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Item 2. Management’s Discussion and Analysis

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 
 In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco." 
 The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Quarterly Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”). 
 
 
 
 
 Forward-Looking Statements 
 We make forward-looking statements in this Quarterly Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans, objectives and our views on domestic and global market conditions (including the Agency RMBS and residential and commercial real estate market). When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “project,” “forecast” or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. 
 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. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. 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. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 
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 Executive Summary 
 We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. 
 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 this Quarterly Report, we also invested in: 
 • a commercial mortgage loan; 
 • to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS; and 
 • U.S. Treasury securities. 
 We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification. 
 We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P. (the “Operating Partnership”). We are externally managed and advised by our Manager, an indirect wholly-owned subsidiary of Invesco. 
 We have elected to be taxed as a real estate investment trust (“REIT”) for U.S. 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 definition of “Investment Company” under the 1940 Act. 
 
 Market Conditions 
 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 third quarter of 2023. Contributing factors included: 
 • 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%. 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. 
 • 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. 
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 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 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. 
 • 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 . 
 Outlook 
 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. 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. 
 
 
 
 
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 Investment Activities 
 The table below shows the composition of our investment portfolio as of September 30, 2023, December 31, 2022 and September 30, 2022. 
 
 As of 
 $ in thousands September 30, 2023 December 31, 2022 September 30, 2022 
 Agency RMBS: 
 30 year fixed-rate, at fair value 5,331,969 4,661,737 4,252,742 
 
 Agency CMO, at fair value 78,007 84,956 59,389 
 Non-Agency CMBS, at fair value 25,987 36,787 37,256 
 Non-Agency RMBS, at fair value 7,965 8,413 7,604 
 
 
 Commercial loan, at fair value — — 23,649 
 Investments in unconsolidated ventures 505 552 3,475 
 Subtotal 5,444,433 4,792,445 4,384,115 
 TBAs, at implied cost basis (1) 
 — 1,437 142,842 
 Total investment portfolio, including TBAs 5,444,433 4,793,882 4,526,957 

 (1) Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs that we do not intend to physically settle on the contractual settlement date as derivative financial instruments. We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. For further details of our U.S GAAP accounting for TBAs, refer to Note 8 “Derivatives and Hedging Activities” in Part I. Item 1 of this report on Form 10-Q. Our TBA dollar roll transactions are a form of off-balance sheet financing. For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below. 
 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. 
 
 As of 
 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 % 
 
 4.0% 1,218,869 22.9 % 4.64 % — — % — % 855,876 20.2 % 4.34 % 
 4.5% 1,313,632 24.6 % 4.97 % 1,392,304 29.9 % 4.93 % 1,548,557 36.4 % 4.64 % 
 5.0% 1,424,615 26.7 % 5.32 % 1,694,939 36.4 % 5.27 % 1,486,108 34.9 % 4.89 % 
 5.5% 1,374,853 25.8 % 5.59 % 1,574,494 33.7 % 5.53 % 160,903 3.8 % 5.30 % 
 Total 30 year fixed-rate Agency RMBS 5,331,969 100.0 % 5.15 % 4,661,737 100.0 % 5.26 % 4,252,742 100.0 % 4.65 % 

 Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles. 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 September 30, 2023, December 31, 2022 and September 30, 2022. 
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 As of 
 September 30, 2023 December 31, 2022 September 30, 2022 
 $ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage 
 Specified pool characteristic: 
 Geographic location 1,557,191 29.2 % 1,302,391 27.9 % 1,281,497 30.2 % 
 Loan balance 1,634,316 30.7 % 1,033,014 22.2 % 1,292,408 30.4 % 
 Generic — — % 158,230 3.4 % 44,278 1.0 % 
 High loan-to-value (“LTV”) ratio 
 1,012,827 19.0 % 750,724 16.1 % 448,163 10.5 % 
 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 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 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. Our remaining unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible. Until the venture completes its liquidation, we are committed to fund $2.9 million in additional capital to cover future expenses should they occur. 
 Financing and Other Liabilities 
 We 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”). 
 The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter. 
 
 $ in thousands Collateralized borrowings under repurchase agreements 
 Quarter Ended Quarter-end balance Average quarterly balance (1) 
 Maximum balance (2) 
 
 September 30, 2022 3,887,291 3,907,505 4,165,996 
 December 31, 2022 4,234,823 3,825,218 4,234,823 
 March 31, 2023 4,814,700 4,734,819 4,814,700 
 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. 
 (2) Amount represents the maximum borrowings at month-end during each of the respective periods. 
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 Hedging Instruments 
 We enter into interest rate swap agreements that are designed to mitigate the effects of changes in interest rates for a portion of our borrowings. Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR. To a lesser extent, we also enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of our overall risk management strategy. 
 We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the nine months ended September 30, 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 $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 September 30, 2023 or December 31, 2022. 
 
 Capital Activities 
 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 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 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. 
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 Book Value per Common Share 
 We calculate book value per common share as follows. 
 
 As of 
 In thousands except per share amounts September 30, 2023 December 31, 2022 
 Numerator (adjusted equity): 
 Total equity 785,025 804,075 
 
 Less: Liquidation preference of Series B Preferred Stock (111,635) (113,441) 
 Less: Liquidation preference of Series C Preferred Stock (192,030) (195,412) 
 Total adjusted equity 481,360 495,222 
 
 Denominator (number of shares): 
 Common stock outstanding 48,461 38,711 
 
 Book value per common share 9.93 12.79 

 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. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value. 
 
 Critical Accounting Policies and Estimates 
 There have been no significant changes to our critical accounting policies and estimates that are disclosed in our most recent Form 10-K for the year ended December 31, 2022. 
 Recent Accounting Standards 
 None. 
 
 
 
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 Results of Operations 
 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 
 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) 
 Weighted average number of shares of common stock: 
 Basic 45,746,840 34,050,718 42,604,379 33,345,920 
 Diluted 45,746,840 34,050,718 42,604,379 33,345,920 

 
 
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 Interest Income and Average Earning Asset Yields 
 The table below presents information related to our average earning assets and earning asset yields for the three and nine months ended September 30, 2023 and 2022. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Average earning assets (1) 
 5,498,298 4,568,855 5,344,055 5,403,538 
 Average earning asset yields (2) 
 5.47 % 4.35 % 5.39 % 3.37 % 

 (1) Average balances for each period are based on weighted month-end balances. 
 (2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized. 
 Our primary source of income is interest earned on our investment portfolio. 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 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 September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Interest Income 
 Mortgage-backed and other securities - coupon interest 72,200 49,224 211,435 140,673 
 Mortgage-backed and other securities - net (premium amortization) discount accretion 2,932 (166) 4,412 (5,984) 
 Mortgage-backed and other securities - interest income 75,132 49,058 215,847 134,689 
 Commercial loan — 670 — 1,768 
 Total interest income 75,132 49,728 215,847 136,457 

 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. 
 Prepayment Speeds 
 Our RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. 
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 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 
 Agency RMBS 2,465 (355) 3,616 (6,861) 
 Non-Agency CMBS 301 328 888 1,340 
 Non-Agency RMBS (126) (139) (384) (422) 
 
 U.S. Treasury Securities 292 — 292 (41) 
 Net (premium amortization) discount accretion 2,932 (166) 4,412 (5,984) 

 
 
 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. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results. 
 
 Interest Expense and Cost of Funds 
 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 
 Total average borrowings (1) 
 4,902,400 3,907,724 4,811,136 4,720,478 
 Maximum borrowings during the period (2) 
 4,987,006 4,165,996 4,987,006 6,636,913 
 Cost of funds (3) 
 5.36 % 1.84 % 4.83 % 0.55 % 

 (1) Average borrowings for each period are based on weighted month-end balances. 
 (2) Amount represents the maximum borrowings at month-end during each of the respective periods. 
 (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 $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 
 Interest Expense 
 Interest expense on repurchase agreement borrowings 67,511 22,863 183,954 34,212 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (1,810) (4,855) (9,505) (14,853) 
 Repurchase agreements interest expense 65,701 18,008 174,449 19,359 
 Total interest expense 65,701 18,008 174,449 19,359 

 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. 
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 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 $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 $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 nine months ended September 30, 2023 and 2022. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 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 
 Interest expense on repurchase agreement borrowings 67,511 22,863 183,954 34,212 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (1,810) (4,855) (9,505) (14,853) 
 Repurchase agreements interest expense 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 
 Net interest rate margin 0.11 % 2.51 % 0.56 % 2.82 % 

 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 0.11% 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 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. 
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 Gain (Loss) on Investments, net 
 The table below summarizes the components of gain (loss) on investments, net for the three and nine months ended September 30, 2023 and 2022. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Net realized gains (losses) on sale of MBS (33,157) (120,418) (57,406) (974,444) 
 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) 

 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. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of September 30, 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 $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 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 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 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 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). Earnings and losses of unconsolidated ventures were driven primarily by the underlying portfolio investments. 
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 Gain (Loss) on Derivative Instruments, net 
 We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. 
 The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods. 
 
 $ 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 

 
 
 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. 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. 
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 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 
 Interest Rate Swaps (1) 
 5,900,000 0.79 % 5.31 % 7.7 5,800,000 0.45 % 4.30 % 6.3 

 (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 
 Interest Rate Swaps (1) 
 950,000 5.31 % 5.30 % 0.7 2,350,000 4.30 % 2.78 % 9.3 

 (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 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 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 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. 
 
 Expenses 
 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 $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. 
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 Gain on Repurchase and Retirement of Preferred Stock 
 In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three and nine months ended September 30, 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 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: $2.78). 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; (ii) net gains on derivative instruments of $151.7 million in the 2023 period compared to $133.5 million in the 2022 period; and (iii) a $22.3 million decrease in net interest income. 
 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: $13.42). 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; and (iii) a $75.7 million decrease in net interest income. 
 For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, and changes in net interest income, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”. 
 
 Non-GAAP Financial Measures 
 The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S. GAAP measures. We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below. 
 
 Non-GAAP Financial Measure Most Directly Comparable U.S. GAAP Measure 
 Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) 
 Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds) 
 Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin) 
 Economic debt-to-equity ratio Debt-to-equity ratio 

 The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies. 
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 Earnings Available for Distribution 
 Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; 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. We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate. 
 To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We have historically distributed at least 100% of our REIT taxable income. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs. 
 Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP) or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs. 
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 The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to earnings available for distribution for the following periods. 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands, except per share data 2023 2022 2023 2022 
 Net income (loss) attributable to common stockholders (74,024) (94,602) (59,821) (447,562) 
 Adjustments: 
 (Gain) loss on investments, net 224,897 260,837 272,620 1,090,101 
 Realized (gain) loss on derivative instruments, net (1) 
 (84,565) (62,877) (19,611) (487,538) 
 Unrealized (gain) loss on derivative instruments, net (1) 
 5,002 (40,527) 6,220 (21,618) 
 TBA dollar roll income (2) 
 — 2,159 697 27,415 
 Gain on repurchase and retirement of preferred stock (347) (12,688) (711) (14,179) 
 Foreign currency (gains) losses, net (3) 
 — — 66 (44) 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) 
 (1,810) (4,855) (9,505) (14,853) 
 Subtotal 143,177 142,049 249,776 579,284 
 Earnings available for distribution 69,153 47,447 189,955 131,722 
 Basic income (loss) per common share (1.62) (2.78) (1.40) (13.42) 
 Earnings available for distribution per common share (5) 
 1.51 1.39 4.46 3.95 

 (1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Realized gain (loss) on derivative instruments, net 84,565 62,877 19,611 487,538 
 Unrealized gain (loss) on derivative instruments, net (5,002) 40,527 (6,220) 21,618 
 Contractual net interest income (expense) on interest rate swaps 72,126 30,145 190,027 44,995 
 Gain (loss) on derivative instruments, net 151,689 133,549 203,418 554,151 

 (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations. 
 (3) Foreign currency gains (losses), net includes foreign currency transaction gains and losses and the reclassification of currency translation adjustments that were previously recorded in accumulated other comprehensive income and is included in other investment income (loss), net on the condensed consolidated statements of operations. 
 (4) U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Interest expense on repurchase agreement borrowings 67,511 22,863 183,954 34,212 
 Amortization of net deferred (gain) loss on de-designated interest rate swaps (1,810) (4,855) (9,505) (14,853) 
 Repurchase agreements interest expense 65,701 18,008 174,449 19,359 

 (5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding. 
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 The table below shows the components of earnings available for distribution for the following periods. 
 
 Three Months Ended September 30, Nine Months Ended September 30, 
 $ in thousands 2023 2022 2023 2022 
 Effective net interest income (1) 
 79,747 57,010 221,920 147,240 
 TBA dollar roll income — 2,159 697 27,415 
 
 Equity in earnings (losses) of unconsolidated ventures 2 (6) 4 (287) 
 (Increase) decrease in provision for credit losses (43) — (212) — 
 Total expenses (4,781) (5,854) (14,980) (20,290) 
 Subtotal 74,925 53,309 207,429 154,078 
 Dividends to preferred stockholders (5,772) (5,862) (17,474) (22,356) 
 
 Earnings available for distribution 69,153 47,447 189,955 131,722 

 (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 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 
 We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings. We add back the net payments or receipts on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs. 
 We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. 
 We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance. 
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 The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods. 
 
 Three Months Ended September 30, 
 2023 2022 
 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds 
 Total interest expense 65,701 5.36 % 18,008 1.84 % 
 Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 1,810 0.15 % 4,855 0.50 % 
 Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (72,126) (5.88) % (30,145) (3.09) % 
 Effective interest expense (4,615) (0.37) % (7,282) (0.75) % 

 
 Nine Months Ended September 30, 
 2023 2022 
 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds 
 Total interest expense 174,449 4.83 % 19,359 0.55 % 
 Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps 9,505 0.26 % 14,853 0.42 % 
 Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (190,027) (5.27) % (44,995) (1.27) % 
 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 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. 
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 The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods. 
 
 Three Months Ended September 30, 
 2023 2022 
 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin 
 Net interest income 9,431 0.11 % 31,720 2.51 % 
 Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (1,810) (0.15) % (4,855) (0.50) % 
 
 Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 72,126 5.88 % 30,145 3.09 % 
 Effective net interest income 79,747 5.84 % 57,010 5.10 % 

 
 Nine Months Ended September 30, 
 2023 2022 
 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin 
 Net interest income 41,398 0.56 % 117,098 2.82 % 
 Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (9,505) (0.26) % (14,853) (0.42) % 
 
 Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 190,027 5.27 % 44,995 1.27 % 
 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 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. GAAP interest expense was largely offset by an increase in contractual net interest income on interest rate swaps. 
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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 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 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. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage. 
 As of September 30, 2023 
 $ in thousands Agency
RMBS Credit Portfolio (1) 
 Total 
 Mortgage-backed securities 5,409,976 33,952 5,443,928 
 
 Cash and cash equivalents (2) 
 173,921 — 173,921 
 Restricted cash (3) 
 185,824 — 185,824 
 
 Other assets 25,500 2,170 27,670 
 Total assets 5,795,221 36,122 5,831,343 
 
 Repurchase agreements 4,987,006 — 4,987,006 
 Derivative liabilities, at fair value (3) 
 7,637 — 7,637 
 Other liabilities 49,848 1,827 51,675 
 Total liabilities 5,044,491 1,827 5,046,318 
 
 Total stockholders' equity (allocated) 750,730 34,295 785,025 
 Debt-to-equity ratio (4) 
 6.6 — 6.4 
 Economic debt-to-equity ratio (5) 
 6.6 — 6.4 

 (1) Investments in non-Agency CMBS, non-Agency RMBS and an unconsolidated joint venture are included in credit portfolio. 
 (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. 
 (3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class. 
 (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. 
 (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis to total stockholders' equity. We did not have any TBAs outstanding as of September 30, 2023. 
 
 
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 As of December 31, 2022 
 $ in thousands Agency
RMBS Credit Portfolio (1) 
 Total 
 Mortgage-backed securities 4,746,693 45,200 4,791,893 
 Cash and cash equivalents (2) 
 175,535 — 175,535 
 Restricted cash (3) 
 103,246 — 103,246 
 Derivative assets, at fair value (3) 
 662 — 662 
 Other assets 25,252 807 26,059 
 Total assets 5,051,388 46,007 5,097,395 
 
 Repurchase agreements 4,234,823 — 4,234,823 
 Derivative liabilities, at fair value (3) 
 2,079 — 2,079 
 Other liabilities 53,980 2,438 56,418 
 Total liabilities 4,290,882 2,438 4,293,320 
 
 Total stockholders' equity (allocated) 760,506 43,569 804,075 
 Debt-to-equity ratio (4) 
 5.6 — 5.3 
 Economic debt-to-equity ratio (5) 
 5.6 — 5.3 

 (1) Investments in non-Agency CMBS, non-Agency RMBS and unconsolidated joint ventures are included in credit portfolio. 
 (2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. 
 (3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class. 
 (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. 
 (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.4 million as of December 31, 2022) to total stockholders' equity. 
 
 
 
 
 Liquidity and Capital Resources 
 Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities. 
 We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. 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 $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 $206.1 million for the nine months ended September 30, 2023 (September 30, 2022: $126.8 million). 
 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). 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 $260.9 million from principal payments of MBS during the nine months ended September 30, 2023 (September 30, 2022: $330.6 million). 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). 
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 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 $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 $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. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately. 
 Effects of Margin Requirements, Leverage and Credit Spreads 
 Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a “margin call”, which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. 
 We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. 
 We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition. 
 We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods. 
 Forward-Looking Statements Regarding Liquidity 
 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 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 
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 public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. 
 
 Exposure to Financial Counterparties 
 We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty. 
 As of 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. However, our repurchase agreements are generally denominated in U.S. dollars. 
 
 $ in thousands Number of Counterparties Repurchase Agreement Financing Exposure 
 North America 13 2,653,139 128,963 
 Europe (excluding United Kingdom) 3 724,294 31,705 
 Asia 4 971,652 48,085 
 United Kingdom 1 637,921 25,838 
 Total 21 4,987,006 234,591 

 
 Dividends 
 To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. 
 As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 12 – "Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, 2022. 
 Unrelated Business Taxable Income 
 We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income. 
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 Other Matters 
 We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended September 30, 2023, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2023. 
 At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of September 30, 2023, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Invesco Mortgage Capital Inc. 10-Q

Item 2. Management’s Discussion and Analysis
