Invesco Mortgage Capital Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of $ in thousands, except share amounts March 31, 2021 December 31, 2020 ASSETS Mortgage-backed securities, at fair value (including pledged securities of $ 8,641,007 and $ 7,614,935 , respectively; net of allowance for credit losses of $ 830 and $ 1,768 , respectively) 9,099,742 8,172,182 Cash and cash equivalents 198,357 148,011 Restricted cash 380,678 244,573 Due from counterparties 11,440 1,078 Investment related receivable 18,536 15,840 Derivative assets, at fair value 17,193 10,004 Other assets 36,890 41,163 Total assets 9,762,836 8,632,851 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 8,240,887 7,228,699 Derivative liabilities, at fair value 4,273 6,344 Dividends payable 24,888 18,970 Investment related payable 1,454 274 Accrued interest payable 547 823 Collateral held payable 1,337 3,546 Accounts payable and accrued expenses 1,967 1,448 Due to affiliate 5,551 5,589 Total liabilities 8,280,904 7,265,693 Commitments and contingencies (See Note 14): Stockholders' equity: Preferred Stock, par value $ 0.01 per share; 50,000,000 shares authorized: 7.75 % Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($ 140,000 aggregate liquidation preference) 135,356 135,356 7.75 % Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($ 155,000 aggregate liquidation preference) 149,860 149,860 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($ 287,500 aggregate liquidation preference) 278,108 278,108 Common Stock, par value $ 0.01 per share; 450,000,000 shares authorized; 246,397,710 and 203,222,108 shares issued and outstanding, respectively 2,464 2,032 Additional paid in capital 3,548,230 3,387,552 Accumulated other comprehensive income 54,827 58,605 Retained earnings (distributions in excess of earnings) ( 2,686,913 ) ( 2,644,355 ) Total stockholders’ equity 1,481,932 1,367,158 Total liabilities and stockholders' equity 9,762,836 8,632,851 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, $ in thousands, except share amounts 2021 2020 Interest income Mortgage-backed and credit risk transfer securities 39,434 185,536 Commercial and other loans 576 1,163 Total interest income 40,010 186,699 Interest expense Repurchase agreements (1) ( 1,660 ) 79,042 Secured loans — 6,646 Total interest expense ( 1,660 ) 85,688 Net interest income 41,670 101,011 Other income (loss) Gain (loss) on investments, net ( 331,857 ) ( 755,483 ) (Increase) decrease in provision for credit losses 938 — Equity in earnings (losses) of unconsolidated ventures ( 94 ) 170 Gain (loss) on derivative instruments, net 286,961 ( 910,779 ) Realized and unrealized credit derivative income (loss), net — ( 33,052 ) Net gain (loss) on extinguishment of debt — ( 4,806 ) Other investment income (loss), net ( 16 ) 803 Total other income (loss) ( 44,068 ) ( 1,703,147 ) Expenses Management fee – related party 4,884 10,953 General and administrative 1,993 3,103 Total expenses 6,877 14,056 Net income (loss) attributable to Invesco Mortgage Capital, Inc. ( 9,275 ) ( 1,616,192 ) Dividends to preferred stockholders 11,107 11,107 Net income (loss) attributable to common stockholders ( 20,382 ) ( 1,627,299 ) Net income (loss) per share: Net income (loss) attributable to common stockholders Basic ( 0.09 ) ( 10.38 ) Diluted ( 0.09 ) ( 10.38 ) (1) Negative interest expense on repurchase agreements for the three months ended March 31, 2021 consists of $ 3.7 million of current period interest expense on repurchase agreements and $ 5.4 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". The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended March 31, $ in thousands 2021 2020 Net income (loss) ( 9,275 ) ( 1,616,192 ) Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net 981 ( 186,605 ) Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 36,957 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 5,368 ) ( 10,067 ) Currency translation adjustments on investment in unconsolidated venture 609 480 Total other comprehensive loss ( 3,778 ) ( 159,235 ) Comprehensive income (loss) ( 13,053 ) ( 1,775,427 ) Less: Dividends to preferred stockholders ( 11,107 ) ( 11,107 ) Comprehensive income (loss) attributable to common stockholders ( 24,160 ) ( 1,786,534 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2021 and 2020 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 203,222,108 2,032 3,387,552 58,605 ( 2,644,355 ) 1,367,158 Net income (loss) — — — — — — — — — — ( 9,275 ) ( 9,275 ) Other comprehensive loss — — — — — — — — — ( 3,778 ) — ( 3,778 ) Proceeds from issuance of common stock, net of offering costs — — — — — — 43,150,000 432 160,549 — — 160,981 Stock awards — — — — — — 25,602 — — — — — Common stock dividends — — — — — — — — — — ( 22,176 ) ( 22,176 ) Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 ) Amortization of equity-based compensation — — — — — — — — 129 — — 129 Balance at March 31, 2021 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 246,397,710 2,464 3,548,230 54,827 ( 2,686,913 ) 1,481,932 Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2019 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 144,256,357 1,443 2,892,652 288,963 ( 814,483 ) 2,931,899 Cumulative effect of adoption of new accounting principle — — — — — — — — — — 342 342 Net income (loss) — — — — — — — — — — ( 1,616,192 ) ( 1,616,192 ) Other comprehensive loss — — — — — — — — — ( 159,235 ) — ( 159,235 ) Proceeds from issuance of common stock, net of offering costs — — — — — — 20,700,000 207 346,819 — — 347,026 Stock awards — — — — — — 10,000 — — — — — Common stock dividends — — — — — — — — — — ( 82,483 ) ( 82,483 ) Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 ) Amortization of equity-based compensation — — — — — — — — 131 — — 131 Balance at March 31, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 164,966,357 1,650 3,239,602 129,728 ( 2,523,923 ) 1,410,381 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, $ in thousands 2021 2020 Cash Flows from Operating Activities Net income (loss) ( 9,275 ) ( 1,616,192 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net 11,625 10,658 Realized and unrealized (gain) loss on derivative instruments, net ( 291,510 ) 922,703 Realized and unrealized (gain) loss on credit derivatives, net — 37,770 (Gain) loss on investments, net 331,857 755,483 Decrease in provision for credit losses ( 938 ) — (Gain) loss from investments in unconsolidated ventures in excess of distributions received 18 222 Other amortization ( 5,239 ) ( 9,936 ) Net loss on extinguishment of debt — 4,806 Changes in operating assets and liabilities: (Increase) decrease in operating assets ( 1,990 ) 37,955 Decrease in operating liabilities ( 43 ) ( 33,431 ) Net cash provided by operating activities 34,505 110,038 Cash Flows from Investing Activities Purchase of mortgage-backed and credit risk transfer securities ( 7,012,452 ) ( 4,444,744 ) Distributions from investments in unconsolidated ventures, net 1,233 1,168 Change in other assets — 19,269 Principal payments from mortgage-backed and credit risk transfer securities 200,590 636,498 Proceeds from sale of mortgage-backed and credit risk transfer securities 5,545,566 16,238,252 Proceeds from sale of credit derivatives — 2,283 Settlement (termination) of forwards, swaps, swaptions and TBAs, net 282,250 ( 904,220 ) Net change in due from counterparties and collateral held payable on derivative instruments ( 3,438 ) 4,849 Principal payments from commercial loans held-for-investment — 136 Net cash provided by (used in) investing activities ( 986,251 ) 11,553,491 Cash Flows from Financing Activities Proceeds from issuance of common stock 161,413 347,299 Principal repayments of secured loans — ( 300,000 ) Proceeds from repurchase agreements 28,514,983 44,017,958 Principal repayments of repurchase agreements and related fees ( 27,502,795 ) ( 55,266,696 ) Net change in due from counterparties and collateral held payable on repurchase agreements ( 7,953 ) ( 311,732 ) Payments of deferred offering costs ( 86 ) ( 40 ) Payments of dividends ( 27,365 ) ( 74,841 ) Net cash provided by (used in) financing activities 1,138,197 ( 11,588,052 ) Net change in cash, cash equivalents and restricted cash 186,451 75,477 Cash, cash equivalents and restricted cash, beginning of period 392,584 289,502 Cash, cash equivalents and restricted cash, end of period 579,035 364,979 Supplement Disclosure of Cash Flow Information Interest paid 3,985 131,074 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities 981 ( 149,648 ) Dividends declared not paid 24,888 93,590 Increase in Agency CMBS purchase commitments — 410,654 Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments ( 271 ) ( 760,217 ) Offering costs not paid ( 334 ) ( 273 ) Net change in repurchase agreements, not settled — ( 625 ) Change in foreign currency translation adjustment on other investments ( 609 ) ( 480 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Organization and Business Operations Invesco Mortgage Capital Inc. (the "Company" or "we") is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS") and other mortgage-related assets. We currently invest in: • Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae"), or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS"); • Commercial mortgage-backed securities ("CMBS") that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS"); • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS"); • Commercial mortgage loans; and • Other real estate-related financing agreements. We have also historically invested in: • CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively "Agency CMBS"); • Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); and • Residential mortgage loans. We conduct our business through IAS Operating Partnership L.P. (the "Operating Partnership") and have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm. We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code o f 1986. To maintain our REIT qualification, we are generally required to distribute at least 90 % of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the "Investment Company" definition under the Investment Company Act of 1940, as amended (the "1940 Act"). Note 2 – Summary of Significant Accounting Policies Basis of Presentation and Consolidation Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020. Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and consolidate the financial statements of the Company and our controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed and credit risk transfer securities and allowances for credit losses. Actual results may differ from those estimates. 6 Table of Contents Significant Accounting Policies There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2020. Accounting Pronouncements Recently Issued In January 2021, the Financial Accounting Standards Board expanded existing accounting guidance for evaluating the effects of reference rate reform on financial reporting. The new guidance expands the temporary optional expedients and exceptions to U.S. GAAP for contract modifications, hedge accounting and other relationships that reference London Interbank Overnight Financing Rate ("LIBOR") to apply to all derivative instruments affected by the market-wide change in the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition). The guidance can be applied as of January 1, 2020. We will evaluate our contracts that are eligible for modification relief and may apply the elections prospectively as needed. We are currently evaluating what impact the guidance will have on our consolidated financial statements. Note 3 – Variable Interest Entities ("VIEs") Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, 2021 is presented in the table below. $ in thousands Carrying Amount Company's Maximum Risk of Loss Non-Agency CMBS 91,250 91,250 Non-Agency RMBS 10,574 10,574 Investments in unconsolidated ventures 15,766 15,766 Total 117,590 117,590 Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 5 - "Other Assets" for additional details regarding these investments. 7 Table of Contents Note 4 – Mortgage-Backed and Credit Risk Transfer Securities During the first half of 2020, 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 to generate liquidity and reduce leverage. We resumed investing in Agency RMBS in July 2020. The following tables summarize our MBS portfolio by asset type as of March 31, 2021 and December 31, 2020. March 31, 2021 $ in thousands Principal/ Notional Balance Unamortized Premium (Discount) Amortized Cost Allowance for Credit Losses Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 30 year fixed-rate 8,832,549 352,768 9,185,317 — ( 187,399 ) 8,997,918 1.88 % Total Agency RMBS pass-through 8,832,549 352,768 9,185,317 — ( 187,399 ) 8,997,918 1.88 % Agency-CMO (2) 18,536 ( 18,536 ) — — — — — % Non-Agency CMBS 91,427 ( 4,914 ) 86,513 ( 830 ) 5,567 91,250 8.60 % Non-Agency RMBS (3)(4)(5) 637,509 ( 627,312 ) 10,197 — 377 10,574 6.21 % Total 9,580,021 ( 297,994 ) 9,282,027 ( 830 ) ( 181,455 ) 9,099,742 1.95 % (1) Period-end weighted average yield is based on amortized cost as of March 31, 2021 and incorporates future prepayment and loss assumptions. (2) Agency collateralized mortgage obligation ("Agency-CMO") are interest-only securities ("Agency IO"). (3) Non-Agency RMBS is 65.3 % fixed rate, 33.7 % variable rate, and 1.0 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying Hybrid adjustable-rate mortgage ("ARM") loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable (calculated using the principal/notional balance) based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 98.5 % of principal/notional balance, 48.3 % of amortized cost and 37.7 % of fair value. 8 Table of Contents December 31, 2020 $ in thousands Principal/Notional Balance Unamortized Premium (Discount) Amortized Cost Allowance for Credit Losses Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 30 year fixed-rate 7,635,107 391,644 8,026,751 — 24,115 8,050,866 1.86 % Total Agency RMBS pass-through 7,635,107 391,644 8,026,751 — 24,115 8,050,866 1.86 % Agency-CMO (2) 19,634 ( 19,634 ) — — — — — % Non-Agency CMBS 112,549 ( 5,791 ) 106,758 ( 1,768 ) 4,593 109,583 9.40 % Non-Agency RMBS (3)(4)(5) 790,627 ( 779,660 ) 10,967 — 766 11,733 7.83 % Total 8,557,917 ( 413,441 ) 8,144,476 ( 1,768 ) 29,474 8,172,182 1.97 % (1) Period-end weighted average yield is based on amortized cost as of December 31, 2020 and incorporates future prepayment and loss assumptions. (2) All Agency-CMO are Agency IO. (3) Non-Agency RMBS is 67.3 % fixed rate, 31.8 % variable rate and 0.9 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable calculated using the principal/notional balance based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes non-Agency IO which represent 98.8 % of principal/notional balance, 49.3 % of amortized cost and 41.5 % of fair value. The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of March 31, 2021 and December 31, 2020. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, 2016. As of March 31, 2021 and December 31, 2020, approximately 99 % of our MBS are accounted for under the fair value option. March 31, 2021 December 31, 2020 $ in thousands Available-for-sale Securities Securities under Fair Value Option Total Fair Value Available-for-sale Securities Securities under Fair Value Option Total Fair Value Agency RMBS: 30 year fixed-rate — 8,997,918 8,997,918 — 8,050,866 8,050,866 Total RMBS Agency pass-through — 8,997,918 8,997,918 — 8,050,866 8,050,866 Non-Agency CMBS 91,250 — 91,250 109,583 — 109,583 Non-Agency RMBS 6,943 3,631 10,574 7,267 4,466 11,733 Total 98,193 9,001,549 9,099,742 116,850 8,055,332 8,172,182 The components of the carrying value of our MBS portfolio at March 31, 2021 and December 31, 2020 are presented below. Accrued interest receivable on our MBS portfolio, which is recorded within investment related receivable on our condensed consolidated balance sheets, was $ 17.5 million at March 31, 2021 (December 31, 2020: $ 15.4 million). March 31, 2021 $ in thousands MBS Interest-Only Securities Total Principal/notional balance 8,933,501 646,520 9,580,021 Unamortized premium 354,451 — 354,451 Unamortized discount ( 10,852 ) ( 641,593 ) ( 652,445 ) Allowance for credit losses ( 830 ) — ( 830 ) Gross unrealized gains (1) 8,297 102 8,399 Gross unrealized losses (1) ( 188,816 ) ( 1,038 ) ( 189,854 ) Fair value 9,095,751 3,991 9,099,742 9 Table of Contents December 31, 2020 $ in thousands MBS Interest-Only Securities Total Principal/notional balance 7,757,491 800,426 8,557,917 Unamortized premium 391,644 — 391,644 Unamortized discount ( 10,067 ) ( 795,018 ) ( 805,085 ) Allowance for credit losses ( 1,768 ) — ( 1,768 ) Gross unrealized gains (1) 34,539 103 34,642 Gross unrealized losses (1) ( 4,527 ) ( 641 ) ( 5,168 ) Fair value 8,167,312 4,870 8,172,182 (1) Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for as derivatives or under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. Realization occurs upon sale or settlement of such securities. Further detail on the components of our total gains (losses) on investments, net for the three months ended March 31, 2021 and 2020 is provided below in this Note 4. The following table summarizes our MBS portfolio according to estimated weighted average life classifications as of March 31, 2021 and December 31, 2020 . $ in thousands March 31, 2021 December 31, 2020 Less than one year 29,223 22,112 Greater than one year and less than five years 149,120 5,303,917 Greater than or equal to five years 8,921,399 2,846,153 Total 9,099,742 8,172,182 The following tables present the estimated fair value and gross unrealized losses of our MBS by length of time that such securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020. March 31, 2021 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 30 year fixed-rate 8,592,854 ( 188,816 ) 93 — — — 8,592,854 ( 188,816 ) 93 Total Agency RMBS pass-through (1) 8,592,854 ( 188,816 ) 93 — — — 8,592,854 ( 188,816 ) 93 Non-Agency RMBS (2) 3,487 ( 1,014 ) 10 17 ( 24 ) 4 3,504 ( 1,038 ) 14 Total 8,596,341 ( 189,830 ) 103 17 ( 24 ) 4 8,596,358 ( 189,854 ) 107 (1) Fair value option has been elected for all Agency RMBS in an unrealized loss position. (2) Fair value option has been elected for all non-Agency RMBS in an unrealized loss position. 10 Table of Contents December 31, 2020 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 30 year fixed-rate 1,496,279 ( 4,108 ) 20 — — — 1,496,279 ( 4,108 ) 20 Total Agency RMBS pass-through (1) 1,496,279 ( 4,108 ) 20 — — — 1,496,279 ( 4,108 ) 20 Non-Agency CMBS (2) 27,069 ( 419 ) 1 — — — 27,069 ( 419 ) 1 Non-Agency RMBS (3) 2,681 ( 438 ) 6 1,612 ( 203 ) 7 4,293 ( 641 ) 13 Total 1,526,029 ( 4,965 ) 27 1,612 ( 203 ) 7 1,527,641 ( 5,168 ) 34 (1) Fair value option has been elected for all Agency RMBS in an unrealized loss position. (2) Unrealized losses on non-Agency CMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to current amortized cost basis. (3) Fair value option has been elected for all non-Agency RMBS in an unrealized loss position. As of March 31, 2021 and December 31, 2020, we have recorded an allowance for credit losses of $ 830,000 and $ 1.8 million, respectively, on a single non-Agency CMBS on our condensed consolidated balance sheets. We recorded a $ 938,000 decrease in the provision for credit losses on our consolidated statement of operations during the three months ended March 31, 2021. We did not record any provisions for credit losses during the three months ended March 31, 2020. During the three months ended March 31, 2020, we recorded impairments of $ 78.8 million on our condensed consolidated statement of operations because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis. The following table presents a roll-forward of our allowance for credit losses. Three Months Ended March 31, $ in thousands 2021 Beginning allowance for credit losses ( 1,768 ) Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period 938 Ending allowance for credit losses ( 830 ) The following table summarizes the components of our total gain (loss) on investments, net for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, $ in thousands 2021 2020 Gross realized gains on sale of investments 201 328,128 Gross realized losses on sale of investments ( 117,048 ) ( 332,413 ) Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments — ( 78,834 ) Net unrealized gains and losses on MBS and GSE CRT accounted for under the fair value option ( 211,912 ) ( 666,872 ) Net unrealized gains and losses on commercial loan and loan participation interest ( 3,098 ) ( 5,492 ) Total gain (loss) on investments, net ( 331,857 ) ( 755,483 ) The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2021 and 2020. GSE CRT interest income excludes coupon interest associated with embedded derivatives of $ 4.7 million for the three months ended March 31, 2020 that was recorded as realized and unrealized credit derivative income (loss), net. 11 Table of Contents For the three months ended March 31, 2021 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 49,555 ( 12,484 ) 37,071 Non-Agency CMBS 1,305 878 2,183 Non-Agency RMBS 624 ( 450 ) 174 Other 6 — 6 Total 51,490 ( 12,056 ) 39,434 For the three months ended March 31, 2020 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 105,878 ( 20,913 ) 84,965 Agency CMBS 33,995 ( 1,666 ) 32,329 Non-Agency CMBS 42,218 5,058 47,276 Non-Agency RMBS 10,760 2,698 13,458 GSE CRT 8,507 ( 1,750 ) 6,757 Other 751 — 751 Total 202,109 ( 16,573 ) 185,536 Note 5 – Other Assets The following table summarizes our other assets as of March 31, 2021 and December 31, 2020: $ in thousands March 31, 2021 December 31, 2020 Commercial loan, held-for-investment 20,000 23,098 Investments in unconsolidated ventures 15,766 16,408 Prepaid expenses and other assets 1,124 1,657 Total 36,890 41,163 In March 2021, we agreed to extend the contractual maturity of our commercial loan investment from February 2021 to February 2022 at the request of the borrower. The borrower continues to make current interest payments on the loan and posted additional cash reserves in connection with the loan modification. The loan had a principal balance of $ 23.9 million as of March 31, 2021 and December 31, 2020 and a weighted average coupon rate of 8.62 % as of March 31, 2021 and 8.65 % as of December 31, 2020. We account for this investment using the fair value option. We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures. 12 Table of Contents Note 6 – Borrowings We have historically financed the majority of our investment portfolio through repurchase agreements and secured loans. We fully repaid our secured loans during the year ended December 31, 2020. The following tables summarize certain characteristics of our borrowings at March 31, 2021 and December 31, 2020. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements. $ in thousands March 31, 2021 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 8,240,887 0.15 % 18 Total Borrowings 8,240,887 0.15 % 18 $ in thousands December 31, 2020 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 7,228,699 0.21 % 14 Total Borrowings 7,228,699 0.21 % 14 Repurchase Agreements In the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic. We received an unusually high number of margin calls from our repurchase agreement counterparties during March 2020 following significant spread widening in both Agency and non-Agency securities. As a result, we were unable to meet margin calls and were not in compliance with all of the financial covenants of our repurchase agreements as of March 31, 2020. While certain of our repurchase agreement counterparties permitted our repurchase agreements to remain outstanding while we were not in compliance, other counterparties seized and sold securities that we had posted as collateral for our repurchase agreements. As of May 7, 2020, we repaid all of our repurchase agreements that may have been in default. Gains and losses associated with the termination of these repurchase agreements during the three months ended March 31, 2020 are reported as net gain (loss) on extinguishment of debt in our condensed consolidated statement of operations. We resumed financing the purchase of Agency RMBS with repurchase agreements in July 2020. These repurchase agreements generally bear interest at a contractually agreed upon rate and have maturities of approximately one to three months. Repurchase agreements are accounted for as secured borrowings since we maintain effective control of the financed assets. The repurchase agreements are subject to certain financial covenants. We were in compliance with all of these covenants as of March 31, 2021. Secured Loans During the year ended December 31, 2020, IAS Services LLC, our former wholly-owned captive insurance subsidiary, fully repaid its outstanding secured loans from the Federal Home Loan Bank of Indianapolis ("FHLBI"). 13 Table of Contents Note 7 - Collateral Positions The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, interest rate swaps, currency forward contracts and to-be-announced securities forward contracts ("TBAs") as of March 31, 2021 and December 31, 2020. Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020 for a description of how we determine fair value. Agency RMBS collateral pledged is included in mortgage-backed securities on our condensed consolidated balance sheets. Cash collateral pledged on centrally cleared interest rate swaps and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is classified as due from counterparties on our condensed consolidated balance sheets. Cash collateral held that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of March 31, 2021 and December 31, 2020, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets. $ in thousands As of Collateral Pledged March 31, 2021 December 31, 2020 Repurchase Agreements: Agency RMBS 8,641,007 7,614,935 Cash 6,736 700 Total repurchase agreements collateral pledged 8,647,743 7,615,635 Interest Rate Swaps, Currency Forward Contracts and TBAs: Cash 4,704 378 Restricted cash 380,678 244,573 Total interest rate swaps, currency forward contracts and TBAs collateral pledged 385,382 244,951 Total collateral pledged: Agency RMBS 8,641,007 7,614,935 Cash 11,440 1,078 Restricted cash 380,678 244,573 Total collateral pledged 9,033,125 7,860,586 As of Collateral Held March 31, 2021 December 31, 2020 Repurchase Agreements: Cash — 1,916 Non-cash collateral — 4,226 Total repurchase agreements collateral held — 6,142 Interest Rate Swaps, Currency Forward Contracts and TBAs: Cash 1,337 1,630 Total interest rate swaps, currency forward contracts and TBAs collateral held 1,337 1,630 Total collateral held: Cash 1,337 3,546 Non-cash collateral — 4,226 Total collateral held 1,337 7,772 14 Table of Contents Repurchase Agreements Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value. We would be required to provide additional collateral to fund margin calls if the value of pledged assets declined. We intend to maintain a level of liquidity that will enable us to meet margin calls. Our repurchase agreement collateral pledged ratio (MBS pledged as collateral/amount outstanding) was 105 % as of March 31, 2021 (December 31, 2020: 105 %). Interest Rate Swaps As of March 31, 2021 and December 31, 2020, all of our interest rate swaps were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange ("CME") and LCH Limited ("LCH") through a Futures Commission Merchant ("FCM"). We are required to pledge initial margin and daily variation margin for our centrally cleared interest rate swaps that is based on the fair value of our contracts as determined by our FCM. Collateral pledged with our FCM is segregated in our books and records and can be in the form of cash or securities. Daily variation margin for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Our FCM agreements include cross default provisions. TBAs and Currency Forward Contracts Our TBAs and currency forward contracts provide for bilateral collateral pledging based on market value as determined by our counterparties. Collateral pledged with our TBA and currency forward counterparties is segregated in our books and records and can be in the form of cash or securities. Our counterparties have the right to repledge the collateral posted and have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the contracts changes. Note 8 – Derivatives and Hedging Activities The following table summarizes changes in the notional amount of our derivative instruments during 2021: $ in thousands Notional Amount as of December 31, 2020 Additions Settlement, Termination, Expiration or Exercise Notional Amount as of March 31, 2021 Interest Rate Swaps (1) 6,300,000 500,000 ( 500,000 ) 6,300,000 Interest Rate Swaptions — 1,000,000 ( 1,000,000 ) — Currency Forward Contracts 33,084 16,850 ( 33,084 ) 16,850 TBA Purchase Contracts 1,700,000 7,350,000 ( 7,050,000 ) 2,000,000 TBA Sale Contracts — ( 7,550,000 ) 7,050,000 ( 500,000 ) Total 8,033,084 1,316,850 ( 1,533,084 ) 7,816,850 (1) Notional amount as of March 31, 2021 excludes $ 1.3 billion of interest rate swaps with forward start dates. Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our derivative counterparties. Interest Rate Swaps Our repurchase agreements are usually settled on a short-term basis ranging from one to six months . At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Under the terms of our interest rate swap contracts, we make fixed-rate payments to a counterparty in exchange for the receipt of variable-rate amounts over the life of the agreements without exchange of the underlying notional amount. Amounts recorded in accumulated other comprehensive income ("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 reclassified $ 5.4 million as a decrease (March 31, 2020: $ 10.1 million as a decrease) to interest expense for the three months ended March 31, 2021. We increased the amount of gains and losses 15 Table of Contents reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $ 4.2 million because it was probable that the original forecasted repurchase agreement transactions would not occur by the end of the originally specified time period . During the next 12 months, we estimate that $ 21.8 million will be reclas sified as a decrease to interest expense, repurchase agreements. As of March 31, 2021, $ 46.7 million (December 31, 2020: $ 52.1 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and will be reclassified as a decrease to interest expense, repurchase agreements over a period of time through December 15, 2023. As of March 31, 2021 and December 31, 2020, we had interest rate swaps with the following maturities outstand ing, excluding interest rate swaps with forward start dates: $ in thousands As of March 31, 2021 Maturities Notional Amount (1) Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity 3 to 5 years 2,250,000 0.20 % 0.11 % 3.9 5 to 7 years 1,775,000 0.43 % 0.11 % 6.5 7 to 10 years 2,275,000 0.60 % 0.11 % 8.9 Total 6,300,000 0.41 % 0.11 % 6.5 $ in thousands As of December 31, 2020 Maturities Notional Amount (2) Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity 3 to 5 years 2,250,000 0.20 % 0.15 % 4.2 5 to 7 years 1,775,000 0.43 % 0.15 % 6.7 7 to 10 years 2,275,000 0.60 % 0.15 % 9.2 Total 6,300,000 0.41 % 0.15 % 6.7 (1) Notional amount includes $ 6.3 billion of interest rate swaps that received variable payments based on 1-month LIBOR as of March 31, 2021. (2) Notional amount includes $ 6.3 billion of interest rate swaps that received variable payments based on 1-month LIBOR as of December 31, 2020. As of March 31, 2021, we held $ 1.3 billion notional amount of interest rate swaps with forward start dates that will receive interest based on 1-month LIBOR with a weighted average maturity of 21.3 years and a weighted average fixed pay rate of 1.37 %. We did not hold any interest rate swaps with forward start dates as of December 31, 2020. Swaptions and Currency Forward Contracts We periodically purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of our Agency RMBS portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into interest rate swap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our condensed consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. If an interest rate swaption expires unexercised, the loss on the interest rate swaption would equal the premium paid. If we sell or exercise an interest rate swaption, the realized gain or loss on the interest rate swaption would equal the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid. We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. As of March 31, 2021, we had $ 16.9 million (December 31, 2020: $ 33.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in Euro. 16 Table of Contents Credit Derivatives Our GSE CRTs purchased prior to August 24, 2015 were accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. Embedded derivatives associated with GSE CRTs were recorded within mortgage-backed and credit risk transfer securities, at fair value, on the condensed consolidated balance sheets. TBAs We primarily 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 RMBS. The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of March 31, 2021 and December 31, 2020. $ in thousands As of March 31, 2021 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA purchase contracts 2,000,000 2,054,000 2,049,727 ( 4,273 ) TBA sales contracts ( 500,000 ) ( 505,934 ) ( 504,844 ) 1,090 Net TBA derivatives 1,500,000 1,548,066 1,544,883 ( 3,183 ) $ in thousands As of December 31, 2020 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA purchase contracts 1,700,000 1,772,211 1,782,104 9,893 Net TBA derivatives 1,700,000 1,772,211 1,782,104 9,893 Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020. $ in thousands Derivative Assets Derivative Liabilities As of March 31, 2021 As of December 31, 2020 As of March 31, 2021 As of December 31, 2020 Balance Sheet Fair Value Fair Value Balance Sheet Fair Value Fair Value Interest Rate Swaps Asset 15,545 — Interest Rate Swaps Liability — 5,537 Currency Forward Contracts 558 111 Currency Forward Contracts — 807 TBAs 1,090 9,893 TBAs 4,273 — Total Derivative Assets 17,193 10,004 Total Derivative Liabilities 4,273 6,344 Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement The table below presents the effect of our credit derivatives on the condensed consolidated statements of operations for the three months ended March 31, 2020. $ in thousands Three months ended March 31, 2020 Derivative not designated as hedging instrument Realized gain (loss), net GSE CRT embedded derivative coupon interest Unrealized gain (loss), net Realized and unrealized credit derivative income (loss), net GSE CRT Embedded Derivatives 2,283 4,718 ( 40,053 ) ( 33,052 ) 17 Table of Contents The following tables summarizes the effect of interest rate swaps, interest rate swaptions, currency forward contracts and TBAs reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020: $ in thousands Three Months Ended March 31, 2021 Derivative 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 327,527 ( 4,549 ) 21,081 344,059 Interest Rate Swaptions ( 553 ) — — ( 553 ) Currency Forward Contracts ( 539 ) — 1,255 716 TBAs ( 44,185 ) — ( 13,076 ) ( 57,261 ) Total 282,250 ( 4,549 ) 9,260 286,961 $ in thousands Three Months Ended March 31, 2020 Derivative 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 ( 904,704 ) 11,924 ( 18,532 ) ( 911,312 ) Currency Forward Contracts 484 — 49 533 Total ( 904,220 ) 11,924 ( 18,483 ) ( 910,779 ) 18 Table of Contents Note 9 – Offsetting Assets and Liabilities Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets. The following tables present information about the assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets at March 31, 2021 and December 31, 2020. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. As of March 31, 2021, our derivative asset of $ 15.5 million (December 31, 2020: derivative liability of $ 5.5 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin. As of March 31, 2021 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Assets Derivatives (1) (2) 1,648 — 1,648 ( 445 ) ( 1,203 ) — Total Assets 1,648 — 1,648 ( 445 ) ( 1,203 ) — Liabilities Derivatives (1) (2) ( 4,273 ) — ( 4,273 ) 445 3,828 — Repurchase Agreements (3) ( 8,240,887 ) — ( 8,240,887 ) 8,240,887 — — Total Liabilities ( 8,245,160 ) — ( 8,245,160 ) 8,241,332 3,828 — As of December 31, 2020 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Assets Derivatives (1) (2) 10,004 — 10,004 ( 111 ) ( 1,630 ) 8,263 Total Assets 10,004 — 10,004 ( 111 ) ( 1,630 ) 8,263 Liabilities Derivatives (1) (2) ( 807 ) — ( 807 ) 111 610 ( 86 ) Repurchase Agreements (3) ( 7,228,699 ) — ( 7,228,699 ) 7,228,699 — — Total Liabilities ( 7,229,506 ) — ( 7,229,506 ) 7,228,810 610 ( 86 ) (1) Amounts represent derivative assets and derivative liabilities which could potentially be offset against other derivative assets, derivative liabilities and cash collateral pledged or received. (2) Cash collateral pledged by us on our currency forward contracts, TBAs and centrally cleared interest rate swaps was $ 385.4 million and $ 245.0 million as of March 31, 2021 and December 31, 2020, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and is therefore excluded from the tables above. We held cash collateral on our derivatives of $ 1.3 million and $ 1.6 million at March 31, 2021 and December 31, 2020, respectively. (3) The fair value of securities pledged against our borrowing under repurchase agreements was $ 8.6 billion and $ 7.6 billion at March 31, 2021 and December 31, 2020, respectively. We pledged cash collateral of $ 6.7 million and $ 700,000 under repurchase agreements as of March 31, 2021 and December 31, 2020, respectively. We held cash collateral of $ 1.9 million under repurchase agreements as of December 31, 2020. We did no t hold cash collateral under repurchase agreements as of March 31, 2021. 19 Table of Contents Note 10 – Fair Value of Financial Instruments A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows: • Level 1 Inputs – Quoted prices for identical instruments in active markets. • Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 Inputs – Instruments with primarily unobservable value drivers. The following tables present our assets and liabilities measured at fair value on a recurring basis. March 31, 2021 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (2) Total at Fair Value Assets: Mortgage-backed securities (1) — 9,099,742 — — 9,099,742 Derivative assets — 17,193 — — 17,193 Other assets (3) — — 20,000 15,766 35,766 Total assets — 9,116,935 20,000 15,766 9,152,701 Liabilities: Derivative liabilities — 4,273 — — 4,273 Total liabilities — 4,273 — — 4,273 December 31, 2020 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (2) Total at Fair Value Assets: Mortgage-backed securities (1) — 8,172,182 — — 8,172,182 Derivative assets — 10,004 — — 10,004 Other assets (3) — — 23,098 16,408 39,506 Total assets — 8,182,186 23,098 16,408 8,221,692 Liabilities: Derivative liabilities — 6,344 — — 6,344 Total liabilities — 6,344 — — 6,344 (1) For more detail about the fair value of our MBS, refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities." (2) Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of March 31, 2021 and December 31, 2020, the weighted average remaining term of our investments in unconsolidated ventures was 1.2 years and 1.5 years, respectively. (3) Includes $ 20.0 million and $ 23.1 million of a commercial loan as of March 31, 2021 and December 31, 2020, respectively. We value the loan based on a third party appraisal. 20 Table of Contents The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives, which we have valued utilizing Level 3 inputs: Three Months Ended March 31, $ in thousands 2020 Beginning balance 10,281 Sales and settlements ( 2,283 ) Total net credit derivative gains (losses) included in net income: Realized credit derivative gains (losses), net 2,283 Unrealized credit derivative gains (losses), net (1) ( 40,053 ) Ending balance ( 29,772 ) (1) Includes $ 37.6 million of unrealized losses attributable to GSE CRT embedded derivatives still held as of March 31, 2020. The following table shows a reconciliation of the beginning and ending fair value measurements of our loan participation interest, which we have valued utilizing Level 3 inputs: Three Months Ended March 31, $ in thousands 2020 Beginning balance 44,654 Repayments ( 19,269 ) Total net unrealized losses included in net income: Unrealized losses ( 3,808 ) Ending balance 21,577 Unrealized losses on our loan participation interest were included in gain (loss) on investments, net in our condensed consolidated statements of operations. The following table shows a reconciliation of the beginning balance of our commercial loan and ending balance at fair value, which we have valued utilizing Level 3 inputs: Three Months Ended March 31, Three Months Ended March 31, $ in thousands 2021 2020 Beginning balance 23,098 24,055 Cumulative effect of adoption of new accounting principle — 342 Repayments — ( 136 ) Total net unrealized losses included in net income: Unrealized losses ( 3,098 ) ( 1,684 ) Ending balance 20,000 22,577 Unrealized losses on our commercial loan are included in gain (loss) on investments, net in our condensed consolidated statements of operations. We elected the fair value option for our commercial loan on January 1, 2020 when we implemented the new accounting guidance for how entities report credit losses for assets measured at amortized cost. The following table summarizes the significant unobservable input used in the fair value measurement of our commercial loan: Fair Value at Valuation Unobservable $ in thousands March 31, 2021 Technique Input Rate Commercial Loan 20,000 Discounted Cash Flow Discount rate 29.4 % Fair Value at Valuation Unobservable $ in thousands December 31, 2020 Technique Input Rate Commercial Loan 23,098 Discounted Cash Flow Discount rate 29.9 % 21 Table of Contents The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020: March 31, 2021 December 31, 2020 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Liabilities Repurchase agreements 8,240,887 8,240,959 7,228,699 7,228,719 Total 8,240,887 8,240,959 7,228,699 7,228,719 The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the condensed consolidated balance sheets. • The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality. Note 11 – Related Party Transactions Our Manager is at all times subject to the supervision and oversight of our Board of Directors and has only such functions and authority as we delegate to it. Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. During the three months ended March 31, 2021, we reimbursed our Manager $ 242,000 (March 31, 2020: $ 242,000 ) for costs of support personnel. We have invested $ 1.9 million in money market or mutual funds managed by affiliates of our Manager as of December 31, 2020. The investments are reported as cash and cash equivalents on our condensed consolidated balance sheets as they are highly liquid and have original or remaining maturities of three months or less when purchased. We did not have any investments in money market of mutual funds managed by affiliates of our Manager as of March 31, 2021. Management Fee Our management fee is equal to 1.50 % of our stockholders' equity per annum. For purposes of calculating the management fee, stockholders' equity is calculated as average month-end stockholders' equity for the prior calendar quarter as determined in accordance with U.S. GAAP. Stockholders' equity may exclude one-time events due to changes in U.S. GAAP and certain non-cash items upon approval by a majority of our independent directors. We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager. Expense Reimbursement We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation. The following table summarizes the costs incurred on our behalf by our Manager for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, $ in thousands 2021 2020 Incurred costs, prepaid or expensed 1,157 2,214 Incurred costs, charged against equity as a cost of raising capital 77 62 Total incurred costs, originally paid by our Manager 1,234 2,276 22 Table of Contents Note 12 – Stockholders’ Equity Preferred Stock Holders of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum. Dividends are cumulative and payable quarterly in arrears. Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.18 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50 % of the liquidation preference of $ 25.00 per share or $ 1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. As of July 2017, we have the option to redeem shares of our Series A Preferred Stock for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of redemption. We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company before those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control. We may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). We have not sold any shares of preferred stock under equity distribution agreements. Common Stock On February 4, 2021, we completed a public offering of 27,600,000 shares of common stock at the price of $ 3.75 per share. Total net proceeds were approximately $ 103.1 million after deducting offering expenses. As of March 31, 2021, we may sell up to 22,060,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). During the three months ended March 31, 2021, we sold 15,550,000 shares under our equity distribution agreement for proceeds of $ 57.8 million, net of approximately $ 831,000 in commissions and fees. During the three months ended March 31, 2020 , we did not sell any shares of common stock under equity distribution agreements. Share Repurchase Program During the three months ended March 31, 2021 and 2020, we did no t repurchase any shares of our common stock. As of March 31, 2021, we had authority to purchase 18,163,982 shares of our common stock through our share repurchase program. 23 Table of Contents Accumulated Other Comprehensive Income The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three months ended March 31, 2021 and 2020. The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option. Three Months Ended March 31, 2021 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net — 981 — 981 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 5,368 ) ( 5,368 ) Currency translation adjustments on investment in unconsolidated venture 609 — — 609 Total other comprehensive income (loss) 609 981 ( 5,368 ) ( 3,778 ) AOCI balance at beginning of period 499 5,993 52,113 58,605 Total other comprehensive income (loss) 609 981 ( 5,368 ) ( 3,778 ) AOCI balance at end of period 1,108 6,974 46,745 54,827 Three Months Ended March 31, 2020 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net — ( 186,605 ) — ( 186,605 ) Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net — 36,957 — 36,957 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 10,067 ) ( 10,067 ) Currency translation adjustments on investment in unconsolidated venture 480 — — 480 Total other comprehensive income (loss) 480 ( 149,648 ) ( 10,067 ) ( 159,235 ) AOCI balance at beginning of period ( 645 ) 213,701 75,907 288,963 Total other comprehensive income (loss) 480 ( 149,648 ) ( 10,067 ) ( 159,235 ) AOCI balance at end of period ( 165 ) 64,053 65,840 129,728 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 original life of the interest rate swap agreements. 24 Table of Contents Dividends The table below summarizes the dividends we declared during the three months ended March 31, 2021 and 2020: $ in thousands, except per share amounts Dividends Declared Series A Preferred Stock Per Share In Aggregate Date of Payment 2021 February 19, 2021 0.4844 2,713 April 26, 2021 2020 March 17, 2020 0.4844 2,713 May 22, 2020 $ in thousands, except per share amounts Dividends Declared Series B Preferred Stock Per Share In Aggregate Date of Payment 2021 February 19, 2021 0.4844 3,003 March 29, 2021 2020 February 18, 2020 0.4844 3,003 May 22, 2020 $ in thousands, except per share amounts Dividends Declared Series C Preferred Stock Per Share In Aggregate Date of Payment 2021 February 19, 2021 0.46875 5,391 March 29, 2021 2020 February 18, 2020 0.46875 5,391 May 22, 2020 $ in thousands, except per share amounts Dividends Declared Common Stock Per Share In Aggregate Date of Payment 2021 March 26, 2021 0.09 22,176 April 27, 2021 2020 March 17, 2020 0.50 82,483 June 30, 2020 On May 9, 2020, our Board of Directors approved payment of our common stock dividend that was declared on March 17, 2020 in a combination of cash and shares of our common stock. Stockholders had the opportunity to elect payment of the dividend all in cash or all in common shares, subject to a limit of 10 % or approximately $ 8.2 million of cash in the aggregate (excluding any cash paid in lieu of issuing fractional shares). On June 30, 2020, we paid the dividend through the issuance of 16,338,511 shares of common stock and the payment of approximately $ 8.2 million in cash. The number of shares included in the dividend was calculated based on the $ 4.5435 volume weighted average trading price of our common stock on the New York Stock Exchange on June 17, 18 and 19, 2020. 25 Table of Contents Note 13 – Earnings (Loss) per Common Share Earnings (loss) per share for the three months ended March 31, 2021 and 2020 is computed as follows: Three Months Ended March 31, In thousands, except per share amounts 2021 2020 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders ( 20,382 ) ( 1,627,299 ) Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 223,955 156,771 Dilutive Shares 223,955 156,771 Net income (loss) per share: Net income (loss) attributable to common stockholders Basic ( 0.09 ) ( 10.38 ) Diluted ( 0.09 ) ( 10.38 ) The following potential weighted average common shares were excluded from diluted earnings per share for the three months ended March 31, 2021 and 2020 as the effect would be antidilutive: 12,385 and 12,065 for restricted stock awards, respectively. Note 14 – Commitments and Contingencies Commitments and Contingencies Commitments and contingencies may arise in the ordinary course of business. Our material off-balance sheet commitments as of March 31, 2021 are discussed below. As discussed in Note 5 - "Other Assets", we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner. The entities are structured such that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified. As of March 31, 2021 and December 31, 2020, our undrawn capital and purchase commitments were $ 6.7 million and $ 6.8 million, respectively. Note 15 – Subsequent Events We declared the following dividends on May 4, 2021: a Series A Preferred Stock dividend of $ 0.4844 per share payable on July 26, 2021 to our stockholders of record as of July 1, 2021, a Series B Preferred Stock dividend of $ 0.4844 per share payable on June 28, 2021 to our stockholders of record as of June 5, 2021 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on June 28, 2021 to our stockholders of record as of June 5, 2021. 26 Table of Contents