What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-03 compared with 2023-05-09 · 258 added, 202 removed, 560 unchanged (45% of the section changed)

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

These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans, objectives and our views on domestic and global market conditions (including the Agency RMBS and residential and commercial real estate market).

When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “project,” “forecast” or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words.

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

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

As of June 30, 2023, we were invested in:

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

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government agency or a federally chartered corporation (“non-Agency RMBS”);

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

• other real estate-related financing arrangements.

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• a commercial mortgage loan;

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

Treasury securities.

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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.

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.

• Financial conditions improved throughout the second quarter, as credit spreads tightened, equity markets rallied, concerns around the U.S.

debt ceiling were resolved and volatility eased.

The positive environment seen across most risk assets was largely spurred by a continued moderation in most inflation measures.

Headline consumer price index (“CPI”) fell from 5.0% to 3.0% during the quarter, while CPI (ex.

food and energy) fell from 5.6% to 4.8%.

Core personal consumption expenditures, however, remained anchored at 4.7%, and has been in a tight range between 4.6% and 4.7% since the beginning of the year.

Investors continue to expect further drops in inflation, as Treasury inflation-protected securities breakeven rates dropped sharply during the quarter, with the two year breakeven ending the quarter at 2.1% and the five year breakeven ending at 2.2%.

• Interest rates were sharply higher during the quarter, largely reversing the rally spurred by the uncertainty surrounding the regional banking system that we saw in the first quarter.

The yield on the two year Treasury increased by 87 basis points, to 4.90%, the yield on the five year Treasury increased 59 basis points, to 4.16% and the yield on the ten year Treasury finished at 3.84%, up 37 basis points on the quarter.

The Federal Reserve’s Open Market Committee (“FOMC”) increased the Federal Funds target rate by 25 basis points in May, taking the target to a range of 5.0% to 5.25%.

• Agency mortgage performance improved during the second quarter as lower coupon valuations recovered a portion of their underperformance in March, while higher coupon valuations were largely unchanged as interest rate volatility remained elevated.

As a result, current coupon spreads ended modestly wider while performance versus Treasuries was

slightly positive.

In addition, premiums on specified pool collateral declined as a result of sharply higher interest rates during the quarter.

Although modestly lower levels of interest rate volatility led to increased demand for risk assets by investors, this demand was largely offset by faster than anticipated sales of failed bank assets by the FDIC and the increased supply caused by a stronger housing market.

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

• The employment picture remained strong as gains in non-farm payrolls averaged 244,000 per month.

The unemployment rate was slightly higher, ending the quarter up 0.1 at 3.6%.

• Risk assets performed well during the quarter.

The S&P 500 gained 8.3%, while the NASDAQ was up 12.8%.

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.

Likewise, credit spreads across investment grade credit, high yield and emerging market debt all finished the quarter tighter.

Credit spreads on debt backed by commercial real estate mortgage loans also finished the quarter tighter, buoyed by increased investor risk appetite.

• Despite favorable moves in CMBS valuations, increasing vacancy rates, declining real estate values, increased borrowing costs, and tighter mortgage lending standards remain challenges for the sector.

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.

The number of CMBS loans residing with special servicers increased across property types.

• Non-Agency RMBS credit spreads tightened during the quarter as low issuance and compelling relative value drove positive market technicals.

The resilience of home prices through the first half of the year despite high mortgage rates and historically low affordability further supported investor risk appetite.

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.

Moving into the third quarter of 2023, the FOMC’s monetary policy tightening cycle is expected to conclude by the end of the year, with one or two more 25 basis point increases in the Fed Funds Rate reflected in the futures market.

While the timing remains uncertain, the potential decline in interest rate volatility in conjunction with the end of the tightening cycle should be supportive for higher coupon Agency RMBS valuations.

Furthermore, Agency RMBS supply and demand technicals are expected to improve in the second half of the year, as the liquidation of assets from the FDIC nears its conclusion and organic net supply declines.

Commercial banks should also soon receive greater clarity on their regulatory environment, which could encourage further deployment of capital away from loans and into lower risk weighted assets such as Agency RMBS.

Finally, valuations in production coupon Agency RMBS remain historically attractive, and funding capacity is robust.

Taken together, we believe the decline in interest rate volatility and a supportive technical environment, combined with compelling valuations and favorable funding conditions, represent an attractive investment opportunity in Agency RMBS for the remainder of 2023.

Investment Activities

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

The table below shows the composition of our investment portfolio as of June 30, 2023, December 31, 2022 and June 30, 2022.

$ in thousands June 30, 2023 December 31, 2022 June 30, 2022

30 year fixed-rate, at fair value 5,383,997 4,661,737 3,802,451

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Non-Agency RMBS, at fair value 8,256 8,413 8,262

Treasury securities, at fair value — — 482,445

Commercial loan, at fair value — — 23,478

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

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

We sold $1.5 billion and purchased $2.4 billion of Agency RMBS during the six months ended June 30, 2023.

As of June 30, 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 86% as of June 30, 2022.

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

June 30, 2023 December 31, 2022 June 30, 2022

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

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5.5% 1,523,565 28.3 % 1,574,494 33.7 % — — %

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

Total 30 year fixed-rate Agency RMBS 5,383,997 100.0 % 4,661,737 100.0 % 3,802,451 100.0 %

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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.

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

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

June 30, 2023 December 31, 2022 June 30, 2022

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

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Total 30 year fixed-rate Agency RMBS 5,383,997 100.0 % 4,661,737 100.0 % 3,802,451 100.0 %

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

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 have invested in TBAs as an alternative means of investing in and financing Agency RMBS.

As of June 30, 2023 and December 31, 2022, we had no investments or immaterial investments in TBAs, versus 11% of our investment portfolio as of June 30, 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.

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.

As of June 30, 2023;

December 31, 2022 and June 30, 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 June 30, 2023.

Approximately 71% of non-Agency CMBS were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of June 30, 2023.

As of June 30, 2023;

December 31, 2022 and June 30, 2022, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs.

As of December 31, 2022 and June 30, 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.

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Maximum balance (2)

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

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

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

June 30, 2023 4,959,388 4,791,720 4,959,388

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

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

During the 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.

During the six months ended June 30, 2023, we terminated existing interest rate swaps with a notional amount of $775.0 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 six months ended June 30, 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 recorded net gains of $96.6 million and $52.2 million on interest rate swaps for the three and six months ended June 30, 2023, respectively, 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.

We did not have any currency forward contracts outstanding as of June 30, 2023 or December 31, 2022.

Capital Activities

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.

As of June 30, 2023, we may sell up to 10,181,292 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 June 30, 2023, we sold 2,888,639 shares of common stock under our equity distribution agreement for proceeds of $31.0 million, net of approximately $421,000 in commissions and fees.

During the six months ended June 30, 2023, we sold 5,818,708 shares of common stock under our equity distribution agreement for proceeds of $66.8 million, net of approximately $903,000 in commissions and fees.

We did not sell any shares of common stock under equity distribution agreements during the three and six months ended June 30, 2022.

For information on dividends declared during the six months ended June 30, 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 three months ended March 31, 2023, we did not repurchase any shares of our common stock.

During the six months ended June 30, 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.

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

During the three and six months ended June 30, 2023, we repurchased and retired 37,788 shares of Series B Preferred Stock and 42,696 shares of Series C Preferred Stock.

During the three and six months ended June 30, 2022, we repurchased and retired 43,820 shares of Series B Preferred Stock and 620,141 shares of Series C Preferred Stock.

As of June 30, 2023, we had authority to purchase 1,299,846 additional shares of our Series B Preferred Stock and 1,273,774 additional shares of our Series C Preferred Stock under the current share repurchase program.

Book Value per Common Share

We calculate book value per common share as follows.

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

In thousands except per share amounts June 30, 2023 December 31, 2022

Numerator (adjusted equity):

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Book value per common share 11.98 12.79

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.

Our book value per common share decreased 6.3% as of June 30, 2023 compared to December 31, 2022 as modest outperformance in higher coupon Agency RMBS relative to Treasuries has been offset by further inversion of the yield curve, elevated interest rate volatility given changes in the expectation for near-term monetary policy and declines in premiums on our specified pool investments.

Refer to Item 3.

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Results of Operations

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,

The table below presents information from our condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands, except share data 2023 2022 2023 2022

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Repurchase agreements 59,022 3,455 108,748 1,351

49,726 (2,104)

Total interest expense 59,022 3,455 108,748 1,351

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Gain (loss) on investments, net (99,679) (324,876) (47,723) (829,264)

(Increase) decrease in provision for credit losses (169) — (169) —

Equity in earnings (losses) of unconsolidated ventures — (352) 2 (281)

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Dividends to preferred stockholders (5,840) (8,100) (11,702) (16,494)

Gain on repurchase and retirement of preferred stock 364 1,491 364 1,491

Net income (loss) attributable to common stockholders (1,398) (116,144) 14,203 (352,960)

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Diluted 42,391,477 32,990,319 41,008,028 32,987,678

(1) Negative interest expense on repurchase agreements in 2022 is due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements.

For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - “ Derivatives and Hedging Activities ” and Note 12 - “ Stockholders' Equity ” in Part I.

of this report on Form 10-Q.

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 months ended March 31, 2023 and 2022.

Three Months Ended March 31,

The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 2023 2022

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

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

We had average earning assets of $5.3 billion for the three months ended June 30, 2023 (June 30, 2022:

$4.7 billion) and $5.3 billion for the six months ended June 30, 2023 (June 30, 2022:

$5.8 billion).

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).

Average earnings assets were higher for the three months ended June 30, 2023 relative to the same period in 2022 primarily due to higher leverage.

The decrease in average earning assets for the six months ended June 30, 2023 compared to 2022 is primarily due to a reduction in the size of our investment portfolio and related repurchase agreement borrowings during the first half of 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 and six months ended June 30, 2023 compared to 2022 primarily due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $71.4 million and $140.7 million for the three and six months ended June 30, 2023, respectively (June 30, 2022:

$44.6 million and $86.7 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 March 31,

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

$ in thousands 2023 2022 2023 2022

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Total interest income 71,428 44,555 140,715 86,729

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.

Mortgage-backed and other securities interest income increased $27.4 million and $55.1 million for the three and six months ended June 30, 2023, respectively, compared to 2022 primarily due to a 159 and 236 basis point increase in average earning asset yields, respectively.

Our commercial loan investment was fully repaid in October 2022.

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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 months ended March 31, 2023 and 2022.

Three Months Ended March 31,

The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 2023 2022

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Net (premium amortization) discount accretion 1,309 774 1,480 (5,818)

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.

Net discount accretion was $1.3 million for the three months ended June 30, 2023 compared to $774,000 for the same period in 2022.

Net discount accretion was $1.5 million for the six months ended June 30, 2023 compared to net premium amortization of $5.8 million for the same period in 2022.

The change in net (premium amortization) discount accretion for the six months ended June 30, 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 information related to our borrowings and cost of funds for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 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 $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,

Total average borrowings increased $732.3 million for the three months ended June 30, 2023 compared to the same period in 2022 primarily due to higher leverage.

Total average borrowings decreased $368.8 million for the six months ended June 30, 2023 compared to the same period in 2022 primarily due to a reduction in the size of our investment portfolio and related repurchase agreement borrowings during the first half of 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 459 and 451 basis points for the three and six months ended June 30, 2023, respectively, 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 5.0% to 5.25% as of June 30, 2023.

The table below presents the components of interest expense for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 2023 2022

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Total interest expense 59,022 3,455 108,748 1,351

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.

Our repurchase agreements interest expense, which equals our total interest expense, increased $55.6 million and $107.4 million for the three and six months ended June 30, 2023, respectively, compared to 2022 primarily due to a higher cost of funds.

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 $4.5 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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $3.2 million and $7.7 million during the three and six months ended June 30, 2023 respectively, and $4.8 million and $10.0 million during the three and six months ended June 30, 2022, respectively.

Amounts 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 $2.7 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 months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The table below presents the components of net interest income for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 2023 2022

10 unchanged sentences

Net interest rate margin 0.48 % 3.48 % 0.78 % 2.93 %

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 net interest income, which equals interest income less interest expense, totaled $12.4 million and $32.0 million for the three and six months ended June 30, 2023, respectively (June 30, 2022:

$41.1 million and $85.4 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 0.48% and 0.78% for the three and six months ended June 30, 2023, respectively (June 30, 2022:

3.48% and 2.93%).

The decrease in net interest income for the three and six months ended June 30, 2023 compared to 2022 was primarily due to a higher cost of funds related to increases in the Federal Funds target rate, which was partially offset by higher interest income.

The decrease in net interest rate margin for the three and six months ended June 30, 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 months ended March 31, 2023 and 2022:

Three Months Ended March 31,

The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2023 and 2022.

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

$ in thousands 2023 2022 2023 2022

4 unchanged sentences

Treasury securities — 19,827 — —

Net realized gains (losses) on U.S.

Treasury securities — (34,198) — (34,198)

Total gain (loss) on investments, net (99,679) (324,876) (47,723) (829,264)

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.

During the three and six months ended June 30, 2023, we sold MBS and realized net losses of $10.5 million and $24.2 million, respectively (June 30, 2022:

net losses of $535.1 million and $854.0 million).

Net realized losses during the three and six months ended June 30, 2023 and 2022 primarily reflect the repositioning of Agency RMBS coupon allocations and sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS in an effort to improve the earnings power of the portfolio.

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

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

As of June 30, 2023, $5.5 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 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 recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $89.2 million and $23.5 million in the three and six months ended June 30, 2023, respectively, compared to net unrealized gains of $224.5 million and $59.0 million in the three and six months ended June 30, 2022, respectively.

Net unrealized losses in the three and six months ended June 30, 2023 were primarily due to lower valuations on our Agency RMBS given higher interest rates and wider spreads on our holdings.

Net unrealized gains in the three and six months ended June 30, 2022 were primarily driven by reversals of unrealized losses upon sale.

We recorded an unrealized gain of $87,000 and an unrealized loss of $37,000 on our commercial loan investment in the three and six months ended June 30, 2022, respectively.

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 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.

Treasury securities during the six months ended June 30, 2023 .

We recorded net realized and unrealized losses of $14.4 million and $34.2 million on U.S.

Treasury securities during the three and six months ended June 30, 2022, respectively, due to rising interest rates.

(Increase) Decrease in Provision for Credit Losses

As of June 30, 2023, $42.4 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2022:

$42.5 million).

During the three and six months ended June 30, 2023, we recorded a $169,000 provision for credit losses on a single non-Agency CMBS based on a comparison of the security's amortized cost basis to discounted expected cash flows.

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

Equity in Earnings (Losses) of Unconsolidated Ventures

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.

For the three and six months ended June 30, 2023 we recorded equity in earnings of unconsolidated ventures of $2,000.

(June 30, 2022:

equity in losses of $352,000 and $281,000, respectively).

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

Gain (Loss) on Derivative Instruments, net

4 unchanged sentences

$ in thousands

Three months ended March 31, 2023

Three months ended June 30, 2023

not designated as

1 unchanged sentence

Interest Rate Swaps 27,893 63,437 5,312 96,642

Currency Forward Contracts (18) — — (18)

TBAs (929) — 929 —

1 unchanged sentence

$ in thousands

Three months ended March 31, 2022

Three months ended June 30, 2022

not designated as

4 unchanged sentences

Total 141,232 13,566 26,944 181,742

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.

$ in thousands

Six months ended June 30, 2023

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 (63,056) 117,901 (2,656) 52,189

Currency Forward Contracts (18) — — (18)

TBAs (1,880) — 1,438 (442)

Total (64,954) 117,901 (1,218) 51,729

$ in thousands

Six months ended June 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 553,222 14,850 (14,365) 553,707

Currency Forward Contracts 679 — (218) 461

TBAs (129,240) — (4,326) (133,566)

Total 424,661 14,850 (18,909) 420,602

During the six months ended June 30, 2023, we terminated existing interest rate swaps with a notional amount of $775.0 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 six months ended June 30, 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 recorded net gains of $96.6 million and $52.2 million on interest rate swaps for the three and six months ended June 30, 2023, respectively, (June 30, 2022:

$220.5 million and $553.7 million) primarily due to changes in forward interest rate expectations.

As of June 30, 2023, we had $5.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 49 days.

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

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

As of June 30, 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 June 30, 2023 As of December 31, 2022

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

Interest Rate Swaps (1)

6,300,000 0.45 % 5.09 % 5.5 5,800,000 0.45 % 4.30 % 6.3

(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:

(1) Excludes $475.0 million notional amount of interest rate swaps with forward start dates as of June 30, 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:

As of June 30, 2023, these interest rate swaps had a weighted average maturity of 30.1 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

As of June 30, 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 June 30, 2023 As of December 31, 2022

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

Interest Rate Swaps (1)

1,575,000 5.09 % 2.69 % 9.9 2,350,000 4.30 % 2.78 % 9.3

(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:

(1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of June 30, 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:

As of June 30, 2023, these interest rate swaps had a weighted average maturity of 15.5 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 .

As of June 30, 2023 and December 31, 2022, we did not have any currency forward contracts outstanding.

During the three and six months ended June 30, 2022, we settled currency forward contracts of €6.5 million and €24.1 million, respectively, or $7.4 million and $27.8 million, respectively, in notional amount related to our investment in an unconsolidated venture and realized net gains of $486,000 and $679,000, respectively .

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 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.

As of June 30, 2023 and December 31, 2022, we had no investments or immaterial investments in TBAs.

We recorded $442,000 of net realized and unrealized losses on TBAs during the six months ended June 30, 2023.

We recorded $39.1 million and $133.6 million of net realized and unrealized losses on TBAs during the three and six months ended June 30, 2022, respectively.

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

Other Investment Income (Loss), net

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.

Our other investment income (loss), net during the three and six months ended June 30, 2023 and 2022 consisted of foreign currency transaction gains and losses.

Other investment income (loss) for the six months ended June 30, 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 $3.2 million and $6.1 million for the three and six months ended June 30, 2023, respectively (June 30, 2022:

$4.6 million and $9.9 million).

Management fees decreased for the three and six months ended June 30, 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 $2.1 million for the three months ended March 31, 2023 (March 31, 2022:

$2.0 million).

Our general and administrative expenses not covered under our management agreement amounted to $2.0 million and $4.1 million for the three and six months ended June 30, 2023, respectively (June 30, 2022:

$2.5 million and $4.5 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 six months ended June 30, 2023, we repurchased and retired 37,788 shares of Series B Preferred Stock and 42,696 shares of Series C Preferred Stock.

During the three and six months ended June 30, 2022, we repurchased and retired 43,820 shares of Series B Preferred Stock and 620,141 shares of Series C Preferred Stock.

Gains on repurchases and retirements of preferred stock represent the difference between the consideration transferred and the carrying value of the preferred stock.

Net Income (Loss) attributable to Common Stockholders

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:

For the three months ended June 30, 2023, our net loss attributable to common stockholders was $1.4 million (June 30, 2022:

$116.1 million ) or $0.03 basic and diluted net loss per average share available to common stockholders (June 30, 2022:

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $99.7 million in the 2023 period compared to $324.9 million in the 2022 period;

(ii) net gains on derivative instruments of $96.6 million in the 2023 period compared to $181.7 million in the 2022 period;

and (iii) a $28.7 million decrease in net interest income.

For the six months ended June 30, 2023, our net income attributable to common stockholders was $14.2 million (June 30, 2022:

$353.0 million net loss attributable to common stockholders) or $0.35 basic and diluted net income per average share available to common stockholders (June 30, 2022:

$10.70 basic and diluted net loss per average share available to common stockholders).

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;

The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $47.7 million in the 2023 period compared to $829.3 million in the 2022 period;

(ii) net gains on derivative instruments of $51.7 million in the 2023 period compared to $420.6 million in the 2022 period;

and (iii) a $53.4 million decrease in net interest income.

21 unchanged sentences

TBA dollar roll income;

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.

gain on repurchase and retirement of preferred stock, foreign currency gains (losses), net and amortization of net deferred (gain) loss on de-designated interest rate swaps.

periods and, to a certain extent, compare to our peer companies.

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

7 unchanged sentences

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

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

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

7 unchanged sentences

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

Three Months Ended March 31,

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

$ in thousands, except per share data 2023 2022 2023 2022

4 unchanged sentences

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

(6,241) (26,944) 1,218 18,909

TBA dollar roll income (2)

— 11,855 697 25,256

Gain on repurchase and retirement of preferred stock (364) (1,491) (364) (1,491)

Foreign currency (gains) losses, net (3)

(27) 11 66 (44)

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

4 unchanged sentences

Earnings available for distribution per common share (5)

1.45 1.40 2.95 2.55

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

Three Months Ended March 31,

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

$ in thousands 2023 2022 2023 2022

10 unchanged sentences

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

Three Months Ended March 31,

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

$ in thousands 2023 2022 2023 2022

3 unchanged sentences

(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 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 March 31,

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

$ in thousands 2023 2022 2023 2022

3 unchanged sentences

Equity in earnings (losses) of unconsolidated ventures — (352) 2 (281)

(Increase) decrease in provision for credit losses (169) — (169) —

Total expenses (5,131) (7,138) (10,199) (14,436)

3 unchanged sentences

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

Earnings available for distribution 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.

Earnings available for distribution increased during the three and six months ended June 30, 2023 compared to the same periods 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

10 unchanged sentences

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 March 31,

Three Months Ended June 30,

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

3 unchanged sentences

Effective interest expense (1,214) (0.10) % (5,309) (0.53) %

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

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.

Six Months Ended June 30,

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

Total interest expense 108,748 4.56 % 1,351 0.05 %

Amortization of net deferred gain (loss) on de-designated interest rate swaps 7,695 0.32 % 9,998 0.39 %

Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (117,901) (4.95) % (14,850) (0.58) %

Effective interest expense (1,458) (0.07) % (3,501) (0.14) %

Our effective interest expense and effective cost of funds increased modestly in the three and six months ended June 30, 2023 compared to the same periods in 2022 as significant increases in U.S.

GAAP interest expense, which were driven by increases in the Federal Funds target rate, were largely offset by increases in contractual net interest income on interest rate swaps.

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 March 31,

Three Months Ended June 30,

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

3 unchanged sentences

Effective net interest income 72,642 5.51 % 49,864 4.35 %

69,531 5.30 % 40,366 2.30 %

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.

Six Months Ended June 30,

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

Net interest income 31,967 0.78 % 85,378 2.93 %

Amortization of net deferred (gain) loss on de-designated interest rate swaps (7,695) (0.32) % (9,998) (0.39) %

Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 117,901 4.95 % 14,850 0.58 %

Effective net interest income 142,173 5.41 % 90,230 3.12 %

Our effective net interest income and effective interest rate margin increased in the three and six months ended June 30, 2023 compared to the same periods 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 less significant impact on effective net interest income and effective interest rate margin as higher U.S.

GAAP interest expense was largely offset by an increase in contractual net interest income on 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 March 31, 2023 and December 31, 2022.

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of June 30, 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 March 31, 2023, approximately 95% of our equity is allocated to Agency RMBS.

As of June 30, 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.

3 unchanged sentences

GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those 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)

As of June 30, 2023

$ in thousands Agency

RMBS Credit Portfolio (1)

Mortgage-backed securities 5,462,474 44,986 5,507,460

3 unchanged sentences

124,669 — 124,669

Derivative assets, at fair value (3)

3,416 — 3,416

Other assets 24,298 766 25,064

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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 ($929,000 as of March 31, 2023) to total stockholders' equity.

December 31, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

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

We did not have any TBAs outstanding as of June 30, 2023.

As of December 31, 2022

$ in thousands Agency

RMBS Credit Portfolio (1)

Mortgage-backed securities 4,746,693 45,200 4,791,893

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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 $228.9 million at March 31, 2023 (March 31, 2022:

We held cash, cash equivalents and restricted cash of $333.7 million as of June 30, 2023 (June 30, 2022:

$330.8 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 $67.2 million for the three months ended March 31, 2023 (March 31, 2022:

Our operating activities provided net cash of $153.7 million for the six months ended June 30, 2023 (June 30, 2022:

$80.8 million).

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:

Our investing activities used net cash of $830.0 million in the six months ended June 30, 2023 compared to net cash provided by investing activities of $3.5 billion in the six months ended June 30, 2022.

We used cash of $2.4 billion to purchase MBS during the six months ended June 30, 2023 (June 30, 2022:

$14.4 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:

We used cash of $65.0 million to settle derivative contracts in the six months ended June 30, 2023 (June 30, 2022:

received cash of $424.7 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 $61.1 million from principal payments of MBS during the three months ended March 31, 2023 (March 31, 2022:

Our primary source of cash from investing activities for the six months ended June 30, 2023 was proceeds from sales of MBS of $1.5 billion (June 30, 2022:

$17.3 billion from the sales of MBS and $468.1 million from the sales of U.S.

Treasury securities).

We also generated $144.5 million from principal payments of MBS during the six months ended June 30, 2023 (June 30, 2022:

$264.8 million).

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

Our financing activities provided net cash of $731.2 million for the six months ended June 30, 2023 (June 30, 2022:

net cash used by financing activities of $3.8 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:

During the six months ended June 30, 2023, we received cash for net proceeds on our repurchase agreements of $724.6 million (June 30, 2022:

net cash used of $3.7 billion).

We also used cash of $53.5

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

million for the six months ended June 30, 2023 to pay dividends (June 30, 2022:

$75.9 million).

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.

Proceeds from issuance of common stock provided $66.8 million for the six months ended June 30, 2023.

As of June 30, 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.

21 unchanged sentences

Forward-Looking Statements Regarding Liquidity

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.

As of June 30, 2023, we held $5.2 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $283.3 million of unencumbered investments and unrestricted cash of $209.0 million as of June 30, 2023.

As of June 30, 2023, our known contractual obligations primarily consisted of $5.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 49 days.

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

11 unchanged sentences

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.

As of June 30, 2023, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $42.0 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of June 30, 2023.

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

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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 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.

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended June 30, 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.

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

3 unchanged sentences

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

We calculate that as of June 30, 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