Invesco Mortgage Capital Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco." The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the "SEC"). Forward-Looking Statements We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "intend," "project," "forecast" or similar expressions and future or conditional verbs such as "will," "may," "could," "should," and "would," and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to: • our business and investment strategy; • our investment portfolio and expected investments; • our projected operating results; • 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 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; • financing and advance rates for our target assets; • changes to our expected leverage; • our expected book value per common share; • our intention and ability to pay dividends; • interest rate mismatches between our target assets and our borrowings used to fund such investments; • the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs; • our ability to maintain sufficient liquidity to meet our short-term liquidity needs; • changes in the credit rating of the U.S. government; • changes in interest rates and interest rate spreads and the market value of our target assets; • changes in prepayment rates on our target assets; • the impact of any deficiencies in loss mitigation of third parties and related uncertainty in the timing of collateral disposition; 27 Table of Contents • our reliance on third parties in connection with services related to our target assets; • disruption of our information technology systems; • the impact of potential data security breaches or other cyber-attacks or other disruptions; • the effects of hedging instruments on our target assets; • rates of default or decreased recovery rates on our target assets; • modifications to whole loans or loans underlying securities; • the degree to which our hedging strategies may or may not protect us from interest rate and foreign currency exchange rate volatility; • the degree to which derivative contracts expose us to contingent liabilities; • counterparty defaults; • compliance with financial covenants in our financing arrangements; • changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes; • our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes; • our ability to maintain our exception from the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act"); • the availability of investment opportunities in mortgage-related, real estate-related and other securities; • the availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities; • the market price and trading volume of our capital stock; • the availability of qualified personnel from our Manager and our Manager's continued ability to find and retain such personnel; • the relationship with our Manager; • estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future; • estimates relating to fair value of our target assets and interest income recognition; • our understanding of our competition; • changes to generally accepted accounting principles in the United States of America ("U.S. GAAP"); • the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and • market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this Report. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in this Report. 28 Table of Contents Executive Summary We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS") and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we invest in the following: • 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"); • To-be-announced securities forward contracts ("TBAs") to purchase Agency RMBS; • Commercial mortgage loans, • U.S. Treasury securities; and • Other real estate-related financing arrangements. We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification. We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P. (the “Operating Partnership”). We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), an indirect wholly-owned subsidiary of Invesco Ltd. ("Invesco"). We have 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 definition of "Investment Company" under the 1940 Act. Market Conditions 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. 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 1.98%, down from 3.29% last quarter, while the 5 year breakeven rate fell from 2.62% to 2.16%. 29 Table of Contents 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. Office, multi-family and industrial property sectors continue to post relatively lower delinquency levels. Loans secured by office properties have benefited from long-term tenant leases and industrial warehouse properties have benefited from growing online shopping, as online retailers have demanded more space to support their fulfillment process. Despite 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 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. 30 Table of Contents Investment Activities The table below shows the composition of our investment portfolio as of September 30, 2022, December 31, 2021 and September 30, 2021: As of $ in thousands September 30, 2022 December 31, 2021 September 30, 2021 Agency RMBS: 30 year fixed-rate, at fair value 4,252,742 7,701,523 8,725,908 Agency CMO, at fair value 59,389 30,757 29,103 Non-Agency CMBS, at fair value 37,256 62,909 63,783 Non-Agency RMBS, at fair value 7,604 9,070 9,208 Commercial loan, at fair value 23,649 23,515 22,268 Investments in unconsolidated ventures 3,475 12,476 12,426 Subtotal 4,384,115 7,840,250 8,862,696 TBAs, at implied cost basis (1) 142,842 1,636,906 1,552,969 Total investment portfolio, including TBAs 4,526,957 9,477,156 10,415,665 (1) Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs that we do not intend to physically settle on the contractual settlement date as derivative financial instruments. We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. For further details of our U.S GAAP accounting for TBAs, refer to Note 8 "Derivatives and Hedging Activities" in Part I. Item 1 of this report on Form 10-Q. Our TBA dollar roll transactions are a form of off-balance sheet financing. For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below. 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. As of September 30, 2022 December 31, 2021 September 30, 2021 $ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage 2.0% — — % 2,408,404 31.3 % 3,829,453 43.9 % 2.5% — — % 2,877,568 37.3 % 2,453,797 28.1 % 3.0% 201,298 4.7 % 2,178,476 28.3 % 2,190,944 25.1 % 3.5% — — % 237,075 3.1 % 251,714 2.9 % 4.0% 855,876 20.2 % — — % — — % 4.5% 1,548,557 36.4 % — — % — — % 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 % Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles. We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments. Specified pools typically consist of characteristics such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, non-owner occupied loans (investment and vacation properties) and higher geographic concentrations in states such as New York, Florida and Texas. In addition, specified pools with certain loan age and servicers can also exhibit prepayment tendencies that may be attractive. 31 Table of Contents We invest in TBAs as an alternative means of investing in and financing Agency RMBS. 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 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. Until the ventures complete their liquidation, we are committed to fund $6.0 million in additional capital to cover future expenses should they occur. Financing and Other Liabilities We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to SOFR. The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter. $ in thousands Collateralized borrowings under repurchase agreements Quarter Ended Quarter-end balance Average quarterly balance (1) Maximum balance (2) September 30, 2021 7,873,798 7,846,536 7,886,360 December 31, 2021 6,987,834 7,442,784 7,776,070 March 31, 2022 5,837,420 6,218,445 6,636,913 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. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. Hedging Instruments We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR. To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of our overall risk management strategy. Prior to the transition of our interest rate swap portfolio to swaps that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps were generally indexed to one- or three-month LIBOR. We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the nine months ended September 30, 2022, we terminated existing interest rate swaps with a notional amount of $9.2 32 Table of Contents 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 $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 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 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 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 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 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. The reverse stock split was effected following the close of business on June 3, 2022. For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split. Book Value per Common Share We calculate book value per common share as follows. As of In thousands except per share amounts September 30, 2022 December 31, 2021 Numerator (adjusted equity): Total equity 761,209 1,402,135 Less: Liquidation preference of Series B Preferred Stock (113,441) (155,000) Less: Liquidation preference of Series C Preferred Stock (195,412) (287,500) Total adjusted equity 452,356 959,635 Denominator (number of shares): Common stock outstanding 35,352 32,987 Book value per common share 12.80 29.09 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 33 Table of Contents quarter, resulting in the sector’s worst nine-month performance on record. Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value. Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies and estimates that are disclosed in our most recent Form 10-K for the year ended December 31, 2021. Recent Accounting Standards None. 34 Table of Contents Results of Operations The table below presents certain information from our condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021. 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) Weighted average number of shares of common stock: Basic 34,050,718 29,719,628 33,345,920 26,069,862 Diluted 34,050,718 29,721,306 33,345,920 26,069,862 (1) Negative interest expense on repurchase agreements in 2021 is due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements. For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity" in Part I. Item 1. of this report on Form 10-Q. 35 Table of Contents Interest Income and Average Earning Asset Yields The table below presents information related to our average earning assets and earning asset yields for the three and nine months ended September 30, 2022 and 2021. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Average earning assets (1) 4,568,855 8,713,515 5,403,538 8,955,315 Average earning asset yields (2) 4.35 % 1.98 % 3.37 % 1.88 % (1) Average balances for each period are based on weighted month-end balances. (2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized. Our primary source of income is interest earned on our investment portfolio. 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 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 September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Interest Income Mortgage-backed and other securities - coupon interest 49,224 51,998 140,673 155,001 Mortgage-backed and other securities - net (premium amortization) discount accretion (166) (9,341) (5,984) (30,276) Mortgage-backed and other securities - interest income 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 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 Our RMBS portfolio is subject to prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds are estimated on a quarterly basis. 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. 36 Table of Contents 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 Agency RMBS (355) (9,548) (6,861) (31,482) Non-Agency CMBS 328 480 1,340 2,203 Non-Agency RMBS (139) (273) (422) (997) U.S. Treasury Securities — — (41) — Net (premium amortization) discount accretion (166) (9,341) (5,984) (30,276) 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. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results. Interest Expense and Cost of Funds 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 Interest Expense Interest expense on repurchase agreement borrowings 22,863 2,329 34,212 8,289 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (5,601) (14,853) (16,398) Repurchase agreements interest expense 18,008 (3,272) 19,359 (8,109) Total interest expense 18,008 (3,272) 19,359 (8,109) 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 $4.9 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. 37 Table of Contents 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 Total average borrowings (1) 3,907,724 7,846,240 4,720,478 8,044,655 Maximum borrowings during the period (2) 4,165,996 7,886,360 6,636,913 8,708,686 Cost of funds (3) 1.84 % (0.17) % 0.55 % (0.13) % (1) Average borrowings for each period are based on weighted month-end balances. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. (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 $3.3 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 nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 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 Interest expense on repurchase agreement borrowings 22,863 2,329 34,212 8,289 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (5,601) (14,853) (16,398) Repurchase agreements interest expense 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 Net interest rate margin 2.51 % 2.15 % 2.82 % 2.01 % 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 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 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. 38 Table of Contents Gain (Loss) on Investments, net The table below summarizes the components of gain (loss) on investments, net for the three and nine months ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Net realized gains (losses) on sale of MBS (120,418) (4,451) (974,444) (239,304) 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) 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 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. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of September 30, 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 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 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 nine months ended September 30, 2021. (Increase) Decrease in Provision for Credit Losses 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 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 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). Earnings and losses of unconsolidated ventures are driven by the underlying portfolio investments. 39 Table of Contents Gain (Loss) on Derivative Instruments, net We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods. $ 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 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. 40 Table of Contents 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 Interest Rate Swaps (1) 5,800,000 0.45 % 2.98 % 6.5 6,300,000 0.30 % 0.05 % 5.7 (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: none). We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates. 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 September 30, 2022, we had $140.0 million notional amount of TBAs (December 31, 2021: $1.6 billion). 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 nine months ended September 30, 2022 and three and nine months ended September 30, 2021 consisted of foreign currency transaction gains and losses. Expenses 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 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 $2.0 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). General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs. Gain on Repurchase and Retirement of Preferred Stock In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three and nine months ended September 30, 2022, we repurchased and retired 1,618,546 shares and 1,662,366 shares 41 Table of Contents 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 nine months ended September 30, 2021. Net Income (Loss) attributable to Common Stockholders 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 $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; (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 The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S. GAAP measures. We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below. Non-GAAP Financial Measure Most Directly Comparable U.S. GAAP Measure Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds) Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin) Economic debt-to-equity ratio Debt-to-equity ratio The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies. 42 Table of Contents Earnings Available for Distribution Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; gain on repurchase and retirement of preferred stock; (gain) loss on foreign currency transactions, net and amortization of net deferred (gain) loss on de-designated interest rate swaps. By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies. However, because not all of our peer companies use identical operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by our peer companies. We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate. We added the gain on repurchase and retirement of preferred stock as a reconciling item to our earnings available for distribution calculation in the second quarter of 2022 because the gain does not represent earnings on our investment portfolio. To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We have historically distributed at least 100% of our REIT taxable income. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs. Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs. 43 Table of Contents The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to earnings available for distribution for the following periods. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands, except per share data 2022 2021 2022 2021 Net income (loss) attributable to common stockholders (94,602) 49,286 (447,562) (59,436) Adjustments: (Gain) loss on investments, net 260,837 16,830 1,090,101 276,067 Realized (gain) loss on derivative instruments, net (1) (62,877) (38,093) (487,538) (164,396) Unrealized (gain) loss on derivative instruments, net (1) (40,527) (1,364) (21,618) 15,141 TBA dollar roll income (2) 2,159 9,316 27,415 29,541 Gain on repurchase and retirement of preferred stock (12,688) — (14,179) — (Gain) loss on foreign currency transactions, net (3) — (1) (44) (1) Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) (4,855) (5,601) (14,853) (16,398) Subtotal 142,049 (18,913) 579,284 139,954 Earnings available for distribution 47,447 30,373 131,722 80,518 Basic income (loss) per common share (2.78) 1.66 (13.42) (2.28) Earnings available for distribution per common share (5) 1.39 1.02 3.95 3.09 (1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Realized gain (loss) on derivative instruments, net 62,877 38,093 487,538 164,396 Unrealized gain (loss) on derivative instruments, net 40,527 1,364 21,618 (15,141) Contractual net interest income (expense) on interest rate swaps 30,145 (4,175) 44,995 (13,296) Gain (loss) on derivative instruments, net 133,549 35,282 554,151 135,959 (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency securities, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations. (3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the condensed consolidated statements of operations. (4) U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Interest expense on repurchase agreement borrowings 22,863 2,329 34,212 8,289 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (5,601) (14,853) (16,398) Repurchase agreements interest expense 18,008 (3,272) 19,359 (8,109) (5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding. Earnings available for distribution per common share has been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022. 44 Table of Contents The table below shows the components of earnings available for distribution for the following periods. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2022 2021 2022 2021 Effective net interest income (1) 57,010 36,678 147,240 104,761 TBA dollar roll income 2,159 9,316 27,415 29,541 Equity in earnings (losses) of unconsolidated ventures (6) 344 (287) 581 (Increase) decrease in provision for credit losses — — — 1,768 Total expenses (5,854) (7,571) (20,290) (22,050) Subtotal 53,309 38,767 154,078 114,601 Dividends to preferred stockholders (5,862) (8,394) (22,356) (29,401) Issuance and redemption costs of redeemed preferred stock — — — (4,682) Earnings available for distribution 47,447 30,373 131,722 80,518 (1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure. Earnings available for distribution increased during the three months ended September 30, 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 We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs. We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance. 45 Table of Contents 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 September 30, 2022 2021 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds Total interest expense 18,008 1.84 % (3,272) (0.17) % Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 4,855 0.50 % 5,601 0.29 % Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (30,145) (3.09) % 4,175 0.21 % Effective interest expense (7,282) (0.75) % 6,504 0.33 % Nine Months Ended September 30, 2022 2021 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds Total interest expense 19,359 0.55 % (8,109) (0.13) % Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 14,853 0.42 % 16,398 0.27 % Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (44,995) (1.27) % 13,296 0.22 % Effective interest expense (10,783) (0.30) % 21,585 0.36 % 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. 46 Table of Contents 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 September 30, 2022 2021 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 31,720 2.51 % 46,454 2.15 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (0.50) % (5,601) (0.29) % Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 30,145 3.09 % (4,175) (0.21) % Effective net interest income 57,010 5.10 % 36,678 1.65 % Nine Months Ended September 30, 2022 2021 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 117,098 2.82 % 134,455 2.01 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (14,853) (0.42) % (16,398) (0.27) % Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 44,995 1.27 % (13,296) (0.22) % Effective net interest income 147,240 3.67 % 104,761 1.52 % 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. 47 Table of Contents Economic Debt-to-Equity Ratio The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of September 30, 2022 and December 31, 2021. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity. As of September 30, 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. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage. September 30, 2022 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 4,312,131 44,860 4,356,991 Cash and cash equivalents (2) 163,590 — 163,590 Restricted cash (3) 100,775 — 100,775 Derivative assets, at fair value (3) 11,161 66 11,227 Other assets 25,516 27,606 53,122 Total assets 4,613,173 72,532 4,685,705 Repurchase agreements 3,887,291 — 3,887,291 Derivative liabilities, at fair value (3) 3,695 — 3,695 Other liabilities 30,754 2,756 33,510 Total liabilities 3,921,740 2,756 3,924,496 Total stockholders' equity (allocated) 691,433 69,776 761,209 Debt-to-equity ratio (4) 5.6 — 5.1 Economic debt-to-equity ratio (5) 5.8 — 5.3 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. (3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class. (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($142.8 million as of September 30, 2022) to total stockholders' equity. 48 Table of Contents December 31, 2021 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 7,732,281 71,978 7,804,259 Cash and cash equivalents (2) 357,134 — 357,134 Restricted cash (3) 219,918 — 219,918 Derivative assets, at fair value (3) — 270 270 Other assets 25,728 36,532 62,260 Total assets 8,335,061 108,780 8,443,841 Repurchase agreements 6,987,834 — 6,987,834 Derivative liabilities, at fair value (3) 14,356 — 14,356 Other liabilities 35,596 3,920 39,516 Total liabilities 7,037,786 3,920 7,041,706 Total stockholders' equity (allocated) 1,297,275 104,860 1,402,135 Debt-to-equity ratio (4) 5.4 — 5.0 Economic debt-to-equity ratio (5) 6.6 — 6.2 (1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio. (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. (3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class. (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.6 billion as of December 31, 2021) to total stockholders' equity. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. 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 $264.4 million at September 30, 2022 (September 30, 2021: $486.2 million). 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 $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 $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 nine months ended September 30, 2022 (September 30, 2021: $13.4 billion to purchase MBS). 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). 49 Table of Contents 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 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 $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 $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. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately. Effects of Margin Requirements, Leverage and Credit Spreads Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a "margin call," which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition. We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods. Forward-Looking Statements Regarding Liquidity 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. Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities. We are also committed to fund $6.0 million in additional capital to our unconsolidated joint ventures to cover future expenses should they occur. Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses. Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through 50 Table of Contents public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Dividends To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 12 – "Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, 2021. Unrelated Business Taxable Income We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income. Other Matters We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended 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. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of September 30, 2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act. 51 Table of Contents Exposure to Financial Counterparties We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty. As of September 30, 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. However, our repurchase agreements are generally denominated in U.S. dollars. $ in thousands Number of Counterparties Repurchase Agreement Financing Exposure North America 11 2,192,393 98,365 Europe (excluding United Kingdom) 2 264,118 10,628 Asia 3 1,008,408 43,784 United Kingdom 1 422,372 14,562 Total 17 3,887,291 167,339