What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 265 added, 261 removed, 717 unchanged (42% of the section changed)

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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.

Some of these factors are described under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations." 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.

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• Residential mortgage loans.

We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and diversifying our risk profile.

We are externally managed and advised by Invesco Advisers, Inc.

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Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, monetary policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.

Financial conditions eased 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 financial conditions tightened modestly during the third quarter of 2021 as credit spreads widened and volatility increased in reaction to higher price data, they remained accommodative by historical standards.

Concerns around the impact of the COVID-19 delta variant remain, although the number of reported cases has been declining since early September.

Interest rates across the yield curve remained relatively stable despite the increase in prices.

Likewise, equity performance was also stable, with the S&P 500 gaining 0.6% and the NASDAQ losing 0.2%.

The employment picture continued to improve during the quarter, as gains in nonfarm payrolls averaged 550,000 per month, and the unemployment rate fell from 5.9% to 4.8% at quarter-end.

Consumer activity was mixed during the quarter, as consumer confidence measures fell while spending and retail sales both increased modestly.

With the rollout of COVID-19 vaccinations continuing, albeit at a slowing pace, we remain cautiously optimistic about near-term gains in economic activity, although pressure from higher prices remains a concern.

The yield curve was largely unchanged during the third quarter as persistent inflation fears were offset by concerns that the increase in COVID-19 cases could upend the recovery.

The yield on the 10 year Treasury bond rose 2 basis points to 1.49%, while the yield on the 2 year Treasury note rose 3 basis points to 0.28%.

While the short end of the yield curve remains pinned close to zero as the Federal Open Market Committee ("FOMC") targets the lower bound, the futures market has begun to price in increases to the Federal Funds rate beginning late next year.

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

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

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

rate implied by 2 year U.S.

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

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

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

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

The consumer price index ("CPI") remained elevated, ending the third quarter at 5.4%, unchanged from last quarter, while the CPI excluding food and energy ended the quarter at 4.0%, down from 4.5% last quarter.

Commodity prices continued to march higher during the quarter, with West Texas Intermediate ("WTI")

crude recording a 5.8% increase and the Commodity Research Bureau ("CRB") commodity index gaining 7.3%.

Despite these price increases, breakeven rates on inflation-protected Treasuries were mixed during the third quarter, perhaps reflecting a belief that these price increases are transitory in nature.

The inflation rate implied by 2 year U.S.

Treasury inflation-protected securities ("TIPS") fell 19 basis points to 2.53%, while the 5 year breakeven rate rose 3 basis points, also to 2.53%.

CMBS risk premiums were relatively unchanged in the third quarter.

Amid the COVID-19 vaccine program and progress toward controlling the pandemic, the economy is showing signs of improvement despite elevated case counts largely fueled by the delta variant.

This pick-up in economic activity has translated to improving employment levels and increased commercial real estate activity.

While commercial mortgage loan delinquencies remain elevated across many property types, they continue to decline from their post-pandemic peak levels.

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

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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.

Agency RMBS performance was mixed during the third quarter, as higher coupons benefited from early indications of prepayment burnout while lower coupons suffered from an increased likelihood that the Federal Reserve will begin to taper their purchase activity during the fourth quarter of 2021.

Prepayment speeds remained elevated during the quarter, but a decline in refinancing activity, seasonal factors, and the anticipation of higher rates as inflation concerns persist should lead to modestly slower speeds in the months ahead.

Premiums on specified pool Agency RMBS were generally unchanged during the quarter, and we expect those premiums to remain sensitive to the general level of interest rates.

The dollar roll market for lower coupon TBA securities continues to be a bright spot, as implied financing rates remained attractive throughout the quarter given persistent demand from the Federal Reserve and commercial banks.

Despite the anticipated reduction in Agency RMBS purchases by the Federal Reserve, diminishing supply and continued demand from commercial banks should support valuations in the coming months.

As we move into the fourth quarter, investors continue to be 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.

will remain robust while supply chain frictions associated with the reopening of the economy will continue to pressure inflation expectations higher in the near term.

Proposed Changes to LIBOR

In 2017, the U.K.

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

This announcement indicates that the continuation of LIBOR will not be guaranteed after 2021.

The Alternative Reference Rates Committee ("ARRC"), which was convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR.

ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR.

Further, on March 5, 2021, the FCA announced that December 31, 2021 will be the cessation date for 1-week & 2-month tenors of USD-LIBOR.

In March 2021, the U.K.

Financial Conduct Authority ("FCA"), which regulates LIBOR, announced that December 31, 2021 will be the cessation date for 1-week & 2-month tenors of USD-LIBOR.

The FCA also set June 30, 2023 as the cessation date for the other five tenors (overnight, 1-month, 3-month, 6-month and 12-month) of USD-LIBOR.

Additionally, this FCA announcement constitutes an index cessation event under the International Swaps and Derivatives Association Inc.’s ("ISDA") IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol, as well as the ARRC’s fallback language for non-consumer cash products, giving the market clarity on the spread adjustments to alternative reference rate based fallbacks for all EUR-, CHF-, GBP-, JPY- and USD-LIBOR settings.

On April 6, 2021, New York State ("NYS") put into law legislation to help address challenges surrounding legacy LIBOR contracts that have no effective means to transition away from LIBOR and to incentivize the selection of SOFR-based fallback rates in other contracts.

The law applies to existing USD-LIBOR contracts governed by NYS law that use LIBOR as a

benchmark and contain no fallback provisions or contain fallback provisions that result in a benchmark replacement that is based in any way on any LIBOR value.

For these in scope contracts, the NYS law provides that on and after "LIBOR Replacement Date" (the date that USD-LIBOR ceases to be published or to be representative), USD-LIBOR is replaced by operation of law with the relevant SOFR-based rate plus the spread adjustment recommended for that contract type by the US Federal Reserve or the ARRC, and any LIBOR-based fallback provisions are permanently overridden.

Additionally, the law applies to existing USD-LIBOR contracts governed by NYS law that contain fallback provisions that permit or require a party to select a benchmark replacement that is based in any way on any LIBOR value or otherwise in its discretion.

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

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 Alternative Reference Rates Committee's ("ARRC") 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.

In July 2021, the ARRC formally recommended Chicago Mercantile Exchange Group's forward looking Secured Overnight Financing Rate ("SOFR") term rate.

However, market participants are still evaluating what convention of SOFR will be adopted for various types of financial instruments and securitization vehicles.

For example, the mortgage and derivatives markets have adopted the daily compounded and paid in arrears SOFR convention.

In contrast, government sponsored enterprises, such as Fannie Mae, and Freddie Mac have begun issuing adjustable rate mortgages, mortgage-backed securities, and credit risk transfer deals indexed to the 30-, 90-, and 180-day Average SOFR rates published by the Federal Reserve Bank of New York as well as Term SOFR rates in the future.

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.

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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.

Should we choose to call the Series B or Series C Preferred Stock 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 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, 202 0.

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.

Beginning in the fourth quarter of 2021, we intend to transition our interest rate swaps that are currently indexed to LIBOR to interest rate swaps that are indexed to SOFR in a manner that will allow us to qualify for contract modification relief and maintain the same accounting for and presentation of interest rate swaps that was in place prior to modification.

As discussed above, while we do not currently intend to amend our Series B or Series C Preferred Stock to change the USD-LIBOR cessation fallback language, we may seek to apply the guidance if an amendment occurs prior to December 31, 2022.

Investment Activities

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

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

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

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

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

30 year fixed-rate, at fair value 8,725,908 8,050,866 5,536,103

Agency CMO 14,201 — —

Agency CMO, at fair value 29,103 — —

Non-Agency CMBS, at fair value 63,783 109,583 427,369

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Total investment portfolio, including TBAs 10,415,665 9,983,899 6,955,522

(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.

(1) Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S.

GAAP, we record TBAs that we do not intend to physically settle on the contractual settlement date as derivative financial instruments.

We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs.

For further details of our U.S GAAP accounting for 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.

Our TBA dollar roll transactions are a form of off-balance sheet financing.

For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below.

We sold $11.8 billion and purchased $13.4 billion of Agency RMBS during the nine months ended September 30, 2021 primarily to rotate into higher yielding securities.

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.

As of September 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 80% as of September 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.

Our 30 year fixed-rate Agency RMBS holdings as of September 30, 2021 consisted of specified pools with coupon distributions as shown in the table below.

$ in thousands Fair Value Percentage

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3.0% 2,190,944 25.1 %

Total Agency RMBS 8,642,830 100.0 %

3.5% 251,714 2.9 %

Total 30 year fixed-rate Agency RMBS 8,725,908 100.0 %

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.

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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

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.

As of September 30, 2021, the implied cost basis of TBAs represented approximately 15% of our total investment portfolio versus 18% as of December 31, 2020 and 13% as of September 30, 2020.

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

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

Implied financing rates in the dollar roll market were 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 2020.

We expect the Federal Reserve to begin reducing net purchases of Agency RMBS in the fourth quarter of 2021, and ending net purchases in the middle of 2022.

It is likely the Federal Reserve will continue to reinvest all or a portion of paydowns on their MBS portfolio in the subsequent quarters, which would continue to support the Agency RMBS TBA dollar roll market.

As of September 30, 2021 and December 31, 2020 our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs, versus 6% as of September 30, 2020.

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.

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

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

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

Our holdings of GSE CRT represented less than 1% of our total investment portfolio, including TBAs as of September 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.

As of September 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 September 30, 2021, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

The unconsolidated ventures invest in our target assets.

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Maximum balance (2)

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

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

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

September 30, 2021 7,873,798 7,846,536 7,886,360

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

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We have committed to invest up to $125.3 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.

As of September 30, 2021, $118.7 million of our commitment to these unconsolidated ventures has been called.

We are committed to fund $6.6 million in additional capital to fund future investments and cover future expenses should they occur.

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We actively manage our swap portfolio by terminating and entering into new swaps as the size and composition of our investment portfolio changes.

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.

During the nine months ended September 30, 2021, we terminated existing swaps with a notional amount of $1.5 billion and entered into new swaps with a notional amount of $2.5 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 realized a net gain of $183.8 million on interest rate swaps during the nine months ended September 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:

As of September 30, 2021, we had €14.3 million or $16.8 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).

During the nine months ended September 30, 2021, we settled currency forward contracts of €56.5 million or $68.0 million (September 30, 2020:

€62.5 million or $68.8 million) in notional amount and realized a net gain of $58,000 (September 30, 2020:

$1.3 million net loss).

Capital Activities

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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.

The excess of the consideration transferred over carrying value was 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 nine months ended September 30, 2021.

As of September 30, 2021, we sold all of the shares of common stock that we registered with the SEC under our shelf registration statement in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent.

We intend to register an additional 75,000,000 shares of common stock under our shelf registration statement in November 2021 that may be sold under a new equity distribution agreement.

During the three months ended September 30, 2021, we sold 22,060,000 shares of common stock under our equity distribution agreement for proceeds of $67.5 million, net of approximately $1.0 million in commissions and fees.

During the nine months ended September 30, 2021, we sold 37,610,000 shares of common stock under our equity distribution agreement for proceeds of $125.4 million, net of approximately $1.8 million in commissions and fees.

During three and nine months ended September 30, 2020, we sold 25,431 shares of common stock under our equity distribution agreement for proceeds of $80,000, net of approximately $2,000 in commissions and fees.

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

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

Book Value per Common Share

We calculate book value per common share as follows:

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

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

Numerator (adjusted equity):

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Book value per common share 3.25 3.86

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

Our book value per common share decreased 15.8% as of September 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.

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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,

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

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

$ in thousands, except share data 2021 2020 2021 2020

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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,

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

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

$ in thousands 2021 2020 2021 2020

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

We had average earning assets of approximately $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:

We had average earning assets of approximately $8.7 billion for the three months ended September 30, 2021 (September 30, 2020:

$4.2 billion) and $9.0 billion for the nine months ended September 30, 2021 (September 30, 2020:

$8.0 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:

Average earning assets increased for the three and nine months ended September 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.

We earned total interest income of $43.2 million and $126.3 million for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

$27.4 million and $244.3 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,

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

$ in thousands 2021 2020 2021 2020

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Total interest income 43,182 27,436 126,346 244,308

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.

MBS and GSE CRT interest income increased $15.8 million for the three months ended September 30, 2021 compared to 2020 primarily due to a $24.5 million increase in coupon interest reflecting higher average earning assets that was partially offset by a 64 basis point decrease in average earning asset yields.

MBS and GSE CRT interest income decreased $117.3 million for the nine months ended September 30, 2021 compared to 2020 reflecting a 221 basis point decrease in average earning asset yields.

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

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the nine months ended September 30, 2021.

For further details on the composition of our investment portfolio as of September 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 $4,000 and $616,000 during the three and nine months ended September 30, 2021, respectively, compared to 2020.

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

Prepayment Speeds

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

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

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

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

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

$ in thousands 2021 2020 2021 2020

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Net (premium amortization) discount accretion (9,341) (559) (30,276) (14,345)

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 .

Net premium amortization increased $8.8 million and $15.9 million for the three and nine months ended September 30, 2021, respectively, compared to 2020 primarily due to sales of assets purchased at discounts and the purchase of Agency RMBS at premiums during the second half of 2020 and in 2021 .

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

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

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

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

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

$ in thousands 2021 2020 2021 2020

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Total interest expense (3,272) (1,416) (8,109) 84,714

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 interest expense on repurchase agreement borrowings increased $799,000 for the three months ended September 30, 2021 compared to 2020 primarily due to higher average borrowings.

Our interest expense on repurchase agreement borrowings decreased $85.6 million for the nine months ended September 30, 2021 compared to 2020 primarily due to 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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.6 million and $16.4 million during the three and nine months ended September 30, 2021, respectively, and $3.2 million and $17.8 million during the three and nine months ended September 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 $20.5 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.

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,

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

For the three and nine months ended September 30, 2020, the weighted average borrowing rate on our secured loans was 1.16% and 1.47%, respectively.

Our total interest expense during the three months ended September 30, 2021 decreased $1.9 million compared to 2020 primarily due to higher amortization of net deferred gains on de-designated interest rate swaps.

Our total interest expense during the nine months ended September 30, 2021 decreased $92.8 million compared to 2020 primarily due to a decrease of $94.2 million 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 nine months ended September 30, 2021 and 2020:

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

$ in thousands 2021 2020 2021 2020

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(3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.

Total average borrowings 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.

Total average borrowings increased $4.5 billion and $1.1 billion in the three and nine months ended September 30, 2021 compared to 2020 because we resumed investing in Agency RMBS in July 2020 and financing purchases with repurchase agreements.

The increase in repurchase agreement borrowings was partially offset by the repayment of $1.65 billion of secured loans during 2020.

Our average cost of funds decreased 176 basis points for the nine months ended September 30, 2021 compared to 2020 primarily due to the factors discussed above.

There was no change in the average cost of funds for the three months ended September 30, 2021 compared to 2020.

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,

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

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

$ in thousands 2021 2020 2021 2020

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Net interest rate margin 2.15 % 2.79 % 2.01 % 2.46 %

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:

Our net interest income, which equals interest income less interest expense, totaled $46.5 million and $134.5 million for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

$28.9 million and $159.6 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:

The increase in net interest income for the three months ended September 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 nine months ended September 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 2.15% and 2.01% for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

2.79% and 2.46%).

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

months ended June 30, 2021 compared to 2020, net interest rate margin was impacted by decreases in the Federal Funds rate that had a greater impact on our average cost of funds than on our average asset yields.

Our cost of funds on all of our borrowings is influenced by changes in short term interest rates, whereas substantially all of the Company’s investments were fixed-rate assets as of June 30, 2021.

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

For the nine months ended September 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 September 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,

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

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

$ in thousands 2021 2020 2021 2020

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Total gain (loss) on investments, net (16,830) 65,106 (276,067) (996,743)

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.

During the three and nine months ended September 30, 2021, we sold MBS and GSE CRTs and realized net losses of $4.5 million and $239.3 million, respectively (September 30, 2020:

net gains of $50.1 million and net losses of $358.9 million).

Realized net losses during the nine months ended September 30, 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We sold securities during the nine months ended September 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 did not record any impairment during the three and nine months ended September 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 $9.0 million and $94.1 million of impairment on non-Agency RMBS and CMBS securities during the three and nine months ended September 30, 2020, respectively, because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis .

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015.

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

As of June 30, 2021, $8.7 billion (December 31, 2020:

As of September 30, 2021, $8.8 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.

99%) of our MBS are accounted for under the fair value option.

We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for under the fair value option of $13.8 million and $35.9 million in the three and nine months ended September 30, 2021, respectively, compared to net unrealized gains of $24.0 million in the three months ended September 30, 2020 and net unrealized losses of $537.4 million in the nine months ended September 30, 2020.

Net unrealized losses in the three and nine months ended September 30, 2021 primarily reflect wider interest rate spreads on our Agency RMBS.

Net unrealized losses in the nine months ended September 30, 2020 reflect declines in valuations due to wider interest rate spreads.

We recorded an unrealized gain of $1.4 million and an unrealized loss of $830,000 on our commercial loan in the three and nine months ended September 30, 2021, respectively, compared to unrealized losses of $15,000 and $2.5 million in the three and nine months ended September 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 recorded a realized loss of $3.8 million on our loan participation interest in the nine months ended September 30, 2020.

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

(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:

As of September 30, 2021, $70.8 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.

We recorded a $1.8 million decrease in the provision for credit losses for this security during the nine months ended September 30, 2021 because the security fully repaid in June 2021.

We did not record any provisions for credit losses the during the three and nine months ended September 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:

For the three and nine months ended September 30, 2021, we recorded equity in earnings of unconsolidated ventures of $344,000 and $581,000, respectively (September 30, 2020:

equity in earnings of $332,000 and $820,000).

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.

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

Gain (Loss) on Derivative Instruments, net

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$ in thousands

Three months ended June 30, 2021

Three months ended September 30, 2021

not designated as

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$ in thousands

Three months ended June 30, 2020

Three months ended September 30, 2020

not designated as

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

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

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

TBAs 1,227 — 2,578 3,805

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

$ in thousands

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

not designated as

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$ in thousands

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

not designated as

2 unchanged sentences

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

TBAs 1,227 — 2,578 3,805

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

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.

During the nine months ended September 30, 2021, we terminated existing interest rate swaps with a notional amount of $1.5 billion and entered into new swaps with a notional amount of $2.5 billion.

We realized a net gain of $22.7 million and $183.8 million for the three and nine months ended September 30, 2021, respectively, on interest rate swaps due to rising interest rates.

In March 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 realized a net loss of $909.4 million for the nine months ended September 30, 2020 on interest rate swaps primarily due to falling interest rates.

As of September 30, 2021, we had $7.9 billion of repurchase agreement borrowings with a weighted average remaining maturity of 56 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

As of September 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 September 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

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6,300,000 0.41 % 0.08 % 6.0 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.

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

As of September 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

$ in thousands As of September 30, 2021

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

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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:

As of September 30, 2021, we had $16.8 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:

As of September 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.

We recorded $4.5 million of net realized and unrealized gains and $35.2 million of net realized and unrealized losses on TBAs during the three and nine months ended September 30, 2021, respectively.

Net realized and unrealized losses in the nine months ended September 30, 2021 primarily reflect a sharp increase in mortgage rates during the first quarter of 2021.

We recorded net realized and unrealized gains of $3.8 million on TBAs during the three and nine months ended September 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,

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

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

$ in thousands 2020 2020

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

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.

Realized and unrealized credit derivative loss in the nine months ended September 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 nine months ended September 30, 2021.

Net Gain (Loss) on Extinguishment of Debt

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

of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements during the six months ended June 30, 2020.

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

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

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

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

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

We incurred management fees of $5.4 million and $15.8 million for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

$4.1 million and $24.9 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.

Management fees increased for the three months ended September 30, 2021 compared to the same period in 2020 due to a higher management fee base.

Management fees decreased for the nine months ended September 30, 2021 compared to the same period in 2020 due to a lower management fee base.

Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.

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

Our general and administrative expenses not covered under our management agreement amounted to $2.1 million and $6.3 million for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

$1.8 million and $9.0 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.

General and administrative costs were lower for the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic during the nine months ended September 30, 2020 totaling $2.6 million.

Issuance and Redemption Costs of Redeemed Preferred Stock

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

Net Income (Loss) attributable to Common Stockholders

For the three months ended 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:

For the three months ended September 30, 2021, our net income attributable to common stockholders was $49.3 million (September 30, 2020:

$96.9 million net income attributable to common stockholders) or $0.17 basic and diluted net income per average share available to common stockholders (September 30, 2020:

$0.53 basic and diluted net income per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $16.8 million in the 2021 period compared to net gains on investments of $65.1 million in the 2020 period;

(ii) net gains on derivative instruments of $35.3 million in the 2021 period compared to net gains on derivative instruments of $2.9 million in the 2020 period;

(iii) a $17.6 million increase in net interest income and (iv) a $15.8 million net gain on extinguishment of debt in the 2020 period.

For the nine months ended September 30, 2021 our net loss attributable to common stockholders was $59.4 million (September 30, 2020:

$1.8 billion net loss attributable to common stockholders) or $0.23 basic and diluted net loss per average share available to common stockholders (September 30, 2020:

$10.87 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 $136.0 million in the 2021 period compared to net losses on derivative instruments of $908.2 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;

(ii) net losses on investments of $276.1 million in the 2021 period compared to net losses on investments of $996.7 million in the 2020 period;

(iii) credit derivative net losses of $35.3 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."

(iv) a $25.1 million decrease in net interest income and (v) a $14.7 million net gain on extinguishment of debt in the 2020 period.

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

Non-GAAP Financial Measures

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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.

GAAP net income (loss) attributable to common stockholders to earnings available for distribution because we sold all of our GSE CRTs that were

accounted for as hybrid financial instruments during 2020.

Additionally, we have historically calculated effective interest income (and by calculation, effective yield) as U.S.

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GAAP total interest income beginning in 2021.

We did not present 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.

We did not present earnings available for distribution for the nine months ended September 30, 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 nine months ended September 30, 2020 and the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio.

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

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

However, because not all of our peer companies use identical

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

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

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

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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,

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

$ in thousands, except per share data 2021 2020 2021

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TBA dollar roll income (2)

9,316 2,055 29,541

(Gain) loss on foreign currency transactions, net (3)

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(5,601) (3,243) (16,398)

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

Subtotal (18,913) (85,584) 139,954

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Earnings available for distribution per common share (5)

0.10 0.06 0.31

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,

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

$ in thousands 2021 2020 2021

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(3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the condensed consolidated statements of operations.

Other investment income (loss) for the three months ended September 30, 2020 consists of quarterly dividends on our FHLBI stock.

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,

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

$ in thousands 2021 2020 2021

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

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

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

The components of earnings available for distribution for the following periods are:

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

$ in thousands 2021 2020 2021

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TBA dollar roll income 9,316 2,055 29,541

Dividend income — 402 —

Equity in earnings (losses) of unconsolidated ventures 344 332 581

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(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.

Earnings available for distribution increased during the three months ended September 30, 2021 compared to the same period in 2020 as we resumed investing in Agency RMBS and begin investing in TBAs in the third quarter of 2020.

Earnings available for distribution for the nine months ended September 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 nine months ended September 30, 2020.

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

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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.

financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance.

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

Three Months Ended June 30,

Three Months Ended September 30,

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

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43,182 1.98 % 27,914 2.67 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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126,346 1.88 % 250,631 4.20 %

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.

Our effective interest income increased in the three months ended September 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 $8.7 billion for the three months ended September 30, 2021 from $4.2 billion for the same period in 2020 because we resumed investing in Agency RMBS during the third quarter of 2020.

Our effective interest income decreased in the nine months ended September 30, 2021 compared to the same period in 2020 due to lower asset yields primarily as a result of our asset sales in the first half of 2020.

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

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the nine months ended September 30, 2021.

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

Three Months Ended June 30,

Three Months Ended September 30,

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

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6,504 0.33 % 2,382 0.29 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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21,585 0.36 % 91,158 1.75 %

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.

Our effective interest expense increased in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to contractual net interest expense on interest rate swaps of $4.2 million during the three months ended September 30, 2021 compared to contractual net interest expense on interest rate swaps of $555,000 for the same period in 2020.

Our effective cost of funds increased in the three months ended September 30, 2021 compared to the same period in 2020 primarily due to this change in contractual net interest expense on interest rate swaps.

Our effective interest expense and effective cost of funds decreased in the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to 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 $13.3 million during the nine months ended September 30, 2021 compared to $11.4 million of contractual net interest income for the same period in 2020.

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.

Three Months Ended June 30,

Three Months Ended September 30,

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

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36,678 1.65 % 25,532 2.38 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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104,761 1.52 % 159,473 2.45 %

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.

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

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

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of June 30, 2021 and December 31, 2020.

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

As of September 30, 2021, approximately 93% of our equity is allocated to Agency RMBS.

We present an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S.

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

June 30, 2021

September 30, 2021

$ in thousands Agency RMBS Credit Portfolio (1)

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Derivative assets, at fair value (3)

3,980 437 4,417

Other assets 29,551 35,256 64,807

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

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.5 billion as of June 30, 2021) to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.6 billion as of September 30, 2021) to total stockholders' equity.

December 31, 2020

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These events have led us to seek to avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements.

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

We held cash, cash equivalents and restricted cash of $486.2 million at September 30, 2021 (September 30, 2020:

$425.1 million).

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

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

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

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

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

Our operating activities provided net cash of $110.5 million for the nine months ended September 30, 2021 (September 30, 2020:

$143.7 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:

Our investing activities used net cash of $797.6 million in the nine months ended September 30, 2021 compared to net cash provided by investing activities of $13.7 billion in the nine months ended September 30, 2020.

Our primary source of cash from investing activities for the nine months ended September 30, 2021 was proceeds from sales of MBS and GSE CRTs of $11.8 billion (September 30, 2020:

$24.3 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:

We also generated $615.2 million from principal payments of MBS and GSE CRTs during the nine months ended September 30, 2021 (September 30, 2020:

$730.3 million).

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

We invested $13.4 billion in MBS and GSE CRTs during the nine months ended September 30, 2021 (September 30, 2020:

$10.5 billion).

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

We received cash of $164.4 million to settle derivative contracts in the nine months ended September 30, 2021 (September 30, 2020:

net cash used of $909.4 million).

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

Our financing activities provided net cash of $780.8 million for the nine months ended September 30, 2021 (September 30, 2020:

net cash used by financing activities of $13.7 billion).

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

During the nine months ended September 30, 2021, we received net cash from repurchase agreement borrowings of $645.1 million (September 30, 2020:

net repayments of $12.3 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:

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

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

We also used cash of $96.6 million for the nine months ended September 30, 2021 to pay dividends (September 30, 2020:

$117.3 million).

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

Proceeds from issuance of common stock provided $375.3 million for the nine months ended September 30, 2021 (September 30, 2020:

$347.2 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.

As of September 30, 2021, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.8% for Agency RMBS.

The haircuts ranged from a low of 3% to a high of 5%.

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Forward-Looking Statements Regarding Liquidity

As of 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.

As of September 30, 2021, we held $8.3 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $598.1 million of unencumbered investments and unrestricted cash of $189.5 million as of September 30, 2021.

Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations, and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.

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

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

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

Payments Due by Period

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We have committed to invest up to $125.3 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.

As of September 30, 2021, $118.7 million of our commitment to these unconsolidated ventures had been called.

We are committed to fund $6.6 million in additional capital to fund future investments and cover future expenses should they occur.

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If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.

As of 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.

As of September 30, 2021, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $72.8 million, or 5% of our stockholders' equity.

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

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

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Other Matters

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

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

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government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test.

This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries.

In addition, we believe neither

we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities.

This requirement

limits the types of businesses in which we are permitted to engage in through our subsidiaries.

In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities.

Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries.

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

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis