine months ended September 30, 2020 (September 30, 2019:

$195.9 million) to pay dividends.

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

Proceeds from issuance of common stock provided $347.2 million for the nine months ended September 30, 2020 (September 30, 2019:

$486.5 million).

As of September 30, 2020, the average margin requirement (weighted by borrowing amount), or the percentage amount by which the collateral value must exceed the loan amount (also refer to as the "haircut") under our repurchase agreements was 5.0% for Agency RMBS.

Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements.

An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately.

Forward-Looking Statements Regarding Liquidity

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 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.

As of September 30, 2020, we hold $5.5 billion of Agency securities that are financed by repurchase agreements.

We also have approximately $514.0 million of unencumbered investments and unrestricted cash of $258.9 million as of September 30, 2020.

Based upon our current portfolio and existing borrowing arrangements, 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.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing.

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

As of September 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

Secured loans 740,000 740,000 — — —

Interest expense on secured loans (1)

2,141 2,141 — — —

Obligations of Invesco Mortgage Capital Inc.

Repurchase agreements 5,243,288 5,243,288 — — —

Interest expense on repurchase agreements 1,034 1,034 — — —

5,244,322 5,244,322 — — —

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

(1) 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.

Off-Balance Sheet Arrangements

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

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

We are committed to invest $6.7 million in these unconsolidated joint ventures to fund future investments and cover future expenses should they occur.

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For additional information regarding the characteristics of our dividends, refer to Note 12 – “Stockholders' Equity” of our annual report on Form 10-K for the year ended December 31, 2019.

Virtually all of our assets and liabilities are sensitive to interest rates.

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

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

Unrelated Business Taxable Income

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 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 in order 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 September 30, 2020, one counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $60.6 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to repurchase agreement counterparties by geographic concentration as of September 30, 2020.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 9 3,788,283 198,129

Europe (excluding United Kingdom) 1 168,585 9,135

Asia 3 1,286,420 67,399

Total 13 5,243,288 274,663

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 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.

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 September 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.

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IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).

(“percentage tests”).

The SEC staff has issued a “no-action” letter in which it confirmed that it would not recommend enforcement action if an issuer continues to rely on the exclusion provided by Section 3(c)(5)(C) of the 1940 Act if the issuer does not meet the percentage tests if:

(1) the inability to meet those tests is the result of the sale of an underlying asset;

(2) proceeds from the sale are invested in government securities, certificates of deposit, or other securities appropriate for the purpose of preserving value pending the investment of the proceeds in assets that meet the percentage tests;

and (3) the issuer intends to purchase assets that meet the percentage tests as soon as possible but generally within one year.

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

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.

We calculate that as of September 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