What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-04 compared with 2022-05-04 · 266 added, 205 removed, 565 unchanged (45% of the section changed)

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

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

To achieve this objective, we invest in the following:

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

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

• A commercial mortgage loan;

• Other real estate-related financing arrangements;

• Commercial mortgage loans,

Treasury securities;

• Other real estate-related financing arrangements.

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

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

Financial conditions 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 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.

Financial conditions continued to tighten significantly during the second quarter of 2022 as sharply higher price data, disruptions to supply chains brought on by the war in Ukraine and continued COVID-19 lockdowns in China weighed on the financial markets.

The pace of declines in the equity markets accelerated, credit spreads widened and volatility increased from already elevated levels as recession fears increased and the Federal Reserve continued its aggressive removal of prior accommodations.

Interest rates were higher across the yield curve, with shorter dated maturities increasing slightly more than longer dated maturities.

Equity markets ended the second quarter lower, as the S&P 500 lost 16.4% while the NASDAQ lost 22.4%.

The employment picture remained a bright spot during the quarter, as gains in nonfarm payrolls averaged 375,000 per month, and the unemployment rate held steady at 3.6%.

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

Interest rates rose during the second quarter.

The Federal Open Market Committee (“FOMC”) raised the Federal Funds rate twice, by a total of 125 basis points, and continued to signal more rate hikes to come.

During the quarter, the yield on the 2 year Treasury note increased 62 basis points to 2.95%, the yield on the 5 year Treasury increased 58 basis points to 3.04% and the yield on the 10 year Treasury ended the quarter at 3.01%, up 67 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.

Market expectations reflect further rate hikes, with pricing in the Federal Funds futures market reflecting as many as six additional hikes by the end of 2022.

The consumer price index ("CPI") hit another 40-year high during the quarter, with the index rising to 9.1%, compared to 8.5% in March.

The CPI excluding food and energy ended the quarter at 5.9%, down from 6.5% last quarter.

Commodity prices were mixed during the quarter, with West Texas Intermediate crude recording an increase of 11.2%, while the Commodity Research Bureau commodity index fell slightly, by 1.4%.

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 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 severe slowdown in activity.

Treasury inflation-protected securities ended the quarter at 3.29% (down from 4.41% last quarter), while the 5 year breakeven rate fell from 3.43% to 2.62% over the course of the quarter.

After posting one of their worst quarterly performances during the first quarter of 2022, Agency RMBS continued to perform poorly during the second quarter.

Elevated interest rate volatility and increased market expectations of 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.

The accelerated timeline for 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.

Prepayment speeds moderated during the quarter as mortgage rates increased sharply, dampening refinancing activity.

In addition, the dollar roll market for current production Agency TBAs was attractive, as demand for the newly originated higher coupons outpaced supply.

Overall, we remain cautious on the Agency RMBS sector despite cheaper valuations, as heightened volatility and an uncertain technical environment weighs on our outlook.

CMBS risk premiums increased in the second quarter of 2022 due to higher inflation and increased interest rate volatility.

Despite these concerns, U.S.

commercial real estate occupancy and rental rates continued to improve across most property types and geographic regions.

While commercial mortgage loan delinquencies remained elevated across many property types, they were materially lower than COVID-19 peak levels.

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

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

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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.

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

This strength was reflected in rapid home price appreciation, which has recently begun to moderate as affordability declined to historically low levels following the swift rise in mortgage rates.

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 conditions and increased macroeconomic volatility over the past several quarters.

Investment Activities

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

The table below shows the composition of our investment portfolio as of June 30, 2022, December 31, 2021 and June 30, 2021:

$ in thousands June 30, 2022 December 31, 2021 June 30, 2021

30 year fixed-rate, at fair value 3,802,451 7,701,523 8,642,830

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Non-Agency RMBS, at fair value 8,262 9,070 9,832

Treasury securities, at fair value 482,445 — —

Commercial loan, at fair value 23,478 23,515 20,822

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

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.

We sold $17.3 billion and purchased $14.4 billion of Agency RMBS during the six months ended June 30, 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

As of June 30, 2022, our holdings of 30 year fixed-rate Agency RMBS represented approximately 86% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2021 and 84% as of June 30, 2021.

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

June 30, 2022 December 31, 2021 June 30, 2021

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

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3.5% 900,002 23.7 % 237,075 3.1 % — — %

4.0% 911,599 24.0 % — — % — — %

4.5% 1,011,921 26.6 % — — % — — %

5.0% 342,516 9.0 % — — % — — %

Total 30 year fixed-rate Agency RMBS 3,802,451 100.0 % 7,701,523 100.0 % 8,642,830 100.0 %

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

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.

As of June 30, 2022, the implied cost basis of TBAs represented approximately 11% of our total investment portfolio versus 17% as of December 31, 2021 and 15% as of June 30, 2021.

As of June 30, 2022, our investments consist of 30-year Agency RMBS TBAs with coupons that range from 4.5% to 5.0% 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.

As of June 30, 2022;

December 31, 2021 and June 30, 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 June 30, 2022.

Approximately 75% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2022.

As of June 30, 2022;

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

As of June 30, 2022;

December 31, 2021 and June 30, 2021, we held an investment in a commercial real estate mezzanine loan.

As of June 30, 2022, the loan is scheduled to mature in September 2022 and has a loan-to-value ratio of approximately 68%.

As of June 30, 2022;

December 31, 2021 and June 30, 2021, 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.

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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.

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.

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

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.

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Maximum balance (2)

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

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

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

June 30, 2022 3,262,530 4,059,917 4,902,191

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

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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 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.

Prior to the transition of our interest rate 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 interest rate swap portfolio as the size and composition of our investment portfolio changes.

During the six months ended June 30, 2022, we terminated existing interest rate swaps with a notional amount of $7.4 billion

and entered into new interest rate swaps with a notional amount of $8.7 billion, excluding interest rate swaps with forward start dates, 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 $343.3 million on interest rate swaps during the three months ended March 31, 2022 primarily due to rising interest rates.

We realized a net gain of $553.2 million on interest rate swaps during the six months ended June 30, 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 March 31, 2022, we had €6.5 million or $7.4 million (December 31, 2021:

As of June 30, 2022, we had €5.8 million or $6.2 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 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:

During the six months ended June 30, 2022, we settled currency forward contracts of €24.1 million or $27.8 million (June 30, 2021:

€41.7 million or $49.9 million) in notional amount and realized a net gain of $679,000 (June 30, 2021:

$552,000 net loss).

Capital Activities

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.

As of June 30, 2022, we may sell up to 5,686,598 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 six months ended June 30, 2022, we did not sell any shares of common stock under our equity distribution agreement.

During the six months ended June 30, 2021, we sold 1,555,000 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 six months ended June 30, 2022 and 2021, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

Item 1 of this report on Form 10-Q.

During the three months ended March 31, 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.

During the six months ended June 30, 2022, we did not repurchase any shares of our common stock.

In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock.

During the three and six months ended June 30, 2022, we repurchased and retired 43,820 shares of Series B Preferred Stock and 620,141 shares of Series C Preferred Stock.

As of June 30, 2022, we had authority to purchase 2,956,180 additional shares of our Series B Preferred Stock and 4,379,859 additional shares of our Series C Preferred Stock under the current share repurchase program.

Refer to Note 15 - “Subsequent Events” in Part I.

Item 1 of this report on Form 10-Q for details on repurchases subsequent to June 30, 2022.

In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock.

The reverse stock split was effected following the close of business on June 3, 2022.

For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split.

Book Value per Common Share

We calculate book value per common share as follows.

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

$ in thousands except per share amounts June 30, 2022 December 31, 2021

Numerator (adjusted equity):

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Book value per common share 16.16 29.09

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.

Our book value per common share decreased 44.4% as of June 30, 2022 compared to December 31, 2021 as Agency RMBS valuations were sharply lower during the first half of 2022.

The end of asset purchases by the Federal Reserve in March and escalating inflationary pressures led to increased expectations for tighter monetary policy and elevated market volatility, resulting in the sector's worst first half performance in over 30 years.

Refer to Item 3.

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Results of Operations

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

Three Months Ended March 31,

The table below presents certain information from our condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021.

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

$ in thousands, except share data 2022 2021 2022 2021

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Dividends to preferred stockholders (8,100) (9,900) (16,494) (21,007)

Gain on repurchase and retirement of preferred stock 1,491 — 1,491 —

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

Net income (loss) attributable to common stockholders (116,144) (88,340) (352,960) (108,722)

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Diluted 32,990,319 26,013,975 32,987,678 24,214,733

(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.

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

For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity" in Part I.

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Interest Income and Average Earning Asset Yields

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

Three Months Ended March 31,

The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2022 and 2021.

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

$ in thousands 2022 2021 2022 2021

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

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,

We had average earning assets of $4.7 billion for the three months ended June 30, 2022 (June 30, 2021:

$8.8 billion) and $5.8 billion for the six months ended June 30, 2022 (June 30, 2021:

$9.1 billion).

Average earning assets decreased for the three and six months ended June 30, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Average earning asset yields increased for the three and six months ended June 30, 2022 compared to 2021 due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $44.6 million and $86.7 million for the three and six months ended June 30, 2022, respectively (June 30, 2021:

$43.2 million and $83.2 million).

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

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

$ in thousands 2022 2021 2022 2021

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Mortgage-backed and other securities - coupon interest 43,220 51,513 91,449 103,003

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

Mortgage-backed and other securities - net (premium amortization) discount accretion 774 (8,879) (5,818) (20,935)

Mortgage-backed and other securities - interest income 43,994 42,634 85,631 82,068

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Total interest income 44,555 43,154 86,729 83,164

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.

Mortgage-backed and other securities interest income increased $1.4 million and $3.6 million for the three and six months ended June 30, 2022 compared to 2021 despite lower average earning assets due to a 186 and 115 basis point increase in average earning asset yields, respectively.

Interest income on our commercial loan was relatively flat during the three and six months ended June 30, 2022 compared to 2021.

Prepayment Speeds

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.

Our RMBS portfolio is subject to 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.

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

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

Three Months Ended March 31,

The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio for the three and six months ended June 30, 2022 and 2021.

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

$ in thousands 2022 2021 2022 2021

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Net (premium amortization) discount accretion 774 (8,879) (5,818) (20,935)

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.

Net discount accretion was $774,000 for the three months ended June 30, 2022 compared to net premium amortization of $8.9 million for the same period in 2021.

Net premium amortization decreased $15.1 million for the six months ended June 30, 2022 compared to the same period 2021.

The decrease in premium amortization for the three and six months ended June 30, 2022 compared to 2021 was primarily the result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

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

Three Months Ended March 31,

The table below presents the components of interest expense for the three and six months ended June 30, 2022 and 2021.

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

$ in thousands 2022 2021 2022 2021

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Total interest expense 3,455 (3,177) 1,351 (4,837)

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 $5.2 million during the three months ended March 31, 2022 and $5.4 million and during the three months ended March 31, 2021.

Our repurchase agreements interest expense, which equals our total interest expense, increased $6.6 million and $6.2 million for the three and six months ended June 30, 2022 compared to 2021 as the Federal Reserve raised the Federal Funds target rate.

Our repurchase agreements 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 $4.8 million and $10.0 million during the three and six months ended June 30, 2022, respectively, and $5.4 million and $10.8 million during the three and six months ended June 30, 2021, respectively.

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

During the next twelve months, we estimate that $17.4 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.

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,

The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2022 and 2021.

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

$ in thousands 2022 2021 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 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.

Total average borrowings decreased $3.9 billion and $3.0 billion in the three and six months ended June 30, 2022 compared to 2021, respectively, 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 and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Our average cost of funds increased 50 and 17 basis points for the three and six months ended June 30, 2022, respectively, compared to 2021 as the Federal Reserve raised the Federal Funds target rate.

Net Interest Income

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,

The table below presents the components of net interest income for the three and six months ended June 30, 2022 and 2021:

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

$ in thousands 2022 2021 2022 2021

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Net interest rate margin 3.48 % 2.12 % 2.93 % 1.95 %

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.

Our net interest income, which equals interest income less interest expense, totaled $41.1 million and $85.4 million for the three and six months ended June 30, 2022, respectively (June 30, 2021:

$46.3 million and $88.0 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 3.48% and 2.93% for the three and six months ended June 30, 2022, respectively (June 30, 2021:

2.12% and 1.95%).

The decrease in net interest income for the three and six months ended June 30, 2022 compared to 2021 was primarily due to higher interest expense as the Federal Reserve raised the Federal Funds target rate.

The increase in net interest rate margin for the three and six months ended June 30, 2022 compared to 2021 was primarily due to our rotation into higher yielding Agency RMBS, which was partially offset by higher interest rates.

Gain (Loss) on Investments, net

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,

The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2022 and 2021:

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

$ in thousands 2022 2021 2022 2021

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Treasury securities 19,827 — — —

Net realized gains (losses) on U.S.

Treasury securities (34,198) — (34,198) —

Total gain (loss) on investments, net (324,876) 72,620 (829,264) (259,237)

(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.

During the three and six months ended June 30, 2022, we sold MBS and realized net losses of $535.1 million and $854.0 million, respectively (June 30, 2021:

net losses of $118.0 million and $234.9 million).

Realized net losses during the three and six months ended June 30, 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.

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

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

As of June 30, 2022, $3.9 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 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 recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $224.5 million and $59.0 million in the three and six months ended June 30, 2022, respectively, compared to net unrealized gains of $189.8 million and unrealized net losses of $22.1 million in the three and six months ended June 30, 2021, respectively.

Net unrealized gains in three and six months ended June 30, 2022 and three months ended June 30, 2021 were primarily driven by reversals of unrealized losses upon sale.

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

We recorded an unrealized gain of $87,000 and an unrealized loss of $37,000 on our commercial loan in the three and six months ended June 30, 2022, respectively compared to an unrealized gain of $822,000 and an unrealized loss of $2.3 million on our commercial loan in the three and six months ended June 30, 2021, respectively.

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

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 recorded net realized and unrealized losses of $14.4 million and $34.2 million on U.S.

Treasury securities in the three and six months ended June 30, 2022, respectively, due to rising interest rates.

We did not hold any U.S.

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

Treasury securities during the three and six months ended June 30, 2021.

(Increase) Decrease in Provision for Credit Losses

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:

As of June 30, 2022, $49.9 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2021:

$70.2 million).

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.

We did not record any provisions for credit losses during the three and six months ended June 30, 2022.

We recorded a $830,000 and $1.8 million decrease in the provision for credit losses on a single non-Agency CMBS during the three and six months ended June 30, 2021, respectively, because the security fully repaid in June 2021.

Equity in Earnings (Losses) of Unconsolidated Ventures

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.

For the three and six months ended June 30, 2022, we recorded equity in losses of unconsolidated ventures of $352,000 and $281,000, respectively (June 30, 2021:

equity in earnings of $331,000 and $237,000).

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

Gain (Loss) on Derivative Instruments, net

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$ in thousands

Three months ended March 31, 2022

Three months ended June 30, 2022

not designated as

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$ in thousands

Three months ended March 31, 2021

Three months ended June 30, 2021

not designated as

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

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

TBAs 10,431 — 7,163 17,594

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

$ in thousands

Six Months Ended June 30, 2022

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 553,222 14,850 (14,365) 553,707

Currency Forward Contracts 679 — (218) 461

TBAs (129,240) — (4,326) (133,566)

Total 424,661 14,850 (18,909) 420,602

$ in thousands

Six Months Ended June 30, 2021

not designated as

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

Interest Rate Swaps 161,162 (9,121) (11,705) 140,336

Interest Rate Swaptions (553) — — (553)

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Total 126,303 (9,121) (16,505) 100,677

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.

During the six months ended June 30, 2022, we terminated existing interest rate swaps with a notional amount of $7.4 billion and entered into new interest rate swaps with a notional amount of $8.7 billion, excluding interest rate swaps with forward start dates.

We realized net gains of $209.9 million and $553.2 million for the three and six months ended June 30, 2022, respectively, on interest rate swaps due to rising interest rates.

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

As of June 30, 2022, we had $3.3 billion of repurchase agreement borrowings with a weighted average remaining maturity of 22 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 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

As of June 30, 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 June 30, 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

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5,800,000 0.45 % 1.50 % 6.8 6,300,000 0.30 % 0.05 % 5.7

(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

(1) Excludes $1.0 billion and $1.3 billion notional amount of interest rate swaps with forward start dates as of June 30, 2022 and December 31, 2021, respectively.

As of June 30, 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 June 30, 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

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

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

As of June 30, 2022, we had $6.2 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 March 31, 2022, we had $1.5 billion net notional amount of TBAs (December 31, 2021:

As of June 30, 2022, we had $450.0 million net notional amount of TBAs (December 31, 2021:

$1.6 billion).

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.

We recorded $39.1 million and $133.6 million of net realized and unrealized losses on TBAs during the three and six months ended June 30, 2022, respectively.

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

Net realized and unrealized losses on TBAs for the three and six months ended June 30, 2022 primarily reflect rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

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

Other Investment Income (Loss), net

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.

Our other investment income (loss), net during the three and six months ended June 30, 2022 and 2021 consisted of foreign currency transaction gains and losses.

We incurred management fees of $4.6 million and $9.9 million for the three and six months ended June 30, 2022, respectively (June 30, 2021:

$5.5 million and $10.3 million).

Management fees decreased for the three and six months ended June 30, 2022 compared to the same periods in 2021 due to a lower stockholders' equity management fee base.

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

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

$2.0 million).

Our general and administrative expenses not covered under our management agreement amounted to $2.5 million and $4.5 million for the three and six months ended June 30, 2022, respectively (June 30, 2021:

$2.1 million and $4.1 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.

Gain on Repurchase and Retirement of Preferred Stock

In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock.

During the three and six months ended June 30, 2022, we repurchased and retired 43,820 shares of Series B Preferred Stock and 620,141 shares of Series C Preferred Stock.

The difference between the consideration transferred and the carrying value of the preferred stock resulted in a gain attributable to common stockholders of $1.5 million during the three and six months ended June 30, 2022.

Issuance and Redemption Costs of Redeemed Preferred Stock

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

The excess of the consideration transferred over carrying value 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 three and six months ended June 30, 2021.

Net Income (Loss) attributable to Common Stockholders

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:

For the three months ended June 30, 2022, our net loss attributable to common stockholders was $116.1 million (June 30, 2021:

$88.3 million net loss attributable to common stockholders) or $3.52 basic and diluted net loss per average share available to common stockholders (June 30, 2021:

$3.40 basic and diluted net loss per average share available to common stockholders).

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $324.9 million in the 2022 period compared to $72.6 million net gains on investments in the 2021 period;

(ii) net gains on derivative instruments of $181.7 million in the 2022 period compared to net losses on derivative instruments of $186.3 million in the 2021 period;

and (iii) a $5.2 million decrease in net interest income.

For the six months ended June 30, 2022, our net loss attributable to common stockholders was $353.0 million (June 30, 2021:

$108.7 million net loss attributable to common stockholders) or $10.70 basic and diluted net loss per average share available to common stockholders (June 30, 2021:

$4.49 basic and diluted net loss per average share available to common stockholders).

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $829.3 million in the 2022 period compared to $259.2 million in the 2021 period;

(ii) net gains on derivative instruments of $420.6 million in the 2022 period compared to $100.7 million in the 2021 period;

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

and (iii) a $2.6 million decrease 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”.

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TBA dollar roll income;

gain on repurchase and retirement of preferred stock;

(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.

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

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

similarly titled measures used by our peer companies.

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

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

We added the gain on repurchase and retirement of preferred stock as a reconciling item to our earnings available for distribution calculation in the second quarter of 2022 because the gain does not represent earnings on our investment portfolio.

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

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

Three Months Ended March 31,

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

$ in thousands, except per share data 2022 2021 2022 2021

7 unchanged sentences

11,855 9,680 25,256 20,225

Gain on repurchase and retirement of preferred stock (1,491) — (1,491) —

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

11 (16) (44) —

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

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Earnings available for distribution per common share (5)

1.40 0.96 2.55 2.07

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

Three Months Ended March 31,

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

$ in thousands 2022 2021 2022 2021

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

Three Months Ended March 31,

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

$ in thousands 2022 2021 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.

Earnings available for distribution per common share has been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022.

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

Three Months Ended March 31,

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

$ in thousands 2022 2021 2022 2021

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Dividends to preferred stockholders (8,100) (9,900) (16,494) (21,007)

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

Earnings available for distribution 46,129 24,987 84,275 50,145

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

Earnings available for distribution 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.

Earnings available for distribution increased during the three and six months ended June 30, 2022 compared to the same periods in 2021 primarily due to higher effective net interest income, higher TBA dollar roll income and $4.7 million of issuance and redemption costs from the redemption of our Series A Preferred Stock in June 2021.

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

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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,

Three Months Ended June 30,

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

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(5,309) (0.53) % 6,824 0.34 %

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.

Six Months Ended June 30,

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

Total interest expense 1,351 0.05 % (4,837) (0.12) %

Amortization of net deferred gain (loss) on de-designated interest rate swaps 9,998 0.39 % 10,797 0.27 %

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

(14,850) (0.58) % 9,121 0.22 %

Effective interest expense

(3,501) (0.14) % 15,081 0.37 %

Our effective interest expense and effective cost of funds decreased in the three months ended June 30, 2022 compared to the same period in 2021 primarily due to contractual net interest income on interest rate swaps of $13.6 million during the three months ended June 30, 2022 compared to $4.6 million of contractual net interest expense for the same period in 2021.

Our effective interest expense and effective cost of funds decreased in the six months ended June 30, 2022 compared to the same period in 2021 primarily due to contractual net interest income on interest rate swaps of $14.9 million during the six months ended June 30, 2022 compared to $9.1 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,

Three Months Ended June 30,

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

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49,864 4.35 % 36,330 1.62 %

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.

Six Months Ended June 30,

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

Net interest income 85,378 2.93 % 88,001 1.95 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps (9,998) (0.39) % (10,797) (0.27) %

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

14,850 0.58 % (9,121) (0.22) %

Effective net interest income

90,230 3.12 % 68,083 1.46 %

Effective net interest income increased in the three and six months ended June 30, 2022 compared to the same periods in 2021 primarily due to changes in contractual net interest income (expense) on interest rate swaps as discussed above.

Our effective interest rate margin increased in the three and six months ended June 30, 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 March 31, 2022 and December 31, 2021.

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of June 30, 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 March 31, 2022, approximately 92% of our equity is allocated to Agency RMBS.

As of June 30, 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.

March 31, 2022

June 30, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed securities 3,863,260 51,905 3,915,165

Treasury securities 482,445 — 482,445

Cash and cash equivalents (2)

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

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.5 billion as of March 31, 2022) 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 ($466.6 million as of June 30, 2022) to total stockholders' equity.

December 31, 2021

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Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs.

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs.

Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.

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

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

We held cash, cash equivalents and restricted cash of $330.8 million at June 30, 2022 (June 30, 2021:

$488.1 million).

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

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

Our operating activities provided net cash of $80.8 million for the six months ended June 30, 2022 (June 30, 2021:

$73.5 million).

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

Our investing activities provided net cash of $3.5 billion in the six months ended June 30, 2022 compared to net cash used in investing activities of $704.1 million in the six months ended June 30, 2021.

Our primary source of cash from investing activities for the six months ended June 30, 2022 was proceeds from sales of MBS of $17.3 billion and proceeds from the sales of U.S.

Treasury securities of $468.1 million (June 30, 2021:

$9.8 billion from the sales of MBS).

We also generated $264.8 million from principal payments of MBS during the six months ended June 30, 2022 (June 30, 2021:

$416.5 million).

We used cash of $14.4 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:

Treasury securities during the six months ended June 30, 2022 (June 30, 2021:

$11.0 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).

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:

We received cash of $424.7 million to settle derivative contracts in the six months ended June 30, 2022 (June 30, 2021:

$126.3 million).

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.

Our financing activities used net cash of $3.8 billion for the six months ended June 30, 2022 (June 30, 2021:

net cash provided by financing activities of $726.1 million).

During the six months ended June 30, 2022, we used cash for net principal repayments on our repurchase agreements of $3.7 billion (June 30, 2021:

net cash provided of $622.5 million).

We also used cash of $75.9 million for the six months ended June 30, 2022 to pay dividends (June 30, 2021:

$62.2 million to pay dividends and $140.0 million to redeem our Series A Preferred Stock).

Proceeds from issuance of common stock provided $307.6 million during the six months ended June 30, 2021.

As of June 30, 2022, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.7% for Agency RMBS.

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

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 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.

As of June 30, 2022, we held $3.5 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $474.9 million of unencumbered investments and unrestricted cash of $202.2 million as of June 30, 2022.

As of June 30, 2022, our known contractual obligations primarily consisted of $3.3 billion of repurchase agreement borrowings with a weighted average remaining maturity of 22 days.

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

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Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing.

We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes.

We may increase our capital resources by obtaining long-term credit facilities or through

public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes.

Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds.

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Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 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.

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

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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.

We calculate that as of June 30, 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 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.

As of June 30, 2022, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $48.0 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of June 30, 2022.

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis