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 September 30, 2022 December 31, 2021 ASSETS Mortgage-backed securities, at fair value (including pledged securities of $ 4,043,370 and $ 7,326,175 , respectively) 4,356,991 7,804,259 Cash and cash equivalents 163,590 357,134 Restricted cash 100,775 219,918 Due from counterparties 4,837 7,985 Investment related receivable 19,306 16,766 Derivative assets, at fair value 11,227 270 Other assets 28,979 37,509 Total assets 4,685,705 8,443,841 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 3,887,291 6,987,834 Derivative liabilities, at fair value 3,695 14,356 Dividends payable 22,979 29,689 Investment related payable 706 — Accrued interest payable 3,766 1,171 Collateral held payable 10 280 Accounts payable and accrued expenses 1,839 1,887 Due to affiliate 4,210 6,489 Total liabilities 3,924,496 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: 4,537,634 and 6,200,000 shares issued and outstanding, respectively ($ 113,441 and $ 155,000 aggregate liquidation preference, respectively) 109,679 149,860 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 7,816,470 and 11,500,000 shares issued and outstanding, respectively ($ 195,412 and $ 287,500 aggregate liquidation preference, respectively) 189,028 278,108 Common Stock, par value $ 0.01 per share; 67,000,000 and 450,000,000 shares authorized, respectively; 35,352,123 and 32,987,478 shares issued and outstanding, respectively 353 330 Additional paid in capital 3,858,418 3,819,375 Accumulated other comprehensive income 16,510 37,286 Retained earnings (distributions in excess of earnings) ( 3,412,779 ) ( 2,882,824 ) Total stockholders’ equity 761,209 1,402,135 Total liabilities and stockholders' equity 4,685,705 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 September 30, Nine Months Ended September 30, $ in thousands, except share data 2022 2021 2022 2021 Interest income Mortgage-backed and other securities 49,058 42,657 134,689 124,725 Commercial loan 670 525 1,768 1,621 Total interest income 49,728 43,182 136,457 126,346 Interest expense Repurchase agreements (1) 18,008 ( 3,272 ) 19,359 ( 8,109 ) Total interest expense 18,008 ( 3,272 ) 19,359 ( 8,109 ) Net interest income 31,720 46,454 117,098 134,455 Other income (loss) Gain (loss) on investments, net ( 260,837 ) ( 16,830 ) ( 1,090,101 ) ( 276,067 ) (Increase) decrease in provision for credit losses — — — 1,768 Equity in earnings (losses) of unconsolidated ventures ( 6 ) 344 ( 287 ) 581 Gain (loss) on derivative instruments, net 133,549 35,282 554,151 135,959 Other investment income (loss), net — 1 44 1 Total other income (loss) ( 127,294 ) 18,797 ( 536,193 ) ( 137,758 ) Expenses Management fee – related party 3,836 5,432 13,729 15,771 General and administrative 2,018 2,139 6,561 6,279 Total expenses 5,854 7,571 20,290 22,050 Net income (loss) ( 101,428 ) 57,680 ( 439,385 ) ( 25,353 ) Dividends to preferred stockholders ( 5,862 ) ( 8,394 ) ( 22,356 ) ( 29,401 ) Gain on repurchase and retirement of preferred stock 12,688 — 14,179 — Issuance and redemption costs of redeemed preferred stock — — — ( 4,682 ) Net income (loss) attributable to common stockholders ( 94,602 ) 49,286 ( 447,562 ) ( 59,436 ) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 2.78 ) 1.66 ( 13.42 ) ( 2.28 ) Diluted ( 2.78 ) 1.66 ( 13.42 ) ( 2.28 ) (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 September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Net income (loss) ( 101,428 ) 57,680 ( 439,385 ) ( 25,353 ) Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed securities, net ( 1,243 ) ( 473 ) ( 5,489 ) 1,663 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 4,855 ) ( 5,601 ) ( 14,853 ) ( 16,398 ) Currency translation adjustments on investment in unconsolidated venture ( 141 ) 187 ( 434 ) 164 Total other comprehensive income (loss) ( 6,239 ) ( 5,887 ) ( 20,776 ) ( 14,571 ) Comprehensive income (loss) ( 107,667 ) 51,793 ( 460,161 ) ( 39,924 ) Dividends to preferred stockholders ( 5,862 ) ( 8,394 ) ( 22,356 ) ( 29,401 ) Gain on repurchase and retirement of preferred stock 12,688 — 14,179 — Issuance and redemption costs of redeemed preferred stock — — — ( 4,682 ) Comprehensive income (loss) attributable to common stockholders ( 100,841 ) 43,399 ( 468,338 ) ( 74,007 ) 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; June 30, 2022 and September 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 Net income (loss) — — — — — — — — ( 101,428 ) ( 101,428 ) Other comprehensive income (loss) — — — — — — — ( 6,239 ) — ( 6,239 ) Proceeds from issuance of common stock, net of offering costs 2,327,805 23 38,590 38,613 Repurchase and retirement of preferred stock ( 1,618,546 ) ( 39,122 ) ( 3,063,389 ) ( 74,083 ) — — — — 12,688 ( 100,517 ) Common stock dividends — — — — — — — — ( 22,979 ) ( 22,979 ) Preferred stock dividends — — — — — — — — ( 5,862 ) ( 5,862 ) Amortization of equity-based compensation — — — — — — 158 — — 158 Balance at September 30, 2022 4,537,634 109,679 7,816,470 189,028 35,352,123 353 3,858,418 16,510 ( 3,412,779 ) 761,209 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; June 30, 2021 and September 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 Net income (loss) — — — — — — — — — — 57,680 57,680 Other comprehensive income (loss) — — — — — — — — — ( 5,887 ) — ( 5,887 ) Proceeds from issuance of common stock, net of offering costs — — — — — — 2,206,000 22 67,506 — — 67,528 Common stock dividends — — — — — — — — — — ( 28,057 ) ( 28,057 ) Preferred stock dividends — — — — — — — — — — ( 8,394 ) ( 8,394 ) Amortization of equity-based compensation — — — — — — — — 122 — — 122 Balance at September 30, 2021 — — 6,200,000 149,860 11,500,000 278,108 31,174,076 312 3,764,152 44,034 ( 2,780,095 ) 1,456,371 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) Nine Months Ended September 30, $ in thousands 2022 2021 Cash Flows from Operating Activities Net income (loss) ( 439,385 ) ( 25,353 ) 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 835 28,436 Realized and unrealized (gain) loss on derivative instruments, net ( 509,156 ) ( 149,255 ) (Gain) loss on investments, net 1,090,101 276,067 Increase (decrease) in provision for credit losses — ( 1,768 ) (Gain) loss from investments in unconsolidated ventures in excess of distributions received 38 4 Other amortization ( 14,399 ) ( 15,906 ) Changes in operating assets and liabilities: (Increase) decrease in operating assets ( 1,901 ) ( 2,904 ) Increase (decrease) in operating liabilities 651 1,134 Net cash provided by (used in) operating activities 126,784 110,455 Cash Flows from Investing Activities Purchase of mortgage-backed securities ( 20,721,166 ) ( 13,387,052 ) Purchase of U.S. Treasury securities ( 502,290 ) — Distributions from investments in unconsolidated ventures, net 8,529 4,142 Principal payments from mortgage-backed securities 330,550 615,203 Proceeds from sale of mortgage-backed securities 22,775,148 11,815,848 Proceeds from the sale of U.S. Treasury securities 468,051 — Settlement (termination) of forwards, swaps, swaptions and TBAs, net 487,538 164,396 Net change in due from counterparties and collateral held payable on derivative instruments ( 649 ) ( 10,167 ) Net cash provided by (used in) investing activities 2,845,711 ( 797,630 ) Cash Flows from Financing Activities Proceeds from issuance of common stock 38,726 375,283 Redemption of preferred stock — ( 140,038 ) Repurchase of preferred stock ( 115,082 ) — Cash paid in lieu of fractional shares in connection with one-for-ten reverse stock split ( 1 ) — Proceeds from repurchase agreements 51,685,864 71,066,670 Principal repayments of repurchase agreements ( 54,786,407 ) ( 70,421,571 ) Net change in due from counterparties and collateral held payable on repurchase agreements 3,527 ( 2,311 ) Payments of deferred costs ( 350 ) ( 575 ) Payments of dividends ( 111,459 ) ( 96,618 ) Net cash provided by (used in) financing activities ( 3,285,182 ) 780,840 Net change in cash, cash equivalents and restricted cash ( 312,687 ) 93,665 Cash, cash equivalents and restricted cash, beginning of period 577,052 392,584 Cash, cash equivalents and restricted cash, end of period 264,365 486,249 Supplement Disclosure of Cash Flow Information Interest paid 31,616 8,283 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed securities classified as available-for-sale ( 5,489 ) 1,663 Dividends declared not paid 22,979 28,057 Net change in investment related receivable (payable) ( 416 ) 61 Offering costs not paid 144 351 Change in foreign currency translation adjustment on other investments 434 ( 164 ) 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 September 30, 2022 is presented in the table below. $ in thousands Carrying Amount Company's Maximum Risk of Loss Non-Agency CMBS 37,256 37,256 Non-Agency RMBS 7,604 7,604 Investments in unconsolidated ventures 3,475 3,475 Total 48,335 48,335 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 September 30, 2022 and December 31, 2021. September 30, 2022 $ in thousands Principal/ Notional Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) 30 year fixed-rate Agency RMBS 4,451,986 ( 53,352 ) 4,398,634 ( 145,892 ) 4,252,742 4.65 % Agency-CMO (2) 416,292 ( 360,444 ) 55,848 3,541 59,389 8.54 % Non-Agency CMBS 38,652 ( 1,758 ) 36,894 362 37,256 8.51 % Non-Agency RMBS (3)(4)(5) 315,941 ( 307,772 ) 8,169 ( 565 ) 7,604 8.01 % Total 5,222,871 ( 723,326 ) 4,499,545 ( 142,554 ) 4,356,991 4.74 % (1) Period-end weighted average yield is based on amortized cost as of September 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 63.9 % fixed rate, 35.2 % 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 97.2 % of principal/notional balance, 42.7 % of amortized cost and 26.3 % 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) 30 year fixed-rate Agency RMBS 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 September 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 September 30, 2022 and December 31, 2021, approximately 99 % of our MBS are accounted for under the fair value option. September 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 30 year fixed-rate Agency RMBS — 4,252,742 4,252,742 — 7,701,523 7,701,523 Agency-CMO — 59,389 59,389 — 30,757 30,757 Non-Agency CMBS 37,256 — 37,256 62,909 — 62,909 Non-Agency RMBS 5,719 1,885 7,604 7,288 1,782 9,070 Total 42,975 4,314,016 4,356,991 70,197 7,734,062 7,804,259 The components of the carrying value of our MBS portfolio at September 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 $ 17.9 million at September 30, 2022 (December 31, 2021: $ 16.6 million). September 30, 2022 $ in thousands MBS Interest-Only Securities Total Principal/notional balance 4,499,427 723,444 5,222,871 Unamortized premium 29,388 — 29,388 Unamortized discount ( 88,604 ) ( 664,110 ) ( 752,714 ) Gross unrealized gains (1) 2,931 4,790 7,721 Gross unrealized losses (1) ( 147,542 ) ( 2,733 ) ( 150,275 ) Fair value 4,295,600 61,391 4,356,991 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 nine months ended September 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 September 30, 2022 and December 31, 2021 . $ in thousands September 30, 2022 December 31, 2021 Less than one year 26,951 23,150 Greater than one year and less than five years 10,306 891,510 Greater than or equal to five years 4,319,734 6,889,599 Total 4,356,991 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 September 30, 2022 and December 31, 2021. September 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 30 year fixed-rate Agency RMBS (1) 4,040,618 ( 147,512 ) 40 — — — 4,040,618 ( 147,512 ) 40 Agency-CMO (1) 6,914 ( 798 ) 2 3,064 ( 451 ) 1 9,978 ( 1,249 ) 3 Non-Agency RMBS (2) 358 ( 30 ) 2 2,002 ( 1,484 ) 14 2,360 ( 1,514 ) 16 Total 4,047,890 ( 148,340 ) 44 5,066 ( 1,935 ) 15 4,052,956 ( 150,275 ) 59 (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 $ 1.8 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 30 year fixed-rate Agency RMBS (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 September 30, 2022 and December 31, 2021, we did no t have an allowance for credit losses recorded on our condensed consolidated balance sheets. The following table presents a roll-forward of our allowance for credit losses. Nine Months Ended September 30, $ in thousands 2021 Beginning allowance for credit losses ( 1,768 ) Decrease to the allowance for credit losses on securities that had an allowance recorded in a previous period 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 nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Gross realized gains on sale of MBS — 3,096 5,348 3,297 Gross realized losses on sale of MBS ( 120,418 ) ( 7,547 ) ( 979,792 ) ( 242,601 ) Net unrealized gains (losses) on MBS accounted for under the fair value option ( 140,590 ) ( 13,825 ) ( 81,593 ) ( 35,933 ) Net unrealized gains (losses) on commercial loan 171 1,446 134 ( 830 ) Net realized gains (losses) on U.S. Treasury securities — — ( 34,198 ) — Total gain (loss) on investments, net ( 260,837 ) ( 16,830 ) ( 1,090,101 ) ( 276,067 ) 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 nine months ended September 30, 2022 and 2021. For the three months ended September 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 48,075 ( 355 ) 47,720 Non-Agency CMBS 485 328 813 Non-Agency RMBS 288 ( 139 ) 149 Other 376 — 376 Total 49,224 ( 166 ) 49,058 For the three months ended September 30, 2021 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 50,748 ( 9,548 ) 41,200 Non-Agency CMBS 761 480 1,241 Non-Agency RMBS 483 ( 273 ) 210 Other 6 — 6 Total 51,998 ( 9,341 ) 42,657 For the nine months ended September 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 135,600 ( 6,861 ) 128,739 Non-Agency CMBS 1,890 1,340 3,230 Non-Agency RMBS 928 ( 422 ) 506 U.S. Treasury securities 1,773 ( 41 ) 1,732 Other 482 — 482 Total 140,673 ( 5,984 ) 134,689 For the nine months ended September 30, 2021 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 150,306 ( 31,482 ) 118,824 Non-Agency CMBS 3,102 2,203 5,305 Non-Agency RMBS 1,574 ( 997 ) 577 Other 19 — 19 Total 155,001 ( 30,276 ) 124,725 12 Table of Contents Note 5 – Other Assets The following table summarizes our other assets as of September 30, 2022 and December 31, 2021. $ in thousands September 30, 2022 December 31, 2021 Commercial loan, held-for-investment 23,649 23,515 Investments in unconsolidated ventures 3,475 12,476 Prepaid expenses and other assets 1,855 1,518 Total 28,979 37,509 Our commercial loan had a principal balance of $ 23.9 million as of September 30, 2022 and December 31, 2021 and a weighted average coupon rate of 11.06 % as of September 30, 2022 and 8.60 % as of December 31, 2021. We accounted for this loan under the fair value option and, accordingly, there were no capitalized origination costs or fees associated with the loan. We recorded unrealized gains of $ 171,000 and $ 134,000 on this loan in our condensed consolidated statements of operations during the three and nine months ended September 30, 2022, respectively. We recorded unrealized gains of $ 1.4 million and unrealized losses of $ 830,000 on this loan during the three and nine months ended September 30, 2021, respectively. In September 2022, we extended the contractual maturity of our commercial loan to November 2022; however, the loan was repaid in full in October 2022. 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 September 30, 2022 and December 31, 2021. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements. $ in thousands September 30, 2022 Weighted Weighted Average Average Remaining Amount Interest Maturity Outstanding Rate (days) Repurchase Agreements - Agency RMBS 3,887,291 3.27 % 60 Total Borrowings 3,887,291 3.27 % 60 $ 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 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 September 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 September 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 September 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 September 30, 2022 December 31, 2021 Repurchase Agreements: Agency RMBS 4,043,370 7,326,175 Cash — 3,527 Total repurchase agreements collateral pledged 4,043,370 7,329,702 Derivative Instruments: Cash 4,837 4,458 Restricted cash 100,775 219,918 Total derivative instruments collateral pledged 105,612 224,376 Total collateral pledged: Agency RMBS 4,043,370 7,326,175 Cash 4,837 7,985 Restricted cash 100,775 219,918 Total collateral pledged 4,148,982 7,554,078 As of Collateral Held September 30, 2022 December 31, 2021 Repurchase Agreements: Non-cash collateral 908 248 Total repurchase agreements collateral held 908 248 Derivative instruments: Cash 10 280 Total derivative instruments collateral held 10 280 Total collateral held: Cash 10 280 Non-cash collateral 908 248 Total collateral held 918 528 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 104 % as of September 30, 2022 (December 31, 2021: 105 %). Interest Rate Swaps As of September 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 September 30, 2022 Interest Rate Swaps (1) (2) 8,050,000 9,575,000 ( 9,150,000 ) 8,475,000 Currency Forward Contracts 13,596 22,027 ( 33,955 ) 1,668 TBA Purchase Contracts 1,600,000 18,462,000 ( 19,922,000 ) 140,000 TBA Sale Contracts — ( 19,922,000 ) 19,922,000 — Total 9,663,596 8,137,027 ( 9,183,955 ) 8,616,668 (1) Does not include interest rate swaps with forward start dates. See below for additional detail on our interest rate swaps with forward start dates. (2) Notional amount as of September 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 $ 2.7 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 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 a lesser extent, 15 Table of Contents 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 accumulated other comprehensive income ("AOCI") before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the 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 $ 4.9 million and $ 14.9 million as a decrease (September 30, 2021: $ 5.6 million and $ 16.4 million as a decrease) to interest expense for the three and nine months ended September 30, 2022, respectively. During the next 12 months, we estimate that $ 14.4 million will be reclas sified as a decrease to interest expense, repurchase agreements. As of September 30, 2022, $ 15.3 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 September 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 September 30, 2022 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 1,550,000 0.09 % 2.98 % 2.4 3 to 5 years 1,075,000 0.25 % 2.98 % 4.9 5 to 7 years 850,000 0.34 % 2.98 % 5.6 7 to 10 years 1,825,000 0.52 % 2.98 % 7.8 Greater than 10 years 500,000 1.92 % 2.98 % 19.5 Total 5,800,000 0.45 % 2.98 % 6.5 $ 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 September 30, 2022, we held $ 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, these interest rate swaps had a weighted average maturity of 16.7 years (December 31, 2021: 20.8 years) and a weighted average fixed pay rate of 0.89 % (December 31, 2021: 0.99 %). As of September 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 September 30, 2022 Maturities Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Less than 3 years 250,000 2.98 % 4.00 % 0.6 3 to 5 years 600,000 2.98 % 2.73 % 4.2 5 to 7 years 1,125,000 2.98 % 2.66 % 6.3 7 to 10 years 325,000 2.98 % 2.61 % 9.1 Greater than 10 years 375,000 2.98 % 2.67 % 29.8 Total 2,675,000 2.98 % 2.80 % 8.9 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 As of September 30, 2022, we held $ 275.0 million notional amount of interest rate swaps with forward start dates that will pay floating interest based on SOFR. As of September 30, 2022, these interest rate swaps had a weighted average maturity of 16.3 years and a weighted average fixed receive rate of 2.63 %. We did not hold any such interest rate swaps as of December 31, 2021. 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 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. 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 September 30, 2022 and December 31, 2021. $ in thousands As of September 30, 2022 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA Purchase Contracts 140,000 142,842 139,147 ( 3,695 ) $ 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 September 30, 2022 and December 31, 2021. $ in thousands Derivative Assets Derivative Liabilities As of September 30, 2022 As of December 31, 2021 As of September 30, 2022 As of December 31, 2021 Balance Sheet Fair Value Fair Value Balance Sheet Fair Value Fair Value Interest Rate Swaps Asset 11,161 — Interest Rate Swaps Liability — 11,405 Currency Forward Contracts 66 270 Currency Forward Contracts — — TBAs — — TBAs 3,695 2,951 Total Derivative Assets 11,227 270 Total Derivative Liabilities 3,695 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 nine months ended September 30, 2022 and 2021. $ in thousands Three Months Ended September 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 71,862 30,145 36,930 138,937 Currency Forward Contracts 187 — 14 201 TBAs ( 9,172 ) — 3,583 ( 5,589 ) Total 62,877 30,145 40,527 133,549 $ in thousands Three Months Ended September 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 22,663 ( 4,175 ) 11,997 30,485 Currency Forward Contracts 610 — ( 266 ) 344 TBAs 14,820 — ( 10,367 ) 4,453 Total 38,093 ( 4,175 ) 1,364 35,282 $ in thousands Nine Months Ended September 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 625,084 44,995 22,565 692,644 Currency Forward Contracts 866 — ( 204 ) 662 TBAs ( 138,412 ) — ( 743 ) ( 139,155 ) Total 487,538 44,995 21,618 554,151 $ in thousands Nine Months Ended September 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 183,825 ( 13,296 ) 292 170,821 Interest Rate Swaptions ( 553 ) — — ( 553 ) Currency Forward Contracts 58 — 847 905 TBAs ( 18,934 ) — ( 16,280 ) ( 35,214 ) Total 164,396 ( 13,296 ) ( 15,141 ) 135,959 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 September 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 asset of $ 11.2 million at September 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 September 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) 66 — 66 — ( 10 ) 56 Total Assets 66 — 66 — ( 10 ) 56 Liabilities Derivatives (1) (2) ( 3,695 ) — ( 3,695 ) — 3,617 ( 78 ) Repurchase Agreements (3) ( 3,887,291 ) — ( 3,887,291 ) 3,887,291 — — Total Liabilities ( 3,890,986 ) — ( 3,890,986 ) 3,887,291 3,617 ( 78 ) 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 $ 105.6 million and $ 224.4 million as of September 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 $ 10,000 and $ 280,000 as of September 30, 2022 and December 31, 2021, respectively. (3) The fair value of securities pledged against our borrowings under repurchase agreements was $ 4.0 billion and $ 7.3 billion at September 30, 2022 and December 31, 2021, respectively. We pledged no cash collateral and $ 3.5 million of cash collateral under repurchase agreements as of September 30, 2022 and December 31, 2021, respectively. We did not hold any cash collateral under repurchase agreements as of September 30, 2022 or 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. September 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) — 4,356,991 — — 4,356,991 Derivative assets — 11,227 — — 11,227 Other assets — — 23,649 3,475 27,124 Total assets — 4,368,218 23,649 3,475 4,395,342 Liabilities: Derivative liabilities — 3,695 — — 3,695 Total liabilities — 3,695 — — 3,695 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 September 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 September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Beginning balance 23,478 20,822 23,515 23,098 Unrealized gains (losses) 171 1,446 134 ( 830 ) Ending balance 23,649 22,268 23,649 22,268 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 September 30, 2022 Technique Input Rate Commercial Loan 23,649 Discounted Cash Flow Discount rate 20.6 % 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 September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Liabilities Repurchase agreements 3,887,291 3,885,463 6,987,834 6,987,806 Total 3,887,291 3,885,463 6,987,834 6,987,806 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 nine months ended September 30, 2022, we reimbursed our Manager $ 375,000 and $ 1.1 million, respectively (September 30, 2021: $ 287,000 and $ 846,000 , 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 nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Incurred costs, prepaid or expensed 3,060 2,724 6,417 5,577 Incurred costs, charged against equity as a cost of raising capital — 254 217 646 Total incurred costs, originally paid by our Manager 3,060 2,978 6,634 6,223 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 nine months ended September 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 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. 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. 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. 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. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). 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 22 Table of Contents million, net of approximately $ 603,000 in commissions and fees. During the three months ended September 30, 2021, we sold 2,206,000 shares 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. During the three and nine months ended September 30, 2022 and 2021, we did no t repurchase any shares of our common stock. As of September 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 AOCI for the three and nine months ended September 30, 2022 and 2021. The tables exclude gains and losses on MBS that are accounted for under the fair value option. Three Months Ended September 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 — ( 1,243 ) — ( 1,243 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 4,855 ) ( 4,855 ) Currency translation adjustments on investment in unconsolidated venture ( 141 ) — — ( 141 ) Total other comprehensive income (loss) ( 141 ) ( 1,243 ) ( 4,855 ) ( 6,239 ) AOCI balance at beginning of period 131 2,503 20,115 22,749 Total other comprehensive income (loss) ( 141 ) ( 1,243 ) ( 4,855 ) ( 6,239 ) AOCI balance at end of period ( 10 ) 1,260 15,260 16,510 Three Months Ended September 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 — ( 473 ) — ( 473 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 5,601 ) ( 5,601 ) Currency translation adjustments on investment in unconsolidated venture 187 — — 187 Total other comprehensive income (loss) 187 ( 473 ) ( 5,601 ) ( 5,887 ) AOCI balance at beginning of period 476 8,129 41,316 49,921 Total other comprehensive income (loss) 187 ( 473 ) ( 5,601 ) ( 5,887 ) AOCI balance at end of period 663 7,656 35,715 44,034 23 Table of Contents Nine Months Ended September 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 — ( 5,489 ) — ( 5,489 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 14,853 ) ( 14,853 ) Currency translation adjustments on investment in unconsolidated venture ( 434 ) — — ( 434 ) Total other comprehensive income (loss) ( 434 ) ( 5,489 ) ( 14,853 ) ( 20,776 ) AOCI balance at beginning of period 424 6,749 30,113 37,286 Total other comprehensive income (loss) ( 434 ) ( 5,489 ) ( 14,853 ) ( 20,776 ) AOCI balance at end of period ( 10 ) 1,260 15,260 16,510 Nine Months Ended September 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 — 1,663 — 1,663 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 16,398 ) ( 16,398 ) Currency translation adjustments on investment in unconsolidated venture 164 — — 164 Total other comprehensive income (loss) 164 1,663 ( 16,398 ) ( 14,571 ) AOCI balance at beginning of period 499 5,993 52,113 58,605 Total other comprehensive income (loss) 164 1,663 ( 16,398 ) ( 14,571 ) AOCI balance at end of period 663 7,656 35,715 44,034 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 nine months ended September 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 August 2, 2022 0.4844 2,198 September 27, 2022 May 3, 2022 0.4844 2,991 June 27, 2022 February 16, 2022 0.4844 3,003 March 28, 2022 2021 August 3, 2021 0.4844 3,003 September 27, 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 August 2, 2022 0.46875 3,664 September 27, 2022 May 3, 2022 0.46875 5,109 June 27, 2022 February 16, 2022 0.46875 5,391 March 28, 2022 2021 August 3, 2021 0.46875 5,391 September 27, 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 September 28, 2022 0.65 22,979 October 27, 2022 June 27, 2022 0.90 29,721 July 27, 2022 March 28, 2022 0.90 29,693 April 27, 2022 2021 September 28, 2021 0.90 28,057 October 26, 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 nine months ended September 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 September 30, Nine Months Ended September 30, In thousands, except per share amounts 2022 2021 2022 2021 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders ( 94,602 ) 49,286 ( 447,562 ) ( 59,436 ) Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 34,051 29,720 33,346 26,070 Effect of dilutive securities: Restricted stock awards — 1 — — Dilutive Shares 34,051 29,721 33,346 26,070 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 2.78 ) 1.66 ( 13.42 ) ( 2.28 ) Diluted ( 2.78 ) 1.66 ( 13.42 ) ( 2.28 ) The following potential weighted average common shares were excluded from diluted earnings per share for three and nine months ended September 30, 2022 as the effect would be antidilutive: 1,127 and 1,248 for restricted stock awards, respectively ( 1,582 for restricted stock awards for nine months ended September 30, 2021). 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 September 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 $ 6.0 million in additional capital to cover future expenses should they occur. Note 15 – Subsequent Events Dividends We declared the following dividends on November 1, 2022: a Series B Preferred Stock dividend of $ 0.4844 per share payable on December 27, 2022 to our stockholders of record as of December 5, 2022 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on December 27, 2022 to our stockholders of record as of December 5, 2022. Commercial Loan In October 2022, our commercial loan with a principal balance of $ 23.9 million was repaid in full. 26 Table of Contents