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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-21 · 230 added, 361 removed, 580 unchanged (50% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The discussion and analysis disclosed herein apply to material changes in our consolidated financial statements for 2023 and 2022.

For the comparison of 2022 and 2021, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2022 Annual Report on Form 10-K, filed with the SEC on February 21, 2023.

The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Part IV, Item 15 of this Report.

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Treasury notes) and the supply of, and demand for, assets in which we invest.

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 during 2022.

Market Conditions and Impacts

Macroeconomic factors that affect our business include interest rates, interest rate volatility, spread premiums, fiscal and monetary policy, residential and commercial real estate prices, credit availability, the health of the banking system, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.

Of these macroeconomic factors, monetary policy, the health of the banking system, inflation, interest rates and interest rate volatility had the most direct impacts on our performance during 2023.

Contributing factors included:

• Financial conditions tightened steadily through the first three quarters of 2022 as the Federal Reserve’s Open Market Committee (“FOMC”) began an aggressive campaign of increasing the Federal Funds target rate a total of 425 basis points in response to inflation levels that had not been seen in decades.

This took the target from a range of 0% to 0.25% to a range of 4.25% to 4.50% to end the year.

• Given the uncertainty around Federal Reserve policy, interest rates were quite volatile during the year and the yield curve became inverted, meaning short term rates were higher than long term rates.

The yield on the 2 year Treasury rose by 369 basis points, to 4.07%, while the yield on the 10 year Treasury increased by 236 basis points, to 3.37%.

• The Federal Reserve concluded their net purchases of Agency RMBS in March, with runoff of their $2.7 trillion portfolio commencing in June.

In addition, commercial banks sharply reduced their purchases of Agency RMBS in 2022 as well, as the decline in bank deposits, increase in loan activity, and regulatory capital challenges diminished their appetite for securities.

These market participants had been the largest sources of demand for the sector since the onset of the COVID-19 pandemic.

Table of Conten t s

Agency RMBS underperformed Treasuries over the course of 2022, ending the year with one of the worst total returns for the sector on record.

In addition to the factors discussed above, performance was negatively impacted by market expectations for further restrictive monetary policy.

Prepayment speeds slowed as borrowers faced a sharp increase in mortgage rates, but this reduction in supply was offset by the decrease in demand from the Federal Reserve and commercial banks discussed above.

Production coupon mortgages underperformed their Treasury hedges, trailing by approximately 360 basis points, while payups on specified pool collateral fell as the value of prepayment protection was reduced amidst higher mortgage rates and slowing prepayment speeds.

Dollar rolls for TBA investments, which had been a bright spot during most of the year, underperformed in the second half of the year as mortgage rates increased and production waned.

• While financial conditions ended the year more accommodative, the path was quite volatile.

Concerns around the regional banking system near the end of the first quarter caused a sharp tightening in conditions as risk markets reacted negatively.

Financial conditions recovered quickly during the second and early part of the third quarter before once again tightening as interest rates spiked higher as financial markets adjusted to shifting expectations for fiscal and monetary policy.

However, financial conditions reversed course towards the end of the year, with asset values buoyed by expectations the Federal Open Market Committee (“FOMC) was finished with their tightening cycle and had potentially achieved a soft landing for the economy.

• Despite the FOMC increasing the Federal Funds target rate four times during the year, from a range of 4.25% to 4.50% to a range of 5.25% to 5.50%, U.S.

Treasury yields ended the year relatively unchanged.

The 2-year U.S.

Treasury yield increased 18 basis points to 4.25% at year end, while the 10-year U.S.

Treasury yield increased 1 basis point to 3.88%.

While yields ended the year relatively flat, volatility in the interim was quite pronounced, mirroring the swings in financial conditions.

During the year, the 2-year yield traded in a range from 3.73% to 5.22% and the 10-year yield traded between 3.29% and 4.99%.

• Agency RMBS outperformed Treasuries over the course of 2023, as the sharp reversal in interest rates and interest rate volatility in the fourth quarter led to notable outperformance in the sector.

The outperformance in the fourth quarter more than offset the underperformance in the first nine months of the year, as relative performance to Treasuries in the sector remained volatile.

In the first nine months of the year, performance was negatively impacted by market expectations for further restrictive monetary policy, elevated interest rate volatility and the deterioration of the regional banking system, which added unexpected supply to the market.

• Quantitative tightening continued throughout 2023, as the Federal Reserve passively reduced the size of their balance sheet through maturities of U.S.

Treasuries and paydowns of Agency RMBS.

The runoff of Agency RMBS from the balance sheet added over $200 billion of net supply to the market, while commercial bank paydowns and sales contributed approximately $150 billion.

These additional sources of supply offset a decline in organic supply due to lower originations and resulted in increased reliance on money manager and overseas investors to provide demand for Agency RMBS.

This demand was sensitive to macroeconomic factors and the heightened volatility in interest rates, leading to commensurate volatility in Agency RMBS valuations.

These volatile shifts in valuations created significant challenges in hedging and setting risk parameters, making it difficult to fully capture the outperformance.

◦ Prepayment speeds remained at very low levels as borrowers faced elevated mortgage rates, and muted housing turnover led to a sharp reduction in net supply year-over-year.

◦ Premiums on specified pool collateral declined modestly as the value of prepayment protection was reduced amidst historically high mortgage rates and slow prepayment speeds.

◦ Implied financing via the dollar roll market for TBA investments remained unattractive, as reduced demand from the Federal Reserve and commercial banks negatively impacted fundamentals, while the increase in loan balances worsened the prepayment profile.

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

• Most risk assets were under considerable pressure during 2022 with the S&P 500 suffering a loss of 19.4%, while the NASDAQ was down 33.1% as a result of rising interest rates and high inflation.

Financial conditions eased somewhat during the fourth quarter, as confidence began to grow that inflation had peaked and the FOMC was nearing the end of their tightening cycle.

Equity performance was mixed during the fourth quarter, as the S&P 500 advanced by 7.1% and the NASDAQ lost 1%.

• The employment picture remained a bright spot as gains in non-farm payrolls averaged 375,000 per month, for a total of 4.5 million jobs added during the year.

The unemployment rate improved during the year, decreasing from 3.9% at the end of 2021 to 3.5% in December.

• Consumer activity held up well through most of the year, with retail sales remaining generally positive before moderating during the fourth quarter.

Higher prices weighed on consumer confidence measures, however, as sentiment fell throughout the first three quarters before rebounding slightly along with financial conditions.

• Year-over-year price growth, as measured by the consumer price index (“CPI”), peaked at a 40 year high of 9.1% in June, before slowing steadily during the second half of the year, ending 2022 at 6.5%.

Likewise, commodities also saw significant increases during 2022, with West Texas Intermediate crude oil recording a 16.7% increase and the Commodity Research Bureau commodity index gaining 19.5%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”), which reflect investors' expectations of future inflation, indicating confidence that the FOMC will be successful at bringing inflation levels significantly lower as the inflation rate implied by 2 year and 5 year TIPs was 2.31% and 2.38%, respectively, at the end of the year.

• CMBS risk premiums increased due to monetary policy tightening and moderating improvement of commercial real estate fundamentals.

Commercial real estate occupancy and rental rates began to stabilize across most property sectors while headwinds for property valuations increased given elevated borrowing costs.

Despite an increase in the fourth quarter, CMBS loan delinquencies finished the year lower and remain significantly below COVID-19 peak levels.

The lodging and retail sector reported the highest level of CMBS loan delinquencies while multi-family and industrial property sectors continued to post relatively lower delinquency levels.

We expect fundamental improvement to continue to moderate as the pace of positive net absorption slows and lending conditions tighten.

• While tight supply and stable underlying demand persisted for most of 2022, the housing market recovery that began in 2021 slowed and ultimately reversed due to the dramatic increase in mortgage rates.

National home prices declined during the second half of the year, but still finished higher compared to 2021.

Despite the potential for a slowing economy, borrower defaults are likely to remain contained given strong loan underwriting and high levels of borrower equity.

As we enter 2023, both the FOMC and the Federal Funds futures market expect additional rate increases during the first half of the year, with market expectations reflecting approximately 0.50% of additional hikes.

While further changes in monetary policy by the Federal Reserve may bring challenges in the coming months, we believe that a potential reduction in interest rate volatility combined with compelling valuations and favorable funding conditions will support an attractive investment environment for Agency RMBS in 2023.

Table of Conten t s

• Risk assets performed extremely well during the year, with the S&P 500 gaining 24.2% and the NASDAQ gaining 43.4%, as investor confidence grew with the FOMC’s tightening cycle nearing its conclusion.

The fourth quarter was particularly strong, with the S&P and NASDAQ up 11.2% and 13.6%, respectively.

Likewise, fixed income credit spreads saw strong performance, with investment grade corporate, high yield corporate and emerging market debt ending the year at levels not seen in several years.

• The employment picture remained robust as gains in non-farm payrolls averaged approximately 255,000 per month, for a total of 3.1 million jobs added during the year.

The unemployment rate rose modestly during the year, from 3.5% at the end of 2022 to 3.7% in December.

• Inflation moderated throughout 2023, as year over year gains in the consumer price index (“CPI”) decreased from 6.5% at year-end 2022 to 3.4% at year-end 2023.

CPI excluding food and energy followed a similar trajectory, decreasing from 5.7% to 3.9%.

Commodity prices also moderated during 2023, with the price per barrel of West Texas Intermediate crude oil decreasing by 6.1% and the Commodity Research Bureau commodity index falling by 5%.

Breakeven rates on U.S Treasury inflation-protected securities (“TIPs”), which reflect investors' expectations of future inflation, continue to indicate confidence that the FOMC will be successful at bringing inflation levels lower, as the inflation rate implied by 2 year and 5 year TIPs was 2.02% and 2.15%, respectively, at the end of the year.

• Consumer activity held up well throughout the year, with retail sales remaining positive.

Consumer confidence measures generally followed the path of financial conditions, displaying volatility throughout the year, but ending at a multi-year high as inflation pressures moderated.

• CMBS risk premiums increased as tighter lending conditions and elevated borrowing costs resulted in deteriorating commercial real estate fundamentals.

Commercial real estate occupancy and property valuations declined across most property sectors as rent growth slowed materially and, in many instances, turned negative.

Price discovery remained limited with fewer transactions taking place than in prior years.

CMBS loan delinquencies finished the year higher.

Retail and office property sectors reported the highest level of CMBS loan delinquencies while industrial and multi-family posted relatively lower delinquency levels.

Despite the Federal Reserve signaling lower rates in 2024, some properties may continue to find it difficult to re-finance due to notably higher rates than their current mortgage loan coupons.

• Non-Agency RMBS credit spreads tightened across subsectors during the year, 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 supported investor risk appetite.

Despite the potential for sub-trend economic growth, borrower defaults are likely to remain contained given strong loan underwriting and high levels of borrower equity.

Throughout 2023, persistently elevated interest rate volatility provided a challenging environment for Agency RMBS valuations.

Sharp changes in investor expectations for inflation, economic growth and the path for of monetary policy led to substantial adjustments to both the level of interest rates and the shape of the yield curve, which are important inputs for both determining the attractiveness of Agency RMBS investments and applying appropriate hedges.

Market volatility increased particularly in March as the regional banking crisis brought fears of broader contagion, and again in September and October amid concerns regarding Treasury supply and further tightening of monetary policy.

Both episodes of heightened volatility led to notable underperformance in Agency RMBS as they brought increased supply to the market.

We sought to maintain sufficient levels of cash and unencumbered assets during these challenging markets and closely monitored counterparty exposures given the stress in the banking sector.

During October, we reduced risk by decreasing leverage as volatility initially increased, and subsequently, returned leverage to our target range as volatility began to subside and our market outlook for Agency RMBS valuations improved.

Over the course of the year, we increased the coupon diversification of the investments in our portfolio into both lower and higher coupon Agency RMBS, with the weighted average coupon of our specified pool investments remaining unchanged at 5.0%.

Our book value per common share ended the year at $10.00, representing a decline of 22% for 2023, and when combined with our $1.60 common stock dividends produced an economic return of (9.3)% (1) for the year.

Our debt-to-equity ratio ended the year at 5.7x, up modestly from 5.3x as of December 31, 2022.

Throughout the year, we sought to minimize the impact of changes in short term interest rates on Earnings Available for Distribution (2) (“EAD”) by hedging a high percentage of our funding cost.

As a result, EAD for the period continued to benefit from favorable funding and low-cost, pay-fixed swaps.

(1) Economic return for the year ended December 31, 2023 is defined as the change in book value per common share from December 31, 2022 to December 31, 2023 of ($2.79);

plus dividends declared of $1.60 per common share;

divided by the December 31, 2022 book value per common share of $12.79.

(2) Earnings available for distribution is a non-GAAP financial measure.

See Non-GAAP Financial Measures below for additional information.

As we enter 2024, both the FOMC and the Federal Funds futures market forecast that the next policy move by the FOMC will be a rate cut, although they have differing expectations regarding the timing and quantity of these cuts.

While evolving expectations around the timing of changes in monetary policy may bring challenges in the coming months, we believe that a potential reduction in interest rate volatility, combined with compelling valuations and favorable funding conditions, will support an attractive investment environment for Agency RMBS in 2024.

Investment Activities

The table below shows the breakdown of our investment portfolio as of December 31, 2022 and 2021.

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

$ in thousands As of December 31,

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Non-Agency RMBS, at fair value 8,139 8,413

Commercial loan, at fair value — 23,515

Treasury securities, at fair value 11,214 —

Investments in unconsolidated ventures 500 552

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TBAs, at implied cost basis (1)

1,437 1,636,906

Total investment portfolio, including TBAs 5,057,020 4,793,882

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

We sold $27.3 billion and purchased $25.7 billion of Agency RMBS during the year ended December 31, 2022 primarily to rotate into higher yielding securities, in some cases changing coupon rates or the type of specified pool collateral.

Purchases were primarily funded with proceeds from the sales, paydowns of securities and by leveraging proceeds from the issuance of common stock.

We sold $5.2 billion and purchased $5.9 billion of Agency RMBS during the year ended December 31, 2023.

As of December 31, 2023 and 2022, our holdings of 30 year fixed-rate Agency RMBS represented 98% and 97% of our total investment portfolio, including TBAs, respectively.

The table below shows the coupon distributions of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2022 and 2021.

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

As of December 31,

$ in thousands Fair Value Percentage Fair Value Percentage

2.0% — — % 2,408,404 31.3 %

2.5% — — % 2,877,568 37.3 %

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

4.0% 876,337 17.7 % 4.65 % — — % — %

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

Table of Conten t s

As of December 31,

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Low credit score 1,105,042 22.3 % 1,417,378 30.4 %

Investment property — — % 1,148,126 14.9 %

Total 30 year fixed-rate Agency RMBS 4,952,474 100.0 % 4,661,737 100.0 %

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

As of December 31, 2022, the implied cost basis of TBAs did not represent a material amount of our total investment portfolio, versus 17% as of December 31, 2021.

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 December 31, 2022 and 2021, our holdings of non-Agency CMBS represented approximately 1% of our total investment portfolio, including TBAs.

Our non-Agency CMBS portfolio is comprised of fixed-rate securities that are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2022.

Approximately 71% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2022.

As of December 31, 2022 and 2021, our holdings of non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs.

As of December 31, 2021,we held an investment in one commercial real estate mezzanine loan that had an LTV ratio of approximately 68.0%.

The loan was repaid in full in October 2022.

As of December 31, 2022, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager.

Both of the unconsolidated ventures are in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

Until the ventures complete their liquidation, we are committed to fund $6.3 million in additional capital to cover future expenses should they occur.

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

Approximately 68% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of December 31, 2023.

As of December 31, 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 investment portfolio through repurchase agreements.

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

Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to SOFR.

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(2) Amount represents the maximum borrowings at month-end during each of the respective periods.

Table of Conten t s

Hedging Instruments

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• the value of derivatives used for hedging may be adjusted from time-to-time in accordance with accounting rules to reflect changes in fair value.

We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings.

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.

Prior to transitioning interest rate swaps to swaps that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps were generally indexed to one- or three-month LIBOR.

To a lesser extent, we have also used 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 year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new interest rate swaps with a notional amount of $10.1 billion, excluding interest rate swaps with forward start dates, as part of our overall risk management strategy.

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 consolidated statement of operati ons.

We realized a net gain of $593.0 million on interest rate swaps during the year ended December 31, 2022 primarily due to rising interest rates.

We have 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 December 31, 2022.

As of December 31, 2021 we had €11.7 million or $13.6 million notional amount of forward contracts related to our investment in an unconsolidated venture.

During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million (2021:

€70.8 million or $84.8 million) in notional amount related to our investment in an unconsolidated venture and realized a net gain of $919,000 (2021:

$209,000 net gain).

During the year ended December 31, 2023, we terminated existing interest rate swaps with a notional amount of $7.6 billion and entered into new interest rate swaps with a notional amount of $3.5 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 December 31, 2023.

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 December 31, 2023 or December 31, 2022.

Capital Activities

As of December 31, 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 year ended December 31, 2023, we sold 9,699,471 shares of common stock under our equity distribution agreement with placement agents for proceeds of $109.1 million, net of approximately $1.5 million in commissions and fees.

During the year ended December 31, 2022, we sold 5,686,598 shares of common stock under our equity distribution agreements for proceeds of $81.6 million, net of approximately $1.3 million in commissions and fees.

We did not have any remaining shares authorized under our at-the-market program as of December 31, 2022.

In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock.

During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.

As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program.

During the year ended December 31, 2023, we repurchased and retired 151,637 shares of Series B Preferred Stock and 271,031 shares of Series C Preferred Stock and recorded a gain on repurchase and retirement of preferred stock of $1.5 million.

During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock and recorded a gain on repurchase and retirement of preferred stock of $14.2 million.

As of December 31, 2023, we had authority to repurchase 1,185,997 additional shares of our Series B Preferred Stock and 1,045,439 additional shares of our Series C Preferred Stock under the current share repurchase program.

In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock.

The reverse stock split was effected following the close of business on June 3, 2022.

For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, unless otherwise noted.

For information on dividends declared and paid during the year ended December 31, 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.

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

For information on dividends declared and paid during the years ended December 31, 2023 and 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.

During the year ended December 31, 2023, we did not repurchase any shares of our common stock.

Table of Conten t s

Book Value per Common Share

We calculate book value per common share as follows:

Years Ended December 31,

As of December 31,

In thousands except per share amounts 2023 2022 2021

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Total equity 782,665 804,075 1,402,135

Liquidation preference of Series A Preferred Stock — — (140,000)

Liquidation preference of Series B Preferred Stock (109,650) (113,441) (155,000)

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Book value per common share 10.00 12.79 29.09

Our book value per common share decreased 56% as of December 31, 2022 compared to December 31, 2021 as Agency RMBS were negatively impacted by interest rate volatility, sharply higher interest rates, an inverted yield curve and market expectations for even more restrictive monetary policy, resulting in one of the sector's worst total returns on record.

Our book value per common share decreased 25% as of December 31, 2021 compared to December 31, 2020.

The increase in interest rate volatility and prepayment speeds, combined with reduced investor demand for prepayment protection and the potential for an earlier than expected taper of MBS purchases from the Federal Reserve resulted in Agency RMBS sharply underperforming interest rate swap hedges during the first half of 2021.

Book value per common share further decreased in the second half of 2021 as the Federal Reserve's announced tapering and subsequent acceleration of the pace of tapering in December 2021 negatively impacted Agency RMBS valuations.

Book value per common share decreased 22% as of December 31, 2023 compared to December 31, 2022 as Agency RMBS performance in the first nine months of 2023 was negatively impacted by market expectations for further restrictive monetary policy, elevated interest rate volatility and the deterioration of the regional banking system, which added unexpected supply to the market.

Refer to Item 7A.

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If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, allowances for credit losses on our available-for-sale MBS, and a change in our interest income recognition among other effects.

Mortgage-Backed and Credit Risk Transfer Securities.

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016;

our GSE CRTs purchased on or after August 24, 2015;

and all of our RMBS IOs.

Mortgage-Backed Securities.

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and all of our RMBS IOs.

Under the fair value option, changes in fair value are recognized in the consolidated statement of operations.

In our view, the fair value option election more appropriately reflects the results of our operations because MBS and GSE CRT fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments.

In our view, the fair value option election more appropriately reflects the results of our operations because MBS fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments.

As of December 31, 2023, $5.0 billion (December 31, 2022:

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We record our MBS purchased before September 1, 2016, as available-for-sale and report these MBS at fair value.

We recorded our GSE CRTs purchased before August 24, 2015 as hybrid financial instruments and reported these GSE CRTs at fair value.

We did not hold any GSE CRTs as of December 31, 2022 or December 31, 2021.

We determine the fair value of our MBS by obtaining valuations from an independent source.

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It is possible that changes in these inputs could change the valuation estimate and lead us to establish allowances for credit losses on our available-for-sale MBS.

Table of Conten t s

Further information is provided in Note 2 - “Summary of Significant Accounting Policies” and Note 4 - “Mortgage-Backed and Credit Risk Transfer Securities.”

Refer to the preceding discussion under “Market Conditions and Impacts” for information on how conditions in 2023 impacted valuations of our Agency RMBS, which constituted substantially all of our investment portfolio during 2023.

Additionally, refer to Item 7A.

“Quantitative and Qualitative Disclosures About Market Risk” for the estimated impact of an instantaneous shift in the yield curve on the market value of our interest rate-sensitive investments.

Interest Income Recognition.

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Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows.

We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price.

We estimate future expected cash flows at the time of purchase and determine the effective interest rate based

on these estimated cash flows and our purchase price.

Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment, unless those changes will be reflected in an allowance for credit losses.

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Accordingly, under different conditions, we could report materially different amounts.

For Agency RMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows.

We do not estimate prepayments in applying the effective interest method.

Prepayment rates on our mortgage-backed securities remained moderately low throughout 2023 given elevated mortgage rates.

Refer to Item 7A.

“Quantitative and Qualitative Disclosures About Market Risk” for an estimate of the percentage change in our net interest income, including interest paid or received under interest rate swaps, caused by an instantaneous 50 and 100 basis points increase or decrease in interest rates.

For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows.

We do not estimate prepayments in applying the effective interest method.

Interest income on GSE CRTs purchased before August 24, 2015 was accrued based on the coupon rate of the debt host contract which reflected the credit risk of GSE unsecured senior debt with a similar maturity.

Premiums or discounts associated with the purchase of credit risk transfer securities were amortized or accreted into interest income over the life of the debt host contract using the effective interest method.

Interest income on GSE CRTs purchased on or after August 24, 2015 was based on estimated future cash flows.

Interest income from our commercial and other loans was recognized when earned and deemed collectible.

Accounting for Derivative Financial Instruments.

We use derivatives to manage interest rate and currency exchange risk and as an alternative means of investing in and financing Agency RMBS.

We use or have used derivatives to manage interest rate and currency exchange risk and as an alternative means of investing in and financing Agency RMBS.

We record all derivatives on our consolidated balance sheets at fair value.

Our interest rate swaps, currency forward contracts and TBAs are valued using a market approach through the use of quoted prices available in an active market.

Our interest rate swaps and TBAs are valued using a market approach through the use of quoted prices available in an active market.

All of our interest rate swaps were centrally cleared by a registered clearing organization as of December 31, 2023.

Effective December 31, 2013, we voluntarily discontinued hedge accounting for our interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges.

As a result of discontinuing hedge accounting, changes in the fair value of the interest rate swaps are recorded in gain (loss) on derivative instruments, net in our consolidated statement of operations, rather than in accumulated other comprehensive income (loss).

Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our consolidated statement of operations.

Further information is provided in Note 8 - “Derivatives and Hedging Activities” of our consolidated financial statements included in Part IV, Item 15 of this Report.

Table of Conten t s

The factors that impact valuations of our TBAs are similar to those that impact valuations of our Agency RMBS.

Interest rate swap valuations are most significantly impacted by forward interest rate expectations.

We recognized net gains on our interest rate swaps in 2023 primarily due to shifting expectations that interest rates would stay higher for longer.

Results of Operations

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Mortgage-backed and other securities 277,929 192,566 167,056

Commercial and other loans 1,947 2,146 2,766

Commercial loan — 1,947 2,146

Total interest income 277,929 194,513 169,202

2 unchanged sentences

228,229 51,560 (11,290)

Secured loans — — 8,655

Total interest expense 228,229 51,560 (11,290)

5 unchanged sentences

Gain (loss) on derivative instruments, net 61,838 559,007 122,611

Realized and unrealized credit derivative income (loss), net — — (35,312)

Net gain (loss) on extinguishment of debt — — 14,742

Other investment income (loss), net (66) 186 1

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For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - “Derivatives and Hedging Activities” and Note 12 - “Stockholders' Equity” in Part IV, Item 15 of this report on Form 10-K.

Table of Conten t s

Interest Income and Average Earning Asset Yields

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

We had average earning assets of $5.1 billion during the year ended December 31, 2022 (2021:

$8.8 billion;

$7.9 billion).

Average earning assets decreased for the year ended December 31, 2022 compared to 2021 as we reduced the size of our investment portfolio given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Average earning asset yields increased for the year ended December 31, 2022 compared to 2021 primarily due to our rotation into higher yielding Agency RMBS.

Average earning assets increased for the year ended December 31, 2021 compared to 2020 as we resumed investing in Agency RMBS during the third quarter of 2020 after selling a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

Average earning asset yields decreased during the year ended December 31, 2021 compared to 2020 due to changes in our portfolio composition.

Average earning assets were relatively unchanged for the year ended December 31, 2023 compared to 2022.

Average earning asset yields increased for the year ended December 31, 2023 compared to 2022 due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $277.9 million during 2023 (2022:

$194.5 million).

$280.2 million).

Our interest income consists of coupon interest and net (premium amortization) discount accretion on MBS and other securities as well as interest income on commercial and other loans as shown in the table below.

Our interest income consists of coupon interest and net (premium amortization) discount accretion on MBS and other securities as well as interest income on our commercial loan as shown in the table below.

Years Ended December 31,

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Mortgage-backed and other securities - interest income 277,929 192,566 167,056

Commercial and other loans 1,947 2,146 2,766

Commercial loan — 1,947 2,146

Total interest income 277,929 194,513 169,202

Mortgage-backed and other securities interest income increased $25.5 million for the year ended December 31, 2022 compared to 2021 despite lower average earning assets due to a 187 basis point increase in average earning asset yields.

Interest income on our commercial loan decreased during the year ended December 31, 2022 compared to 2021 primarily due to the repayment of the commercial loan in October 2022 .

Mortgage-backed and other securities interest income decreased $110.3 million for the year ended December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease in average earning asset yields.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

Table of Conten t s

Mortgage-backed and other securities interest income increased $85.4 million for the year ended December 31, 2023 compared to 2022 due to a 165 basis point increase in average earning asset yields.

Our commercial loan investment was fully repaid in October 2022 .

Prepayment Speeds

Our RMBS portfolio (and previously our GSE CRT 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.

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.

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.

For Agency RMBS where we do not estimate prepayments, premium amortization and discount accretion are not impacted by prepayments until actual prepayments occur.

For those securities on which we do estimate prepayments, expected future prepayment speeds are estimated on a quarterly basis.

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.

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Agency RMBS 5,160 (6,755) (41,881)

Agency CMBS — — (1,744)

Non-Agency CMBS 1,101 1,624 2,695

Non-Agency RMBS (479) (552) (1,264)

GSE CRT — — (2,560)

Treasury Securities 291 (41) —

Net (premium amortization) discount accretion 6,073 (5,724) (40,450)

Net premium amortization decreased $34.7 million during 2022 compared to 2021 primarily as a result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Net premium amortization increased $19.2 million during 2021 compared to 2020 primarily due to sales of non-Agency CMBS purchased at discounts and the purchase of Agency RMBS at premiums during the second half of 2020 and in 2021.

Net discount accretion was $6.1 million during 2023 compared to net premium amortization of $5.7 million during 2022 as the result of repositioning our Agency RMBS portfolio into securities with lower book prices.

Our interest income is subject to interest rate risk.

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(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.

Table of Conten t s

Total average borrowings decreased $3.4 billion in 2022 compared to 2021 as we reduced the size of our investment portfolio and related repurchase agreement borrowings given expectations that the Federal Reserve's tapering of asset purchases and acceleration of monetary policy tightening could result in an increase in market volatility and lower valuations on our holdings.

Our cost of funds increased 129 basis points in 2022 compared to 2021 primarily due to increases in the Federal Funds target rate.

Total average borrowings increased $965.8 million in 2021 compared to 2020 because we resumed investing in Agency RMBS in July 2020 and financing purchases with repurchase agreements.

The increase in repurchase agreement borrowings was partially offset by the repayment of $1.65 billion of secured loans during 2020.

Our cost of funds decreased 133 basis points in 2021 compared to 2020 primarily due to decreases in the Federal Funds target rate.

Total average borrowings were relatively unchanged for the year ended December 31, 2023 compared to 2022.

Our average cost of funds increased 388 basis points in 2023 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 December 31, 2023.

The table below presents the components of interest expense for the years ended December 31, 2023, 2022 and 2021.

5 unchanged sentences

Repurchase agreements interest expense 228,229 51,560 (11,290)

Secured loans — — 8,655

Total interest expense 228,229 51,560 (11,290)

Our interest expense on repurchase agreement borrowings increased $167.4 million for the year ended December 31, 2023 compared to 2022 due to a higher cost of funds.

Our interest expense on repurchase agreement borrowings decreased $86.7 million for the year ended December 31, 2021 compared to 2020 due to a lower cost of funds.

Our repurchase agreements interest expense as reported in our consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above.

Amounts recorded in accumulated other comprehensive income (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $19.7 million, $22.0 million and $23.8 million during the years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively.

We expect to reclassify the remaining $10.4 million of net unrealized gains recorded in AOCI as a decrease to interest expense on repurchase agreements on the consolidated statements of operations in 2023.

We repaid our secured loans during 2020 and did not incur interest expense for secured loans during the years ended December 31, 2022 and 2021.

Table of Conten t s

Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $10.4 million and $19.7 million during the years ended December 31, 2023 and December 31, 2022, respectively.

Amounts recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps were reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest was accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.

As of December 31, 2023, there were no net deferred gains or losses on discontinued cash flow hedges included in accumulated other comprehensive income.

Net Interest Income

4 unchanged sentences

Mortgage-backed and other securities 277,929 192,566 167,056

Commercial and other loans 1,947 2,146 2,766

Commercial loan — 1,947 2,146

Total interest income 277,929 194,513 169,202

3 unchanged sentences

Repurchase agreements interest expense 228,229 51,560 (11,290)

Secured loans — — 8,655

Total interest expense 228,229 51,560 (11,290)

3 unchanged sentences

$143.0 million).

$197.9 million).

The decrease in net interest income for the year ended December 31, 2022 compared to 2021 was primarily due to higher interest expense as the Federal Reserve raised the Federal Funds target rate.

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.

The decrease in net interest income for 2021 compared to 2020 was primarily due to the sale of MBS and GSE CRT in the first half of 2020 as previously discussed.

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 2.64% for the year ended December 31, 2022 (2021:

The increase in net interest rate margin for the year ended December 31, 2022 compared to 2021 was primarily due to our rotation into higher yielding Agency RMBS, which was partially offset by higher interest rates on our borrowings.

The decrease in net interest rate margin for 2021 compared to 2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings.

The decrease in net interest income and net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds, for the year ended December 31, 2023 compared to 2022 was due to higher interest expense related to increases in the Federal Funds target rate, which was partially offset by our rotation into higher yielding Agency RMBS.

Our cost of funds is generally more sensitive to changes in interest rates than the yield on our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.

Gain (Loss) on Investments, net

2 unchanged sentences

$ in thousands 2023 2022 2021

Net realized gains (losses) on sale of MBS and GSE CRT (1,163,910) (281,224) (363,781)

Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments — — (101,138)

Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option 118,365 (85,702) (492,047)

Net realized gains (losses) on sale of MBS (158,028) (1,163,910) (281,224)

Net unrealized gains (losses) on MBS accounted for under the fair value option 50,364 118,365 (85,702)

Net unrealized gains (losses) on commercial loan — 404 417

Net unrealized gains (losses) on U.S.

Treasury securities 372 — —

Net realized gains (losses) on U.S.

Treasury securities 12 (34,198) —

Realized loss on loan participation interest — — (3,808)

Total gain (loss) on investments, net (107,280) (1,079,339) (366,509)

Table of Conten t s

During the year ended December 31, 2023, we sold MBS for cash proceeds of $5.2 billion (2022:

MBS of $27.3 billion;

MBS and GSE CRTs of $25.0 billion) and realized net losses of $1.2 billion (2021:

net losses of $281.2 million;

net losses of $363.8 million).

Realized net losses during the year ended December 31, 2022 and 2021 primarily reflect sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS.

We sold securities during the year ended December 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic.

A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our repurchase agreement counterparties seized and sold our securities when we were unable to meet margin calls in March 2020.

We did not record any impairment during the years ended December 31, 2022 and 2021 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

We recorded $94.1 million of impairment on non-Agency RMBS and CMBS securities during the year ended December 31, 2020, because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

For additional information regarding our accounting policy for impairment, refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report.

We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and all of our GSE CRTs purchased on or after August 24, 2015.

Before September 1, 2016, we had also elected the fair value option for our RMBS IOs.

and realized net losses of $158.0 million (2022:

net losses of $1.2 billion).

Realized net losses during the year ended December 31, 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 consolidated statements of operations.

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We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $50.4 million in 2023 (2022:

net unrealized losses of $85.7 million on our MBS portfolio accounted for under the fair value option;

net unrealized losses of $492.0 million on our MBS and GSE CRT portfolio accounted for under the fair value option).

Net unrealized gains in the year ended December 31, 2022 reflect reclassifications on securities that were sold as well as tighter spreads and favorable rates on assets held at year end.

Net unrealized losses in the years ended December 31, 2021 and 2020 primarily reflect wider interest rate spreads.

net unrealized gains of $118.4 million).

Net unrealized gains in the year ended December 31, 2023 primarily reflect favorable valuations on our assets held at year end.

Net unrealized gains in the year ended December 31, 2022 reflect reclassifications of unrealized losses upon sale as well as tighter spreads and favorable rates on assets held at year end.

In October 2022, our commercial loan with a principal balance of $23.9 million was repaid in full.

We recorded unrealized gains of $404,000 and $417,000 on our commercial loan investment during the years ended December 31, 2022 and 2021, respectively, and unrealized losses of $1.2 million during the year ended December 31, 2020.

We recorded unrealized gains of $404,000 on our commercial loan investment during the years ended December 31, 2022.

We valued our commercial loan investment based upon a valuation from an independent pricing service.

We recorded a realized loss of $3.8 million on our loan participation interest during year ended December 31, 2020.

We sold the loan participation interest in April 2020.

We recorded net unrealized gains of $372,000 and net realized gains of $12,000 on U.S.

Treasury securities during the year ended December 31, 2023.

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

Treasury securities during the year ended December 31, 2022 due to rising interest rates.

We did not invest in U.S.

Treasury securities during the years ended December 31, 2021 and 2020.

(Increase) Decrease in Provision for Credit Losses

As of December 31, 2023, approximately $15.7 million of our $5.0 billion of MBS are classified as available-for-sale and subject to evaluation for credit losses.

We recorded a provision for credit losses of $320,000 on a single non-Agency CMBS for the year ended December 31, 2023 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 year ended December 31, 2022.

We recorded a provision for credit losses of $1.8 million on a single non-Agency CMBS for the year ended December 31, 2020.

We recorded a $1.8 million decrease in the provision for credit losses during the year ended December 31, 2021 because the security fully repaid in June 2021.

Refer to Note 2 – “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report for additional information on how we calculate our provision for credit losses.

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For the year ended December 31, 2023, we recorded equity in losses of unconsolidated ventures of $1,000 (2022:

equity in earnings of $870,000;

equity in earnings of $1.2 million).

equity in losses of $407,000).

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

3 unchanged sentences

Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations.

Table of Conten t s

The tables below summarize the components of our gain (loss) on derivative instruments, net for the years ended December 31, 2023, 2022 and 2021:

14 unchanged sentences

Interest Rate Swaps 593,035 86,872 11,426 691,333

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 919 — (271) 648

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Interest Rate Swaps 185,232 (15,803) (5,869) 163,560

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 209 — 970 1,179

1 unchanged sentence

Total 156,157 (15,803) (17,743) 122,611

During the year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new swaps with a notional amount of $10.1 billion, excluding terminations and additions of forward starting swaps.

We realized a net gain of $593.0 million on interest rate swaps during the year ended December 31, 2022 due to rising interest rates.

As of December 31, 2022, we had $4.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 28 days.

During the year ended December 31, 2023, we entered into interest rate swaps with a notional amount of $3.5 billion and terminated existing interest rate swaps with a notional amount of $7.6 billion (December 31, 2022:

$10.0 billion of additions and $10.1 billion of terminations).

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

We recorded net gains of $62.3 million and $691.3 million on interest rate swaps during the years ended December 31, 2023 and 2022, respectively, primarily due to changes in forward interest rate expectations.

As of December 31, 2023, we had $4.5 billion of repurchase agreement borrowings with a weighted average remaining maturity of 20 days (December 31, 2022:

$4.2 billion and 28 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.

During the year ended December 31, 2021, we terminated existing swaps with a notional amount of $2.5 billion and entered into new swaps with a notional amount of $4.3 billion, excluding terminations and additions related to the transition of interest rate swaps to swaps that are indexed to SOFR in the fourth quarter of 2021 and terminations and additions of forward starting swaps.

We realized a net gain of $185.2 million on interest rate swaps during the year ended December 31, 2021 due to rising interest rates.

In March 2020, we terminated interest rate swaps as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic.

Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.

We realized a net loss of $904.7 million on these interest rate swaps during the first half of 2020 primarily due to falling interest rates.

We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements.

Table of Conten t s

As of December 31, 2023 and 2022, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR.

$ in thousands December 31, 2022 December 31, 2021

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

$ in thousands As of December 31, 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)

4,065,000 1.10 % 5.38 % 6.6 5,800,000 0.45 % 4.30 % 6.3

(1) Excludes $975.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will receive floating interest based upon SOFR (December 31, 2021:

$1.3 billion).

As of December 31, 2022 and 2021, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest.

$ in thousands December 31, 2022 December 31, 2021

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

(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.

We did not have any such forward starting swaps as of December 31, 2023.

As of December 31, 2022, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest.

We did not have any such interest rate swaps as of December 31, 2023.

$ in thousands As of December 31, 2022

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

Interest Rate Swaps (1)

2,350,000 4.30 % 2.78 % 9.3

(1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will pay floating interest based upon SOFR (December 31, 2021:

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

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

As of December 31, 2021 we had $13.6 million of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.

(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 December 31, 2023 and December 31, 2022, we did not have any currency forward contracts outstanding.

During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million in notional amount related to our investment in an unconsolidated venture denominated in euro and realized a net gain of $919,000.

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 December 31, 2022, we did not have a net notional amount of TBAs.

During the year ended December 31, 2022, we recorded $133.0 million of realized and unrealized losses on TBAs primarily due to rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

As of December 31, 2021, we had $1.6 billion notional amount of TBAs and recorded $41.6 million of realized and unrealized losses on TBAs during the year ended December 31, 2021 primarily due to a sharp increase in mortgage rates in the first quarter of 2021.

As of December 31, 2020, we had $1.7 billion notional amount of TBAs and recorded $24.4 million of realized and unrealized gains during the year ended December 31, 2020.

Realized and Unrealized Credit Derivative Income (Loss), net

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the year ended December 31, 2020.

Year Ended December 31

$ in thousands 2020

GSE CRT embedded derivative coupon interest 6,323

Gain (loss) on settlement of GSE CRT embedded derivatives (31,354)

Change in fair value of GSE CRT embedded derivatives (10,281)

Total realized and unrealized credit derivative income (loss), net (35,312)

During the year ended December 31, 2020 , we recorded realized and unrealized credit derivative losses of $41.6 million, excluding embedded derivative coupon interest.

We sold all of our GSE CRTs that were accounted for as hybrid financial instruments with embedded derivatives during the year ended December 31, 2020.

Table of Conten t s

Net Gain (Loss) on Extinguishment of Debt

As discussed in Note 6 - “Borrowings” of our consolidated financial statements in Part IV, Item 15 of this Report, during 2020, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements.

We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt and settlements of counterparty claims for less than the principal balance of our repurchase agreements as a gain on extinguishment of debt in our consolidated statement of operations.

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

We recorded $442,000 and $133.0 million of net realized and unrealized losses on TBAs during the year ended December 31, 2023 and December 31, 2022, respectively.

Net realized and unrealized losses on TBAs for the year ended December 31, 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, net for the years ended December 31, 2023 and 2022 consisted of foreign currency transaction gains and losses.

Other investment income, net for the year ended December 31, 2020 primarily consisted of quarterly dividends on FHLBI stock.

Other investment income (loss), net decreased during the year ended December 31, 2021 compared to 2020 due to the redemption of our FHLBI stock.

The table below summarizes the components of other investment income (loss), net for the years ended December 31, 2022, 2021 and 2020:

Years Ended December 31,

$ in thousands 2022 2021 2020

Dividend income — — 2,072

Gain (loss) on foreign currency transactions, net 186 1 65

Total 186 1 2,137

Other investment income (loss) for the year ended December 31, 2023 also includes the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023.

For the year ended December 31, 2023, we incurred management fees of $12.3 million (2022:

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Refer to Note 11 – “Related Party Transactions” of our consolidated financial statements in Part IV, Item 15 of this Report for a discussion of our relationship with our Manager and a description of how our fees are calculated.

For the year ended December 31, 2021 we incurred management fees of $21.1 million (2020:

$29.4 million) that are payable to our Manager under our management agreement.

Management fees decreased for the year ended December 31, 2021 compared to 2020 due to a lower stockholders' equity management fee base in 2021.

For the year ended December 31, 2023, our general and administrative expenses not covered under our management agreement amounted to $7.4 million (2022:

$8.4 million).

$10.9 million).

General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs.

General and administrative costs were lower for the year ended December 31, 2021 compared to 2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic totaling $2.6 million in 2020.

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 year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.

The difference between the consideration transferred and the carrying value of the preferred stock resulted in a gain attributable to common stockholders of $14.2 million during the year ended December 31, 2022.

Issuance and Redemption Costs of Redeemed Preferred Stock

In June, 2021, we redeemed all issued and outstanding shares of our Series A Preferred Stock.

The excess of the consideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $4.7 million in net income (loss) attributable to common stockholders during the year ended December 31, 2021.

Table of Conten t s

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 year ended December 31, 2023, our net loss attributable to common stockholders was $37.5 million (2022:

$132.5 million net loss attributable to common stockholders;

$1.7 billion net loss attributable to common stockholders) or $12.21 basic and diluted net loss per average share available to common stockholders (2021:

$4.82 basic and diluted net loss per average share available to common stockholders;

$98.93 basic and diluted net loss per average share available to common stockholders).

For the year ended December 31, 2022, the change in net loss attributable to common stockholders compared to 2021 was primarily due to:

(i) net losses on investments of $1.1 billion versus $366.5 million in the 2021 period;

(ii) net gains on derivative instruments of $559.0 million versus net gains on derivatives of $122.6 million in the 2021 period;

(iii) lower net interest income of $143.0 million versus $180.5 million in the 2021 period;

and (iv) a gain on repurchase and retirement of preferred stock of $14.2 million in 2022.

$417.0 million) or $0.85 basic and diluted net loss per average share available to common stockholders (2022:

For the year ended December 31, 2023, the change in net loss attributable to common stockholders compared to 2022 was primarily due to:

(i) net losses on investments of $366.5 million versus $961.9 million in the 2020 period;

(ii) net gains on derivative instruments of $122.6 million versus net losses on derivatives of $851.1 million in the 2020 period;

(iii) net losses on credit derivatives of $35.3 million in the 2020 period;

(iv) lower net interest income of $180.5 million versus $197.9 million in the 2020 period and (v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, net changes in net interest income, gains of repurchase and retirement of preferred stock, realized and unrealized credit derivative income (loss) and gain (loss) on extinguishment of debt see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net”, “Net Interest Income”, “Gain on Repurchase and Retirement of Preferred Stock”, “Realized and Unrealized Credit Derivative Income (Loss), net” and “Net Gain (Loss) on Extinguishment of Debt.”

(i) net losses on investments of $107.3 million versus $1.1 billion in the 2022 period;

(ii) net gains on derivative instruments of $61.8 million versus $559.0 million in the 2022 period and (iii) a $93.3 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

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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 income (and by calculation, effective yield) Total interest income (and by calculation, earning asset yields)

Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds)

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In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.

We did not present earnings available for distribution for the year ended December 31, 2020 because earnings available for distribution excluded the material adverse impact of the market disruption caused by the COVID-19 pandemic on our financial condition.

In addition, earnings available for the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio.

Table of Conten t s

Earnings Available for Distribution

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gain on repurchase and retirement of preferred stock;

(gain) loss on foreign currency transactions, net and amortization of net deferred (gain) loss on de-designated interest rate swaps.

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.

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We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate.

We added the gain on repurchase and retirement of preferred stock as a reconciling item to our earnings available for distribution calculation in the second quarter of 2022 because the gain does not represent earnings on our investment portfolio.

To maintain our qualification as a REIT, U.S.

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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.

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.

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GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs.

Table of Conten t s

The table below provides a reconciliation of U.S.

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(Gain) on repurchase and retirement of preferred stock (1,471) (14,179) —

(Gain) loss on foreign currency transactions, net (3)

Foreign currency (gains) losses, net (3)

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

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Earnings available for distribution per common share (5)

5.35 5.42 4.13

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

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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 securities, less an implied financing cost, over the forward settlement period.

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 consolidated statements of operations.

(3) Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the 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 consolidated statements of operations.

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

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$ in thousands 2023 2022 2021

Interest expense on repurchase agreements outstanding 71,268 10,710

Interest expense on repurchase agreements borrowings 238,634 71,268 10,710

Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (19,708) (22,000)

Repurchase agreements interest expense 228,229 51,560 (11,290)

Table of Conten t s

(5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding.

Earnings available for distribution per common share has been retroactively adjusted to reflect our one-for-ten reverse stock split that was effected following the close of business on June 3, 2022.

The components of earnings available for distribution for the years ended December 31, 2022 and 2021 are:

The components of earnings available for distribution for the years ended December 31, 2023, 2022 and 2021 were:

Years Ended December 31,

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

Earnings available for distribution increased for the year ended December 31, 2022 compared to 2021 primarily due to an increase in effective net interest income.

See below for a discussion of the change in effective net interest income.

As discussed above, we did not report earnings available for distribution for the year ended December 31, 2020.

Effective Interest Income / Effective Yield/ Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin

Prior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S.

GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net.

We included our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest was not accounted for consistently under U.S.

We accounted for GSE CRTs purchased before August 24, 2015 as hybrid financial instruments, but elected the fair value option for GSE CRTs purchased on or after August 24, 2015.

GAAP, coupon interest on GSE CRTs accounted for using the fair value option was recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments was recorded as realized and unrealized credit derivative income (loss).

We added back GSE CRT embedded derivative coupon interest to our total interest income because we considered GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

Earnings available for distribution increased for the year ended December 31, 2023 compared to 2022 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 floating rate borrowings.

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.

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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;

the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreement interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with 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.

Table of Conten t s

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:

Years Ended December 31,

2022 2021 2020

$ in thousands Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield Reconciliation Yield/Effective Yield

Total interest income 194,513 3.79 % 169,202 1.92 % 280,166 3.55 %

GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net — — % — — % 6,323 0.08 %

Effective interest income 194,513 3.79 % 169,202 1.92 % 286,489 3.63 %

Our effective interest income increased for the year ended December 31, 2022 versus 2021, despite lower average earnings assets, due to a 187 basis point increase in effective yields resulting from our rotation in higher yielding Agency RMBS.

Our effective interest income decreased for the year ended December 31, 2021 versus 2020 due to lower asset yields primarily as a result of our asset sales in the first half of 2020.

Changes in effective yield for the year ended December 31, 2021 versus 2020 are primarily due to changes in portfolio composition.

Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS during the year ended December 31, 2021.

The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

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(374) — % (15,604) (0.34) % 26,513 0.34 %

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2022 versus 2021 despite an increase in total interest expense, which reflects increases in the Federal Funds target rate, due to $86.9 million of contractual net interest income on interest rate swaps compared to $15.8 million of contractual net interest expense in 2021.

The change in contractual net interest expense (income) on interest rate swaps was driven by rising interest rates.

Our effective interest expense and effective cost of funds decreased for the year ended December 31, 2021 versus 2020 primarily due to a lower average cost of funds reflecting decreases in the Federal Funds target rate.

Lower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $15.8 million for the year ended December 31, 2021 compared to $8.0 million of contractual net interest income for the same period in 2020.

Table of Conten t s

Our effective interest expense and effective cost of funds increased modestly for the year ended December 31, 2023 compared to 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.

In addition to changes caused by the underlying floating rate index, the amount of contractual net interest income or expense on interest swaps that we recognize may change materially from period to period based on changes in the size and composition of our interest rate swap portfolio, which are generally broadly aligned with changes in our repurchase agreement borrowings.

See preceding discussion under “Gain (Loss) on Derivative Instruments, net” for details of our interest rate swap portfolio as of December 31, 2023 and December 31, 2022.

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:

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Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (0.23) % (19,708) (0.44) % (22,000) (0.28) %

GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net

— — % — — % 6,323 0.08 %

Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net

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278,303 5.44 % 210,117 4.13 % 142,689 1.58 %

Effective net interest income and effective interest rate margin increased for the year ended December 31, 2022 versus 2021 due to changes in contractual net interest income (expense) on interest rate swaps and an increase in total interest income resulting from our rotation into higher yielding Agency RMBS, which were partially offset by higher total interest expense and a higher average cost of funds resulting from increases in the Federal Funds target rate.

Effective net interest income decreased for the year ended December 31, 2021 versus 2020 primarily due to lower asset yields as a result of our asset sales in the first half of 2020 that were partially offset by a lower average cost of funds reflecting decreases in the Federal Funds target rate.

Effective interest rate margin deceased for the year ended December 31, 2021 versus 2020 due to changes in portfolio composition.

Our effective net interest income and effective interest rate margin increased for the year ended December 31, 2023 compared to 2022 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.

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 December 31, 2023 and December 31, 2022.

Our debt-to-equity ratio is calculated in accordance with U.S.

Our debt-to-equity ratio is calculated in

accordance with U.S.

GAAP and is the ratio of total debt to total stockholders' equity.

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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 other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

Table of Conten t s

December 31, 2022

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 December 31, 2023

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed securities 5,027,232 18,074 5,045,306

Treasury securities 11,214 — 11,214

Cash and cash equivalents (2)

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Repurchase agreements 4,458,695 — 4,458,695

Derivative liabilities, at fair value (3)

2,079 — 2,079

Other liabilities 42,117 732 42,849

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Economic debt-to-equity ratio (5)

(1) Investments in non-Agency CMBS, non-Agency RMBS and unconsolidated joint ventures are included in credit portfolio.

(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.

(3) Restricted cash and derivative assets 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.

December 31, 2021

(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 December 31, 2023.

As of December 31, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

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Economic debt-to-equity ratio (5)

(1) Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio.

(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.

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(4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.6 billion as of December 31, 2021) to total stockholders' equity.

Table of Conten t s

(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 measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs.

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.

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However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.

The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets negatively affected our liquidity during the year ended December 31, 2020.

Under the terms of our repurchase agreements, our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion.

In addition, our lenders have the contractual right to increase the “haircut”, or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile.

As a result of significant spread widening in both Agency and non-Agency securities in the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls.

We sold portfolio assets to generate liquidity, in many cases at significantly distressed market prices.

Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs.

These events have led us to seek to avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements.

Management's Discussion and Analysis of Financial Condition and Results of Operations and Part I.

Risk Factors in this Report for more information on how the COVID-19 pandemic has impacted and may continue to impact our liquidity and capital resources.

We held cash, cash equivalents and restricted cash of $198.6 million at December 31, 2023 (2022:

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$196.1 million).

$170.5 million).

Our investing activities provided net cash of $2.4 billion for the year ended December 31, 2022 (2021:

$120.7 million;

$11.6 billion).

Our investing activities used net cash of $536.8 million for the year ended December 31, 2023 (2022:

provided net cash of $2.4 billion).

Our primary use of cash from investing activities during the year ended December 31, 2023 was $5.9 billion to purchase MBS and $59.5 million to purchase U.S.

Treasury securities.

We also paid $179.5 million to settle derivative contracts during the year ended December 31, 2023.

We received proceeds from the sale of MBS of $5.2 billion and proceeds from the sale of U.S.

Treasury securities of $49.0 million during the year ended December 31, 2023.

We also generated $348.5 million from principal payments of MBS during the year ended December 31, 2023.

Our primary source of cash from investing activities during the year ended December 31, 2022 was proceeds from the sale of MBS of $27.3 billion and proceeds from the sale of U.S.

Treasury securities of $468.1 million.

We also generated $403.3 million from principal payments of MBS and received cash of $459.5 million to settle derivative contracts during the year ended December 31, 2022.

We also generated $403.3 million from principal payments of MBS and received cash of $459.5 million to settle derivative contracts during the

year ended December 31, 2022.

We used cash of $25.7 billion to purchase MBS and $502.3 million to purchase U.S.

Treasury securities during the year ended December 31, 2022.

During the year ended December 31, 2021, we sold MBS for proceeds of $16.3 billion.

We also generated $825.2 million from principal payments of MBS and received cash of $156.2 million to settle derivative contracts during the year ended December 31, 2021.

We used cash of $17.1 billion to purchase MBS during the year ended December 31, 2021.

During the year ended December 31, 2020, we sold MBS and GSE CRT for proceeds of $25.0 billion.

We also generated $892.6 million from principal payments of MBS and GSE CRT during the year ended December 31, 2020.

We used cash to purchase $13.6 billion of MBS and GSE CRT securities during the year ended December 31, 2020.

We also used cash of $844.6 million on derivative contracts during the year ended December 31, 2020 primarily as we sold Agency securities and our sensitivity to interest rates decreased.

Our financing activities used net cash of $2.9 billion for the year ended December 31, 2022 (2021:

$88.6 million;

2020:$11.6 billion).

Our financing activities for the year ended December 31, 2022 primarily consisted of net principal repayments on our repurchase agreements of $2.8 billion.

Our financing activities provided net cash of $218.9 million for the year ended December 31, 2023 (2022:

used net cash of $2.9 billion).

Our primary source of cash from financing activities during the year ended December 31, 2023 was net proceeds on our repurchase agreements of $223.5 million and proceeds from issuance of common stock of $109.1 million.

We paid dividends of $102.2 million and used $8.7 million to repurchase Series B and Series C Preferred Stock.

Proceeds from the issuance of common stock provided $81.9 million during the year ended December 31, 2022.

Our financing activities for the year ended December 31, 2021 primarily consisted of net principal repayments on our repurchase agreements of $240.9 million.

We paid dividends of $133.1 million and used cash of $140.0 million to redeem our Series A Preferred Stock during the year ended December 31, 2021.

Proceeds from the issuance of common stock provided $430.5 million during the year ended December 31, 2021.

Table of Conten t s

Our financing activities for the year ended December 31, 2020 primarily consisted of net principal repayments on our repurchase agreements of $10.3 billion.

In addition, we repaid secured loans of $1.65 billion and paid dividends of $137.5 million.

Our primary use of cash from financing activities during the year ended December 31, 2022 was net principal repayments on our repurchase agreements of $2.8 billion.

We paid dividends of $140.3 million and used cash of $115.1 million to repurchase Series B and Series C Preferred Stock during the year ended December 31, 2022.

Proceeds from the issuance of common stock provided $81.9 million during the year ended December 31, 2022.

As of December 31, 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%.

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.

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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 $6.3 million in additional capital to our unconsolidated joint ventures to cover future expenses should they occur.

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

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

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

Such financing will depend on market conditions for capital raises and our ability to

Table of Conten t s

invest such offering proceeds.

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.

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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.

However, our repurchase agreements are denominated in U.S.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

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Total 20 4,458,695 216,004

Table of Conten t s

Other Matters

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis