What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-04 compared with 2021-11-03 · 289 added, 501 removed, 481 unchanged (62% of the section changed)

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Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:

• ongoing spread and economic and operational impact of the COVID-19 pandemic, including but not limited to, the impact on the value, volatility, availability, financing and liquidity of mortgage assets;

• the economic and operational impact of the COVID-19 pandemic, including but not limited to, the impact on the value, volatility, availability, financing and liquidity of target assets;

• our business and investment strategy;

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• our projected operating results;

• general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S.

• general volatility of financial markets and the effects of governmental responses, including actions and initiatives of the U.S.

governmental agencies and changes to U.S.

government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and our ability to respond to and comply with such actions, initiatives and changes;

government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, interest rate fluctuations, increases in inflation, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and our ability to respond to and comply with such actions, initiatives and changes;

• the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements;

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• the impact of potential data security breaches or other cyber-attacks or other disruptions;

• effects of hedging instruments on our target assets;

• the effects of hedging instruments on our target assets;

• rates of default or decreased recovery rates on our target assets;

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• our ability to maintain our exception from the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act");

• availability of investment opportunities in mortgage-related, real estate-related and other securities;

• availability of U.S.

• the availability of investment opportunities in mortgage-related, real estate-related and other securities;

• the availability of U.S.

Government Agency guarantees with regard to payments of principal and interest on securities;

• the market price and trading volume of our capital stock;

• availability of qualified personnel from our Manager and our Manager's continued ability to find and retain such personnel;

• the availability of qualified personnel from our Manager and our Manager's continued ability to find and retain such personnel;

• the relationship with our Manager;

• estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future;

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

• estimates relating to fair value of our target assets and interest income recognition;

• our understanding of our competition;

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These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.

Some of these factors are described under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

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

If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

Any forward-looking statement speaks only as of the date on which it is made.

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

• Commercial mortgage loans;

• A commercial mortgage loan;

• Other real estate-related financing arrangements;

We have also historically invested in:

• CMBS that are guaranteed by a U.S.

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

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

• Residential mortgage loans.

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

Treasury securities.

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.

(the “Operating Partnership”).

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

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Market Conditions

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

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

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

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

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

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 tightened significantly during the first quarter of 2022 as equity markets declined, credit spreads widened and volatility increased in reaction to sharply higher price data and the potential disruption to supply chains brought on by the conflict in Ukraine and continued COVID-19 lockdowns in China.

Interest rates were higher across the yield curve, with shorter dated maturities increasing more than longer dated maturities as the Federal Reserve began to remove monetary policy accommodations.

Equity markets ended the first quarter lower, as the S&P 500 lost 4.9% while the NASDAQ lost 9.1% since the end of 2021.

The employment picture continued to improve during the quarter, as gains in nonfarm payrolls averaged 562,000 per month, and the unemployment rate fell from 3.9% to 3.6% at quarter-end.

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

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

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

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

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

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

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

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

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

Consumer activity was mixed with consumer confidence measures declining as the impact of higher prices took hold, while spending and retail sales both increased modestly.

Interest rates rose during the first quarter as market expectations of additional aggressive increases to the Federal Funds target rate by the Federal Open Market Committee (“FOMC”) impacted shorter maturities and increases in inflation expectations affected longer dated maturities.

During the quarter, the yield on the 2 year Treasury note increased 160 basis points to 2.34%, the yield on the 5 year Treasury increased 120 basis points to 2.46% and the yield on the 10 year Treasury ended the quarter at 2.34%, up 83 basis points.

In March, the FOMC raised the Federal Funds target rate as it began its fight against inflation.

Market expectations for further rate hikes increased dramatically, with pricing in the Federal Funds futures market reflecting as many as 10 additional hikes by the end of 2023.

The consumer price index ("CPI") hit a 40-year high of 8.5% during March, up from 7.0% at year-end.

The CPI excluding food and energy ended the quarter at 6.5%, up from 5.5% last quarter.

Commodity prices gaped higher during the quarter, with West Texas Intermediate crude recording a 56.2% increase and the Commodity Research Bureau commodity index gaining 37.4%.

Despite these price increases, breakeven rates on inflation-protected Treasuries reflected the belief that the Federal Reserve will have success in reducing inflation below

current levels.

The inflation rate implied by 2 year U.S.

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

CMBS risk premiums were relatively unchanged in the third quarter.

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

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

Treasury inflation-protected securities ended the quarter at 4.41% (up from 3.22% last quarter), while the 5 year breakeven rate rose from 2.91% to 3.43% over the course of the quarter.

After posting their worst performance in nearly a decade in 2021, Agency RMBS underperformed significantly worse during the first quarter of 2022.

Underperformance relative to Treasuries during the first quarter was approximately twice as bad as in 2021, with lower coupons lagging Treasuries by approximately 200 basis points.

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

In particular, the accelerated timeline for the tapering of net asset purchases and balance sheet normalization significantly disrupted the supply and demand dynamics in Agency RMBS, as the Federal Reserve signaled a notable decline in demand for the asset class in 2022.

While prepayment speeds remained relatively elevated due to the strength of the housing market, premiums on specified pool Agency RMBS collapsed during the quarter as investor demand for prepayment protection disappeared as mortgage rates hit multi-year highs.

Prepayment speeds should moderate in the months ahead, as sharply higher mortgage rates dampen refinancing activity.

The dollar roll market for new production higher coupon TBAs continues to be attractive, as demand for par-priced paper outstrips current production.

Overall, despite cheaper valuations, we remain cautious on the Agency RMBS sector, as heightened volatility and a worsening technical picture weighs on our outlook.

CMBS risk premiums increased in the first quarter of 2022 due to elevated geopolitical risks , 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 sharp slowdown in activity.

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.

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

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

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

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

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

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

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

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

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

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

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

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

Our expectation is that growth in the U.S.

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

Proposed Changes to LIBOR

In March 2021, the U.K.

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

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

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

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

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

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

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

It is possible that not all of our assets and liabilities will transition away

from LIBOR at the same time or to the same alternative reference rate, in each case increasing the difficulty of hedging.

Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread and there is no assurance that the spread adjustments will avoid negative financial impacts on our portfolio at the time of transition.

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

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

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

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

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

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

The guidance can be applied as of January 1, 202 0.

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

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

The housing market staged a robust recovery following 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 as mortgage rates have increased and affordability has declined.

After reversing much of the credit spread widening that occurred in March 2020, residential mortgage-backed securities valuations have been negatively impacted by challenging market technicals and increased macro volatility over the past two quarters despite supportive credit fundamentals.

Investment Activities

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

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

The table below shows the composition of our investment portfolio as of March 31, 2022, December 31, 2021 and March 31, 2021:

$ in thousands March 31, 2022 December 31, 2021 March 31, 2021

30 year fixed-rate, at fair value 5,861,979 7,701,523 8,997,918

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Non-Agency RMBS, at fair value 8,402 9,070 10,574

GSE CRT, at fair value — — 4,917

Treasury securities, at fair value 482,445 — —

Commercial loan, at fair value 23,391 23,515 20,000

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

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

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

As of September 30, 2021, our holdings of 30 year fixed-rate Agency RMBS represented approximately 84% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2020 and 80% as of September 30, 2020.

We sold substantially all of our Agency RMBS portfolio in the first half of 2020 to generate liquidity and reduce leverage.

We resumed investing in 30 year fixed-rate Agency RMBS in July 2020 and began investing in TBAs in the third quarter of 2020.

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

$ in thousands Fair Value Percentage

We sold $8.8 billion and purchased $7.6 billion of Agency RMBS during the three months ended March 31, 2022 primarily to rotate into higher yielding securities, in some cases changing coupon rates or the type of specified pool collateral.

Purchases were funded with proceeds from the sales and paydowns of securities.

As of March 31, 2022, our holdings of 30 year fixed-rate Agency RMBS represented approximately 73% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2021 and 84% as of March 31, 2021.

Our 30 year fixed-rate Agency RMBS holdings as of March 31, 2022, December 31, 2021 and March 31, 2021 consisted of specified pools with coupon distributions as shown in the table below.

March 31, 2022 December 31, 2021 March 31, 2021

$ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage

2.0% 1,911,141 32.6 % 2,408,404 31.3 % 4,135,167 46.0 %

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Total 30 year fixed-rate Agency RMBS 5,861,979 100.0 % 7,701,523 100.0 % 8,997,918 100.0 %

Our purchases of Agency RMBS have been primarily focused on specified pools with prepayment protection, as low mortgage rates and a robust housing market have increased borrower incentives to prepay their mortgage loans.

We seek to mitigate the negative impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that diminish borrower incentive to prepay, such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, higher percentage of non-owner occupied loans (investment and vacation properties) and newly originated loans.

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

Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles.

We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments.

Specified pools typically consist of characteristics such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, non-owner occupied loans (investment and vacation properties) and higher geographic concentrations in states such as New York, Florida and Texas.

In addition, specified pools with certain loan age and servicers can also exhibit prepayment tendencies that may be attractive.

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

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

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

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

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

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

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

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

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

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

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

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

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

Our holdings of GSE CRT represented less than 1% of our total investment portfolio, including TBAs as of September 30, 2020.

GSE CRTs are unsecured general obligations of the GSEs that are structured to provide credit protection to the issuer with respect to defaults and other credit events within pools of mortgage loans that collateralize MBS issued and guaranteed by the GSEs.

As of September 30, 2021, we held an investment in one commercial real estate mezzanine loan that is due in 2022 and has a loan-to-value ratio of approximately 78.9%.

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

The unconsolidated ventures invest in our target assets.

As of March 31, 2022, the implied cost basis of TBAs represented approximately 19% of our total investment portfolio versus 17% as of December 31, 2021 and 14% as of March 31, 2021.

As of March 31, 2022, our investments consist of 30-year Agency RMBS TBAs with coupons that range from 2.5% to 4.0% 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 below those available in the repurchase market as the sharp rise in mortgage rates led to a supply and demand imbalance in certain coupons, benefiting investors.

We anticipate this benefit to diminish in the coming quarters as the imbalance decreases due to an increase in production of higher coupon Agency RMBS.

As of March 31, 2022;

December 31, 2021 and March 31, 2021 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 March 31, 2022.

Approximately 72% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2022.

As of March 31, 2022;

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

As of March 31, 2022, our holdings of U.S.

Treasury securities represented approximately 6% of our total investment portfolio, including TBAs, versus 0% as of December 31, 2021and March 31, 2021.We use various financial instruments, including swaps and U.S.

Treasury securities to keep duration within management's targeted range.

Management determines the type of financial instrument best suited to manage duration based on various factors, including interest rate swap spreads, repurchase agreement borrowing rates, expected holding periods and transaction costs.

Our holdings of U.S.

Treasury securities as of March 31, 2022 were comprised of 5-, 7- and 10-year U.S.

Treasury notes with a weighted average coupon rate of 1.88%.

As of March 31, 2022, we held an investment in one commercial real estate mezzanine loan that is due in June 2022 and has a loan-to-value ratio of approximately 68.0%.

As of March 31, 2022, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

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.

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

We repaid our secured loans during 2020 with proceeds from sales of assets that collateralized the secured loans.

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

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:

$ in thousands Collateralized borrowings under repurchase agreements and secured loans

We also currently use repurchase agreements to finance our purchases of U.S.

Treasury securities.

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

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter.

$ in thousands Collateralized borrowings under repurchase agreements

Quarter Ended Quarter-end balance Average quarterly balance (1)

Maximum balance (2)

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

December 31, 2020 7,228,699 6,883,773 7,237,496

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

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

December 31, 2021 6,987,834 7,442,784 7,776,070

March 31, 2022 5,837,420 6,218,445 6,636,913

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

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

We have committed to invest up to $125.3 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

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

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

Hedging Instruments

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

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

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

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.

During the nine months ended September 30, 2021, we terminated existing swaps with a notional amount of $1.5 billion and entered into new swaps with a notional amount of $2.5 billion as part of our overall risk management strategy.

During the three months ended March 31, 2022, we terminated existing swaps with a notional amount of $4.0 billion and entered into new swaps with a notional amount of $5.1 billion as part of our overall risk management strategy.

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

We realized a net gain of $183.8 million on interest rate swaps during the nine months ended September 30, 2021 primarily due to rising interest rates.

We realized a net gain of $343.3 million on interest rate swaps during the three months ended March 31, 2022 primarily due to rising interest rates.

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

As of September 30, 2021, we had €14.3 million or $16.8 million (December 31, 2020:

As of March 31, 2022, we had €6.5 million or $7.4 million (December 31, 2021:

€11.7 million or $13.6 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture.

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

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

$1.3 million net loss).

During the three months ended March 31, 2022, we settled currency forward contracts of €17.6 million or $20.4 million (March 31, 2021:

€27.8 million or $33.1 million) in notional amount and realized a net gain of $193,000 (March 31, 2021:

$539,000 net loss).

Capital Activities

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

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

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

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

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

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

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

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

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

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

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

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

For information on dividends declared during the nine months ended September 30, 2021 and 2020, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

As of March 31, 2022, 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 three months ended March 31, 2022, we did not sell any shares of common stock under our equity distribution agreement.

During three months ended March 31, 2021, we sold 15,550,000 shares of common stock under an equity distribution agreement for proceeds of $57.8 million, net of approximately $831,000 in commissions and fees.

For information on dividends declared during the three months ended March 31, 2022 and 2021, see Note 13 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

Item 1 of this report on Form 10-Q.

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

During the three months ended March 31, 2022, we did not repurchase any shares of our common stock.

In May 2022, our Board of Directors approved a preferred stock repurchase plan under which we are authorized to repurchase 3,000,000 shares of our Series B Preferred Stock and 5,000,000 shares of our Series C Preferred Stock.

Refer to Note 16 - "Subsequent Events" of our condensed consolidated financial statements in Part I.

of this report on Form 10-Q for details of our one-for-ten reverse stock split that was approved by our Board of Directors on May 3, 2022.

Book Value per Common Share

We calculate book value per common share as follows.

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

$ in thousands except per share amounts March 31, 2022 December 31, 2021

Numerator (adjusted equity):

Total equity 1,127,947 1,402,135

Liquidation preference of Series A Preferred Stock — (140,000)

Liquidation preference of Series B Preferred Stock (155,000) (155,000)

4 unchanged sentences

Book value per common share 2.08 2.91

Our book value per common share decreased 15.8% as of September 30, 2021 compared to December 31, 2020.

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

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

Our book value per common share decreased 28.5% as of March 31, 2022 compared to December 31, 2021 as the anticipation of an accelerated timeline for balance sheet reduction and the sharp pivot to tighter monetary policy by the Federal Reserve has pressured valuations lower in 2022.

Premium valuations on our specified pool collateral have also deteriorated as higher rates reduced investor demand for prepayment protection.

Furthermore, the Russian invasion of Ukraine has led to a reduction in demand for risk assets as volatility and uncertainty increased.

Refer to Item 3.

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

Critical Accounting Policies

There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates that are disclosed in our most recent Form 10-K for the year ended December 31, 2021.

Recent Accounting Standards

See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Issued".

Results of Operations

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

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

The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,

$ in thousands, except share data 2022 2021

Interest income

Mortgage-backed and credit risk transfer securities 42,657 26,907 124,725 242,071

Commercial and other loans 525 529 1,621 2,237

Mortgage-backed and other securities 41,637 39,434

Commercial loan 537 576

Total interest income 42,174 40,010

2 unchanged sentences

(2,104) (1,660)

Secured loans — 297 — 8,655

Total interest expense (2,104) (1,660)

5 unchanged sentences

Gain (loss) on derivative instruments, net 238,860 286,961

Realized and unrealized credit derivative income (loss), net — 478 — (35,312)

Net gain (loss) on extinguishment of debt — 15,849 — 14,742

Other investment income (loss), net 55 (16)

3 unchanged sentences

Total expenses 7,298 6,877

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

57,680 107,966 (25,353) (1,797,065)

Net income (loss) (228,422) (9,275)

Dividends to preferred stockholders 8,394 11,107

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

Net income (loss) attributable to common stockholders (236,816) (20,382)

Net income (loss) per share:

Earnings (loss) per share:

Net income (loss) attributable to common stockholders

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Diluted 329,850,097 223,954,989

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

(1) Negative interest expense on repurchase agreements 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 9 - "Derivatives and Hedging Activities" and Note 13 - "Stockholders' Equity" in Part I.

1 unchanged sentence

Interest Income and Average Earning Asset Yields

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

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

The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,

$ in thousands 2022 2021

7 unchanged sentences

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

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

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

$8.0 billion).

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

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

$27.4 million and $244.3 million).

Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.

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

We had average earning assets of $7.0 billion for the three months ended March 31, 2022 (March 31, 2021:

$9.3 billion) Average earning assets decreased for the three months ended March 31, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases could result in an increase in market volatility and lower valuations on our holdings.

Average earning asset yields were 2.41% for the three months ended March 31, 2022 (March 31, 2021:

Average earning asset yields increased for the three months ended March 31, 2022 compared to 2021 due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $42.2 million for the three months ended March 31, 2022 (March 31, 2021:

$40.0 million).

Our interest income includes coupon interest and net premium amortization on mortgage-backed and other securities as well as interest income on our commercial loan as shown in the table below.

Three Months Ended March 31,

$ in thousands 2022 2021

Interest Income

MBS and GSE CRT - coupon interest 51,998 27,466 155,001 256,416

MBS and GSE CRT - net premium amortization (9,341) (559) (30,276) (14,345)

MBS and GSE CRT - interest income 42,657 26,907 124,725 242,071

Commercial and other loans 525 529 1,621 2,237

Mortgage-backed and other securities - coupon interest 48,229 51,490

Mortgage-backed and other securities - net premium amortization (6,592) (12,056)

Mortgage-backed and other securities - interest income 41,637 39,434

Commercial loan 537 576

Total interest income 42,174 40,010

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

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

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

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

For further details on the composition of our investment portfolio as of September 30, 2021 and 2020, see the discussion under Investment Activities above in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Interest income on our commercial and other loans decreased $4,000 and $616,000 during the three and nine months ended September 30, 2021, respectively, compared to 2020.

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

Mortgage-backed and other securities interest income increased $2.2 million for the three months ended March 31, 2022 compared to 2021 despite lower average earning assets due to a 69 basis point increase in average earning asset yields.

Interest income on our commercial loan was relatively flat during the three months ended March 31, 2022 compared to 2021.

Prepayment Speeds

Our RMBS portfolio (and previously our GSE CRT portfolio) is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Our RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Expected future prepayment speeds are estimated on a quarterly basis.

2 unchanged sentences

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

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

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

The following table presents net premium amortization recognized on our mortgage-backed and other securities portfolio for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,

$ in thousands 2022 2021

Agency RMBS (6,928) (12,484)

Agency CMBS — — — (1,744)

Non-Agency CMBS 503 878

Non-Agency RMBS (151) (450)

GSE CRT — (274) — (2,560)

Treasury Securities (16) —

Net (premium amortization) discount accretion (6,592) (12,056)

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

Net premium amortization decreased $5.5 million for the three months ended March 31, 2022 compared to 2021 primarily due to repositioning our Agency RMBS portfolio into securities with lower book prices.

Our interest income is subject to interest rate risk.

2 unchanged sentences

Interest Expense and Cost of Funds

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

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

The table below presents the components of interest expense for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,

$ in thousands 2022 2021

3 unchanged sentences

Repurchase agreements interest expense (2,104) (1,660)

Secured loans — 297 — 8,655

Total interest expense (2,104) (1,660)

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

Our interest expense on repurchase agreement borrowings decreased $85.6 million for the nine months ended September 30, 2021 compared to 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds interest rate.

Our repurchase agreements interest expense, which equals our total interest expense, decreased $444,000 for the three months ended March 31, 2022 compared to 2021 due to our lower average borrowings.

Our repurchase agreement interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.6 million and $16.4 million during the three and nine months ended September 30, 2021, respectively, and $3.2 million and $17.8 million during the three and nine months ended September 30, 2020, respectively.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.2 million during the three months ended March 31, 2022 and $5.4 million and during the three months ended March 31, 2021.

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

During the next twelve months, we estimate that $19.0 million of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.

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

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

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

Our total interest expense during the nine months ended September 30, 2021 decreased $92.8 million compared to 2020 primarily due to a decrease of $94.2 million in interest expense on repurchase agreements borrowings and secured loans as discussed above.

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

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

The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2022 and 2021.

Three Months Ended March 31,

$ in thousands 2022 2021

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

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

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

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

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

Total average borrowings decreased $2.1 billion in the three months ended March 31, 2022 compared to 2021 as we reduced the size of our investment portfolio, and related repurchase agreement borrowings, given expectations that the Federal Reserve's tapering of asset purchases could result in an increase in market volatility and lower valuations on our holdings.

Our average cost of funds decreased 6 basis points for the three months ended March 31, 2022 compared to 2021 as amortization of net deferred gains on de-designated interest rate swaps comprised a larger portion of our total interest expense.

Net Interest Income

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

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

The table below presents the components of net interest income for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

$ in thousands 2022 2021

Interest Income

Mortgage-backed and credit risk transfer securities 42,657 26,907 124,725 242,071

Commercial and other loans 525 529 1,621 2,237

Mortgage-backed and other securities 41,637 39,434

Commercial loan 537 576

Total interest income 42,174 40,010

3 unchanged sentences

Repurchase agreements interest expense (2,104) (1,660)

Secured loans — 297 — 8,655

Total interest expense (2,104) (1,660)

1 unchanged sentence

Net interest rate margin 2.55 % 1.80 %

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

$28.9 million and $159.6 million).

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

The decrease in net interest income for the nine months ended September 30, 2021 compared to 2020 was primarily due to the sale of MBS and GSE CRTs in the first half of 2020 as previously discussed.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 2.15% and 2.01% for the three and nine months ended September 30, 2021, respectively (September 30, 2020:

2.79% and 2.46%).

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

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

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

Our net interest income, which equals interest income less interest expense, totaled $44.3 million for the three months ended March 31, 2022 (March 31, 2021:

$41.7 million).

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 2.55% for the three months ended March 31, 2022 (March 31, 2021:

The increase in net interest income and net interest rate margin for the three months ended March 31, 2022 compared to 2021 was primarily due to our rotation into higher yielding Agency RMBS.

Gain (Loss) on Investments, net

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

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

The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31,

$ in thousands 2022 2021

Net realized gains (losses) on sale of investments (4,451) 50,110 (239,304) (358,914)

Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments — (8,983) — (94,104)

Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option (13,825) 23,994 (35,933) (537,433)

Net unrealized gains (losses) on commercial loan and loan participation interest 1,446 (15) (830) (2,484)

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

Net realized gains (losses) on sale of MBS (318,970) (116,847)

Net unrealized gains (losses) on MBS accounted for under the fair value option (165,467) (211,912)

Net unrealized gains (losses) on commercial loan (124) (3,098)

Net unrealized gains (losses) on U.S.

Treasury securities (19,827) —

Total gain (loss) on investments, net (1)

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

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

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

We sold securities during the nine months ended September 30, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

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

We did not record any impairment during the three and nine months ended September 30, 2021 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

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

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

(504,388) (331,857)

During the three months ended March 31, 2022, we sold MBS and realized net losses of $319.0 million (March 31, 2021:

net losses of $116.8 million).

Realized net losses during the three months ended March 31, 2022 and 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016.

Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities.

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

As of September 30, 2021, $8.8 billion (December 31, 2020:

As of March 31, 2022, $5.9 billion (December 31, 2021:

$7.7 billion) or 99% (December 31, 2021:

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

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

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

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

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

We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $165.5 million in the three months ended March 31, 2022 compared to net unrealized losses of $211.9 million in the three months ended March 31, 2021.

Net unrealized losses in the three months ended March 31, 2022 primarily reflect wider interest rate spreads on our Agency RMBS.

Net unrealized losses in the three months ended March 31, 2021 reflect wider interest rate spreads on our

Agency assets as a sharp increase in mortgage rates and reduced investor demand for prepayment protection resulted in lower valuation premiums on our Agency RMBS specified pools.

We recorded an unrealized loss of $124,000 and $3.1 million on our commercial loan in the three months ended March 31, 2022 and 2021, respectively.

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

We recorded a realized loss of $3.8 million on our loan participation interest in the nine months ended September 30, 2020.

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

We recorded unrealized losses of $19.8 million on U.S.

Treasury securities in the three months ended March 31, 2022 due to rising interest rates.

We did not hold any U.S.

Treasury securities during the three months ended March 31, 2021.

(Increase) Decrease in Provision for Credit Losses

As of September 30, 2021, $70.8 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2020:

As of March 31, 2022, $68.2 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2021:

$70.2 million).

As of December 31, 2020, we had established a $1.8 million allowance for credit losses on a single non-Agency CMBS based on a comparison of the security's amortized cost basis to discounted expected cash flows.

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

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

Refer to Note 4 – "Mortgage-Backed Securities and

Credit Risk Transfer Securities" of our condensed consolidated financial statements included in Part I.

Item 1 of this Report for additional information on our allowance for credit losses.

We did not record any provisions for credit losses during the three months ended March 31, 2022.

We recorded a $938,000 decrease in the provision for credit losses on a single non-Agency CMBS during the three months ended March 31, 2021 because the valuation for the security improved.

Equity in Earnings (Losses) of Unconsolidated Ventures

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

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

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

For the three months ended March 31, 2022, we recorded equity in earnings of unconsolidated ventures of $71,000 (March 31, 2021:

equity in losses of $94,000).

Earnings and losses on unconsolidated ventures are driven by the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net

4 unchanged sentences

$ in thousands

Three months ended September 30, 2021

not designated as

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

Interest Rate Swaps 22,663 (4,175) 11,997 30,485

Currency Forward Contracts 610 — (266) 344

TBAs 14,820 — (10,367) 4,453

Total 38,093 (4,175) 1,364 35,282

$ in thousands

Three months ended September 30, 2020

Three months ended March 31, 2022

not designated as

5 unchanged sentences

$ in thousands

Nine Months Ended September 30, 2021

Three months ended March 31, 2021

not designated as

5 unchanged sentences

Total 282,250 (4,549) 9,260 286,961

$ in thousands

Nine Months Ended September 30, 2020

not designated as

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

Interest Rate Swaps (909,366) 11,369 (13,266) (911,263)

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

TBAs 1,227 — 2,578 3,805

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

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

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

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

Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

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

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

During the three months ended March 31, 2022, we terminated existing interest rate swaps with a notional amount of $4.0 billion and entered into new swaps with a notional amount of $5.1 billion.

We realized a net gains of $343.3 million and $327.5 million for the three months ended March 31, 2022 and 2021, respectively, on interest rate swaps due to rising interest rates.

As of March 31, 2022, we had $5.8 billion of repurchase agreement borrowings with a weighted average remaining maturity of 28 days.

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

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

As of September 30, 2021 and December 31, 2020, we held the following interest rate swaps whereby we receive interest at a one-month LIBOR rate:

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

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

As of March 31, 2022 and December 31, 2021, we held interest rate swaps whereby we receive floating interest based upon SOFR as shown in the table below.

$ in thousands As of March 31, 2022 As of December 31, 2021

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)

6,800,000 0.42 % 0.30 % 6.5 6,300,000 0.30 % 0.05 % 5.7

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

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

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

$ in thousands As of September 30, 2021

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

(1) Notional amount as of March 31, 2022 and December 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

As of March 31, 2022 and December 31, 2021, we held interest rate swaps whereby we pay floating interest based upon SOFR as shown in the table below.

$ in thousands As of March 31, 2022 As of December 31, 2021

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

Interest Rate Swaps 2,300,000 0.30 % 1.53 % 7.0 1,750,000 0.05 % 0.98 % 4.9

We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates.

As of September 30, 2021, we had $16.8 million (December 31, 2020:

As of March 31, 2022, we had $7.4 million (December 31, 2021:

$13.6 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.

We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS.

As of September 30, 2021, we had $1.5 billion notional amount of TBAs (December 31, 2020:

As of March 31, 2022, we had $1.5 billion net notional amount of TBAs (December 31, 2021:

$1.6 billion).

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

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

We recorded net realized and unrealized gains of $3.8 million on TBAs during the three and nine months ended September 30, 2020.

Realized and Unrealized Credit Derivative Income (Loss), net

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

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

$ in thousands 2020 2020

GSE CRT embedded derivative coupon interest 478 6,323

Gain (loss) on settlement of GSE CRT embedded derivatives (17,223) (31,354)

Change in fair value of GSE CRT embedded derivatives 17,223 (10,281)

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

Realized and unrealized credit derivative loss in the nine months ended September 30, 2020 was driven by a decline in the fair value of our GSE CRT embedded derivatives as asset prices dropped due to spread widening.

We did not hold any GSE CRTs during the three and nine months ended September 30, 2021.

Net Gain (Loss) on Extinguishment of Debt

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

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

We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt and settlements of counterparty claims for less than the principal balance of our repurchase agreements as a gain on extinguishment of debt in our condensed consolidated statement of operations.

We recorded $94.5 million and $57.3 million of net realized and unrealized losses on TBAs during the three months ended March 31, 2022 and 2021, respectively, primarily due to rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

Other Investment Income (Loss), net

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

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

FHLBI redeemed our stock at cost during 2020.

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

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

$4.1 million and $24.9 million).

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

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

Our other investment income (loss), net during the three months ended March 31, 2022 and 2021 consisted of foreign currency transaction gains and losses.

We incurred management fees of $5.3 million for the three months ended March 31, 2022 (March 31, 2021:

$4.9 million).

Management fees increased for the three months ended March 31, 2022 compared to the same period in 2021 due to a higher stockholders' equity management fee base.

Refer to Note 12 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.

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

$1.8 million and $9.0 million).

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

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

Issuance and Redemption Costs of Redeemed Preferred Stock

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

Our general and administrative expenses not covered under our management agreement amounted to $2.0 million for the three months ended March 31, 2022 (March 31, 2021:

$2.0 million).

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.

Net Income (Loss) attributable to Common Stockholders

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

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

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

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

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

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

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

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

For the three months ended March 31, 2022, our net loss attributable to common stockholders was $236.8 million (March 31, 2021:

$20.4 million net loss attributable to common stockholders) or $0.72 basic and diluted net loss per average share available to common stockholders (March 31, 2021:

$0.09 basic and diluted net loss per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $136.0 million in the 2021 period compared to net losses on derivative instruments of $908.2 million in the 2020 period;

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

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

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

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

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $504.4 million in the 2022 period compared to $331.9 million in the 2021 period;

(ii) net gains on derivative instruments of $238.9 million in the 2022 period compared to $287.0 million in the 2021 period;

and (iii) a $2.6 million increase in net interest income.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments and net changes in net interest income, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”.

Non-GAAP Financial Measures

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

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

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

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

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

• economic debt-to-equity ratio.

The most directly comparable U.S.

GAAP measures are:

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

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

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

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

• debt-to-equit y ratio.

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

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

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

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

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

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

accounted for as hybrid financial instruments during 2020.

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

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

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

GAAP total interest income beginning in 2021.

We did not present earnings available for distribution for the nine months ended September 30, 2020 or for the year ended December 31, 2020 because earnings available for distribution excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

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

The 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 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

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

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

Earnings Available for Distribution (formerly Core Earnings)

Earnings Available for Distribution

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

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TBA dollar roll income;

(gain) loss on foreign currency transactions, net;

amortization of net deferred (gain) loss on de-designated interest rate swaps;

and net (gain) loss on extinguishment of debt.

(gain) loss on foreign currency transactions, net and amortization of net deferred (gain) loss on de-designated interest rate swaps.

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.

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

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

Three Months Ended March 31,

$ in thousands, except per share data 2022 2021

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(5,196) (5,368)

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

Subtotal 274,962 45,540

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Earnings available for distribution per common share (5)

0.10 0.06 0.31

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

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

Three Months Ended March 31,

$ in thousands 2022 2021

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

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

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

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

Three Months Ended March 31,

$ in thousands 2022 2021

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

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

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

The table below shows the components of earnings available for distribution for the following periods.

Three Months Ended March 31,

$ in thousands 2022 2021

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TBA dollar roll income 13,401 10,545

Dividend income — 402 —

Equity in earnings (losses) of unconsolidated ventures 71 (94)

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Dividends to preferred stockholders (8,394) (11,107)

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

Earnings available for distribution 38,146 25,158

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

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

Earnings available for distribution for the nine months ended September 30, 2021 was driven by effective net interest income and TBA dollar roll income.

As discussed above, we did not report earnings available for distribution for the nine months ended September 30, 2020.

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

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

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

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

Earnings available for distribution increased during the three months ended March 31, 2022 compared to the same period in 2021 due to higher effective net interest income and TBA dollar roll income.

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

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

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We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S.

GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net;

amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net.

We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S.

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

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

Three Months Ended September 30,

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

Total interest income 43,182 1.98 % 27,436 2.62 %

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

— — % 478 0.05 %

Effective interest income

43,182 1.98 % 27,914 2.67 %

Nine Months Ended September 30,

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

Total interest income 126,346 1.88 % 244,308 4.09 %

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

— — % 6,323 0.11 %

Effective interest income

126,346 1.88 % 250,631 4.20 %

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

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

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

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

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

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

Three Months Ended September 30,

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

Total interest expense (3,272) (0.17) % (1,416) (0.17) %

Amortization of net deferred gain (loss) on de-designated interest rate swaps 5,601 0.29 % 3,243 0.39 %

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

4,175 0.21 % 555 0.07 %

Effective interest expense

6,504 0.33 % 2,382 0.29 %

Nine Months Ended September 30,

GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense.

We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S.

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

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

Three Months Ended March 31,

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

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1,808 0.11 % 8,257 0.40 %

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

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

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

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $13.3 million during the nine months ended September 30, 2021 compared to $11.4 million of contractual net interest income for the same period in 2020.

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

Three Months Ended September 30,

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

Net interest income 46,454 2.15 % 28,852 2.79 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,601) (0.29) % (3,243) (0.39) %

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

— — % 478 0.05 %

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

(4,175) (0.21) % (555) (0.07) %

Effective net interest income

36,678 1.65 % 25,532 2.38 %

Nine Months Ended September 30,

Our effective interest expense and effective cost of funds decreased in the three months ended March 31, 2022 compared to the same period in 2021 primarily due to contractual net interest income on interest rate swaps of $1.3 million during the three months ended March 31, 2022 compared to $4.5 million of contractual net interest expense for the same period in 2021.

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.

Three Months Ended March 31,

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

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Amortization of net deferred (gain) loss on de-designated interest rate swaps (5,196) (0.33) % (5,368) (0.26) %

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

— — % 6,323 0.11 %

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

2 unchanged sentences

40,366 2.30 % 31,753 1.32 %

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

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

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

Effective net interest income increased in the three months ended March 31, 2022 compared to the same period in 2021 primarily due to higher net interest income and changes in contractual net interest income (expense) on interest rate swaps as discussed above.

Our effective interest rate margin increased in the three months ended March 31, 2022 compared to the same periods in 2021 primarily due to our rotation into higher yielding Agency RMBS and changes in contractual net interest income (expense) on interest rate swaps.

Economic Debt-to-Equity Ratio

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

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of March 31, 2022 and December 31, 2021.

Our debt-to-equity ratio is calculated in accordance with U.S.

GAAP and is the ratio of total debt to total stockholders' equity.

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

As of March 31, 2022, approximately 92% of our equity is allocated to Agency RMBS.

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

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

September 30, 2021

March 31, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed securities 5,922,797 69,697 5,992,494

Treasury securities 482,445 — 482,445

Cash and cash equivalents (2)

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Derivative assets, at fair value (3)

17,437 237 17,674

Other assets 63,693 28,779 92,472

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

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

(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 ($1.6 billion as of September 30, 2021) to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.5 billion as of March 31, 2022) to total stockholders' equity.

December 31, 2021

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

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

(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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However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.

The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets negatively affected our liquidity during the year ended December 31, 2020.

Under the terms of our repurchase agreements, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion.

In addition, our lenders have the contractual right to increase the "haircut", or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile.

As a result of significant spread widening in both Agency and non-Agency securities in the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls.

We sold portfolio assets to generate liquidity, in many cases at significantly distressed market prices.

Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs.

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

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

We held cash, cash equivalents and restricted cash of $497.5 million at March 31, 2022 (March 31, 2021:

$579.0 million).

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

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

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

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

Our operating activities provided net cash of $40.1 million for the three months ended March 31, 2022 (March 31, 2021:

$34.5 million).

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

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

Our investing activities provided net cash of $1.1 billion in the three months ended March 31, 2022 compared to net cash used in investing activities of $986.3 million in the three months ended March 31, 2021.

Our primary source of cash from investing activities for the three months ended March 31, 2022 was proceeds from sales of MBS of $8.8 billion (March 31, 2021:

$5.5 billion).

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

We also generated $168.3 million from principal payments of MBS during the three months ended March 31, 2022 (March 31, 2021:

$200.6 million).

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

$10.5 billion).

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

net cash used of $909.4 million).

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

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

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

net repayments of $12.3 billion).

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

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

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

We used cash of $7.6 billion to purchase MBS and $502.3 million to purchase U.S.

Treasury securities during the three months ended March 31, 2022 (March 31, 2021:

$7.0 billion to purchase MBS).

We received cash of $283.4 million to settle derivative contracts in the three months ended March 31, 2022 (March 31, 2021:

$282.3 million).

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

Our financing activities used net cash of $1.2 billion for the three months ended March 31, 2022 (March 31, 2021:

net cash provided by financing activities of $1.1 billion).

During the three months ended March 31, 2022, we used cash for net principal repayments on our repurchase agreements of $1.2 billion (March 31, 2021:

net cash provided of $1.0 billion).

We also used cash of $38.1 million for the three months ended March 31, 2022 to pay dividends (March 31, 2021:

$27.4 million).

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

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

Proceeds from issuance of common stock provided $161.4 million during the three months ended March 31, 2021.

As of March 31, 2022, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.8% for Agency RMBS and 0.3% for U.S.

Treasury securities.

The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS and a low of 0% to a high of 1% for U.S.

Treasury securities.

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

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Forward-Looking Statements Regarding Liquidity

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

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

As of March 31, 2022, we held $5.6 billion of Agency securities and $482.4 million of U.S.

Treasury securities that are financed by repurchase agreements.

We also had approximately $413.0 million of unencumbered investments and unrestricted cash of $251.7 million as of March 31, 2022.

As of March 31, 2022, our known contractual obligations primarily consist of $5.8 billion of repurchase agreement borrowings with a weighted average remaining maturity of 28 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 condensed consolidated financial statements for additional information on how our management fee is calculated.

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

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

Our reimbursement obligation is not subject to any dollar limitation.

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

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

Payments Due by Period

$ in thousands Total Less than 1

year 1-3 years 3-5 years After 5

Repurchase agreements 7,873,798 7,873,798 — — —

Interest expense on repurchase agreements 2,356 2,356 — — —

7,876,154 7,876,154 — — —

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

Off-Balance Sheet Arrangements

We have committed to invest up to $125.3 million in unconsolidated ventures that are sponsored by an affiliate of our Manager.

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

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

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

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

We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income.

We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income.

Before we pay any dividend, whether for U.S.

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We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.

Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2022, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2022.

At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act.

If we were required to register as an investment company, then our use of leverage would be substantially reduced.

Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S.

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

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

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

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

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

We calculate that as of March 31, 2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

Exposure to Financial Counterparties

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

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

As of March 31, 2022, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $56.4 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2022.

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

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Asia 3 1,412,692 60,025

United Kingdom 1 588,587 13,570

Total 18 5,837,420 269,356

Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended September 30, 2021, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2021.

If we were required to register as an investment company, then our use of leverage would be substantially reduced.

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

This requirement

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis