What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-17 compared with 2021-02-22 · 431 added, 416 removed, 573 unchanged (60% of the section changed)

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

To achieve this objective, we have invested in the following:

To achieve this objective, we currently invest in the following:

• Residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S.

government agency such as the Government National Mortgage Association (“Ginnie Mae”) or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”);

• Commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S.

government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);

• Commercial mortgage-backed securities (“CMBS”) that are not guaranteed by a U.S.

government agency or a federally chartered corporation (“non-Agency CMBS”);

• RMBS that are not guaranteed by a U.S.

government agency or a federally chartered corporation (“non-Agency RMBS”);

• CMBS that are not guaranteed by a U.S.

government agency or a federally chartered corporation (“non-Agency CMBS”);

• Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);

• To-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;

• Residential and commercial mortgage loans;

• Commercial mortgage loans;

• Other real estate-related financing arrangements.

We conduct our business through IAS Operating Partnership L.P.

We have also historically invested in the following:

• CMBS that are guaranteed by a U.S.

government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);

• Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);

• Residential mortgage loans.

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

We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P.

(our “Operating Partnership”).

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We operate our business in a manner that permits our exclusion from the definition of an “Investment Company” under the 1940 Act.

In the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic.

Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties in the latter part of March.

We notified our financing counterparties on March 23, 2020 that we were not in a position to fund the margin calls we received and that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements.

To generate liquidity and reduce leverage in the first half of 2020, we sold a substantial portion of our MBS and GSE CRT portfolio.

During the year ended December 31, 2020, we repaid all of our repurchase agreements that may not have been in compliance under our borrowing agreements and repaid our secured borrowings from the FHLBI.

We resumed investing in Agency RMBS in July 2020 with approximately 98% of our portfolio, excluding TBAs, invested in Agency RMBS at year end.

We are financing our purchases of Agency RMBS with repurchase agreements and are in compliance with the terms of our financing arrangements as of December 31, 2020.

We also began investing in TBAs as an alternative means of investing in and financing Agency RMBS in the third quarter of 2020.

These TBAs are accounted for as derivative instruments under U.S.

We continue to hold unencumbered credit assets and evaluate potential credit investments that do not rely on short-term or mark-to-market financing.

To further strengthen our balance sheet and position ourselves for future investment opportunities, we have explored and will continue to explore additional sources of financing including issuances of debt and equity securities and other forms of long-term financing arrangements.

However, no assurance can be given that we will be able to access any additional sources of financing.

On March 24, 2020, we announced that we would delay the payment of quarterly dividends on our common and preferred stock to preserve liquidity until we could more accurately assess the impact of volatile market conditions related to the COVID-19 pandemic.

On May 9, 2020, our board of directors approved payment of the previously declared common and preferred dividends.

We paid our first quarter 2020 common stock dividend of $0.50 per share on June 30, 2020 in a combination of cash and common shares.

We paid cash dividends of $0.02, $0.05 and $0.08 per share on our common stock for the second, third and fourth quarter of 2020, respectively.

Dividends on our Series A Preferred, Series B Preferred and Series C Preferred Stock are current.

While the Federal Reserve has taken a number of proactive measures to bolster liquidity, we expect market conditions to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic.

Invesco is committed to helping its employees, clients and communities navigate the challenges presented by the spread of COVID-19.

The primary focus of Invesco's efforts is to ensure the health and safety of its employees while preserving its ability to serve clients and manage assets in a highly dynamic market environment.

To help ensure it can continue to meet client needs, such as those of our Company, the majority of our Manager’s employees are working remotely.

Portfolio managers, research analysts and traders are successfully working remotely or in secure locations with access to all systems necessary to fulfill their responsibilities and an ability to connect with their teams to manage client assets.

Additionally, our Manager’s operational, control and support teams have successfully transitioned to a remote working environment.

Factors Impacting Our Operating Results

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Macroeconomic factors that affect our business include interest rate spread premiums, governmental 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 over the course of 2020, as conditions continued to improve during the third and fourth quarter.

This reflected the continued economic recovery following the sharp declines brought on by the onset of the COVID-19 pandemic earlier in the year.

The performance of U.S.

equities also followed this pattern, with the S&P 500 Index increasing by almost 12% during the fourth quarter and over 16% for the year despite falling sharply during the first quarter.

Investor confidence was bolstered through the year as the U.S.

Government embarked on multiple stimulus packages.

The Federal Reserve provided unprecedented support to the markets via direct securities purchases, implementing various lending programs and facilities, and pledging to keep the Federal Funds rate in a range of 0% to 0.25% for an extended period.

Gains in nonfarm payrolls averaged 283,000 per month during the fourth quarter, and the unemployment rate ended the year at 6.7%, improving from the high of 14.7% that was recorded in April.

The continued rebound in economic activity from the March and April trough can be seen across a number of measures, as consumer activity remained positive as evidenced by gains in spending, retail sales and consumer confidence metrics.

While the continued economic recovery is encouraging, we remain cautious about the pace of near-term gains as the number of COVID-19 cases has remained elevated with the vaccine rollout underway.

Interest rates fell sharply across the yield curve during 2020, reflecting both the effects of the Federal Reserve’s bond buying program and investor demand for safe-haven assets.

The yield on the 2 year Treasury note fell 145 basis points to 0.12% while the yield on the 10 year Treasury bond fell by 100 basis points to 0.91%.

During the fourth quarter, the yield curve steepened as investors began pricing in the impact of further stimulus along with positive news regarding multiple vaccine trials.

During the quarter, the yield on the 2 year Treasury note fell one basis point while the yield on the 10 year bond increased by 23 basis points.

The short end of the yield curve remains pinned close to zero, as the Federal Funds target rate is at the lower bound, and the futures market continues to forecast no change for the next several years.

Interest rate volatility measures also reflect the view that rates will stay contained, as these remain near multi-year lows.

While price data has broadly shown a rebound off the lows of March and April, most measures still show that inflation remains subdued.

The consumer price index was 1.4% at year end, well off the low of 0.1% in May, but still lower than pre-COVID levels.

The personal consumption expenditure index (1.5% at year end) also increased in the fourth quarter but remains close to pre-COVID lows.

On the other hand, breakeven rates on inflation protected Treasuries have broken out to levels not seen in several years as investors price in the potential impact on prices of the recent stimulus measures and positive growth expectations.

The inflation rate implied by 2 year and 5 year TIPs was 2.01% and 1.97%, respectively, at year end.

The COVID-19 pandemic has negatively impacted most commercial real estate property types.

The lodging and retail sectors have been the most impacted due to travel restrictions and accelerated growth in e-commerce.

In the retail sector, many tenants are finding it difficult to meet rent obligations and, in some instances, are foregoing payments or seeking forbearance relief.

Real estate loans are experiencing growing delinquencies and are at greater risk of default which could impact the fundamental performance of our investments.

Despite fundamental deterioration, CMBS risk premiums contracted in the fourth quarter due to modest new issuance supply and increased investor demand.

The United States Federal Reserve’s Term Asset-Backed Securities Loan Facility (“TALF”) that provides financing for triple-A rated conduit non-Agency CMBS also continued to contribute to stability in the CMBS market.

While residential real estate fundamentals deteriorated significantly at the onset of the pandemic, low mortgage rates and tight housing supply have driven a dramatic recovery.

Demographic trends and changes in housing preferences shaped by the COVID-19 pandemic have combined with improved affordability to generate robust demand, especially for single family homes.

This strength is also reflected in home price appreciation, which accelerated in the second half of the year.

Meanwhile, credit spreads on residential mortgage backed securities have largely recovered the widening that occurred at the onset of the pandemic.

Financial conditions eased significantly over the first half of 2021, as markets responded to an encouraging decrease in COVID-19 cases and deaths.

However, the easing of conditions peaked at mid-year and tightened during the second half of the year as a resurgence of COVID-19 cases and concerns over large increases in inflation caused investors to turn cautious.

These concerns have only increased as we enter the first weeks of 2022, as more aggressive removal of stimulus by the Federal Reserve becomes priced into the market and is reflected in tighter financial conditions.

Despite the tighter conditions of the second half of 2021, the equity markets were strong throughout the year, with the S&P 500 Index increasing by 26.9% during 2021, including a gain of 10.6% during the fourth quarter.

The NASDAQ gained 21.4% for the year, including an increase of 8.3% during the fourth quarter.

Equities have dropped sharply to start 2022, however, with the S&P down 5.3% and the NASDAQ down 9.0% through the end of January.

The employment picture improved steadily throughout the course of 2021, with gains in nonfarm payrolls averaging 537,000 for the year and 365,000 during the fourth quarter.

The unemployment rate also improved markedly, declining from 6.7% at end of 2020 to 3.9% at the end of 2021.

Consumer activity was positive during the year, with most of the increases in consumer spending and retail sales skewed towards the first half of the year, as the resurgence in COVID-19 cases and sharp increases in price levels took their toll during the second half of 2021.

Consumer confidence measures also reflected this dynamic, showing confidence levels peaking around mid-year before dropping during the second half of 2021.

Interest rates rose across the yield curve during 2021, as market expectations of increases to the Federal Funds target rate by the Federal Open Market Committee ( “ FOMC ” ) impacted shorter maturities and increases in inflation affected longer dated maturities.

During 2021, the yield on the 2 year Treasury note increased 61 basis points to 0.73%, the yield on the 5 year Treasury increased 90 basis points to 1.26% and the yield on the 10 year Treasury ended the year at 1.51%, up 60 basis points.

Most of the rate increases that occurred on the short end of the curve occurred during the fourth quarter, as the 2 year increased 46 basis points during the quarter, reflecting a dramatic repricing of Federal Funds futures contracts caused by an equally dramatic increase in prices.

At year-end, the pricing of these contracts reflected an expectation that the FOMC will increase the Federal Funds target rate by approximately 125 basis points by mid-2023 as compared to an expectation of no increases at the end of 2020.

Unsurprisingly, interest rate volatility also increased drastically throughout the year, particularly when measured against shorter term interest rates.

One of the largest concerns for both the markets and the FOMC during 2021 has been the severe rise in inflation.

The personal consumption expenditure index ended 2021 with an increase to 4.9% compared to 1.5% at the end of 2020.

L ikewise, commodities also saw significant increases during 2021, with West Texas Intermediate crude oil recording a 58.8% increase and the Commodity Research Bureau commodity index gaining 38.5%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”) , which reflect investors' expectations of future inflation, have broken out to levels not seen in several years.

The inflation rate implied by 2 year and 5 year TIPs was 3.22% and 2.91%, respectively, at the end of the year.

CMBS risk premiums increased in the fourth quarter of 2021 due to elevated new issuance, renewed COVID-19 concerns resulting from the Omicron variant, higher inflation and increased interest rate volatility.

Despite these concerns, the economy continued to show signs of improvement.

This pick-up in economic activity has translated to improving employment levels, increased commercial real estate activity and continued property price appreciation.

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 severe slowdown in activity.

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

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

The housing market has staged a robust recovery since the onset of the COVID-19 pandemic, driven in part by low mortgage rates and tight supply conditions.

Demographic trends and changes in housing preferences shaped by the pandemic

have contributed to solid demand, especially for single family homes.

This strength is reflected in rapid home price appreciation, which has only recently begun to moderate.

Meanwhile, credit spreads on residential mortgage-backed securities have reversed the widening that occurred in March 2020, but finished 2021 well off the lows reached earlier in the year.

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

Congress has responded by passing three rounds of fiscal stimulus measures, the most notable being the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included relief measures for households and businesses directly or indirectly impacted by the virus.

The CARES Act includes provisions for COVID-19 related temporary forbearance on federally backed mortgage loans, which allows borrowers of loans guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to suspend making principal and interest payments for a period of up to 360 days if they are facing hardship.

Following the temporary forbearance period, mortgage servicers must provide several options to impacted borrowers, including a repayment schedule or loan modification, depending on the borrowers’ circumstances.

We believe the provision of forbearance and loan modifications has and will continue to substantially reduce borrower defaults and loan losses relative to levels that would have likely occurred without these actions.

The performance of Agency RMBS was mixed during 2020, as sharp underperformance during the first quarter was mostly offset by significant gains resulting from the Federal Reserve’s strong response to the liquidity crisis, which included a bond purchase program beginning in March.

The Agency RMBS sector also received support from commercial banks, as bank deposits overwhelmed tepid loan demand and left banks with significant amounts to invest in the sector.

Lower coupon mortgages were the primary beneficiary of the Federal Reserve and commercial bank demand, as those bonds experienced significant spread tightening and a favorable dollar roll environment for most of the year.

Higher coupon mortgages did not fare as well, as their relatively high dollar prices exacerbate the impact of increasing prepayment rates.

Pay-ups on specified pool collateral remained elevated, reflecting strong demand for prepayment protection.

We expect the market for Agency RMBS to remain positive, as the level of support from the Federal Reserve outweighs the negative impact of higher prepayment rates.

As we move into 2021, investor concerns center around the pace of the recovery and the implementation of vaccines to combat and eventually bring an end to the COVID-19 pandemic.

Our expectation is that growth in the U.S.

will remain robust as the economy continues to reopen over the course of the year.

In addition, the regulatory landscape for our repurchase agreement counterparties continues to evolve, which may affect funding methods and lending practices.

While we are not directly subject to compliance with the implementation of rules regarding financial institutions, the effect of these regulations and others could impact our ability to finance our assets in the future.

government has responded by passing a number of fiscal stimulus measures and relief programs for households and businesses directly or indirectly impacted by the virus.

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

Agency RMBS significantly underperformed over the course of 2021, marking the sector’s worst total return since 2013 and the worst year of performance relative to U.S.

Treasuries since 2011.

Increased interest rate volatility and elevated market expectations for more restrictive monetary policy were particularly harmful for low coupon 30 year Agency RMBS, which benefited the most from the Federal Reserve’s response to the COVID-19 pandemic.

In addition, net purchases of $580 billion from the Federal Reserve and nearly $400 billion by commercial banks was mostly offset by heavy supply from mortgage originators, which eclipsed record levels in 2021 reaching approximately $870 billion of net issuance.

During the second half of 2021, Agency RMBS performance was negatively impacted by the market’s anticipation that the Federal Reserve’s MBS purchase program would be slowed or stopped in an effort to remove accommodative policies in its fight against inflation.

While prepayment speeds remained elevated, premiums on specified pool Agency RMBS fell in 2021 as investor demand for prepayment protection waned given higher mortgage rates.

Prepayment speeds should moderate in the months ahead, as seasonal factors and higher mortgage rates dampen housing and refinancing activity.

The dollar roll market for low coupon TBAs continues to be attractive, as implied financing rates remained negative given persistent demand from the Federal Reserve and commercial banks.

Overall, we remain cautious on the Agency RMBS sector, as more restrictive monetary policy and worsening supply and demand technicals may weigh on valuations.

As we move into 2022, investors are focused first and foremost on the Federal Reserve and how their removal of policy accommodation to fight persistent inflation will impact rates and risk assets.

Another concern is the impact of the ongoing COVID-19 pandemic, and how the trajectory of new cases might impact economic activity.

These concerns leave us with a cautious outlook for the coming year.

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 November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released a consultation on its intention to cease the publication of the one week and two month U.S.

Dollar (“USD”)-LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the five remaining USD-LIBOR settings (overnight and one, three, six and twelve months) immediately following the LIBOR publication on June 30, 2023.

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.

Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR.

It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time or to the same alternative reference rate, in each case increasing the difficulty of hedging.

Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread.

Industry organizations are attempting to structure the spread calculation in an objective manner, but there is no assurance that all asset types or securitization vehicles will use the same spread.

We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management.

We have material contracts that are indexed to LIBOR and are monitoring this activity and evaluating the related risks.

However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.

The FCA, which regulates LIBOR announced on March 5, 2021 that it will cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023.

The ARRC, the U.S.

working group tasked with assisting in the industry wide transition away from LIBOR, has supported the FCA’s announcement of USD LIBOR cessation and has recommended the market adopt SOFR.

To accelerate the transition away from LIBOR, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued joint supervisory guidance to cease entering into new contracts referencing USD LIBOR after December 31, 2021 (note there are limited exceptions related to derivative product use).

We, similar to the broader industry, are transitioning away from LIBOR to alternative risk-free rates, such as SOFR.

We continue to actively monitor and adjust our LIBOR transition strategy and timeline as necessary.

Switching existing financial instruments from LIBOR to SOFR requires calculations of a spread.

There is no assurance that the calculated spread will be fair and accurate or that all financial instruments will use the same spread.

We have an investment in a commercial loan indexed to LIBOR that is scheduled to mature in 2022.

In addition, our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock each begin to pay a USD LIBOR-based rate at the time the stock becomes callable.

Our Series B and Series C Preferred Stock are governed by New York state law that provides for USD LIBOR-linked contracts to transition to an alternative reference rate for contracts.

We do not currently intend to amend our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock or our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock to change the existing USD LIBOR cessation fallback language.

Our Series B and Series C Preferred Stock each become callable at the time the stock begins to pay a USD-LIBOR-based rate.

Should we choose to call the Series B or Series C Preferred Stock in order to avoid a dispute over the results of the USD-LIBOR fallbacks for that class, we may be forced to raise additional funds at an unfavorable time.

In October 2019, the IRS and Treasury proposed regulations that are expected to provide taxpayers relief from adverse impacts resulting from the transition away from LIBOR to an alternative reference rate.

The proposed regulations make clear that a change in the reference rate (and associated alterations to payment terms) of a financial instrument is generally not considered a taxable event, provided the fair value of the modified instrument is substantially equivalent to the fair value of the unmodified instrument.

The Financial Accounting Standards Board has also issued accounting guidance that provides optional expedients and exceptions to contracts, hedging relationships and other transactions impacted by LIBOR transition if certain criteria are met.

The guidance can be applied as of January 1, 2020.

We will evaluate our contracts that are eligible for modification relief and may apply the elections prospectively as needed.

We are currently evaluating what impact the guidance will have on our consolidated financial statements.

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 through December 31, 2022.

In the fourth quarter of 2021, we transitioned our interest rate swaps that were indexed to LIBOR to interest rate swaps that are indexed to SOFR in a manner that allowed 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.

Investment Activities

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30 year fixed-rate, at fair value 7,701,523 8,050,866

15 year fixed-rate, at fair value — 292,414

Hybrid ARM, at fair value — 56,893

Agency CMO, at fair value 30,757 —

Agency CMBS, at fair value — 4,767,930

Non-Agency CMBS, at fair value 62,909 109,583

Non-Agency RMBS, at fair value 9,070 11,733

GSE CRT, at fair value — 923,672

Loan participation interest, at fair value — 44,654

Commercial loan 23,098 24,055

Commercial loan, at fair value 23,515 23,098

Investments in unconsolidated ventures 12,476 16,408

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TBAs, at implied cost basis (1)

1,636,906 1,772,211

Total investment portfolio, including TBAs 9,477,156 9,983,899

(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 IV.

of this report on Form 10-K.

As of December 31, 2020 our holdings of 30 year fixed-rate Agency RMBS represented 81% of our total investment portfolio, including TBAs, versus 48% as of December 31, 2019.

As previously discussed, 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.

Our Agency RMBS holdings as of December 31, 2020 consisted primarily of newly issued specified pools with coupon distributions as shown in the table below.

$ in thousands Fair Value Percentage

(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 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 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 IV, Item 15 of this Report.

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 $16.3 billion and purchased $17.1 billion of Agency RMBS during the year ended December 31, 2021.

We rotated our Agency RMBS throughout the year into securities that have higher yields, in some cases to change coupon rate or the type of specified pool collateral.

Purchases were funded with proceeds from the sales, paydowns of securities and by leveraging proceeds from the issuance of common stock.

As of December 31, 2021 and 2020 our holdings of 30 year fixed-rate Agency RMBS represented 81% of our total investment portfolio, including TBAs.

Our 30 year fixed-rate Agency RMBS holdings as of December 31, 2021 and 2020 consisted of specified pools with coupon distributions as shown in the table below.

As of December 31,

$ in thousands Fair Value Percentage Fair Value Percentage

1.5% — — % 106,377 1.3 %

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3.0% 2,178,476 28.3 % 667,551 8.3 %

Total Agency RMBS 8,050,866 100.0 %

3.5% 237,075 3.1 % — — %

Total 30 year fixed-rate Agency RMBS 7,701,523 100.0 % 8,050,866 100.0 %

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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In addition, we focus a significant amount of purchases in specified pools that have higher geographic concentrations in states that exhibit slower prepayments such as New York, Florida and Texas.

We began investing in TBAs as an alternative means of investing in and financing Agency RMBS in the third quarter of 2020.

As of December 31, 2020, the implied cost basis of TBAs represented approximately 18% of our total investment portfolio.

Our investments consist of 30-year Agency RMBS TBAs with coupons that range from 2.0% to 2.5% in conventional and Ginnie Mae collateral.

We invest in TBAs as an alternative means of investing in and financing Agency RMBS.

As of December 31, 2021, the implied cost basis of TBAs represented approximately 17% of our total investment portfolio, versus 18% as of December 31, 2020.

Our investments consist of 30-year Agency RMBS TBAs with coupons that range from 2.5% to 3.0% in conventional collateral.

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

Implied financing rates in the dollar roll market were substantially below those available in the repurchase market due to the magnitude and persistence of the Federal Reserve's MBS purchase program, which began to increase holdings in March of 2020.

We expect the purchase program to continue in 2021, as the Federal Reserve views the program as a key component of its stated objectives.

We sold all of our holdings of Agency CMBS in the first half of 2020.

Agency CMBS represented approximately 22% of our investment portfolio as of December 31, 2019.

We historically focused our Agency CMBS investments in securities issued by Freddie Mac, Fannie Mae and Ginnie Mae that had characteristics that reduced prepayment risk.

As of December 31, 2020, our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs, versus 17% as of December 31, 2019.

Our non-Agency CMBS portfolio is collateralized by loans that were originated before 2015 that are secured by various property types located across the United States.

Property types include but are not limited to office, retail, multifamily, industrial warehouses and hotels.

The largest property geographic locations include Texas, Ohio, California, New York and Virginia as detailed in the table below.

Most of our non-Agency CMBS portfolio is comprised of fixed-rate securities that are rated investment grade by a nationally recognized statistical rating organization.

Approximately 75% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2020.

Further, approximately 59% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2020.

The table below illustrates the vintage distribution of our non-Agency CMBS portfolio as of December 31, 2020 as a percentage of fair value:

2010 2011 2012 2013 2014

Non-Agency CMBS 44.0 % — % 20.2 % 26.2 % 9.6 %

The table below presents the geographic concentration of the underlying collateral for our non-Agency CMBS portfolio as of December 31, 2020.

The geographic markets that we invest in have been and continue to be severely impacted by the ongoing COVID-19 pandemic.

Non-Agency CMBS

State Percentage

California 10.0 %

New York 9.1 %

Virginia 6.0 %

Washington DC 5.5 %

Florida 4.3 %

Illinois 3.8 %

Georgia 2.6 %

Connecticut 2.5 %

Total 100.0 %

As of December 31, 2020, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs, versus 4% as of December 31, 2019.

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.

The Federal Reserve began reducing net purchases of Agency RMBS in the fourth quarter of 2021, and net purchases are expected to end in March 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 December 31, 2021 and 2020, our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs.

Our non-Agency CMBS portfolio is comprised of fixed-rate securities that are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2021.

Approximately 72.4% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2021.

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

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 December 31, 2020.

Our holdings of GSE CRTs represented approximately 4% of our total investment portfolio, including TBAs, as of December 31, 2019.

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 December 31, 2020, we held an investment in one commercial real estate mezzanine loan that matures in 2021 and has a LTV ratio of approximately 78.9%.

Refer to Note 16 – “Subsequent Events” of our consolidated financial statements in Part IV of this Report for additional information on the contractual maturity of our commercial loan.

As of December 31, 2021, we held an investment in one commercial real estate mezzanine loan that is due in February 2022 and has a LTV ratio of approximately 68.0%.

In February 2022, we received a request from the borrower to extend the contractual maturity of the commercial loan investment to May 29, 2022.

Refer to Note 15 – “Subsequent Events” of our consolidated financial statements in Part IV, Item 15 of this Report for additional information.

As of December 31, 2021, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

The unconsolidated ventures invest in our target assets.

We are committed to invest $6.8 million in additional capital in these unconsolidated ventures to fund future investments and cover future expenses should they occur.

Both of the unconsolidated ventures are in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

Until the ventures complete their liquidation, we are committed to fund $6.5 million in additional capital to cover future expenses should they occur.

Financing and Other Liabilities

We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that have historically moved in close relationship to LIBOR.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to SOFR.

We also used secured loans from the FHLBI to finance a portion of our investment portfolio.

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We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings.

Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed off of one- or three-month LIBOR.

Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR.

To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of our overall risk management strategy.

Prior to the transition of our swap portfolio to swaps that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps were generally indexed to one- or three-month LIBOR.

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

We terminated all of our interest rate swaps in March 2020 as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

We realized a net loss of $904.7 million

on these swaps during the first half of 2020 due to falling interest rates.

We entered into new swaps during the six months ended December 31, 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

As of December 31, 2020, we had $6.3 billion of notional amount of interest rate swaps.

All of these interest rate swaps are centrally cleared by a registered clearing organization.

We realized a net gain of $47.0 million on these swaps during the second half of 2020.

During the year ended December 31, 2021, we terminated existing swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion as part of our overall risk management strategy.

These amounts exclude $7.3 billion of terminations and additions related to the transition of our swap portfolio from swaps that were indexed to LIBOR to swaps that are indexed to SOFR in the fourth quarter of 2021, as well as terminations and additions of forward starting swaps.

Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our consolidated statement of operati ons.

We realized a net gain of $185.2 million on interest rate swaps during the year ended December 31, 2021 primarily due to rising interest rates.

We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies.

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During the year ended December 31, 2021, we settled currency forward contracts of €70.8 million or $84.8 million (2020:

€89.8 million or $101.6 million) in notional amount and realized a net loss of $1.3 million (2019:

$1.5 million net gain).

€83.4 million or $93.4 million) in notional amount and realized a net gain of $209,000 (2020:

$1.3 million net loss).

Capital Activities

On February 6, 2020, we completed a public offering of 20,700,000 shares of common stock at the price of $16.78 per share.

Total net proceeds were approximately $347.0 million after deducting offering costs.

On February 4, 2021, we completed a public offering of 27,600,000 shares of common stock at the price of $3.75 per share.

In February 2021, we completed a public offering of 27,600,000 shares of common stock at the price of $3.75 per share.

Total net proceeds were approximately $103.1 million after deducting estimated offering costs.

As of December 31, 2020, we may sell up to 37,610,000 shares of our common stock and 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreements.

We sold 21,849,740 shares of common stock for proceeds of $73.7 million, net of approximately $1.2 million in commissions and fees, under these agreements during the year ended December 31, 2020.

For information on dividends declared and paid during the year ended December 31, 2020, including our common stock dividend paid on June 30, 2020 in a combination of cash and shares of our common stock, see Note 12 - "Stockholders' Equity" of our consolidated financial statements in Part IV.

Item 15 of this report on Form 10-K.

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

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

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

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

The excess of the consideration transferred over carrying value 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 year ended December 31, 2021.

As of December 31, 2021, we may sell up to 56,865,980 shares of our common stock and 5,500,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

During the year ended December 31, 2021, we sold 55,744,020 shares of common stock for proceeds of $180.5 million, net of approximately $2.6 million in commissions and fees, under our equity distribution agreements.

During the year ended December 31, 2020, we sold 21,849,740 shares of common stock for proceeds of $73.7 million, net of approximately $1.2 million in commissions and fees, under our equity distribution agreements.

For information on dividends declared and paid during the year ended December 31, 2021, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.

During the year ended December 31, 2021, we did not repurchase any shares of our common stock.

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Book value per common share 2.91 3.86 16.29

Our book value per common share decreased 24.6% as of December 31, 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.

Book value per common share further decreased in the second half of 2021 as the Federal Reserve's announced tapering and subsequent acceleration of the pace of tapering in December 2021 negatively impacted Agency RMBS valuations.

Our book value per common share decreased 76.3% as of December 31, 2020 compared to December 31, 2019 primarily due to realized and unrealized losses on investments and derivatives during the year ended December 31, 2020 resulting from the unprecedented market disruption caused by the COVID-19 pandemic.

Our book value per common share increased 6.7% as of December 31, 2019 compared to December 31, 2018 primarily due to interest rate spread tightening in both Agency and credit assets.

Monetary policy eased notably in 2019, as the Federal Reserve pivoted from increasing in the Federal Funds rate in 2018 to an easing policy through a pause in the first half of 2019 and cutting the Federal Funds rate in the second half of 2019.

This shift in monetary policy supported risk assets, with additional steps by the Federal Reserve, such as increasing the size of its balance sheet via asset purchases and supporting the repurchase market through temporary open market operations, supporting market liquidity.

Refer to Item 7A.

“Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.

Critical Accounting Policies

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S.

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All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements.

If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, allowances for credit losses on our available-for-sale MBS, change in our interest income recognition, and a change in our tax liability among other effects.

If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, allowances for credit losses on our available-for-sale MBS, and a change in our interest income recognition among other effects.

Mortgage-Backed and Credit Risk Transfer Securities.

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$8.1 billion) or 99% (December 31, 2020:

80%) of our MBS and GSE CRT are accounted for under the fair value option.

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

We record our MBS purchased before September 1, 2016, as available-for-sale and report these MBS at fair value.

We recorded our GSE CRTs purchased before August 24, 2015 as hybrid financial instruments and reported these GSE CRTs at fair value.

We did not hold any GSE CRTs as of December 31, 2020.

We determine the fair value of our MBS and GSE CRTs by obtaining valuations from an independent source.

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

We determine the fair value of our MBS by obtaining valuations from an independent source.

If the fair value of a security is not available from a third-party pricing service, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors.

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For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security, unless those changes will be reflected in an allowance for credit losses, and the security's yield is revised prospectively.

One of the most significant factors impacting our projected cash flows is changes in long-term interest rates.

When interest rates fall, prepayments will generally increase and when interest rates rise, prepayments will generally decrease.

However, there are a variety of factors that may impact the rate of prepayments on our securities.

Accordingly, under different conditions, we could report materially different amounts.

Refer to Item 7A.

“Quantitative and Qualitative Disclosures About Market Risk” for an estimate of the percentage change in our net interest income, including interest paid or received under interest rate swaps, caused by an instantaneous 50 and 100 basis points increase or decrease in interest rates.

For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows.

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Premiums or discounts associated with the purchase of credit risk transfer securities were amortized or accreted into interest income over the life of the debt host contract using the effective interest method.

Interest income on GSE CRTs purchased on or after August 24, 2015 is based on estimated future cash flows.

Interest income on GSE CRTs purchased on or after August 24, 2015 was based on estimated future cash flows.

Interest income from our commercial and other loans is recognized when earned and deemed collectible or until a loan becomes past due based on the terms of the loan agreement.

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We record all derivatives on our consolidated balance sheets at fair value.

Our interest rate swaps, currency forward contracts and TBAs are valued using a market approach through the use of quoted prices available in an active market.

All of our interest rate swaps were centrally cleared by a registered clearing organization as of December 31, 2021.

Effective December 31, 2013, we voluntarily discontinued hedge accounting for our interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges.

As a result of discontinuing hedge accounting, changes in the fair value of the interest rate swaps are recorded in gain (loss) on derivative instruments, net in our consolidated statement of operations, rather than in accumulated other comprehensive income (loss).

Further information is provided in Note 8 - “Derivatives and Hedging Activities.” of our consolidated financial statements included in Part IV of this Report.

Income Taxes.

We have elected to be taxed as a REIT.

Accordingly, we generally will not be subject to U.S.

federal and applicable state and local corporate income tax to the extent that we make qualifying distributions and provided we satisfy on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests.

The REIT qualifications rules are complex and failure to apply them correctly could subject us to U.S.

federal, state and local income taxes.

Further information is provided in Note 8 - “Derivatives and Hedging Activities.” of our consolidated financial statements included in Part IV, Item 15 of this Report.

Expected Impact of New Authoritative Guidance on Future Financial Information

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The new guidance expands the temporary optional expedients and exceptions to U.S.

GAAP for contract modifications, hedge accounting and other relationships that reference London Interbank Overnight Financing Rate ("LIBOR") to apply to all derivative instruments affected by the market-wide change in the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition).

The guidance can be applied as of January 1, 2020.

We will evaluate our contracts that are eligible for modification relief and may apply the elections prospectively as needed.

We are currently evaluating what impact the guidance will have on our consolidated financial statements .

GAAP for contract modifications, hedge accounting and other relationships that reference LIBOR to apply to

all derivative instruments affected by the market-wide change in the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition).

The new guidance can be applied through December 31, 2022.

We have an investment in a commercial loan indexed to LIBOR that is scheduled to mature in 2022.

In addition, our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock each become callable at the time the stock begins to pay a LIBOR-based rate.

Our Series B and Series C Preferred Stock are governed by New York state law.

The state of New York has approved legislative solutions for U.S.

dollar LIBOR-linked contracts to transition to an alternative rate for contracts that are governed by New York state law.

We do not currently intend to amend our Series B or Series C Preferred Stock to change the existing LIBOR cessation fallback language.

Results of Operations

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Repurchase agreements (1)

(11,290) 73,607 430,697

Secured loans — 8,655 41,623

Exchangeable senior notes — — 1,621

Total interest expense (11,290) 82,262 472,320

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Total expenses 29,233 40,230 46,174

Net income (loss) (1,674,352) 364,101 (70,536)

Net income attributable to non-controlling interest — — 254

Net income (loss) attributable to Invesco Mortgage Capital Inc.

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Dividends to preferred stockholders 37,795 44,426 44,426

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

Net income (loss) attributable to common stockholders (132,477) (1,718,778) 319,675

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Diluted 275,132,233 173,730,389 132,317,853

(1) Negative interest expense on repurchase agreements in 2021 is due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements.

For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - “Derivatives and Hedging Activities” and Note 12 - “Stockholders' Equity” in Part IV, Item 15 of this report on Form 10-K.

Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and earning asset yields as of and for the years ended December 31, 2020, 2019 and 2018.

As of and for the Years Ended

The table below presents information related to our average earning assets and earning asset yields for the years ended December 31, 2021, 2020 and 2019.

Years ended December 31,

$ in thousands 2021 2020 2019

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$20.6 billion).

Average earning assets increased for the year ended December 31, 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 during the year ended December 31, 2020 compared to 2019.

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic and sold a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage.

Average earning assets decreased during the year ended December 31, 2020 compared to the same periods in 2019 primarily due to these asset sales.

We resumed investing in Agency RMBS in July 2020.

Due to the magnitude of changes in our investment portfolio since December 31, 2019, our average earning assets and asset yields for the year ended December 31, 2020 are not indicative of our future ability to generate interest income.

Average earning assets increased during the year ended December 31, 2019 compared to 2018 primarily because we invested and leveraged $508.9 million in net proceeds from 2019 common stock issuances and $168.5 million in proceeds from commercial loan repayments since the beginning of 2018 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.

The yield on our average earning assets during the year ended December 31, 2021 was 1.92% (2020:

Our average earning asset yields decreased during the year ended December 31, 2021 compared to 2020 and during the year ended December 31, 2020 compared to 2019 primarily due to changes in our portfolio composition.

We earned interest income of $169.2 million (2020:

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Total interest income 169,202 280,166 778,367

MBS and GSE CRT interest income decreased $110.3 million for the year ended December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease in average earning asset yields.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

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

MBS and GSE CRT interest income decreased $495.3 million during the year ended December 31, 2020 compared to 2019 primarily due to a $534.8 million decrease in coupon interest reflecting lower average earning assets.

Lower coupon interest was offset by a $39.5 million decrease in net premium amortization during the year ended December 31, 2020 primarily due to sales of assets purchased at premiums.

Interest income on our commercial and other loans decreased $2.9 million during the year ended December 31, 2020, primarily due to the sale of our loan participation interest in April 2020 and repayments on commercial loans.

MBS and GSE CRT interest income increased $141.2 million during the year ended December 31, 2019 compared to 2018 primarily due to higher coupon interest rates on our higher average earning assets.

Interest income on commercial and other loans decreased $5.8 million during 2019 primarily due to commercial loan payoffs.

The yield on our average earning assets during the year ended December 31, 2020 was 3.55% (2019:

Our average earning asset yields decreased during the year ended December 31, 2020 compared to 2019 primarily due to changes in portfolio composition.

Our average earning asset yields increased during the year ended December 31, 2019 compared to 2018 primarily due to purchases of new securities at higher yields and higher index rates on floating and adjustable rate assets.

Lower coupon interest was partially offset by a $39.5 million decrease in net premium amortization during the year ended December 31, 2020 primarily due to sales of assets purchased at premiums.

Prepayment Speeds

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Net (premium amortization) discount accretion (40,450) (21,213) (60,719)

Net premium amortization increased $19.2 million during 2021 compared to 2020 primarily due to sales of non-Agency CMBS purchased at discounts and the purchase of Agency RMBS at premiums during the second half of 2020 and in 2021.

Net premium amortization decreased $39.5 million during 2020 compared to 2019 due to sales of assets purchased at premiums and slower prepayment speeds on newly issued Agency RMBS purchased in the second half of 2020.

Net premium amortization increased $3.0 million during 2019 compared to 2018 primarily due to purchases of Agency CMBS at premiums and faster prepayment speeds on Agency RMBS and GSE CRTs.

Higher premium amortization was partially offset by changes in asset mix and discount accretion on non-Agency RMBS and non-Agency CMBS.

Our interest income is subject to interest rate risk.

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The table below presents the components of interest expense for the years ended December 31, 2021, 2020 and 2019.

For the Years Ended

Years ended December 31,

$ in thousands 2021 2020 2019

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Secured loans — 8,655 41,623

Exchangeable senior notes — — 1,621

Total interest expense (11,290) 82,262 472,320

Our interest expense on repurchase agreement borrowings decreased $357.0 million for the year ended December 31, 2020 compared to 2019 primarily due to lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds interest rate.

Average borrowings decreased primarily due to repayments of repurchase agreements in the first half of 2020 with proceeds from asset sales due to financial market disruption caused by the COVID-19 pandemic as previously discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our interest expense on repurchase agreement borrowings decreased $86.7 million for the year ended December 31, 2021 compared to 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds rate.

Average borrowings also decreased due to repayment of $1.65 billion of secured loans during 2020.

Our interest expense on repurchase agreement borrowings rose $126.8 million for the year ended December 31, 2019 compared to 2018 primarily due to higher average borrowings and a higher average cost of funds in 2019.

We increased our average borrowings in 2019 after investing and leveraging $508.9 million in net proceeds from 2019 common stock issuances and $168.5 million in proceeds from commercial loan repayments since the beginning of 2018 primarily into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS.

Our repurchase agreements interest expense includes amortization of deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

Amounts recorded in accumulated other comprehensive income (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the 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.

over the remaining life of the interest rate swap agreements.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $22.0 million, $23.8 million and $23.7 million during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.

During the next twelve months, we estimate that $19.7 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 during 2020 and did not incur interest expense for secured loans during the year ended December 31, 2021.

Interest expense for our secured loans decreased for the year ended December 31, 2020 compared to 2019 primarily due to the repayment of $1.65 billion of secured loans during 2020 and lower borrowing rates.

Before modification as discussed in Note 6 - “Borrowings” in Part IV of this Report, borrowing rates on our secured loans were based on the three-month FHLB swap rate plus a spread.

Before modification, borrowing rates on our secured loans were based on the three-month FHLB swap rate plus a spread.

After modification, borrowing rates on our secured loans were based on the FHLBI's short-term cost of funds.

For the year ended December 31, 2020, our secured loans had a weighted average borrowing rate of 1.47% as compared to 2.52% for the year ended December 31, 2019.

Interest expense on our secured loans increased for the year ended December 31, 2019 compared to 2018 primarily due to higher borrowing rates as a result of increases in the federal funds target interest rate.

For the year ended December 31, 2019, our secured loans had a weighted average borrowing rate of 2.52% as compared to 2.15% for the year ended December 31, 2018.

During 2020 and 2019, we did not incur interest expense on exchangeable senior notes (the “Notes”) because the Notes were retired on March 15, 2018.

We retired $143.4 million of the Notes in 2018.

Our total interest expense during the year ended December 31, 2021 decreased $93.6 million compared to 2020 primarily due to a decrease of $95.3 million in interest expense on repurchase agreement borrowings and secured loans.

Our total interest expense during the year ended December 31, 2020 decreased $390.1 million compared to 2019 primarily due to a $390.0 million decrease in interest expense on repurchase agreement borrowings and secured loans.

Our total interest expense during the year ended December 31, 2019 increased $133.5 million compared to 2018 primarily due to a $133.0 million increase in interest expense on repurchase agreement borrowings and secured loans that was partially offset by a $1.6 million decrease in interest expense on exchangeable senior notes.

The table below presents our average borrowings and cost of funds as of and for the years ended December 31, 2020, 2019 and 2018.

As of and for the Years Ended

The table below presents our average borrowings and cost of funds for the years ended December 31, 2021, 2020 and 2019.

Years ended December 31,

$ in thousands 2021 2020 2019

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(2) Amount represents the maximum borrowings at month-end during each of the respective periods.

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

Total average borrowings decreased $11.8 billion in 2020 compared to 2019 because we repaid $10.3 billion of net repurchase agreements and $1.65 billion of secured loans during 2020 as discussed above.

Our cost of funds decreased in 2020 compared to 2019 due to decreases in the Federal Funds rate.

Total average borrowings rose $3.1 billion in 2019 compared to 2018 because we entered into repurchase agreements to finance our increased holdings of 30 year fixed-rate Agency RMBS, Agency CMBS, and non-Agency CMBS.

The increase in our cost of funds for 2019 versus 2018 was primarily due to increases in the Federal Funds rate throughout 2018.

(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 $965.8 million in 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.

Total average borrowings decreased $11.8 billion in 2020 compared to 2019 because we repaid $10.3 billion of net repurchase agreements and $1.65 billion of secured loans during 2020.

Our cost of funds decreased in 2021 compared to 2020 and in 2020 compared to 2019 primarily due to decreases in the Federal Funds rate.

Net Interest Income

The table below presents the components of net interest income for the years ended December 31, 2021, 2020 and 2019.

For the Years Ended

Years ended December 31,

$ in thousands 2021 2020 2019

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Secured loans — 8,655 41,623

Exchangeable senior notes — — 1,621

Total interest expense (11,290) 82,262 472,320

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Net interest rate margin 2.06 % 2.36 % 1.26 %

Our net interest income, which equals total interest income less total interest expense, totaled $197.9 million (2019:

Our net interest income, which equals total interest income less total interest expense, totaled $180.5 million for the year ended December 31, 2021 (2020:

$197.9 million;

$304.1 million) for the year ended December 31, 2020.

The decrease in net interest income for the year ended December 31, 2020 compared to 2019 was primarily due the sale of MBS and GSE CRTs in the first half of 2020 as previously discussed.

The increase in net interest income for the year ended December 31, 2019 compared to 2018 was primarily due to an increase in interest income driven by higher average assets that exceeded the increase in interest expense driven by higher average borrowings.

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 2.36% (2019:

1.39%) for the year ended December 31, 2020.

The increase in net interest rate margin for 2020 versus 2019 was primarily due to the change in our portfolio composition, including related repurchase agreement borrowings, due to assets sales and decreases in the Federal Funds rate that had a greater impact on our average cost of funds than on our average earning asset yields.

The decrease in net interest rate margin for 2019 versus 2018 was primarily due to increases in the federal funds rate throughout 2018 that had a greater impact on our average cost of funds than on our average earning asset yields.

$306.0 million).

The decrease in net interest income for the year ended December 31, 2021 compared to 2020 and for the year ended December 31, 2020 compared to 2019 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 2.06% for the year ended December 31, 2021 (2020:

The decrease in net interest rate margin for 2021 compared to 2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings.

The increase in net interest rate margin for 2020 compared to 2019 was primarily due to the change in our portfolio composition, including related repurchase agreement borrowings, due to assets sales and decreases in the Federal Funds rate that had a greater impact on our average cost of funds than on our average earning asset yields.

Gain (Loss) on Investments, net

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Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option (85,702) (492,047) 624,158

Net unrealized gains (losses) on commercial loan and loan participation interest (1,164) — —

Net unrealized gains (losses) on commercial loan 417 (1,164) —

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

Net unrealized gains (losses) on trading securities — — (21)

Total gain (loss) on investments, net (366,509) (961,938) 624,466

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic in 2020.

During the year ended December 31, 2020, we sold MBS and GSE CRTs for cash proceeds of $25.0 billion (2019:

$3.3 billion;

$4.7 billion) and realized net losses of $363.8 million (2019:

net gains of $8.0 million;

During the year ended December 31, 2021, we sold MBS for cash proceeds of $16.3 billion (2020:

MBS and GSE CRTs of $25.0 billion;

MBS and GSE CRTs of $3.3 billion) and realized net losses of $281.2 million (2020:

net losses of $363.8 million;

Sales prices of our holdings were severely impacted by the lack of liquidity and uncertainty surrounding the economic impact of the COVID-19 pandemic, particularly during the first half of 2020.

net gains of $8.0 million).

Realized net losses during the year ended December 31, 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We sold securities during the year ended December 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our repurchase agreement counterparties seized and sold our securities when we were unable to meet margin calls in March 2020.

We recorded $94.1 million of impairment on non-Agency RMBS and non-Agency CMBS during the year ended December 31, 2020 because we intended to sell or more likely than not would be required to sell these securities before recovery of their amortized cost basis.

We assess our investment securities for impairment on a quarterly basis.

For additional information regarding our accounting policy for credit losses and impairment, refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV of this Report.

We did not record any impairment during the years ended December 31, 2021 or 2019 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 $94.1 million of impairment on non-Agency RMBS and CMBS securities during the year ended December 31, 2020, because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

For additional information regarding our accounting policy for impairment, refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report.

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

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As of December 31, 2021, $7.7 billion or 99% (December 31, 2020:

$17.4 billion or 80%) of our MBS and GSE CRTs are accounted for under the fair value option.

Our percentage of MBS and GSE CRTs accounted for under the fair value option increased as of December 31, 2020 due to a change in portfolio composition.

During the first half of 2020, we sold MBS and GSE CRTs previously accounted for as available-for-sale securities primarily to generate liquidity and reduce leverage given unprecedented market conditions as a result of the COVID-19 pandemic.

We resumed investing in Agency RMBS in July 2020 and elected the fair value option for these securities.

We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for under the fair value option of $492.0 million in 2020 compared to net unrealized gains of $624.2 million in 2019 and unrealized losses of $101.7 million in 2018.

Net unrealized losses in 2020 reflect declines in valuations due to wider interest rate spreads.

Net unrealized gains in 2019 reflect lower interest rates, tighter interest rate spreads on the Company's credit assets and Agency CMBS and valuation gains in the Company's specified pool Agency RMBS.

Most of our holdings of 30 year fixed-rate Agency RMBS are in specified pools with attractive prepayment characteristics.

We recorded a realized loss of $3.8 million on our loan participation interest during year ended December 31, 2020 and unrealized losses of $1.2 million on our commercial loan during the year ended December 31, 2020.

$8.1 billion or 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 $85.7 million in 2021 compared to net unrealized losses of $492.0 million in 2020 and unrealized gains of $624.2 million in 2019.

Net unrealized losses in 2021 primarily reflect wider interest rate spreads on our Agency RMBS.

Net unrealized losses in the year ended December 31, 2020 reflect declines in valuations due to wider interest rate spreads.

Net unrealized gains in 2019 reflect lower interest rates, tighter interest rate spreads on credit assets and Agency CMBS and valuation gains in specified pool Agency RMBS.

We recorded unrealized gains of $417,000 and unrealized losses of $1.2 million on our commercial loan investment during the years ended December 31, 2021 and 2020, respectively.

We value our commercial loan investment based upon a valuation from an independent pricing service.

We recorded a realized loss of $3.8 million on our loan participation interest during year ended December 31, 2020.

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

We valued our commercial loan based upon a valuation from an independent pricing service.

(Increase) Decrease in Provision for Credit Losses

On January 1, 2020, we adopted accounting guidance that requires us to estimate an allowance for credit losses on available-for-sale securities in unrealized loss positions.

As of December 31, 2021, approximately $70.2 million of our $7.8 billion of MBS are classified as available-for-sale and subject to evaluation for credit losses.

For the year ended December 31, 2020, we recorded a $1.8 million provision 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.

Refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV of this Report for additional information on how we calculate our provision for credit losses.

We recorded a provision for credit losses of $1.8 million on single non-Agency CMBS for the year ended December 31, 2020 based on a comparison of the security's amortized cost basis to discounted expected cash flows.

We recorded a $1.8 million decrease in the provision for credit losses d uring the year ended December 31, 2021 because the security fully repaid in June 2021.

Refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report for additional information on how we calculate our provision for credit losses.

Equity in Earnings (Losses) of Unconsolidated Ventures

For the year ended December 31, 2020, we recorded equity in earnings of unconsolidated ventures of $1.2 million (2019:

For the year ended December 31, 2021, we recorded equity in earnings of unconsolidated ventures of $870,000 (2020:

$1.2 million;

$2.2 million).

We recorded equity in earnings for the year ended December 31, 2020, 2019 and 2018 primarily due to realized and unrealized gains on portfolio investments.

We recorded equity in earnings for the years ended December 31, 2021, 2020 and 2019 primarily due to earnings on the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net

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Interest Rate Swaps 185,232 (15,803) (5,869) 163,560

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 209 — 970 1,179

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Interest Rate Swaps (857,753) 8,047 (24,068) (873,774)

Futures Contracts (157,929) — 7,836 (150,093)

Currency Forward Contracts (1,301) — (345) (1,646)

TBAs 14,477 — 9,893 24,370

Total (844,577) 8,047 (14,520) (851,050)

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Currency Forward Contracts 1,478 — (180) 1,298

TBAs (17) — — (17)

Total (597,077) 35,840 26,482 (534,755)

As of December 31, 2020 and 2019, we held the following interest rate swaps whereby we receive interest at a one-month or three-month LIBOR rate:

$ in thousands December 31, 2020 December 31, 2019

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

Interest Rate Swaps 6,300,000 0.41 % 0.15 % 6.7 14,000,000 1.47 % 1.79 % 5.2

We terminated all of our outstanding interest rate swaps in March 2020 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 on these interest rate swaps during the first half of 2020 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.

During the year ended December 31, 2021, we terminated existing interest rate swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion, excluding terminations and additions related to the transition of our interest rate swaps to swap that are indexed to SOFR in the fourth quarter of 2021 and terminations and additions of forward starting swaps.

We realized a net gain of $185.2 million on interest rate swaps during the year ended December 31, 2021 due to rising interest rates.

As of December 31, 2021, we had $7.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 29 days.

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

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 on these interest rate swaps during the first half of 2020 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.

During the year ended December 31, 2019, we terminated existing swaps with a notional amount of $25.3 billion and entered into new swaps with a notional amount of $27.0 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities.

We realized a net loss of $440.6 million on interest rate swaps in 2019 primarily due to falling interest rates.

We recognized contractual net interest income on swaps of $35.8 million for the year ended December 31, 2019 compared to contractual net interest expense of $20.0 million for the year ended December 31, 2018 primarily as a result of higher average LIBOR.

Our average interest rate swap receive rate was 2.29% for the year ended 2019 versus 2.10% for the year ended December 31, 2018.

We also repositioned our interest rate swap portfolio as LIBOR declined in the second half of 2019 to take advantage of lower interest rate swap fixed pay rates.

Our average interest swap fixed pay rate was 2.03% for the year ended December 31, 2019 versus 2.30% for the year ended December 31, 2018.

We also use futures contracts to manage our exposure to interest rate risk.

As of December 31, 2020 and December 31, 2019, we were not a party to any futures contracts.

During the years ended December 31, 2019 and December 31, 2018, we realized net losses of $157.9 million and $86.3 million, respectively, on the settlement of futures contracts due to falling interest rates.

As of December 31, 2021 and 2020, we held interest rate swaps whereby we receive interest at a variable rate as shown in the table below.

As of December 31, 2021, our interest rate swaps received variable interest based upon SOFR.

As of December 31, 2020, our interest rate swaps received variable interest based upon one-month LIBOR.

$ in thousands December 31, 2021 December 31, 2020

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

Interest Rate Swaps (1)

6,300,000 0.30 % 0.05 % 5.7 6,300,000 0.41 % 0.15 % 6.7

(1) Notional amount as of December 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

As of December 31, 2021, we held interest rate swaps whereby we pay variable interest based upon SOFR as shown in the table below.

We did not hold any interest rate swaps that paid floating interest as of December 31, 2020.

$ in thousands December 31, 2021

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

Interest Rate Swaps 1,750,000 0.05 % 0.98 % 4.9

We have also used futures contracts to manage our exposure to interest rate risk.

We were not party to any futures contracts as of December 31, 2021, 2020 or 2019.

During the year ended December 31, 2019, we realized net losses of $157.9 million on the settlement of futures contracts due to falling interest rates.

D aily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our consolidated statement of operations.

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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 December 31, 2021, we had $1.6 billion notional amount of TBAs and recorded $41.6 million of realized and unrealized losses during the year ended December 31, 2021 primarily due to the sharp increase in mortgage rates during the first quarter of 2021.

As of December 31, 2020, we had $1.7 billion notional amount of TBAs and recorded $24.4 million of realized and unrealized gains during the year ended December 31, 2020.

We were not a party to any TBAs accounted for as derivatives as of December 31, 2019 or 2018.

We were not party to any TBAs accounted for as derivatives during 2019.

Realized and Unrealized Credit Derivative Income (Loss), net

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We sold all of our GSE CRTs that were accounted for as hybrid financial instruments with embedded derivatives during the year ended December 31, 2020.

During the year ended December 31, 2019, we recorded an unrealized loss on the change in the fair value of our GSE CRT embedded derivatives of $12.5 million because the decreases in valuation of the GSE CRT debt host contracts exceeded the decreases in valuation of the hybrid financial instruments..

Net Gain (Loss) on Extinguishment of Debt

As discussed in Note 6 - "Borrowings" of our consolidated financial statements in Part IV of this Report, during 2020, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

As discussed in Note 6 - “Borrowings” of our consolidated financial statements in Part IV, Item 15 of this Report, during 2020, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

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 consolidated statement of operations.

During the year ended December 31, 2018, we retired $143.4 million of the Notes for a repurchase price of $143.4 million and realized a net loss on extinguishment of debt of $26,000.

Other Investment Income (Loss), net

Other investment income (loss), net in 2020 and 2019 primarily consists of quarterly dividends from FHLBI stock.

Other investment income (loss), net in 2018 primarily consists of (i) quarterly dividends from FHBLI stock and an investment in an exchange-traded fund and (ii) foreign exchange rate gains and losses related to a commercial loan investment denominated in a foreign currency.

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

FHLBI redeemed our stock at cost during 2020.

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

The table below summarizes the components of other investment income (loss), net for the years ended December 31, 2021, 2020 and 2019.

4 unchanged sentences

Total 1 2,137 3,950

We were required to purchase and hold a certain amount of FHLBI stock, which was based, in part, upon the outstanding principal balance of secured loans from the FHLBI.

We earned dividend income on our investment in FHLBI stock, and 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.

Other investment income (loss), net decreased during the year ended December 31, 2020 compared to 2019 because the FHLBI redeemed our stock at cost during 2020 in connection with the repayment of our secured loans.

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

We incurred foreign currency losses on the revaluation of a commercial loan investment (notional amount of £34.5 million) for the year ended December 31, 2018 due to a decline in the Pound Sterling/U.S.

Dollar foreign exchange rate.

This commercial loan was repaid by the borrower during 2018.

Other investment income (loss), net decreased during the year ended December 31, 2021 compared to 2020 and during the year ended December 31, 2020 compared to 2019 due to the redemption of our FHLBI stock.

For the year ended December 31, 2021, we incurred management fees of $21.1 million (2020:

$38.2 million), which are payable to our Manager under our management agreement.

$29.4 million) that are payable to our Manager under our management agreement.

Management fees decreased for the year ended December 31, 2021 compared to 2020 due to a lower stockholders' equity management fee base in 2021.

Our management fees are calculated quarterly in arrears.

Refer to Note 11 – “Related Party Transactions” of our consolidated financial statements in Part IV of this Report for a discussion of our relationship with our Manager and a description of how our fees are calculated.

Refer to Note 11 – “Related Party Transactions” of our consolidated financial statements in Part IV, Item 15 of this Report for a discussion of our relationship with our Manager and a description of how our fees are calculated.

For the year ended December 31, 2020 we incurred management fees of $29.4 million (2019:

1 unchanged sentence

Management fees decreased for the year ended December 31, 2020 compared to 2019 due to a lower stockholders' equity management fee base in 2020.

The calculation of the management fee was amended in the fourth quarter of 2019.

For the year ended December 31, 2021, our general and administrative expenses not covered under our management agreement amounted to $8.2 million (2020:

2 unchanged sentences

General and administrative expenses not covered under our management agreement 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 higher for the year ended December 31, 2020 compared to 2019 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $2.6 million.

General and administrative costs were higher for the year ended December 31, 2019 compared to 2018 primarily due to higher fees for derivative transactions in 2019 and the write-off of previously deferred costs associated with the Company's at-the-market program in the first quarter of 2019.

General and administrative costs were lower for the year ended December 31, 2021 compared to 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 totaling $2.6 million in 2020.

General and administrative costs were higher for the year ended December 31, 2020 compared to 2019 primarily due to these fees.

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 year ended December 31, 2020, our net loss attributable to common stockholders was $1.7 billion (2019:

$319.7 million net income attributable to common stockholders;

$115.2 million net loss attributable to common stockholders) or $9.89 basic and diluted net loss per average share available to common stockholders (2019:

$2.42 basic and diluted net income per average share available to common stockholders;

For the year ended December 31, 2021, our net loss attributable to common stockholders was $132.5 million (2020:

$1.7 billion net loss attributable to common stockholders;

$319.7 million net income attributable to common stockholders) or $0.48 basic and diluted net loss per average share available to common stockholders (2020:

$9.89 basic and diluted net loss per average share available to common stockholders;

$2.42 basic and diluted net income per average share available to common stockholders).

For the year ended December 31, 2021, the change in net loss attributable to common stockholders compared to 2020 was primarily due to:

(i) net losses on investments of $366.5 million versus $961.9 million in the 2020 period;

(ii) net gains on derivative instruments of $122.6 million versus net losses on derivatives of $851.1 million in the 2020 period;

(iii) net losses on credit derivatives of $35.3 million in the 2020 period;

(iv) lower net interest income of $180.5 million versus $197.9 million in the 2020 period and (v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For the year ended December 31, 2020, we reported a net loss attributable to common stockholders compared to net income attributable to common stockholders in 2019 primarily due to:

3 unchanged sentences

(iv) lower net interest income of $197.9 million versus $306.0 million in the 2019 period and (v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For the year ended December 31, 2019, we reported net income attributable to common stockholders compared to a net loss attributable to common stockholders in 2018 primarily due to:

(i) net gains on investment of $624.5 million versus net losses on investments of $327.7 million in the 2018 period;

(ii) net losses on derivative instruments of $534.8 million versus $5.3 million in the 2018 period;

(iii) net gains on credit derivatives of $8.3 million versus net losses on credit derivatives of $151,000 in the 2018 period;

(iv) higher net interest income of $306.0 million versus $304.1 million in the 2018 period.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, realized and unrealized credit derivative income (loss), net changes in net interest income and net gain (loss) on extinguishment of debt in the 2021, 2020 and 2019 periods, see preceding discussion under “Gain (loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net”, “Realized and Unrealized Credit Derivative Income (Loss), net”, “Net Interest Income” and “Net Gain (Loss) on Extinguishment of Debt”.

Non-GAAP Financial Measures

We use the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below:

• core earnings (and by calculation, core earnings per common share),

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

• effective interest expense (and by calculation, effective cost of funds),

• effective net interest income (and by calculation, effective interest rate margin), and

• economic debt-to-equity ratio.

The most directly comparable U.S.

GAAP measures are:

• net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share),

• total interest income (and by calculation, earning asset yields),

• total interest expense (and by calculation, cost of funds),

• net interest income (and by calculation, net interest rate margin), and

• debt-to-equity ratio.

We are not presenting core earnings for the year ended December 31, 2020 because core earnings excludes the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

In addition, core earnings for the year ended December 31, 2020 is not indicative of the reduced earnings potential of our current investment portfolio.

We intend to resume reporting annual core earnings for the year ended December 31, 2021.

We calculate core earnings as U.S.

The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S.

GAAP measures.

We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below.

Non-GAAP Financial Measure Most Directly Comparable U.S.

Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share)

Effective interest income (and by calculation, effective yield) Total interest income (and by calculation, earning asset yields)

Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds)

Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin)

Economic debt-to-equity ratio Debt-to-equity ratio

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

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

We adjust our calculations of non-GAAP financial measures for changes in the composition of our investment portfolio where appropriate.

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

Beginning in 2021, realized and unrealized gains and losses on GSE CRT embedded derivatives no longer impacted the reconciliation of U.S.

GAAP net income (loss) attributable to common stockholders to earnings available for distribution because we sold all of our GSE CRTs that were accounted for as hybrid financial instruments during 2020.

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

GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net.

As we no longer earn embedded derivative coupon interest due to the sale of our GSE CRTs during 2020, effective interest income is equal to U.S.

GAAP total interest income beginning in 2021.

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

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

GAAP financial measures and should not be considered substitutes for U.S.

GAAP financial measures.

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

Earnings Available for Distribution (formerly Core Earnings)

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

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

We calculate earnings available for distribution as U.S.

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

1 unchanged sentence

unrealized (gain) loss on derivative instruments, net;

TBA dollar roll income;

realized and unrealized (gain) loss on GSE CRT embedded derivatives, net;

TBA dollar roll income;

(gain) loss on foreign currency transactions, net;

1 unchanged sentence

and net (gain) loss on extinguishment of debt.

Core earnings for the year ended December 31, 2020 is distortive because it excludes significant realized losses on investments and derivative instruments that the Company incurred as it navigated the market disruption caused by the COVID-19 pandemic.

Additionally, as of December 31, 2020, the Company no longer holds a substantial portion of the MBS and GSE CRT that contributed to core earnings during the first half of 2020.

We began investing in TBAs as an alternative means of investing in and financing Agency RMBS in the third quarter of 2020 and are presenting an economic debt-to-equity ratio, a non-GAAP financial measure, that considers the impact of TBAs that are accounted for as derivative instruments under U.S.

GAAP on leverage as discussed further below.

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

GAAP financial measures and should not be considered substitutes for U.S.

GAAP financial measures.

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

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

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

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

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

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

For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our consolidated balance sheets.

We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our consolidated statements of operations.

In addition, certain gains and losses represent one-time events.

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

To maintain our qualification as a REIT, U.S.

federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains.

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

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

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

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

We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S.

GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S.

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

The table below provides a reconciliation of U.S.

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

Years Ended December 31,

$ in thousands, except per share data 2021 2019

Net income (loss) attributable to common stockholders (132,477) 319,675

(Gain) loss on investments, net 366,509 (624,466)

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

(156,157) 597,077

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

17,743 (26,482)

Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)

TBA dollar roll income (3)

(Gain) loss on foreign currency transactions, net (4)

Amortization of net deferred (gain) loss on de-designated interest rate swaps (5)

(22,000) (23,729)

Subtotal 246,152 (65,116)

Earnings available for distribution 113,675 254,559

Basic earnings (loss) per common share (0.48) 2.42

Earnings available for distribution per common share (6)

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

Years Ended December 31,

$ in thousands 2021 2019

Realized gain (loss) on derivative instruments, net 156,157 (597,077)

Unrealized gain (loss) on derivative instruments, net (17,743) 26,482

Contractual net interest income (expense) on interest rate swaps (15,803) 35,840

Gain (loss) on derivative instruments, net 122,611 (534,755)

GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components:

Years Ended December 31,

$ in thousands 2021 2019

Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net — (12,490)

GSE CRT embedded derivative coupon interest — 20,833

Realized and unrealized credit derivative income (loss), net — 8,343

(3) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold.

The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month.

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

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

TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our consolidated statements of operations.

GAAP other investment income (loss), net on the consolidated statements of operations includes the following components:

Years Ended December 31,

$ in thousands 2021 2019

Dividend income — 3,944

Gain (loss) on foreign currency transactions, net 1 6

Other investment income (loss), net 1 3,950

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

Years Ended December 31,

$ in thousands 2021 2019

Interest expense on repurchase agreements outstanding 10,710 454,426

Amortization of net deferred (gain) loss on de-designated interest rate swaps (22,000) (23,729)

Repurchase agreements interest expense (11,290) 430,697

(6) 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 years ended December 31, 2021 and 2019 are:

Years Ended December 31,

$ in thousands 2021 2019

Effective net interest income (1)

142,689 338,991

TBA dollar roll income 40,058 —

Dividend income — 3,944

Equity in earnings (losses) of unconsolidated ventures 870 2,224

(Increase) decrease in provision for credit losses 1,768 —

Total expenses (29,233) (46,174)

Subtotal 156,152 298,985

Dividends to preferred stockholders (37,795) (44,426)

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

Earnings available for distribution 113,675 254,559

(1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.

Earnings available for distribution for the year ended December 31, 2021 was driven by effective net interest income and TBA dollar roll income.

Earnings available for distribution for the year ended December 31, 2019 was driven by effective net interest income.

As discussed above, we did not report earnings available for distribution for the year ended December 31, 2020.

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

We calculate effective interest income (and by calculation, effective yield) as U.S.

GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

We include our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S.

We account for GSE CRTs purchased before August 24, 2015 as hybrid financial instruments, but we have elected the fair value option for GSE CRTs purchased on or after August 24, 2015.

GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss).

We add back GSE CRT embedded derivative coupon interest to our total interest income because we consider GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

We did not hold any GSE CRTs as of December 31, 2020.

Prior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S.

GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net.

We included our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest was not accounted for consistently under U.S.

We accounted for GSE CRTs purchased before August 24, 2015 as hybrid financial instruments, but elected the fair value option for GSE CRTs purchased on or after August 24, 2015.

GAAP, coupon interest on GSE CRTs accounted for using the fair value option was recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments was recorded as realized and unrealized credit derivative income (loss).

We added back GSE CRT embedded derivative coupon interest to our total interest income because we considered GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

We calculate effective interest expense (and by calculation, effective cost of funds) as U.S.

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Effective interest income 169,202 1.92 % 286,489 3.63 % 799,200 3.89 %

Our effective interest income decreased for the year ended December 31, 2020 versus 2019 primarily due to lower average earnings assets.

Our effective interest income decreased for the year ended December 31, 2021 versus 2020 due to lower asset yields primarily as a result of our asset sales in the first half of 2020.

Changes in effective yield for the year ended December 31, 2021 versus 2020 are primarily due to changes in portfolio composition.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

Our effective interest income decreased for the year ended December 31, 2020 versus 2019 primarily due to lower average earning assets.

Our average earning assets decreased to $7.9 billion for the year ended December 31, 2020 from $20.6 billion for the year ended December 31, 2019 primarily because we sold a substantial portion of our MBS and GSE CRT portfolio during the first half of 2020 due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed.

Changes in effective yield for the year ended December 31, 2020 versus 2019 are primarily due to changes in our portfolio composition as discussed in Investment Activities above.

Our effective interest income increased for the year ended December 31, 2019 versus 2018 primarily due to higher average earning assets and higher effective yield.

Our average earning assets increased to $20.6 billion for the year ended December 31, 2019 from $18.1 billion for the year ended December 31, 2018 primarily because we invested and leveraged $508.9 million in net proceeds from 2019 common stock issuances and $168.5 million in proceeds from commercial loan repayments since the beginning of 2018 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.

The increase in effective yield for the year ended December 31, 2019 versus 2018 was primarily due to the purchase of new securities at higher yields and higher index rates on floating and adjustable rate assets.

Changes in effective yield for the year ended December 31, 2020 versus 2019 are primarily due to changes in our portfolio composition.

The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

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26,513 0.34 % 98,009 1.41 % 460,209 2.46 %

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2020 compared to the same period in 2019 primarily due to lower interest expense paid on repurchase agreements.

We recorded total interest expense of $82.3 million for the year ended December 31, 2020 compared to $472.3 million for the same period in 2019 due to lower average borrowings and a lower Federal Funds target interest rate.

Our effective interest expense and effective cost of funds increased for the year ended December 31, 2019 compared to the same period in 2018 primarily due to increased borrowings and increases in the Federal Funds rate throughout 2018.

Effective interest expense was also impacted by a change in contractual net interest expense (income) on interest rate swaps from $20.0 million of contractual net interest expense for the year ended December 31, 2018 to $35.8 million of contractual net interest income for the year ended December 31, 2019 primarily as a result of higher LIBOR.

Our average interest rate swap receive rate was 2.29% for the year ended December 31, 2019 versus 2.10% for the year ended December 31, 2018.

See the preceding caption “Interest Expense and Cost of Funds” for further discussion of these variances.

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2021 versus 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds rate.

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $15.8 million during the year ended December 31, 2021 compared to $8.0 million of contractual net interest income for the same period in 2020.

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2020 versus 2019 primarily due to lower interest expense paid on repurchase agreements.

The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:

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142,689 1.58 % 188,480 2.22 % 338,991 1.43 %

Effective net interest income for the year ended December 31, 2020 decreased primarily due to lower average earning asset balances that were partially offset by lower average borrowings and a lower effective cost of funds driven by cuts in the Federal Funds interest rate.

Effective interest rate margin for the year ended December 31, 2020 increased due to changes in portfolio composition, including related repurchase agreement borrowings, and a lower Federal Funds target interest rate.

Effective net interest income and effective interest rate margin for the year ended December 31, 2019 increased primarily due to earning contractual net interest income on interest rate swaps of $35.8 million compared to incurring contractual net interest expense on interest rate swaps of $20.0 million in the same period in 2018, primarily as a result of higher LIBOR rates in 2019.

Effective net interest income for the year ended December 31, 2021 decreased versus 2020 primarily due to lower asset yields 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 rate.

Effective interest rate margin for the year ended December 31, 2021 decreased versus 2020 due to changes in portfolio composition.

Effective net interest income for the year ended December 31, 2020 decreased versus 2019 primarily due to lower average earning asset balances that were partially offset by lower average borrowings and a lower effective cost of funds driven

by cuts in the Federal Funds rate.

Effective interest rate margin for the year ended December 31, 2020 increased versus 2019 due to changes in portfolio composition, including related repurchase agreement borrowings, and a lower Federal Funds rate.

Economic Debt-to-Equity Ratio

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$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed and credit risk transfer securities 8,050,865 121,317 8,172,182

Mortgage-backed securities 7,732,281 71,978 7,804,259

Cash and cash equivalents (2)

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Derivative assets, at fair value (3)

9,893 111 10,004

Other assets 25,728 36,532 62,260

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(1) Investments in non-Agency CMBS, non-Agency RMBS, commercial loans and unconsolidated joint ventures are included in credit portfolio.

(2) Cash and cash equivalents are allocated based on our financing strategy for each class.

(3) Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(2) Cash and cash equivalents is allocated based on our financing strategy for each asset class.

(3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class.

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

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December 31, 2020

$ in thousands Agency RMBS Agency CMBS Credit Portfolio (1)

Mortgage-backed and credit risk transfer securities 11,301,037 4,767,930 5,702,819 21,771,786

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed securities 8,050,865 121,317 8,172,182

Cash and cash equivalents (2)

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Repurchase agreements 7,228,699 — 7,228,699

Secured loans (4)

540,299 — 1,109,701 1,650,000

Derivative liabilities, at fair value (3)

5,537 807 6,344

Other liabilities 27,114 3,536 30,650

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Debt-to-equity ratio (4)

7.9 8.9 4.1 6.5

Economic debt-to-equity ratio (5)

7.9 8.9 4.1 6.5

(1) Investments in non-Agency RMBS, non-Agency CMBS, GSE CRT, commercial loans, unconsolidated joint ventures and loan participation interest are included in credit portfolio.

(2) Cash and cash equivalents are allocated based on a percentage of stockholders' equity for each asset class.

(3) Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(4) Secured loans are allocated based on amount of collateral pledged.

(5) Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total stockholders' equity.

(6) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements, secured loans and TBAs at implied cost basis to total stockholders' equity.

(1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio.

(2) Cash and cash equivalents is allocated based on our financing strategy for each asset class.

(3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class.

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

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.8 billion as of December 31, 2020) to total stockholders' equity.

Liquidity and Capital Resources

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Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I.

Risk Factors in

this Report for more information on how the COVID-19 pandemic has impacted and may continue to impact our liquidity and capital resources.

Risk Factors in this Report for more information on how the COVID-19 pandemic has impacted and may continue to impact our liquidity and capital resources.

We held cash, cash equivalents and restricted cash of $577.1 million at December 31, 2021 (2020:

$392.6 million).

As previously discussed, we increased our cash, cash equivalents and restricted cash balances at December 31, 2020 to improve our liquidity because of market disruption created by the COVID-19 pandemic.

Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash timing of principal and interest payments, repayments of debt, and asset purchases and sales.

Our operating activities provided net cash of approximately $152.3 million for the year ended December 31, 2021 (2020:

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$343.4 million).

Our investing activities provided net cash of $11.6 billion for the year ended December 31, 2020 (2019:

Our investing activities provided net cash of $120.7 million for the year ended December 31, 2021 (2020:

provided net cash of $11.6 billion;

used net cash of $4.3 billion).

provided net cash of $621.6 million).

Our primary source of cash from investing activities for the year ended December 31, 2020 was proceeds from the sale of MBS and GSE CRT of $25.0 billion.

Our primary source of cash from investing activities during the year ended December 31, 2021 was $16.3 billion from the sale of MBS.

We also generated $825.2 million from principal payments of MBS and received cash of $156.2 million to settle derivative contracts during the year ended December 31, 2021.

We used cash of $17.1 billion to purchase MBS during the year ended December 31, 2021.

During the year ended December 31, 2020, we sold MBS and GSE CRT for proceeds of $25.0 billion.

We also generated $892.6 million from principal payments of MBS and GSE CRT during the year ended December 31, 2020.

We used cash to purchase $13.6 billion of MBS and GSE CRT securities.

We used cash to purchase $13.6 billion of MBS and GSE CRT securities during the year ended December 31, 2020.

We also used cash of $844.6 million on derivative contracts during the year ended December 31, 2020 primarily as we sold Agency securities and our sensitivity to interest rates decreased.

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Purchases were partially funded by principal payments from MBS and GSE CRT securities of $2.2 billion, proceeds from MBS and GSE CRT sales of $3.3 billion, and through investing and leveraging proceeds of common stock offerings.

During the year ended December 31, 2018, we used cash to purchase $6.2 billion of MBS and GSE CRT securities.

Purchases were partially funded by principal payments from MBS and GSE CRT securities of $2.0 billion, proceeds from MBS and GSE CRT sales of $4.7 billion, and principal payments from commercial loans held-for investment of $160.9 million.

Our financing activities used net cash of $11.6 billion for the year ended December 31, 2020 (2019:

Our financing activities used net cash of $88.6 million for the year ended December 31, 2021 (2020:

used net cash of $11.6 billion;

provided net cash of $4.1 billion).

used net cash of $879.2 million).

Our financing activities for the year ended December 31, 2021 primarily consisted of net principal repayments on our repurchase agreements of $240.9 million.

We paid dividends of $133.1 million and used cash of $140.0 million to redeem our Series A Preferred Stock during the year ended December 31, 2021.

Proceeds from the issuance of common stock provided $430.5 million during the year ended December 31, 2021.

Our financing activities for the year ended December 31, 2020 primarily consisted of net principal repayments on our repurchase agreements of $10.3 billion.

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We also raised proceeds of $509.1 million from the issuance of common stock and paid dividends of $271.2 million.

Our financing activities for the year ended December 31, 2018 primarily consisted of net principal repayments on our repurchase agreements of $478.3 million.

We used cash of $143.4 million to extinguish our exchangeable senior notes that matured in March 2018.

In addition, we paid dividends of $234.4 million and redeemed Operating Partnership Units of $21.8 million.

As of December 31, 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%.

Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements.

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If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls.

There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased

collateral requirements.

There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements.

If our haircuts increase, our liquidity will proportionately decrease.

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We also had approximately $514.1 million of unencumbered investments and unrestricted cash of $357.1 million as of December 31, 2021.

As of December 31, 2021, our known contractual obligations primarily consist of $7.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 29 days.

We generally intend to refinance the majority of our repurchase agreement borrowings at market rates upon maturity.

Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities.

We are also committed to fund $6.5 million in additional capital to our unconsolidated joint ventures to cover future expenses should they occur.

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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If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

Contractual Obligations

We have entered into an agreement with our Manager under which our Manager is entitled to receive a management fee and the reimbursement of certain operating expenses incurred on our behalf.

The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum.

Refer to Note 11 – “Related Party Transactions” of our consolidated financial statements in Part IV of this Report for additional information on how our management fee is calculated.

Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us.

We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services.

Our reimbursement obligation is not subject to any dollar limitation.

Refer to Note 11 – “Related Party Transactions” of our consolidated financial statements in Part IV of this Report for details of our reimbursements to our Manager.

As of December 31, 2020, we had the following contractual obligations:

Payments Due by Period

$ in thousands Total Less than 1

year 1-3 years 3-5 years After 5

Obligations of Invesco Mortgage Capital Inc.

Repurchase agreements 7,228,699 7,228,699 — — —

Interest expense on repurchase agreements 1,420 1,420 — — —

Total contractual obligations (1)

7,230,119 7,230,119 — — —

(1) Excluded from total contractual obligations are the amounts due to our Manager under our management agreement, as those obligations do not have fixed and determinable payments.

Off-Balance Sheet Arrangements

We have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager.

The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner.

The entities are structured such

that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified.

As of December 31, 2020, our undrawn capital commitments were $6.8 million.

To maintain our qualification as a REIT, U.S.

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and (iii) temporary differences related to amortization of premiums and discounts on investments.

For additional information regarding the characteristics of our dividends, refer to Note 12 – “Stockholders' Equity” of our consolidated financial statements in Part IV of this Report.

For additional information regarding the characteristics of our dividends, refer to Note 12 – “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this Report.

Unrelated Business Taxable Income

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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 December 31, 2020, one counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $68.4 million, or 5% of our stockholders’ equity.

The following table summarizes our exposure to counterparties by geographic concentration as of December 31, 2020.

As of December 31, 2021, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $70.1 million, or 5% of our stockholders’ equity.

The following table summarizes our exposure under repurchase agreements to counterparties by geographic concentration as of December 31, 2021.

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

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Asia 4 1,917,804 99,182

United Kingdom 1 190,246 8,018

Total 18 6,987,834 355,342

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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-K

Item 7. Management’s Discussion and Analysis