Invesco Mortgage Capital Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of $ in thousands, except share amounts June 30, 2022 December 31, 2021 ASSETS Mortgage-backed securities, at fair value (including pledged securities of $ 3,467,386 and $ 7,326,175 , respectively) 3,915,165 7,804,259 Cash and cash equivalents 202,182 357,134 Restricted cash 128,604 219,918 Due from counterparties 10,231 7,985 Investment related receivable 15,996 16,766 Derivative assets, at fair value 4,289 270 Other assets 27,964 37,509 Total assets 4,304,431 8,443,841 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 3,262,530 6,987,834 Derivative liabilities, at fair value 37,284 14,356 Dividends payable 29,722 29,689 Accrued interest payable 1,807 1,171 Collateral held payable 5,728 280 Accounts payable and accrued expenses 1,919 1,887 Due to affiliate 5,978 6,489 Total liabilities 3,344,968 7,041,706 Commitments and contingencies (See Note 14): Stockholders' equity: Preferred Stock, par value $ 0.01 per share; 50,000,000 shares authorized: 7.75 % Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,156,180 and 6,200,000 shares issued and outstanding, respectively ($ 153,905 and $ 155,000 aggregate liquidation preference, respectively) 148,801 149,860 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 10,879,859 and 11,500,000 shares issued and outstanding, respectively ($ 271,996 and $ 287,500 aggregate liquidation preference, respectively) 263,111 278,108 Common Stock, par value $ 0.01 per share; 450,000,000 shares authorized; 33,024,318 and 32,987,478 shares issued and outstanding, respectively 330 330 Additional paid in capital 3,819,670 3,819,375 Accumulated other comprehensive income 22,749 37,286 Retained earnings (distributions in excess of earnings) ( 3,295,198 ) ( 2,882,824 ) Total stockholders’ equity 959,463 1,402,135 Total liabilities and stockholders' equity 4,304,431 8,443,841 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, $ in thousands, except share data 2022 2021 2022 2021 Interest income Mortgage-backed and other securities 43,994 42,634 85,631 82,068 Commercial loan 561 520 1,098 1,096 Total interest income 44,555 43,154 86,729 83,164 Interest expense Repurchase agreements (1) 3,455 ( 3,177 ) 1,351 ( 4,837 ) Total interest expense 3,455 ( 3,177 ) 1,351 ( 4,837 ) Net interest income 41,100 46,331 85,378 88,001 Other income (loss) Gain (loss) on investments, net ( 324,876 ) 72,620 ( 829,264 ) ( 259,237 ) (Increase) decrease in provision for credit losses — 830 — 1,768 Equity in earnings (losses) of unconsolidated ventures ( 352 ) 331 ( 281 ) 237 Gain (loss) on derivative instruments, net 181,742 ( 186,284 ) 420,602 100,677 Other investment income (loss), net ( 11 ) 16 44 — Total other income (loss) ( 143,497 ) ( 112,487 ) ( 408,899 ) ( 156,555 ) Expenses Management fee – related party 4,619 5,455 9,893 10,339 General and administrative 2,519 2,147 4,543 4,140 Total expenses 7,138 7,602 14,436 14,479 Net income (loss) ( 109,535 ) ( 73,758 ) ( 337,957 ) ( 83,033 ) 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 ) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 3.52 ) ( 3.40 ) ( 10.70 ) ( 4.49 ) Diluted ( 3.52 ) ( 3.40 ) ( 10.70 ) ( 4.49 ) (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". The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, $ in thousands 2022 2021 2022 2021 Net income (loss) ( 109,535 ) ( 73,758 ) ( 337,957 ) ( 83,033 ) Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed securities, net ( 1,825 ) 1,155 ( 4,246 ) 2,136 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 4,802 ) ( 5,429 ) ( 9,998 ) ( 10,797 ) Currency translation adjustments on investment in unconsolidated venture ( 93 ) ( 632 ) ( 293 ) ( 23 ) Total other comprehensive income (loss) ( 6,720 ) ( 4,906 ) ( 14,537 ) ( 8,684 ) Comprehensive income (loss) ( 116,255 ) ( 78,664 ) ( 352,494 ) ( 91,717 ) 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 ) Comprehensive income (loss) attributable to common stockholders ( 122,864 ) ( 93,246 ) ( 367,497 ) ( 117,406 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2022 and June 30, 2022 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Balance at December 31, 2021 6,200,000 149,860 11,500,000 278,108 32,987,478 330 3,819,375 37,286 ( 2,882,824 ) 1,402,135 Net income (loss) — — — — — — — — ( 228,422 ) ( 228,422 ) Other comprehensive income (loss) — — — — — — — ( 7,817 ) — ( 7,817 ) Stock awards — — — — 4,315 — — — — — Common stock dividends — — — — — — — — ( 29,693 ) ( 29,693 ) Preferred stock dividends — — — — — — — — ( 8,394 ) ( 8,394 ) Amortization of equity-based compensation — — — — — — 138 — — 138 Balance at March 31, 2022 6,200,000 149,860 11,500,000 278,108 32,991,793 330 3,819,513 29,469 ( 3,149,333 ) 1,127,947 Net income (loss) — — — — — — — — ( 109,535 ) ( 109,535 ) Other comprehensive income (loss) — — — — — — — ( 6,720 ) — ( 6,720 ) Repurchase and retirement of preferred stock ( 43,820 ) ( 1,059 ) ( 620,141 ) ( 14,997 ) — — — 1,491 ( 14,565 ) Stock awards — — — 32,571 — — — Payments in lieu of fractional shares in connection with one-for-ten reverse stock split — — — — ( 46 ) — ( 1 ) — — ( 1 ) Common stock dividends — — — — — — ( 29,721 ) ( 29,721 ) Preferred stock dividends — — — — — — — ( 8,100 ) ( 8,100 ) Amortization of equity-based compensation — — — — — — 158 — — 158 Balance at June 30, 2022 6,156,180 148,801 10,879,859 263,111 33,024,318 330 3,819,670 22,749 ( 3,295,198 ) 959,463 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2021 and June 30, 2021 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series A Preferred Stock Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Shares Amount Balance at December 31, 2020 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 20,322,211 203 3,389,381 58,605 ( 2,644,355 ) 1,367,158 Net income (loss) — — — — — — — — — — ( 9,275 ) ( 9,275 ) Other comprehensive income (loss) — — — — — — — — — ( 3,778 ) — ( 3,778 ) Proceeds from issuance of common stock, net of offering costs — — — — — — 4,315,000 43 160,938 — — 160,981 Stock awards — — — — — — 2,560 — — — — — Common stock dividends — — — — — — — — — — ( 22,176 ) ( 22,176 ) Preferred stock dividends — — — — — — — — — — ( 11,107 ) ( 11,107 ) Amortization of equity-based compensation — — — — — — — — 129 — — 129 Balance at March 31, 2021 5,600,000 135,356 6,200,000 149,860 11,500,000 278,108 24,639,771 246 3,550,448 54,827 ( 2,686,913 ) 1,481,932 Net income (loss) — — — — — — — — — — ( 73,758 ) ( 73,758 ) Other comprehensive income (loss) — — — — — — — — — ( 4,906 ) — ( 4,906 ) Proceeds from issuance of common stock, net of offering costs — — — — — 4,312,500 43 145,836 — — 145,879 Stock awards — — — — — 15,805 1 — — — 1 Common stock dividends — — — — — — — — — — ( 26,071 ) ( 26,071 ) Preferred stock dividends — — — — — — — — — — ( 9,900 ) ( 9,900 ) Redemption of preferred stock ( 5,600,000 ) ( 135,356 ) — — — — — — — — ( 4,682 ) ( 140,038 ) Amortization of equity-based compensation — — — — — — — — 240 — — 240 Balance at June 30, 2021 — — 6,200,000 149,860 11,500,000 278,108 28,968,076 290 3,696,524 49,921 ( 2,801,324 ) 1,373,379 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, $ in thousands 2022 2021 Cash Flows from Operating Activities Net income (loss) ( 337,957 ) ( 83,033 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of mortgage-backed and other securities premiums and (discounts), net 2,333 20,389 Realized and unrealized (gain) loss on derivative instruments, net ( 405,752 ) ( 109,798 ) (Gain) loss on investments, net 829,264 259,237 Increase (decrease) in provision for credit losses — ( 1,768 ) (Gain) loss from investments in unconsolidated ventures in excess of distributions received 37 24 Other amortization ( 9,702 ) ( 10,427 ) Changes in operating assets and liabilities: (Increase) decrease in operating assets 2,182 ( 1,108 ) Increase (decrease) in operating liabilities 374 ( 39 ) Net cash provided by (used in) operating activities 80,779 73,477 Cash Flows from Investing Activities Purchase of mortgage-backed securities ( 14,442,287 ) ( 11,003,833 ) Purchase of U.S. Treasury securities ( 502,290 ) — Distributions from investments in unconsolidated ventures, net 8,524 2,425 Principal payments from mortgage-backed securities 264,791 416,524 Proceeds from sale of mortgage-backed securities 17,264,232 9,755,377 Proceeds from the sale of U.S. Treasury securities 468,051 — Settlement (termination) of forwards, swaps, swaptions and TBAs, net 424,661 126,303 Net change in due from counterparties and collateral held payable on derivative instruments ( 3,897 ) ( 942 ) Net cash provided by (used in) investing activities 3,481,785 ( 704,146 ) Cash Flows from Financing Activities Proceeds from issuance of common stock — 307,618 Redemption of preferred stock — ( 140,038 ) Repurchase of preferred stock ( 14,565 ) — Cash paid in lieu of fractional shares in connection with one-for-ten reverse stock split ( 1 ) — Proceeds from repurchase agreements 35,949,170 54,825,005 Principal repayments of repurchase agreements ( 39,674,474 ) ( 54,202,500 ) Net change in due from counterparties and collateral held payable on repurchase agreements 7,099 ( 1,516 ) Payments of deferred costs ( 184 ) ( 281 ) Payments of dividends ( 75,875 ) ( 62,153 ) Net cash provided by (used in) financing activities ( 3,808,830 ) 726,135 Net change in cash, cash equivalents and restricted cash ( 246,266 ) 95,466 Cash, cash equivalents and restricted cash, beginning of period 577,052 392,584 Cash, cash equivalents and restricted cash, end of period 330,786 488,050 Supplement Disclosure of Cash Flow Information Interest paid 10,713 6,406 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed securities classified as available-for-sale ( 4,246 ) 2,136 Dividends declared not paid 29,722 26,071 Net change in investment related receivable (payable) ( 791 ) ( 5 ) Offering costs not paid 310 647 Change in foreign currency translation adjustment on other investments 293 23 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Organization and Business Operations Invesco Mortgage Capital Inc. (the “Company” or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS”) and other mortgage-related assets. We invest in: • Residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”); • Commercial mortgage-backed securities (“CMBS”) that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”); • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”); • Commercial mortgage loans, • U.S. Treasury securities; and • Other real estate-related financing agreements. We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) and have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a leading independent global investment management firm. We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90 % of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the “Investment Company” definition under the Investment Company Act of 1940, as amended (the “1940 Act”). Note 2 – Summary of Significant Accounting Policies Basis of Presentation and Consolidation For all periods presented, common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, which was effected following the close of business on June 3, 2022. Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021. Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and consolidate the financial statements of the Company and its controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities and allowances for credit losses. Actual results may differ from those estimates. 7 Table of Contents Significant Accounting Policies There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2021 other than as detailed below. U.S. Treasury Securities U.S. Treasury securities are classified as trading securities and reported at fair value on our condensed consolidated balance sheets. Purchases of U.S. Treasury Securities are recorded on the trade date. Changes in the fair value of U.S. Treasury securities are recognized within gain (loss) on investments, net in our condensed consolidated statements of operations. Coupon interest income is accrued based on the outstanding principal balance of the securities and their contractual terms. Interest income on U.S. Treasury securities is recognized within mortgage-backed and other securities interest income on our condensed consolidated statements of operations. Note 3 – Variable Interest Entities ("VIEs") Our maximum risk of loss in VIEs in which we are not the primary beneficiary at June 30, 2022 is presented in the table below. $ in thousands Carrying Amount Company's Maximum Risk of Loss Non-Agency CMBS 43,644 43,644 Non-Agency RMBS 8,262 8,262 Investments in unconsolidated ventures 3,622 3,622 Total 55,528 55,528 Refer to Note 4 - "Mortgage-Backed Securities" and Note 5 - "Other Assets" for additional details regarding these investments. Note 4 – Mortgage-Backed Securities The following tables summarize our MBS portfolio by asset type as of June 30, 2022 and December 31, 2021. June 30, 2022 $ in thousands Principal/ Notional Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 30 year fixed-rate 3,870,377 ( 62,776 ) 3,807,601 ( 5,150 ) 3,802,451 4.07 % Total Agency RMBS pass-through 3,870,377 ( 62,776 ) 3,807,601 ( 5,150 ) 3,802,451 4.07 % Agency-CMO (2) 427,319 ( 369,955 ) 57,364 3,444 60,808 9.29 % Non-Agency CMBS 44,652 ( 2,084 ) 42,568 1,076 43,644 8.44 % Non-Agency RMBS (3)(4)(5) 330,051 ( 321,699 ) 8,352 ( 90 ) 8,262 8.58 % Total 4,672,399 ( 756,514 ) 3,915,885 ( 720 ) 3,915,165 4.21 % (1) Period-end weighted average yield is based on amortized cost as of June 30, 2022 and incorporates future prepayment and loss assumptions. (2) All Agency collateralized mortgage obligations (“Agency-CMO”) are interest-only securities (“Agency IO”). (3) Non-Agency RMBS is 65.7 % fixed rate, 33.4 % variable rate, and 0.9 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 97.3 % of principal/notional balance, 43.8 % of amortized cost and 25.7 % of fair value. 8 Table of Contents December 31, 2021 $ in thousands Principal/Notional Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) Agency RMBS: 30 year fixed-rate 7,514,229 246,183 7,760,412 ( 58,889 ) 7,701,523 2.07 % Total Agency RMBS pass-through 7,514,229 246,183 7,760,412 ( 58,889 ) 7,701,523 2.07 % Agency-CMO (2) 235,216 ( 203,180 ) 32,036 ( 1,279 ) 30,757 6.47 % Non-Agency CMBS 61,427 ( 3,096 ) 58,331 4,578 62,909 8.63 % Non-Agency RMBS (3)(4)(5) 392,543 ( 383,591 ) 8,952 118 9,070 5.26 % Total 8,203,415 ( 343,684 ) 7,859,731 ( 55,472 ) 7,804,259 2.14 % (1) Period-end weighted average yield is based on amortized cost as of December 31, 2021 and incorporates future prepayment and loss assumptions. (2) All Agency-CMO are Agency IO. (3) Non-Agency RMBS is 63.5 % fixed rate, 35.6 % variable rate and 0.9 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes non-Agency IO which represent 97.7 % of principal/notional balance, 44.8 % of amortized cost and 19.9 % of fair value. The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of June 30, 2022 and December 31, 2021. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, 2016. As of June 30, 2022 and December 31, 2021, approximately 99 % of our MBS are accounted for under the fair value option. June 30, 2022 December 31, 2021 $ in thousands Available-for-sale Securities Securities under Fair Value Option Total Fair Value Available-for-sale Securities Securities under Fair Value Option Total Fair Value Agency RMBS: 30 year fixed-rate — 3,802,451 3,802,451 — 7,701,523 7,701,523 Total Agency RMBS pass-through — 3,802,451 3,802,451 — 7,701,523 7,701,523 Agency-CMO — 60,808 60,808 — 30,757 30,757 Non-Agency CMBS 43,644 — 43,644 62,909 — 62,909 Non-Agency RMBS 6,275 1,987 8,262 7,288 1,782 9,070 Total 49,919 3,865,246 3,915,165 70,197 7,734,062 7,804,259 The components of the carrying value of our MBS portfolio at June 30, 2022 and December 31, 2021 are presented below. Accrued interest receivable on our MBS portfolio, which is recorded within investment related receivable on our condensed consolidated balance sheets, was $ 13.8 million at June 30, 2022 (December 31, 2021: $ 16.6 million). June 30, 2022 $ in thousands MBS Interest-Only Securities Total Principal/notional balance 3,923,868 748,531 4,672,399 Unamortized premium 18,221 — 18,221 Unamortized discount ( 87,224 ) ( 687,511 ) ( 774,735 ) Gross unrealized gains (1) 24,782 4,799 29,581 Gross unrealized losses (1) ( 27,414 ) ( 2,887 ) ( 30,301 ) Fair value 3,852,233 62,932 3,915,165 9 Table of Contents December 31, 2021 $ in thousands MBS Interest-Only Securities Total Principal/notional balance 7,584,812 618,603 8,203,415 Unamortized premium 250,771 — 250,771 Unamortized discount ( 11,902 ) ( 582,553 ) ( 594,455 ) Gross unrealized gains (1) 8,754 109 8,863 Gross unrealized losses (1) ( 60,741 ) ( 3,594 ) ( 64,335 ) Fair value 7,771,694 32,565 7,804,259 (1) Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. Realization occurs upon sale or settlement of such securities. Further detail on the components of our total gains (losses) on investments, net for the three and six months ended June 30, 2022 and 2021 is provided below in this Note 4. The following table summarizes our MBS portfolio according to estimated weighted average life classifications as of June 30, 2022 and December 31, 2021 . $ in thousands June 30, 2022 December 31, 2021 Less than one year 5,994 23,150 Greater than one year and less than five years 37,724 891,510 Greater than or equal to five years 3,871,447 6,889,599 Total 3,915,165 7,804,259 The following tables present the estimated fair value and gross unrealized losses of our MBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2022 and December 31, 2021. June 30, 2022 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 30 year fixed-rate 2,145,400 ( 27,400 ) 19 — — — 2,145,400 ( 27,400 ) 19 Total Agency RMBS pass-through (1) 2,145,400 ( 27,400 ) 19 — — — 2,145,400 ( 27,400 ) 19 Agency-CMO (1) 13,239 ( 997 ) 3 3,245 ( 358 ) 1 16,484 ( 1,355 ) 4 Non-Agency RMBS (2) 572 ( 21 ) 2 1,888 ( 1,525 ) 13 2,460 ( 1,546 ) 15 Total 2,159,211 ( 28,418 ) 24 5,133 ( 1,883 ) 14 2,164,344 ( 30,301 ) 38 (1) Fair value option has been elected for all Agency securities in an unrealized loss position. (2) Includes non-Agency IO with a fair value of $ 1.9 million for which the fair value option has been elected. Such securities have unrealized losses of $ 1.5 million. 10 Table of Contents December 31, 2021 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Agency RMBS: 30 year fixed-rate 6,838,999 ( 60,741 ) 54 — — — 6,838,999 ( 60,741 ) 54 Total Agency RMBS pass-through (1) 6,838,999 ( 60,741 ) 54 — — — 6,838,999 ( 60,741 ) 54 Agency-CMO (1) 21,810 ( 1,389 ) 5 — — — 21,810 ( 1,389 ) 5 Non-Agency RMBS (2) 767 ( 1,132 ) 5 1,042 ( 1,073 ) 9 1,809 ( 2,205 ) 14 Total 6,861,576 ( 63,262 ) 64 1,042 ( 1,073 ) 9 6,862,618 ( 64,335 ) 73 (1) Fair value option has been elected for all Agency securities in an unrealized loss position. (2) Includes non-Agency IO with a fair value of $ 1.7 million for which the fair value option has been elected. Such securities have unrealized losses of $ 2.1 million. The remaining $ 136,000 of unrealized losses on non-Agency RMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to current amortized cost basis. As of June 30, 2022 and December 31, 2021, we did no t have an allowance for credit losses recorded on our condensed consolidated balance sheets. We recorded an $ 830,000 and a $ 1.8 million decrease in the provision for credit losses on our condensed consolidated statement of operations during the three and six months ended June 30, 2021, respectively. The following table presents a roll-forward of our allowance for credit losses. Three Months Ended June 30, Six Months Ended June 30, $ in thousands 2021 2021 Beginning allowance for credit losses ( 830 ) ( 1,768 ) Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period 830 1,768 Ending allowance for credit losses — — The following table summarizes the components of our total 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 Gross realized gains on sale of MBS 5,348 — 5,348 201 Gross realized losses on sale of MBS ( 540,404 ) ( 118,006 ) ( 859,374 ) ( 235,054 ) Net unrealized gains (losses) on MBS accounted for under the fair value option 224,464 189,804 58,997 ( 22,108 ) Net unrealized gains (losses) on commercial loan 87 822 ( 37 ) ( 2,276 ) Net unrealized gains (losses) on U.S. 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 ) 11 Table of Contents The following tables present components of interest income recognized on our mortgage-backed and other securities portfolio for the three and six months ended June 30, 2022 and 2021. For the three months ended June 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 40,927 422 41,349 Non-Agency CMBS 668 509 1,177 Non-Agency RMBS 310 ( 132 ) 178 U.S. Treasury securities 1,213 ( 25 ) 1,188 Other 102 — 102 Total 43,220 774 43,994 For the three months ended June 30, 2021 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 50,003 ( 9,450 ) 40,553 Non-Agency CMBS 1,036 845 1,881 Non-Agency RMBS 467 ( 274 ) 193 Other 7 — 7 Total 51,513 ( 8,879 ) 42,634 For the six months ended June 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 87,525 ( 6,506 ) 81,019 Non-Agency CMBS 1,405 1,012 2,417 Non-Agency RMBS 640 ( 283 ) 357 U.S. Treasury securities 1,773 ( 41 ) 1,732 Other 106 — 106 Total 91,449 ( 5,818 ) 85,631 For the six months ended June 30, 2021 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 99,558 ( 21,934 ) 77,624 Non-Agency CMBS 2,341 1,723 4,064 Non-Agency RMBS 1,091 ( 724 ) 367 Other 13 — 13 Total 103,003 ( 20,935 ) 82,068 12 Table of Contents Note 5 – Other Assets The following table summarizes our other assets as of June 30, 2022 and December 31, 2021. $ in thousands June 30, 2022 December 31, 2021 Commercial loan, held-for-investment 23,478 23,515 Investments in unconsolidated ventures 3,622 12,476 Prepaid expenses and other assets 864 1,518 Total 27,964 37,509 In February 2022, we agreed to extend the contractual maturity of our commercial loan investment from February 2022 to June 2022. In June 2022, we agreed to further extend the contractual maturity to September 2022. The loan had a principal balance of $ 23.9 million as of June 30, 2022 and December 31, 2021 and a weighted average coupon rate of 9.56 % as of June 30, 2022 and 8.60 % as of December 31, 2021. We account for this loan under the fair value option and, accordingly, there are no capitalized origination costs or fees associated with the loan. We recorded an unrealized gain of $ 87,000 and an unrealized loss of $ 37,000 on this loan in our condensed consolidated statements of operations during the three and six months ended June 30, 2022, respectively (June 30, 2021: unrealized gain $ 822,000 and unrealized loss $ 2.3 million, respectively). We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures. Note 6 – Borrowings We finance the majority of our investment portfolio through repurchase agreements. The following tables summarize certain characteristics of our borrowings at June 30, 2022 and December 31, 2021. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements. $ in thousands June 30, 2022 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 3,262,530 1.38 % 22 Total Borrowings 3,262,530 1.38 % 22 $ in thousands December 31, 2021 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 6,987,834 0.14 % 29 Total Borrowings 6,987,834 0.14 % 29 Repurchase Agreements Our repurchase agreements generally bear interest at a contractually agreed upon rate. Agency RMBS repurchase agreements generally have maturities ranging from one to six months. Repurchase agreements are accounted for as secured borrowings since we maintain effective control of the financed assets. The repurchase agreements are subject to certain financial covenants. We were in compliance with all of these covenants as of June 30, 2022. 13 Table of Contents Note 7 - Collateral Positions The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, interest rate swaps, currency forward contracts and TBAs as of June 30, 2022 and December 31, 2021. Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a description of how we determine fair value. Agency RMBS collateral pledged is included in mortgage-backed securities on our condensed consolidated balance sheets. Cash collateral pledged on centrally cleared interest rate swaps and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is classified as due from counterparties on our condensed consolidated balance sheets. Cash collateral held that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of June 30, 2022 and December 31, 2021, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets. $ in thousands As of Collateral Pledged June 30, 2022 December 31, 2021 Repurchase Agreements: Agency RMBS 3,467,386 7,326,175 Cash — 3,527 Total repurchase agreements collateral pledged 3,467,386 7,329,702 Derivative Instruments: Cash 10,231 4,458 Restricted cash 128,604 219,918 Total derivative instruments collateral pledged 138,835 224,376 Total collateral pledged: Agency RMBS 3,467,386 7,326,175 Cash 10,231 7,985 Restricted cash 128,604 219,918 Total collateral pledged 3,606,221 7,554,078 As of Collateral Held June 30, 2022 December 31, 2021 Repurchase Agreements: Cash 3,573 — Non-cash collateral 12,544 248 Total repurchase agreements collateral held 16,117 248 Derivative instruments: Cash 2,155 280 Total derivative instruments collateral held 2,155 280 Total collateral held: Cash 5,728 280 Non-cash collateral 12,544 248 Total collateral held 18,272 528 14 Table of Contents Repurchase Agreements Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value. We would be required to provide additional collateral to fund margin calls if the value of pledged assets declined. We intend to maintain a level of liquidity that will enable us to meet margin calls. The ratio of our total repurchase agreements collateral pledged to our total repurchase agreements outstanding was 106 % as of June 30, 2022 (December 31, 2021: 105 %). Interest Rate Swaps As of June 30, 2022 and December 31, 2021, all of our interest rate swaps were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange ("CME") and LCH Limited ("LCH") through a Futures Commission Merchant ("FCM"). We are required to pledge initial margin and daily variation margin for our centrally cleared interest rate swaps that is based on the fair value of our contracts as determined by our FCM. Collateral pledged with our FCM is segregated in our books and records and can be in the form of cash or securities. Daily variation margin for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Certain of our FCM agreements include cross default provisions. TBAs and Currency Forward Contracts Our TBAs and currency forward contracts provide for bilateral collateral pledging based on market value as determined by our counterparties. Collateral pledged with our TBA and currency forward counterparties is segregated in our books and records and can be in the form of cash or securities. Our counterparties have the right to repledge the collateral posted and have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the contracts changes. Note 8 – Derivatives and Hedging Activities The following table summarizes changes in the notional amount of our derivative instruments during 2022. $ in thousands Notional Amount as of December 31, 2021 Additions Settlement, Termination, Expiration or Exercise Notional Amount as of June 30, 2022 Interest Rate Swaps (1) (2) 8,050,000 8,725,000 ( 7,400,000 ) 9,375,000 Currency Forward Contracts 13,596 20,359 ( 27,783 ) 6,172 TBA Purchase Contracts 1,600,000 17,006,500 ( 17,295,500 ) 1,311,000 TBA Sale Contracts — ( 18,156,500 ) 17,295,500 ( 861,000 ) Total 9,663,596 7,595,359 ( 7,427,783 ) 9,831,172 (1) Does not include interest rate swaps with forward start dates with a notional amount of $ 1.0 billion and $ 1.3 billion as of June 30, 2022 and December 31, 2021, respectively. (2) Notional amount as of June 30, 2022 includes $ 5.8 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $ 3.6 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate. Notional amount as of December 31, 2021 includes $ 6.3 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $ 1.8 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate. Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our derivative counterparties. Interest Rate Swaps Our repurchase agreements are usually settled on a short-term basis ranging from one month to six months . At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Under the terms of the majority of our interest rate swap contracts, we make fixed-rate payments to a counterparty in exchange for the receipt of floating-rate amounts over the life of the agreements without exchange of the underlying notional amount. To 15 Table of Contents a lesser extent, we also enter into interest rate swap contracts whereby we make floating-rate payments to a counterparty in exchange for the receipt of fixed-rate amounts as part of our overall risk management strategy. Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We reclassified $ 4.8 million and $ 10.0 million as a decrease (June 30, 2021: $ 5.4 million and $ 10.8 million as a decrease) to interest expense for the three and six months ended June 30, 2022, respectively. During the next 12 months, we estimate that $ 17.4 million will be reclas sified as a decrease to interest expense, repurchase agreements. As of June 30, 2022, $ 20.1 million (December 31, 2021: $ 30.1 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and will be reclassified as a decrease to interest expense, repurchase agreements over a period of time through December 15, 2023. As of June 30, 2022 and December 31, 2021, we had interest rate swaps whereby we pay interest at a fixed rate and receive floating interest based on the secured overnight financing rate ("SOFR") with the following maturities outstand ing, excluding interest rate swaps with forward start dates. $ in thousands As of June 30, 2022 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 650,000 0.06 % 1.50 % 2.1 3 to 5 years 900,000 0.11 % 1.50 % 3.1 5 to 7 years 1,925,000 0.29 % 1.50 % 5.4 7 to 10 years 1,825,000 0.52 % 1.50 % 8.1 Greater than 10 years 500,000 1.92 % 1.50 % 19.7 Total 5,800,000 0.45 % 1.50 % 6.8 $ in thousands As of December 31, 2021 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 1,000,000 0.06 % 0.05 % 2.6 3 to 5 years 1,250,000 0.12 % 0.05 % 3.6 5 to 7 years 2,225,000 0.32 % 0.05 % 5.9 7 to 10 years 1,825,000 0.52 % 0.05 % 8.6 Total 6,300,000 0.30 % 0.05 % 5.7 As of June 30, 2022, we held $ 1.0 billion notional amount of interest rate swaps with forward start dates that will receive floating interest based on SOFR (December 31, 2021: $ 1.3 billion). As of June 30, 2022, these interest rate swaps had a weighted average maturity of 17.0 years (December 31, 2021: 20.8 years) and a weighted average fixed pay rate of 0.89 % (December 31, 2021: 0.99 %). As of June 30, 2022 and December 31, 2021, we had interest rate swaps whereby we pay floating interest based on SOFR and receive interest at a fixed rate with the following maturities outstanding. $ in thousands As of June 30, 2022 Maturities Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Less than 3 years 1,200,000 1.50 % 3.32 % 2.0 3 to 5 years 600,000 1.50 % 2.73 % 4.4 5 to 7 years 1,175,000 1.50 % 2.67 % 6.3 7 to 10 years 325,000 1.50 % 2.61 % 9.3 Greater than 10 years 275,000 1.50 % 2.72 % 30.0 Total 3,575,000 1.50 % 2.90 % 6.6 16 Table of Contents $ in thousands As of December 31, 2021 Maturities Notional Amounts Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Less than 3 years 1,000,000 0.05 % 0.77 % 2.6 5 to 7 years 500,000 0.05 % 1.26 % 6.9 7 to 10 years 250,000 0.05 % 1.27 % 10.0 Total 1,750,000 0.05 % 0.98 % 4.9 Swaptions and Currency Forward Contracts We periodically purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of our Agency RMBS portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into interest rate swap agreements for a predetermined notional amount, stated term and pay and receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our condensed consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. If an interest rate swaption expires unexercised, the loss on the interest rate swaption would equal the premium paid. If we sell or exercise an interest rate swaption, the realized gain or loss on the interest rate swaption would equal the difference between the cash or the fair value of the underlying interest rate swap received and the premium paid. We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. 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. TBAs 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. The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of June 30, 2022 and December 31, 2021. $ in thousands As of June 30, 2022 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA Purchase Contracts (1) 1,311,000 1,324,001 1,323,965 ( 36 ) TBA Sale Contracts (2) ( 861,000 ) ( 857,442 ) ( 864,683 ) ( 7,241 ) Net TBA Derivatives 450,000 466,559 459,282 ( 7,277 ) (1) Net carrying value of TBA purchase contracts includes $ 4.2 million of derivative assets and $ 4.3 million of derivative liabilities. (2) Net carrying value of TBA sale contracts includes $ 7.2 million of derivative liabilities. $ in thousands As of December 31, 2021 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA Purchase Contracts 1,600,000 1,636,906 1,633,955 ( 2,951 ) 17 Table of Contents Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021. $ in thousands Derivative Assets Derivative Liabilities As of June 30, 2022 As of December 31, 2021 As of June 30, 2022 As of December 31, 2021 Balance Sheet Fair Value Fair Value Balance Sheet Fair Value Fair Value Interest Rate Swaps Asset — — Interest Rate Swaps Liability 25,771 11,405 Currency Forward Contracts 53 270 Currency Forward Contracts — — TBAs 4,236 — TBAs 11,513 2,951 Total Derivative Assets 4,289 270 Total Derivative Liabilities 37,284 14,356 The following tables summarize the effect of interest rate swaps, interest rate swaptions, currency forward contracts and TBAs reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three and six months ended June 30, 2022 and 2021. $ in thousands Three Months Ended June 30, 2022 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 209,913 13,566 ( 2,966 ) 220,513 Currency Forward Contracts 486 — ( 177 ) 309 TBAs ( 69,167 ) — 30,087 ( 39,080 ) Total 141,232 13,566 26,944 181,742 $ in thousands Three Months Ended June 30, 2021 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps ( 166,365 ) ( 4,572 ) ( 32,786 ) ( 203,723 ) Currency Forward Contracts ( 13 ) — ( 142 ) ( 155 ) TBAs 10,431 — 7,163 17,594 Total ( 155,947 ) ( 4,572 ) ( 25,765 ) ( 186,284 ) $ in thousands Six Months Ended June 30, 2022 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 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 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 161,162 ( 9,121 ) ( 11,705 ) 140,336 Interest Rate Swaptions ( 553 ) — — ( 553 ) Currency Forward Contracts ( 552 ) — 1,113 561 TBAs ( 33,754 ) — ( 5,913 ) ( 39,667 ) Total 126,303 ( 9,121 ) ( 16,505 ) 100,677 18 Table of Contents Note 9 – Offsetting Assets and Liabilities Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets. The following tables present information about the assets and liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets at June 30, 2022 and December 31, 2021. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Our derivative liability of $ 25.8 million at June 30, 2022 (December 31, 2021: liability of $ 11.4 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin. As of June 30, 2022 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Assets Derivatives (1) (2) 4,289 — 4,289 ( 3,742 ) ( 547 ) — Total Assets 4,289 — 4,289 ( 3,742 ) ( 547 ) — Liabilities Derivatives (1) (2) ( 11,513 ) — ( 11,513 ) 3,742 6,999 ( 772 ) Repurchase Agreements (3) ( 3,262,530 ) — ( 3,262,530 ) 3,262,530 — — Total Liabilities ( 3,274,043 ) — ( 3,274,043 ) 3,266,272 6,999 ( 772 ) As of December 31, 2021 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Assets Derivatives (1) (2) 270 — 270 — ( 270 ) — Total Assets 270 — 270 — ( 270 ) — Liabilities Derivatives (1) (2) ( 2,951 ) — ( 2,951 ) — 2,951 — Repurchase Agreements (3) ( 6,987,834 ) — ( 6,987,834 ) 6,987,834 — — Total Liabilities ( 6,990,785 ) — ( 6,990,785 ) 6,987,834 2,951 — (1) Amounts represent derivative assets and derivative liabilities which could potentially be offset against other derivative assets, derivative liabilities and cash collateral pledged or received. (2) Cash collateral pledged by us on our derivatives was $ 138.8 million and $ 224.4 million as of June 30, 2022 and December 31, 2021, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and is therefore excluded from the tables above. We held cash collateral on our derivatives of $ 2.2 million and $ 280,000 as of June 30, 2022 and December 31, 2021, respectively. (3) The fair value of securities pledged against our borrowings under repurchase agreements was $ 3.5 billion and $ 7.3 billion at June 30, 2022 and December 31, 2021, respectively. We pledged no cash collateral and $ 3.5 million of cash collateral under repurchase agreements as of June 30, 2022 and December 31, 2021, respectively. We held $ 3.6 million of cash collateral under repurchase agreements as of June 30, 2022. We did not hold cash collateral under repurchase agreements as of December 31, 2021 . 19 Table of Contents Note 10 – Fair Value of Financial Instruments A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows: • Level 1 Inputs – Quoted prices for identical instruments in active markets. • Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 Inputs – Instruments with primarily unobservable value drivers. The following tables present our assets and liabilities measured at fair value on a recurring basis. June 30, 2022 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 (2) NAV as a practical expedient (3) Total at Fair Value Assets: Mortgage-backed securities (1) — 3,915,165 — — 3,915,165 Derivative assets — 4,289 — — 4,289 Other assets — — 23,478 3,622 27,100 Total assets — 3,919,454 23,478 3,622 3,946,554 Liabilities: Derivative liabilities — 37,284 — — 37,284 Total liabilities — 37,284 — — 37,284 December 31, 2021 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 (2) NAV as a practical expedient (3) Total at Fair Value Assets: Mortgage-backed securities (1) — 7,804,259 — — 7,804,259 Derivative assets — 270 — — 270 Other assets — — 23,515 12,476 35,991 Total assets — 7,804,529 23,515 12,476 7,840,520 Liabilities: Derivative liabilities — 14,356 — — 14,356 Total liabilities — 14,356 — — 14,356 (1) For more detail about the fair value of our MBS, refer to Note 4 - "Mortgage-Backed Securities." (2) Amounts reflect our commercial loan investment for which we have elected the fair value option and valued using a third party appraisal. (3) Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of June 30, 2022 and December 31, 2021, our unconsolidated ventures were in liquidation and plan to sell or settle their remaining investments as expeditiously as possible. 20 Table of Contents The following table shows a reconciliation of the beginning and ending fair value measurements of our commercial loan investment, which we have valued utilizing Level 3 inputs. Three Months Ended June 30, Six Months Ended June 30, $ in thousands 2022 2021 2022 2021 Beginning balance 23,391 20,000 23,515 23,098 Unrealized gains (losses) 87 822 ( 37 ) ( 2,276 ) Ending balance 23,478 20,822 23,478 20,822 Unrealized gains and losses on our commercial loan investment are included in gain (loss) on investments, net in our condensed consolidated statements of operations. The following table summarizes the significant unobservable input used in the fair value measurement of our commercial loan. Fair Value at Valuation Unobservable $ in thousands June 30, 2022 Technique Input Rate Commercial Loan 23,478 Discounted Cash Flow Discount rate 18.5 % Fair Value at Valuation Unobservable $ in thousands December 31, 2021 Technique Input Rate Commercial Loan 23,515 Discounted Cash Flow Discount rate 18.8 % The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at June 30, 2022 and December 31, 2021. June 30, 2022 December 31, 2021 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Liabilities Repurchase agreements 3,262,530 3,261,968 6,987,834 6,987,806 Total 3,262,530 3,261,968 6,987,834 6,987,806 The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the condensed consolidated balance sheets. • The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality. Note 11 – Related Party Transactions Our Manager is at all times subject to the supervision and oversight of our board of directors and has only such functions and authority as we delegate to it. Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. During the three and six months ended June 30, 2022, we reimbursed our Manager $ 337,000 and $ 750,000 , respectively (June 30, 2021: $ 261,000 and $ 559,000 , respectively) for costs of support personnel. Management Fee We pay our Manager a fee equal to 1.50 % of our stockholders' equity per annum. For purposes of calculating the management fee, stockholders' equity is calculated as average month-end stockholders' equity for the prior calendar quarter as determined in accordance with U.S. GAAP. Stockholders' equity may exclude one-time events due to changes in U.S. GAAP and certain non-cash items upon approval by a majority of our independent directors. We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager. 21 Table of Contents Expense Reimbursement We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, legal services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation. The following table summarizes the costs incurred on our behalf by our Manager 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 Incurred costs, prepaid or expensed 2,020 1,696 3,357 2,853 Incurred costs, charged against equity as a cost of raising capital 159 315 217 392 Total incurred costs, originally paid by our Manager 2,179 2,011 3,574 3,245 Note 12 – Stockholders’ Equity Preferred Stock In June 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock for $ 140.0 million plus accrued and unpaid dividends. 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. 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” for details on repurchases subsequent to June 30, 2022. Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.18 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50 % of the liquidation preference of $ 25.00 per share or $ 1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289 % of the $ 25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears. We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company before those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control. As of June 30, 2022, we may sell up to 5,500,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). We have not sold any shares of preferred stock under our equity distribution agreements. Common Stock 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 (the "Effective Time"). At the Effective Time, every ten issued and outstanding shares of our common stock were converted into one share of our common stock. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares received cash, in lieu of such fractional shares, in an amount determined based on the closing price of our common stock at the Effective Time. The reverse stock split applied to all of our outstanding shares of common stock and did not affect any stockholder’s ownership percentage of our common stock, except for changes resulting from the payment of cash for fractional shares. 22 Table of Contents As of June 30, 2022, we may sell up to 5,686,598 shares of our common stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). During the three and six months ended June 30, 2022, we did not sell any shares of common stock under the 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. During the three and six months ended June 30, 2022 and 2021, we did no t repurchase any shares of our common stock. As of June 30, 2022, we had authority to purchase 1,816,398 shares of our common stock through our common stock share repurchase program. In May 2022, we granted 32,571 restricted shares of common stock to our independent directors. The restricted shares will become unrestricted shares of common stock on the first anniversary of the grant date unless forfeited, subject to certain conditions that accelerate vesting. Accumulated Other Comprehensive Income The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three and six months ended June 30, 2022 and 2021. The tables exclude gains and losses on MBS that are accounted for under the fair value option. Three Months Ended June 30, 2022 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 1,825 ) — ( 1,825 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 4,802 ) ( 4,802 ) Currency translation adjustments on investment in unconsolidated venture ( 93 ) — — ( 93 ) Total other comprehensive income (loss) ( 93 ) ( 1,825 ) ( 4,802 ) ( 6,720 ) AOCI balance at beginning of period 224 4,328 24,917 29,469 Total other comprehensive income (loss) ( 93 ) ( 1,825 ) ( 4,802 ) ( 6,720 ) AOCI balance at end of period 131 2,503 20,115 22,749 Three Months Ended June 30, 2021 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — 1,155 — 1,155 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 5,429 ) ( 5,429 ) Currency translation adjustments on investment in unconsolidated venture ( 632 ) — — ( 632 ) Total other comprehensive income (loss) ( 632 ) 1,155 ( 5,429 ) ( 4,906 ) AOCI balance at beginning of period 1,108 6,974 46,745 54,827 Total other comprehensive income (loss) ( 632 ) 1,155 ( 5,429 ) ( 4,906 ) AOCI balance at end of period 476 8,129 41,316 49,921 23 Table of Contents Six Months Ended June 30, 2022 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 4,246 ) — ( 4,246 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 9,998 ) ( 9,998 ) Currency translation adjustments on investment in unconsolidated venture ( 293 ) — — ( 293 ) Total other comprehensive income (loss) ( 293 ) ( 4,246 ) ( 9,998 ) ( 14,537 ) AOCI balance at beginning of period 424 6,749 30,113 37,286 Total other comprehensive income (loss) ( 293 ) ( 4,246 ) ( 9,998 ) ( 14,537 ) AOCI balance at end of period 131 2,503 20,115 22,749 Six Months Ended June 30, 2021 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — 2,136 — 2,136 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 10,797 ) ( 10,797 ) Currency translation adjustments on investment in unconsolidated venture ( 23 ) — — ( 23 ) Total other comprehensive income (loss) ( 23 ) 2,136 ( 10,797 ) ( 8,684 ) AOCI balance at beginning of period 499 5,993 52,113 58,605 Total other comprehensive income (loss) ( 23 ) 2,136 ( 10,797 ) ( 8,684 ) AOCI balance at end of period 476 8,129 41,316 49,921 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 original life of the interest rate swap agreements. 24 Table of Contents Dividends The table below summarizes the dividends we declared during the six months ended June 30, 2022 and 2021. Dividends declared per share on our common stock have been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022. $ in thousands, except per share amounts Dividends Declared Series A Preferred Stock Per Share In Aggregate Date of Payment 2021 (1) February 19, 2021 0.4844 2,713 April 26, 2021 (1) On June 16, 2021, we paid a final dividend of $ 0.2691 per share ($ 1.5 million in aggregate) in connection with the redemption of our Series A Preferred Stock. $ in thousands, except per share amounts Dividends Declared Series B Preferred Stock Per Share In Aggregate Date of Payment 2022 May 3, 2022 0.4844 2,991 June 27, 2022 February 16, 2022 0.4844 3,003 March 28, 2022 2021 May 4, 2021 0.4844 3,004 June 28, 2021 February 19, 2021 0.4844 3,003 March 29, 2021 $ in thousands, except per share amounts Dividends Declared Series C Preferred Stock Per Share In Aggregate Date of Payment 2022 May 3, 2022 0.46875 5,109 June 27, 2022 February 16, 2022 0.46875 5,391 March 28, 2022 2021 May 4, 2021 0.46875 5,390 June 28, 2021 February 19, 2021 0.46875 5,391 March 29, 2021 $ in thousands, except per share amounts Dividends Declared Common Stock Per Share In Aggregate Date of Payment 2022 June 27, 2022 0.90 29,721 July 27, 2022 March 28, 2022 0.90 29,693 April 27, 2022 2021 June 23, 2021 0.90 26,071 July 27, 2021 March 26, 2021 0.90 22,176 April 27, 2021 25 Table of Contents Note 13 – Earnings (Loss) per Common Share Earnings (loss) per share for the three and six months ended June 30, 2022 and 2021 is computed as shown in the table below. Common share amounts and earnings (loss) per share have been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022. Three Months Ended June 30, Six Months Ended June 30, In thousands, except per share amounts 2022 2021 2022 2021 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders ( 116,144 ) ( 88,340 ) ( 352,960 ) ( 108,722 ) Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 32,990 26,014 32,988 24,215 Dilutive Shares 32,990 26,014 32,988 24,215 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 3.52 ) ( 3.40 ) ( 10.70 ) ( 4.49 ) Diluted ( 3.52 ) ( 3.40 ) ( 10.70 ) ( 4.49 ) The following potential weighted average common shares were excluded from diluted earnings per share for three and six months ended June 30, 2022 as the effect would be antidilutive: 1,127 and 1,314 for restricted stock awards, respectively (June 30, 2021: 2,082 and 1,722 for restricted stock awards, respectively). Note 14 – Commitments and Contingencies Commitments and Contingencies Commitments and contingencies may arise in the ordinary course of business. Our material off-balance sheet commitments as of June 30, 2022 are discussed below. As discussed in Note 5 - “Other Assets”, we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invested in the partnerships as a limited partner. 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 $ 6.2 million in additional capital to cover future expenses should they occur. Note 15 – Subsequent Events Dividends We declared the following dividends on August 2, 2022: a Series B Preferred Stock dividend of $ 0.4844 per share payable on September 27, 2022 to our stockholders of record as of September 5, 2022 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on September 27, 2022 to our stockholders of record as of September 5, 2022. Repurchase of Series B and Series C Preferred Stock Between July 1, 2022 and August 4, 2022, we repurchased 1,618,546 shares of our Series B Preferred Stock for $ 35.0 million and 3,063,389 shares of our Series C Preferred Stock for $ 65.6 million. We will record a gain on the repurchase and retirement of these shares during the three months ended September 30, 2022. As of August 4, 2022, we had authority to repurchase 1,337,634 additional shares of Series B Preferred Stock and 1,316,470 additional shares of Series C Preferred Stock under our current preferred share repurchase program. Change in Authorized Common Shares On August 3, 2022, the Company filed an Articles of Amendment to reduce the number of shares of common stock, par value $ 0.01 per share, that the Company has authority to issue. Effective upon filing, the Articles of Amendment amended the Charter of the Company to reduce the total authorized number of shares of common stock of the Company from 450,000,000 to 67,000,000 . 26 Table of Contents