Invesco Mortgage Capital Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of $ in thousands, except share amounts June 30, 2023 December 31, 2022 ASSETS Mortgage-backed securities, at fair value (including pledged securities of $ 5,224,675 and $ 4,439,583 , respectively; net of allowance for credit losses of $ 169 and $ 0 , respectively) 5,507,460 4,791,893 Cash and cash equivalents 209,036 175,535 Restricted cash 124,669 103,246 Due from counterparties — 1,584 Investment related receivable 23,809 22,744 Derivative assets, at fair value — 662 Other assets 1,255 1,731 Total assets 5,866,229 5,097,395 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 4,959,388 4,234,823 Derivative liabilities, at fair value 2,635 2,079 Dividends payable 17,832 25,162 Accrued interest payable 40,159 20,546 Collateral held payable — 4,892 Accounts payable and accrued expenses 1,779 1,365 Due to affiliate 3,552 4,453 Total liabilities 5,025,345 4,293,320 Commitments and contingencies (See Note 14): Stockholders' equity: Preferred Stock, par value $ 0.01 per share; 50,000,000 shares authorized: 7.75 % Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 4,499,846 and 4,537,634 shares issued and outstanding, respectively ($ 112,496 and $ 113,441 aggregate liquidation preference, respectively) 108,766 109,679 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 7,773,774 and 7,816,470 shares issued and outstanding, respectively ($ 194,344 and $ 195,412 aggregate liquidation preference, respectively) 187,995 189,028 Common Stock, par value $ 0.01 per share; 67,000,000 shares authorized, 44,579,863 and 38,710,916 shares issued and outstanding, respectively 445 387 Additional paid in capital 3,968,567 3,901,562 Accumulated other comprehensive income 2,741 10,761 Retained earnings (distributions in excess of earnings) ( 3,427,630 ) ( 3,407,342 ) Total stockholders’ equity 840,884 804,075 Total liabilities and stockholders' equity 5,866,229 5,097,395 The accompanying notes are an integral part of these condensed consolidated financial statements. 1 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended June 30, Six Months Ended June 30, $ in thousands, except share data 2023 2022 2023 2022 Interest income Mortgage-backed and other securities 71,428 43,994 140,715 85,631 Commercial loan — 561 — 1,098 Total interest income 71,428 44,555 140,715 86,729 Interest expense Repurchase agreements 59,022 3,455 108,748 1,351 Total interest expense 59,022 3,455 108,748 1,351 Net interest income 12,406 41,100 31,967 85,378 Other income (loss) 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 ) Gain (loss) on derivative instruments, net 96,624 181,742 51,729 420,602 Other investment income (loss), net 27 ( 11 ) ( 66 ) 44 Total other income (loss) ( 3,197 ) ( 143,497 ) 3,773 ( 408,899 ) Expenses Management fee – related party 3,168 4,619 6,147 9,893 General and administrative 1,963 2,519 4,052 4,543 Total expenses 5,131 7,138 10,199 14,436 Net income (loss) 4,078 ( 109,535 ) 25,541 ( 337,957 ) 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 ) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 0.03 ) ( 3.52 ) 0.35 ( 10.70 ) Diluted ( 0.03 ) ( 3.52 ) 0.35 ( 10.70 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 2 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, $ in thousands 2023 2022 2023 2022 Net income (loss) 4,078 ( 109,535 ) 25,541 ( 337,957 ) Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed securities, net ( 131 ) ( 1,825 ) ( 607 ) ( 4,246 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses 169 — 169 — Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 3,201 ) ( 4,802 ) ( 7,695 ) ( 9,998 ) Currency translation adjustments on investment in unconsolidated venture — ( 93 ) ( 10 ) ( 293 ) Reclassification of currency translation loss on investment in unconsolidated venture to other investment income (loss), net — — 123 — Total other comprehensive income (loss) ( 3,163 ) ( 6,720 ) ( 8,020 ) ( 14,537 ) Comprehensive income (loss) 915 ( 116,255 ) 17,521 ( 352,494 ) 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 Comprehensive income (loss) attributable to common stockholders ( 4,561 ) ( 122,864 ) 6,183 ( 367,497 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2023 and June 30, 2023 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Balance as of December 31, 2022 4,537,634 109,679 7,816,470 189,028 38,710,916 387 3,901,562 10,761 ( 3,407,342 ) 804,075 Net income (loss) — — — — — — — — 21,463 21,463 Other comprehensive income (loss) — — — — — — — ( 4,857 ) — ( 4,857 ) Proceeds from issuance of common stock, net of offering costs — — — — 2,930,069 29 35,763 — — 35,792 Stock awards — — — — 6,259 — — — — — Common stock dividends — — — — — — — — ( 16,658 ) ( 16,658 ) Preferred stock dividends — — — — — — — — ( 5,862 ) ( 5,862 ) Amortization of equity-based compensation — — — — — — 162 — — 162 Balance as of March 31, 2023 4,537,634 109,679 7,816,470 189,028 41,647,244 416 3,937,487 5,904 ( 3,408,399 ) 834,115 Net income (loss) — — — — — — — — 4,078 4,078 Other comprehensive income (loss) — — — — — — — ( 3,163 ) — ( 3,163 ) Proceeds from issuance of common stock, net of offering costs — — — — 2,888,639 29 30,939 — — 30,968 Repurchase and retirement of preferred stock ( 37,788 ) ( 913 ) ( 42,696 ) ( 1,033 ) — — — — 364 ( 1,582 ) Stock awards — — — — 43,980 — — — — — Common stock dividends — — — — — — — — ( 17,833 ) ( 17,833 ) Preferred stock dividends — — — — — — — — ( 5,840 ) ( 5,840 ) Amortization of equity-based compensation — — — — — — 141 — — 141 Balance as of June 30, 2023 4,499,846 108,766 7,773,774 187,995 44,579,863 445 3,968,567 2,741 ( 3,427,630 ) 840,884 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three months ended March 31, 2022 and June 30, 2022 (Unaudited) Additional Paid in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Distributions in excess of earnings) Total Stockholders’ Equity Series B Preferred Stock Series C Preferred Stock $ in thousands, except share amounts Common Stock Shares Amount Shares Amount Shares Amount Balance as of December 31, 2021 6,200,000 149,860 11,500,000 278,108 32,987,478 330 3,819,375 37,286 ( 2,882,824 ) 1,402,135 Net income (loss) — — — — — — — — ( 228,422 ) ( 228,422 ) Other comprehensive income (loss) — — — — — — — ( 7,817 ) — ( 7,817 ) Stock awards — — — — 4,315 — — — — — Common stock dividends — — — — — — — — ( 29,693 ) ( 29,693 ) Preferred stock dividends — — — — — — — — ( 8,394 ) ( 8,394 ) Amortization of equity-based compensation — — — — — — 138 — — 138 Balance as of March 31, 2022 6,200,000 149,860 11,500,000 278,108 32,991,793 330 3,819,513 29,469 ( 3,149,333 ) 1,127,947 Net income (loss) — — — — — — — — ( 109,535 ) ( 109,535 ) Other comprehensive income (loss) — — — — — — — ( 6,720 ) — ( 6,720 ) Repurchase and retirement of preferred stock ( 43,820 ) ( 1,059 ) ( 620,141 ) ( 14,997 ) — — — — 1,491 ( 14,565 ) Stock awards — — — — 32,571 — — — — — Payments in lieu of fractional shares in connection with one-for-ten reverse stock split — — — — ( 46 ) — ( 1 ) — — ( 1 ) Common stock dividends — — — — — — — — — — Preferred stock dividends — — — — — — — — ( 29,721 ) ( 29,721 ) Redemption of preferred stock — — — — — — — — ( 8,100 ) ( 8,100 ) Amortization of equity-based compensation — — — — — — 158 — — 158 Balance as of June 30, 2022 6,156,180 148,801 10,879,859 263,111 33,024,318 330 3,819,670 22,749 ( 3,295,198 ) 959,463 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, $ in thousands 2023 2022 Cash Flows from Operating Activities Net income (loss) 25,541 ( 337,957 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of mortgage-backed and other securities premiums and (discounts), net 2,752 2,333 Realized and unrealized (gain) loss on derivative instruments, net 66,172 ( 405,752 ) (Gain) loss on investments, net 47,723 829,264 Increase (decrease) in provision for credit losses 169 — (Gain) loss from investments in unconsolidated ventures in excess of distributions received ( 2 ) 37 Other amortization ( 7,392 ) ( 9,702 ) Loss on foreign currency translation 123 — Changes in operating assets and liabilities: (Increase) decrease in operating assets ( 421 ) 2,182 Increase (decrease) in operating liabilities 19,079 374 Net cash provided by (used in) operating activities 153,744 80,779 Cash Flows from Investing Activities Purchase of mortgage-backed securities ( 2,393,198 ) ( 14,442,287 ) Purchase of U.S. Treasury securities — ( 502,290 ) Distributions from investments in unconsolidated ventures, net 40 8,524 Principal payments from mortgage-backed securities 144,515 264,791 Proceeds from sale of mortgage-backed securities 1,482,034 17,264,232 Proceeds from the sale of U.S. Treasury securities — 468,051 Settlement (termination) of forwards, swaps, and TBAs, net ( 64,954 ) 424,661 Net change in due from counterparties and collateral held payable on derivative instruments 1,584 ( 3,897 ) Net cash provided by (used in) investing activities ( 829,979 ) 3,481,785 Cash Flows from Financing Activities Proceeds from issuance of common stock 66,760 — Repurchase of preferred stock ( 1,582 ) ( 14,565 ) Cash paid in lieu of fractional shares in connection with one-for-ten reverse stock split — ( 1 ) Proceeds from repurchase agreements 17,156,436 35,949,170 Principal repayments of repurchase agreements ( 16,431,871 ) ( 39,674,474 ) Net change in due from counterparties and collateral held payable on repurchase agreements ( 4,892 ) 7,099 Payments of deferred costs ( 169 ) ( 184 ) Payments of dividends ( 53,523 ) ( 75,875 ) Net cash provided by (used in) financing activities 731,159 ( 3,808,830 ) Net change in cash, cash equivalents and restricted cash 54,924 ( 246,266 ) Cash, cash equivalents and restricted cash, beginning of period 278,781 577,052 Cash, cash equivalents and restricted cash, end of period 333,705 330,786 Supplement Disclosure of Cash Flow Information Interest paid 96,830 10,713 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed securities classified as available-for-sale 438 ( 4,246 ) Dividends declared not paid 17,832 29,722 Net change in investment related receivable (payable) — ( 791 ) Net change in foreign currency translation adjustment recorded in accumulated other comprehensive income ( 113 ) 293 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – Organization and Business Operations Invesco Mortgage Capital Inc. (the “Company” or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS”) and other mortgage-related assets. As of June 30, 2023, we were invested in: • residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”); • commercial mortgage-backed securities (“CMBS”) that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”); • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”); and • other real estate-related financing arrangements. During the periods presented in these condensed consolidated financial statements, we also invested in: • a commercial mortgage loan; and • U.S. Treasury securities. We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) and have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a leading independent global investment management firm. We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90 % of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the “Investment Company” definition under the Investment Company Act of 1940, as amended (the “1940 Act”). Note 2 – Summary of Significant Accounting Policies Basis of Presentation and Consolidation Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022. Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and consolidate the financial statements of the Company and its controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities and allowances for credit losses. Actual results may differ from those estimates. Significant Accounting Policies There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2022. 7 Table of Contents Note 3 – Variable Interest Entities ("VIEs") Our maximum risk of loss in VIEs in which we are not the primary beneficiary as of June 30, 2023 is presented in the table below. $ in thousands Carrying Amount Company's Maximum Risk of Loss Non-Agency CMBS 36,730 36,730 Non-Agency RMBS 8,256 8,256 Investments in unconsolidated ventures 503 503 Total 45,489 45,489 Refer to Note 4 - "Mortgage-Backed Securities" and Note 5 - "Other Assets" for additional details regarding these investments. Note 4 – Mortgage-Backed Securities The following tables summarize our MBS portfolio by asset type as of June 30, 2023 and December 31, 2022. As of June 30, 2023 $ in thousands Principal/ Notional Balance Unamortized Premium (Discount) Amortized Cost Allowance for Credit Losses Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) 30 year fixed-rate Agency RMBS 5,521,614 ( 170,891 ) 5,350,723 — 33,274 5,383,997 5.14 % Agency-CMO (2) 596,770 ( 518,048 ) 78,722 — ( 245 ) 78,477 9.60 % Non-Agency CMBS 38,652 ( 885 ) 37,767 ( 169 ) ( 868 ) 36,730 8.52 % Non-Agency RMBS (3)(4)(5) 291,613 ( 283,897 ) 7,716 — 540 8,256 8.41 % Total 6,448,649 ( 973,721 ) 5,474,928 ( 169 ) 32,701 5,507,460 5.24 % (1) Period-end weighted average yield is based on amortized cost as of June 30, 2023 and incorporates future prepayment and loss assumptions when appropriate. (2) All Agency collateralized mortgage obligations (“Agency-CMO”) are interest-only securities (“Agency IO”). (3) Non-Agency RMBS is 68.0 % fixed rate, 31.2 % variable rate, and 0.8 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 97.0 % of principal/notional balance, 39.3 % of amortized cost and 33.4 % of fair value. 8 Table of Contents As of December 31, 2022 $ in thousands Principal/Notional Balance Unamortized Premium (Discount) Amortized Cost Unrealized Gain/ (Loss), net Fair Value Period- end Weighted Average Yield (1) 30 year fixed-rate Agency RMBS 4,722,768 ( 115,365 ) 4,607,403 54,334 4,661,737 5.26 % Agency-CMO (2) 619,069 ( 536,376 ) 82,693 2,263 84,956 9.09 % Non-Agency CMBS 38,652 ( 1,472 ) 37,180 ( 393 ) 36,787 8.35 % Non-Agency RMBS (3)(4)(5) 307,016 ( 299,012 ) 8,004 409 8,413 8.33 % Total 5,687,505 ( 952,225 ) 4,735,280 56,613 4,791,893 5.35 % (1) Period-end weighted average yield is based on amortized cost as of December 31, 2022 and incorporates future prepayment and loss assumptions when appropriate. (2) All Agency-CMO are Agency IO. (3) Non-Agency RMBS is 68.6 % fixed rate, 30.6 % variable rate and 0.8 % floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index. (4) Of the total discount in non-Agency RMBS, $ 2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities. (5) Non-Agency RMBS includes non-Agency IO which represent 97.1 % of principal/notional balance, 41.6 % of amortized cost and 35.3 % of fair value. The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of June 30, 2023 and December 31, 2022. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, 2016. As of June 30, 2023 and December 31, 2022, approximately 99 % of our MBS was accounted for under the fair value option. As of June 30, 2023 December 31, 2022 $ in thousands Available-for-sale Securities Securities under Fair Value Option Total Fair Value Available-for-sale Securities Securities under Fair Value Option Total Fair Value 30 year fixed-rate Agency RMBS — 5,383,997 5,383,997 — 4,661,737 4,661,737 Agency-CMO — 78,477 78,477 — 84,956 84,956 Non-Agency CMBS 36,730 — 36,730 36,787 — 36,787 Non-Agency RMBS 5,703 2,553 8,256 5,667 2,746 8,413 Total 42,433 5,465,027 5,507,460 42,454 4,749,439 4,791,893 The components of the carrying value of our MBS portfolio as of June 30, 2023 and December 31, 2022 are presented below. Accrued interest receivable on our MBS portfolio, which is recorded within investment related receivable on our condensed consolidated balance sheets, was $ 23.8 million as of June 30, 2023 (December 31, 2022: $ 21.3 million). As of June 30, 2023 December 31, 2022 $ in thousands MBS Interest-Only Securities Total MBS Interest-Only Securities Total Principal/notional balance 5,568,991 879,658 6,448,649 4,770,175 917,330 5,687,505 Unamortized premium 2,674 — 2,674 5,195 — 5,195 Unamortized discount ( 178,489 ) ( 797,906 ) ( 976,395 ) ( 126,112 ) ( 831,308 ) ( 957,420 ) Allowance for credit losses ( 169 ) — ( 169 ) — — — Gross unrealized gains (1) 43,706 3,272 46,978 62,245 4,605 66,850 Gross unrealized losses (1) ( 10,492 ) ( 3,785 ) ( 14,277 ) ( 7,535 ) ( 2,702 ) ( 10,237 ) Fair value 5,426,221 81,239 5,507,460 4,703,968 87,925 4,791,893 (1) Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. Realization occurs upon sale or settlement of such securities. Further detail on the components of our total gains (losses) on investments, net for the three and six months ended June 30, 2023 and 2022 is provided below in this Note 4. 9 Table of Contents The following table summarizes our MBS portfolio according to estimated weighted average life classifications as of June 30, 2023 and December 31, 2022 . As of $ in thousands June 30, 2023 December 31, 2022 Less than one year 26,717 26,593 Greater than one year and less than five years 10,014 10,194 Greater than or equal to five years 5,470,729 4,755,106 Total 5,507,460 4,791,893 The following tables present the estimated fair value and gross unrealized losses of our MBS by length of time that such securities have been in a continuous unrealized loss position as of June 30, 2023 and December 31, 2022. As of June 30, 2023 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities 30 year fixed-rate Agency RMBS (1) 1,849,796 ( 9,597 ) 17 — — — 1,849,796 ( 9,597 ) 17 Agency-CMO (1) 42,147 ( 1,617 ) 8 8,773 ( 1,702 ) 3 50,920 ( 3,319 ) 11 Non-Agency CMBS (2) 36,730 ( 868 ) 3 — — — 36,730 ( 868 ) 3 Non-Agency RMBS (3) — — — 1,600 ( 493 ) 10 1,600 ( 493 ) 10 Total 1,928,673 ( 12,082 ) 28 10,373 ( 2,195 ) 13 1,939,046 ( 14,277 ) 41 (1) Fair value option has been elected for all Agency securities in an unrealized loss position. (2) Unrealized losses on non-Agency CMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to current amortized cost basis. (3) Includes non-Agency IO with a fair value of $ 1.3 million for which the fair value option has been elected. Such securities have unrealized losses of $ 466,000 . As of December 31, 2022 Less than 12 Months 12 Months or More Total $ in thousands Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities Fair Value Unrealized Losses Number of Securities 30 year fixed-rate Agency RMBS (1) 929,292 ( 7,060 ) 7 — — — 929,292 ( 7,060 ) 7 Agency-CMO (1) 25,417 ( 1,645 ) 6 2,934 ( 496 ) 1 28,351 ( 2,141 ) 7 Non-Agency CMBS (2) 26,592 ( 439 ) 2 — — — 26,592 ( 439 ) 2 Non-Agency RMBS (3) 349 ( 36 ) 2 1,411 ( 561 ) 9 1,760 ( 597 ) 11 Total 981,650 ( 9,180 ) 17 4,345 ( 1,057 ) 10 985,995 ( 10,237 ) 27 (1) Fair value option has been elected for all Agency securities in an unrealized loss position. (2) Unrealized losses on non-Agency CMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to current amortized cost basis. (3) Includes non-Agency IO with a fair value of $ 1.4 million for which the fair value option has been elected. Such securities have unrealized losses of $ 561,000 . 10 Table of Contents We recorded a $ 169,000 provision for credit losses on a single non-Agency CMBS during the three and six months ended June 30, 2023. We did no t record any provisions for credit losses during the three and six months ended June 30, 2022. The following table presents a roll-forward of our allowance for credit losses. Three Months Ended June 30, Six Months Ended June 30, $ in thousands 2023 2023 Beginning allowance for credit losses — — Additions to the allowance for credit losses on securities for which credit losses were not previously recorded ( 169 ) ( 169 ) Ending allowance for credit losses ( 169 ) ( 169 ) The following table summarizes the components of our total 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 Gross realized gains on sale of MBS — 5,348 5,363 5,348 Gross realized losses on sale of MBS ( 10,484 ) ( 540,404 ) ( 29,612 ) ( 859,374 ) Net unrealized gains (losses) on MBS accounted for under the fair value option ( 89,195 ) 224,464 ( 23,474 ) 58,997 Net unrealized gains (losses) on commercial loan — 87 — ( 37 ) Net unrealized gains (losses) on U.S. 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 ) The following tables present components of interest income recognized on our mortgage-backed and other securities portfolio for the three and six months ended June 30, 2023 and 2022. For the three months ended June 30, 2023 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 68,570 1,138 69,708 Non-Agency CMBS 491 296 787 Non-Agency RMBS 288 ( 125 ) 163 Other 770 — 770 Total 70,119 1,309 71,428 For the three months ended June 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 40,927 422 41,349 Non-Agency CMBS 668 509 1,177 Non-Agency RMBS 310 ( 132 ) 178 U.S. Treasury Securities 1,213 ( 25 ) 1,188 Other 102 — 102 Total 43,220 774 43,994 11 Table of Contents For the six months ended June 30, 2023 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 136,053 1,152 137,205 Non-Agency CMBS 966 587 1,553 Non-Agency RMBS 578 ( 259 ) 319 Other 1,638 — 1,638 Total 139,235 1,480 140,715 For the six months ended June 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 87,525 ( 6,506 ) 81,019 Non-Agency CMBS 1,405 1,012 2,417 Non-Agency RMBS 640 ( 283 ) 357 U.S. Treasury Securities 1,773 ( 41 ) 1,732 Other 106 — 106 Total 91,449 ( 5,818 ) 85,631 Note 5 – Other Assets The following table summarizes our other assets as of June 30, 2023 and December 31, 2022. As of $ in thousands June 30, 2023 December 31, 2022 Investments in unconsolidated ventures 503 552 Prepaid expenses and other assets 752 1,179 Total 1,255 1,731 As of December 31, 2022, we were invested 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. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitment to this unconsolidated venture. Note 6 – Borrowings We finance the majority of our investment portfolio through repurchase agreements. Our repurchase agreements bear interest at a contractually agreed upon rate and generally have maturities ranging from one to six months . We account for our repurchase agreements as secured borrowings since we maintain effective control of the financed assets. Our repurchase agreements are subject to certain financial covenants. We were in compliance with all of these covenants as of June 30, 2023. The following tables summarize certain characteristics of our borrowings as of June 30, 2023 and December 31, 2022. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase agreements. As of $ in thousands June 30, 2023 December 31, 2022 Weighted Weighted Weighted Average Weighted Average Average Remaining Average Remaining Amount Interest Maturity Amount Interest Maturity Outstanding Rate (days) Outstanding Rate (days) Repurchase Agreements - Agency RMBS 4,959,388 5.21 % 49 4,234,823 4.24 % 28 Total Borrowings 4,959,388 5.21 % 49 4,234,823 4.24 % 28 12 Table of Contents Note 7 - Collateral Positions The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, interest rate swaps and TBAs as of June 30, 2023 and December 31, 2022. Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 for a description of how we determine fair value. Agency RMBS collateral pledged is included in mortgage-backed securities on our condensed consolidated balance sheets. Cash collateral pledged on centrally cleared interest rate swaps is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is classified as due from counterparties on our condensed consolidated balance sheets. Cash collateral held that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of June 30, 2023 and December 31, 2022, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets. $ in thousands As of Collateral Pledged June 30, 2023 December 31, 2022 Repurchase Agreements: Agency RMBS 5,224,675 4,439,583 Total repurchase agreements collateral pledged 5,224,675 4,439,583 Derivative Instruments: Cash — 1,584 Restricted cash 124,669 103,246 Total derivative instruments collateral pledged 124,669 104,830 Total collateral pledged: Agency RMBS 5,224,675 4,439,583 Cash — 1,584 Restricted cash 124,669 103,246 Total collateral pledged 5,349,344 4,544,413 As of Collateral Held June 30, 2023 December 31, 2022 Repurchase Agreements: Cash — 4,892 Non-cash collateral — 7,216 Total repurchase agreements collateral held — 12,108 Repurchase Agreements Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value. We would be required to provide additional collateral to fund margin calls if the value of pledged assets declined. We intend to maintain a level of liquidity that will enable us to meet margin calls. The ratio of our total repurchase agreements collateral pledged to our total repurchase agreements outstanding was 105 % as of June 30, 2023 (December 31, 2022: 105 %) based on the fair value of the securities as reported in our condensed consolidated balance sheets. Interest Rate Swaps As of June 30, 2023 and December 31, 2022, all of our interest rate swaps were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange (“CME”) and LCH Limited (“LCH”) through a Futures Commission Merchant (“FCM”). We are required to pledge initial margin and daily variation margin for our centrally cleared interest rate 13 Table of Contents swaps that is based on the fair value of our contracts as determined by our FCM. Collateral pledged with our FCM is segregated in our books and records and can be in the form of cash or securities. Daily variation margin for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Certain of our FCM agreements include cross default provisions. TBAs Our TBAs provide for bilateral collateral pledging based on market value as determined by our counterparties. Collateral pledged with our TBA counterparties is segregated in our books and records and can be in the form of cash or securities. Our counterparties have the right to repledge the collateral posted and have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the contracts changes. Note 8 – Derivatives and Hedging Activities The following table summarizes changes in the notional amount of our derivative instruments during 2023. $ in thousands Notional Amount as of December 31, 2022 Additions Settlement, Termination, Expiration or Exercise Notional Amount as of June 30, 2023 Interest Rate Swaps (1) (2) 8,150,000 500,000 ( 775,000 ) 7,875,000 TBA Purchase Contracts 400,000 1,150,000 ( 1,550,000 ) — TBA Sale Contracts ( 400,000 ) ( 1,150,000 ) 1,550,000 — Total 8,150,000 500,000 ( 775,000 ) 7,875,000 (1) Does not include interest rate swaps with forward start dates until the date they begin to bear interest. See below for additional detail on our interest rate swaps with forward start dates. (2) Notional amount as of June 30, 2023 includes $ 6.3 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $ 1.6 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate. Notional amount as of December 31, 2022 includes $ 5.8 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $ 2.4 billion of interest rate swaps whereby we pay interest at a floating rate and receive interest at a fixed rate. Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our derivative counterparties. Interest Rate Swaps Our repurchase agreements are usually settled on a short-term basis ranging from one month to six months . At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Under the terms of the majority of our interest rate swap contracts, we make fixed-rate payments to a counterparty in exchange for the receipt of floating-rate amounts over the life of the agreements without exchange of the underlying notional amount. To a lesser extent, we also enter into interest rate swap contracts whereby we make floating-rate payments to a counterparty in exchange for the receipt of fixed-rate amounts as part of our overall risk management strategy. Amounts recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We reclassified $ 3.2 million and $ 7.7 million as a decrease (June 30, 2022: $ 4.8 million and $ 10.0 million as a decrease) to interest expense for the three and six months ended June 30, 2023, respectively. As of June 30, 2023, $ 2.7 million (December 31, 2022: $ 10.4 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and are expected to be reclassified as a decrease to interest expense, repurchase agreements over a period of time through December 15, 2023. 14 Table of Contents As of June 30, 2023 and December 31, 2022, we had interest rate swaps whereby we pay interest at a fixed rate and receive floating interest based on the secured overnight financing rate (“SOFR”) with the following maturities outstand ing, excluding interest rate swaps with forward start dates. $ in thousands As of June 30, 2023 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 2,050,000 0.18 % 5.09 % 1.9 3 to 5 years 1,475,000 0.27 % 5.09 % 4.2 5 to 7 years 850,000 0.38 % 5.09 % 5.7 7 to 10 years 1,425,000 0.55 % 5.09 % 7.3 Greater than 10 years 500,000 1.92 % 5.09 % 18.7 Total 6,300,000 0.45 % 5.09 % 5.5 $ in thousands As of December 31, 2022 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 1,550,000 0.09 % 4.30 % 2.2 3 to 5 years 1,475,000 0.27 % 4.30 % 4.7 5 to 7 years 850,000 0.38 % 4.30 % 6.2 7 to 10 years 1,425,000 0.55 % 4.30 % 7.8 Greater than 10 years 500,000 1.92 % 4.30 % 19.2 Total 5,800,000 0.45 % 4.30 % 6.3 As of June 30, 2023, we held $ 475.0 million notional amount of interest rate swaps with forward start dates that will receive floating interest based on SOFR (December 31, 2022: $ 975.0 million). 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: 0.89 %). As of June 30, 2023 and December 31, 2022, we had interest rate swaps whereby we pay floating interest based on SOFR and receive interest at a fixed rate with the following maturities outstanding, excluding interest rate swaps with forward start dates. $ in thousands As of June 30, 2023 Maturities Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity 3 to 5 years 375,000 5.09 % 2.66 % 4.6 5 to 7 years 825,000 5.09 % 2.68 % 6.0 7 to 10 years 100,000 5.09 % 2.74 % 8.9 Greater than 10 years 275,000 5.09 % 2.72 % 29.0 Total 1,575,000 5.09 % 2.69 % 9.9 15 Table of Contents $ in thousands As of December 31, 2022 Maturities Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Less than 3 years 100,000 4.30 % 4.90 % 0.9 3 to 5 years 550,000 4.30 % 2.74 % 4.0 5 to 7 years 1,125,000 4.30 % 2.66 % 6.0 7 to 10 years 200,000 4.30 % 2.66 % 8.4 Greater than 10 years 375,000 4.30 % 2.67 % 29.5 Total 2,350,000 4.30 % 2.78 % 9.3 As of June 30, 2023, we held $ 275.0 million notional amount of interest rate swaps with forward start dates that will pay floating interest based on SOFR (December 31, 2022: $ 275.0 million). 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: 2.63 %). Currency Forward Contracts We have historically used currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. We did not have any currency forward contracts outstanding as of June 30, 2023 or December 31, 2022. TBAs We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of December 31, 2022. We did not have any TBAs outstanding as of June 30, 2023. $ in thousands As of December 31, 2022 Notional Amount Implied Cost Basis Implied Market Value Net Carrying Value TBA Purchase Contracts (1) 400,000 404,144 402,237 ( 1,907 ) TBA Sale Contracts (2) ( 400,000 ) ( 402,707 ) ( 402,237 ) 470 Net TBA Derivatives — 1,437 — ( 1,437 ) (1) Net carrying value of TBA purchase contracts includes $ 1.9 million of derivative liabilities. (2) Net carrying value of TBA sales contract includes $ 642,000 of derivative assets and $ 172,000 of derivative liabilities. Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. $ in thousands Derivative Assets Derivative Liabilities As of As of June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 Balance Sheet Fair Value Fair Value Balance Sheet Fair Value Fair Value Interest Rate Swaps Asset — 20 Interest Rate Swaps Liability 2,635 — TBAs — 642 TBAs — 2,079 Total Derivative Assets — 662 Total Derivative Liabilities 2,635 2,079 16 Table of Contents The following tables summarize the effect of interest rate swaps, currency forward contracts and TBAs reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022. $ in thousands Three Months Ended June 30, 2023 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 27,893 63,437 5,312 96,642 Currency Forward Contracts ( 18 ) — — ( 18 ) TBAs ( 929 ) — 929 — Total 26,946 63,437 6,241 96,624 $ in thousands Three Months Ended June 30, 2022 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 209,913 13,566 ( 2,966 ) 220,513 Currency Forward Contracts 486 — ( 177 ) 309 TBAs ( 69,167 ) — 30,087 ( 39,080 ) Total 141,232 13,566 26,944 181,742 $ in thousands Six Months Ended June 30, 2023 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps ( 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 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 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 17 Table of Contents Note 9 – Offsetting Assets and Liabilities Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets. The following tables present information about the assets and liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Our derivative liability of $ 2.6 million as of June 30, 2023 (December 31, 2022: asset of $ 20,000 ) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin. As of June 30, 2023 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Liabilities Repurchase Agreements (1) ( 4,959,388 ) — ( 4,959,388 ) 4,959,388 — — Total Liabilities ( 4,959,388 ) — ( 4,959,388 ) 4,959,388 — — As of December 31, 2022 Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets $ in thousands Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Balance Sheets Net Amounts of Assets (Liabilities) Presented in the Balance Sheets Financial Instruments Cash Collateral (Received) Pledged Net Amount Assets Derivatives (2) (3) 642 — 642 ( 642 ) — — Total Assets 642 — 642 ( 642 ) — — Liabilities Derivatives (2) (3) ( 2,079 ) — ( 2,079 ) 642 1,297 ( 140 ) Repurchase Agreements (1) ( 4,234,823 ) — ( 4,234,823 ) 4,234,823 — — Total Liabilities ( 4,236,902 ) — ( 4,236,902 ) 4,235,465 1,297 ( 140 ) (1) The fair value of securities pledged against our borrowings under repurchase agreements was $ 5.2 billion as of June 30, 2023 (December 31, 2022: $ 4.4 billion). We held no cash collateral under repurchase agreements as of June 30, 2023 (December 31, 2022: $ 4.9 million). (2) Amounts represent derivative assets and derivative liabilities which could potentially be offset against other derivative assets, derivative liabilities and cash collateral pledged or received. (3) Cash collateral pledged by us on our derivatives was $ 124.7 million as of June 30, 2023 (December 31, 2022: $ 104.8 million) of which $ 124.7 million relates to initial margin pledged on centrally cleared interest rate swaps (December 31, 2022: $ 103.2 million). C entrally cleared interest rate swaps are excluded from the tables above. We held no cash collateral on our derivatives as of June 30, 2023 and December 31, 2022 . 18 Table of Contents Note 10 – Fair Value of Financial Instruments A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows: • Level 1 Inputs – Quoted prices for identical instruments in active markets. • Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. • Level 3 Inputs – Instruments with primarily unobservable value drivers. The following tables present our assets and liabilities measured at fair value on a recurring basis. As of June 30, 2023 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (2) Total at Fair Value Assets: Mortgage-backed securities (1) — 5,507,460 — — 5,507,460 Other assets — — — 503 503 Total assets — 5,507,460 — 503 5,507,963 Liabilities: Derivative liabilities — 2,635 — — 2,635 Total liabilities — 2,635 — — 2,635 As of December 31, 2022 Fair Value Measurements Using: $ in thousands Level 1 Level 2 Level 3 NAV as a practical expedient (2) Total at Fair Value Assets: Mortgage-backed securities (1) — 4,791,893 — — 4,791,893 Derivative assets — 662 — — 662 Other assets — — — 552 552 Total assets — 4,792,555 — 552 4,793,107 Liabilities: Derivative liabilities — 2,079 — — 2,079 Total liabilities — 2,079 — — 2,079 (1) For more detail about the fair value of our MBS, refer to Note 4 - “Mortgage-Backed Securities”. (2) Investments in unconsolidated ventures are valued using the net asset value (“NAV”) as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of December 31, 2022, we were invested in two unconsolidated ventures that were managed by an affiliate of our Manager. One of the unconsolidated ventures was dissolved during the first quarter of 2023. As of June 30, 2023, the remaining unconsolidated venture was in liquidation and plans to sell or settle its remaining investments as expeditiously as possible. 19 Table of Contents The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets as of June 30, 2023 and December 31, 2022. As of June 30, 2023 December 31, 2022 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Liabilities Repurchase agreements 4,959,388 4,958,370 4,234,823 4,233,627 Total 4,959,388 4,958,370 4,234,823 4,233,627 The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality. Note 11 – Related Party Transactions Our Manager is at all times subject to the supervision and oversight of our board of directors and has only such functions and authority as we delegate to it. Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. The costs of support personnel provided by our Manager for the three and six months ended June 30, 2023 reimbursed or reimbursable by us were $ 461,000 and $ 870,000 , respectively (June 30, 2022: $ 337,000 and $ 750,000 , respectively). Management Fee We pay our Manager a fee equal to 1.50 % of our stockholders' equity per annum. For purposes of calculating the management fee, stockholders' equity is calculated as average month-end stockholders' equity for the prior calendar quarter as determined in accordance with U.S. GAAP. Stockholders' equity may exclude one-time events due to changes in U.S. GAAP and certain non-cash items upon approval by a majority of our independent directors. We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager. Expense Reimbursement We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, legal services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation. The following table summarizes the costs incurred on our behalf by our Manager during 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 Incurred costs, prepaid or expensed 1,294 2,020 2,688 3,357 Incurred costs, charged or expected to be charged against equity as a cost of raising capital 257 159 257 217 Total incurred costs, originally paid by our Manager 1,551 2,179 2,945 3,574 Note 12 – Stockholders’ Equity 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. 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. 20 Table of Contents Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75 % of the liquidation preference of $ 25.00 per share or $ 1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate originally equal to three-month London Interbank Offered Rate (“LIBOR”) plus a spread of 5.18 % of the $ 25.00 liquidation preference per annum. On June 30, 2023, LIBOR ceased being published. Under the Adjustable Interest Rate (LIBOR) Act ( “LIBOR Act”), the floating rate will be three-month CME Term SOFR plus the applicable credit spread adjustment ( 0.26161 %). Dividends are cumulative and payable quarterly in arrears. Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50 % of the liquidation preference of $ 25.00 per share or $ 1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate originally equal to three-month LIBOR plus a spread of 5.289 % of the $ 25.00 liquidation preference per annum. Under the LIBOR Act, the floating rate will be three-month CME Term SOFR plus the applicable credit spread adjustment ( 0.26161 %). Dividends are cumulative and payable quarterly in arrears. We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $ 25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company before those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control. Common Stock In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock. The reverse stock split was effected following the close of business on June 3, 2022 (the “Effective Time”). At the Effective Time, every ten issued and outstanding shares of our common stock were converted into one share of our common stock. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares received cash, in lieu of such fractional shares, in an amount determined based on the closing price of our common stock at the Effective Time. The reverse stock split applied to all of our outstanding shares of common stock and did not affect any stockholder’s ownership percentage of our common stock, except for changes resulting from the payment of cash for fractional shares. As of 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. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). 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. During the three and six months ended June 30, 2023 and 2022, we did not repurchase any shares of our common stock. As of June 30, 2023, we had authority to purchase 1,816,398 shares of our common stock through our common stock share repurchase program. 21 Table of Contents Accumulated Other Comprehensive Income The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income (“AOCI”) for the three and six months ended June 30, 2023 and 2022. The tables exclude gains and losses on MBS that are accounted for under the fair value option. Three Months Ended June 30, 2023 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 131 ) — ( 131 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses — 169 — 169 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 3,201 ) ( 3,201 ) Total other comprehensive income (loss) — 38 ( 3,201 ) ( 3,163 ) AOCI balance at beginning of period — ( 7 ) 5,911 5,904 Total other comprehensive income (loss) — 38 ( 3,201 ) ( 3,163 ) AOCI balance at end of period — 31 2,710 2,741 Three Months Ended June 30, 2022 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 1,825 ) — ( 1,825 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 4,802 ) ( 4,802 ) Currency translation adjustments on investment in unconsolidated venture ( 93 ) — — ( 93 ) Total other comprehensive income (loss) ( 93 ) ( 1,825 ) ( 4,802 ) ( 6,720 ) AOCI balance at beginning of period 224 4,328 24,917 29,469 Total other comprehensive income (loss) ( 93 ) ( 1,825 ) ( 4,802 ) ( 6,720 ) AOCI balance at end of period 131 2,503 20,115 22,749 22 Table of Contents Six Months Ended June 30, 2023 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 607 ) — ( 607 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses — 169 — 169 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 7,695 ) ( 7,695 ) Currency translation adjustments on investment in unconsolidated venture ( 10 ) — — ( 10 ) Reclassification of currency translation loss on investment in unconsolidated venture to other investment income (loss), net 123 — — 123 Total other comprehensive income (loss) 113 ( 438 ) ( 7,695 ) ( 8,020 ) AOCI balance at beginning of period ( 113 ) 469 10,405 10,761 Total other comprehensive income (loss) 113 ( 438 ) ( 7,695 ) ( 8,020 ) AOCI balance at end of period — 31 2,710 2,741 Six Months Ended June 30, 2022 $ in thousands Equity method investments Available-for-sale securities Derivatives and hedging Total Total other comprehensive income (loss) Unrealized gain (loss) on mortgage-backed securities, net — ( 4,246 ) — ( 4,246 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 9,998 ) ( 9,998 ) Currency translation adjustments on investment in unconsolidated venture ( 293 ) — — ( 293 ) Total other comprehensive income (loss) ( 293 ) ( 4,246 ) ( 9,998 ) ( 14,537 ) AOCI balance at beginning of period 424 6,749 30,113 37,286 Total other comprehensive income (loss) ( 293 ) ( 4,246 ) ( 9,998 ) ( 14,537 ) AOCI balance at end of period 131 2,503 20,115 22,749 Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements. 23 Table of Contents Dividends The table below summarizes the dividends we declared during the six months ended June 30, 2023 and 2022. $ in thousands, except per share amounts Dividends Declared Series B Preferred Stock Per Share In Aggregate Date of Payment 2023 May 8, 2023 0.4844 2,186 June 27, 2023 February 17, 2023 0.4844 2,198 March 27, 2023 2022 May 3, 2022 0.4844 2,991 June 27, 2022 February 16, 2022 0.4844 3,003 March 28, 2022 $ in thousands, except per share amounts Dividends Declared Series C Preferred Stock Per Share In Aggregate Date of Payment 2023 May 8, 2023 0.46875 3,654 June 27, 2023 February 17, 2023 0.46875 3,664 March 27, 2023 2022 May 3, 2022 0.46875 5,109 June 27, 2022 February 16, 2022 0.46875 5,391 March 28, 2022 $ in thousands, except per share amounts Dividends Declared Common Stock Per Share In Aggregate Date of Payment 2023 June 21, 2023 0.40 17,833 July 27, 2023 March 27, 2023 0.40 16,658 April 27, 2023 2022 June 27, 2022 0.90 29,721 July 27, 2022 March 28, 2022 0.90 29,693 April 27, 2022 24 Table of Contents Note 13 – Earnings (Loss) per Common Share Earnings (loss) per share for the three and six months ended June 30, 2023 and 2022 is computed as shown in the table below. Three Months Ended June 30, Six Months Ended June 30, In thousands, except per share amounts 2023 2022 2023 2022 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders ( 1,398 ) ( 116,144 ) 14,203 ( 352,960 ) Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 42,391 32,990 41,007 32,988 Effect of dilutive securities: Restricted stock awards — — 1 — Dilutive Shares 42,391 32,990 41,008 32,988 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 0.03 ) ( 3.52 ) 0.35 ( 10.70 ) Diluted ( 0.03 ) ( 3.52 ) 0.35 ( 10.70 ) The following potential weighted average common shares were excluded from diluted earnings per share for the three months ended June 30, 2023 as the effect would be antidilutive: 654 (three and six months ended June 30, 2022: 1,127 and 1,314 for restricted stock awards, respectively) . Note 14 – Commitments and Contingencies Commitments and Contingencies Commitments and contingencies may arise in the ordinary course of business. Our material off-balance sheet commitments as of June 30, 2023 are discussed below. As discussed in Note 5 - “Other Assets”, we have invested in an unconsolidated venture that is sponsored by an affiliate of our Manager. The unconsolidated venture is structured as a partnership, and we invested in the partnership as a limited partner. The 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. Note 15 – Subsequent Events Dividends We declared the following dividends on August 2, 2023: a Series B Preferred Stock dividend of $ 0.4844 per share payable on September 27, 2023 to our stockholders of record as of September 5, 2023 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on September 27, 2023 to our stockholders of record as of September 5, 2023. 25 Table of Contents