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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-02 · 287 added, 364 removed, 475 unchanged (58% of the section changed)

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together with its consolidated subsidiaries (which does not include us), as "Invesco."

The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the "SEC").

The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Quarterly Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Forward-Looking Statements

We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such statements are intended to be covered by the safe harbor provided by the same.

We make forward-looking statements in this Quarterly Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same.

Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control.

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

• the effects of health endemics, including the COVID-19 pandemic;

• unfavorable or changing economic, market or political conditions;

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

governmental agencies and changes to U.S.

government policies, actions and initiatives of foreign governmental agencies and central banks, and monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio, and our ability to respond to and comply with such actions, initiatives and changes;

• our business and investment strategy;

• our investment portfolio and expected investments;

• our projected operating results;

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

governmental agencies and changes to U.S.

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

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

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

• the availability of investment opportunities in mortgage-related, real estate-related and other securities;

• the availability of U.S.

Government Agency guarantees with regard to payments of principal and interest on securities;

• the impact of changes in the credit rating of the U.S.

• financing and advance rates for our target assets;

• the impact of changes in interest rates and interest rate spreads and the market value of our target assets;

• the potential interest rate mismatches between our target assets and our borrowings used to fund such investments;

• changes to our expected leverage;

• our expected book value per common share;

• our intention and ability to pay dividends;

• interest rate mismatches between our target assets and our borrowings used to fund such investments;

• the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;

• our ability to maintain sufficient liquidity to meet our short-term liquidity needs;

• changes in the credit rating of the U.S.

• changes in interest rates and interest rate spreads and the market value of our target assets;

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

• the adequacy of our cash flow from operations and borrowings, and our ability to maintain sufficient liquidity to meet our short-term liquidity needs;

• changes in prepayment rates on our target assets;

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• our reliance on third parties in connection with services related to our target assets;

• disruption of our information technology systems;

• the impact of potential data security breaches or other cyber-attacks or other disruptions;

• the effects of hedging instruments on our target assets;

• rates of default or decreased recovery rates on our target assets;

• modifications to whole loans or loans underlying securities;

• the degree to which our hedging strategies may or may not protect us from interest rate and foreign currency exchange rate volatility;

• the effects of hedging instruments, including, but not limited to, the degree to which our hedging strategies may or may not protect us from interest rate and foreign currency exchange rate volatility;

• the degree to which derivative contracts expose us to contingent liabilities;

• rates of default or decreased recovery rates on our target assets;

• counterparty defaults;

• compliance with financial covenants in our financing arrangements;

• changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes;

• modifications to whole loans or loans underlying securities;

• our ability to comply with financial covenants in our financing arrangements;

• disruption of our information technology systems;

• the impact of potential data security breaches or other cyber-attacks or other disruptions;

• changes in governmental regulations, and changes in zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes;

• our ability to maintain our qualification as a real estate investment trust for U.S.

federal income tax purposes;

• our ability to maintain our exception from the definition of "investment company" under the Investment Company Act of 1940, as amended (the "1940 Act");

• the availability of investment opportunities in mortgage-related, real estate-related and other securities;

• the availability of U.S.

Government Agency guarantees with regard to payments of principal and interest on securities;

• our ability to maintain our exception from the definition of “investment company” under the 1940 Act;

• the market price and trading volume of our capital stock;

• our ability to continue to generate taxable income and our ability to continue to make distributions to our stockholders in the future;

• our intention and ability to pay dividends;

• our dependence upon, and the relationship with, our Manager;

• the availability of qualified personnel from our Manager, and our Manager’s continued ability to find and retain such personnel;

• the relationship with our Manager;

• estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future;

• estimates relating to fair value of our target assets and interest income recognition;

• the accuracy of our estimates relating to fair value of our target assets and interest income recognition;

• our understanding of our competition;

• changes to generally accepted accounting principles in the United States of America ("U.S.

• the impact of changes to U.S.

• the adequacy of our disclosure controls and procedures and internal controls over financial reporting;

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Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

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

To achieve this objective, we invest in the following:

As of March 31, 2023, we were invested in:

• residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S.

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• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;

• Commercial mortgage loans,

Treasury securities;

• other real estate-related financing arrangements.

During the periods presented in this Quarterly Report, we also invested in:

• a commercial mortgage loan;

Treasury securities.

We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification.

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(the “Operating Partnership”).

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

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

We are externally managed and advised by our Manager, an indirect wholly-owned subsidiary of Invesco.

We have elected to be taxed as a real estate investment trust (“REIT”) for U.S.

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

Financial conditions tightened further during the third quarter as the Federal Reserve’s Open Market Committee (“FOMC”) increased the Federal Funds rate twice, by a total of 150 basis points, in response to inflation levels that persist at multi-decade highs.

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

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

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

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

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

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

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

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

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

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

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

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

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

The inflation rate implied by 2 year U.S.

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

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

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

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

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

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

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

Over the last year, U.S.

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

While commercial mortgage loan delinquencies remained elevated across many property types, they are materially lower than COVID-19 peak levels.

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

Office, multi-family and industrial property sectors continue to post relatively lower delinquency levels.

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

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

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

Demographic trends and changes in housing preferences shaped by the pandemic also contributed to demand, especially for single family homes.

This strength was reflected in rapid home price appreciation, which has moderated in recent months as affordability declined to historically low levels following the swift rise in mortgage rates.

After reversing much of the credit spread widening that occurred in March 2020, residential mortgage-backed securities valuations have been negatively impacted by challenging market conditions and increased macroeconomic volatility over the past several quarters.

Of these macroeconomic factors, government policy initiatives, inflation, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the first quarter of 2023.

Contributing factors included:

• Financial conditions improved during the first two months of the quarter, as credit spreads tightened, equity markets rallied and volatility eased.

However, these positive trends reversed in March as the health of the regional banking system came into question amid multiple bank failures.

In response, swift action by regulators, including the Federal Reserve, quickly calmed markets and allowed financial conditions to stabilize and end the quarter only slightly tighter.

• Given the uncertainty around the health of the banking system, interest rates rallied during the quarter, as the yield on the 2 year Treasury fell by 40 basis points, to 4.03%, while the yield on the 10 year Treasury decreased by 41 basis points, to 3.47%.

The Federal Reserve’s Open Market Committee (“FOMC”) continued its fight against inflation by increasing the Federal Funds target rate twice, taking the target to a range of 4.75% to 5.0%.

• After a strong start to the new year in January, Agency MBS lagged similar duration Treasuries in February and March, resulting in underperformance for the quarter.

Lower coupon Agency MBS sharply underperformed those higher in the coupon stack, as lower coupons were negatively impacted by two distinct events during the quarter.

First in February by the sharp increase in interest rates as the disinflationary trend in economic data slowed, and second in March by concerns regarding the timing of sales from Silicon Valley Bank and Signature Bank portfolios, which were highly concentrated in lower coupon Agency MBS.

The following market conditions were also notable for the company in the first quarter of 2023:

• Risk assets, with the exception of structured securities, performed well during the quarter.

The S&P 500 gained 7.0%, while the NASDAQ was up 16.8%.

Likewise, credit spreads across investment grade credit, high yield and emerging

market debt all finished the quarter tighter.

Debt backed by commercial real estate was negatively impacted by concerns that regional banks could be forced to sell assets.

• The employment picture remained strong as gains in non-farm payrolls averaged 345,000 per month, for a total of just over one million jobs added during the quarter.

The unemployment rate held steady, ending the quarter at 3.5%.

• Year-over-year price growth, as measured by the consumer price index (“CPI”), continued to moderate during the first quarter, declining from 6.5% at year-end to 5.0% at the end of the first quarter.

Commodity prices also moderated during the first quarter, with the Commodity Research Bureau commodity index falling 3.6%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”), which reflect investors' expectations of future inflation, continue to indicate 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 2.68% and 2.48%, respectively, at the end of the quarter.

• CMBS risk premiums increased due to declining real estate values, increased borrowing costs and tighter mortgage lending standards.

The pace of property rent growth is slowing and vacancy rates are increasing across many property types.

Meanwhile, reevaluation of tenant needs and a corresponding increase in the amount of available sublease space has created unique headwinds for the office sector.

CMBS loan delinquencies increased slightly over the quarter.

Industrial, multifamily and retail property loan delinquencies declined while the rate of office loan delinquencies increased notably.

• Credit spreads for non-Agency RMBS ended the quarter largely unchanged, as strong performance early in the period was undone by broader risk aversion into quarter end.

Although security valuations were driven primarily by market technicals, investors also focused on deterioration in housing fundamentals, particularly with respect to more credit sensitive profiles.

Home price declines resulting from historically low affordability have moderated in recent months as borrowing costs stabilized.

Meanwhile, low inventory, positive demographic trends, and shifts in housing preferences in favor of single-family properties have provided crucial support to the market.

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

Moving into the second quarter of 2023, pricing in the Federal Funds futures market indicates that the market expects one or two additional target rate increases during the second quarter.

While the timing of the end of the FOMC’s tightening cycle remains uncertain, we believe the conclusion of tightening monetary policy and 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.

Investment Activities

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

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

The table below shows the composition of our investment portfolio as of March 31, 2023, December 31, 2022 and March 31, 2022:

$ in thousands March 31, 2023 December 31, 2022 March 31, 2022

30 year fixed-rate, at fair value 5,320,942 4,661,737 5,861,979

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Non-Agency RMBS, at fair value 8,319 8,413 8,402

Treasury securities, at fair value — — 482,445

Commercial loan, at fair value — — 23,391

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

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

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

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

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

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

We sold $783.9 million and purchased $1.4 billion of Agency RMBS during the three months ended March 31, 2023.

As of March 31, 2023, our holdings of 30 year fixed-rate Agency RMBS represented approximately 98% of our total investment portfolio, including TBAs, versus 97% as of December 31, 2022 and 73% as of March 31, 2022.

Our 30 year fixed-rate Agency RMBS holdings as of March 31, 2023, December 31, 2022 and March 31, 2022 consisted of specified pools with coupon distributions as shown in the table below.

March 31, 2023 December 31, 2022 March 31, 2022

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

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5.5% 1,565,114 29.4 % 1,574,494 33.7 % — — %

5.5% 160,903 3.8 % — — % — — %

Total 30 year fixed-rate Agency RMBS 5,320,942 100.0 % 4,661,737 100.0 % 5,861,979 100.0 %

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We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments.

Specified pools typically consist of characteristics such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, non-owner occupied loans (investment and vacation properties) and higher geographic concentrations in states such as New York, Florida and Texas.

In addition, specified pools with certain loan age and servicers can also exhibit prepayment tendencies that may be attractive.

The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of March 31, 2023, December 31, 2022 and March 31, 2022.

March 31, 2023 December 31, 2022 March 31, 2022

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

Specified pool characteristic:

Geographic location 1,566,529 29.5 % 1,302,391 27.9 % 2,116,743 36.1 %

Loan balance 1,338,150 25.1 % 1,033,014 22.2 % 2,180,304 37.2 %

Generic — — % 158,230 3.4 % 372,955 6.4 %

High loan-to-value (“LTV”) ratio

956,556 18.0 % 750,724 16.1 % 807,451 13.8 %

Low credit score 1,459,707 27.4 % 1,417,378 30.4 % 384,526 6.5 %

Total 30 year fixed-rate Agency RMBS 5,320,942 100.0 % 4,661,737 100.0 % 5,861,979 100.0 %

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

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

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

As of March 31, 2023 and December 31, 2022 the implied cost basis of TBAs did not represent a material amount of our total investment portfolio, versus 19% as of March 31, 2022.

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

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

We anticipate this benefit to diminish in the coming quarters as the imbalance decreases due to an increase in production of higher coupon Agency RMBS.

As of September 30, 2022;

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

Our non-Agency CMBS portfolio is comprised of fixed-rate securities that were rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2022.

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

As of September 30, 2022;

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

As of September 30, 2022;

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

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

The loan was repaid in full in October 2022.

As of September 30, 2022;

December 31, 2021 and September 30, 2021, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

Both of the unconsolidated ventures are in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

Until the ventures complete their liquidation, we are committed to fund $6.0 million in additional capital to cover future expenses should they occur.

As of March 31, 2023;

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

Our non-Agency CMBS portfolio is comprised of fixed-rate securities that were rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2023.

Approximately 72% of non-Agency CMBS were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2023.

As of March 31, 2023;

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

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

Our joint venture whose net assets were denominated in euros was dissolved during the first quarter of 2023.

Our remaining unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.

Until the venture completes its liquidation, we are committed to fund $2.9 million in additional capital to cover future expenses should they occur.

Financing and Other Liabilities

We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to SOFR.

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 the secured overnight financing rate (“SOFR”).

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter.

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Maximum balance (2)

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

December 31, 2021 6,987,834 7,442,784 7,776,070

March 31, 2022 5,837,420 6,218,445 6,636,913

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

December 31, 2022 4,234,823 3,825,218 4,234,823

March 31, 2023 4,814,700 4,734,819 4,814,700

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

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Hedging Instruments

We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings.

We enter into interest rate swap agreements that are designed to mitigate the effects of changes in interest rates for a portion of our borrowings.

Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR.

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

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

We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes.

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

billion and entered into new interest rate swaps with a notional amount of $9.6 billion, excluding interest rate swaps with forward start dates, as part of our overall risk management strategy.

Daily variation margin pay ment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.

We realized a net gain of $625.1 million on interest rate swaps during the nine months ended September 30, 2022 primarily due to rising interest rates.

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

As of September 30, 2022, we had €1.6 million or $1.7 million (December 31, 2021:

€11.7 million or $13.6 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture.

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

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

$58,000 net gain).

During the three months ended March 31, 2023, we terminated existing interest rate swaps with a notional amount of $525.0 million.

In addition, one of our forward starting swaps held as of December 31, 2022 with a notional amount of $500.0 million began to bear interest during the three months ended March 31, 2023.

The remainder of our forward starting swaps begin to bear interest in July 2023.

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 condensed consolidated statement of operati ons.

We recorded net losses of $44.5 million on interest rate swaps for the three months ended March 31, 2023 primarily due to changes in forward interest rate expectations.

We have historically 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 March 31, 2023 or December 31, 2022.

Capital Activities

As of September 30, 2022, we may sell up to 3,358,793 shares of our common stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

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

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

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

For information on dividends declared during the nine months ended September 30, 2022 and 2021, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

As of March 31, 2023, we may sell up to 13,069,931 shares of our common stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

During the three months ended March 31, 2023, we sold 2,930,069 shares of common stock under our equity distribution agreement for proceeds of $35.8 million, net of approximately $482,000 in commissions and fees.

During the three months ended March 31, 2022 we did not sell any shares of common stock under equity distribution agreements.

For information on dividends declared during the three months ended March 31, 2023 and 2022, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

Item 1 of this report on Form 10-Q.

During the nine months ended September 30, 2022, we did not repurchase any shares of our common stock.

During the three months ended March 31, 2023, we did not repurchase any shares of our common stock.

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

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

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

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

We did not repurchase any preferred stock in the three months ended March 31, 2023.

As of March 31, 2023, 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.

For all periods presented, common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split.

Book Value per Common Share

We calculate book value per common share as follows.

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

In thousands except per share amounts March 31, 2023 December 31, 2022

Numerator (adjusted equity):

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Book value per common share 12.61 12.79

Our book value per common share decreased 56.0% as of September 30, 2022 compared to December 31, 2021 as the end of asset purchases by the Federal Reserve in March and escalating inflationary pressures led to increased expectations for tighter monetary policy and elevated market volatility.

Agency RMBS valuations were sharply lower for the third consecutive

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

Our book value per common share decreased 1.4% as of March 31, 2023 compared to December 31, 2022 due to modest underperformance in higher coupon Agency RMBS as the slowing of the recent disinflationary trend led to an increase in

interest rate volatility.

Refer to Item 3.

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Results of Operations

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

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

The table below presents information from our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

$ in thousands, except share data 2023 2022

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Gain (loss) on investments, net 51,956 (504,388)

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

Equity in earnings (losses) of unconsolidated ventures 2 71

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Dividends to preferred stockholders (5,862) (8,394)

Gain on repurchase and retirement of preferred stock 12,688 — 14,179 —

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

Net income (loss) attributable to common stockholders 15,601 (236,816)

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Interest Income and Average Earning Asset Yields

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

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

The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

$ in thousands 2023 2022

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

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

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

We had average earning assets of $5.2 billion for the three months ended March 31, 2023 (March 31, 2022:

$7.0 billion).

Average earning assets decreased for the three and nine months ended September 30, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

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

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

$43.2 million and $126.3 million).

The decrease in average earning assets for the three months ended March 31, 2023 compared to 2022 is primarily due to a reduction in the size of our investment portfolio and related repurchase agreement borrowings during 2022 given expectations that elevated market volatility could result in lower valuations on our assets, while maintaining appropriate levels of leverage following declines in stockholders' equity.

Average earning asset yields increased for the three months ended March 31, 2023 compared to 2022 primarily due to our rotation into higher yielding Agency RMBS during 2022.

We earned total interest income of $69.3 million for the three months ended March 31, 2023 (March 31, 2022:

$42.2 million).

Our interest income includes coupon interest and net (premium amortization) discount accretion on mortgage-backed and other securities as well as interest income on our commercial loan as shown in the table below.

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

Three Months Ended March 31,

$ in thousands 2023 2022

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Total interest income 69,287 42,174

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

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

Mortgage-backed and other securities interest income increased $27.7 million for the three months ended March 31, 2023 compared to 2022 despite lower average earning assets due to a 287 basis point increase in average earning asset yields.

Our commercial loan investment was fully repaid in October 2022.

Prepayment Speeds

Our RMBS portfolio is subject to prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Our RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income.

Expected future prepayment speeds are estimated on a quarterly basis.

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

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

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

The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

$ in thousands 2023 2022

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Net (premium amortization) discount accretion 171 (6,592)

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

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

The decrease in premium amortization for the three and nine months ended September 30, 2022 compared to 2021 was primarily the result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Net discount accretion was $171,000 for the three months ended March 31, 2023 compared to net premium amortization of $6.6 million for the same period in 2022.

The change in net (premium amortization) discount accretion for the three months ended March 31, 2023 compared to 2022 was primarily the result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

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

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

$ in thousands 2022 2021 2022 2021

Interest Expense

Interest expense on repurchase agreement borrowings 22,863 2,329 34,212 8,289

Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (5,601) (14,853) (16,398)

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

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

Our repurchase agreements interest expense, which equals our total interest expense, increased $21.3 million and $27.5 million for the three and nine months ended September 30, 2022, respectively, compared to 2021 as the Federal Reserve raised the Federal Funds target rate.

Our repurchase agreements interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

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

Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

During the next twelve months, we estimate that $14.4 million of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.

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

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

The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

$ in thousands 2023 2022

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(3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.

Total average borrowings decreased $3.9 billion and $3.3 billion in the three and nine months ended September 30, 2022, respectively, compared to 2021 as we reduced the size of our investment portfolio and related repurchase agreement borrowings given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Our average cost of funds increased 201 and 68 basis points for the three and nine months ended September 30, 2022, respectively, compared to 2021 as the Federal Reserve raised the Federal Funds target rate.

Total average borrowings decreased $1.5 billion in the three months ended March 31, 2023 compared to 2022 primarily due to a reduction in the size of our investment portfolio and related repurchase agreement borrowings during 2022 given expectations that elevated market volatility could result in lower valuations on our assets, while maintaining appropriate levels of leverage following declines in stockholders' equity.

Our average cost of funds increased 434 basis points for the three months ended March 31, 2023 compared to 2022 as the FOMC has consistently raised the Federal Funds target rate from a range of 0.0% to 0.25% as of January 1, 2022 to a range of 4.75% to 5.0% as of March 31, 2023.

The table below presents the components of interest expense for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

$ in thousands 2023 2022

Interest Expense

Interest expense on repurchase agreement borrowings 54,220 3,092

Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,494) (5,196)

Repurchase agreements interest expense 49,726 (2,104)

Total interest expense 49,726 (2,104)

Our repurchase agreements interest expense, which equals our total interest expense, increased $51.8 million for the three months ended March 31, 2023 compared to 2022 despite lower average borrowings due to a higher cost of funds.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $4.5 million during the three months ended March 31, 2023 and $5.2 million during the three months ended March 31, 2022.

recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

We expect that the remaining $5.9 million of net deferred gains on de-designated interest rate swaps will be reclassified from accumulated other comprehensive income and recorded as a decrease to interest expense over a period of time through December 15, 2023.

Net Interest Income

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

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

The table below presents the components of net interest income for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

$ in thousands 2023 2022

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Net interest rate margin 1.08 % 2.55 %

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

$46.5 million and $134.5 million).

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 2.51% and 2.82% for the three and nine months ended September 30, 2022, respectively (September 30, 2021:

2.15% and 2.01%).

The decrease in net interest income for the three and nine months ended September 30, 2022 compared to 2021 was primarily due to higher interest expense as the Federal Reserve raised the Federal Funds target rate.

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

Our net interest income, which equals interest income less interest expense, totaled $19.6 million for the three months ended March 31, 2023 (March 31, 2022:

$44.3 million).

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.08% for the three months ended March 31, 2023 (March 31, 2022:

The decrease in net interest income for the three months ended March 31, 2023 compared to 2022 was primarily due to a higher cost of funds related to increases in the Federal Funds target rate.

The decrease in net interest rate margin for the three months ended March 31, 2023 compared to 2022 was primarily due to a higher cost of funds, which was partially offset by our rotation into higher yielding Agency RMBS.

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.

Gain (Loss) on Investments, net

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

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

The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31,

$ in thousands 2023 2022

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Net unrealized gains (losses) on commercial loan — (124)

Net realized gains (losses) on U.S.

Net unrealized gains (losses) on U.S.

Treasury securities — (19,827)

Total gain (loss) on investments, net 51,956 (504,388)

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

net losses of $4.5 million and $239.3 million).

Realized net losses during the three and nine months ended September 30, 2022 and 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

During the three months ended March 31, 2023, we sold MBS and realized net losses of $13.8 million (March 31, 2022:

net losses of $319.0 million).

Net realized losses during the three months ended March 31, 2023 primarily reflect sales of 4.5% and 5.0% coupon Agency RMBS to purchase 4.0% coupon Agency RMBS with similar yields.

Net realized losses during the three months ended March 31, 2022 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016.

Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities.

Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net.

As of September 30, 2022, $4.3 billion (December 31, 2021:

Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a

component of gain (loss) on investments, net.

As of March 31, 2023, $5.4 billion (December 31, 2022:

$4.7 billion) or 99% (December 31, 2022:

99%) of our MBS are accounted for under the fair value option.

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

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

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

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

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

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

We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $65.7 million in the three months ended March 31, 2023 compared to net unrealized losses of $165.5 million in the three months ended March 31, 2022.

Net unrealized gains in the three months ended March 31, 2023 were primarily due to improved Agency RMBS valuations as yields on Treasuries decreased.

Net unrealized losses in the three months ended March 31, 2022 primarily reflect wider interest rate spreads on our Agency RMBS.

We recorded unrealized losses of $124,000 on our commercial loan investment in the three months ended March 31, 2022.

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

We did not hold any U.S.

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

(Increase) Decrease in Provision for Credit Losses

As of September 30, 2022, $43.0 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2021:

$70.2 million).

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

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

Treasury securities during the three months ended March 31, 2023 .

We recorded unrealized losses of $19.8 million on U.S.

Treasury securities during the three months ended March 31, 2022 due to rising interest rates.

Equity in Earnings (Losses) of Unconsolidated Ventures

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

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

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

For the three months ended March 31, 2023, we recorded equity in earnings of unconsolidated ventures of $2,000 (March 31, 2022:

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

Gain (Loss) on Derivative Instruments, net

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$ in thousands

Three months ended September 30, 2022

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps 71,862 30,145 36,930 138,937

Currency Forward Contracts 187 — 14 201

TBAs (9,172) — 3,583 (5,589)

Total 62,877 30,145 40,527 133,549

$ in thousands

Three months ended September 30, 2021

not designated as

hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net

Interest Rate Swaps 22,663 (4,175) 11,997 30,485

Currency Forward Contracts 610 — (266) 344

TBAs 14,820 — (10,367) 4,453

Total 38,093 (4,175) 1,364 35,282

$ in thousands

Nine Months Ended September 30, 2022

Three months ended March 31, 2023

not designated as

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Interest Rate Swaps (90,949) 54,464 (7,968) (44,453)

Currency Forward Contracts 866 — (204) 662

TBAs (951) — 509 (442)

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$ in thousands

Nine Months Ended September 30, 2021

Three months ended March 31, 2022

not designated as

1 unchanged sentence

Interest Rate Swaps 343,309 1,284 (11,399) 333,194

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 193 — (41) 152

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Total 283,429 1,284 (45,853) 238,860

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

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

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

During the three months ended March 31, 2023, we terminated existing interest rate swaps with a notional amount of $525.0 million.

In addition, one of our forward starting swaps held as of December 31, 2022 with a notional amount of $500.0 million began to bear interest during the three months ended March 31, 2023.

The remainder of our forward starting swaps begin to bear interest in July 2023.

We recorded net losses of $44.5 million and net gains of $333.2 million on interest rate swaps for the three months ended March 31, 2023 and 2022, respectively, primarily due to changes in forward interest rate expectations.

As of March 31, 2023, we had $4.8 billion of repurchase agreement borrowings with a weighted average remaining maturity of 52 days.

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

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

As of September 30, 2022 and December 31, 2021, we held interest rate swaps whereby we receive floating interest based upon SOFR as shown in the table below.

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

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

As of March 31, 2023 and December 31, 2022, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR.

$ in thousands As of March 31, 2023 As of December 31, 2022

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

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6,300,000 0.45 % 4.82 % 5.8 5,800,000 0.45 % 4.30 % 6.3

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

$1.3 billion).

As of September 30, 2022 and December 31, 2021, we held interest rate swaps whereby we pay floating interest based upon SOFR as shown in the table below.

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

(1) Excludes $475.0 million notional amount of interest rate swaps with forward start dates as of March 31, 2023 that will receive floating interest based upon SOFR (December 31, 2022:

$975.0 million).

As of March 31, 2023, these interest rate swaps had a weighted average maturity of 30.3 years (December 31, 2022:

16.5 years) and a weighted average fixed pay rate of 1.33% (December 31, 2022:

As of March 31, 2023 and December 31, 2022, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest.

$ in thousands As of March 31, 2023 As of December 31, 2022

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

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1,825,000 4.82 % 2.70 % 9.3 2,350,000 4.30 % 2.78 % 9.3

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

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

As of September 30, 2022, we had $1.7 million (December 31, 2021:

$13.6 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in Euro.

(1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of March 31, 2023 that will pay floating interest based upon SOFR (December 31, 2022:

$275.0 million).

As of March 31, 2023, these interest rate swaps had a weighted average maturity of 15.8 years (December 31, 2022:

16.0 years) and a weighted average fixed receive rate of 2.63% (December 31, 2022:

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

As of March 31, 2023 and December 31, 2022, we did not have any currency forward contracts outstanding.

During the three months ended March 31, 2022 we settled currency forward contracts of €17.6 million or $20.4 million in notional amount related to our investment in an unconsolidated venture and realized a net gain of $193,000 .

We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS.

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

$1.6 billion).

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

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

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

Net realized and unrealized losses for the nine months ended September 30, 2021 primarily reflect a sharp increase in mortgage rates during the first quarter of 2021.

As of March 31, 2023 and December 31, 2022, we did not have a net notional amount of TBAs.

We recorded $442,000 and $94.5 million of net realized and unrealized losses on TBAs during the three months ended March 31, 2023 and 2022, respectively.

Net realized and unrealized losses on TBAs for the three months ended March 31, 2022 primarily reflect rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

Other Investment Income (Loss), net

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

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

$5.4 million and $15.8 million).

Management fees decreased for the three and nine months ended September 30, 2022 compared to the same periods in 2021 due to a lower stockholders' equity management fee base.

Our other investment income (loss), net during the three months ended March 31, 2023 and 2022 consisted of foreign currency transaction gains and losses.

Other investment income (loss) for the three months ended March 31, 2023 also includes the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023.

We incurred management fees of $3.0 million for the three months ended March 31, 2023 (March 31, 2022:

$5.3 million).

Management fees decreased for the three months ended March 31, 2023 compared to the same periods in 2022 due to a lower stockholders' equity management fee base.

Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.

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

$2.1 million and $6.3 million).

Our general and administrative expenses not covered under our management agreement amounted to $2.1 million for the three months ended March 31, 2023 (March 31, 2022:

$2.0 million).

General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs.

Gain on Repurchase and Retirement of Preferred Stock

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

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

of Series B Preferred Stock, respectively.

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

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

Issuance and Redemption Costs of Redeemed Preferred Stock

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

The excess of the consideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $4.7 million in net income (loss) attributable to common stockholders during the nine months ended September 30, 2021.

Net Income (Loss) attributable to Common Stockholders

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

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

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

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

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

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

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

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

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

For the three months ended March 31, 2023, our net income attributable to common stockholders was $15.6 million (March 31, 2022:

$236.8 million net loss attributable to common stockholders) or $0.39 basic and diluted net income per average share available to common stockholders (March 31, 2022:

$7.18 basic and diluted net loss per average share available to common stockholders).

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

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

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

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

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

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on investments of $52.0 million in the 2023 period compared to net losses on investments of $504.4 million in the 2022 period;

(ii) net losses on derivative instruments of $44.9 million in the 2023 period compared to net gains on derivative instruments of $238.9 million in the 2022 period;

and (iii) a $24.7 million decrease in net interest income.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, and changes in net interest income, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”.

Non-GAAP Financial Measures

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TBA dollar roll income;

gain on repurchase and retirement of preferred stock;

(gain) loss on foreign currency transactions, net and amortization of net deferred (gain) loss on de-designated interest rate swaps.

foreign currency gains (losses), 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.

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We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate.

We added the gain on repurchase and retirement of preferred stock as a reconciling item to our earnings available for distribution calculation in the second quarter of 2022 because the gain does not represent earnings on our investment portfolio.

To maintain our qualification as a REIT, U.S.

federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains.

federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital

We have historically distributed at least 100% of our REIT taxable income.

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

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

Three Months Ended March 31,

$ in thousands, except per share data 2023 2022

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Unrealized (gain) loss on derivative instruments, net (1)

(40,527) (1,364) (21,618) 15,141

TBA dollar roll income (2)

2,159 9,316 27,415 29,541

Gain on repurchase and retirement of preferred stock (12,688) — (14,179) —

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

— (1) (44) (1)

Foreign currency (gains) losses, net (3)

Amortization of net deferred (gain) loss on de-designated interest rate swaps (4)

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Earnings available for distribution per common share (5)

1.39 1.02 3.95 3.09

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

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

Three Months Ended March 31,

$ in thousands 2023 2022

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TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement.

We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency securities, less an implied financing cost, over the forward settlement period.

We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, less an implied financing cost, over the forward settlement period.

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

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

(3) Foreign currency gains (losses), net includes foreign currency transaction gains and losses and the reclassification of currency translation adjustments that were previously recorded in accumulated other comprehensive income and is included in other investment income (loss), net on the condensed consolidated statements of operations.

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

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

Three Months Ended March 31,

$ in thousands 2023 2022

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(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.

Earnings available for distribution per common share for the three months ended March 31, 2023 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 table below shows the components of earnings available for distribution for the following periods.

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

Three Months Ended March 31,

$ in thousands 2023 2022

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Equity in earnings (losses) of unconsolidated ventures 2 71

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

Total expenses (5,068) (7,298)

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Dividends to preferred stockholders (5,862) (8,394)

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

Earnings available for distribution 59,300 38,146

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

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

Earnings available for distribution increased during the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to higher effective net interest income, a decrease in dividends to preferred stockholders and $4.7 million of issuance and redemption costs from the redemption of our Series A Preferred Stock in June 2021.

Earnings available for distribution increased during the three months ended March 31, 2023 compared to the same period in 2022 primarily due to an increase in effective net interest income, which was partially offset by a reduction in our TBA notional amount and related TBA dollar roll activity.

Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin

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GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense.

We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings.

We add back the net payments we make on our interest rate swap agreements to our total U.S.

We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings.

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.

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

Three Months Ended September 30,

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

Total interest expense 18,008 1.84 % (3,272) (0.17) %

Amortization of net deferred gain (loss) on de-designated interest rate swaps 4,855 0.50 % 5,601 0.29 %

Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net

(30,145) (3.09) % 4,175 0.21 %

Effective interest expense

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

Nine Months Ended September 30,

Three Months Ended March 31,

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

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Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (54,464) (4.60) % (1,284) (0.08) %

(44,995) (1.27) % 13,296 0.22 %

Effective interest expense

(244) (0.02) % 1,808 0.11 %

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

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

Our effective interest expense and effective cost of funds decreased in the three months ended March 31, 2023 compared to the same period in 2022 despite a $51.8 million increase in total interest expense, which primarily reflects increases in the Federal Funds target rate, due to $54.5 million of contractual net interest income on interest rate swaps compared to $1.3 million for the same period in 2022.

The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.

Three Months Ended September 30,

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

Net interest income 31,720 2.51 % 46,454 2.15 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps (4,855) (0.50) % (5,601) (0.29) %

Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net

30,145 3.09 % (4,175) (0.21) %

Effective net interest income

57,010 5.10 % 36,678 1.65 %

Nine Months Ended September 30,

Three Months Ended March 31,

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

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Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 54,464 4.60 % 1,284 0.08 %

44,995 1.27 % (13,296) (0.22) %

Effective net interest income

69,531 5.30 % 40,366 2.30 %

Effective net interest income increased in the three and nine months ended September 30, 2022 compared to the same periods in 2021 despite lower net interest income primarily due to changes in contractual net interest income (expense) on interest rate swaps as discussed above.

Our effective interest rate margin increased in the three and nine months ended September 30, 2022 compared to the same periods in 2021 primarily due to our rotation into higher yielding Agency RMBS and changes in contractual net interest income (expense) on interest rate swaps, which were partially offset by higher interest rates on our borrowings.

Our effective net interest income and effective interest rate margin increased in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to higher interest income resulting from our rotation into higher yielding Agency RMBS during 2022.

Effective interest expense and effective cost of funds had a minimal impact on effective net interest income and effective interest rate margin as higher U.S.

GAAP interest expense was offset by an increase in contractual net interest income on our interest rate swaps.

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of September 30, 2022 and December 31, 2021.

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of March 31, 2023 and December 31, 2022.

Our debt-to-equity ratio is calculated in accordance with U.S.

GAAP and is the ratio of total debt to total stockholders' equity.

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

As of March 31, 2023, approximately 95% of our equity is allocated to Agency RMBS.

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

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We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S.

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

September 30, 2022

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 of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

March 31, 2023

$ in thousands Agency RMBS Credit Portfolio (1)

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Economic debt-to-equity ratio (5)

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

(1) Investments in non-Agency CMBS, non-Agency RMBS and an unconsolidated joint venture are included in credit portfolio.

(2) Cash and cash equivalents is allocated based on our financing strategy for each asset class.

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(4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($142.8 million as of September 30, 2022) to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($929,000 as of March 31, 2023) to total stockholders' equity.

December 31, 2022

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Economic debt-to-equity ratio (5)

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

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(4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($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.

Liquidity and Capital Resources

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However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.

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

We held cash, cash equivalents and restricted cash of $228.9 million at March 31, 2023 (March 31, 2022:

$497.5 million).

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

Our operating activities provided net cash of $126.8 million for the nine months ended September 30, 2022 (September 30, 2021:

Our operating activities provided net cash of $67.2 million for the three months ended March 31, 2023 (March 31, 2022:

$40.1 million).

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

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

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

Our investing activities used net cash of $696.9 million in the three months ended March 31, 2023 compared to net cash provided by investing activities of $1.1 billion in the three months ended March 31, 2022.

We used cash of $1.4 billion to purchase MBS during the three months ended March 31, 2023 (March 31, 2022:

$7.6 billion to purchase MBS and $502.3 million to purchase U.S.

Treasury securities).

We used cash of $91.9 million to settle derivative contracts in the three months ended March 31, 2023 (March 31, 2022:

received cash of $283.4 million).

Our primary source of cash from investing activities for the three months ended March 31, 2023 was proceeds from sales of MBS of $783.9 million (March 31, 2022:

$8.8 billion from the sales of MBS).

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

$615.2 million).

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

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

$13.4 billion to purchase MBS).

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

We also generated $61.1 million from principal payments of MBS during the three months ended March 31, 2023 (March 31, 2022:

$168.3 million).

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

net cash provided by financing activities of $780.8 million).

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

net cash provided of $645.1 million).

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

$96.6 million to pay dividends and $140.0 million to redeem our Series A Preferred Stock).

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

Our financing activities provided net cash of $579.8 million for the three months ended March 31, 2023 (March 31, 2022:

net cash used by financing activities of $1.2 billion).

During the three months ended March 31, 2023, we received cash for net proceeds on our repurchase agreements of $579.9 million (March 31, 2022:

net cash used of $1.2 billion).

We also used cash of

$31.0 million for the three months ended March 31, 2023 to pay dividends (March 31, 2022:

$38.1 million).

As of September 30, 2022, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.7% for Agency RMBS.

Proceeds from issuance of common stock provided $35.8 million for the three months ended March 31, 2023.

As of March 31, 2023, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.6% for Agency RMBS.

The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS.

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Forward-Looking Statements Regarding Liquidity

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

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

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

As of March 31, 2023, we held $5.1 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $362.1 million of unencumbered investments and unrestricted cash of $101.8 million as of March 31, 2023.

As of March 31, 2023, our known contractual obligations primarily consisted of $4.8 billion of repurchase agreement borrowings with a weighted average remaining maturity of 52 days.

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

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Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing.

We may increase our capital resources by obtaining long-term credit facilities or through

public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes.

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.

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.

Exposure to Financial Counterparties

We finance a substantial portion of our investment portfolio through repurchase agreements.

Under these agreements, we pledge assets from our investment portfolio as collateral.

Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio.

If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.

As of March 31, 2023, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $41.7 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2023.

The information is based on the geographic headquarters of the counterparty or counterparty's parent company.

However, our repurchase agreements are generally denominated in U.S.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 12 2,527,438 134,410

Europe (excluding United Kingdom) 2 402,511 18,296

Asia 3 1,291,186 72,187

United Kingdom 1 593,565 26,404

Total 18 4,814,700 251,297

To maintain our qualification as a REIT, U.S.

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Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended September 30, 2022, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2022.

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2023, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2023.

At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act.

If we were required to register as an investment company, then our use of leverage would be substantially reduced.

Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S.

own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S.

government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test.

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IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).

We calculate that as of September 30, 2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

Exposure to Financial Counterparties

We finance a substantial portion of our investment portfolio through repurchase agreements.

Under these agreements, we pledge assets from our investment portfolio as collateral.

Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio.

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

The following table summarizes our exposure to counterparties by geographic concentration as of September 30, 2022.

The information is based on the geographic headquarters of the counterparty or counterparty's parent company.

However, our repurchase agreements are generally denominated in U.S.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 11 2,192,393 98,365

Europe (excluding United Kingdom) 2 264,118 10,628

Asia 3 1,008,408 43,784

United Kingdom 1 422,372 14,562

Total 17 3,887,291 167,339

We calculate that as of March 31, 2023, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis