Invesco Mortgage Capital Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco." The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the "SEC"). Forward-Looking Statements We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "intend," "project," "forecast" or similar expressions and future or conditional verbs such as "will," "may," "could," "should," and "would," and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to: • ongoing spread and economic and operational impact of the COVID-19 pandemic, including but not limited to, the impact on the value, volatility, availability, financing and liquidity of mortgage assets; • our business and investment strategy; • our investment portfolio and expected investments; • our projected operating results; • general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S. governmental agencies and changes to U.S. government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and our ability to respond to and comply with such actions, initiatives and changes; • the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements; • financing and advance rates for our target assets; • changes to our expected leverage; • 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; • the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs; • our ability to maintain sufficient liquidity to meet our short-term liquidity needs; • changes in the credit rating of the U.S. government; • changes in interest rates and interest rate spreads and the market value of our target assets; • changes in prepayment rates on our target assets; • the impact of any deficiencies in loss mitigation of third parties and related uncertainty in the timing of collateral disposition; • our reliance on third parties in connection with services related to our target assets; 27 Table of Contents • disruption of our information technology systems; • the impact of potential data security breaches or other cyber-attacks or other disruptions; • effects of hedging instruments on our target assets; • rates of default or decreased recovery rates on our target assets; • modifications to whole loans or loans underlying securities; • the degree to which our hedging strategies may or may not protect us from interest rate and foreign currency exchange rate volatility; • the degree to which derivative contracts expose us to contingent liabilities; • counterparty defaults; • compliance with financial covenants in our financing arrangements; • changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes; • our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes; • our ability to maintain our exception from the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act"); • availability of investment opportunities in mortgage-related, real estate-related and other securities; • availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities; • the market price and trading volume of our capital stock; • availability of qualified personnel from our Manager and our Manager's continued ability to find and retain such personnel; • the relationship with our Manager; • estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future; • estimates relating to fair value of our target assets and loan loss reserves; • our understanding of our competition; • changes to generally accepted accounting principles in the United States of America ("U.S. GAAP"); • the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and • market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings "Risk Factors," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Business." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in this Report. 28 Table of Contents Executive Summary We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS") and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we currently invest in the following: • 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"); • To-be-announced securities forward contracts ("TBAs") to purchase Agency RMBS; • Commercial mortgage loans; and • Other real estate-related financing arrangements. 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 Freddie Mac or Fannie Mae (collectively "Agency CMBS"); • Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); and • Residential mortgage loans. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), an indirect wholly-owned subsidiary of Invesco Ltd. ("Invesco"). We have 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 of 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 definition of "Investment Company" under the 1940 Act. Market Conditions Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, monetary 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 eased during the first quarter, as equities and most credit sectors continued to react favorably to an uptick in economic activity brought on by the massive government stimulus in response to the COVID-19 pandemic as well as the successful rollout of vaccines. Equities began the year in positive territory, with the S&P 500 and the NASDAQ gaining 5.8% and 2.8%, respectively. The employment picture continued to improve during the quarter, as gains in nonfarm payrolls averaged 539,000 per month, and the unemployment rate fell to 6.0% from 6.7% at year-end. Consumer activity was mixed during the quarter, as consumer confidence measures continued to rise but spending and retail sales numbers were very volatile. With the rollout of vaccinations continuing, we remain cautiously optimistic about near-term gains in economic activity, particularly given the amount of anticipated government stimulus. The yield curve steepened dramatically during the first quarter as inflation fears drove interest rates at the long end of the curve higher. The yield on the 10 year Treasury bond rose 83 basis points to 1.74%, while the yield on the 2 year Treasury note rose only 4 basis points to 0.16%. The short end of the yield curve remains pinned close to zero as the Federal Open Market Committee ("FOMC") targets the lower bound, the futures market has begun to price in increases to the Federal Funds rate beginning late next year. The consumer price index ("CPI") was 2.6% at quarter-end, up from 1.4% at year-end, while the CPI excluding food and energy was flat for the quarter. Commodity prices rose sharply during the quarter, with West Texas Intermediate ("WTI") crude recording a 21.7% increase and the Commodity Research Bureau ("CRB") commodity index gaining 10.2%. Breakeven rates on inflation-protected Treasuries continued to increase as investors price in the potential impact of the recent stimulus measures and positive growth expectations. The inflation rate implied by 2 year U.S. Treasury inflation-protected securities ("TIPS") rose 65 basis points to 2.66%, while the 5 year breakeven rate rose 64 basis points to 2.60%. 29 Table of Contents 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, many tenants are finding it difficult to meet rent obligations and, in some instances, are foregoing payments or seeking forbearance relief. Real estate loans have experienced growing delinquencies and are at greater risk of default which could impact the fundamental performance of some of our investments. Despite fundamental challenges, CMBS risk premiums contracted in the first quarter due to a modest new issuance supply and continued investor demand. While residential real estate fundamentals deteriorated significantly at the onset of the pandemic, low mortgage rates and tight housing supply have driven a significant recovery. 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 home price appreciation, which has accelerated rapidly over the past three quarters. Meanwhile, credit spreads on residential mortgage backed securities have largely recovered the widening that occurred at the onset of the pandemic. Nevertheless, many individual homeowners have been adversely impacted by the economic consequences of the COVID-19 pandemic. The U.S. government has responded by passing a number of fiscal stimulus measures and relief programs for households and businesses directly or indirectly impacted by the virus. We believe that stimulus payments and the provision of borrower relief including forbearance and loan modifications has and will continue to substantially reduce borrower defaults and loan losses relative to levels that would have likely occurred without these actions. Lower coupon Agency mortgages underperformed during the quarter, as robust issuance and higher interest rate volatility offset continued strong demand via the Federal Reserve and commercial banks. Prepayment speeds remained elevated during the quarter, reflecting the low mortgage rate environment that was prevalent in the second half of 2020 and into 2021. Expectations for future prepayment speeds have declined, reflecting higher mortgage rates at quarter-end. These lowered speed expectations led to lower premiums on specified pool Agency collateral, as investors are less willing to pay for protection against higher speeds as mortgage rates rise. The dollar roll environment remained favorable, despite weakening modestly over the quarter. Although relatively tight valuations and increased volatility represent headwinds for Agency RMBS, slowing prepayment speeds and continued demand from the Federal Reserve support the sector. As we move into the second quarter, investors are focused on the pace of the recovery and the implementation of COVID-19 vaccines. Concerns around the potential for inflationary pressures, brought on by the unprecedented stimulus and anticipated sharp economic recovery also remain. Our expectation is that growth in the U.S. will remain robust as the economy continues to reopen over the course of the year, and that inflation will remain subdued in the near-term. Proposed Changes to LIBOR In 2017, the U.K. 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. 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. Further, on March 5, 2021, the FCA announced that December 31, 2021 will be the cessation date for 1-week & 2-month tenors of USD-LIBOR. The FCA also set June 30, 2023 as the cessation date for the other five tenors (overnight, 1-month, 3-month, 6-month and 12-month) of USD-LIBOR. Additionally, this FCA announcement constitutes an index cessation event under the International Swaps and Derivatives Association Inc.’s ("ISDA") IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol, as well as the ARRC’s fallback language for non-consumer cash products, giving the market clarity on the spread adjustments to alternative reference rate based fallbacks for all EUR-, CHF-, GBP-, JPY- and USD-LIBOR settings. On April 6, 2021, New York State (NYS) put into law legislation to help address challenges surrounding legacy LIBOR contracts that have no effective means to transition away from LIBOR and to incentivize the selection of SOFR-based fallback rates in other contracts. The law applies to existing USD-LIBOR contracts governed by NYS law that use LIBOR as a benchmark and contain no fallback provisions or contain fallback provisions that result in a benchmark replacement that is based in any way on any LIBOR value. For these in scope contracts, the NYS law provides that on and after "LIBOR Replacement Date" (the date that USD LIBOR ceases to be published or to be representative), USD-LIBOR is replaced by operation of law with the relevant SOFR-based rate plus the spread adjustment recommended for that contract type by the US Federal Reserve or the ARRC, and any LIBOR-based fallback provisions are permanently overridden. Additionally, the law applies to existing USD LIBOR contracts governed by NYS law that contain fallback provisions that permit or require a party to select a benchmark replacement that is based in any way on any LIBOR value or otherwise in its discretion. For such contracts, the law authorizes and safe harbors the selection by such party of the relevant SOFR-based rate plus the spread 30 Table of Contents adjustment recommended for that contract type by the Federal Reserve or the ARRC to apply on and after the "LIBOR Replacement Date". SOFR is an overnight rate unlike LIBOR which is a forward-looking term rate, making SOFR an inexact replacement for LIBOR. There is currently no perfect way to create robust, forward-looking, SOFR term rates. Note that the ARRC has announced that they will not recommend a forward-looking SOFR term rate by mid-2021, as previously announced, due to insufficient development of the SOFR derivatives markets. Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time or to the same alternative reference rate, in each case increasing the difficulty of hedging. Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread and there is no assurance that the spread adjustments will avoid negative financial impacts on our portfolio at the time of transition. We have material contracts that are indexed to LIBOR and are monitoring this activity and evaluating the related risks. 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. We do not currently intend to amend our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock or our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock to change the existing USD-LIBOR cessation fallback language. Our Series B and Series C Preferred Stock each become callable at the time the stock begins to pay a USD-LIBOR-based rate. Should we choose to call the Series B or Series C Preferred Stock in order to avoid a dispute over the results of the USD-LIBOR fallbacks for that class, we may be forced to raise additional funds at an unfavorable time. 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. The proposed regulations make clear that a change in the reference rate (and associated alterations to payment terms) of a financial instrument is generally not considered a taxable event, provided the fair value of the modified instrument is substantially equivalent to the fair value of the unmodified instrument. The Financial Accounting Standards Board has also issued accounting guidance that provides optional expedients and exceptions to contracts, hedging relationships and other transactions impacted by LIBOR transition if certain criteria are met. 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. 31 Table of Contents Investment Activities The table below shows the composition of our investment portfolio as of March 31, 2021, December 31, 2020 and March 31, 2020: As of $ in thousands March 31, 2021 December 31, 2020 March 31, 2020 Agency RMBS: 30 year fixed-rate, at fair value 8,997,918 8,050,866 1,421,162 15 year fixed-rate, at fair value — — 71,166 Hybrid ARM, at fair value — — 2,672 Agency CMO, at fair value — — 300,535 Agency CMBS, at fair value — — 2,278,027 Non-Agency CMBS, at fair value 91,250 109,583 2,869,051 Non-Agency RMBS, at fair value 10,574 11,733 568,081 GSE CRT, at fair value — — 534,114 Loan participation interest, at fair value — — 21,577 Commercial loan, at fair value 20,000 23,098 22,577 Investments in unconsolidated ventures 15,766 16,408 21,088 Subtotal 9,135,508 8,211,688 8,110,050 TBAs, at implied cost basis (1) 1,548,066 1,772,211 — Total investment portfolio, including TBAs 10,683,574 9,983,899 8,110,050 (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 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. Item 1 of this report on Form 10-Q. To capitalize on the sharp increase in interest rates and lower valuations on investment opportunities during the three months ended March 31, 2021, we sold $5.5 billion of lower yielding Agency RMBS and purchased $7.0 billion of higher yielding Agency RMBS. Purchases were funded with proceeds from the sales, paydowns of securities and by leveraging proceeds from the issuance of common stock. As of March 31, 2021, our holdings of 30 year fixed-rate Agency RMBS represented approximately 84% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2020 and 18% as of March 31, 2020. 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 and began investing in TBAs in the third quarter of 2020. Our Agency RMBS holdings as of March 31, 2021 consisted primarily of specified pools with coupon distributions as shown in the table below. $ in thousands Fair Value Percentage 2.0% 4,135,167 46.0 % 2.5% 4,255,013 47.2 % 3.0% 607,738 6.8 % Total Agency RMBS 8,997,918 100.0 % 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") ratio, 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. 32 Table of Contents We invest in TBAs as an alternative means of investing in and financing Agency RMBS. As of March 31, 2021, the implied cost basis of TBAs represented approximately 14% of our total investment portfolio versus 18% as of December 31, 2020. Our investments consist of 30 year Agency RMBS TBAs with coupons that range from 2.0% to 2.5% in conventional and Ginnie Mae collateral. We maintain a meaningful allocation to TBAs given attractive implied financing rates in the Agency RMBS 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 2020. We expect the purchase program to continue in 2021, as the Federal Reserve views the program as a key component of its stated objectives. We sold all of our Agency CMBS holdings during the first half of 2020. Agency CMBS represented approximately 28% of our investment portfolio as of March 31, 2020. 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 March 31, 2021 and December 31, 2020 our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs, versus 35% as of March 31, 2020. 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 Texas, California, New York, Illinois and Florida. Most of our non-Agency CMBS portfolio is comprised of fixed-rate securities that are rated investment grade by a nationally recognized statistical rating organization. Approximately 68% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2021. Further, approximately 49% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2021. As of March 31, 2021 and December 31, 2020, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs, versus 7% as of March 31, 2020. 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. We did not hold any GSE CRTs as of March 31, 2021 or December 31, 2020. Our holdings of GSE CRT represented approximately 7% as of March 31, 2020. 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 March 31, 2021, we held an investment in one commercial real estate mezzanine loan that is due in 2022 and has a loan-to-value ratio of approximately 78.9%. As of March 31, 2021, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Financing and Other Liabilities 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 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. 33 Table of Contents The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter: $ in thousands Collateralized borrowings under repurchase agreements and secured loans Quarter Ended Quarter-end balance Average quarterly balance (1) Maximum balance (2) March 31, 2020 7,637,746 16,673,939 23,132,234 June 30, 2020 740,000 983,599 1,373,296 September 30, 2020 5,243,288 3,373,356 5,243,288 December 31, 2020 7,228,699 6,883,773 7,237,496 March 31, 2021 8,240,887 8,359,010 8,708,686 (1) Average quarterly balance for each period is based on month-end balances. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. We have committed to invest up to $125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, 2021, $118.7 million of our commitment to these unconsolidated ventures has been called. We are committed to fund $6.7 million in additional capital to fund future investments and cover future expenses should they occur. Hedging Instruments We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we pay fixed interest rates and receive floating interest rates indexed off of one- or three-month LIBOR. We actively manage our swap portfolio by terminating and entering into new swaps as the size and composition of our investment portfolio changes. During the three months ended March 31, 2021, we terminated existing swaps with a notional amount of $500.0 million and entered into new swaps with a notional amount of $500.0 million to hedge repurchase agreement debt associated with purchases of Agency RMBS . Daily variation margin payment for interest rate swaps 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 realized a net gain of $327.5 million on interest rate swaps during the three months ended March 31, 2021 primarily due to rising interest rates. We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. As of March 31, 2021, we had €13.9 million or $16.9 million (December 31, 2020: €27.8 million or $33.1 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture. During the three months ended March 31, 2021, we settled currency forward contracts of €27.8 million or $33.1 million (March 31, 2020: €20.8 million or $23.1 million) in notional amount and realized a net loss of $539,000 (March 31, 2020: $484,000 net gain). Capital Activities 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. We sold 15,550,000 shares of common stock for proceeds of $57.8 million, net of approximately $831,000 in commissions and fees, under our equity distribution agreement during the three months ended March 31, 2021. We did not sell any shares of common stock under equity distribution agreements during the three months ended March 31, 2020. For information on dividends declared during the three months ended March 31, 2021 and 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 three months ended March 31, 2021, we did not repurchase any shares of our common stock. 34 Table of Contents Book Value per Common Share We calculate book value per common share as follows: As of $ in thousands except per share amounts March 31, 2021 December 31, 2020 Numerator (adjusted equity): Total equity 1,481,932 1,367,158 Less: Liquidation preference of Series A Preferred Stock (140,000) (140,000) Less: Liquidation preference of Series B Preferred Stock (155,000) (155,000) Less: Liquidation preference of Series C Preferred Stock (287,500) (287,500) Total adjusted equity 899,432 784,658 Denominator (number of shares): Common stock outstanding 246,398 203,222 Book value per common share 3.65 3.86 Our book value per common share decreased 5.4% as of March 31, 2021 compared to December 31, 2020 as higher interest rates and an increase in volatility led to wider interest rate spreads on our 30 year Agency RMBS holdings. In addition, a sharp increase in mortgage rates and reduced investor demand for prepayment protection resulted in lower valuation premiums on our Agency RMBS specified pools. The benchmark U.S. treasury rate rose 83 basis points to 1.74% as of March 31, 2021. Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value. 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, 2020. Recent Accounting Standards See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Issued". 35 Table of Contents Results of Operations The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, $ in thousands, except share data 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) Weighted average number of shares of common stock: Basic 223,954,989 156,771,279 Diluted 223,954,989 156,771,279 (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" in Part I. Item 1. of this report on Form 10-Q. 36 Table of Contents Interest Income and Average Earning Asset Yields The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, $ in thousands 2021 2020 Average earning assets (1) 9,330,134 17,837,749 Average earning asset yields (2) 1.72 % 4.19 % (1) Average balances for each period are based on weighted month-end balances. (2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized. Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately $9.3 billion for the three months ended March 31, 2021 (March 31, 2020: $17.8 billion). Average earning assets decreased for the three months ended March 31, 2021 compared to 2020 as we sold a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage due to the financial market disruption caused by the COVID-19 pandemic. We earned total interest income of $40.0 million for the three months ended March 31, 2021 (March 31, 2020: $186.7 million). Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below. Three Months Ended March 31, $ in thousands 2021 2020 Interest Income MBS and GSE CRT - coupon interest 51,490 202,109 MBS and GSE CRT - net premium amortization (12,056) (16,573) MBS and GSE CRT - interest income 39,434 185,536 Commercial and other loans 576 1,163 Total interest income 40,010 186,699 MBS and GSE CRT interest income decreased $146.1 million for the three months ended March 31, 2021 compared to 2020 primarily due to a $150.6 million decrease in coupon interest reflecting lower average earnings assets and a 247 basis point decrease in average earning asset yields. Average earnings asset yields decreased due to a change in portfolio composition. Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS as of March 31, 2021. For further details on the composition of our investment portfolio as of March 31, 2021 and 2020, see the discussion under Investment Activities above in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest income on our commercial and other loans decreased $587,000 during the three months ended March 31, 2021 compared to 2020 primarily due to the sale of our loan participation interest in April 2020. Prepayment Speeds Our RMBS portfolio (and previously our 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 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. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. 37 Table of Contents The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2021 and 2020. Three Months Ended March 31, $ in thousands 2021 2020 Agency RMBS (12,484) (20,913) Agency CMBS — (1,666) Non-Agency CMBS 878 5,058 Non-Agency RMBS (450) 2,698 GSE CRT — (1,750) Net (premium amortization) discount accretion (12,056) (16,573) Net premium amortization decreased $4.5 million for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to sales of assets purchased at premiums and slower prepayment speeds on Agency RMBS purchased during 2020 and 2021 . Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results. Interest Expense and Cost of Funds The table below presents the components of interest expense for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, $ in thousands 2021 2020 Interest Expense Interest expense on repurchase agreement borrowings 3,708 89,109 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,368) (10,067) Repurchase agreements interest expense (1,660) 79,042 Secured loans — 6,646 Total interest expense (1,660) 85,688 Our interest expense on repurchase agreement borrowings decreased $85.4 million for the three months ended March 31, 2021 compared to 2020 due to lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds interest rate. 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 $5.4 million during the three months ended March 31, 2021 and $10.1 million during the three months ended March 31, 2020. Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We increased the amount of gains and losses reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $4.2 million because it was probable that the original forecasted repurchase agreement transactions would not occur by the end of the originally specified time period . During the next twelve months, we estimate that $21.8 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. We repaid our secured loans in the third quarter of 2020 and did not incur interest expense for secured loans during the three months ended March 31, 2021. For the three months ended March 31, 2020, the weighted average borrowing rate on our secured loans was 1.83%. Our total interest expense during the three months ended March 31, 2021 decreased $87.3 million from the same period in 2020 primarily due to the $92.0 million decrease in interest expense on repurchase agreements borrowings and secured loans in the 2021 period as discussed above. 38 Table of Contents The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, $ in thousands 2021 2020 Total average borrowings (1) 8,347,354 16,531,997 Maximum borrowings during the period (2) 8,708,686 23,132,234 Cost of funds (3) (0.08) % 2.07 % (1) Average borrowings for each period are based on weighted month-end balances. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. (3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings. Total average borrowings decreased $8.2 billion in the three months ended March 31, 2021 compared to 2020 primarily because we repaid repurchase agreements in the first half of 2020 with proceeds from asset sales due to the financial market disruption caused by the COVID-19 pandemic. Average borrowings also decreased because we repaid $1.65 billion of secured loans during 2020. Our average cost of funds decreased 215 basis points for three months ended March 31, 2021 versus 2020 primarily due to decreases in the Federal Funds rate since the beginning of 2020. Net Interest Income The table below presents the components of net interest income for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, $ in thousands 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 Interest expense on repurchase agreement borrowings 3,708 89,109 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,368) (10,067) Repurchase agreements interest expense (1,660) 79,042 Secured loans — 6,646 Total interest expense (1,660) 85,688 Net interest income 41,670 101,011 Net interest rate margin 1.80 % 2.12 % Our net interest income, which equals interest income less interest expense, totaled $41.7 million for the three months ended March 31, 2021 (March 31, 2020: $101.0 million). The decrease in net interest income for the three months ended March 31, 2021 was primarily due to 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 1.80% for the three months ended March 31, 2021 (March 31, 2020: 2.12%). The decrease in net interest rate margin for the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings, and decreases in the Federal Funds rate that had a greater impact on our average cost of funds than on our average 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 March 31, 2021. 39 Table of Contents Gain (Loss) on Investments, net The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, $ in thousands 2021 2020 Net realized gains (losses) on sale of investments (116,847) (4,285) 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 (losses) on MBS and GSE CRT accounted for under the fair value option (211,912) (666,872) Net unrealized gains (losses) on commercial loan and loan participation interest (3,098) (5,492) Total gain (loss) on investments, net (331,857) (755,483) During the three months ended March 31, 2021, we sold MBS and GSE CRTs for cash proceeds of $5.5 billion (March 31, 2020: $16.2 billion) and realized net losses of $116.8 million (March 31, 2020: net losses of $4.3 million). We sold lower yielding Agency RMBS during the three months ended March 31, 2021 and purchased higher yielding Agency RMBS to capitalize on the sharp increase in interest rates and lower valuations on investment opportunities during the quarter. We sold securities during the three months ended March 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic. 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 did not record any impairment during the three months ended March 31, 2021 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis. We recorded $78.8 million of impairment on non-Agency RMBS and CMBS securities during the three months ended March 31, 2020 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis . We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of March 31, 2021, $9.0 billion (December 31, 2020: $8.1 billion) or 99% (December 31, 2020: 99%) of our MBS and GSE CRT are accounted for under the fair value option. We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for under the fair value option of $211.9 million in the three months ended March 31, 2021 compared to net unrealized losses of $666.9 million in the three months ended March 31, 2020. Net unrealized losses in three months ended March 31, 2021 reflect wider interest rate spreads on our Agency assets as a sharp increase in mortgage rates and reduced investor demand for prepayment protection resulted in lower valuation premiums on our Agency RMBS specified pools. Net unrealized losses in the three months ended March 31, 2020 reflect lower interest rates and wider interest rate spreads on our Agency and non-Agency assets. We recorded unrealized losses of $3.1 million and $1.7 million on our commercial loan in the three months ended March 31, 2021 and 2020, respectively. We value our commercial loan based upon a valuation from an independent pricing service. We recorded an unrealized loss of $3.8 million on our loan participation interest in the three months ended March 31, 2020. We sold our loan participation interest on April 1, 2020. (Increase) Decrease in Provision for Credit Losses As of March 31, 2021, $98.2 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2020: $116.9 million). As of December 31, 2020, we had established a $1.8 million allowance for credit losses on a single non-Agency CMBS based on a comparison of the security's amortized cost basis to discounted expected cash flows. We recorded a $938,000 decrease in the provision for credit losses for this security during the three months ended March 31, 2021 because the valuation for the security improved. We did not record any provisions for credit losses the during three months ended March 31, 2020. Refer to Note 4 – "Mortgage-Backed Securities and Credit Risk Transfer Securities" of our condensed consolidated financial statements included in Part I. Item 1 of this Report for additional information on our allowance for credit losses. 40 Table of Contents Equity in Earnings (Losses) of Unconsolidated Ventures For the three months ended March 31, 2021, we recorded equity in losses of unconsolidated ventures of $94,000 (March 31, 2020: equity in earnings of $170,000). We recorded equity in losses for the three months ended March 31, 2021 primarily due to realized and unrealized losses on the underlying portfolio investments. We recorded equity in earnings for the three months ended March 31, 2020 primarily due to realized and unrealized gains on the underlying portfolio investments. Gain (Loss) on Derivative Instruments, net 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 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) During the three months ended March 31, 2021, we terminated existing swaps with a notional amount of $500.0 million and entered into new swaps with a notional amount of $500.0 million to hedge repurchase agreement debt associated with purchases of Agency RMBS. We realized a net gain of $327.5 million for the three months ended March 31, 2021 on interest rate swaps primarily due to rising interest rates. During the three months ended March 31, 2020, we terminated all of our outstanding interest rate swaps 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 for the three months ended March 31, 2020 on interest rate swaps 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 March 31, 2021, we had $8.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 18 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. 41 Table of Contents As of March 31, 2021 and December 31, 2020, we held the following interest rate swaps whereby we receive interest at a one-month LIBOR rate: $ in thousands As of March 31, 2021 As of December 31, 2020 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 (1) 6,300,000 0.41 % 0.11 % 6.5 6,300,000 0.41 % 0.15 % 6.7 (1) Notional amount as of March 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates. We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates. 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. 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. As of March 31, 2021, we had $1.5 billion notional amount of TBAs (December 31, 2020: $1.7 billion). We recorded $57.3 million of realized and unrealized losses, net on TBAs during the three months ended March 31, 2021 primarily due to a sharp increase in mortgage rates. We did not invest in TBAs during the three months ended March 31, 2020. Realized and Unrealized Credit Derivative Income (Loss), net The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three months ended March 31, 2020. Three Months Ended March 31, $ in thousands 2020 GSE CRT embedded derivative coupon interest 4,718 Gain (loss) on settlement of GSE CRT embedded derivatives 2,283 Change in fair value of GSE CRT embedded derivatives (40,053) Total realized and unrealized credit derivative income (loss), net (33,052) Realized and unrealized credit derivative loss in the three months ended March 31, 2020 was driven by a decline in the fair value of our GSE CRT embedded derivatives as asset prices dropped due to spread widening. We did not hold any GSE CRTs during the three months ended March 31, 2021. Net Gain (Loss) on Extinguishment of Debt As discussed in Note 6 - "Borrowings" of our condensed consolidated financial statements include in Part I. Item 1. of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements during the three months ended March 31, 2020. We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt in our condensed consolidated statement of operations. Other Investment Income (Loss), net Our other investment income (loss), net during the three months ended March 31, 2020 primarily consisted 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 of 2020. Expenses We incurred management fees of $4.9 million for the three months ended March 31, 2021 (March 31, 2020: $11.0 million). Management fees decreased for the three months ended March 31, 2021 compared to the same period in 2020 due to a lower management fee base. 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 $2.0 million for the three months ended March 31, 2021 (March 31, 2020: $3.1 million). General and administrative expenses primarily consist of 42 Table of Contents directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees, and miscellaneous general and administrative costs. General and administrative costs were lower for the three months ended March 31, 2021 compared to the same period in 2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic during the three months ended March 31, 2020 totaling $1.1 million. Net Income (Loss) attributable to Common Stockholders For the three months ended March 31, 2021, our net loss attributable to common stockholders was $20.4 million (March 31, 2020: $1.6 billion net loss attributable to common stockholders) or $0.09 basic and diluted net loss per average share available to common stockholders (March 31, 2020: $10.38 basic and diluted net loss per average share available to common stockholders). The change in net loss attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $287.0 million in the 2021 period compared to net losses on derivative instruments of $910.8 million in the 2020 period; (ii) net losses on investments of $331.9 million in the 2021 period compared to a net losses on investments of $755.5 million in the 2020 period; (iii) credit derivative net losses of $33.1 million in the 2020 period; and (iv) a $59.3 million decrease in net interest income. For further information on the changes in net gains (loss) on derivative instruments, net gain (loss) on investments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income." Non-GAAP Financial Measures We use 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: • core earnings (and by calculation, core earnings per common share), • effective interest income (and by calculation, effective yield), • effective interest expense (and by calculation, effective cost of funds), • effective net interest income (and by calculation, effective interest rate margin), and • economic debt-to-equity ratio. The most directly comparable U.S. GAAP measures are: • net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share), • total interest income (and by calculation, earning asset yields), • total interest expense (and by calculation, cost of funds), • net interest income (and by calculation, net interest rate margin), and • debt-to-equit y ratio. We adjust our calculations of non-GAAP financial measures for changes in the composition of our investment portfolio where appropriate. We have historically adjusted core earnings to exclude the impact of realized and unrealized gains and losses on GSE CRT embedded derivatives. Beginning in 2021, realized and unrealized gains and losses on GSE CRT embedded derivatives no longer impacted the reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings because we sold all of our GSE CRTs that were accounted for as hybrid financial instruments during 2020. Additionally, we have historically calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. As we no longer earn embedded derivative coupon interest due to the sale of our GSE CRTs during 2020, effective interest income will be equal to U.S. GAAP total interest income beginning in 2021. We did not present core earnings for the first half of 2020 or for the year ended December 31, 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 first half of 2020 and the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio. 43 Table of Contents The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. 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; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and net (gain) loss on extinguishment of debt. 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. 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 condensed 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 condensed 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 March 31, $ in thousands, except per share data 2021 Net income (loss) attributable to common stockholders (20,382) Adjustments: (Gain) loss on investments, net 331,857 Realized (gain) loss on derivative instruments, net (1) (282,250) Unrealized (gain) loss on derivative instruments, net (1) (9,260) TBA dollar roll income (2) 10,545 (Gain) loss on foreign currency transactions, net (3) 16 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) (5,368) Subtotal 45,540 Core earnings attributable to common stockholders 25,158 Basic income (loss) per common share (0.09) Core earnings per share attributable to common stockholders (5) 0.11 (1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components: Three Months Ended March 31, $ in thousands 2021 Realized gain (loss) on derivative instruments, net 282,250 Unrealized gain (loss) on derivative instruments, net 9,260 Contractual net interest income (expense) on interest rate swaps (4,549) Gain (loss) on derivative instruments, net 286,961 44 Table of Contents (2) 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. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations. (3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the condensed consolidated statements of operations. (4) U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components: Three Months Ended March 31, $ in thousands 2021 Interest expense on repurchase agreement borrowings 3,708 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,368) Repurchase agreements interest expense (1,660) (5) 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 earnings for the three months ended March 31, 2021 are: Three Months Ended March 31, $ in thousands 2021 Effective net interest income (1) 31,753 TBA dollar roll income 10,545 Equity in earnings (losses) of unconsolidated ventures (94) (Increase) decrease in provision for credit losses 938 Total expenses (6,877) Total core earnings 36,265 Dividends to preferred stockholders (11,107) Core earnings attributable to common stockholders 25,158 (1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure. Core earnings during the three months ended March 31, 2021 was driven by effective net interest income and TBA dollar roll income. As discussed above, we did not report core earnings for the three months ended March 31, 2020. 45 Table of Contents Effective Interest Income / Effective Yield / Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin Prior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. We included our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest was not accounted for consistently under U.S. GAAP. We accounted for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments was recorded as realized and unrealized credit derivative income (loss). We added back GSE CRT embedded derivative coupon interest to our total interest income because we considered 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 calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs. 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, 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 was 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. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance. The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods: Three Months Ended March 31, 2021 2020 $ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield Total interest income 40,010 1.72 % 186,699 4.19 % Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net — — % 4,718 0.10 % Effective interest income 40,010 1.72 % 191,417 4.29 % Our effective interest income decreased in the three months ended March 31, 2021 versus the same period in 2020 due to lower average earning assets and changes in portfolio composition. Our average earning assets decreased to $9.3 billion for the three months ended March 31, 2021 from $17.8 billion for the same period in 2020 primarily because we sold MBS and GSE CRTs due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed. Our effective yield decreased in the three months ended March 31, 2021 versus the same period in 2020 due to changes in portfolio composition. Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS as of March 31, 2021 compared to 18% as of March 31, 2020. 46 Table of Contents The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods. Three Months Ended March 31, 2021 2020 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds Total interest expense (1,660) (0.08) % 85,688 2.07 % Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 5,368 0.26 % 10,067 0.24 % Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net 4,549 0.22 % (11,924) (0.29) % Effective interest expense 8,257 0.40 % 83,831 2.02 % Our effective interest expense and effective cost of funds decreased during the three months ended March 31, 2021 compared to the same period in 2020 primarily due to lower interest expense paid on our repurchase agreements due to lower average borrowings and a lower Federal Funds target interest rate. Lower interest expense on repurchase agreements was partially offset by contractual net interest expense on interest rate swaps of $4.5 million during the three months ended March 31, 2021 compared to $11.9 million of contractual net interest income for the same period in 2020. The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods. Three Months Ended March 31, 2021 2020 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 41,670 1.80 % 101,011 2.12 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,368) (0.26) % (10,067) (0.24) % Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net — — % 4,718 0.10 % Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net (4,549) (0.22) % 11,924 0.29 % Effective net interest income 31,753 1.32 % 107,586 2.27 % Effective net interest income and effective interest rate margin for the three months ended March 31, 2021 decreased from the same period in 2020 primarily due to lower average earning assets and lower effective yields that were partially offset by lower average borrowings and a lower effective cost of funds driven by cuts in the Federal Funds rate. 47 Table of Contents 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 March 31, 2021 and December 31, 2020. 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 March 31, 2021, approximately 91% of our equity is allocated to Agency RMBS. We present 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 investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS 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. March 31, 2021 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 8,997,918 101,824 9,099,742 Cash and cash equivalents (2) 198,357 — 198,357 Restricted cash (3) 380,678 — 380,678 Derivative assets, at fair value (3) 16,634 559 17,193 Other assets 30,340 36,526 66,866 Total assets 9,623,927 138,909 9,762,836 Repurchase agreements 8,240,887 — 8,240,887 Derivative liabilities, at fair value (3) 4,273 — 4,273 Other liabilities 31,155 4,589 35,744 Total liabilities 8,276,315 4,589 8,280,904 Total stockholders' equity (allocated) 1,347,612 134,320 1,481,932 Debt-to-equity ratio (4) 6.1 — 5.6 Economic debt-to-equity ratio (5) 7.3 — 6.6 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. (2) Cash and cash equivalents is 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 ($1.5 billion as of March 31, 2021) to total stockholders' equity. 48 Table of Contents December 31, 2020 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 8,050,865 121,317 8,172,182 Cash and cash equivalents (2) 148,011 — 148,011 Restricted cash 243,963 610 244,573 Derivative assets, at fair value (3) 9,893 111 10,004 Other assets 17,606 40,475 58,081 Total assets 8,470,338 162,513 8,632,851 Repurchase agreements 7,228,699 — 7,228,699 Derivative liabilities, at fair value (3) 5,537 807 6,344 Other liabilities 27,114 3,536 30,650 Total liabilities 7,261,350 4,343 7,265,693 Total stockholders' equity (allocated) 1,208,988 158,170 1,367,158 Debt-to-equity ratio (4) 6.0 — 5.3 Economic debt-to-equity ratio (5) 7.4 — 6.6 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. (2) Cash and cash equivalents is 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 ($1.8 billion as of December 31, 2020) to total stockholders' equity. Liquidity and Capital Resources Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. 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. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets negatively affected our liquidity during the year ended December 31, 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. We sold portfolio assets 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 avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements. We held cash, cash equivalents and restricted cash of $579.0 million at March 31, 2021 (March 31, 2020: $365.0 million). Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances related to the 49 Table of Contents timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of $34.5 million for the three months ended March 31, 2021 (March 31, 2020: $110.0 million). Our investing activities used net cash of $986.3 million in the three months ended March 31, 2021 compared to net cash provided by investing activities of $11.6 billion in the three months ended March 31, 2020. Our primary source of cash from investing activities for the three months ended March 31, 2021 was proceeds from sales of MBS and GSE CRTs of $5.5 billion (March 31, 2020: $16.2 billion). We also generated $200.6 million from principal payments of MBS and GSE CRTs during the three months ended March 31, 2021 (March 31, 2020: $636.5 million). We invested $7.0 billion in MBS and GSE CRTs during the three months ended March 31, 2021 (March 31, 2020: $4.4 billion). We received cash of $282.3 million to settle derivative contracts in the three months ended March 31, 2021 (March 31, 2020: net cash used of $904.2 million). Our financing activities provided net cash of $1.1 billion for the three months ended March 31, 2021 (March 31, 2020: net cash used by financing activities of $11.6 billion). We received net cash from repurchase agreement borrowing of $1.0 billion (March 31, 2020: net repayments of $11.2 billion). In addition, we repaid $300.0 million of secured loans from the FHLBI upon their maturity during the three months ended March 31, 2020. We also used cash of $27.4 million for the three months ended March 31, 2021 to pay dividends (March 31, 2020: $74.8 million). Proceeds from issuance of common stock provided $161.4 million for the three months ended March 31, 2021 (March 31, 2020: $347.3 million). As of March 31, 2021, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.9% for Agency RMBS. The haircuts ranged from a low of 4% to a high of 5%. 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. Effects of Margin Requirements, Leverage and Credit Spreads Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a "margin call," which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition. We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods. 50 Table of Contents Forward-Looking Statements Regarding Liquidity As of March 31, 2021, we held $8.6 billion of Agency securities that are financed by repurchase agreements. We also had approximately $494.5 million of unencumbered investments and unrestricted cash of $198.4 million as of March 31, 2021. 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. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Contractual Obligations We have entered into an agreement with our Manager under which our Manager is entitled to receive a management fee and the reimbursement of certain operating expenses incurred on our behalf. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum. Refer to Note 11 - "Related Party Transactions" of our condensed consolidated financial statements for additional information on how our management fee is calculated. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager. As of March 31, 2021, we had the following contractual obligations: Payments Due by Period $ in thousands Total Less than 1 year 1-3 years 3-5 years After 5 years Repurchase agreements 8,240,887 8,240,887 — — — Interest expense on repurchase agreements 1,153 1,153 — — — Total (1) 8,242,040 8,242,040 — — — (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 We have committed to invest up to $125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, 2021, $118.7 million of our commitment to these unconsolidated ventures had been called. We are committed to fund $6.7 million in additional capital to fund future investments and cover future expenses should they occur. 51 Table of Contents Dividends To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. 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, 2020. 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 to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty. As of March 31, 2021, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $74.1 million, or 5% of our stockholders' equity. The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2021. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are generally denominated in U.S. dollars. $ in thousands Number of Counterparties Repurchase Agreement Financing Exposure North America 11 5,182,059 270,933 Europe (excluding United Kingdom) 2 884,295 42,148 Asia 4 2,174,533 109,449 Total 17 8,240,887 422,530 Other Matters We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2021, 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, 2021. 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. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of 52 Table of Contents U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. 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). We calculate that as of March 31, 2021, we conducted our business so as not to be regulated as an investment company under the 1940 Act.