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Item 2. Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 
 In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco." 
 The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the "SEC"). 
 
 
 
 
 Forward-Looking Statements 
 We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "intend," "project," "forecast" or similar expressions and future or conditional verbs such as "will," "may," "could," "should," and "would," and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to: 
 • ongoing spread and economic and operational impact of the COVID-19 pandemic, including but not limited to, the impact on the value, volatility, availability, financing and liquidity of mortgage assets; 
 • our business and investment strategy; 
 • our investment portfolio and expected investments; 
 • our projected operating results; 
 • general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S. governmental agencies and changes to U.S. government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and our ability to respond to and comply with such actions, initiatives and changes; 
 • the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements; 
 • financing and advance rates for our target assets; 
 • changes to our expected leverage; 
 • our expected book value per common share; 
 • our intention and ability to pay dividends; 
 • interest rate mismatches between our target assets and our borrowings used to fund such investments; 
 • the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs; 
 • our ability to maintain sufficient liquidity to meet our short-term liquidity needs; 
 • changes in the credit rating of the U.S. government; 
 • changes in interest rates and interest rate spreads and the market value of our target assets; 
 • changes in prepayment rates on our target assets; 
 • the impact of any deficiencies in loss mitigation of third parties and related uncertainty in the timing of collateral disposition; 
 • our reliance on third parties in connection with services related to our target assets; 
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 • disruption of our information technology systems; 
 • the impact of potential data security breaches or other cyber-attacks or other disruptions; 
 • effects of hedging instruments on our target assets; 
 • rates of default or decreased recovery rates on our target assets; 
 • modifications to whole loans or loans underlying securities; 
 • the degree to which our hedging strategies may or may not protect us from interest rate and foreign currency exchange rate volatility; 
 • the degree to which derivative contracts expose us to contingent liabilities; 
 • counterparty defaults; 
 • compliance with financial covenants in our financing arrangements; 
 • changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes; 
 • our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes; 
 • our ability to maintain our exception from the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act"); 
 • availability of investment opportunities in mortgage-related, real estate-related and other securities; 
 • availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities; 
 • the market price and trading volume of our capital stock; 
 • availability of qualified personnel from our Manager and our Manager's continued ability to find and retain such personnel; 
 • the relationship with our Manager; 
 • estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future; 
 • estimates relating to fair value of our target assets and credit loss reserves; 
 • our understanding of our competition; 
 • changes to generally accepted accounting principles in the United States of America ("U.S. GAAP"); 
 • the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and 
 • market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy. 
 The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings "Risk Factors," "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and "Business." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 
 The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in this Report. 
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 Executive Summary 
 We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS") and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we currently invest in the following: 
 • Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae") or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS"); 
 • Commercial mortgage-backed securities ("CMBS") that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS"); 
 • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS"); 
 • To-be-announced securities forward contracts ("TBAs") to purchase Agency RMBS; 
 • Commercial mortgage loans; and 
 • Other real estate-related financing arrangements. 
 We have also historically invested in: 
 • CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively "Agency CMBS"); 
 • Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); and 
 • Residential mortgage loans. 
 We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), an indirect wholly-owned subsidiary of Invesco Ltd. ("Invesco"). 
 We have elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of "Investment Company" under the 1940 Act. 
 
 Market Conditions 
 Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, monetary policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation. 
 Financial conditions eased 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 
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 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 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. The U.S. government has responded by passing a number of fiscal stimulus measures and relief programs for households and businesses directly or indirectly impacted by the virus. 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 the inflation numbers we have seen over the past quarter will prove transitory. 
 Proposed Changes to LIBOR 
 In 2017, the U.K. Financial Conduct Authority (the "FCA"), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR will not be guaranteed after 2021. The Alternative Reference Rates Committee ("ARRC"), which was convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. Further, on March 5, 2021, the FCA announced that December 31, 2021 will be the cessation date for 1-week & 2-month tenors of USD-LIBOR. The FCA also set June 30, 2023 as the cessation date for the other five tenors (overnight, 1-month, 3-month, 6-month and 12-month) of USD-LIBOR. Additionally, this FCA announcement constitutes an index cessation event under the International Swaps and Derivatives Association Inc.’s ("ISDA") IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol, as well as the ARRC’s fallback language for non-consumer cash products, giving the market clarity on the spread adjustments to alternative reference rate based fallbacks for all EUR-, CHF-, GBP-, JPY- and USD-LIBOR settings. 
 On April 6, 2021, New York State ("NYS") put into law legislation to help address challenges surrounding legacy LIBOR contracts that have no effective means to transition away from LIBOR and to incentivize the selection of SOFR-based fallback rates in other contracts. The law applies to existing USD-LIBOR contracts governed by NYS law that use LIBOR as a 
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 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". 
 SOFR is an overnight rate unlike LIBOR which is a forward-looking term rate, making SOFR an inexact replacement for LIBOR. There is currently no perfect way to create robust, forward-looking, SOFR term rates. Note that the ARRC has announced that they will not recommend a forward-looking SOFR term rate by mid-2021, as previously announced, due to insufficient development of the SOFR derivatives markets. Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time or to the same alternative reference rate, in each case increasing the difficulty of hedging. Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread and there is no assurance that the spread adjustments will avoid negative financial impacts on our portfolio at the time of transition. 
 We have material contracts that are indexed to LIBOR and are monitoring this activity and evaluating the related risks. However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments. We do not currently intend to amend our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock or our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock to change the existing USD-LIBOR cessation fallback language. Our Series B and Series C Preferred Stock each become callable at the time the stock begins to pay a USD-LIBOR-based rate. Should we choose to call the Series B or Series C Preferred Stock in order to avoid a dispute over the results of the USD-LIBOR fallbacks for that class, we may be forced to raise additional funds at an unfavorable time. 
 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 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. 
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 Investment Activities 
 The table below shows the composition of our investment portfolio as of June 30, 2021, December 31, 2020 and June 30, 2020: 
 
 As of 
 $ in thousands June 30, 2021 December 31, 2020 June 30, 2020 
 Agency RMBS: 
 30 year fixed-rate, at fair value 8,642,830 8,050,866 6,828 
 15 year fixed-rate, at fair value — — 3,125 
 Agency CMO 14,201 — — 
 Non-Agency CMBS, at fair value 63,800 109,583 1,457,915 
 Non-Agency RMBS, at fair value 9,832 11,733 14,404 
 GSE CRT, at fair value — — 101,886 
 Commercial loan, at fair value 20,822 23,098 21,792 
 Investments in unconsolidated ventures 13,936 16,408 19,246 
 Subtotal 8,765,421 8,211,688 1,625,196 
 TBAs, at implied cost basis (1) 
 1,547,465 1,772,211 — 
 Total investment portfolio, including TBAs 10,312,886 9,983,899 1,625,196 

 (1) TBAs that we do not intend to physically settle on the contractual settlement date are accounted for as derivative financial instruments and recorded on our consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. Refer to Note 8 "Derivatives and Hedging Activities" in Part I. Item 1 of this report on Form 10-Q. 
 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 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 June 30, 2021 consisted primarily of specified pools with coupon distributions as shown in the table below. 
 
 $ in thousands Fair Value Percentage 
 2.0% 3,893,021 45.0 % 
 2.5% 2,567,396 29.7 % 
 3.0% 2,182,413 25.3 % 
 Total Agency RMBS 8,642,830 100.0 % 

 Our purchases of Agency RMBS have been primarily focused on specified pools with prepayment protection, as low mortgage rates and a robust housing market have increased borrower incentives to prepay their mortgage loans. We seek to mitigate the negative impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that diminish borrower incentive to prepay, such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, higher percentage of non-owner occupied loans (investment and vacation properties) and newly originated loans. In addition, we focus a significant amount of purchases in specified pools that have higher geographic concentrations in states that exhibit slower prepayments such as New York, Florida and Texas. 
 We invest in TBAs as an alternative means of investing in and financing Agency RMBS. 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 
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 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. 
 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 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. 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 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 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. 
 Financing and Other Liabilities 
 We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that have historically moved in close relationship to LIBOR. 
 We also used secured loans from the FHLBI to finance a portion of our investment portfolio. We repaid our secured loans during 2020 with proceeds from sales of assets that collateralized the secured loans. We terminated our membership in FHLBI in the third quarter of 2020. 
 The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter: 
 
 $ in thousands Collateralized borrowings under repurchase agreements and secured loans 
 Quarter Ended Quarter-end balance Average quarterly balance (1) 
 Maximum balance (2) 
 
 June 30, 2020 740,000 983,599 1,373,296 
 September 30, 2020 5,243,288 3,373,356 5,243,288 
 December 31, 2020 7,228,699 6,883,773 7,237,496 
 March 31, 2021 8,240,887 8,359,010 8,708,686 
 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. 
 (2) Amount represents the maximum borrowings at month-end during each of the respective periods. 
 
 
 We have committed to invest up to $125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of 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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 Hedging Instruments 
 We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we 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 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 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 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 
 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. 
 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 six months ended June 30, 2021, we did not repurchase any shares of our common stock. 
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 Book Value per Common Share 
 We calculate book value per common share as follows: 
 
 As of 
 $ in thousands except per share amounts June 30, 2021 December 31, 2020 
 Numerator (adjusted equity): 
 Total equity 1,373,379 1,367,158 
 Less: Liquidation preference of Series A Preferred Stock — (140,000) 
 Less: Liquidation preference of Series B Preferred Stock (155,000) (155,000) 
 Less: Liquidation preference of Series C Preferred Stock (287,500) (287,500) 
 Total adjusted equity 930,879 784,658 
 
 Denominator (number of shares): 
 Common stock outstanding 289,681 203,222 
 
 Book value per common share 3.21 3.86 

 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. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value. 
 
 Critical Accounting Policies 
 There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, 2020. 
 Recent Accounting Standards 
 See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Issued". 
 
 
 
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 Results of Operations 
 The table below presents certain information from our condensed consolidated statements of operations for the three and six months ended June 30, 2021 and 2020. 
 
 Three Months Ended June 30, Six Months Ended June 30, 
 $ in thousands, except share data 2021 2020 2021 2020 
 Interest income 
 Mortgage-backed and credit risk transfer securities 42,634 29,628 82,068 215,164 
 Commercial and other loans 520 545 1,096 1,708 
 Total interest income 43,154 30,173 83,164 216,872 
 Interest expense 
 Repurchase agreements (1) 
 (3,177) (1,270) (4,837) 77,772 
 Secured loans — 1,712 — 8,358 
 Total interest expense (3,177) 442 (4,837) 86,130 
 Net interest income 46,331 29,731 88,001 130,742 
 Other income (loss) 
 Gain (loss) on investments, net 72,620 (306,366) (259,237) (1,061,849) 
 (Increase) decrease in provision for credit losses 830 — 1,768 — 
 Equity in earnings (losses) of unconsolidated ventures 331 318 237 488 
 Gain (loss) on derivative instruments, net (186,284) (343) 100,677 (911,122) 
 Realized and unrealized credit derivative income (loss), net — (2,738) — (35,790) 
 Net gain (loss) on extinguishment of debt — 3,701 — (1,107) 
 Other investment income (loss), net 16 731 — 1,534 
 Total other income (loss) (112,487) (304,697) (156,555) (2,007,846) 
 Expenses 
 Management fee – related party 5,455 9,793 10,339 20,746 
 General and administrative 2,147 4,080 4,140 7,181 
 Total expenses 7,602 13,873 14,479 27,927 
 Net income (loss) attributable to Invesco Mortgage Capital Inc. (73,758) (288,839) (83,033) (1,905,031) 
 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) 
 Net income (loss) per share: 
 Net income (loss) attributable to common stockholders 
 Basic (0.34) (1.80) (0.45) (11.91) 
 Diluted (0.34) (1.80) (0.45) (11.91) 
 Weighted average number of shares of common stock: 
 Basic 260,139,759 166,943,073 242,147,331 161,857,175 
 Diluted 260,139,759 166,943,073 242,147,331 161,857,175 

 (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. Item 1. of this report on Form 10-Q. 
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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 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 
 Average earning assets (1) 
 8,829,072 1,905,555 9,078,218 9,871,653 
 Average earning asset yields (2) 
 1.96 % 6.33 % 1.83 % 4.39 % 

 (1) Average balances for each period are based on weighted month-end balances. 
 (2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized. 
 Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately $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 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 June 30, Six Months Ended June 30, 
 $ in thousands 2021 2020 2021 2020 
 Interest Income 
 MBS and GSE CRT - coupon interest 51,513 26,841 103,003 228,950 
 MBS and GSE CRT - net premium amortization (8,879) 2,787 (20,935) (13,786) 
 MBS and GSE CRT - interest income 42,634 29,628 82,068 215,164 
 Commercial and other loans 520 545 1,096 1,708 
 Total interest income 43,154 30,173 83,164 216,872 

 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 
 Our RMBS portfolio (and previously our GSE CRT portfolio) is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. 
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 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 
 Agency RMBS (9,450) (894) (21,934) (21,807) 
 Agency CMBS — (78) — (1,744) 
 Non-Agency CMBS 845 4,473 1,723 9,531 
 Non-Agency RMBS (274) (178) (724) 2,520 
 GSE CRT — (536) — (2,286) 
 Net (premium amortization) discount accretion (8,879) 2,787 (20,935) (13,786) 

 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. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results. 
 
 Interest Expense and Cost of Funds 
 The table below presents the components of interest expense for the three 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 
 Interest Expense 
 Interest expense on repurchase agreement borrowings 2,252 3,233 5,960 92,342 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,429) (4,503) (10,797) (14,570) 
 Repurchase agreements interest expense (3,177) (1,270) (4,837) 77,772 
 Secured loans — 1,712 — 8,358 
 Total interest expense (3,177) 442 (4,837) 86,130 

 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 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 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 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. 
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 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 
 Total average borrowings (1) 
 7,945,877 981,992 8,145,507 8,756,995 
 Maximum borrowings during the period (2) 
 8,004,924 1,373,296 8,708,686 23,132,234 
 Cost of funds (3) 
 (0.16) % 0.18 % (0.12) % 1.97 % 

 (1) Average borrowings for each period are based on weighted month-end balances. 
 (2) Amount represents the maximum borrowings at month-end during each of the respective periods. 
 (3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings. 
 Total average borrowings 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 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 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 
 Interest Income 
 Mortgage-backed and credit risk transfer securities 42,634 29,628 82,068 215,164 
 Commercial and other loans 520 545 1,096 1,708 
 Total interest income 43,154 30,173 83,164 216,872 
 Interest Expense 
 Interest expense on repurchase agreement borrowings 2,252 3,233 5,960 92,342 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,429) (4,503) (10,797) (14,570) 
 Repurchase agreements interest expense (3,177) (1,270) (4,837) 77,772 
 Secured loans — 1,712 — 8,358 
 Total interest expense (3,177) 442 (4,837) 86,130 
 Net interest income 46,331 29,731 88,001 130,742 
 Net interest rate margin 2.12 % 6.15 % 1.95 % 2.42 % 

 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. For the six 
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 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 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 
 Net realized gains (losses) on sale of investments (118,006) (404,739) (234,853) (409,024) 
 Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments — (6,287) — (85,121) 
 Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option 189,804 105,445 (22,108) (561,427) 
 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 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 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. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of 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 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 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. 
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 (Increase) Decrease in Provision for Credit Losses 
 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 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. Item 1 of this Report for additional information on our allowance for credit losses. 
 
 Equity in Earnings (Losses) of Unconsolidated Ventures 
 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 
 We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. 
 The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods: 
 
 $ in thousands 
 Three months ended June 30, 2021 
 Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net 
 Interest Rate Swaps (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 
 Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net 
 
 
 Currency Forward Contracts (138) — (205) (343) 
 
 Total (138) — (205) (343) 

 
 $ in thousands 
 Six Months Ended June 30, 2021 
 Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net 
 Interest Rate Swaps 161,162 (9,121) (11,705) 140,336 
 Interest Rate Swaptions (553) — — (553) 
 Currency Forward Contracts (552) — 1,113 561 
 TBAs (33,754) — (5,913) (39,667) 
 Total 126,303 (9,121) (16,505) 100,677 

 
 $ in thousands 
 Six Months Ended June 30, 2020 
 Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net 
 Interest Rate Swaps (904,704) 11,924 (18,532) (911,312) 
 
 Currency Forward Contracts 346 — (156) 190 
 
 Total (904,358) 11,924 (18,688) (911,122) 

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 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 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 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 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 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 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 June 30, 2021, we had $1.5 billion notional amount of TBAs (December 31, 2020: $1.7 billion). 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 and six months ended June 30, 2020. 
 
 Three Months Ended June 30, Six Months Ended June 30, 
 $ in thousands 2020 2020 
 GSE CRT embedded derivative coupon interest 1,127 5,845 
 Gain (loss) on settlement of GSE CRT embedded derivatives (16,414) (14,131) 
 Change in fair value of GSE CRT embedded derivatives 12,549 (27,504) 
 Total realized and unrealized credit derivative income (loss), net (2,738) (35,790) 

 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. 
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 Net Gain (Loss) on Extinguishment of Debt 
 As discussed in Note 6 - "Borrowings" of our condensed consolidated financial statements include in Part I. Item 1. of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements during the 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 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. FHLBI redeemed our stock at cost during 2020. We terminated our FHLBI membership in the third quarter of 2020. 
 
 Expenses 
 We incurred management fees of $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 $2.1 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. 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. 
 
 Net Income (Loss) attributable to Common Stockholders 
 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 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; and (iv) a $42.7 million decrease in net interest income. 
 For further information on the changes in net gains (loss) on derivative instruments, net gain (loss) on investments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income." 
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 Non-GAAP Financial Measures 
 We use the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below: 
 • earnings available for distribution (and by calculation, earnings available for distribution per common share), 
 • effective interest income (and by calculation, effective yield), 
 • effective interest expense (and by calculation, effective cost of funds), 
 • effective net interest income (and by calculation, effective interest rate margin), and 
 • economic debt-to-equity ratio. 
 The most directly comparable U.S. GAAP measures are: 
 • net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share), 
 • total interest income (and by calculation, earning asset yields), 
 • total interest expense (and by calculation, cost of funds), 
 • net interest income (and by calculation, net interest rate margin), and 
 • debt-to-equit y ratio. 
 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 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 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. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. As we no longer earn embedded derivative coupon interest due to the sale of our GSE CRTs during 2020, effective interest income will be equal to U.S. GAAP total interest income beginning in 2021. 
 We did not present 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. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies. 
 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; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and net (gain) loss on extinguishment of debt. 
 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 
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 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. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events. We 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. 
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 The table below provides a reconciliation of U.S. 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 
 Net income (loss) attributable to common stockholders (88,340) (108,722) 
 Adjustments: 
 (Gain) loss on investments, net (72,620) 259,237 
 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) 
 9,680 20,225 
 
 (Gain) loss on foreign currency transactions, net (3) 
 (16) — 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) 
 (5,429) (10,797) 
 
 
 Subtotal 113,327 158,867 
 Earnings available for distribution 24,987 50,145 
 Basic income (loss) per common share (0.34) (0.45) 
 Earnings available for distribution per common share (5) 
 0.10 0.21 

 (1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components: 
 
 Three Months Ended June 30, Six Months Ended June 30, 
 $ in thousands 2021 2021 
 Realized gain (loss) on derivative instruments, net (155,947) 126,303 
 Unrealized gain (loss) on derivative instruments, net (25,765) (16,505) 
 Contractual net interest income (expense) on interest rate swaps (4,572) (9,121) 
 Gain (loss) on derivative instruments, net (186,284) 100,677 

 (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in 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. 
 (3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the condensed consolidated statements of operations. 
 (4) U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components: 
 
 Three Months Ended June 30, Six Months Ended June 30, 
 $ in thousands 2021 2021 
 Interest expense on repurchase agreement borrowings 2,252 5,960 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,429) (10,797) 
 Repurchase agreements interest expense (3,177) (4,837) 

 (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. 
 
 
 
 
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 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 
 
 Equity in earnings (losses) of unconsolidated ventures 331 237 
 (Increase) decrease in provision for credit losses 830 1,768 
 Total expenses (7,602) (14,479) 
 Subtotal 39,569 75,834 
 Dividends to preferred stockholders (9,900) (21,007) 
 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. 
 
 
 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 
 Prior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. We included our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest was not accounted for consistently under U.S. GAAP. We accounted for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments was recorded as realized and unrealized credit derivative income (loss). We added back GSE CRT embedded derivative coupon interest to our total interest income because we considered GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument. 
 We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs. 
 We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net; amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. 
 We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance. 
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 The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods: 
 
 Three Months Ended June 30, 
 2021 2020 
 $ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield 
 Total interest income 43,154 1.96 % 30,173 6.33 % 
 Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net 
 — — % 1,127 0.24 % 
 Effective interest income 
 43,154 1.96 % 31,300 6.57 % 

 
 Six Months Ended June 30, 
 2021 2020 
 $ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield 
 Total interest income 83,164 1.83 % 216,872 4.39 % 
 Add: 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. 
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 The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods. 
 
 Three Months Ended June 30, 
 2021 2020 
 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds 
 Total interest expense (3,177) (0.16) % 442 0.18 % 
 Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 5,429 0.27 % 4,503 1.83 % 
 Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net 
 4,572 0.23 % — — % 
 Effective interest expense 
 6,824 0.34 % 4,945 2.01 % 

 
 Six Months Ended June 30, 
 2021 2020 
 $ 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 % 
 Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 10,797 0.27 % 14,570 0.33 % 
 Add (Less): 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. 
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 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 June 30, 
 2021 2020 
 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin 
 Net interest income 46,331 2.12 % 29,731 6.15 % 
 Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,429) (0.27) % (4,503) (1.83) % 
 Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net 
 — — % 1,127 0.24 % 
 Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 
 (4,572) (0.23) % — — % 
 Effective net interest income 
 36,330 1.62 % 26,355 4.56 % 

 
 Six Months Ended June 30, 
 2021 2020 
 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin 
 Net interest income 88,001 1.95 % 130,742 2.42 % 
 Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,797) (0.27) % (14,570) (0.33) % 
 Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net 
 — — % 5,845 0.12 % 
 Add (Less): 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. 
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 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 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 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. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage. 
 
 
 June 30, 2021 
 $ in thousands Agency RMBS Credit Portfolio (1) 
 Total 
 Mortgage-backed securities 8,657,030 73,633 8,730,663 
 Cash and cash equivalents (2) 
 134,664 — 134,664 
 Restricted cash (3) 
 353,386 — 353,386 
 Derivative assets, at fair value (3) 
 3,980 437 4,417 
 Other assets 18,157 35,413 53,570 
 Total assets 9,167,217 109,483 9,276,700 
 
 Repurchase agreements 7,851,204 — 7,851,204 
 Derivative liabilities, at fair value (3) 
 17,242 20 17,262 
 Other liabilities 31,404 3,451 34,855 
 Total liabilities 7,899,850 3,471 7,903,321 
 
 Total stockholders' equity (allocated) 1,267,367 106,012 1,373,379 
 Debt-to-equity ratio (4) 
 6.2 — 5.7 
 Economic debt-to-equity ratio (5) 
 7.4 — 6.8 

 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. 
 (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. 
 (3) Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class. 
 (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. 
 (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.5 billion as of June 30, 2021) to total stockholders' equity. 
 
 
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 December 31, 2020 
 $ in thousands Agency RMBS Credit Portfolio (1) 
 Total 
 Mortgage-backed securities 8,050,865 121,317 8,172,182 
 Cash and cash equivalents (2) 
 148,011 — 148,011 
 Restricted cash (3) 
 243,963 610 244,573 
 Derivative assets, at fair value (3) 
 9,893 111 10,004 
 Other assets 17,606 40,475 58,081 
 Total assets 8,470,338 162,513 8,632,851 
 
 Repurchase agreements 7,228,699 — 7,228,699 
 
 
 Derivative liabilities, at fair value (3) 
 5,537 807 6,344 
 Other liabilities 27,114 3,536 30,650 
 Total liabilities 7,261,350 4,343 7,265,693 
 
 Total stockholders' equity (allocated) 1,208,988 158,170 1,367,158 
 Debt-to-equity ratio (4) 
 6.0 — 5.3 
 Economic debt-to-equity ratio (5) 
 7.4 — 6.6 

 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. 
 (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. 
 (3) Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class. 
 (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. 
 (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.8 billion as of December 31, 2020) to total stockholders' equity. 
 
 
 
 
 Liquidity and Capital Resources 
 Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities. 
 We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. 
 The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets negatively affected our liquidity during the year ended December 31, 2020. Under the terms of our repurchase agreements, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion. In addition, our lenders have the contractual right to increase the "haircut", or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile. As a result of significant spread widening in both Agency and non-Agency securities in the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls. We sold portfolio assets to generate liquidity, in many cases at significantly distressed market prices. Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs. These events have led us to seek to avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements. 
 We held cash, cash equivalents and restricted cash of $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 
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 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 $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 $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 $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 $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 $726.1 million for the six months ended June 30, 2021 (June 30, 2020: net cash used by financing activities of $18.2 billion). 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 $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 $307.6 million for the six months ended June 30, 2021 (June 30, 2020: $347.1 million). 
 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%. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately. 
 Effects of Margin Requirements, Leverage and Credit Spreads 
 Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a "margin call," which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. 
 We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. 
 We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition. 
 We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods. 
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 Forward-Looking Statements Regarding Liquidity 
 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. 
 Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. 
 
 Contractual Obligations 
 We have entered into an agreement with our Manager under which our Manager is entitled to receive a management fee and the reimbursement of certain operating expenses incurred on our behalf. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum. Refer to Note 11 - "Related Party Transactions" of our condensed consolidated financial statements for additional information on how our management fee is calculated. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager. 
 As of June 30, 2021, we had the following contractual obligations: 
 
 Payments Due by Period 
 $ in thousands Total Less than 1
year 1-3 years 3-5 years After 5
years 
 
 Repurchase agreements 7,851,204 7,851,204 — — — 
 Interest expense on repurchase agreements 1,685 1,685 — — — 
 Total (1) 
 7,852,889 7,852,889 — — — 

 
 (1) Excluded from total contractual obligations are the amounts due to our Manager under the management agreement, as those obligations do not have fixed and determinable payments. 
 
 Off-Balance Sheet Arrangements 
 We have committed to invest up to $125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of 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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 Dividends 
 To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. 
 As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 12 – "Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, 2020. 
 Unrelated Business Taxable Income 
 We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income. 
 
 Exposure to Financial Counterparties 
 We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty. 
 As of 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. However, our repurchase agreements are generally denominated in U.S. dollars. 
 
 $ in thousands Number of Counterparties Repurchase Agreement Financing Exposure 
 North America 12 4,866,085 254,953 
 Europe (excluding United Kingdom) 2 816,313 33,435 
 Asia 4 2,168,806 114,004 
 
 Total 18 7,851,204 402,392 

 
 Other Matters 
 We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended June 30, 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 U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither 
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 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 June 30, 2021, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Invesco Mortgage Capital Inc. 10-Q

Item 2. Management’s Discussion and Analysis
