Invesco Mortgage Capital Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco." The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Quarterly Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”). Forward-Looking Statements We make forward-looking statements in this Quarterly Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans, objectives and our views on domestic and global market conditions (including the mortgage-backed securities, residential and commercial real estate markets). When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “project,” “forecast” or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words. The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. We caution you not to rely unduly on any forward-looking statements and urge you to carefully consider the factors described under the headings "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report and our Annual Report on Form 10-K. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 22 Table of Contents Executive Summary We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. As of March 31, 2024, we were invested in: • residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”) (collectively “Agency RMBS”); • commercial mortgage-backed securities ("CMBS") that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively “Agency CMBS”); • CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”); and • RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”). During the periods presented in this Quarterly Report, we also invested in: • to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS; • U.S. Treasury securities; and • other real estate-related financing arrangements in the form of unconsolidated ventures. We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification. We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P. (the “Operating Partnership”). We are externally managed and advised by our Manager, an indirect wholly-owned subsidiary of Invesco. We have elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of “Investment Company” under the 1940 Act. Market Conditions 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, government policy initiatives, inflation, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the first quarter of 2024. Contributing factors included: • Financial conditions remained accommodative during the first quarter as credit spreads tightened, equity market valuations increased, and interest rate volatility eased as financial markets reacted favorably despite the higher interest rate environment brought on by shifting expectations for economic growth and monetary policy. Inflation readings were generally flat during the quarter, remaining stubbornly above the Federal Reserve’s 2% inflation target. The headline consumer price index (“CPI”) ended the quarter at 3.5%, up from December’s 3.4%, while CPI (ex. food and energy) fell slightly from 3.9% to 3.8%. Given these relatively high readings, investors' expectations for future inflation have adjusted upward, as Treasury inflation-protected securities breakeven rates increased. The two-year breakeven ended the quarter at 2.72% (up from 2.02% at year-end) and the five-year breakeven ended at 2.44% (up from 2.15%) • Stronger than expected inflation readings, along with continued evidence of robust economic activity, led to sharply higher interest rates across the maturity spectrum during the quarter. The yield on the two-year Treasury increased by 37 basis points to 4.62%, the yield on the five-year Treasury increased 37 basis points to 4.20% and the yield on the ten-year Treasury finished at 4.19%, up 33 basis points on the quarter. The stronger than expected economic growth and inflation data also led to a dramatic re-pricing of the market’s expectations of future monetary policy. These expectations, as seen the through the Federal Funds futures market, adjusted from projecting over six cuts in the 23 Table of Contents Federal Open Market Committee’s (“FOMC”) benchmark rate during the balance of 2024 to less than three cuts. Further, the market’s expectation for the beginning of the easing cycle shifted from March to July. • Higher coupon Agency RMBS outperformed Treasuries while coupons lower in the stack underperformed, given a notable decline in interest rate volatility and improvement in supply and demand dynamics in the first quarter of 2024. Despite the sharp increase in interest rates, interest rate volatility fell as market expectations for monetary policy converged with official projections by the FOMC, benefiting valuations in higher coupons. In addition, organic supply remained at very low levels while demand from money managers, commercial banks, and overseas investors broadly outpaced expectations. • Quantitative tightening continued in the first quarter of 2024, as the Federal Reserve passively reduced the size of their balance sheet through maturities of U.S. Treasuries and paydowns of Agency RMBS. Paydowns of Agency RMBS from the balance sheet added approximately $14.5 billion of net supply to the market each month, well below the Federal Reserve's monthly cap of $35 billion. Although quantitative tightening is anticipated to conclude in the second half of 2024, runoff of the Agency RMBS portion of the balance sheet is expected to continue, with proceeds redeployed into Treasuries. • Prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates. • Premiums on higher coupon specified pool collateral increased modestly given improvement in supply and demand technicals. • Implied financing via the dollar roll market for TBA investments remained relatively unattractive, as reduced demand from the Federal Reserve and commercial banks negatively impacted fundamentals, while the increase in loan balances worsened the prepayment profile. • Agency CMBS risk premiums declined over the quarter as new issuance volumes remained relatively low and higher yields helped drive investor demand for fixed-rate bonds. Market Rates As of March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 One Quarter Change One Year Change Interest Rates Effective Federal Funds Rate 5.33 % 5.33 % 5.33 % 5.08 % 4.83 % — % 0.50 % One-month SOFR 5.33 % 5.35 % 5.32 % 5.14 % 4.81 % (0.02) % 0.52 % 2 Year Treasury 4.62 % 4.25 % 5.04 % 4.87 % 4.06 % 0.37 % 0.56 % 5 Year Treasury 4.20 % 3.83 % 4.60 % 4.13 % 3.61 % 0.37 % 0.59 % 10 Year Treasury 4.19 % 3.86 % 4.57 % 3.82 % 3.49 % 0.33 % 0.70 % 30 Year Treasury 4.34 % 4.02 % 4.71 % 3.85 % 3.69 % 0.32 % 0.65 % 24 Table of Contents As of (in basis points) March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 One Quarter Change One Year Change Swap Spreads (1) 2 Year (8) (18) (7) (8) 3 10 (11) 5 Year (23) (32) (23) (22) (23) 9 — 10 Year (37) (40) (30) (25) (29) 3 (8) 30 Year (73) (71) (69) (66) (73) (2) — 30 Year Mortgage Spreads vs. 5/10 Year Treasury Blend (2) FNMA 2.0% 62 55 63 39 65 7 (3) FNMA 2.5% 68 65 71 50 73 3 (5) FNMA 3.0% 75 73 77 61 80 2 (5) FNMA 3.5% 80 81 85 72 90 (1) (10) FNMA 4.0% 89 95 96 89 107 (6) (18) FNMA 4.5% 102 110 107 108 125 (8) (23) FNMA 5.0% 118 131 125 133 150 (13) (32) FNMA 5.5% 138 154 144 161 174 (16) (36) FNMA 6.0% 153 165 164 184 174 (12) (21) 10 Year Agency CMBS Spreads vs. Treasuries (3) FHLMC K 54 60 74 68 82 (6) (28) FNMA DUS 58 67 78 75 77 (9) (19) (1) Swap spreads represent the difference between the fixed rate coupon of an interest rate swap and the yield on a U.S. Treasury security with a similar maturity. (2) Mortgage spreads represent the difference between the yield on the Agency TBA and the blended average yield of five year and ten year U.S. Treasury securities. (3) Agency CMBS spreads represent the difference between the yields on new issue Freddie Mac K Certificates and Fannie Mae Delegated Underwriting and Servicing MBS (“DUS”) and a U.S. Treasury security with a similar maturity. Outlook Given the increase in market volatility in April, we remain cautious on the near-term outlook for the Agency RMBS sector as the market adjusts to shifting expectations around the timing of monetary policy adjustments. Our recent allocation to fixed rate Agency CMBS reduces our exposure to near-term interest rate volatility while providing attractive returns with favorable funding. Over the longer term, however, the potential normalization of monetary policy and a steeper yield curve should be supportive of Agency RMBS. We believe Agency RMBS investors stand to benefit from attractive valuations, favorable funding and robust liquidity as the macro environment evolves. 25 Table of Contents Investment Activities The table below shows the composition of our investment portfolio as of March 31, 2024, December 31, 2023 and March 31, 2023. As of $ in thousands March 31, 2024 December 31, 2023 March 31, 2023 Agency RMBS: 30 year fixed-rate pass-through, at fair value 4,649,052 4,952,474 5,320,942 Agency CMO, at fair value 74,701 74,758 81,258 Agency CMBS, at fair value 265,512 — — Non-Agency CMBS, at fair value 10,188 9,935 36,624 Non-Agency RMBS, at fair value 7,651 8,139 8,319 U.S. Treasury securities, at fair value — 11,214 — Investments in unconsolidated ventures — 500 504 Subtotal 5,007,104 5,057,020 5,447,647 TBAs, at implied cost basis (1) — — 929 Total investment portfolio, including TBAs 5,007,104 5,057,020 5,448,576 (1) Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs that we do not intend to physically settle on the contractual settlement date as derivative financial instruments. We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. Our TBA dollar roll transactions are a form of off-balance sheet financing. For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below. As of March 31, 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 93% of our total investment portfolio, including TBAs, versus 98% as of December 31, 2023 and March 31, 2023. Our 30 year fixed-rate Agency RMBS holdings as of March 31, 2024, December 31, 2023 and March 31, 2023 consisted of specified pools with coupon distributions as shown in the table below. As of March 31, 2024 December 31, 2023 March 31, 2023 $ in thousands Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield 4.0% 764,780 16.5 % 4.64 % 876,337 17.7 % 4.65 % 770,111 14.5 % 4.52 % 4.5% 892,872 19.2 % 4.95 % 1,017,191 20.5 % 4.95 % 1,445,923 27.2 % 4.92 % 5.0% 1,001,505 21.5 % 5.34 % 1,028,036 20.8 % 5.34 % 1,539,794 28.9 % 5.27 % 5.5% 992,970 21.4 % 5.59 % 1,016,707 20.5 % 5.59 % 1,565,114 29.4 % 5.53 % 6.0% 996,925 21.4 % 6.03 % 1,014,203 20.5 % 6.03 % — — — % Total 30 year fixed-rate Agency RMBS 4,649,052 100.0 % 5.35 % 4,952,474 100.0 % 5.33 % 5,320,942 100.0 % 5.15 % Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles. We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments. The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of March 31, 2024, December 31, 2023 and March 31, 2023. 26 Table of Contents As of March 31, 2024 December 31, 2023 March 31, 2023 $ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage Specified pool characteristic: Geographic location 968,689 20.9 % 1,079,310 21.8 % 1,566,529 29.5 % Loan balance 2,130,283 45.8 % 2,193,876 44.3 % 1,338,150 25.1 % High loan-to-value ratio 470,621 10.1 % 574,246 11.6 % 956,556 18.0 % Low credit score 1,079,459 23.2 % 1,105,042 22.3 % 1,459,707 27.4 % Total 30 year fixed-rate Agency RMBS 4,649,052 100.0 % 4,952,474 100.0 % 5,320,942 100.0 % As of March 31, 2024, our holdings of Agency CMBS represented approximately 5% of our total investment portfolio versus 0% as of December 31, 2023 and March 31, 2023. As of March 31, 2024, our Agency CMBS holdings were comprised of fixed-rate securities with Fannie Mae DUS representing 74% our holdings and Freddie Mac Multifamily Participation Certificates representing 24% of our holdings. We invested in Agency CMBS in the first quarter of 2024 because these securities benefit from prepayment protection characteristics and have an attractive return profile. Further, the hedging costs related to these holdings are economical as they are less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of March 31, 2024, December 31, 2023 and March 31, 2023, our holdings of non-Agency CMBS and non-Agency RMBS represented less than 1% of our total investment portfolio, including TBAs. Approximately 70% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of March 31, 2024. In the first quarter of 2024, we received a final distribution from our sole remaining unconsolidated venture. Following this distribution, we no longer have any investments in unconsolidated ventures. Financing and Other Liabilities We finance the majority of our investment portfolio through repurchase agreements. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to the secured overnight financing rate (“SOFR”). The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter. $ in thousands Collateralized borrowings under repurchase agreements Quarter Ended Quarter-end balance Average quarterly balance (1) Maximum balance (2) March 31, 2023 4,814,700 4,734,819 4,814,700 June 30, 2023 4,959,388 4,791,720 4,959,388 September 30, 2023 4,987,006 4,902,400 4,987,006 December 31, 2023 4,458,695 3,736,432 4,458,695 March 31, 2024 4,393,908 4,419,757 4,531,261 (1) Average quarterly balance for each period is based on month-end balances. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. Hedging Instruments We enter into interest rate swap agreements that are designed to mitigate the effects of changes in interest rates for a portion of our borrowings. Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR. To a lesser extent, we 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 three months ended March 31, 2024, we entered into interest rate swaps with a notional amount of $1.3 billion and terminated existing interest rate swaps with a notional amount of $1.1 billion. Daily variation margin payment for interest rate 27 Table of Contents swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations. Capital Activities As of March 31, 2024, we may sell up to 5,934,691 shares of our common stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents. During the three months ended March 31, 2024, we sold 365,838 shares of common stock under our equity distribution agreement for proceeds of $3.3 million, net of approximately $43,000 in commissions and fees. During the three months ended March 31, 2023, we sold 2,930,069 shares of common stock under an equity distribution agreement for proceeds of $35.8 million, net of approximately $482,000 in commissions and fees. For information on dividends declared during the three months ended March 31, 2024 and 2023, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I. Item 1 of this report on Form 10-Q. During the three months ended March 31, 2024, we did not repurchase any shares of our common stock. In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three months ended March 31, 2024, we repurchased and retired 93,347 shares of Series B Preferred Stock and 95,917 shares of Series C Preferred Stock. During the three months ended March 31, 2023, we did not repurchase any shares of preferred stock. As of March 31, 2024, we had authority to repurchase 1,092,650 additional shares of our Series B Preferred Stock and 949,522 additional shares of our Series C Preferred Stock under the current share repurchase program. Book Value per Common Share We calculate book value per common share as follows. As of In thousands except per share amounts March 31, 2024 December 31, 2023 Numerator (adjusted equity): Total equity 785,572 782,665 Less: Liquidation preference of Series B Preferred Stock (107,316) (109,650) Less: Liquidation preference of Series C Preferred Stock (186,238) (188,636) Total adjusted equity 492,018 484,379 Denominator (number of shares): Common stock outstanding 48,826 48,461 Book value per common share 10.08 10.00 Our book value per common share increased 0.8% as of March 31, 2024 compared to December 31, 2023 as our higher coupon Agency RMBS performed well relative to interest rate swap hedges, despite a notable increase in interest rates during the quarter. Strong performance in higher coupons was driven by a meaningful decline in interest rate volatility given market expectations for monetary policy easing in the first half of 2024. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value. Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies and estimates that are disclosed in our most recent Form 10-K for the year ended December 31, 2023. Recent Accounting Standards None. 28 Table of Contents Results of Operations The table below presents information from our condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands, except share data 2024 2023 Interest income 68,583 69,287 Interest expense 61,580 49,726 Net interest income 7,003 19,561 Other income (loss) Gain (loss) on investments, net (66,153) 51,956 (Increase) decrease in provision for credit losses (39) — Equity in earnings (losses) of unconsolidated ventures (193) 2 Gain (loss) on derivative instruments, net 93,161 (44,895) Other investment income (loss), net — (93) Total other income (loss) 26,776 6,970 Expenses Management fee – related party 2,861 2,979 General and administrative 1,796 2,089 Total expenses 4,657 5,068 Net income (loss) 29,122 21,463 Dividends to preferred stockholders (5,585) (5,862) Gain on repurchase and retirement of preferred stock 193 — Net income (loss) attributable to common stockholders 23,730 15,601 Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic 0.49 0.39 Diluted 0.49 0.39 Weighted average number of shares of common stock: Basic 48,499,863 39,607,354 Diluted 48,500,476 39,608,545 29 Table of Contents Interest Income and Average Earning Asset Yields The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Average earning assets (1) 4,972,242 5,245,291 Average earning asset yields (2) 5.52 % 5.28 % (1) Average balances for each period are based on weighted month-end balances. (2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized. Total average earning assets decreased $273.0 million for the three months ended March 31, 2024 compared to 2023. We maintained similar amounts of leverage during both periods, but modest declines in stockholders' equity resulted in lower average earnings assets for the three months ended March 31, 2024 compared to 2023. Average earning asset yields increased for the three months ended March 31, 2024 compared to 2023 due to our rotation into higher yielding Agency RMBS. We earned total interest income of $68.6 million for the three months ended March 31, 2024 (March 31, 2023: $69.3 million). Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below. Three Months Ended March 31, $ in thousands 2024 2023 Interest Income Coupon interest 67,442 69,116 Net (premium amortization) discount accretion 1,141 171 Total interest income 68,583 69,287 Interest income was relatively unchanged for the three months ended March 31, 2024 compared to 2023 as a decrease in average earning assets was largely offset by an increase in average earning asset yields. Prepayment Speeds Our RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. 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. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. The following table presents net (premium amortization) discount accretion recognized for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Agency RMBS 1,136 14 Agency CMBS 5 — Non-Agency CMBS 127 291 Non-Agency RMBS (126) (134) U.S. Treasury Securities (1) — Net (premium amortization) discount accretion 1,141 171 30 Table of Contents Net discount accretion was $1.1 million for the three months ended March 31, 2024 compared to $171,000 in 2023. The increase in net discount accretion for the three months ended March 31, 2024 compared to 2023 was the result of repositioning our Agency RMBS portfolio into securities with lower book prices and slightly faster prepayment rates. Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results. Interest Expense and Cost of Funds The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Total average borrowings (1) 4,419,757 4,737,476 Maximum borrowings during the period (2) 4,531,261 4,814,700 Cost of funds (3) 5.57 % 4.20 % (1) Average borrowings for each period are based on weighted month-end balances. (2) Amount represents the maximum borrowings at month-end during each of the respective periods. (3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings. Total average borrowings decreased $317.7 million for the three months ended March 31, 2024 compared to 2023. We maintained similar amounts of leverage during both periods, but modest declines in stockholders' equity resulted in lower average borrowings for the three months ended March 31, 2024 compared to 2023. Our average cost of funds increased 137 basis points for the three months ended March 31, 2024 compared to 2023 as the FOMC has raised the Federal Funds target rate from a range of 4.25% to 4.50% as of January 1, 2023 to a range of 5.25% to 5.50% as of March 31, 2024. The table below presents the components of interest expense for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Interest Expense Interest expense on repurchase agreement borrowings 61,580 54,220 Amortization of net deferred (gain) loss on de-designated interest rate swaps — (4,494) Total interest expense 61,580 49,726 Our interest expense increased $11.9 million for the three months ended March 31, 2024 compared to 2023 as increases in our cost of funds more than offset decreases in our average borrowings. Our interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above. Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $4.5 million during the three months ended March 31, 2023. 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 the condensed 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 March 31, 2024 and December 31, 2023, there were no net deferred gains or losses on discontinued cash flow hedges remaining in accumulated other comprehensive income. 31 Table of Contents Net Interest Income The table below presents the components of net interest income for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Interest income 68,583 69,287 Interest Expense: Interest expense on repurchase agreement borrowings 61,580 54,220 Amortization of net deferred (gain) loss on de-designated interest rate swaps — (4,494) Total interest expense 61,580 49,726 Net interest income 7,003 19,561 Net interest rate margin (0.05) % 1.08 % Our net interest income, which equals total interest income less total interest expense, totaled $7.0 million for the three months ended March 31, 2024 (March 31, 2023: $19.6 million). 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 three months ended March 31, 2024 compared to 2023 was due to higher interest expense related to increases in the Federal Funds target rate. 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 The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2024 and 2023. Three Months Ended March 31, $ in thousands 2024 2023 Net realized gains (losses) on sale of MBS (3,222) (13,765) Net unrealized gains (losses) on MBS accounted for under the fair value option (62,473) 65,721 Net unrealized gains (losses) on U.S. Treasury securities (372) — Net realized gains (losses) on U.S. Treasury securities (86) — Total gain (loss) on investments, net (66,153) 51,956 During the three months ended March 31, 2024, we sold MBS and realized net losses of $3.2 million (March 31, 2023: net losses of $13.8 million). Net realized losses during the three months ended March 31, 2024 reflect sales of lower coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS. Net realized losses during the three months ended March 31, 2023 primarily reflect the repositioning of Agency RMBS coupon allocations and sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS in an effort to improve the earnings power of the portfolio. We have elected the fair value option for all of our MBS purchased on or after September 1, 2016. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, $5.0 billion or 99.7% of our MBS were accounted for under the fair value option. We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $62.5 million in the three months ended March 31, 2024 compared to net unrealized gains of $65.7 million in the three months ended March 31, 2023. Net unrealized losses in the three months ended March 31, 2024 resulted from higher interest rates during the quarter, as valuations on fixed-rate securities declined as interest rates rose. Net unrealized gains in the three months ended March 31, 2023 were primarily due to improved Agency RMBS valuations as yields on Treasuries decreased. We recorded net realized and unrealized losses of $458,000 on U.S. Treasury securities in the three months ended March 31, 2024. We did not hold any U.S. Treasury securities during the three months ended March 31, 2023. (Increase) Decrease in Provision for Credit Losses As of March 31, 2024, $15.5 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2023: $15.7 million). During the three months ended March 31, 2024, we recorded a $39,000 provision 32 Table of Contents for credit losses on a single non-Agency CMBS based on a comparison of the security's amortized cost basis to discounted expected cash flows. We did not record any provisions for credit losses during the three months ended March 31, 2023. Equity in Earnings (Losses) of Unconsolidated Ventures For the three months ended March 31, 2024 we recorded equity in losses of unconsolidated ventures of $193,000 (March 31, 2023: equity in earnings of $2,000). We received a final distribution from our sole remaining unconsolidated venture during the first quarter of 2024, and the venture was dissolved in April 2024. Gain (Loss) on Derivative Instruments, net We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods. $ in thousands Three months ended March 31, 2024 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 48,682 45,287 (808) 93,161 Total 48,682 45,287 (808) 93,161 $ in thousands Three months ended March 31, 2023 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps (90,949) 54,464 (7,968) (44,453) TBAs (951) — 509 (442) Total (91,900) 54,464 (7,459) (44,895) During the three months ended March 31, 2024, we entered into interest rate swaps with a notional amount of $1.3 billion and terminated existing interest rate swaps with a notional amount of $1.1 billion. We recorded net gains of $93.2 million on interest rate swaps for the three months ended March 31, 2024 (March 31, 2023: net losses of $44.5 million) primarily due to changes in forward interest rate expectations. As of March 31, 2024, we had $4.4 billion of repurchase agreement borrowings with a weighted average remaining maturity of 20 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense. As of March 31, 2024 and December 31, 2023, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR. $ in thousands As of March 31, 2024 As of December 31, 2023 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 4,265,000 1.17 % 5.34 % 7.2 4,065,000 1.10 % 5.38 % 6.6 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 March 31, 2024 and December 31, 2023, we had no investments in TBAs. We recorded $442,000 of net realized and unrealized losses on TBAs during the three months ended March 31, 2023. 33 Table of Contents Other Investment Income (Loss), net Our other investment income (loss), net during the three months ended March 31, 2023 consisted of foreign currency transaction gains and losses and the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023. Expenses We incurred management fees of $2.9 million for the three months ended March 31, 2024 (March 31, 2023: $3.0 million). Management fees decreased for the three months ended March 31, 2024 compared to the same period in 2023 due to a lower stockholders' equity management fee base. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated. Our general and administrative expenses not covered under our management agreement amounted to $1.8 million for the three months ended March 31, 2024 (March 31, 2023: $2.1 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. Gain on Repurchase and Retirement of Preferred Stock In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three months ended March 31, 2024, we repurchased and retired 93,347 shares of Series B Preferred Stock and 95,917 shares of Series C Preferred Stock. During the three months ended March 31, 2023, we did not repurchase any shares of preferred stock. Gains on repurchases and retirements of preferred stock represent the difference between the consideration transferred and the carrying value of the preferred stock. Net Income (Loss) attributable to Common Stockholders For the three months ended March 31, 2024, our net income attributable to common stockholders was $23.7 million (March 31, 2023: $15.6 million) or $0.49 basic and diluted net income per average share available to common stockholders (March 31, 2023: $0.39). The change in net income attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $93.2 million in the 2024 period compared to net losses on derivative instruments of $44.9 million in the 2023 period; (ii) net losses on investments of $66.2 million in the 2024 period compared to net gains on investments of $52.0 million in the 2023 period; and (iii) a $12.6 million decrease in net interest income. For further information on the changes in net gain (loss) on derivative instruments, net gain (loss) on investments and changes in net interest income, see preceding discussion under “Gain (Loss) on Derivative Instruments, net”, “Gain (Loss) on Investments, net” and “Net Interest Income”. Non-GAAP Financial Measures The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S. GAAP measures. We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below. Non-GAAP Financial Measure Most Directly Comparable U.S. GAAP Measure Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds) Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin) Economic debt-to-equity ratio Debt-to-equity ratio The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies. 34 Table of Contents Earnings Available for Distribution Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; gain on repurchase and retirement of preferred stock; foreign currency (gains) losses, net and amortization of net deferred (gain) loss on de-designated interest rate swaps. By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies. However, because not all of our peer companies use identical operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by our peer companies. We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate. To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We have historically distributed at least 100% of our REIT taxable income. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs. Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP) or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs. 35 Table of Contents The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to earnings available for distribution for the following periods. Three Months Ended March 31, $ in thousands, except per share data 2024 2023 Net income (loss) attributable to common stockholders 23,730 15,601 Adjustments: (Gain) loss on investments, net 66,153 (51,956) Realized (gain) loss on derivative instruments, net (1) (48,682) 91,900 Unrealized (gain) loss on derivative instruments, net (1) 808 7,459 TBA dollar roll income (2) — 697 Gain on repurchase and retirement of preferred stock (193) — Foreign currency (gains) losses, net (3) — 93 Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) — (4,494) Subtotal 18,086 43,699 Earnings available for distribution 41,816 59,300 Basic income (loss) per common share 0.49 0.39 Earnings available for distribution per common share (5) 0.86 1.50 (1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components. Three Months Ended March 31, $ in thousands 2024 2023 Realized gain (loss) on derivative instruments, net 48,682 (91,900) Unrealized gain (loss) on derivative instruments, net (808) (7,459) Contractual net interest income (expense) on interest rate swaps 45,287 54,464 Gain (loss) on derivative instruments, net 93,161 (44,895) (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations. (3) Foreign currency gains (losses), net includes foreign currency transaction gains and losses and the reclassification of currency translation adjustments that were previously recorded in accumulated other comprehensive income and is included in other investment income (loss), net on the condensed consolidated statements of operations. (4) U.S. GAAP interest expense on the condensed consolidated statements of operations includes the following components. Three Months Ended March 31, $ in thousands 2024 2023 Interest expense on repurchase agreement borrowings 61,580 54,220 Amortization of net deferred (gain) loss on de-designated interest rate swaps — (4,494) Total interest expense 61,580 49,726 (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. 36 Table of Contents The table below shows the components of earnings available for distribution for the following periods. Three Months Ended March 31, $ in thousands 2024 2023 Effective net interest income (1) 52,290 69,531 TBA dollar roll income — 697 Equity in earnings (losses) of unconsolidated ventures (193) 2 (Increase) decrease in provision for credit losses (39) — Total expenses (4,657) (5,068) Subtotal 47,401 65,162 Dividends to preferred stockholders (5,585) (5,862) Earnings available for distribution 41,816 59,300 (1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure. Earnings available for distribution decreased during the three months ended March 31, 2024 compared to the same period in 2023 due to lower effective net interest income. See below for details on the change in effective net interest income. 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 interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings. We add back the net payments or receipts on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs. We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as 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. The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods. Three Months Ended March 31, 2024 2023 $ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds Total interest expense 61,580 5.57 % 49,726 4.20 % Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps — — % 4,494 0.38 % Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (45,287) (4.10) % (54,464) (4.60) % Effective interest expense 16,293 1.47 % (244) (0.02) % Our effective interest expense and effective cost of funds increased in the three months ended March 31, 2024 compared to the same period in 2023 due to higher U.S. GAAP interest expense driven by increases in the Federal Funds target rate and decreases 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 37 Table of Contents 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 March 31, 2024 and December 31, 2023. The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods. Three Months Ended March 31, 2024 2023 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 7,003 (0.05) % 19,561 1.08 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps — — % (4,494) (0.38) % Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 45,287 4.10 % 54,464 4.60 % Effective net interest income 52,290 4.05 % 69,531 5.30 % Our effective net interest income and effective interest rate margin decreased in the three months ended March 31, 2024 compared to the same period in 2023 due to higher U.S. GAAP interest expense driven by increases in the Federal Funds target rate and decreases in contractual net interest income on interest rate swaps. 38 Table of Contents 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 March 31, 2024 and December 31, 2023. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity. As of March 31, 2024, approximately 88% of our equity is allocated to Agency RMBS. We present an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage. As of March 31, 2024 $ in thousands Agency RMBS Agency CMBS Credit Portfolio (1) Total Mortgage-backed securities 4,723,751 265,512 17,841 5,007,104 Cash and cash equivalents (2) 56,716 3,174 — 59,890 Restricted cash (3) 125,860 14,755 — 140,615 Derivative assets, at fair value (3) 117 14 — 131 Other assets 22,569 1,033 131 23,733 Total assets 4,929,013 284,488 17,972 5,231,473 Repurchase agreements 4,189,856 204,052 — 4,393,908 Other liabilities 48,061 3,245 687 51,993 Total liabilities 4,237,917 207,297 687 4,445,901 Total stockholders' equity (allocated) 691,096 77,191 17,285 785,572 Debt-to-equity ratio (4) 6.1 2.6 — 5.6 Economic debt-to-equity ratio (5) 6.1 2.6 — 5.6 (1) Investments in non-Agency CMBS and non-Agency RMBS 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 are allocated based on our hedging strategy for each asset class. (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis to total stockholders' equity. We did not have any TBAs outstanding as of March 31, 2024. 39 Table of Contents As of December 31, 2023 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 5,027,232 18,074 5,045,306 U.S. Treasury securities 11,214 — 11,214 Cash and cash equivalents (2) 76,967 — 76,967 Restricted cash (3) 121,670 — 121,670 Derivative assets, at fair value (3) 939 — 939 Other assets 27,480 633 28,113 Total assets 5,265,502 18,707 5,284,209 Repurchase agreements 4,458,695 — 4,458,695 Other liabilities 42,117 732 42,849 Total liabilities 4,500,812 732 4,501,544 Total stockholders' equity (allocated) 764,690 17,975 782,665 Debt-to-equity ratio (4) 5.8 — 5.7 Economic debt-to-equity ratio (5) 5.8 — 5.7 (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 are allocated based on our hedging strategy for each asset class. (4) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity. (5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis to total stockholders' equity. We did not have any TBAs outstanding as of December 31, 2023. Liquidity and Capital Resources Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our condensed consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. We held cash, cash equivalents and restricted cash of $200.5 million as of March 31, 2024 (March 31, 2023: $228.9 million). Our cash, cash equivalents and restricted cash change due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of approximately $57.5 million for the three months ended March 31, 2024 (March 31, 2023: $67.2 million). Our investing activities provided net cash of $37.1 million in the three months ended March 31, 2024 compared to net cash used by investing activities of $696.9 million in the three months ended March 31, 2023. Our primary source of cash from investing activities for the three months ended March 31, 2024 was proceeds from sales of MBS of $296.5 million and proceeds from sales of U.S. Treasury securities of $10.8 million (March 31, 2023: $783.9 million from the sales of MBS). We also generated $71.2 million from principal payments of MBS during the three months ended March 31, 2024 (March 31, 2023: $61.1 million) and received cash of $48.7 million to settle derivative contracts in the three months ended March 31, 2024 (March 31, 2023: net cash used of $91.9 million). We used cash of $390.4 million to purchase MBS during the three months ended March 31, 2024 (March 31, 2023: $1.4 billion to purchase MBS). Our financing activities used net cash of $92.7 million for the three months ended March 31, 2024 compared to net cash provided by financing activities of $579.8 million in the three months ended March 31, 2023. During the three months ended March 31, 2024, we used cash for net repayments on our repurchase agreements of $64.4 million (March 31, 2023: net cash 40 Table of Contents provided of $579.9 million). We also used cash of $25.0 million for the three months ended March 31, 2024 to pay dividends (March 31, 2023: $31.0 million). Proceeds from issuance of common stock provided $3.3 million for the three months ended March 31, 2024 (March 31, 2023: $35.8 million). As of March 31, 2024, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.6% for Agency RMBS and 5.0% for Agency CMBS. The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS and a low of 4% to a high of 6% for Agency CMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately. Effects of Margin Requirements, Leverage and Credit Spreads Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a “margin call”, which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition. We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods. Forward-Looking Statements Regarding Liquidity As of March 31, 2024, we held $4.6 billion of Agency securities that are financed by repurchase agreements. We also had approximately $390.7 million of unencumbered investments and unrestricted cash of $59.9 million as of March 31, 2024. As of March 31, 2024, our known contractual obligations primarily consisted of $4.4 billion of repurchase agreement borrowings with a weighted average remaining maturity of 20 days. We generally intend to refinance the majority of our repurchase agreement borrowings at market rates upon maturity. Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities. Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses. Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to 41 Table of Contents invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations. Exposure to Financial Counterparties We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty. As of March 31, 2024, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $39.3 million, or 5% of our stockholders' equity. The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2024. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are denominated in U.S. dollars. $ in thousands Number of Counterparties Repurchase Agreement Financing Exposure North America 13 2,459,816 (118,063) Europe (excluding United Kingdom) 3 586,339 (25,413) Asia 4 927,386 (46,065) United Kingdom 1 420,367 (16,765) Total 21 4,393,908 (206,306) Dividends To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 12 – "Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, 2023. Unrelated Business Taxable Income We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income. Other Matters We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2024, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2024. At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned 42 Table of Contents subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of March 31, 2024, we conducted our business so as not to be regulated as an investment company under the 1940 Act.