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 September 30, 2023 December 31, 2022 ASSETS Mortgage-backed securities, at fair value (including pledged securities of $ 5,226,133 and $ 4,439,583 , respectively; net of allowance for credit losses of $ 212 and $ 0 , respectively) 5,443,928 4,791,893 Cash and cash equivalents 173,921 175,535 Restricted cash 185,824 103,246 Due from counterparties — 1,584 Investment related receivable 25,608 22,744 Derivative assets, at fair value — 662 Other assets 2,062 1,731 Total assets 5,831,343 5,097,395 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Repurchase agreements 4,987,006 4,234,823 Derivative liabilities, at fair value 7,637 2,079 Dividends payable 19,384 25,162 Accrued interest payable 26,751 20,546 Collateral held payable — 4,892 Accounts payable and accrued expenses 1,838 1,365 Due to affiliate 3,702 4,453 Total liabilities 5,046,318 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: 4,465,414 and 4,537,634 shares issued and outstanding, respectively ($ 111,635 and $ 113,441 aggregate liquidation preference, respectively) 107,934 109,679 7.50 % Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 7,681,211 and 7,816,470 shares issued and outstanding, respectively ($ 192,030 and $ 195,412 aggregate liquidation preference, respectively) 185,757 189,028 Common Stock, par value $ 0.01 per share; 67,000,000 shares authorized, 48,460,626 and 38,710,916 shares issued and outstanding, respectively 484 387 Additional paid in capital 4,011,005 3,901,562 Accumulated other comprehensive income 883 10,761 Retained earnings (distributions in excess of earnings) ( 3,521,038 ) ( 3,407,342 ) Total stockholders’ equity 785,025 804,075 Total liabilities and stockholders' equity 5,831,343 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 September 30, Nine Months Ended September 30, $ in thousands, except share data 2023 2022 2023 2022 Interest income Mortgage-backed and other securities 75,132 49,058 215,847 134,689 Commercial loan — 670 — 1,768 Total interest income 75,132 49,728 215,847 136,457 Interest expense Repurchase agreements 65,701 18,008 174,449 19,359 Total interest expense 65,701 18,008 174,449 19,359 Net interest income 9,431 31,720 41,398 117,098 Other income (loss) Gain (loss) on investments, net ( 224,897 ) ( 260,837 ) ( 272,620 ) ( 1,090,101 ) (Increase) decrease in provision for credit losses ( 43 ) — ( 212 ) — Equity in earnings (losses) of unconsolidated ventures 2 ( 6 ) 4 ( 287 ) Gain (loss) on derivative instruments, net 151,689 133,549 203,418 554,151 Other investment income (loss), net — — ( 66 ) 44 Total other income (loss) ( 73,249 ) ( 127,294 ) ( 69,476 ) ( 536,193 ) Expenses Management fee – related party 3,090 3,836 9,237 13,729 General and administrative 1,691 2,018 5,743 6,561 Total expenses 4,781 5,854 14,980 20,290 Net income (loss) ( 68,599 ) ( 101,428 ) ( 43,058 ) ( 439,385 ) Dividends to preferred stockholders ( 5,772 ) ( 5,862 ) ( 17,474 ) ( 22,356 ) Gain on repurchase and retirement of preferred stock 347 12,688 711 14,179 Net income (loss) attributable to common stockholders ( 74,024 ) ( 94,602 ) ( 59,821 ) ( 447,562 ) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 1.62 ) ( 2.78 ) ( 1.40 ) ( 13.42 ) Diluted ( 1.62 ) ( 2.78 ) ( 1.40 ) ( 13.42 ) 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 September 30, Nine Months Ended September 30, $ in thousands 2023 2022 2023 2022 Net income (loss) ( 68,599 ) ( 101,428 ) ( 43,058 ) ( 439,385 ) Other comprehensive income (loss): Unrealized gain (loss) on mortgage-backed securities, net ( 91 ) ( 1,243 ) ( 698 ) ( 5,489 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses 43 — 212 — Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense ( 1,810 ) ( 4,855 ) ( 9,505 ) ( 14,853 ) Currency translation adjustments on investment in unconsolidated venture — ( 141 ) ( 10 ) ( 434 ) Reclassification of currency translation loss on investment in unconsolidated venture to other investment income (loss), net — — 123 — Total other comprehensive income (loss) ( 1,858 ) ( 6,239 ) ( 9,878 ) ( 20,776 ) Comprehensive income (loss) ( 70,457 ) ( 107,667 ) ( 52,936 ) ( 460,161 ) Dividends to preferred stockholders ( 5,772 ) ( 5,862 ) ( 17,474 ) ( 22,356 ) Gain on repurchase and retirement of preferred stock 347 12,688 711 14,179 Comprehensive income (loss) attributable to common stockholders ( 75,882 ) ( 100,841 ) ( 69,699 ) ( 468,338 ) 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; June 30, 2023 and September 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 Net income (loss) — — — — — — — — ( 68,599 ) ( 68,599 ) Other comprehensive income (loss) — — — — — — — ( 1,858 ) — ( 1,858 ) Proceeds from issuance of common stock, net of offering costs 3,880,763 39 42,305 42,344 Repurchase and retirement of preferred stock ( 34,432 ) ( 832 ) ( 92,563 ) ( 2,238 ) — — — — 347 ( 2,723 ) Common stock dividends — — — — — — — — ( 19,384 ) ( 19,384 ) Preferred stock dividends — — — — — — — — ( 5,772 ) ( 5,772 ) Amortization of equity-based compensation — — — — — — 133 — — 133 Balance at September 30, 2023 4,465,414 107,934 7,681,211 185,757 48,460,626 484 4,011,005 883 ( 3,521,038 ) 785,025 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; June 30, 2022 and September 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 Net income (loss) — — — — — — — — ( 101,428 ) ( 101,428 ) Other comprehensive income (loss) — — — — — — — ( 6,239 ) — ( 6,239 ) Proceeds from issuance of common stock, net of offering costs — — — — 2,327,805 23 38,590 — — 38,613 Repurchase and retirement of preferred stock ( 1,618,546 ) ( 39,122 ) ( 3,063,389 ) ( 74,083 ) — — — — 12,688 ( 100,517 ) Common stock dividends — — — — — — — — ( 22,979 ) ( 22,979 ) Preferred stock dividends — — — — — — — — ( 5,862 ) ( 5,862 ) Amortization of equity-based compensation — — — — — — 158 — — 158 Balance at September 30, 2022 4,537,634 109,679 7,816,470 189,028 35,352,123 353 3,858,418 16,510 ( 3,412,779 ) 761,209 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) Nine Months Ended September 30, $ in thousands 2023 2022 Cash Flows from Operating Activities Net income (loss) ( 43,058 ) ( 439,385 ) 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 ( 4,412 ) 835 Realized and unrealized (gain) loss on derivative instruments, net ( 13,391 ) ( 509,156 ) (Gain) loss on investments, net 272,620 1,090,101 Increase (decrease) in provision for credit losses 212 — (Gain) loss from investments in unconsolidated ventures in excess of distributions received ( 4 ) 38 Other amortization ( 9,069 ) ( 14,399 ) Loss on foreign currency translation 123 — Changes in operating assets and liabilities: (Increase) decrease in operating assets ( 3,106 ) ( 1,901 ) Increase (decrease) in operating liabilities 6,200 651 Net cash provided by (used in) operating activities 206,115 126,784 Cash Flows from Investing Activities Purchase of mortgage-backed securities ( 4,522,098 ) ( 20,721,166 ) Purchase of U.S. Treasury securities ( 48,672 ) ( 502,290 ) Distributions from investments in unconsolidated ventures, net 41 8,529 Principal payments from mortgage-backed securities 260,942 330,550 Proceeds from sale of mortgage-backed securities 3,339,830 22,775,148 Proceeds from the sale of U.S. Treasury securities 48,977 468,051 Settlement (termination) of forwards, swaps, and TBAs, net 19,611 487,538 Net change in due from counterparties and collateral held payable on derivative instruments 1,584 ( 649 ) Net cash provided by (used in) investing activities ( 899,785 ) 2,845,711 Cash Flows from Financing Activities Proceeds from issuance of common stock 109,104 38,726 Repurchase of preferred stock ( 4,305 ) ( 115,082 ) Cash paid in lieu of fractional shares in connection with one-for-ten reverse stock split — ( 1 ) Proceeds from repurchase agreements 28,937,349 51,685,864 Principal repayments of repurchase agreements ( 28,185,166 ) ( 54,786,407 ) Net change in due from counterparties and collateral held payable on repurchase agreements ( 4,892 ) 3,527 Payments of deferred costs ( 329 ) ( 350 ) Payments of dividends ( 77,127 ) ( 111,459 ) Net cash provided by (used in) financing activities 774,634 ( 3,285,182 ) Net change in cash, cash equivalents and restricted cash 80,964 ( 312,687 ) Cash, cash equivalents and restricted cash, beginning of period 278,781 577,052 Cash, cash equivalents and restricted cash, end of period 359,745 264,365 Supplement Disclosure of Cash Flow Information Interest paid 177,748 31,616 Non-cash Investing and Financing Activities Information Net change in unrealized gain (loss) on mortgage-backed securities classified as available-for-sale 486 ( 5,489 ) Dividends declared not paid 19,384 22,979 Net change in investment related receivable (payable) 80 ( 416 ) Net change in foreign currency translation adjustment recorded in accumulated other comprehensive income ( 113 ) 434 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 September 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 September 30, 2023 is presented in the table below. $ in thousands Carrying Amount Company's Maximum Risk of Loss Non-Agency CMBS 25,987 25,987 Non-Agency RMBS 7,965 7,965 Investments in unconsolidated ventures 505 505 Total 34,457 34,457 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 September 30, 2023 and December 31, 2022. As of September 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 5,719,581 ( 227,631 ) 5,491,950 — ( 159,981 ) 5,331,969 5.15 % Agency-CMO (2) 583,850 ( 507,065 ) 76,785 — 1,222 78,007 9.67 % Non-Agency CMBS 27,652 ( 585 ) 27,067 ( 212 ) ( 868 ) 25,987 8.72 % Non-Agency RMBS (3)(4)(5) 283,991 ( 276,555 ) 7,436 — 529 7,965 8.56 % Total 6,615,074 ( 1,011,836 ) 5,603,238 ( 212 ) ( 159,098 ) 5,443,928 5.23 % (1) Period-end weighted average yield is based on amortized cost as of September 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 66.2 % fixed rate, 33.0 % 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, 38.8 % of amortized cost and 33.1 % 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 September 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 September 30, 2023 and December 31, 2022, approximately 99 % of our MBS was accounted for under the fair value option. As of September 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 — 5,331,969 5,331,969 — 4,661,737 4,661,737 Agency-CMO — 78,007 78,007 — 84,956 84,956 Non-Agency CMBS 25,987 — 25,987 36,787 — 36,787 Non-Agency RMBS 5,515 2,450 7,965 5,667 2,746 8,413 Total 31,502 5,412,426 5,443,928 42,454 4,749,439 4,791,893 The components of the carrying value of our MBS portfolio as of September 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 $ 24.2 million as of September 30, 2023 (December 31, 2022: $ 21.3 million). As of September 30, 2023 December 31, 2022 $ in thousands MBS Interest-Only Securities Total MBS Interest-Only Securities Total Principal/notional balance 5,755,806 859,268 6,615,074 4,770,175 917,330 5,687,505 Unamortized premium 294 — 294 5,195 — 5,195 Unamortized discount ( 232,530 ) ( 779,600 ) ( 1,012,130 ) ( 126,112 ) ( 831,308 ) ( 957,420 ) Allowance for credit losses ( 212 ) — ( 212 ) — — — Gross unrealized gains (1) 804 3,817 4,621 62,245 4,605 66,850 Gross unrealized losses (1) ( 160,876 ) ( 2,843 ) ( 163,719 ) ( 7,535 ) ( 2,702 ) ( 10,237 ) Fair value 5,363,286 80,642 5,443,928 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 nine months ended September 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 September 30, 2023 and December 31, 2022 . As of $ in thousands September 30, 2023 December 31, 2022 Less than one year 16,126 26,593 Greater than one year and less than five years 9,862 10,194 Greater than or equal to five years 5,417,940 4,755,106 Total 5,443,928 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 September 30, 2023 and December 31, 2022. As of September 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) 5,331,969 ( 159,981 ) 58 — — — 5,331,969 ( 159,981 ) 58 Agency-CMO (1) 26,827 ( 771 ) 5 8,603 ( 1,633 ) 3 35,430 ( 2,404 ) 8 Non-Agency CMBS (2) 25,987 ( 868 ) 2 — — — 25,987 ( 868 ) 2 Non-Agency RMBS (3) — — — 1,505 ( 466 ) 9 1,505 ( 466 ) 9 Total 5,384,783 ( 161,620 ) 65 10,108 ( 2,099 ) 12 5,394,891 ( 163,719 ) 77 (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 $ 1.2 million for which the fair value option has been elected. Such securities have unrealized losses of $ 439,000 . 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 $ 43,000 and $ 212,000 provision for credit losses on a single non-Agency CMBS during the three and nine months ended September 30, 2023, respectively. We did no t record any provisions for credit losses during the three and nine months ended September 30, 2022. The following table presents a roll-forward of our allowance for credit losses. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2023 2023 Beginning allowance for credit losses ( 169 ) — Additions to the allowance for credit losses on securities for which credit losses were not previously recorded — ( 212 ) Additional increases to the allowance for credit losses on securities that had an allowance recorded in a previous period ( 43 ) — Ending allowance for credit losses ( 212 ) ( 212 ) The following table summarizes the components of our total 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 Gross realized gains on sale of MBS — — 5,363 5,348 Gross realized losses on sale of MBS ( 33,157 ) ( 120,418 ) ( 62,769 ) ( 979,792 ) Net unrealized gains (losses) on MBS accounted for under the fair value option ( 191,752 ) ( 140,590 ) ( 215,226 ) ( 81,593 ) Net unrealized gains (losses) on commercial loan — 171 — 134 Net realized gains (losses) on U.S. Treasury securities 12 — 12 ( 34,198 ) Total gain (loss) on investments, net ( 224,897 ) ( 260,837 ) ( 272,620 ) ( 1,090,101 ) The following tables present components of interest income recognized on our mortgage-backed and other securities portfolio for the three and nine months ended September 30, 2023 and 2022. For the three months ended September 30, 2023 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 70,754 2,465 73,219 Non-Agency CMBS 437 301 738 Non-Agency RMBS 285 ( 126 ) 159 U.S. Treasury securities — 292 292 Other 724 — 724 Total 72,200 2,932 75,132 For the three months ended September 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 48,075 ( 355 ) 47,720 Non-Agency CMBS 485 328 813 Non-Agency RMBS 288 ( 139 ) 149 Other 376 — 376 Total 49,224 ( 166 ) 49,058 11 Table of Contents For the nine months ended September 30, 2023 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 206,804 3,616 210,420 Non-Agency CMBS 1,404 888 2,292 Non-Agency RMBS 865 ( 384 ) 481 U.S. Treasury securities — 292 292 Other 2,362 — 2,362 Total 211,435 4,412 215,847 For the nine months ended September 30, 2022 $ in thousands Coupon Interest Net (Premium Amortization)/Discount Accretion Interest Income Agency RMBS 135,600 ( 6,861 ) 128,739 Non-Agency CMBS 1,890 1,340 3,230 Non-Agency RMBS 928 ( 422 ) 506 U.S. Treasury Securities 1,773 ( 41 ) 1,732 Other 482 — 482 Total 140,673 ( 5,984 ) 134,689 Note 5 – Other Assets The following table summarizes our other assets as of September 30, 2023 and December 31, 2022. As of $ in thousands September 30, 2023 December 31, 2022 Investments in unconsolidated ventures 505 552 Prepaid expenses and other assets 1,557 1,179 Total 2,062 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. 12 Table of Contents 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 September 30, 2023. The following tables summarize certain characteristics of our borrowings as of September 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 September 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 4,987,006 5.43 % 24 4,234,823 4.24 % 28 Total Borrowings 4,987,006 5.43 % 24 4,234,823 4.24 % 28 13 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 September 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 September 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 September 30, 2023 December 31, 2022 Repurchase Agreements: Agency RMBS 5,226,133 4,439,583 Total repurchase agreements collateral pledged 5,226,133 4,439,583 Derivative Instruments: Cash — 1,584 Restricted cash 185,824 103,246 Total derivative instruments collateral pledged 185,824 104,830 Total collateral pledged: Agency RMBS 5,226,133 4,439,583 Cash — 1,584 Restricted cash 185,824 103,246 Total collateral pledged 5,411,957 4,544,413 As of Collateral Held September 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 September 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 September 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 14 Table of Contents interest rate 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 September 30, 2023 Interest Rate Swaps (1) (2) 8,150,000 2,700,000 ( 4,000,000 ) 6,850,000 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 2,700,000 ( 4,000,000 ) 6,850,000 (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 September 30, 2023 includes $ 5.9 billion of interest rate swaps whereby we pay interest at a fixed rate and receive interest at a floating rate and $ 950.0 million 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 $ 1.8 million and $ 9.5 million as a decrease (September 30, 2022: $ 4.9 million and $ 14.9 million as a decrease) to interest expense for the three and nine months ended September 30, 2023, respectively. As of September 30, 2023, $ 900,000 (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 in the fourth quarter of 2023. 15 Table of Contents As of September 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 September 30, 2023 Maturities Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Less than 3 years 950,000 0.32 % 5.31 % 2.1 3 to 5 years 1,975,000 0.35 % 5.31 % 4.2 5 to 7 years 1,175,000 0.46 % 5.31 % 6.6 7 to 10 years 750,000 1.10 % 5.31 % 7.5 Greater than 10 years 1,050,000 2.18 % 5.31 % 20.6 Total 5,900,000 0.79 % 5.31 % 7.7 $ 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 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 %. We did not hold any such interest rate swaps with forward start dates as of September 30, 2023. As of September 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 September 30, 2023 Maturities Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Less than 3 years 900,000 5.31 % 5.44 % 0.5 3 to 5 years 50,000 5.31 % 2.78 % 3.6 Total 950,000 5.31 % 5.30 % 0.7 $ 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 16 Table of Contents 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 %. We did not hold any such interest rate swaps with forward start dates as of September 30, 2023. 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 September 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 September 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 September 30, 2023 and December 31, 2022. $ in thousands Derivative Assets Derivative Liabilities As of As of September 30, 2023 December 31, 2022 September 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 7,637 — TBAs — 642 TBAs — 2,079 Total Derivative Assets — 662 Total Derivative Liabilities 7,637 2,079 17 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 nine months ended September 30, 2023 and 2022. $ in thousands Three Months Ended September 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 84,565 72,126 ( 5,002 ) 151,689 Total 84,565 72,126 ( 5,002 ) 151,689 $ in thousands Three Months Ended September 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 71,862 30,145 36,930 138,937 Currency Forward Contracts 187 — 14 201 TBAs ( 9,172 ) — 3,583 ( 5,589 ) Total 62,877 30,145 40,527 133,549 $ in thousands Nine Months Ended September 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 21,509 190,027 ( 7,658 ) 203,878 Currency Forward Contracts ( 18 ) — — ( 18 ) TBAs ( 1,880 ) — 1,438 ( 442 ) Total 19,611 190,027 ( 6,220 ) 203,418 $ in thousands Nine Months Ended September 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 625,084 44,995 22,565 692,644 Currency Forward Contracts 866 — ( 204 ) 662 TBAs ( 138,412 ) — ( 743 ) ( 139,155 ) Total 487,538 44,995 21,618 554,151 18 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 September 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 $ 7.6 million as of September 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 September 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) ( 4,987,006 ) — ( 4,987,006 ) 4,987,006 — — Total Liabilities ( 4,987,006 ) — ( 4,987,006 ) 4,987,006 — — 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 September 30, 2023 (December 31, 2022: $ 4.4 billion). We held no cash collateral under repurchase agreements as of September 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 $ 185.8 million as of September 30, 2023 (December 31, 2022: $ 104.8 million) of which $ 185.8 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 September 30, 2023 or December 31, 2022 . 19 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 September 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) — 5,443,928 — — 5,443,928 Other assets — — — 505 505 Total assets — 5,443,928 — 505 5,444,433 Liabilities: Derivative liabilities — 7,637 — — 7,637 Total liabilities — 7,637 — — 7,637 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 September 30, 2023, the remaining unconsolidated venture was in liquidation and plans to sell or settle its remaining investments as expeditiously as possible. 20 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 September 30, 2023 and December 31, 2022. As of September 30, 2023 December 31, 2022 $ in thousands Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value Financial Liabilities Repurchase agreements 4,987,006 4,986,655 4,234,823 4,233,627 Total 4,987,006 4,986,655 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 nine months ended September 30, 2023 reimbursed or reimbursable by us were $ 397,000 and $ 1.3 million, respectively (September 30, 2022: $ 375,000 and $ 1.1 million , 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 nine months ended September 30, 2023 and 2022. Three Months Ended September 30, Nine Months Ended September 30, $ in thousands 2023 2022 2023 2022 Incurred costs, prepaid or expensed 2,442 3,060 5,130 6,417 Incurred costs, charged or expected to be charged against equity as a cost of raising capital — — 257 217 Total incurred costs, originally paid by our Manager 2,442 3,060 5,387 6,634 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 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, 21 Table of Contents 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. 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 equal to three-month CME Term SOFR and the applicable credit spread adjustment ( 0.26161 %) plus a spread of 5.18 % of the $ 25.00 liquidation preference per annum. 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 equal to three-month CME Term SOFR and the applicable credit spread adjustment ( 0.26161 %) plus a spread of 5.289 % of the $ 25.00 liquidation preference per annum. 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 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. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). 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. During the three and nine months ended September 30, 2023 and 2022, we did not repurchase any shares of our common stock. As of September 30, 2023, we had authority to repurchase 1,816,398 shares of our common stock through our common stock share repurchase program. 22 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 nine months ended September 30, 2023 and 2022. The tables exclude gains and losses on MBS that are accounted for under the fair value option. Three Months Ended September 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 — ( 91 ) — ( 91 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses — 43 — 43 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 1,810 ) ( 1,810 ) Total other comprehensive income (loss) — ( 48 ) ( 1,810 ) ( 1,858 ) AOCI balance at beginning of period — 31 2,710 2,741 Total other comprehensive income (loss) — ( 48 ) ( 1,810 ) ( 1,858 ) AOCI balance at end of period — ( 17 ) 900 883 Three Months Ended September 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 — ( 1,243 ) — ( 1,243 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 4,855 ) ( 4,855 ) Currency translation adjustments on investment in unconsolidated venture ( 141 ) — — ( 141 ) Total other comprehensive income (loss) ( 141 ) ( 1,243 ) ( 4,855 ) ( 6,239 ) AOCI balance at beginning of period 131 2,503 20,115 22,749 Total other comprehensive income (loss) ( 141 ) ( 1,243 ) ( 4,855 ) ( 6,239 ) AOCI balance at end of period ( 10 ) 1,260 15,260 16,510 23 Table of Contents Nine Months Ended September 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 — ( 698 ) — ( 698 ) Reclassification of unrealized loss on available-for-sale securities to (increase) decrease in provision for credit losses — 212 — 212 Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 9,505 ) ( 9,505 ) 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 ( 486 ) ( 9,505 ) ( 9,878 ) AOCI balance at beginning of period ( 113 ) 469 10,405 10,761 Total other comprehensive income (loss) 113 ( 486 ) ( 9,505 ) ( 9,878 ) AOCI balance at end of period — ( 17 ) 900 883 Nine Months Ended September 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 — ( 5,489 ) — ( 5,489 ) Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense — — ( 14,853 ) ( 14,853 ) Currency translation adjustments on investment in unconsolidated venture ( 434 ) — — ( 434 ) Total other comprehensive income (loss) ( 434 ) ( 5,489 ) ( 14,853 ) ( 20,776 ) AOCI balance at beginning of period 424 6,749 30,113 37,286 Total other comprehensive income (loss) ( 434 ) ( 5,489 ) ( 14,853 ) ( 20,776 ) AOCI balance at end of period ( 10 ) 1,260 15,260 16,510 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. 24 Table of Contents Dividends The table below summarizes the dividends we declared during the nine months ended September 30, 2023 and 2022. $ in thousands, except per share amounts Dividends Declared Series B Preferred Stock Per Share In Aggregate Date of Payment 2023 August 2, 2023 0.4844 2,167 September 27, 2023 May 8, 2023 0.4844 2,186 June 27, 2023 February 17, 2023 0.4844 2,198 March 27, 2023 2022 August 2, 2022 0.4844 2,198 September 27, 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 August 2, 2023 0.46875 3,605 September 27, 2023 May 8, 2023 0.46875 3,654 June 27, 2023 February 17, 2023 0.46875 3,664 March 27, 2023 2022 August 2, 2022 0.46875 3,664 September 27, 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 September 26, 2023 0.40 19,384 October 27, 2023 June 21, 2023 0.40 17,833 July 27, 2023 March 27, 2023 0.40 16,658 April 27, 2023 2022 September 26, 2022 0.65 22,979 October 27, 2022 June 27, 2022 0.90 29,721 July 27, 2022 March 28, 2022 0.90 29,693 April 27, 2022 25 Table of Contents Note 13 – Earnings (Loss) per Common Share Earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022 is computed as shown in the table below. Three Months Ended September 30, Nine Months Ended September 30, In thousands, except per share amounts 2023 2022 2023 2022 Numerator (Income) Basic Earnings: Net income (loss) available to common stockholders ( 74,024 ) ( 94,602 ) ( 59,821 ) ( 447,562 ) Denominator (Weighted Average Shares) Basic Earnings: Shares available to common stockholders 45,747 34,051 42,604 33,346 Dilutive Shares 45,747 34,051 42,604 33,346 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic ( 1.62 ) ( 2.78 ) ( 1.40 ) ( 13.42 ) Diluted ( 1.62 ) ( 2.78 ) ( 1.40 ) ( 13.42 ) The following potential weighted average common shares were excluded from diluted earnings per share for the three and nine months ended September 30, 2023 as the effect would be antidilutive: 1,383 and 1,077 , respectively (three and nine months ended September 30, 2022: 1,127 and 1,248 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 September 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 November 2, 2023: a Series B Preferred Stock dividend of $ 0.4844 per share payable on December 27, 2023 to our stockholders of record as of December 5, 2023 and a Series C Preferred Stock dividend of $ 0.46875 per share payable on December 27, 2023 to our stockholders of record as of December 5, 2023. 26 Table of Contents