What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-06 compared with 2023-08-03 · 194 added, 252 removed, 566 unchanged (44% of the section changed)

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

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

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

• unfavorable or changing economic, market or political conditions;

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

governmental agencies and changes to U.S.

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

• our business and investment strategy;

• our investment portfolio and expected investments;

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

• the availability of U.S.

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

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

• financing and advance rates for our target assets;

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

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

• changes to our expected leverage;

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

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

• changes in prepayment rates on our target assets;

• the impact of any deficiencies in loss mitigation of third parties and related uncertainty in the timing of collateral disposition;

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

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

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

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

• counterparty defaults;

• modifications to whole loans or loans underlying securities;

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

• disruption of our information technology systems;

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

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

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

federal income tax purposes;

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

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

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

• our intention and ability to pay dividends;

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

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

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

• our understanding of our competition;

• the impact of changes to U.S.

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

• market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us.

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These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us.

Some of these factors are described under the headings "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this Report.

We caution you not to rely unduly on any forward-looking statements and urge you to carefully consider the factors described under the headings "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report and our Annual Report on Form 10-K.

If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

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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 June 30, 2023, we were invested in:

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

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

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

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 second quarter of 2023.

Contributing factors included:

• 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.

• Financial conditions became more restrictive during the third quarter, reversing the trend from the prior quarter.

Credit spreads widened, equity market valuations declined, and both interest rates and interest rate volatility spiked higher as financial markets adjusted to shifting expectations for fiscal and monetary policy.

The latest inflation readings were mixed during the quarter, as sharply higher energy costs drove an increase in the headline consumer price index (“CPI”) from 3.0% to 3.7%, while CPI (ex.

food and energy) fell from 4.8% to 4.1%.

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.

Despite the mixed readings, investors continue to expect a further decline in inflation, as Treasury inflation-protected securities breakeven rates were relatively steady, with the two-year breakeven ending the quarter at 2.05% and the five-year breakeven ending at 2.25%.

• Interest rates increased during the quarter as the FOMC raised the Federal Funds target rate in July and delivered a "hawkish pause" in September, indicating that its benchmark rate may need to remain at elevated levels for longer than the market was anticipating.

Meanwhile, economic growth and employment data remained relatively strong.

The yield on the two-year Treasury increased by 15 basis points, to 5.04%, the yield on the five-year Treasury increased 45 basis points, to 4.61% and the yield on the ten-year Treasury finished at 4.57%, up 73 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.

• Agency RMBS sharply underperformed similar duration Treasuries during the third quarter as elevated interest rate volatility and higher interest rates weighed on the sector.

Although underperformance was pervasive across the coupon stack, higher coupon mortgages performed modestly better than lower coupon mortgages given the notable steepening of the yield curve.

The technical picture for the sector was mixed, as supply remains constrained by higher mortgage rates while increased interest rate volatility kept most buyers on the sidelines.

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

• The labor market remained strong as gains in non-farm payrolls averaged 266,000 per month, up from a monthly average of 201,00 last quarter.

The unemployment rate was slightly higher, ending the quarter up 0.2 at 3.8%.

• 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.

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.

• Risk assets broadly underperformed during the quarter.

The S&P 500 lost 3.65%, while the NASDAQ was down 4.12%.

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

• CMBS performance was mixed on the quarter.

Credit spreads for senior bonds declined while subordinate risk premiums increased during the quarter.

Increasing property vacancy rates, declining real estate values, elevated 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.

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.

The number of CMBS loans residing with special servicers increased.

• Non-Agency RMBS credit spread performance varied across subsectors during the quarter, as profiles with superior liquidity and favorable technicals outperformed those with greater interest rate sensitivity and persistent supply.

The resilience of home prices in the face of higher mortgage rates and historically low affordability has 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 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.

Moving into the fourth quarter of 2023, investors continue to price in the possibility of further increases in the Federal Funds target rate.

The uncertain path of monetary policy continues to result in elevated interest rate volatility in the front end of the yield curve, while the persistent strength in recent economic and employment data resulted in a sharp increase in longer-dated volatility as well.

In addition, the increase in geopolitical risk brought on by the ongoing war in Ukraine and the Middle East conflict have contributed to the recent elevated levels of interest rate and broader market volatility.

Although the immediate path of monetary policy remains uncertain, the potential decline in interest rate volatility in conjunction with the end of the tightening cycle should be supportive for Agency RMBS valuations.

Agency RMBS supply and demand dynamics are expected to improve in the coming quarters, as loan originations decline in the face of higher interest rates and seasonal factors.

Commercial banks should also soon receive greater clarity on their regulatory requirements, 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.

While we remain cautious in the near-term due to increased volatility, we believe over time the decline in interest rate volatility and a supportive technical environment, combined with compelling valuations and favorable funding conditions, should create attractive Agency RMBS investment opportunities.

Investment Activities

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

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

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

30 year fixed-rate, at fair value 5,331,969 4,661,737 4,252,742

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

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

3.0% — — % — — % 636,413 16.7 %

We sold $3.3 billion and purchased $4.5 billion of Agency RMBS during the nine months ended September 30, 2023.

As of September 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 94% as of September 30, 2022.

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

September 30, 2023 December 31, 2022 September 30, 2022

$ in thousands Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield

3.0% — — % — % — — % — % 201,298 4.7 % 3.77 %

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

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

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

September 30, 2023 December 31, 2022 September 30, 2022

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

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Low credit score 1,127,635 21.1 % 1,417,378 30.4 % 1,118,388 26.3 %

Investment property — — % — — % 68,008 1.6 %

Total 30 year fixed-rate Agency RMBS 5,331,969 100.0 % 4,661,737 100.0 % 4,252,742 100.0 %

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.

As of September 30, 2023 and December 31, 2022, we had no investments or immaterial investments in TBAs, versus 3% of our investment portfolio as of September 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 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.

As of September 30, 2023, December 31, 2022 and September 30, 2022, our holdings of non-Agency CMBS and non-Agency RMBS represented approximately 1% of our total investment portfolio, including TBAs.

Approximately 83% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 2023.

As of December 31, 2022 and September 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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Financing and Other Liabilities

We finance the majority of investment portfolio through repurchase agreements.

We finance the majority of our investment portfolio through repurchase agreements.

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to the secured overnight financing rate (“SOFR”).

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Maximum balance (2)

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

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

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

September 30, 2023 4,987,006 4,902,400 4,987,006

(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 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.

During the nine months ended September 30, 2023, we entered into interest rate swaps with a notional amount of $2.7 billion and terminated existing interest rate swaps with a notional amount of $4.0 billion.

Forward starting swaps are excluded from the additions and terminations above until they begin to bear interest.

We did not have any forward starting swaps as of September 30, 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 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 recorded net gains of $151.7 million and $203.9 million on interest rate swaps for the three and nine months ended September 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 June 30, 2023 or December 31, 2022.

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

Capital Activities

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.

As of September 30, 2023, we may sell up to 6,300,529 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 September 30, 2023, we sold 3,880,763 shares of common stock under our equity distribution agreement for proceeds of $42.3 million, net of approximately $575,000 in commissions and fees.

During the nine months ended September 30, 2023, we sold 9,699,471 shares of common stock under our equity distribution agreement for proceeds of $109.1 million, net of approximately $1.5 million in commissions and fees.

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

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

During the nine months ended September 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.

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.

During the three and nine months ended September 30, 2023, we repurchased and retired 34,432 and 72,220 shares of Series B Preferred Stock, respectively.

During the three and nine months ended September 30, 2023, we repurchased and retired 92,563 and 135,259 shares of Series C Preferred Stock, respectively.

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

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

As of September 30, 2023, we had authority to repurchase 1,265,414 additional shares of our Series B Preferred Stock and 1,181,211 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 June 30, 2023 December 31, 2022

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

Numerator (adjusted equity):

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Book value per common share 9.93 12.79

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.

Our book value per common share decreased 22% as of September 30, 2023 compared to December 31, 2022 primarily due to sharp underperformance of Agency RMBS relative to similar duration Treasuries during the third quarter as elevated interest rate volatility and higher interest rates weighed on the sector.

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 and six months ended June 30, 2023 and 2022.

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

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

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

$ in thousands, except share data 2023 2022 2023 2022

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Interest Income and Average Earning Asset Yields

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

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

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

Three Months Ended September 30, Nine Months Ended September 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 $5.3 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:

We had average earning assets of $5.5 billion for the three months ended September 30, 2023 (September 30, 2022:

$4.6 billion) and $5.3 billion for the nine months ended September 30, 2023 (September 30, 2022:

$5.4 billion).

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:

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

Average earning assets were relatively unchanged for the nine months ended September 30, 2023 compared to 2022 as we focused on our objective to maintain appropriate levels of leverage following declines in stockholders' equity.

Average earning asset yields increased for the three and nine months ended September 30, 2023 compared to 2022 primarily due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $75.1 million and $215.8 million for the three and nine months ended September 30, 2023, respectively (September 30, 2022:

$49.7 million and $136.5 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 June 30, Six Months Ended June 30,

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

$ in thousands 2023 2022 2023 2022

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Total interest income 75,132 49,728 215,847 136,457

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.

Mortgage-backed and other securities interest income increased $26.1 million and $81.2 million for the three and nine months ended September 30, 2023, respectively, compared to 2022 primarily due to a 112 and 202 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 and six months ended June 30, 2023 and 2022.

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

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

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

$ in thousands 2023 2022 2023 2022

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Net (premium amortization) discount accretion 2,932 (166) 4,412 (5,984)

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.

Net discount accretion was $2.9 million for the three months ended September 30, 2023 compared to net premium amortization of $166,000 for the same period in 2022.

Net discount accretion was $4.4 million for the nine months ended September 30, 2023 compared to net premium amortization of $6.0 million for the same period in 2022.

The change in net (premium amortization) discount accretion for the three and nine months ended September 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 and six months ended June 30, 2023 and 2022.

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

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

Three Months Ended September 30, Nine Months Ended September 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 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,

Total average borrowings increased $994.7 million and $90.7 million for the three and nine months ended September 30, 2023 compared to the same period in 2022, respectively, primarily due to higher leverage.

Our average cost of funds increased 352 and 428 basis points for the three and nine months ended September 30, 2023, respectively, compared to 2022 as the FOMC has raised the Federal Funds target rate from a range of 0.0% to 0.25% as of January 1, 2022 to a range of 5.25% to 5.50% as of September 30, 2023.

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

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

$ in thousands 2023 2022 2023 2022

4 unchanged sentences

Total interest expense 65,701 18,008 174,449 19,359

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, which equals our total interest expense, increased $47.7 million and $155.1 million for the three and nine months ended September 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 $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.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $1.8 million and $9.5 million during the three and nine months ended September 30, 2023 respectively, and $4.9 million and $14.9 million during the three and nine months ended September 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.

We expect that the remaining $900,000 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 in the fourth quarter of 2023.

Net Interest Income

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,

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

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

$ in thousands 2023 2022 2023 2022

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Net interest rate margin 0.11 % 2.51 % 0.56 % 2.82 %

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:

Our net interest income, which equals interest income less interest expense, totaled $9.4 million and $41.4 million for the three and nine months ended September 30, 2023, respectively (September 30, 2022:

$31.7 million and $117.1 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:

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 0.11% and 0.56% for the three and nine months ended September 30, 2023, respectively (September 30, 2022:

2.51% and 2.82%).

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.

The decrease in net interest income for the three and nine months ended September 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 nine months ended September 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 and six months ended June 30, 2023 and 2022.

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

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

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

$ in thousands 2023 2022 2023 2022

2 unchanged sentences

Net unrealized gains (losses) on commercial loan — 171 — 134

Net unrealized gains (losses) on U.S.

Treasury securities — 19,827 — —

Net realized gains (losses) on U.S.

1 unchanged sentence

Total gain (loss) on investments, net (224,897) (260,837) (272,620) (1,090,101)

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.

During the three and nine months ended September 30, 2023, we sold MBS and realized net losses of $33.2 million and $57.4 million, respectively (September 30, 2022:

net losses of $120.4 million and $974.4 million, respectively).

Net realized losses during the three and nine months ended September 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.

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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:

As of September 30, 2023, $5.4 billion (December 31, 2022:

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

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

We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $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 recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $191.8 million and $215.2 million in the three and nine months ended September 30, 2023, respectively, compared to net unrealized losses of $140.6 million and $81.6 million in the three and nine months ended September 30, 2022, respectively.

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

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

We recorded unrealized gains of $171,000 and $134,000 on our commercial loan investment in the three and nine months ended September 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 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.

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

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

As of September 30, 2023, $31.5 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.

During the three and nine months ended September 30, 2023, we recorded a $43,000 and a $212,000 provision for credit losses, respectively, 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 nine months ended September 30, 2022.

Equity in Earnings (Losses) of Unconsolidated Ventures

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

(June 30, 2022:

For the three and nine months ended September 30, 2023 we recorded equity in earnings of unconsolidated ventures of $2,000 and $4,000, respectively.

(September 30, 2022:

equity in losses of $6,000 and $287,000, respectively).

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$ in thousands

Three months ended June 30, 2023

Three months ended September 30, 2023

not designated as

1 unchanged sentence

Interest Rate Swaps 84,565 72,126 (5,002) 151,689

Currency Forward Contracts (18) — — (18)

TBAs (929) — 929 —

Total 84,565 72,126 (5,002) 151,689

$ in thousands

Three months ended June 30, 2022

Three months ended September 30, 2022

not designated as

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$ in thousands

Six months ended June 30, 2023

Nine months ended September 30, 2023

not designated as

5 unchanged sentences

$ in thousands

Six months ended June 30, 2022

Nine months ended September 30, 2022

not designated as

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Total 487,538 44,995 21,618 554,151

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 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.

Forward starting swaps are excluded from the additions and terminations above until they begin to bear interest.

We did not have any forward starting swaps as of September 30, 2023.

We recorded net gains of $151.7 million and $203.9 million on interest rate swaps for the three and nine months ended September 30, 2023, respectively, (September 30, 2022:

$138.9 million and $692.6 million, respectively) primarily due to changes in forward interest rate expectations.

As of September 30, 2023, we had $5.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 24 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 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

As of September 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 September 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

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5,900,000 0.79 % 5.31 % 7.7 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 June 30, 2023 that will receive floating interest based upon 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:

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

(1) As of December 31, 2022, we held $975.0 million notional amount of SOFR-based pay fixed and receive floating interest rate swaps with forward start dates that had a weighted average maturity of 16.5 years and a weighted average fixed pay rate of 0.89% that are excluded from the table above.

As of September 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 September 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

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950,000 5.31 % 5.30 % 0.7 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 June 30, 2023 that will pay floating interest based upon 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:

(1) As of December 31, 2022, we held $275.0 million notional amount of SOFR-based pay floating and receive fixed interest rate swaps with forward start dates that had a weighted average maturity of 16.0 years and a weighted average fixed receive rate of 2.63% that are excluded from that table above.

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

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 .

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

During the three and nine months ended September 30, 2022, we settled currency forward contracts of €5.8 million and €29.9 million, respectively, or $6.2 million and $34.0 million, respectively, in notional amount related to our investment in an unconsolidated venture and realized net gains of $187,000 and $866,000, 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 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.

As of September 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 nine months ended September 30, 2023.

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

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

Other Investment Income (Loss), net

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.

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

Other investment income (loss) for the nine months ended September 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 $3.1 million and $9.2 million for the three and nine months ended September 30, 2023, respectively (September 30, 2022:

$3.8 million and $13.7 million, respectively).

Management fees decreased for the three and nine months ended September 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 $2.0 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).

Our general and administrative expenses not covered under our management agreement amounted to $1.7 million and $5.7 million for the three and nine months ended September 30, 2023, respectively (September 30, 2022:

$2.0 million and $6.6 million, respectively).

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.

1 unchanged sentence

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.

During the three and nine months ended September 30, 2023, we repurchased and retired 34,432 and 72,220 shares of Series B Preferred Stock, respectively.

During the three and nine months ended September 30, 2023, we repurchased and retired 92,563 and 135,259 shares of Series C Preferred Stock, respectively.

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

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

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 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:

For the three months ended September 30, 2023, our net loss attributable to common stockholders was $74.0 million (September 30, 2022:

$94.6 million) or $1.62 basic and diluted net loss per average share available to common stockholders (September 30, 2022:

The change in net loss attributable to common stockholders was primarily due to (i) net losses on investments of $224.9 million in the 2023 period compared to $260.8 million in the 2022 period;

1 unchanged sentence

and (iii) a $22.3 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 losses on investments of $47.7 million in the 2023 period compared to $829.3 million in the 2022 period;

For the nine months ended September 30, 2023, our net loss attributable to common stockholders was $59.8 million (September 30, 2022:

$447.6 million) or $1.40 basic and diluted net loss per average share available to common stockholders (September 30, 2022:

The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $272.6 million in the 2023 period compared to $1.1 billion in the 2022 period;

(ii) net gains on derivative instruments of $203.4 million in the 2023 period compared to $554.2 million in the 2022 period;

23 unchanged sentences

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.

By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting

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

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

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

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

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

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

9 unchanged sentences

Foreign currency (gains) losses, net (3)

(27) 11 66 (44)

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

6 unchanged sentences

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

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

Three Months Ended September 30, Nine Months Ended September 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 June 30, Six Months Ended June 30,

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

$ in thousands 2023 2022 2023 2022

4 unchanged sentences

The table below shows the components of earnings available for distribution for the following periods.

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

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

$ in thousands 2023 2022 2023 2022

9 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 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.

Earnings available for distribution increased during the three and nine months ended September 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 June 30,

Three Months Ended September 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 (4,615) (0.37) % (7,282) (0.75) %

Six Months Ended June 30,

Nine Months Ended September 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 (6,073) (0.18) % (10,783) (0.30) %

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.

Our effective interest expense and effective cost of funds increased modestly in the three and nine months ended September 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 June 30,

Three Months Ended September 30,

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

3 unchanged sentences

Effective net interest income 79,747 5.84 % 57,010 5.10 %

Six Months Ended June 30,

Nine Months Ended September 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 221,920 5.57 % 147,240 3.67 %

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.

Our effective net interest income and effective interest rate margin increased in the three and nine months ended September 30, 2023 compared to the same periods in 2022 primarily due to higher interest income resulting from our rotation into higher yielding Agency RMBS.

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.

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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 June 30, 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 September 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 June 30, 2023, approximately 95% of our equity is allocated to Agency RMBS.

As of September 30, 2023, approximately 96% 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.

As of June 30, 2023

As of September 30, 2023

$ in thousands Agency

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(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.

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

As of December 31, 2022

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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 $333.7 million as of June 30, 2023 (June 30, 2022:

We held cash, cash equivalents and restricted cash of $359.7 million as of September 30, 2023 (September 30, 2022:

$264.4 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 $153.7 million for the six months ended June 30, 2023 (June 30, 2022:

Our operating activities provided net cash of $206.1 million for the nine months ended September 30, 2023 (September 30, 2022:

$126.8 million).

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:

Our investing activities used net cash of $899.8 million in the nine months ended September 30, 2023 compared to net cash provided by investing activities of $2.8 billion in the nine months ended September 30, 2022.

We used cash of $4.5 billion to purchase MBS and $48.7 million to purchase U.S.

Treasury securities during the nine months ended September 30, 2023 (September 30, 2022:

$20.7 billion to purchase MBS and $502.3 million to purchase U.S.

Treasury securities).

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 six months ended June 30, 2023 was proceeds from sales of MBS of $1.5 billion (June 30, 2022:

Our primary source of cash from investing activities for the nine months ended September 30, 2023 was proceeds from sales of MBS of $3.3 billion and proceeds from sales of U.S.

Treasury securities of $49.0 million (September 30, 2022:

$22.8 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:

We also generated $260.9 million from principal payments of MBS during the nine months ended September 30, 2023 (September 30, 2022:

$330.6 million).

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

We received cash of $19.6 million to settle derivative contracts in the nine months ended September 30, 2023 (September 30, 2022:

$487.5 million).

Our financing activities provided net cash of $774.6 million for the nine months ended September 30, 2023 compared to net cash used by financing activities of $3.3 billion in the nine months ended September 30, 2022.

During the nine months ended September 30, 2023, we received cash for net proceeds on our repurchase agreements of $752.2 million (September 30, 2022:

net cash used of $3.1 billion).

We also used cash of $53.5

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

We also used cash of $77.1 million for the nine months ended September 30, 2023 to pay dividends (September 30, 2022:

$111.5 million).

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.

Proceeds from issuance of common stock provided $109.1 million for the nine months ended September 30, 2023 (September 30, 2022:

$38.7 million).

As of September 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.

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Forward-Looking Statements Regarding Liquidity

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.

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

We also had approximately $218.3 million of unencumbered investments and unrestricted cash of $173.9 million as of September 30, 2023.

As of September 30, 2023, our known contractual obligations primarily consisted of $5.0 billion of repurchase agreement borrowings with a weighted average remaining maturity of 24 days.

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

Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities.

We are also committed to fund $2.9 million in additional capital to our unconsolidated joint ventures to cover future expenses should they occur.

We are also committed to fund $2.9 million in additional capital to our unconsolidated joint venture to cover future expenses should they occur.

Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.

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

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

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

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

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

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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 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.

As of September 30, 2023, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $39.3 million, or 5% of our stockholders' equity.

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

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

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

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

We calculate that as of June 30, 2023, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

We calculate that as of September 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