What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-05 · 332 added, 243 removed, 646 unchanged (47% of the section changed)

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• 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;

• estimates relating to fair value of our target assets and credit loss reserves;

• our understanding of our competition;

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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%.

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.

Financial conditions eased once again during the second quarter, as equities and most credit sectors continued to react favorably to an uptick in activity as the economy continued to reopen.

In contrast, interest rates fell, reflecting the concerns around the potential impact of COVID-19 variants that have begun to emerge.

Equities continued to build on their strong start to the year, with the S&P 500 and the NASDAQ gaining 8.2% and 9.5%, respectively.

The employment picture continued to improve during the quarter, as gains in nonfarm payrolls averaged 567,000 per month, and the unemployment rate fell slightly from 6.0% to 5.9% at quarter-end.

Consumer activity was mixed during the quarter, as consumer confidence measures dipped, spending increased and retail sales numbers were relatively flat.

With the rollout of vaccinations continuing, albeit at a slowing pace, we remain cautiously optimistic about near-term gains in economic activity, particularly given the amount of anticipated government stimulus.

The yield curve flattened during the second quarter as inflation fears were offset by concerns that an uptick in COVID-19 cases, exacerbated by more contagious variants, could upend the recovery.

The yield on the 10 year Treasury bond fell 27 basis points to 1.47%, while the yield on the 2 year Treasury note rose 9 basis points to 0.25%.

While 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") increased sharply, ending the second quarter at 5.4%, up from 2.6% at the end of the first quarter, while the CPI excluding food and energy ended the quarter at 4.5%, up from 1.6% last quarter.

Commodity prices also rose sharply during the quarter, with West Texas Intermediate ("WTI") crude recording a 24.9% increase and the Commodity Research Bureau ("CRB") commodity index gaining 15.4%.

Breakeven rates on inflation-protected Treasuries were little changed during the second quarter, as the inflation

rate implied by 2 year U.S.

Treasury inflation-protected securities ("TIPS") rose 5 basis points to 2.72%, while the 5 year breakeven rate fell 10 basis points to 2.50%.

CMBS risk premiums contracted in the second quarter largely due to improving health trends together with supportive fiscal and monetary policies.

Amid the recent vaccine rollout and progress towards controlling the pandemic, increased economic activity has translated to slowly improving commercial real estate fundamentals.

While commercial mortgage loan delinquencies remain elevated across many property types, they have recently been declining overall.

The lodging and retail sectors have experienced the highest level of loan delinquencies due to travel restrictions and a sharp slowdown in activity.

Office, multi-family and industrial property sectors continue to post relatively lower delinquency levels.

Loans secured by office properties have benefited from long-term tenant leases and industrial warehouse properties have benefited from growing online shopping, as online retailers have demanded more space to support their fulfillment process.

Despite increased vacancy rates among some multi-family properties located in central business districts, many properties have performed relatively well as renters have been aided by government support and generous forbearance practices.

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.

Demographic trends and changes in housing preferences shaped by the pandemic led to robust demand, especially for single family homes.

This strength is reflected in home price appreciation, which has accelerated rapidly over the past year.

Meanwhile, credit spreads on residential mortgage backed securities have largely reversed the widening that occurred in March 2020.

Nevertheless, many individual homeowners have been adversely impacted by the economic consequences of the COVID-19 pandemic.

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.

Stimulus payments and the provision of borrower relief including forbearance and loan modifications have substantially reduced borrower defaults and loan losses relative to levels that would have likely occurred without these actions.

Agency RMBS sharply underperformed during the second quarter, as consistent demand from the Federal Reserve was more than offset by elevated net supply, reduced demand from commercial banks, persistent prepayment concerns and an increased likelihood that the Federal Reserve’s timeline for reducing asset purchases would be accelerated.

Prepayment speeds moderated during the quarter, but remained elevated, and the lower interest rate environment at quarter-end should keep prepayments near historical highs over the coming months.

Premiums on specified pool Agency RMBS improved marginally during the quarter, and we expect those premiums to be well supported as 30 year mortgage rates remain near 3%.

The dollar roll environment remained a bright spot, as implied financing rates improved through the quarter as Federal Reserve purchase activity continued to support the market.

While wider spread levels improve the attractiveness of Agency RMBS and despite persistent Federal Reserve demand, the headwinds that the Agency RMBS sector faced during the second quarter largely remain intact.

As we move into the third quarter, investors are focused on the pace of the recovery, the increase in price pressures, the trajectory of new COVID-19 cases and the timing of the Federal Reserve's taper of asset purchases.

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.

will remain robust as the economy continues to reopen over the course of the year, and that the inflation numbers we have seen over the past quarter will prove transitory.

Proposed Changes to LIBOR

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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.

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

adjustment recommended for that contract type by the Federal Reserve or the ARRC to apply on and after the "LIBOR Replacement Date".

For such contracts, the law authorizes and safe harbors the selection by such party of the relevant SOFR-based rate plus the spread 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.

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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 evaluating 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.

Investment Activities

The table below shows the composition of our investment portfolio as of March 31, 2021, December 31, 2020 and March 31, 2020:

$ in thousands March 31, 2021 December 31, 2020 March 31, 2020

The table below shows the composition of our investment portfolio as of June 30, 2021, December 31, 2020 and June 30, 2020:

$ in thousands June 30, 2021 December 31, 2020 June 30, 2020

30 year fixed-rate, at fair value 8,642,830 8,050,866 6,828

15 year fixed-rate, at fair value — — 3,125

Hybrid ARM, at fair value — — 2,672

Agency CMO, at fair value — — 300,535

Agency CMBS, at fair value — — 2,278,027

Agency CMO 14,201 — —

Non-Agency CMBS, at fair value 63,800 109,583 1,457,915

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GSE CRT, at fair value — — 101,886

Loan participation interest, at fair value — — 21,577

Commercial loan, at fair value 20,822 23,098 21,792

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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.

We sold $9.8 billion and purchased $11.0 billion of Agency RMBS during the six months ended June 30, 2021 primarily to capitalize on a sharp increase in interest rates and lower valuations on investment opportunities early in the year.

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.

As of June 30, 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 less than 1% as of June 30, 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.

Our Agency RMBS holdings as of June 30, 2021 consisted primarily of specified pools with coupon distributions as shown in the table below.

$ in thousands Fair Value Percentage

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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.

As of June 30, 2021, the implied cost basis of TBAs represented approximately 15% of our total investment portfolio versus 18% as of December 31, 2020.

As of June 30, 2021, our investments consist of 30 year Agency RMBS TBAs with 2.5% coupons in conventional 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.

As of June 30, 2021 and December 31, 2020 our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs, versus 90% as of June 30, 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.

The largest property geographic locations are in California, New York, Texas, 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.

All of our non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2021.

Further, approximately 72% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2021.

As of June 30, 2021 and December 31, 2020, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs, versus 1% as of June 30, 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.

We did not hold any GSE CRTs as of June 30, 2021 or December 31, 2020.

Our holdings of GSE CRT represented approximately 6% of our total investment portfolio as of June 30, 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.

As of June 30, 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 June 30, 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.

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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

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March 31, 2021 8,240,887 8,359,010 8,708,686

June 30, 2021 7,851,204 7,945,494 8,004,924

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

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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.

As of June 30, 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.

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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.

Under these swap agreements, we make fixed interest rate payments and receive floating interest rate payments indexed off of one- or three-month LIBOR.

To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed off of one- or three-month LIBOR and receive fixed interest rate payments as part of our overall risk management strategy.

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.

During the six months ended June 30, 2021, we terminated existing swaps with a notional amount of $500.0 million and entered into new swaps with a notional amount of $1.5 billion as part of our overall risk management strategy.

Daily variation margin pay ment 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 $161.2 million on interest rate swaps during the six months ended June 30, 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:

As of June 30, 2021, we had €14.8 million or $18.0 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:

During the six months ended June 30, 2021, we settled currency forward contracts of €41.7 million or $49.9 million (June 30, 2020:

€41.7 million or $45.8 million) in notional amount and realized a net loss of $552,000 (June 30, 2020:

$346,000 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.

In February 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.

In June 2021, we completed a public offering of 43,125,000 shares of common stock at the price of $3.39 per share.

Total net proceeds were approximately $145.9 million after deducting offering expenses.

On June 16, 2021 we redeemed all issued and outstanding shares of our Series A Preferred Stock for $140.0 million plus accrued and unpaid dividends.

The cash redemption price for each share of Series A Preferred Stock was $25.00.

The excess of the consideration transferred over carrying value is accounted for as a deemed dividend and resulted in a reduction of $4.7 million in net income (loss) attributable to common stockholders during the three and six months ended June 30, 2021.

As of June 30, 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 15,500,000 shares under our equity distribution agreement for proceeds of $57.8 million, net of approximately $831,000 in commissions and fees during the six months ended June 30, 2021.

We did not sell any shares of common stock under equity distribution agreements during the three months ended June 30, 2021 or three and six months ended June 30, 2020.

For information on dividends declared during the six months ended June 30, 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.

During the six months ended June 30, 2021, we did not repurchase any shares of our common stock.

Book Value per Common Share

We calculate book value per common share as follows:

$ in thousands except per share amounts March 31, 2021 December 31, 2020

$ in thousands except per share amounts June 30, 2021 December 31, 2020

Numerator (adjusted equity):

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Book value per common share 3.21 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.

Our book value per common share decreased 16.8% as of June 30, 2021 compared to December 31, 2020.

The increase in interest rate volatility and prepayment speeds, combined with reduced investor demand for prepayment protection and the potential for an earlier than expected taper of MBS purchases from the Federal Reserve resulted in Agency RMBS sharply underperforming interest rate swap hedges during the first half of 2021.

In particular, lower coupon 30 year Agency RMBS underperformed given their increased sensitivity to changes in interest rates and expectations of the Federal Reserve’s tapering.

Refer to Item 3.

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Results of Operations

The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31,

The table below presents certain information from our condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020.

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

$ in thousands, except share data 2021 2020 2021 2020

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Dividends to preferred stockholders 9,900 11,106 21,007 22,213

Issuance and redemption costs of redeemed preferred stock 4,682 — 4,682 —

Net income (loss) attributable to common stockholders (88,340) (299,945) (108,722) (1,927,244)

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Diluted 260,139,759 166,943,073 242,147,331 161,857,175

(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.

(1) Periods with negative interest expense on repurchase agreements are due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements.

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.

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Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2021 and 2020.

Three Months Ended March 31,

The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2021 and 2020.

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

$ in thousands 2021 2020 2021 2020

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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:

We had average earning assets of approximately $8.8 billion for the three months ended June 30, 2021 (June 30, 2020:

$1.9 billion) and $9.1 billion for the six months ended June 30, 2021 (June 30, 2020:

$9.9 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).

Average earning assets increased for the three months ended June 30, 2021 compared to 2020 as we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

Average earning assets decreased for the six months ended June 30, 2021 compared to 2020 primarily due to these sales.

We earned total interest income of $43.2 million and $83.2 million for the three and six months ended June 30, 2021, respectively (June 30, 2020:

$30.2 million and $216.9 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,

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

$ in thousands 2021 2020 2021 2020

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Total interest income 43,154 30,173 83,164 216,872

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.

MBS and GSE CRT interest income increased $13.0 million for the three months ended June 30, 2021 compared to 2020 primarily due to a $24.7 million increase in coupon interest reflecting higher average earning assets, which was partially offset by a 437 basis point decrease in average earning asset yields.

MBS and GSE CRT interest income decreased $133.1 million for the six months ended June 30, 2021 compared to 2020 reflecting lower average earning assets and a 256 basis point decrease in average earning asset yields.

Average earning asset yields decreased for the three and six months ended June 30, 2021 compared to 2020 due to changes in portfolio composition.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS as of June 30, 2021.

For further details on the composition of our investment portfolio as of June 30, 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 $25,000 and $612,000 during the three and six months ended June 30, 2021, respectively, compared to 2020.

The decrease for six months ended June 30, 2021 is primarily due to the sale of our loan participation interest in April 2020.

Prepayment Speeds

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

The 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,

The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three and six months ended June 30, 2021 and 2020.

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

$ in thousands 2021 2020 2021 2020

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Net (premium amortization) discount accretion (8,879) 2,787 (20,935) (13,786)

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 .

Net premium amortization increased $11.7 million and $7.1 million for the three and six months ended June 30, 2021, respectively, compared to 2020 primarily due to sales of assets purchased at discounts and the purchase of Agency RMBS at premiums during the second half of 2020 and in 2021 .

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

The table below presents the components of interest expense for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

The table below presents the components of interest expense for the three and six months ended June 30, 2021 and 2020:

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

$ in thousands 2021 2020 2021 2020

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Total interest expense (3,177) 442 (4,837) 86,130

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 interest expense on repurchase agreement borrowings decreased $1.0 million for the three months ended June 30, 2021 compared to 2020 despite higher average borrowings primarily due to a change in the collateral underlying our repurchase agreements.

Our interest expense on repurchase agreement borrowings decreased $86.4 million for the six months ended June 30, 2021 compared to 2020 primarily 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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.4 million and $10.8 million during the three and six months ended June 30, 2021, respectively, and $4.5 million and $14.6 million during the three and six months ended June 30, 2020, respectively.

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

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

We increased the amount of gains and losses reclassified as a decrease to interest expense during the three and six months ended June 30, 2020 by $2.7 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 $21.2 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.

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,

We repaid our secured loans in the third quarter of 2020 and did not incur interest expense for secured loans during the three and six months ended June 30, 2021.

For the three and six months ended June 30, 2020, the weighted average borrowing rate on our secured loans was 0.85% and 1.48%, respectively.

Our total interest expense during the three and six months ended June 30, 2021 decreased $3.6 million and $91.0 million, respectively, compared to 2020 primarily due to decreases of $2.7 million and $94.7 million, respectively, in interest expense on repurchase agreements borrowings and secured loans as discussed above.

The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2021 and 2020:

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

$ in thousands 2021 2020 2021 2020

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(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.

Total average borrowings increased $7.0 billion in the three months ended June 30, 2021 compared to 2020 because we resumed investing in Agency RMBS in July 2020 and financing purchases with repurchase agreements.

Total average borrowings decreased in the six months ended June 30, 2021 compared to 2020 primarily because we repaid repurchase agreements as we sold assets from our MBS and GSE CRT portfolio in the first half of 2020.

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.

Our average cost of funds decreased 34 and 209 basis points for three and six months ended June 30, 2021, respectively, compared to 2020 primarily due to the factors discussed above.

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,

The table below presents the components of net interest income for the three and six months ended June 30, 2021 and 2020:

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

$ in thousands 2021 2020 2021 2020

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Net interest rate margin 2.12 % 6.15 % 1.95 % 2.42 %

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:

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.

Our net interest income, which equals interest income less interest expense, totaled $46.3 million and $88.0 million for the three and six months ended June 30, 2021, respectively (June 30, 2020:

$29.7 million and $130.7 million).

The increase in net interest income for the three months ended June 30, 2021 compared to 2020 was primarily the result of resuming investing in Agency RMBS in July 2020 and financing purchases with repurchase agreement borrowings.

The decrease in net interest income for the six months ended June 30, 2021 compared to 2020 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 2.12% and 1.95% for the three and six months ended June 30, 2021, respectively (June 30, 2020:

6.15% and 2.42%).

The decrease in net interest rate margin for the three and six months ended June 30, 2021 compared to 2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings.

months ended June 30, 2021 compared to 2020, net interest rate margin was impacted by 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 June 30, 2021.

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,

The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2021 and 2020:

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

$ in thousands 2021 2020 2021 2020

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Net unrealized gains (losses) on commercial loan and loan participation interest 822 3,023 (2,276) (2,469)

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

Total gain (loss) on investments, net 72,620 (306,366) (259,237) (1,061,849)

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.

During the three and six months ended June 30, 2021, we sold MBS and GSE CRTs and realized net losses of $118.0 million and $234.9 million, respectively (June 30, 2020:

net losses of $404.7 million and $409.0 million).

The majority of sales during the three and six months ended June 30, 2021 were of lower yielding Agency RMBS to purchase higher yielding Agency RMBS and capitalize on a sharp increase in interest rates and lower valuations on investment opportunities early in the year.

We sold securities during the three and six months ended June 30, 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 did not record any impairment during the three and six months ended June 30, 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 $6.3 million and $85.1 million of impairment on non-Agency RMBS and CMBS securities during the three and six months ended June 30, 2020, respectively, because we intended to sell or more likely than not would be required to sell 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.

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

As of March 31, 2021, $9.0 billion (December 31, 2020:

As of June 30, 2021, $8.7 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 recorded net unrealized gains on our MBS and GSE CRT portfolio accounted for under the fair value option of $189.8 million and net unrealized losses of $22.1 million in the three and six months ended June 30, 2021, respectively, compared to net unrealized gains of $105.4 million in the three months ended June 30, 2020 and net unrealized losses of $561.4 million in the six months ended June 30, 2020.

Net unrealized gains in three months ended June 30, 2021 largely reflect reversals of unrealized losses upon sale.

Net unrealized losses in the six months ended June 30, 2021 reflect wider interest rate spreads on our Agency assets during the first quarter of 2021.

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

We recorded an unrealized gain of $822,000 and an unrealized loss of $2.3 million on our commercial loan in the three and six months ended June 30, 2021, respectively, compared to unrealized losses of $785,000 and $2.5 million in the three and six months ended June 30, 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 recorded a realized loss of $3.8 million on our loan participation interest in the three and six months ended June 30, 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:

As of June 30, 2021, $70.9 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.

We recorded an $830,000 and a $1.8 million decrease in the provision for credit losses for this security during the three and six months ended June 30, 2021, respectively, because the security fully repaid in June 2021.

We did not record any provisions for credit losses the during the three and six months ended June 30, 2020.

Refer to Note 4 – "Mortgage-Backed Securities and Credit Risk Transfer Securities" of our condensed consolidated financial statements included in Part I.

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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.

For the three and six months ended June 30, 2021, we recorded equity in earnings of unconsolidated ventures of $331,000 and $237,000, respectively (June 30, 2020:

equity in earnings of $318,000 and $488,000).

We recorded equity in earnings for the three and six months ended June 30, 2021 and 2020 primarily due to earnings on the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net

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$ in thousands

Three Months Ended March 31, 2021

Three months ended June 30, 2021

not designated as

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Interest Rate Swaps (166,365) (4,572) (32,786) (203,723)

Currency Forward Contracts (13) — (142) (155)

TBAs 10,431 — 7,163 17,594

Total (155,947) (4,572) (25,765) (186,284)

$ in thousands

Three months ended June 30, 2020

not designated as

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

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

Total (138) — (205) (343)

$ in thousands

Six Months Ended June 30, 2021

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 161,162 (9,121) (11,705) 140,336

Interest Rate Swaptions (553) — — (553)

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$ in thousands

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

not designated as

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Total (904,358) 11,924 (18,688) (911,122)

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.

During the six months ended June 30, 2021, we terminated existing swaps with a notional amount of $500.0 million and entered into new swaps with a notional amount of $1.5 billion.

We realized a net loss of $166.4 million and a net gain of $161.2 million for the three and six months ended June 30, 2021, respectively, on interest rate swaps due to changing interest rates.

During the six months ended June 30, 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 realized a net loss of $904.7 million for the six months ended June 30, 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.

As of June 30, 2021, we had $7.9 billion of repurchase agreement borrowings with a weighted average remaining maturity of 52 days.

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

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

As of 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)

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

As of June 30, 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 June 30, 2021 As of December 31, 2020

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

Interest Rate Swaps (1)

6,300,000 0.41 % 0.09 % 6.2 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.

(1) Notional amount as of June 30, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

As of June 30, 2021, we held the following interest rate swaps whereby we pay interest at a one-month LIBOR rate.

We did not hold any such interest rate swaps as of December 31, 2020.

$ in thousands As of June 30, 2021

Derivative instrument Notional Amounts Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity

Interest Rate Swaps 1,000,000 0.10 % 0.37 % 2.9

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:

As of June 30, 2021, we had $18.0 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:

As of June 30, 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.

We recorded $17.6 million of realized and unrealized gains and $39.7 million of realized and unrealized losses, net on TBAs during the three and six months ended June 30, 2021, respectively.

Realized and unrealized losses in the six months ended June 30, 2021 reflect a sharp increase in mortgage rates during the first quarter of 2021.

We did not invest in TBAs during the three and six months ended June 30, 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,

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

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

$ in thousands 2020 2020

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

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.

Realized and unrealized credit derivative loss in the three and six months ended June 30, 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 and six months ended June 30, 2021.

Net Gain (Loss) on Extinguishment of Debt

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

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

of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements during the six months ended June 30, 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 and settlements of counterparty claims for less than the principal balance of our repurchase agreements as a gain on extinguishment of debt in our condensed consolidated statement of operations.

Other Investment Income (Loss), net

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

Our other investment income (loss), net during the three and six months ended June 30, 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.

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

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.

We incurred management fees of $5.5 million and $10.3 million for the three and six months ended June 30, 2021, respectively (June 30, 2020:

$9.8 million and $20.7 million).

Management fees decreased for the three and six months ended June 30, 2021 compared to the same periods 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

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.

Our general and administrative expenses not covered under our management agreement amounted to $2.1 million and $4.1 million for the three and six months ended June 30, 2021, respectively (June 30, 2020:

$4.1 million and $7.2 million).

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

General and administrative costs were lower for the three and six months ended June 30, 2021 compared to the same periods 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 and six months ended June 30, 2020 totaling $1.5 million and $2.6 million, respectively.

Issuance and Redemption Costs of Redeemed Preferred Stock

On June 16, 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock.

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:

For the three months ended June 30, 2021, our net loss attributable to common stockholders was $88.3 million (June 30, 2020:

$299.9 million net loss attributable to common stockholders) or $0.34 basic and diluted net loss per average share available to common stockholders (June 30, 2020:

$1.80 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;

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on investments of $72.6 million in the 2021 period compared to net losses on investments of $306.4 million in the 2020 period;

(ii) net losses on derivative instruments of $186.3 million in the 2021 period compared to net losses on derivative instruments of $343,000 in the 2020 period;

and (iii) a $16.6 million increase in net interest income.

For the six months ended June 30, 2021 our net loss attributable to common stockholders was $108.7 million (June 30, 2020:

$1.9 billion net loss attributable to common stockholders) or $0.45 basic and diluted net loss per average share available to common stockholders (June 30, 2020:

$11.91 basic and diluted net loss per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $100.7 million in the 2021 period compared to net losses on derivative instruments of $911.1 million in the 2020 period;

(ii) net losses on investments of $259.2 million in the 2021 period compared to net losses on investments of $1.1 billion in the 2020 period;

(iii) credit derivative net losses of $35.8 million in the 2020 period;

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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),

• earnings available for distribution (and by calculation, earnings available for distribution per common share),

• effective interest income (and by calculation, effective yield),

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• debt-to-equit y ratio.

Commencing with the quarter ended June 30, 2021, we changed the title of our non-GAAP measure of core earnings (and by calculation, core earnings per common share) to earnings available for distribution (and by calculation, earnings available for distribution per common share) to clarify what the measure presents.

The adjustments made to reconcile net income (loss) attributable to common stockholders to earnings available for distribution are identical to those adjustments that we previously made to determine core earnings.

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.

We have historically excluded the impact of realized and unrealized gains and losses on GSE CRT embedded derivatives from the calculation of earnings available for distribution.

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.

GAAP net income (loss) attributable to common stockholders to earnings available for distribution 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.

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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.

We did not present earnings available for distribution for the first half of 2020 or for the year ended December 31, 2020 because earnings available for distribution excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

In addition, earnings available for distribution 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.

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

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

Core Earnings

We calculate core earnings as U.S.

Earnings Available for Distribution (formerly Core Earnings)

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

We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective.

We calculate earnings available for distribution as U.S.

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

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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.

By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies.

However, because not all of our peer companies use identical

operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by our peer companies.

We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S.

GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S.

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

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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.

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

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 have historically distributed at least 100% of our REIT taxable income.

Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock.

However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs.

Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective.

We caution that earnings available for distribution 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.

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

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,

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

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

$ in thousands, except per share data 2021 2021

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

155,947 (126,303)

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

25,765 16,505

TBA dollar roll income (2)

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Amortization of net deferred (gain) loss on de-designated interest rate swaps (4)

(5,429) (10,797)

Subtotal 113,327 158,867

Core earnings attributable to common stockholders 25,158

Earnings available for distribution 24,987 50,145

Basic income (loss) per common share (0.34) (0.45)

Core earnings per share attributable to common stockholders (5)

Earnings available for distribution per common share (5)

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

Three Months Ended March 31,

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

$ in thousands 2021 2021

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

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

We include TBA dollar roll income in earnings available for distribution 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.

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

Three Months Ended March 31,

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

$ in thousands 2021 2021

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Repurchase agreements interest expense (3,177) (4,837)

(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,

(5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding.

The components of earnings available for distribution for the three and six months ended June 30, 2021 are:

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

$ in thousands 2021 2021

Effective net interest income (1)

36,330 68,083

TBA dollar roll income 9,680 20,225

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Total expenses (7,602) (14,479)

Total core earnings 36,265

Subtotal 39,569 75,834

Dividends to preferred stockholders (9,900) (21,007)

Core earnings attributable to common stockholders 25,158

Issuance and redemption costs of redeemed preferred stock (4,682) (4,682)

Earnings available for distribution 24,987 50,145

(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.

Earnings available for distribution during the three and six months ended June 30, 2021 was driven by effective net interest income and TBA dollar roll income.

As discussed above, we did not report earnings available for distribution for the three and six months ended June 30, 2020.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

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

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43,154 1.96 % 31,300 6.57 %

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.

Six Months Ended June 30,

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

Total interest income 83,164 1.83 % 216,872 4.39 %

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

— — % 5,845 0.12 %

Effective interest income

83,164 1.83 % 222,717 4.51 %

Our effective interest income increased in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to higher average earning assets, which was partially offset by a decrease in average earning asset yields.

Our average earning assets increased to $8.8 billion for the three months ended June 30, 2021 from $1.9 billion for the same period in 2020 because we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020.

Our effective interest income decreased in the six months ended June 30, 2021 compared to the same period in 2020 due to lower average earning assets and yields primarily as a result of our asset sales in the first half of 2020.

Our effective yield decreased in the three and six months ended June 30, 2021 compared to the same periods in 2020 due to changes in portfolio composition.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS as of June 30, 2021 compared to less than 1% as of June 30, 2020.

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

Three Months Ended March 31,

Three Months Ended June 30,

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

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6,824 0.34 % 4,945 2.01 %

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.

Six Months Ended June 30,

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

Total interest expense (4,837) (0.12) % 86,130 1.97 %

Amortization of net deferred gain (loss) on de-designated interest rate swaps 10,797 0.27 % 14,570 0.33 %

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

9,121 0.22 % (11,924) (0.27) %

Effective interest expense

15,081 0.37 % 88,776 2.03 %

Our effective interest expense increased in the three months ended June 30, 2021 compared to the same period in 2020 due to contractual net interest expense on interest rate swaps of $4.6 million during the three months ended June 30, 2021.

We did not incur any contractual net interest expense during the three months ended June 30, 2020.

Our effective cost of funds decreased in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a change in the collateral underlying our repurchase agreements.

Additionally, we repaid our secured loans during 2020.

Our effective interest expense and effective cost of funds decreased in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds interest rate.

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $9.1 million during the six months ended June 30, 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,

Three Months Ended June 30,

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

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36,330 1.62 % 26,355 4.56 %

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.

Six Months Ended June 30,

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

Net interest income 88,001 1.95 % 130,742 2.42 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,797) (0.27) % (14,570) (0.33) %

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

— — % 5,845 0.12 %

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

(9,121) (0.22) % 11,924 0.27 %

Effective net interest income

68,083 1.46 % 133,941 2.48 %

Our effective net interest income increased in the three months ended June 30, 2021 compared to the same period in 2020 primarily because we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020.

Our effective net interest income decreased in the six months ended June 30, 2021 compared to the same period in 2020 due to lower average earning assets and yields primarily as a result of our asset sales in the first half of 2020 that were partially offset by lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds interest rate.

Our effective interest rate margin decreased in the three and six months ended June 30, 2021 compared to the same periods in 2020 primarily due to changes in portfolio composition.

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.

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 June 30, 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.

As of June 30, 2021, approximately 92% 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.

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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

June 30, 2021

$ in thousands Agency RMBS Credit Portfolio (1)

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(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.

(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 June 30, 2021) to total stockholders' equity.

December 31, 2020

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Restricted cash (3)

243,963 610 244,573

Derivative assets, at fair value (3)

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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:

We held cash, cash equivalents and restricted cash of $488.1 million at June 30, 2021 (June 30, 2020:

$271.6 million).

Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances related to the

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:

Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances related to the timing of

principal and interest payments, repayments of debt, and asset purchases and sales.

Our operating activities provided net cash of $73.5 million for the six months ended June 30, 2021 (June 30, 2020:

$130.6 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:

Our investing activities used net cash of $704.1 million in the six months ended June 30, 2021 compared to net cash provided by investing activities of $18.0 billion in the six months ended June 30, 2020.

Our primary source of cash from investing activities for the six months ended June 30, 2021 was proceeds from sales of MBS and GSE CRTs of $9.8 billion (June 30, 2020:

$23.1 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:

We also generated $416.5 million from principal payments of MBS and GSE CRTs during the six months ended June 30, 2021 (June 30, 2020:

$690.1 million).

We invested $7.0 billion in MBS and GSE CRTs during the three months ended March 31, 2021 (March 31, 2020:

We invested $11.0 billion in MBS and GSE CRTs during the six months ended June 30, 2021 (June 30, 2020:

$5.0 billion).

We received cash of $282.3 million to settle derivative contracts in the three months ended March 31, 2021 (March 31, 2020:

We received cash of $126.3 million to settle derivative contracts in the six months ended June 30, 2021 (June 30, 2020:

net cash used of $904.4 million).

Our financing activities provided net cash of $1.1 billion for the three months ended March 31, 2021 (March 31, 2020:

Our financing activities provided net cash of $726.1 million for the six months ended June 30, 2021 (June 30, 2020:

net cash used by financing activities of $18.2 billion).

We received net cash from repurchase agreement borrowing of $1.0 billion (March 31, 2020:

During the six months ended June 30, 2021, we received net cash from repurchase agreement borrowing of $622.5 million (June 30, 2020:

net repayments of $17.5 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:

In addition, we repaid $910.0 million of secured loans from the FHLBI during the six months ended June 30, 2020.

We used cash of $140.0 million to redeem our Series A Preferred Stock during the six months ended June 30, 2021.

We also used cash of $62.2 million for the six months ended June 30, 2021 to pay dividends (June 30, 2020:

$102.6 million).

Proceeds from issuance of common stock provided $161.4 million for the three months ended March 31, 2021 (March 31, 2020:

Proceeds from issuance of common stock provided $307.6 million for the six months ended June 30, 2021 (June 30, 2020:

$347.1 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.

As of June 30, 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 3% to a high of 5%.

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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.

As of June 30, 2021, we held $8.2 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $516.5 million of unencumbered investments and unrestricted cash of $134.7 million as of June 30, 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.

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

As of March 31, 2021, we had the following contractual obligations:

As of June 30, 2021, we had the following contractual obligations:

Payments Due by Period

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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.

As of June 30, 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.

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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.

As of June 30, 2021, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $68.7 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of June 30, 2021.

The information is based on the geographic headquarters of the counterparty or counterparty's parent company.

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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.

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended June 30, 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

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.

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.

We calculate that as of June 30, 2021, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis