What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-04 · 206 added, 198 removed, 633 unchanged (39% of the section changed)

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

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

• our business and investment strategy;

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• our projected operating results;

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

• general volatility of financial market, increases in inflation and the effects of governmental responses, including actions and initiatives of the U.S.

governmental agencies and changes to U.S.

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

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

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

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

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Market Conditions

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 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.

Macroeconomic factors that affect our business include interest rates, 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 further during the third quarter as the Federal Reserve’s Open Market Committee (“FOMC”) increased the Federal Funds rate twice, by a total of 150 basis points, in response to inflation levels that persist at multi-decade highs.

Once again, equity markets declined, credit spreads widened and volatility increased from already elevated levels as recession fears increased and the market priced in a more aggressive pace of tightening by the Federal Reserve.

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

Equity markets ended the third quarter lower, as the S&P 500 lost 5.3% while the NASDAQ lost 4.1%.

The employment picture remained a bright spot during the quarter, as gains in non-farm payrolls averaged 372,000 per month, and the unemployment rate decreased slightly to 3.5%.

Consumer activity was mixed with consumer confidence measures remaining close to their recent lows as the impact of higher prices took hold, while spending and retail sales levels were relatively flat.

The FOMC increased the Federal Funds target rate to a range of 3.00% to 3.25% as of quarter-end, and continued to signal more rate hikes to come.

The Federal Funds futures market reflected further hikes of as much as 1.50% to 1.75% by mid-2023.

During the quarter, the yield on the 2 year Treasury note increased 133 basis points to 4.28%, the yield on the 5 year Treasury increased 105 basis points to 4.09% and the yield on the 10 year Treasury ended the quarter at 3.83%, up 82 basis points.

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.

After ending the second quarter at a 40-year high of 9.1%, the consumer price index ("CPI") moderated slightly during the third quarter, ending at 8.2%.

The CPI excluding food and energy ended the quarter at 6.6%, accelerating past the 5.9% rate at the end of last quarter.

Commodity prices fell during the quarter, reflecting increased market expectations that the global economy is likely to slow materially in the coming quarters.

West Texas Intermediate crude fell by 18.7%, while the Commodity Research Bureau commodity index fell by 7.9%.

Despite the elevated inflation numbers, breakeven rates on inflation-protected Treasuries reflected the belief that the Federal Reserve will prevail in reducing inflation below current levels.

The inflation rate implied by 2 year U.S.

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.

Treasury inflation-protected securities ended the quarter at 1.98%, down from 3.29% last quarter, while the 5 year breakeven rate fell from 2.62% to 2.16%.

During the third quarter, the Agency RMBS sector sharply underperformed interest rate hedges as the excess return for the Bloomberg US MBS Index was (1.69%), the worst quarter of relative returns in over a decade.

The index has performed poorly for four consecutive quarters, and the drivers have largely remained the same:

rapidly evolving monetary policy, sharply higher interest rates, escalating/elevated volatility, poor liquidity and a general risk off tone in financial markets.

When combined with the results of the previous three quarters, the index posted the worst relative performance in consecutive quarters and the worst 9 and 12 month periods on record.

While valuations on Agency RMBS have reached historically attractive levels, we remain cautious on the sector as an unstable investment environment persists given the uncertain path of monetary policy and continuing geopolitical risks.

CMBS risk premiums increased in the third quarter due to higher inflation, increased interest rate volatility and the continued removal of accommodative monetary policy.

Over the last year, U.S.

commercial real estate rental rates and valuations have notably improved across most property types and geographic regions.

While commercial mortgage loan delinquencies remained elevated across many property types, they are 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.

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

Despite these positives, we expect fundamental improvement to moderate as the pace of positive net absorption slows and lending conditions tighten.

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 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.

This strength was reflected in rapid home price appreciation, which has moderated in recent months 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 June 30, 2022, December 31, 2021 and June 30, 2021:

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

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

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

30 year fixed-rate, at fair value 4,252,742 7,701,523 8,725,908

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

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 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

We sold $22.8 billion and purchased $20.7 billion of Agency RMBS during the nine months ended September 30, 2022 primarily to rotate into higher yielding securities, in some cases changing coupon rates or the type of specified pool collateral.

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

As of September 30, 2022, our holdings of 30 year fixed-rate Agency RMBS represented approximately 94% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2021 and 84% as of September 30, 2021.

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

September 30, 2022 December 31, 2021 September 30, 2021

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

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5.0% 1,486,108 34.9 % — — % — — %

5.5% 160,903 3.8 % — — % — — %

Total 30 year fixed-rate Agency RMBS 4,252,742 100.0 % 7,701,523 100.0 % 8,725,908 100.0 %

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

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.

As of September 30, 2022, the implied cost basis of TBAs represented approximately 3% of our total investment portfolio versus 17% as of December 31, 2021 and 15% as of September 30, 2021.

As of September 30, 2022, our investments consist of 30-year Agency RMBS TBAs with coupons of 5.5% in conventional collateral.

We decreased the allocation to TBAs as implied financing rates in the Agency RMBS TBA dollar roll market increased more than those available in the repurchase market for most coupons.

We maintained a modest allocation to TBAs as implied financing rates in the dollar roll market for higher coupons continue to be below those available in the repurchase market as the sharp rise in mortgage rates have led to a supply and demand imbalance in new production.

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 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.

As of September 30, 2022;

December 31, 2021 and September 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 were rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2022.

Approximately 71% of non-Agency CMBS were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2022.

As of September 30, 2022;

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

As of September 30, 2022;

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

As of September 30, 2022, the commercial loan had a loan-to-value ratio of approximately 68%.

The loan was repaid in full in October 2022.

As of September 30, 2022;

December 31, 2021 and September 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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Maximum balance (2)

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

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

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

September 30, 2022 3,887,291 3,907,505 4,165,996

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

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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.

During the nine months ended September 30, 2022, we terminated existing interest rate swaps with a notional amount of $9.2

billion and entered into new interest rate swaps with a notional amount of $9.6 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 $553.2 million on interest rate swaps during the six months ended June 30, 2022 primarily due to rising interest rates.

We realized a net gain of $625.1 million on interest rate swaps during the nine months ended September 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 June 30, 2022, we had €5.8 million or $6.2 million (December 31, 2021:

As of September 30, 2022, we had €1.6 million or $1.7 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 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).

During the nine months ended September 30, 2022, we settled currency forward contracts of €29.9 million or $34.0 million (September 30, 2021:

€56.5 million or $68.0 million) in notional amount and realized a net gain of $866,000 (September 30, 2021:

$58,000 net gain).

Capital Activities

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.

As of September 30, 2022, we may sell up to 3,358,793 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.

During the three and nine months ended September 30, 2022, we sold 2,327,805 shares of common stock under our equity distribution agreement for proceeds of $38.6 million, net of approximately $603,000 in commissions and fees.

During the three months ended September 30, 2021, we sold shares 2,206,000 of common stock under an equity distribution agreement for proceeds of $67.5 million, net of approximately $1.0 million in commissions and fees.

During the nine months ended September 30, 2021, we sold 3,761,000 shares of common stock under an equity distribution agreement for proceeds of $125.4 million, net of approximately $1.8 million in commissions and fees.

For information on dividends declared during the nine months ended September 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 six months ended June 30, 2022, we did not repurchase any shares of our common stock.

During the nine months ended September 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.

During the three and nine months ended September 30, 2022, we repurchased and retired 1,618,546 shares and 1,662,366 shares of Series B Preferred Stock, respectively.

During the three and nine months ended September 30, 2022, we repurchased and retired 3,063,389 shares and 3,683,530 shares of Series C Preferred Stock, respectively.

As of September 30, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program.

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

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We calculate book value per common share as follows.

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

In thousands except per share amounts September 30, 2022 December 31, 2021

Numerator (adjusted equity):

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Book value per common share 12.80 29.09

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.

Our book value per common share decreased 56.0% as of September 30, 2022 compared to December 31, 2021 as 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.

Agency RMBS valuations were sharply lower for the third consecutive

quarter, resulting in the sector’s worst nine-month performance on record.

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 and six months ended June 30, 2022 and 2021.

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

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

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

$ in thousands, except share data 2022 2021 2022 2021

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Interest Income and Average Earning Asset Yields

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

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

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

Three Months Ended September 30, Nine Months Ended September 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 $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:

We had average earning assets of $4.6 billion for the three months ended September 30, 2022 (September 30, 2021:

$8.7 billion) and $5.4 billion for the nine months ended September 30, 2022 (September 30, 2021:

$9.0 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:

Average earning assets decreased for the three and nine months ended September 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 nine months ended September 30, 2022 compared to 2021 due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $49.7 million and $136.5 million for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

$43.2 million and $126.3 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,

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

$ in thousands 2022 2021 2022 2021

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Total interest income 49,728 43,182 136,457 126,346

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.

Mortgage-backed and other securities interest income increased $6.4 million and $10.0 million for the three and nine months ended September 30, 2022, respectively, compared to 2021 despite lower average earning assets due to a 237 and 149 basis point increase in average earning asset yields, respectively.

Interest income on our commercial loan increased during the three and nine months ended September 30, 2022 compared to 2021 due to higher interest rates.

Prepayment Speeds

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Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate.

In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance.

If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized.

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) 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,

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

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

$ in thousands 2022 2021 2022 2021

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Net (premium amortization) discount accretion (166) (9,341) (5,984) (30,276)

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.

Net premium amortization was $166,000 for the three months ended September 30, 2022 compared to net premium amortization of $9.3 million for the same period in 2021.

Net premium amortization decreased $24.3 million for the nine months ended September 30, 2022 compared to the same period 2021.

The decrease in premium amortization for the three and nine months ended September 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 and six months ended June 30, 2022 and 2021.

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

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

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

$ in thousands 2022 2021 2022 2021

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Total interest expense 18,008 (3,272) 19,359 (8,109)

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, which equals our total interest expense, increased $21.3 million and $27.5 million for the three and nine months ended September 30, 2022, respectively, 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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $4.9 million and $14.9 million during the three and nine months ended September 30, 2022, respectively, and $5.6 million and $16.4 million during the three and nine months ended September 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 $14.4 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 and six months ended June 30, 2022 and 2021.

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

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

Three Months Ended September 30, Nine Months Ended September 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 $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.

Total average borrowings decreased $3.9 billion and $3.3 billion in the three and nine months ended September 30, 2022, respectively, 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 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 201 and 68 basis points for the three and nine months ended September 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 and six months ended June 30, 2022 and 2021:

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

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

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

$ in thousands 2022 2021 2022 2021

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Net interest rate margin 2.51 % 2.15 % 2.82 % 2.01 %

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:

Our net interest income, which equals interest income less interest expense, totaled $31.7 million and $117.1 million for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

$46.5 million and $134.5 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:

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 2.51% and 2.82% for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

2.15% and 2.01%).

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.

The decrease in net interest income for the three and nine months ended September 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 nine months ended September 30, 2022 compared to 2021 was primarily due to our rotation into higher yielding Agency RMBS, which was partially offset by higher interest rates on our borrowings.

Gain (Loss) on Investments, net

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

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

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

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

$ in thousands 2022 2021 2022 2021

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Net unrealized gains (losses) on commercial loan 171 1,446 134 (830)

Net unrealized gains (losses) on U.S.

Treasury securities 19,827 — — —

Net realized gains (losses) on U.S.

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Total gain (loss) on investments, net (260,837) (16,830) (1,090,101) (276,067)

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:

During the three and nine months ended September 30, 2022, we sold MBS and realized net losses of $120.4 million and $974.4 million, respectively (September 30, 2021:

net losses of $4.5 million and $239.3 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.

Realized net losses during the three and nine months ended September 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 June 30, 2022, $3.9 billion (December 31, 2021:

As of September 30, 2022, $4.3 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 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 recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $140.6 million and $81.6 million in the three and nine months ended September 30, 2022, respectively, compared to net unrealized losses of $13.8 million and $35.9 million in the three and nine months ended September 30, 2021, respectively.

Net unrealized losses in the three and nine months ended September 30, 2022 and 2021 reflect wider interest rate spreads on our Agency assets.

We recorded unrealized gains of $171,000 and $134,000 on our commercial loan in the three and nine months ended September 30, 2022, respectively, compared to an unrealized gain of $1.4 million and an unrealized loss of $830,000 in the three and nine months ended September 30, 2021, respectively.

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

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

Treasury securities in the nine months ended September 30, 2022 due to rising interest rates.

We did not hold any U.S.

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

Treasury securities during the three and nine months ended September 30, 2021.

(Increase) Decrease in Provision for Credit Losses

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:

As of September 30, 2022, $43.0 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 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.

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

We recorded a $1.8 million decrease in the provision for credit losses on a single non-Agency CMBS during the nine months ended September 30, 2021 because the security fully repaid in June 2021.

Equity in Earnings (Losses) of Unconsolidated Ventures

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:

For the three and nine months ended September 30, 2022, we recorded equity in losses of unconsolidated ventures of $6,000 and $287,000, respectively (September 30, 2021:

equity in earnings of $344,000 and $581,000).

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$ in thousands

Three months ended June 30, 2022

Three months ended September 30, 2022

not designated as

5 unchanged sentences

$ in thousands

Three months ended June 30, 2021

Three months ended September 30, 2021

not designated as

5 unchanged sentences

$ in thousands

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

not designated as

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$ in thousands

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

not designated as

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Total 164,396 (13,296) (15,141) 135,959

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.

During the nine months ended September 30, 2022, we terminated existing interest rate swaps with a notional amount of $9.2 billion and entered into new interest rate swaps with a notional amount of $9.6 billion, excluding interest rate swaps with forward start dates.

We realized net gains of $71.9 million and $625.1 million for the three and nine months ended September 30, 2022, respectively, and $22.7 million and $183.8 million for the three and nine months ended September 30, 2021, respectively, on interest rate swaps due to rising interest rates.

As of September 30, 2022, we had $3.9 billion of repurchase agreement borrowings with a weighted average remaining maturity of 60 days.

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

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

As of June 30, 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

As of September 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 September 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 % 2.98 % 6.5 6,300,000 0.30 % 0.05 % 5.7

(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

(1) Excludes $975.0 million 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 September 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 September 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 Fixed Receive Rate Weighted Average Years to Maturity

Interest Rate Swaps (1)

2,675,000 2.98 % 2.80 % 8.9 1,750,000 0.05 % 0.98 % 4.9

(1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates that will pay floating interest based on SOFR (December 31, 2021:

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

As of June 30, 2022, we had $6.2 million (December 31, 2021:

As of September 30, 2022, we had $1.7 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 June 30, 2022, we had $450.0 million net notional amount of TBAs (December 31, 2021:

As of September 30, 2022, we had $140.0 million notional amount of TBAs (December 31, 2021:

$1.6 billion).

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.

We recorded $5.6 million and $139.2 million of net realized and unrealized losses on TBAs during the three and nine months ended September 30, 2022, respectively.

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

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

Net realized and unrealized losses for the nine months ended September 30, 2021 primarily 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 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:

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

We incurred management fees of $3.8 million and $13.7 million for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

$5.4 million and $15.8 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.

Management fees decreased for the three and nine months ended September 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 $2.5 million and $4.5 million for the three and six months ended June 30, 2022, respectively (June 30, 2021:

Our general and administrative expenses not covered under our management agreement amounted to $2.0 million and $6.6 million for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

$2.1 million and $6.3 million).

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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.

During the three and nine months ended September 30, 2022, we repurchased and retired 1,618,546 shares and 1,662,366 shares

of Series B Preferred Stock, respectively.

During the three and nine months ended September 30, 2022, we repurchased and retired 3,063,389 shares and 3,683,530 shares of Series C Preferred Stock, respectively.

The difference between the consideration transferred and the carrying value of the preferred stock resulted in a gain attributable to common stockholders of $12.7 million and $14.2 million during the three and nine months ended September 30, 2022, respectively.

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 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:

For the three months ended September 30, 2022, our net loss attributable to common stockholders was $94.6 million (September 30, 2021:

$49.3 million net income attributable to common stockholders) or $2.78 basic and diluted net loss per average share available to common stockholders (September 30, 2021:

$1.66 basic and diluted net income per average share available to common stockholders).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $260.8 million in the 2022 period compared to $16.8 million in the 2021 period;

(ii) net gains on derivative instruments of $133.5 million in the 2022 period compared to $35.3 million in the 2021 period;

(iii) a $14.7 million decrease in net interest income;

and (iv) a gain on repurchase and retirement of preferred stock of $12.7 million in 2022.

For the nine months ended September 30, 2022, our net loss attributable to common stockholders was $447.6 million (September 30, 2021:

$59.4 million net loss attributable to common stockholders) or $13.42 basic and diluted net loss per average share available to common stockholders (September 30, 2021:

$2.28 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;

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $1.1 billion in the 2022 period compared to $276.1 million in the 2021 period;

(ii) net gains on derivative instruments of $554.2 million in the 2022 period compared to $136.0 million in the 2021 period;

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”.

(iii) a $17.4 million decrease in net interest income;

and (iv) a gain on repurchase and retirement of preferred stock of $14.2 million in 2022.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, net changes in net interest income and gains of repurchase and retirement of preferred stock, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net”, “Net Interest Income” and “Gain on Repurchase and Retirement of Preferred Stock”.

Non-GAAP Financial Measures

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

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

similarly titled measures used by our peer companies.

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

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

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

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

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

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

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

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

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

$ in thousands 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 June 30, Six Months Ended June 30,

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

$ in thousands 2022 2021 2022 2021

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

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

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

$ in thousands 2022 2021 2022 2021

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

Earnings available for distribution 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.

Earnings available for distribution increased during the three months ended September 30, 2022 compared to the same period in 2021 primarily due to higher effective net interest income, which was partially offset by lower TBA dollar roll income.

Earnings available for distribution increased during the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to higher effective net interest income, a decrease in dividends to preferred stockholders 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 June 30,

Three Months Ended September 30,

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

5 unchanged sentences

(7,282) (0.75) % 6,504 0.33 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

5 unchanged sentences

(10,783) (0.30) % 21,585 0.36 %

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.

Our effective interest expense and effective cost of funds decreased in the three and nine months ended September 30, 2022 compared to the same periods in 2021 despite an increase in total interest expense primarily due to contractual net interest income on interest rate swaps of $30.1 million and $45.0 million during the three and nine months ended September 30, 2022, respectively, compared to $4.2 million and $13.3 million of contractual net interest expense for the same periods in 2021, respectively.

The change in contractual net interest expense (income) on interest rate swaps was driven by rising interest rates.

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 June 30,

Three Months Ended September 30,

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

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57,010 5.10 % 36,678 1.65 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

5 unchanged sentences

147,240 3.67 % 104,761 1.52 %

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.

Effective net interest income increased in the three and nine months ended September 30, 2022 compared to the same periods in 2021 despite lower net interest income 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 nine months ended September 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, which were partially offset by higher interest rates on our borrowings.

Economic Debt-to-Equity Ratio

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

As of September 30, 2022, approximately 91% of our equity is allocated to Agency RMBS.

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

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

June 30, 2022

September 30, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

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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 ($466.6 million as of June 30, 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 ($142.8 million as of September 30, 2022) to total stockholders' equity.

December 31, 2021

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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 $330.8 million at June 30, 2022 (June 30, 2021:

We held cash, cash equivalents and restricted cash of $264.4 million at September 30, 2022 (September 30, 2021:

$486.2 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 $80.8 million for the six months ended June 30, 2022 (June 30, 2021:

Our cash, cash equivalents and restricted cash change 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 $126.8 million for the nine months ended September 30, 2022 (September 30, 2021:

$110.5 million).

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:

Our investing activities provided net cash of $2.8 billion in the nine months ended September 30, 2022 compared to net cash used in investing activities of $797.6 million in the nine months ended September 30, 2021.

Our primary source of cash from investing activities for the nine months ended September 30, 2022 was proceeds from sales of MBS of $22.8 billion and proceeds from the sales of U.S.

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

$11.8 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:

We also generated $330.6 million from principal payments of MBS during the nine months ended September 30, 2022 (September 30, 2021:

$615.2 million).

We used cash of $20.7 billion to purchase MBS and $502.3 million to purchase U.S.

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

Treasury securities during the nine months ended September 30, 2022 (September 30, 2021:

$13.4 billion to purchase MBS).

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

We received cash of $487.5 million to settle derivative contracts in the nine months ended September 30, 2022 (September 30, 2021:

$164.4 million).

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

Our financing activities used net cash of $3.3 billion for the nine months ended September 30, 2022 (September 30, 2021:

net cash provided by financing activities of $780.8 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:

During the nine months ended September 30, 2022, we used cash for net principal repayments on our repurchase agreements of $3.1 billion (September 30, 2021:

net cash provided of $645.1 million).

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

We also used cash of $111.5 million for the nine months ended September 30, 2022 to pay dividends (September 30, 2021:

$96.6 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.

Proceeds from issuance of common stock provided $38.7 million for the nine months ended September 30, 2022 (September 30, 2021:

$375.3 million).

As of September 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.

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Forward-Looking Statements Regarding Liquidity

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.

As of September 30, 2022, we held $4.0 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $340.7 million of unencumbered investments and unrestricted cash of $163.6 million as of September 30, 2022.

As of September 30, 2022, our known contractual obligations primarily consisted of $3.9 billion of repurchase agreement borrowings with a weighted average remaining maturity of 60 days.

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

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Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended June 30, 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 September 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 June 30, 2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

We calculate that as of September 30, 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 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.

As of September 30, 2022, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $38.1 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of September 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