What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-17 · 260 added, 323 removed, 681 unchanged (46% of the section changed)

3 unchanged sentences

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

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

• 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;

• Other real estate-related financing arrangements.

We have also historically invested in the following:

• CMBS that are guaranteed by a U.S.

government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);

• Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);

• Residential mortgage loans.

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.

(our “Operating Partnership”).

We are externally managed and advised by Invesco Advisers, Inc.

(our “Manager”), an indirect wholly-owned subsidiary of Invesco Ltd.

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 an “Investment Company” under the 1940 Act.

Factors Impacting Our Operating Results

5 unchanged sentences

Market Conditions

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

Financial conditions eased significantly over the first half of 2021, as markets responded to an encouraging decrease in COVID-19 cases and deaths.

However, the easing of conditions peaked at mid-year and tightened during the second half of the year as a resurgence of COVID-19 cases and concerns over large increases in inflation caused investors to turn cautious.

These concerns have only increased as we enter the first weeks of 2022, as more aggressive removal of stimulus by the Federal Reserve becomes priced into the market and is reflected in tighter financial conditions.

Despite the tighter conditions of the second half of 2021, the equity markets were strong throughout the year, with the S&P 500 Index increasing by 26.9% during 2021, including a gain of 10.6% during the fourth quarter.

The NASDAQ gained 21.4% for the year, including an increase of 8.3% during the fourth quarter.

Equities have dropped sharply to start 2022, however, with the S&P down 5.3% and the NASDAQ down 9.0% through the end of January.

The employment picture improved steadily throughout the course of 2021, with gains in nonfarm payrolls averaging 537,000 for the year and 365,000 during the fourth quarter.

The unemployment rate also improved markedly, declining from 6.7% at end of 2020 to 3.9% at the end of 2021.

Consumer activity was positive during the year, with most of the increases in consumer spending and retail sales skewed towards the first half of the year, as the resurgence in COVID-19 cases and sharp increases in price levels took their toll during the second half of 2021.

Consumer confidence measures also reflected this dynamic, showing confidence levels peaking around mid-year before dropping during the second half of 2021.

Interest rates rose across the yield curve during 2021, as market expectations of increases to the Federal Funds target rate by the Federal Open Market Committee ( “ FOMC ” ) impacted shorter maturities and increases in inflation affected longer dated maturities.

During 2021, the yield on the 2 year Treasury note increased 61 basis points to 0.73%, the yield on the 5 year Treasury increased 90 basis points to 1.26% and the yield on the 10 year Treasury ended the year at 1.51%, up 60 basis points.

Most of the rate increases that occurred on the short end of the curve occurred during the fourth quarter, as the 2 year increased 46 basis points during the quarter, reflecting a dramatic repricing of Federal Funds futures contracts caused by an equally dramatic increase in prices.

At year-end, the pricing of these contracts reflected an expectation that the FOMC will increase the Federal Funds target rate by approximately 125 basis points by mid-2023 as compared to an expectation of no increases at the end of 2020.

Unsurprisingly, interest rate volatility also increased drastically throughout the year, particularly when measured against shorter term interest rates.

One of the largest concerns for both the markets and the FOMC during 2021 has been the severe rise in inflation.

The personal consumption expenditure index ended 2021 with an increase to 4.9% compared to 1.5% at the end of 2020.

L ikewise, commodities also saw significant increases during 2021, with West Texas Intermediate crude oil recording a 58.8% increase and the Commodity Research Bureau commodity index gaining 38.5%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”) , which reflect investors' expectations of future inflation, have broken out to levels not seen in several years.

The inflation rate implied by 2 year and 5 year TIPs was 3.22% and 2.91%, respectively, at the end of the year.

CMBS risk premiums increased in the fourth quarter of 2021 due to elevated new issuance, renewed COVID-19 concerns resulting from the Omicron variant, higher inflation and increased interest rate volatility.

Despite these concerns, the economy continued to show signs of improvement.

This pick-up in economic activity has translated to improving employment levels, increased commercial real estate activity and continued property price appreciation.

While commercial mortgage loan delinquencies remain elevated across many property types, they continue to decline from their post-pandemic peak levels.

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

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.

The housing market has staged a robust recovery since the onset of the COVID-19 pandemic, driven in part by low mortgage rates and tight supply conditions.

Demographic trends and changes in housing preferences shaped by the pandemic

have contributed to solid demand, especially for single family homes.

This strength is reflected in rapid home price appreciation, which has only recently begun to moderate.

Meanwhile, credit spreads on residential mortgage-backed securities have reversed the widening that occurred in March 2020, but finished 2021 well off the lows reached earlier in the year.

Nevertheless, many individual homeowners have been adversely impacted by the economic consequences of the COVID-19 pandemic.

government has responded by passing a number of fiscal stimulus measures and relief programs for households and businesses directly or indirectly impacted by the virus.

Stimulus payments and the provision of borrower relief including forbearance and loan modifications have substantially reduced borrower defaults and loan losses relative to levels that would have likely occurred without these actions.

Agency RMBS significantly underperformed over the course of 2021, marking the sector’s worst total return since 2013 and the worst year of performance relative to U.S.

Treasuries since 2011.

Increased interest rate volatility and elevated market expectations for more restrictive monetary policy were particularly harmful for low coupon 30 year Agency RMBS, which benefited the most from the Federal Reserve’s response to the COVID-19 pandemic.

In addition, net purchases of $580 billion from the Federal Reserve and nearly $400 billion by commercial banks was mostly offset by heavy supply from mortgage originators, which eclipsed record levels in 2021 reaching approximately $870 billion of net issuance.

During the second half of 2021, Agency RMBS performance was negatively impacted by the market’s anticipation that the Federal Reserve’s MBS purchase program would be slowed or stopped in an effort to remove accommodative policies in its fight against inflation.

While prepayment speeds remained elevated, premiums on specified pool Agency RMBS fell in 2021 as investor demand for prepayment protection waned given higher mortgage rates.

Prepayment speeds should moderate in the months ahead, as seasonal factors and higher mortgage rates dampen housing and refinancing activity.

The dollar roll market for low coupon TBAs continues to be attractive, as implied financing rates remained negative given persistent demand from the Federal Reserve and commercial banks.

Overall, we remain cautious on the Agency RMBS sector, as more restrictive monetary policy and worsening supply and demand technicals may weigh on valuations.

As we move into 2022, investors are focused first and foremost on the Federal Reserve and how their removal of policy accommodation to fight persistent inflation will impact rates and risk assets.

Another concern is the impact of the ongoing COVID-19 pandemic, and how the trajectory of new cases might impact economic activity.

These concerns leave us with a cautious outlook for the coming year.

Proposed Changes to LIBOR

The FCA, which regulates LIBOR announced on March 5, 2021 that it will cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023.

The ARRC, the U.S.

working group tasked with assisting in the industry wide transition away from LIBOR, has supported the FCA’s announcement of USD LIBOR cessation and has recommended the market adopt SOFR.

To accelerate the transition away from LIBOR, the Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued joint supervisory guidance to cease entering into new contracts referencing USD LIBOR after December 31, 2021 (note there are limited exceptions related to derivative product use).

We, similar to the broader industry, are transitioning away from LIBOR to alternative risk-free rates, such as SOFR.

We continue to actively monitor and adjust our LIBOR transition strategy and timeline as necessary.

Switching existing financial instruments from LIBOR to SOFR requires calculations of a spread.

There is no assurance that the calculated spread will be fair and accurate or that all financial instruments will use the same spread.

We have an investment in a commercial loan indexed to LIBOR that is scheduled to mature in 2022.

In addition, our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock each begin to pay a USD LIBOR-based rate at the time the stock becomes callable.

Our Series B and Series C Preferred Stock are governed by New York state law that provides for USD LIBOR-linked contracts to transition to an alternative reference rate for contracts.

We do not currently intend to amend our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock or our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock to change the existing USD LIBOR cessation fallback language.

The Financial Accounting Standards Board has issued accounting guidance that provides optional expedients and exceptions to contracts, hedging relationships and other transactions impacted by LIBOR transition if certain criteria are met.

The guidance can be applied through December 31, 2022.

In the fourth quarter of 2021, we transitioned our interest rate swaps that were indexed to LIBOR to interest rate swaps that are indexed to SOFR in a manner that allowed us to qualify for contract modification relief and maintain the same accounting for and presentation of interest rate swaps that was in place prior to modification.

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.

Of these macroeconomic factors, government policy initiatives, inflation, interest rates and interest rate volatility had the most direct impacts on our performance during 2022.

Contributing factors included:

• Financial conditions tightened steadily through the first three quarters of 2022 as the Federal Reserve’s Open Market Committee (“FOMC”) began an aggressive campaign of increasing the Federal Funds target rate a total of 425 basis points in response to inflation levels that had not been seen in decades.

This took the target from a range of 0% to 0.25% to a range of 4.25% to 4.50% to end the year.

• Given the uncertainty around Federal Reserve policy, interest rates were quite volatile during the year and the yield curve became inverted, meaning short term rates were higher than long term rates.

The yield on the 2 year Treasury rose by 369 basis points, to 4.07%, while the yield on the 10 year Treasury increased by 236 basis points, to 3.37%.

• The Federal Reserve concluded their net purchases of Agency RMBS in March, with runoff of their $2.7 trillion portfolio commencing in June.

In addition, commercial banks sharply reduced their purchases of Agency RMBS in 2022 as well, as the decline in bank deposits, increase in loan activity, and regulatory capital challenges diminished their appetite for securities.

These market participants had been the largest sources of demand for the sector since the onset of the COVID-19 pandemic.

Table of Conten t s

Agency RMBS underperformed Treasuries over the course of 2022, ending the year with one of the worst total returns for the sector on record.

In addition to the factors discussed above, performance was negatively impacted by market expectations for further restrictive monetary policy.

Prepayment speeds slowed as borrowers faced a sharp increase in mortgage rates, but this reduction in supply was offset by the decrease in demand from the Federal Reserve and commercial banks discussed above.

Production coupon mortgages underperformed their Treasury hedges, trailing by approximately 360 basis points, while payups on specified pool collateral fell as the value of prepayment protection was reduced amidst higher mortgage rates and slowing prepayment speeds.

Dollar rolls for TBA investments, which had been a bright spot during most of the year, underperformed in the second half of the year as mortgage rates increased and production waned.

The following market conditions were also notable for the company in 2022:

• Most risk assets were under considerable pressure during 2022 with the S&P 500 suffering a loss of 19.4%, while the NASDAQ was down 33.1% as a result of rising interest rates and high inflation.

Financial conditions eased somewhat during the fourth quarter, as confidence began to grow that inflation had peaked and the FOMC was nearing the end of their tightening cycle.

Equity performance was mixed during the fourth quarter, as the S&P 500 advanced by 7.1% and the NASDAQ lost 1%.

• The employment picture remained a bright spot as gains in non-farm payrolls averaged 375,000 per month, for a total of 4.5 million jobs added during the year.

The unemployment rate improved during the year, decreasing from 3.9% at the end of 2021 to 3.5% in December.

• Consumer activity held up well through most of the year, with retail sales remaining generally positive before moderating during the fourth quarter.

Higher prices weighed on consumer confidence measures, however, as sentiment fell throughout the first three quarters before rebounding slightly along with financial conditions.

• Year-over-year price growth, as measured by the consumer price index (“CPI”), peaked at a 40 year high of 9.1% in June, before slowing steadily during the second half of the year, ending 2022 at 6.5%.

Likewise, commodities also saw significant increases during 2022, with West Texas Intermediate crude oil recording a 16.7% increase and the Commodity Research Bureau commodity index gaining 19.5%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”), which reflect investors' expectations of future inflation, indicating confidence that the FOMC will be successful at bringing inflation levels significantly lower as the inflation rate implied by 2 year and 5 year TIPs was 2.31% and 2.38%, respectively, at the end of the year.

• CMBS risk premiums increased due to monetary policy tightening and moderating improvement of commercial real estate fundamentals.

Commercial real estate occupancy and rental rates began to stabilize across most property sectors while headwinds for property valuations increased given elevated borrowing costs.

Despite an increase in the fourth quarter, CMBS loan delinquencies finished the year lower and remain significantly below COVID-19 peak levels.

The lodging and retail sector reported the highest level of CMBS loan delinquencies while multi-family and industrial property sectors continued to post relatively lower delinquency levels.

We expect fundamental improvement to continue to moderate as the pace of positive net absorption slows and lending conditions tighten.

• While tight supply and stable underlying demand persisted for most of 2022, the housing market recovery that began in 2021 slowed and ultimately reversed due to the dramatic increase in mortgage rates.

National home prices declined during the second half of the year, but still finished higher compared to 2021.

Despite the potential for a slowing economy, borrower defaults are likely to remain contained given strong loan underwriting and high levels of borrower equity.

As we enter 2023, both the FOMC and the Federal Funds futures market expect additional rate increases during the first half of the year, with market expectations reflecting approximately 0.50% of additional hikes.

While further changes in monetary policy by the Federal Reserve may bring challenges in the coming months, we believe that a potential reduction in interest rate volatility combined with compelling valuations and favorable funding conditions will support an attractive investment environment for Agency RMBS in 2023.

Table of Conten t s

Investment Activities

17 unchanged sentences

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

We sold $16.3 billion and purchased $17.1 billion of Agency RMBS during the year ended December 31, 2021.

We rotated our Agency RMBS throughout the year into securities that have higher yields, in some cases to change coupon rate or the type of specified pool collateral.

Purchases were funded with proceeds from the sales, paydowns of securities and by leveraging proceeds from the issuance of common stock.

As of December 31, 2021 and 2020 our holdings of 30 year fixed-rate Agency RMBS represented 81% of our total investment portfolio, including TBAs.

Our 30 year fixed-rate Agency RMBS holdings as of December 31, 2021 and 2020 consisted of specified pools with coupon distributions as shown in the table below.

We sold $27.3 billion and purchased $25.7 billion of Agency RMBS during the year ended December 31, 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, paydowns of securities and by leveraging proceeds from the issuance of common stock.

As of December 31, 2022 and 2021 our holdings of 30 year fixed-rate Agency RMBS represented 97% and 81% of our total investment portfolio, including TBAs, respectively.

The table below shows the coupon distributions of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2022 and 2021.

As of December 31,

5 unchanged sentences

4.5% 1,392,304 29.9 % — — %

5.0% 1,694,939 36.4 % — — %

5.5% 1,574,494 33.7 % — — %

Total 30 year fixed-rate Agency RMBS 4,661,737 100.0 % 7,701,523 100.0 %

Our purchases of Agency RMBS have been primarily focused on specified pools with prepayment protection, as low mortgage rates and a robust housing market have increased borrower incentives to prepay their mortgage loans.

We seek to mitigate the negative impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that diminish borrower incentive to prepay, such as a lower loan balance, higher loan-to-value (“LTV”) ratio, lower FICO score, higher percentage of non-owner occupied loans (investment and vacation properties) and newly originated loans.

In addition, we focus a significant amount of purchases in specified pools that have higher geographic concentrations in states that exhibit slower prepayments such as New York, Florida and Texas.

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.

The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2022 and 2021.

Table of Conten t s

As of December 31,

$ in thousands Fair Value Percentage Fair Value Percentage

Specified pool characteristic:

Geographic location 1,302,391 27.9 % 2,125,213 27.6 %

Loan balance 1,033,014 22.2 % 921,716 12.0 %

Generic 158,230 3.4 % 1,991,947 25.9 %

High loan-to-value ("LTV") ratio 750,724 16.1 % 648,529 8.4 %

Low credit score 1,417,378 30.4 % 865,992 11.2 %

Investment property — — % 1,148,126 14.9 %

Total 30 year fixed-rate Agency RMBS 4,661,737 100.0 % 7,701,523 100.0 %

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

As of December 31, 2021, the implied cost basis of TBAs represented approximately 17% of our total investment portfolio, versus 18% as of December 31, 2020.

Our investments consist of 30-year Agency RMBS TBAs with coupons that range from 2.5% to 3.0% in conventional collateral.

We maintain a meaningful allocation to TBAs given attractive implied financing rates in the Agency RMBS TBA dollar roll market.

Implied financing rates in the dollar roll market were below those available in the repurchase market due to

the magnitude and persistence of the Federal Reserve's MBS purchase program, which began to increase holdings in March 2020.

The Federal Reserve began reducing net purchases of Agency RMBS in the fourth quarter of 2021, and net purchases are expected to end in March 2022.

It is likely the Federal Reserve will continue to reinvest all or a portion of paydowns on their MBS portfolio in the subsequent quarters, which would continue to support the Agency RMBS TBA dollar roll market.

As of December 31, 2022, the implied cost basis of TBAs did not represent a material amount of our total investment portfolio, versus 17% as of December 31, 2021.

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.

As of December 31, 2022 and 2021, our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs.

2 unchanged sentences

As of December 31, 2022 and 2021, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs.

We historically held non-Agency RMBS securities collateralized by prime and Alt-A loans and invested in re-securitizations of real estate mortgage investment conduit (“Re-REMIC”) RMBS and securitizations of reperforming mortgage loans.

As of December 31, 2021, we held an investment in one commercial real estate mezzanine loan that is due in February 2022 and has a LTV ratio of approximately 68.0%.

In February 2022, we received a request from the borrower to extend the contractual maturity of the commercial loan investment to May 29, 2022.

Refer to Note 15 – “Subsequent Events” of our consolidated financial statements in Part IV, Item 15 of this Report for additional information.

As of December 31, 2021,we held an investment in one commercial real estate mezzanine loan that had an LTV ratio of approximately 68.0%.

The loan was repaid in full in October 2022.

As of December 31, 2022, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

2 unchanged sentences

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.

We finance the majority of investment portfolio through repurchase agreements.

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.

We also used secured loans from the FHLBI to finance a portion of our investment portfolio.

We repaid our secured loans during 2020 with proceeds from sales of assets that collateralized the secured loans.

We terminated our membership in FHLBI in the third quarter of 2020.

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans 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 and secured loans

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)

10 unchanged sentences

(2) Amount represents the maximum borrowings at month-end during each of the respective periods.

Table of Conten t s

Hedging Instruments

11 unchanged sentences

To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of our overall risk management strategy.

Prior to the transition of our swap portfolio to swaps that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps were generally indexed to one- or three-month LIBOR.

We actively manage our swap portfolio by terminating and entering into new swaps as the size and composition of our investment portfolio changes.

During the year ended December 31, 2021, we terminated existing swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion as part of our overall risk management strategy.

These amounts exclude $7.3 billion of terminations and additions related to the transition of our swap portfolio from swaps that were indexed to LIBOR to swaps that are indexed to SOFR in the fourth quarter of 2021, as well as terminations and additions of forward starting swaps.

Prior to transitioning interest rate swaps 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 year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new interest rate swaps with a notional amount of $10.1 billion, excluding interest rate swaps with forward start dates, as part of our overall risk management strategy.

Daily variation margin payment 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 consolidated statement of operati ons.

We realized a net gain of $593.0 million on interest rate swaps during the year ended December 31, 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 December 31, 2021, we had €11.7 million or $13.6 million (2020:

€27.8 million or $33.1 million) of notional amount of forward contracts related to our investment in an unconsolidated venture.

We have entered into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies.

We did not have any currency forward contracts outstanding as of December 31, 2022.

As of December 31, 2021 we had €11.7 million or $13.6 million notional amount of forward contracts related to our investment in an unconsolidated venture.

During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million (2021:

€83.4 million or $93.4 million) in notional amount and realized a net gain of $209,000 (2020:

$1.3 million net loss).

€70.8 million or $84.8 million) in notional amount related to our investment in an unconsolidated venture and realized a net gain of $919,000 (2021:

$209,000 net gain).

Capital Activities

In February 2021, we completed a public offering of 27,600,000 shares of common stock at the price of $3.75 per share.

Total net proceeds were approximately $103.1 million after deducting estimated offering costs.

In June 2021, we completed a public offering of 43,125,000 shares of common stock at the price of $3.39 per share.

Total net proceeds were approximately $145.9 million after deducting offering expenses.

On June 16, 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock for $140.0 million plus accrued and unpaid dividends.

The cash redemption price for each share of Series A Preferred Stock was 25.00.

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 year ended December 31, 2021.

As of December 31, 2021, we may sell up to 56,865,980 shares of our common stock and 5,500,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

During the year ended December 31, 2021, we sold 55,744,020 shares of common stock for proceeds of $180.5 million, net of approximately $2.6 million in commissions and fees, under our equity distribution agreements.

During the year ended December 31, 2020, we sold 21,849,740 shares of common stock for proceeds of $73.7 million, net of approximately $1.2 million in commissions and fees, under our equity distribution agreements.

During the year ended December 31, 2022, we sold 5,686,598 shares of common stock under our equity distribution agreement with placement agents for proceeds of $81.6 million, net of approximately $1.3 million in commissions and fees.

During the year ended December 31, 2021, we sold 5,574,402 shares of common stock under our equity distribution agreements for proceeds of $180.5 million, net of approximately $2.6 million in commissions and fees.

We did not have any remaining shares authorized under our at-the-market program as of December 31, 2022.

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

During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.

As of December 31, 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, unless otherwise noted.

For information on dividends declared and paid during the year ended December 31, 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.

During the year ended December 31, 2022, we did not repurchase any shares of our common stock.

Table of Conten t s

Book Value per Common Share

11 unchanged sentences

Book value per common share 12.79 29.09 38.61

Our book value per common share decreased 56% as of December 31, 2022 compared to December 31, 2021 as Agency RMBS were negatively impacted by interest rate volatility, sharply higher interest rates, an inverted yield curve and market expectations for even more restrictive monetary policy, resulting in one of the sector's worst total returns on record.

Our book value per common share decreased 25% as of December 31, 2021 compared to December 31, 2020.

1 unchanged sentence

Book value per common share further decreased in the second half of 2021 as the Federal Reserve's announced tapering and subsequent acceleration of the pace of tapering in December 2021 negatively impacted Agency RMBS valuations.

Our book value per common share decreased 76.3% as of December 31, 2020 compared to December 31, 2019 primarily due to realized and unrealized losses on investments and derivatives during the year ended December 31, 2020 resulting from the unprecedented market disruption caused by the COVID-19 pandemic.

Refer to Item 7A.

21 unchanged sentences

It is possible that changes in these inputs could change the valuation estimate and lead us to establish allowances for credit losses on our available-for-sale MBS.

Table of Conten t s

Further information is provided in Note 2 - “Summary of Significant Accounting Policies” and Note 4 - “Mortgage-Backed and Credit Risk Transfer Securities.”

21 unchanged sentences

Interest income on GSE CRTs purchased on or after August 24, 2015 was based on estimated future cash flows.

Interest income from our commercial and other loans is recognized when earned and deemed collectible or until a loan becomes past due based on the terms of the loan agreement.

Interest income from our commercial and other loans was recognized when earned and deemed collectible.

Accounting for Derivative Financial Instruments.

6 unchanged sentences

Further information is provided in Note 8 - “Derivatives and Hedging Activities” of our consolidated financial statements included in Part IV, Item 15 of this Report.

Expected Impact of New Authoritative Guidance on Future Financial Information

In January 2021, the Financial Accounting Standards Board expanded existing accounting guidance for evaluating the effects of reference rate reform on financial reporting.

The new guidance expands the temporary optional expedients and exceptions to U.S.

GAAP for contract modifications, hedge accounting and other relationships that reference LIBOR to apply to

all derivative instruments affected by the market-wide change in the interest rates used for discounting, margining or contract price alignment (commonly referred to as the discounting transition).

The new guidance can be applied through December 31, 2022.

We have an investment in a commercial loan indexed to LIBOR that is scheduled to mature in 2022.

In addition, our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock each become callable at the time the stock begins to pay a LIBOR-based rate.

Our Series B and Series C Preferred Stock are governed by New York state law.

The state of New York has approved legislative solutions for U.S.

dollar LIBOR-linked contracts to transition to an alternative rate for contracts that are governed by New York state law.

We do not currently intend to amend our Series B or Series C Preferred Stock to change the existing LIBOR cessation fallback language.

Table of Conten t s

Results of Operations

3 unchanged sentences

Interest income

Mortgage-backed and credit risk transfer securities 167,056 277,400 772,657

Mortgage-backed and other securities 192,566 167,056 277,400

Commercial and other loans 1,947 2,146 2,766

9 unchanged sentences

(Increase) decrease in provision for credit losses — 1,768 (1,768)

Equity in earnings of unconsolidated ventures 870 1,163 2,224

Equity in earnings (losses) of unconsolidated ventures (407) 870 1,163

Gain (loss) on derivative instruments, net 559,007 122,611 (851,050)

6 unchanged sentences

Total expenses 25,324 29,233 40,230

Net income (loss) attributable to Invesco Mortgage Capital Inc.

(90,000) (1,674,352) 364,101

Net income (loss) (402,924) (90,000) (1,674,352)

Dividends to preferred stockholders (28,218) (37,795) (44,426)

Gain on repurchase and retirement of preferred stock 14,179 — —

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

9 unchanged sentences

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 IV, Item 15 of this report on Form 10-K.

Table of Conten t s

Interest Income and Average Earning Asset Yields

10 unchanged sentences

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

We had average earning assets of approximately $8.8 billion during the year ended December 31, 2021 (2020:

We had average earning assets of $5.1 billion during the year ended December 31, 2022 (2021:

$8.8 billion;

$7.9 billion).

Average earning assets decreased for the year ended December 31, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases 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 year ended December 31, 2022 compared to 2021 primarily due to our rotation into higher yielding Agency RMBS.

Average earning assets increased for the year ended December 31, 2021 compared to 2020 as we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

Average earning assets decreased during the year ended December 31, 2020 compared to 2019.

As previously discussed, we experienced unprecedented market conditions as a result of the COVID-19 pandemic and sold a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage.

The yield on our average earning assets during the year ended December 31, 2021 was 1.92% (2020:

Our average earning asset yields decreased during the year ended December 31, 2021 compared to 2020 and during the year ended December 31, 2020 compared to 2019 primarily due to changes in our portfolio composition.

We earned interest income of $169.2 million (2020:

Average earning asset yields decreased during the year ended December 31, 2021 compared to 2020 due to changes in our portfolio composition.

We earned total interest income of $194.5 million during 2022 (2021:

$169.2 million;

$778.4 million) during 2021.

Our interest income consists of coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.

$280.2 million).

Our interest income consists of coupon interest and net (premium amortization) discount accretion on MBS and other securities as well as interest income on commercial and other loans as shown in the table below.

Years Ended December 31,

1 unchanged sentence

Interest Income

MBS and GSE CRT - coupon interest 207,506 298,613 833,376

MBS and GSE CRT - net premium amortization (40,450) (21,213) (60,719)

MBS and GSE CRT - interest income 167,056 277,400 772,657

Mortgage-backed and other securities - coupon interest 198,290 207,506 298,613

Mortgage-backed and other securities - net (premium amortization) discount accretion (5,724) (40,450) (21,213)

Mortgage-backed and other securities - interest income 192,566 167,056 277,400

Commercial and other loans 1,947 2,146 2,766

Total interest income 194,513 169,202 280,166

MBS and GSE CRT interest income decreased $110.3 million for the year ended December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease in average earning asset yields.

Mortgage-backed and other securities interest income increased $25.5 million for the year ended December 31, 2022 compared to 2021 despite lower average earning assets due to a 187 basis point increase in average earning asset yields.

Interest income on our commercial loan decreased during the year ended December 31, 2022 compared to 2021 primarily due to the repayment of the commercial loan in October 2022 .

Mortgage-backed and other securities interest income decreased $110.3 million for the year ended December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease in average earning asset yields.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

We did not hold any GSE CRTs as of December 31, 2021 or December 31, 2020.

MBS and GSE CRT interest income decreased $495.3 million during the year ended December 31, 2020 compared to 2019 primarily due to a $534.8 million decrease in coupon interest reflecting lower average earning assets.

Lower coupon interest was partially offset by a $39.5 million decrease in net premium amortization during the year ended December 31, 2020 primarily due to sales of assets purchased at premiums.

Interest income on our commercial and other loans decreased $2.9 million during the year ended December 31, 2020, primarily due to the sale of our loan participation interest in April 2020 and repayments on commercial loan investments.

Table of Conten t s

Prepayment Speeds

2 unchanged sentences

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

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

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

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

The following table presents net (premium amortization) discount accretion recognized on our MBS and GSE CRT portfolio during 2021, 2020 and 2019.

The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio during 2022, 2021 and 2020.

Years Ended December 31,

5 unchanged sentences

GSE CRT — — (2,560)

Treasury Securities (41) — —

Net (premium amortization) discount accretion (5,724) (40,450) (21,213)

Net premium amortization decreased $34.7 million during 2022 compared to 2021 primarily as a result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Net premium amortization increased $19.2 million during 2021 compared to 2020 primarily due to sales of non-Agency CMBS purchased at discounts and the purchase of Agency RMBS at premiums during the second half of 2020 and in 2021.

Net premium amortization decreased $39.5 million during 2020 compared to 2019 due to sales of assets purchased at premiums and slower prepayment speeds on newly issued Agency RMBS purchased in the second half of 2020.

Our interest income is subject to interest rate risk.

2 unchanged sentences

Interest Expense and Cost of Funds

The table below presents the components of interest expense for the years ended December 31, 2021, 2020 and 2019.

Years ended December 31,

$ in thousands 2021 2020 2019

Interest Expense

Interest expense on repurchase agreement borrowings 10,710 97,401 454,426

Amortization of net deferred (gain) loss on de-designated interest rate swaps (22,000) (23,794) (23,729)

Repurchase agreements interest expense (11,290) 73,607 430,697

Secured loans — 8,655 41,623

Total interest expense (11,290) 82,262 472,320

Our interest expense on repurchase agreement borrowings decreased $86.7 million for the year ended December 31, 2021 compared to 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds rate.

Our interest expense on repurchase agreement borrowings decreased $357.0 million for the year ended December 31, 2020 compared to 2019 primarily due to lower average borrowings and a lower average cost of funds reflecting decreases in the Federal Funds rate.

Average borrowings decreased primarily due to repayments of repurchase agreements in the first half of 2020 with proceeds from asset sales due to financial market disruption caused by the COVID-19 pandemic as previously discussed.

Average borrowings also decreased due to repayment of $1.65 billion of secured loans during 2020.

Our repurchase agreements interest expense includes amortization of deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

Amounts recorded in accumulated other comprehensive income (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the 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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $22.0 million, $23.8 million and $23.7 million during the years ended December 31, 2021, December 31, 2020 and December 31, 2019, respectively.

During the next twelve months, we estimate that $19.7 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.

We repaid our secured loans during 2020 and did not incur interest expense for secured loans during the year ended December 31, 2021.

Interest expense for our secured loans decreased for the year ended December 31, 2020 compared to 2019 primarily due to the repayment of $1.65 billion of secured loans during 2020 and lower borrowing rates.

Before modification, borrowing rates on our secured loans were based on the three-month FHLB swap rate plus a spread.

After modification, borrowing rates on our secured loans were based on the FHLBI's short-term cost of funds.

For the year ended December 31, 2020, our secured loans had a weighted average borrowing rate of 1.47% as compared to 2.52% for the year ended December 31, 2019.

Our total interest expense during the year ended December 31, 2021 decreased $93.6 million compared to 2020 primarily due to a decrease of $95.3 million in interest expense on repurchase agreement borrowings and secured loans.

Our total interest expense during the year ended December 31, 2020 decreased $390.1 million compared to 2019 primarily due to a $390.0 million decrease in interest expense on repurchase agreement borrowings and secured loans.

The table below presents our average borrowings and cost of funds for the years ended December 31, 2022, 2021 and 2020.

10 unchanged sentences

(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.

Table of Conten t s

Total average borrowings decreased $3.4 billion in 2022 compared to 2021 as we reduced the size of our investment portfolio and related repurchase agreement borrowings given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Our cost of funds increased 129 basis points in 2022 compared to 2021 primarily due to increases in the Federal Funds target rate.

Total average borrowings increased $965.8 million in 2021 compared to 2020 because we resumed investing in Agency RMBS in July 2020 and financing purchases with repurchase agreements.

The increase in repurchase agreement borrowings was partially offset by the repayment of $1.65 billion of secured loans during 2020.

Total average borrowings decreased $11.8 billion in 2020 compared to 2019 because we repaid $10.3 billion of net repurchase agreements and $1.65 billion of secured loans during 2020.

Our cost of funds decreased in 2021 compared to 2020 and in 2020 compared to 2019 primarily due to decreases in the Federal Funds rate.

Our cost of funds decreased 133 basis points in 2021 compared to 2020 primarily due to decreases in the Federal Funds target rate.

The table below presents the components of interest expense for the years ended December 31, 2022, 2021 and 2020.

Years ended December 31,

$ in thousands 2022 2021 2020

Interest Expense

Interest expense on repurchase agreement borrowings 71,268 10,710 97,401

Amortization of net deferred (gain) loss on de-designated interest rate swaps (19,708) (22,000) (23,794)

Repurchase agreements interest expense 51,560 (11,290) 73,607

Secured loans — — 8,655

Total interest expense 51,560 (11,290) 82,262

Our interest expense on repurchase agreement borrowings increased $60.6 million for the year ended December 31, 2022 compared to 2021 due to a higher cost of funds.

Our interest expense on repurchase agreement borrowings decreased $86.7 million for the year ended December 31, 2021 compared to 2020 due to a lower cost of funds.

Our repurchase agreements interest expense as reported in our 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 $19.7 million, $22.0 million and $23.8 million during the years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively.

We expect to reclassify the remaining $10.4 million of net unrealized gains recorded in AOCI as a decrease to interest expense on repurchase agreements on the consolidated statements of operations in 2023.

We repaid our secured loans during 2020 and did not incur interest expense for secured loans during the years ended December 31, 2022 and 2021.

Table of Conten t s

Net Interest Income

3 unchanged sentences

Interest Income

Mortgage-backed and credit risk transfer securities 167,056 277,400 772,657

Mortgage-backed and other securities 192,566 167,056 277,400

Commercial and other loans 1,947 2,146 2,766

11 unchanged sentences

$197.9 million).

The decrease in net interest income for the year ended December 31, 2021 compared to 2020 and for the year ended December 31, 2020 compared to 2019 was primarily due to the sale of MBS and GSE CRTs in the first half of 2020 as previously discussed.

The decrease in net interest income for the year ended December 31, 2022 compared to 2021 was primarily due to higher interest expense as the Federal Reserve raised the Federal Funds target rate.

Our short-term borrowings are generally more sensitive to changes in interest rates than our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.

The decrease in net interest income for 2021 compared to 2020 was primarily due to the sale of MBS and GSE CRT in the first half of 2020 as previously discussed.

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 2.64% for the year ended December 31, 2022 (2021:

The increase in net interest rate margin for the year ended December 31, 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.

The decrease in net interest rate margin for 2021 compared to 2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings.

The increase in net interest rate margin for 2020 compared to 2019 was primarily due to the change in our portfolio composition, including related repurchase agreement borrowings, due to assets sales and decreases in the Federal Funds rate that had a greater impact on our average cost of funds than on our average earning asset yields.

Gain (Loss) on Investments, net

2 unchanged sentences

$ in thousands 2022 2021 2020

Net realized gains (losses) on sale of investments (281,224) (363,781) 8,039

Net realized gains (losses) on sale of MBS and GSE CRT (1,163,910) (281,224) (363,781)

Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments — — (101,138)

Other-than-temporary impairment losses — — (7,731)

Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option 118,365 (85,702) (492,047)

Net unrealized gains (losses) on commercial loan 404 417 (1,164)

Net realized gains (losses) on U.S.

Treasury securities (34,198) — —

Realized loss on loan participation interest — — (3,808)

Total gain (loss) on investments, net (1,079,339) (366,509) (961,938)

Table of Conten t s

During the year ended December 31, 2022, we sold MBS for cash proceeds of $27.3 billion (2021:

MBS and GSE CRTs of $25.0 billion;

MBS and GSE CRTs of $3.3 billion) and realized net losses of $281.2 million (2020:

MBS of $16.3 billion;

MBS and GSE CRTs of $25.0 billion) and realized net losses of $1.2 billion (2021:

net losses of $281.2 million;

net gains of $8.0 million).

Realized net losses during the year ended December 31, 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

net losses of $363.8 million).

Realized net losses during the year ended December 31, 2022 and 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We sold securities during the year ended December 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our repurchase agreement counterparties seized and sold our securities when we were unable to meet margin calls in March 2020.

We did not record any impairment during the years ended December 31, 2021 or 2019 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

We did not record any impairment during the years ended December 31, 2022 and 2021 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

We recorded $94.1 million of impairment on non-Agency RMBS and CMBS securities during the year ended December 31, 2020, because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

5 unchanged sentences

$7.7 billion or 99%) of our MBS are accounted for under the fair value option.

We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for under the fair value option of $85.7 million in 2021 compared to net unrealized losses of $492.0 million in 2020 and unrealized gains of $624.2 million in 2019.

Net unrealized losses in 2021 primarily reflect wider interest rate spreads on our Agency RMBS.

Net unrealized losses in the year ended December 31, 2020 reflect declines in valuations due to wider interest rate spreads.

Net unrealized gains in 2019 reflect lower interest rates, tighter interest rate spreads on credit assets and Agency CMBS and valuation gains in specified pool Agency RMBS.

We recorded unrealized gains of $417,000 and unrealized losses of $1.2 million on our commercial loan investment during the years ended December 31, 2021 and 2020, respectively.

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

We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $118.4 million in 2022 (2021:

net unrealized losses of $85.7 million on our MBS portfolio accounted for under the fair value option;

net unrealized losses of $492.0 million on our MBS and GSE CRT portfolio accounted for under the fair value option).

Net unrealized gains in the year ended December 31, 2022 reflect reclassifications on securities that were sold as well as tighter spreads and favorable rates on assets held at year end.

Net unrealized losses in the years ended December 31, 2021 and 2020 primarily reflect wider interest rate spreads.

In October 2022, our commercial loan with a principal balance of $23.9 million was repaid in full.

We recorded unrealized gains of $404,000 and $417,000 on our commercial loan investment during the years ended December 31, 2022 and 2021, respectively, and unrealized losses of $1.2 million during the year ended December 31, 2020.

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

We recorded a realized loss of $3.8 million on our loan participation interest during year ended December 31, 2020.

We sold the loan participation interest on April 1, 2020.

We sold the loan participation interest in April 2020.

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

Treasury securities during the year ended December 31, 2022 due to rising interest rates.

We did not invest in U.S.

Treasury securities during the years ended December 31, 2021 and 2020.

(Increase) Decrease in Provision for Credit Losses

As of December 31, 2022, approximately $42.5 million of our $4.8 billion of MBS are classified as available-for-sale and subject to evaluation for credit losses.

We recorded a provision for credit losses of $1.8 million on single non-Agency CMBS for the year ended December 31, 2020 based on a comparison of the security's amortized cost basis to discounted expected cash flows.

We recorded a $1.8 million decrease in the provision for credit losses d uring the year ended December 31, 2021 because the security fully repaid in June 2021.

We did not record any provisions for credit losses during the year ended December 31, 2022.

We recorded a provision for credit losses of $1.8 million on a single non-Agency CMBS for the year ended December 31, 2020.

We recorded a $1.8 million decrease in the provision for credit losses during the year ended December 31, 2021 because the security fully repaid in June 2021.

Refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report for additional information on how we calculate our provision for credit losses.

Equity in Earnings (Losses) of Unconsolidated Ventures

For the year ended December 31, 2021, we recorded equity in earnings of unconsolidated ventures of $870,000 (2020:

$1.2 million;

$2.2 million).

We recorded equity in earnings for the years ended December 31, 2021, 2020 and 2019 primarily due to earnings on the underlying portfolio investments.

For the year ended December 31, 2022, we recorded equity in losses of unconsolidated ventures of $407,000 (2021:

equity in earnings of $870,000;

equity in earnings of $1.2 million).

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

Gain (Loss) on Derivative Instruments, net

2 unchanged sentences

Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations.

Table of Conten t s

The tables below summarize the components of our gain (loss) on derivative instruments, net for the years ended December 31, 2022, 2021 and 2020:

5 unchanged sentences

Interest Rate Swaps 593,035 86,872 11,426 691,333

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 919 — (271) 648

7 unchanged sentences

Interest Rate Swaps 185,232 (15,803) (5,869) 163,560

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 209 — 970 1,179

7 unchanged sentences

Interest Rate Swaps (857,753) 8,047 (24,068) (873,774)

Futures Contracts (157,929) — 7,836 (150,093)

Currency Forward Contracts (1,301) — (345) (1,646)

TBAs 14,477 — 9,893 24,370

Total (844,577) 8,047 (14,520) (851,050)

During the year ended December 31, 2021, we terminated existing interest rate swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion, excluding terminations and additions related to the transition of our interest rate swaps to swap that are indexed to SOFR in the fourth quarter of 2021 and terminations and additions of forward starting swaps.

During the year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new swaps with a notional amount of $10.1 billion, excluding terminations and additions of forward starting swaps.

We realized a net gain of $593.0 million on interest rate swaps during the year ended December 31, 2022 due to rising interest rates.

2 unchanged sentences

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

In March 2020, we terminated all of our outstanding interest rate swaps as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

During the year ended December 31, 2021, we terminated existing swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion, excluding terminations and additions related to the transition of interest rate swaps to swaps that are indexed to SOFR in the fourth quarter of 2021 and terminations and additions of forward starting swaps.

We realized a net gain of $185.2 million on interest rate swaps during the year ended December 31, 2021 due to rising interest rates.

In March 2020, we terminated interest rate swaps as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

1 unchanged sentence

We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

During the year ended December 31, 2019, we terminated existing swaps with a notional amount of $25.3 billion and entered into new swaps with a notional amount of $27.0 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities.

We realized a net loss of $440.6 million on interest rate swaps in 2019 primarily due to falling interest rates.

As of December 31, 2021 and 2020, we held interest rate swaps whereby we receive interest at a variable rate as shown in the table below.

As of December 31, 2021, our interest rate swaps received variable interest based upon SOFR.

As of December 31, 2020, our interest rate swaps received variable interest based upon one-month LIBOR.

Table of Conten t s

As of December 31, 2022 and 2021, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR.

$ in thousands December 31, 2022 December 31, 2021

2 unchanged sentences

5,800,000 0.45 % 4.30 % 6.3 6,300,000 0.30 % 0.05 % 5.7

(1) Notional amount as of December 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

As of December 31, 2021, we held interest rate swaps whereby we pay variable interest based upon SOFR as shown in the table below.

We did not hold any interest rate swaps that paid floating interest as of December 31, 2020.

$ in thousands December 31, 2021

Derivative instrument Notional Amounts Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity

(1) Excludes $975.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will receive floating interest based upon SOFR (December 31, 2021:

$1.3 billion).

As of December 31, 2022 and 2021, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest.

$ in thousands December 31, 2022 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)

We have also used futures contracts to manage our exposure to interest rate risk.

We were not party to any futures contracts as of December 31, 2021, 2020 or 2019.

During the year ended December 31, 2019, we realized net losses of $157.9 million on the settlement of futures contracts due to falling interest rates.

D aily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our consolidated statement of operations.

2,350,000 4.30 % 2.78 % 9.3 1,750,000 0.05 % 0.98 % 4.9

(1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will pay floating interest based upon SOFR (December 31, 2021:

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

As of December 31, 2021, we had $13.6 million (December 31, 2020:

$33.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.

As of December 31, 2022, we did not have any currency forward contracts outstanding.

As of December 31, 2021 we had $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 December 31, 2021, we had $1.6 billion notional amount of TBAs and recorded $41.6 million of realized and unrealized losses during the year ended December 31, 2021 primarily due to the sharp increase in mortgage rates during the first quarter of 2021.

As of December 31, 2022, we did not have a net notional amount of TBAs.

During the year ended December 31, 2022, we recorded $133.0 million of realized and unrealized losses on TBAs primarily due to rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

As of December 31, 2021, we had $1.6 billion notional amount of TBAs and recorded $41.6 million of realized and unrealized losses on TBAs during the year ended December 31, 2021 primarily due to a sharp increase in mortgage rates in the first quarter of 2021.

As of December 31, 2020, we had $1.7 billion notional amount of TBAs and recorded $24.4 million of realized and unrealized gains during the year ended December 31, 2020.

We were not party to any TBAs accounted for as derivatives during 2019.

Realized and Unrealized Credit Derivative Income (Loss), net

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the years ended December 31, 2020 and 2019.

Years Ended December 31,

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the year ended December 31, 2020.

Year Ended December 31

$ in thousands 2020

4 unchanged sentences

During the year ended December 31, 2020 , we recorded realized and unrealized credit derivative losses of $41.6 million, excluding embedded derivative coupon interest.

T he decrease from 2019 was primarily driven by a decline in the fair value of our GSE CRT embedded derivatives as asset prices declined due to spread widening.

We sold all of our GSE CRTs that were accounted for as hybrid financial instruments with embedded derivatives during the year ended December 31, 2020.

Table of Conten t s

Net Gain (Loss) on Extinguishment of Debt

2 unchanged sentences

Other Investment Income (Loss), net

Other investment income (loss), net in 2020 and 2019 primarily consists of quarterly dividends from FHLBI stock.

The amount of our dividend income varied based upon the number of shares that we were required to own and the dividend declared per share.

FHLBI redeemed our stock at cost during 2020.

We terminated our FHLBI membership in the third quarter of 2020.

Our other investment income, net for the years ended December 31, 2022 and 2021 consisted of foreign currency transaction gains and losses.

Other investment income, net for the year ended December 31, 2020 primarily consisted of quarterly dividends on FHLBI stock.

Other investment income (loss), net decreased during the year ended December 31, 2021 compared to 2020 due to the redemption of our FHLBI stock.

The table below summarizes the components of other investment income (loss), net for the years ended December 31, 2022, 2021 and 2020:

4 unchanged sentences

Total 186 1 2,137

Other investment income (loss), net decreased during the year ended December 31, 2021 compared to 2020 and during the year ended December 31, 2020 compared to 2019 due to the redemption of our FHLBI stock.

For the year ended December 31, 2022, we incurred management fees of $16.9 million (2021:

11 unchanged sentences

General and administrative costs were lower for the year ended December 31, 2021 compared to 2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $2.6 million in 2020.

General and administrative costs were higher for the year ended December 31, 2020 compared to 2019 primarily due to these fees.

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 year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.

The difference between the consideration transferred and the carrying value of the preferred stock resulted in a gain attributable to common stockholders of $14.2 million during the year ended December 31, 2022.

Issuance and Redemption Costs of Redeemed Preferred Stock

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

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

Table of Conten t s

Net Income (Loss) attributable to Common Stockholders

For the year ended December 31, 2022, our net loss attributable to common stockholders was $417.0 million (2021:

$1.7 billion net loss attributable to common stockholders;

$319.7 million net income attributable to common stockholders) or $0.48 basic and diluted net loss per average share available to common stockholders (2020:

$132.5 million net loss attributable to common stockholders;

$1.7 billion net loss attributable to common stockholders) or $12.21 basic and diluted net loss per average share available to common stockholders (2021:

$4.82 basic and diluted net loss per average share available to common stockholders;

$2.42 basic and diluted net income per average share available to common stockholders).

$98.93 basic and diluted net loss per average share available to common stockholders).

For the year ended December 31, 2022, the change in net loss attributable to common stockholders compared to 2021 was primarily due to:

(i) net losses on investments of $1.1 billion versus $366.5 million in the 2021 period;

(ii) net gains on derivative instruments of $559.0 million versus net gains on derivatives of $122.6 million in the 2021 period;

(iii) lower net interest income of $143.0 million versus $180.5 million in the 2021 period;

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

For the year ended December 31, 2021, the change in net loss attributable to common stockholders compared to 2020 was primarily due to:

(i) net losses on investments of $366.5 million versus $961.9 million in the 2020 period;

2 unchanged sentences

(iv) lower net interest income of $180.5 million versus $197.9 million in the 2020 period and (v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For the year ended December 31, 2020, we reported a net loss attributable to common stockholders compared to net income attributable to common stockholders in 2019 primarily due to:

(i) net losses on investments of $961.9 million versus net gains on investments of $624.5 million in the 2019 period;

(ii) net losses on derivative instruments of $851.1 million versus $534.8 million in the 2019 period;

(iii) net losses on credit derivatives of $35.3 million versus net gains on credit derivatives of $8.3 million in the 2019 period;

(iv) lower net interest income of $197.9 million versus $306.0 million in the 2019 period and (v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, realized and unrealized credit derivative income (loss), net changes in net interest income and net gain (loss) on extinguishment of debt in the 2021, 2020 and 2019 periods, see preceding discussion under “Gain (loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net”, “Realized and Unrealized Credit Derivative Income (Loss), net”, “Net Interest Income” and “Net Gain (Loss) on Extinguishment of Debt”.

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

Non-GAAP Financial Measures

8 unchanged sentences

Economic debt-to-equity ratio Debt-to-equity ratio

Commencing with the quarter ended June 30, 2021, we changed the title of our non-GAAP measure of core earnings (and by calculation, core earnings per common share) to earnings available for distribution (and by calculation, earnings available for distribution per common share) to clarify what the measure presents.

The adjustments made to reconcile net income (loss) attributable to common stockholders to earnings available for distribution are identical to those adjustments that we previously made to determine core earnings.

We adjust our calculations of non-GAAP financial measures for changes in the composition of our investment portfolio where appropriate.

We have historically excluded the impact of realized and unrealized gains and losses on GSE CRT embedded derivatives from the calculation of earnings available for distribution.

Beginning in 2021, realized and unrealized gains and losses on GSE CRT embedded derivatives no longer impacted the reconciliation of U.S.

GAAP net income (loss) attributable to common stockholders to earnings available for distribution because we sold all of our GSE CRTs that were accounted for as hybrid financial instruments during 2020.

Additionally, we have historically calculated effective interest income (and by calculation, effective yield) as U.S.

GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net.

As we no longer earn embedded derivative coupon interest due to the sale of our GSE CRTs during 2020, effective interest income is equal to U.S.

GAAP total interest income beginning in 2021.

We did not present earnings available for distribution for the year ended December 31, 2020 because earnings available for distribution excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

In addition, earnings available for the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio.

The non-GAAP financial measures used by management should be analyzed in conjunction with U.S.

2 unchanged sentences

In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.

Earnings Available for Distribution (formerly Core Earnings)

In addition, earnings available for the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio.

Table of Conten t s

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.

4 unchanged sentences

unrealized (gain) loss on derivative instruments, net;

realized and unrealized (gain) loss on GSE CRT embedded derivatives, net;

TBA dollar roll income;

(gain) loss on foreign currency transactions, net;

amortization of net deferred (gain) loss on de-designated interest rate swaps;

and net (gain) loss on extinguishment of debt.

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.

7 unchanged sentences

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.

7 unchanged sentences

GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs.

Table of Conten t s

The table below provides a reconciliation of U.S.

8 unchanged sentences

(12,669) 17,743

Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)

TBA dollar roll income (2)

28,843 40,058

Gain on repurchase and retirement of preferred stock (14,179) —

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

12 unchanged sentences

Gain (loss) on derivative instruments, net 559,007 122,611

GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components:

Years Ended December 31,

$ in thousands 2021 2019

Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net — (12,490)

GSE CRT embedded derivative coupon interest — 20,833

Realized and unrealized credit derivative income (loss), net — 8,343

(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.

3 unchanged sentences

TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our consolidated statements of operations.

GAAP other investment income (loss), net on the consolidated statements of operations includes the following components:

Years Ended December 31,

$ in thousands 2021 2019

Dividend income — 3,944

Gain (loss) on foreign currency transactions, net 1 6

Other investment income (loss), net 1 3,950

(3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the consolidated statements of operations.

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

4 unchanged sentences

Repurchase agreements interest expense 51,560 (11,290)

Table of Conten t s

(5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding.

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

The components of earnings available for distribution for the years ended December 31, 2022 and 2021 are:

4 unchanged sentences

TBA dollar roll income 28,843 40,058

Dividend income — 3,944

Equity in earnings (losses) of unconsolidated ventures (407) 870

6 unchanged sentences

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

Earnings available for distribution for the year ended December 31, 2021 was driven by effective net interest income and TBA dollar roll income.

Earnings available for distribution for the year ended December 31, 2019 was driven by effective net interest income.

Earnings available for distribution increased for the year ended December 31, 2022 compared to 2021 primarily due to an increase in effective net interest income.

See below for a discussion of the change in effective net interest income.

As discussed above, we did not report earnings available for distribution for the year ended December 31, 2020.

9 unchanged sentences

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 on our interest rate swap agreements to our total U.S.

We add back the net payments or receipts 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.

4 unchanged sentences

We believe the presentation of effective interest income, effective yield, 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, provide information that is useful to investors in understanding our borrowing costs and operating performance.

GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance.

Table of Conten t s

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:

4 unchanged sentences

GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net — — % — — % 6,323 0.08 %

— — % 6,323 0.08 % 20,833 0.11 %

Effective interest income 194,513 3.79 % 169,202 1.92 % 286,489 3.63 %

Our effective interest income increased for the year ended December 31, 2022 versus 2021, despite lower average earnings assets, due to a 187 basis point increase in effective yields resulting from our rotation in higher yielding Agency RMBS.

Our effective interest income decreased for the year ended December 31, 2021 versus 2020 due to lower asset yields primarily as a result of our asset sales in the first half of 2020.

1 unchanged sentence

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

Our effective interest income decreased for the year ended December 31, 2020 versus 2019 primarily due to lower average earning assets.

Our average earning assets decreased to $7.9 billion for the year ended December 31, 2020 from $20.6 billion for the year ended December 31, 2019 primarily because we sold a substantial portion of our MBS and GSE CRT portfolio during the first half of 2020 due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed.

Changes in effective yield for the year ended December 31, 2020 versus 2019 are primarily due to changes in our portfolio composition.

The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

9 unchanged sentences

(15,604) (0.34) % 26,513 0.34 % 98,009 1.41 %

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2021 versus 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds rate.

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $15.8 million during the year ended December 31, 2021 compared to $8.0 million of contractual net interest income for the same period in 2020.

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2020 versus 2019 primarily due to lower interest expense paid on repurchase agreements.

We recorded total interest expense of $82.3 million for the year ended December 31, 2020 compared to $472.3 million for the same period in 2019 due to lower average borrowings and a lower Federal Funds rate.

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2022 versus 2021 despite an increase in total interest expense, which reflects increases in the Federal Funds target rate, due to $86.9 million of contractual net interest income on interest rate swaps compared to $15.8 million of contractual net interest expense in 2021.

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

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $15.8 million for the year ended December 31, 2021 compared to $8.0 million of contractual net interest income for the same period in 2020.

Table of Conten t s

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:

10 unchanged sentences

210,117 4.13 % 142,689 1.58 % 188,480 2.22 %

Effective net interest income for the year ended December 31, 2021 decreased versus 2020 primarily due to lower asset yields as a result of our asset sales in the first half of 2020 that were partially offset by a lower average cost of funds reflecting decreases in the Federal Funds rate.

Effective interest rate margin for the year ended December 31, 2021 decreased versus 2020 due to changes in portfolio composition.

Effective net interest income for the year ended December 31, 2020 decreased versus 2019 primarily due to lower average earning asset balances that were partially offset by lower average borrowings and a lower effective cost of funds driven

by cuts in the Federal Funds rate.

Effective interest rate margin for the year ended December 31, 2020 increased versus 2019 due to changes in portfolio composition, including related repurchase agreement borrowings, and a lower Federal Funds rate.

Effective net interest income and effective interest rate margin increased for the year ended December 31, 2022 versus 2021 due to changes in contractual net interest income (expense) on interest rate swaps and an increase in total interest income resulting from our rotation into higher yielding Agency RMBS, which were partially offset by higher total interest expense and a higher average cost of funds resulting from increases in the Federal Funds target rate.

Effective net interest income decreased for the year ended December 31, 2021 versus 2020 primarily due to lower asset yields as a result of our asset sales in the first half of 2020 that were partially offset by a lower average cost of funds reflecting decreases in the Federal Funds target rate.

Effective interest rate margin deceased for the year ended December 31, 2021 versus 2020 due to changes in portfolio composition.

Economic Debt-to-Equity Ratio

8 unchanged sentences

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.

Table of Conten t s

December 31, 2022

16 unchanged sentences

Economic debt-to-equity ratio (5)

(1) Investments in non-Agency CMBS, non-Agency RMBS, commercial loans and unconsolidated joint ventures are included in credit portfolio.

(1) Investments in non-Agency CMBS, non-Agency RMBS 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.

1 unchanged sentence

(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.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.4 million as of December 31, 2022 ) to total stockholders' equity.

December 31, 2021

6 unchanged sentences

Derivative assets, at fair value (3)

9,893 111 10,004

Other assets 25,728 36,532 62,260

13 unchanged sentences

(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.

Table of Conten t s

Liquidity and Capital Resources

16 unchanged sentences

$577.1 million).

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

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 approximately $196.1 million for the year ended December 31, 2022 (2021:

1 unchanged sentence

$170.5 million).

Our investing activities provided net cash of $120.7 million for the year ended December 31, 2021 (2020:

provided net cash of $11.6 billion;

used net cash of $4.3 billion).

Our primary source of cash from investing activities during the year ended December 31, 2021 was $16.3 billion from the sale of MBS.

Our investing activities provided net cash of $2.4 billion for the year ended December 31, 2022 (2021:

$120.7 million;

$11.6 billion).

Our primary source of cash from investing activities during the year ended December 31, 2022 was proceeds from the sale of MBS of $27.3 billion and proceeds from the sale of U.S.

Treasury securities of $468.1 million.

We also generated $403.3 million from principal payments of MBS and received cash of $459.5 million to settle derivative contracts during the year ended December 31, 2022.

We used cash of $25.7 billion to purchase MBS and $502.3 million to purchase U.S.

Treasury securities during the year ended December 31, 2022.

During the year ended December 31, 2021, we sold MBS for proceeds of $16.3 billion.

We also generated $825.2 million from principal payments of MBS and received cash of $156.2 million to settle derivative contracts during the year ended December 31, 2021.

We used cash of $17.1 billion to purchase MBS during the year ended December 31, 2021.

3 unchanged sentences

We also used cash of $844.6 million on derivative contracts during the year ended December 31, 2020 primarily as we sold Agency securities and our sensitivity to interest rates decreased.

During the year ended December 31, 2019, we used cash to purchase $9.2 billion of MBS and GSE CRT securities.

Purchases were partially funded by principal payments from MBS and GSE CRT securities of $2.2 billion, proceeds from MBS and GSE CRT sales of $3.3 billion, and through investing and leveraging proceeds of common stock offerings.

Our financing activities used net cash of $88.6 million for the year ended December 31, 2021 (2020:

used net cash of $11.6 billion;

provided net cash of $4.1 billion).

Our financing activities used net cash of $2.9 billion for the year ended December 31, 2022 (2021:

$88.6 million;

2020:$11.6 billion).

Our financing activities for the year ended December 31, 2022 primarily consisted of net principal repayments on our repurchase agreements of $2.8 billion.

We paid dividends of $140.3 million and used $115.1 million to repurchase Series B and Series C Preferred Stock.

Proceeds from the issuance of common stock provided $81.9 million during the year ended December 31, 2022.

Our financing activities for the year ended December 31, 2021 primarily consisted of net principal repayments on our repurchase agreements of $240.9 million.

1 unchanged sentence

Proceeds from the issuance of common stock provided $430.5 million during the year ended December 31, 2021.

Table of Conten t s

Our financing activities for the year ended December 31, 2020 primarily consisted of net principal repayments on our repurchase agreements of $10.3 billion.

1 unchanged sentence

Proceeds from the issuance of common stock provided $420.7 million during the year ended December 31, 2020.

Our financing activities for the year ended December 31, 2019 primarily consisted of net proceeds from repurchase agreements of $3.9 billion.

We also raised proceeds of $509.1 million from the issuance of common stock and paid dividends of $271.2 million.

As of December 31, 2022, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.6% for Agency RMBS.

31 unchanged sentences

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

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

Such financing will depend on market conditions for capital raises and our ability to

Table of Conten t s

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.

32 unchanged sentences

Total 17 4,234,823 190,917

Table of Conten t s

Other Matters

14 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis