What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-05 compared with 2024-08-08 · 203 added, 192 removed, 556 unchanged (42% of the section changed)

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Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation.

As of June 30, 2024, we were invested in:

As of September 30, 2024, we were invested in:

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

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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;

During the periods presented in this Quarterly Report, we also invested in U.S.

Treasury securities and other real estate-related financing arrangements in the form of unconsolidated ventures.

Treasury securities;

• 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.

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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 second quarter of 2024.

Contributing factors included:

• Financial conditions remained accommodative despite tightening modestly during the second quarter, as strong equity market performance was offset by slightly wider credit spreads and increased interest rate volatility.

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

Of these macroeconomic factors, inflation, employment conditions, monetary policy, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the third quarter of 2024.

Inflation readings trended lower during the quarter, moving closer to the Federal Reserve’s 2% inflation target.

The headline consumer price index (“CPI”) ended the quarter at 3.0%, down from March’s 3.5%, while CPI (ex.

food and energy) fell from 3.8% to 3.3%.

The headline consumer price index (“CPI”) ended the quarter at 2.4%, down from June’s 3.0%, while CPI (ex.

food and energy) remained flat at 3.3%.

Investors reacted positively to these readings, with expectations for future inflation adjusting lower and Treasury inflation-protected securities breakeven rates decreased.

The two-year breakeven ended the quarter at 2.11% (down from 2.72% at the end of March) and the five-year breakeven ended at 2.28% (down from 2.44%).

• Despite slowing inflation, interest rates continued to increase across the maturity spectrum as investors began to anticipate the possibility of increased Treasury issuance following this November's presidential election.

The yield on the two-year Treasury increased 10 basis points to 4.72%, the yield on the five-year Treasury increased 13 basis points to 4.33% and the yield on the ten-year Treasury finished at 4.34%, up 15 basis points on the quarter.

Cooling inflation and softer employment data led to a re-pricing of the market’s expectations of future monetary policy.

At the end of the second quarter, the Federal Funds futures market reflected an expectation that the first cut of the benchmark rate by the Federal Open Market Committee’s (“FOMC”) would arrive in either September or November, and that the FOMC would reduce its target rate a total of five time through the end of 2025.

• Most Agency RMBS fixed rate coupons underperformed Treasuries during the second quarter, as interest rate volatility increased given market expectations for looser monetary policy and higher uncertainty on the timing of

monetary policy easing.

The increase in volatility led to a softening in demand for Agency RMBS and seasonal effects increased supply in higher coupons.

Coupons at the bottom of the 30-year coupon stack marginally outperformed Treasuries, given their lower sensitivity to increases in interest rate volatility, while 3.5% through 6.5% coupons underperformed.

• Prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates.

• Premiums on higher coupon specified pool collateral decreased modestly given the increase in interest rates.

• Implied financing via the dollar roll market for TBA investments became attractive for select higher coupons at the beginning of the quarter as demand spiked due to CMO issuance.

This specialness proved fleeting, and most dollar rolls ended the quarter relatively unattractive.

• Quantitative tightening continued in the second quarter of 2024, as the Federal Reserve passively reduced the size of its balance sheet through maturities of U.S.

The two-year breakeven ended the quarter at 1.77% (down from 2.11% at the end of June) and the five-year breakeven ended at 2.09% (down from 2.28%).

Meanwhile, employment data released during the quarter reflected a slowing labor market, as the economy added an average of 152 thousand jobs during July and August.

Following the end of the quarter, the Bureau of Labor Statistics announced the nonfarm payrolls changed to 254 thousand in September.

Cooling inflation and softer employment data prior to the release of September payrolls led to a re-pricing of the market’s expectations of future monetary policy.

Following the Federal Open Market Committee’s (“FOMC”) 50 basis point reduction of the Federal Funds target rate in September.

In addition, Federal Funds futures market expectations as of September 30, 2024 reflected a further 175 to 200 basis point reduction of the target rate through the end of 2025.

Quantitative tightening continued in the third quarter of 2024, as the Federal Reserve passively reduced the size of its balance sheet through maturities of U.S.

Treasuries and paydowns of Agency RMBS.

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Although quantitative tightening is anticipated to conclude over the next several quarters, runoff of the Agency RMBS portion of the balance sheet is expected to continue, with proceeds redeployed into Treasuries.

• Agency CMBS risk premiums were unchanged over the quarter as new issuance volumes remained relatively low.

2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30,

2023 One Quarter Change One Year

Interest rates dropped sharply across the maturity spectrum, as investors reacted to potentially slower economic activity signaled by a weakening labor market.

The yield on the two-year Treasury decreased 107 basis points to 3.65%, the yield on the five-year Treasury decreased 75 basis points to 3.58% and the yield on the ten-year Treasury finished at 3.80%, down 54 basis points on the quarter.

Interest rate volatility increased through August before declining in the wake of the FOMC’s decision to begin easing monetary policy at their September meeting.

Against this macroeconomic backdrop, Agency RMBS outperformed Treasuries during the third quarter.

Lower interest rate volatility increased demand for Agency RMBS, with lower coupons performing better than higher coupons as the sharp decline in interest rates impacted coupons trading at a premium to par.

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 the decrease in interest rates.

Implied financing via the dollar roll market for TBA investments remained relatively unattractive throughout the quarter.

Agency CMBS risk premiums moved modestly wider.

September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 One Quarter Change One Year

Interest Rates

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30 Year Treasury 4.13 % 4.50 % 4.34 % 4.02 % 4.71 % (0.37) % (0.58) %

(in basis points) June 30,

2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30,

2023 One Quarter Change One Year

(in basis points) September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 One Quarter Change One Year

Swap Spreads (1)

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Treasury security with a similar maturity.

As recent economic data indicated the disinflationary trend has continued, increasing the likelihood of an easing of monetary policy in the latter half of 2024, we are constructive on Agency MBS valuations.

Agency mortgage performance has closely followed changes in expectations regarding monetary policy, outperforming when additional easing is priced in and underperforming when easing is priced out, and this relationship is likely to continue.

Given the investors' expectation for two cuts or more in the Federal Funds target rate during the second half of 2024, we believe higher coupon Agency MBS will benefit from strong demand as the yield curve steepens and interest rate volatility declines.

The recent disinflationary trend in economic data suggests that the Federal Reserve may continue to ease monetary policy in the coming months as the need for restrictive monetary policy declines.

This easing should lead to a steeper yield curve and lower interest rate volatility, creating a favorable environment for Agency RMBS investments.

However, if the disinflationary trend reverses and the labor market and economic growth improve, expectations for monetary policy could shift, posing a near-term risk.

Additionally, short-term funding pressures into year end could reduce investor interest in the sector.

Despite these near-term risks, we are constructive on the sector, as Agency mortgage performance stands to benefit from normalization of monetary policy given attractive valuations and supportive supply and demand technicals.

We also remain constructive on Agency CMBS, as we expect a gradual increase in new issuance to be met with adequate investor demand, as the sector offers value relative to other fixed income investments, given its attractive prepayment protection and return profiles.

Investment Activities

The table below shows the composition of our investment portfolio as of June 30, 2024, December 31, 2023 and June 30, 2023.

$ in thousands June 30, 2024 December 31, 2023 June 30, 2023

The table below shows the composition of our investment portfolio as of September 30, 2024, December 31, 2023 and September 30, 2023.

$ in thousands September 30, 2024 December 31, 2023 September 30, 2023

30 year fixed-rate pass-through, at fair value 5,107,814 4,952,474 5,331,969

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Investments in unconsolidated ventures — 500 505

Subtotal 4,836,827 5,057,020 5,507,963

TBAs, at implied cost basis (1)

Total investment portfolio, including TBAs 5,036,772 5,057,020 5,507,963

(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, 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.

We view our TBA dollar roll transactions as 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 June 30, 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 87% of our total investment portfolio, including TBAs, versus 98% as of December 31, 2023 and June 30, 2023.

Our 30 year fixed-rate Agency RMBS holdings as of June 30, 2024, December 31, 2023 and June 30, 2023 consisted of specified pools with coupon distributions as shown in the table below.

June 30, 2024 December 31, 2023 June 30, 2023

Total investment portfolio 5,873,696 5,057,020 5,444,433

As of September 30, 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 87% of our total investment portfolio versus 98% as of December 31, 2023 and September 30, 2023.

Our 30 year fixed-rate Agency RMBS holdings as of September 30, 2024, December 31, 2023 and September 30, 2023 consisted of specified pools with coupon distributions as shown in the table below.

September 30, 2024 December 31, 2023 September 30, 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

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We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments.

The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of June 30, 2024, December 31, 2023 and June 30, 2023.

June 30, 2024 December 31, 2023 June 30, 2023

The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of September 30, 2024, December 31, 2023 and September 30, 2023.

September 30, 2024 December 31, 2023 September 30, 2023

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

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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 June 30, 2024, our holdings of Agency CMBS represented approximately 8% of our total investment portfolio.

Approximately 71% of our Agency CMBS were Fannie Mae DUS and 29% were Freddie Mac Multifamily Participation Certificates.

As of June 30, 2024, December 31, 2023 and June 30, 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 June 30, 2024.

As of September 30, 2024, our holdings of Agency CMBS represented approximately 11% of our total investment portfolio, and approximately 74% of our Agency CMBS were Fannie Mae DUS and 26% were Freddie Mac Multifamily Participation Certificates.

As of September 30, 2024, December 31, 2023 and September 30, 2023, our holdings of non-Agency CMBS and non-Agency RMBS represented less than 1% of our total investment portfolio.

Approximately 68% of our non-Agency securities were rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of September 30, 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.

We resumed investing in TBAs during the second quarter of 2024 as returns in the Agency RMBS TBA dollar roll market became more attractive for certain coupons at the beginning of the quarter.

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

As of June 30, 2024, our TBA holdings were comprised of 5.5% coupons in Ginnie Mae collateral and represented 4% of our investment portfolio.

Financing and Other Liabilities

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Maximum balance (2)

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

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

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June 30, 2024 4,260,475 4,251,953 4,269,254

September 30, 2024 5,184,885 5,004,504 5,184,885

(1) Average quarterly balance for each period is based on month-end balances.

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We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes.

During the six months ended June 30, 2024, we entered into interest rate swaps with a notional amount of $1.9 billion and terminated existing interest rate swaps with a notional amount of $2.0 billion.

Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.

During the nine months ended September 30, 2024, we entered into interest rate swaps with a notional amount of $2.6 billion and terminated existing interest rate swaps with a notional amount of $2.9 billion.

During the third quarter of 2024, we began entering into futures contracts comprised of short positions in Ultra 10 year U.S.

Treasury Notes as an alternative way to help mitigate the potential impact of changes in interest rates on our performance.

During the quarter, we entered into futures contracts with a notional amount of $750.0 million and terminated existing futures contracts with a notional amount of $260.0 million.

Daily variation margin for interest rate swaps and futures contracts 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

During the three months ended June 30, 2024, we sold 1,761,155 shares of common stock under our equity distribution agreement for proceeds of $16.1 million, net of approximately $210,000 in commissions and fees.

During the six months ended June 30, 2024, we sold 2,126,993 shares of common stock under our equity distribution agreement for proceeds of $19.4 million, net of approximately $254,000 in commissions and fees.

During the three months ended June 30, 2023, we sold 2,888,639 shares of common stock under an equity distribution agreement for proceeds of $31.0 million, net of approximately $421,000 in commissions and fees.

During the six months ended June 30, 2023, we sold 5,818,708 shares of common stock under our equity distribution agreement for proceeds of $66.8 million, net of approximately $903,000 in commissions and fees.

As of June 30, 2024, we had 4,173,536 shares of our common stock remaining available for sale under our current equity distribution agreement, all of which were sold in July 2024.

For information on dividends declared during the six months ended June 30, 2024 and 2023, see Note 12 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I.

As of September 30, 2024, we had 12,089,398 shares of our common stock remaining available for sale from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

The table below shows sales of our common stock under equity distribution agreements during the three and nine months ended September 30, 2024 and 2023.

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

Shares in ones, $ in thousands 2024 2023 2024 2023

Shares sold 10,084,138 3,880,763 12,211,131 9,699,471

Net proceeds 88,546 42,344 107,915 109,104

Commissions and other costs 1,261 575 1,515 1,478

For information on dividends declared during the nine months ended September 30, 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 six months ended June 30, 2024, we did not repurchase any shares of our common stock.

During the nine months ended September 30, 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 and six months ended June 30, 2024, we repurchased and retired 44,661 and 138,008 shares of Series B Preferred Stock, respectively, and 105,492 and 201,409 shares of Series C Preferred Stock, respectively.

During the three and six months ended June 30, 2023, we repurchased and retired 37,788 shares of Series B Preferred Stock and 42,696 shares of Series C Preferred Stock.

As of June 30, 2024, we had authority to repurchase 1,047,989 additional shares of our Series B Preferred Stock and 844,030 additional shares of our Series C Preferred Stock under the current share repurchase program.

During the three and nine months ended September 30, 2024, we repurchased and retired no shares and 138,008 shares of Series B Preferred Stock, respectively, and 66,507 and 267,916 shares of Series C Preferred Stock, respectively.

During the three and nine months ended September 30, 2023, we repurchased and retired 34,432 and 72,220 shares of Series B Preferred Stock, respectively, and 92,563 and 135,259 shares of Series C Preferred Stock, respectively.

As of September 30, 2024, we had authority to repurchase 1,047,989 additional shares of our Series B Preferred Stock and 777,523 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.

On November 5, 2024, we announced our intention to redeem all outstanding shares of our Series B Preferred Stock on December 27, 2024 for a cash redemption price of $25.00 per share, plus accrued and unpaid dividends.

The redemption of the Series B Preferred Stock will help optimize our capital structure and reduce our dividend obligations moving forward.

Book Value per Common Share

We calculate book value per common share as follows.

In thousands except per share amounts June 30, 2024 December 31, 2023

In thousands except per share amounts September 30, 2024 December 31, 2023

Numerator (adjusted equity):

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Book value per common share 9.37 10.00

Our book value per common share decreased 7.3% as of June 30, 2024 compared to December 31, 2023 as Agency RMBS modestly underperformed interest rate swaps.

Significant changes in expectations for near term monetary policy led to persistently elevated interest rate volatility, as higher than expected inflation at the beginning of 2024 delayed the anticipated start of the easing cycle as priced in the Federal Funds futures market.

Our book value per common share decreased 6.3% as of September 30, 2024 compared to December 31, 2023.

The decrease in our book value per common share occurred during the first half of 2024 as Agency RMBS modestly underperformed interest rate swaps.

Our book value per common share rebounded slightly during the third quarter of 2024 as interest rates declined sharply and Agency RMBS outperformed interest rate swaps.

Refer to Item 3.

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Results of Operations

The table below presents information from our condensed consolidated statements of operations for the three and six months ended June 30, 2024 and 2023.

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

The table below presents information from our condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands, except share data 2024 2023 2024 2023

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Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2024 and 2023.

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

The table below presents information related to our average earning assets and earning asset yields for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

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All yields are annualized.

Total average earning assets decreased $438.7 million and $356.0 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, due to modest declines in stockholders' equity and lower leverage.

Average earning asset yields increased for the three and six months ended June 30, 2024 compared to 2023 due to our rotation into higher yielding Agency RMBS.

We earned total interest income of $68.0 million and $136.6 million for the three and six months ended June 30, 2024, respectively (June 30, 2023:

Total average earning assets increased $68.0 million and decreased $213.9 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively.

Changes in our average earning assets are a factor of our total stockholders' equity and our desired leverage levels.

Average earning asset yields decreased 16 basis points and increased 8 basis points for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively.

Changes in our average earning assets yields are driven by our coupon allocation to Agency RMBS and the book prices of our securities.

We earned total interest income of $73.8 million and $210.4 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023:

$75.1 million and $215.8 million).

Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below.

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

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

$ in thousands 2024 2023 2024 2023

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Total interest income 73,825 75,132 210,436 215,847

Interest income decreased slightly for the three and six months ended June 30, 2024 compared to 2023 as a decrease in average earning assets was largely offset by an increase in average earning asset yields.

Our interest income was relatively flat for the three months ended September 30, 2024 compared to the same period in 2023 as a decrease in average earning asset yields was largely offset by an increase in average earning assets.

Our interest income decreased $5.4 million for the nine months ended September 30, 2024 compared to the same period in 2023 as a decrease in average earning assets was partially offset by an increase in average earning asset yields.

Prepayment Speeds

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Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected.

The following table presents net (premium amortization) discount accretion recognized for the three and six months ended June 30, 2024 and 2023.

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

The following table presents net (premium amortization) discount accretion recognized for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

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Net (premium amortization) discount accretion 1,477 2,932 4,399 4,412

The increase in net discount accretion for the three and six months ended June 30, 2024 compared to 2023 was driven by higher discount accretion on securities with lower book prices and slightly faster prepayment rates.

Net discount accretion decreased for three months ended September 30, 2024 compared to the same period in 2023 as our portfolio was repositioned into securities with higher book prices.

Net discount accretion was relatively flat for nine months ended September 30, 2024 compared to the same period in 2023 as higher discount accretion in the earlier part of 2024 was offset by our portfolio repositioning into securities with higher book prices.

Our interest income is subject to interest rate risk.

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Interest Expense and Cost of Funds

The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2024 and 2023.

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

The table below presents information related to our borrowings and cost of funds for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

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(3) Average cost of funds is calculated by dividing annualized interest expense including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.

Total average borrowings decreased $539.8 million and $428.9 million for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, due to modest declines in stockholders' equity and lower leverage.

Our average cost of funds increased 66 and 102 basis points for the three and six months ended June 30, 2024 compared to the same periods in 2023, respectively, 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 June 30, 2024.

The table below presents the components of interest expense for the three and six months ended June 30, 2024 and 2023.

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

Total average borrowings increased $102.1 million and decreased $250.8 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively.

Changes in our average borrowings are a factor of our total stockholders' equity and our desired leverage levels.

Our average cost of funds decreased 6 basis points and increased 65 basis points for the three and nine months ended September 30, 2024 compared to the same periods in 2023, respectively.

Changes in our costs of funds are substantially driven by the Federal Funds target rate, which the FOMC raised from a range of 4.25% to 4.50% as of January 1, 2023 to a maximum of 5.25% to 5.50%, before lowering the target rate to 4.75% to 5.00% in September 2024.

Our cost of funds for the three and nine months ended September 30, 2024 was also significantly impacted by a decrease in amortization of net deferred gains on de-designated interest rate swaps.

The amortization of these gains ended in December 2023.

The table below presents the components of interest expense for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

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Total interest expense 66,315 65,701 187,288 174,449

Our interest expense was relatively flat for the three months ended June 30, 2024 compared to 2023 as a decrease in contractual interest expense on our repurchase agreements was offset by a decrease in amortization of net deferred gains on de-designated interest rate swaps.

Our interest expense increased $12.2 million for the six months ended June 30, 2024 compared to 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in our cost of funds that more than offset decreases in our average borrowings.

Our interest expense was relatively flat for the three months ended September 30, 2024 compared to the same period in 2023 as a decrease in contractual interest expense on our repurchase agreements was offset by a decrease in amortization of net deferred gains on de-designated interest rate swaps.

Our interest expense increased $12.8 million for the nine months ended September 30, 2024 compared to the same period in 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in borrowing rates that more than offset decreases in our average borrowings.

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

Net Interest Income

The table below presents the components of net interest income for the three and six months ended June 30, 2024 and 2023.

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

The table below presents the components of net interest income for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

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Net interest rate margin 0.01 % 0.11 % (0.01) % 0.56 %

Our net interest income, which equals total interest income less total interest expense, totaled $8.6 million and $15.6 million for the three and six months ended June 30, 2024, respectively (June 30, 2023:

Our net interest income, which equals total interest income less total interest expense, totaled $7.5 million and $23.1 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023:

$9.4 million and $41.4 million).

The decrease in net interest income for the three months ended June 30, 2024 was due to lower average earning assets, which was partially offset by our rotation into higher yielding Agency RMBS.

The decrease in net interest income for the six months ended June 30, 2024 was due to a decrease in amortization of net deferred gains on de-designated interest rate swaps, increases in the Federal Funds target rate and lower average earnings assets, which were partially offset by lower average borrowings and our rotation into higher yielding Agency RMBS.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds, decreased in the three and six months ended June 30, 2024 compared 2023 as increases in the Federal Funds target rate and decreases in amortization of net deferred gains on de-designated interest rate swaps more than offset our rotation into higher yielding Agency RMBS.

The decrease in net interest income for the three months ended September 30, 2024 compared to the same period in 2023 was primarily due to lower average earning asset yields, which was partially offset by higher average earning assets.

The decrease in net interest income for the nine months ended September 30, 2024 compared to the same period in 2023 was primarily due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in the Federal Funds target rate, which were partially offset by lower average borrowings.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds, decreased in the three months ended September 30, 2024 compared the same period in 2023 due to decreases in average earning asset yields.

Our net interest rate margin decreased in the nine months ended September 30, 2024 due to increases in the Federal Funds target rate and decreases in amortization of net deferred gains on de-designated interest rate swaps.

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 and six months ended June 30, 2024 and 2023.

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

The table below summarizes the components of gain (loss) on investments, net for the three and nine months ended September 30, 2024 and 2023.

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

$ in thousands 2024 2023 2024 2023

6 unchanged sentences

Total gain (loss) on investments, net 165,168 (224,897) 53,803 (272,620)

During the three and six months ended June 30, 2024, we sold MBS and realized net losses of $6.5 million and $9.8 million, respectively (June 30, 2023:

During the three and nine months ended September 30, 2024, we sold MBS and realized net gains of $5.0 million and net losses of $4.8 million, respectively (September 30, 2023:

net losses of $33.2 million and $57.4 million).

Net realized losses during the three and six months ended June 30, 2024 reflect sales of 4.0% to 5.0% coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS.

Net realized losses during the three and six months ended June 30, 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.

Net realized gains and losses during the three and nine months ended September 30, 2024 primarily reflect sales of 4.0% to 5.0% coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS.

Net realized losses during the three and nine months ended September 30, 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.

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Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations.

As of June 30, 2024, $4.8 billion (December 31, 2023:

As of September 30, 2024, $5.9 billion (December 31, 2023:

$5.0 billion) or 99.7% (December 31, 2023:

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 $38.7 million and $101.2 million in the three and six months ended June 30, 2024 compared to net unrealized losses of $89.2 million and $23.5 million in the three and six months ended June 30, 2023.

Net unrealized losses in the three and six months ended June 30, 2024 resulted from higher interest rates and wider spreads on fixed-rate Agency RMBS as valuations declined given an increase in interest rates and elevated interest rate volatility.

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

We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $160.2 million and $59.0 million in the three and nine months ended September 30, 2024 compared to net unrealized losses of $191.8 million and $215.2 million in the three and nine months ended September 30, 2023.

Net unrealized gains in the three and nine months ended September 30, 2024 were due to lower interest rates during the third quarter resulting in improved valuations on Agency RMBS and Agency CMBS.

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

We recorded net realized and unrealized losses of $458,000 on U.S.

Treasury securities in the six months ended June 30, 2024.

We did not hold any U.S.

Treasury securities during the three months ended June 30, 2024 and the three and six months ended June 30, 2023.

Treasury securities in the nine months ended September 30, 2024.

We sold the security during the first quarter of 2024.

(Increase) Decrease in Provision for Credit Losses

As of June 30, 2024, $15.5 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2023:

As of September 30, 2024, $15.4 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 and six months ended June 30, 2024, we recorded a $263,000 and $302,000 provision for credit losses, respectively, on a single non-Agency CMBS.

We recorded a $169,000 provision for credit losses during the three and six months ended June 30, 2023 on the same security.

During the three and nine months ended September 30, 2024, we recorded a decrease of $80,000 and an increase of $222,000 in the provision for credit losses, respectively, on a single non-Agency CMBS.

We recorded a $43,000 and $212,000 increase in the provision for credit losses during the three and nine months ended September 30, 2023, respectively, on the same security.

Increases and decreases in the provision are based on a comparison of the security's amortized cost basis to discounted expected cash flows.

Equity in Earnings (Losses) of Unconsolidated Ventures

For the six months ended June 30, 2024 we recorded equity in losses of unconsolidated ventures of $193,000 (six months ended June 30, 2023:

equity in earnings of $2,000).

For the nine months ended September 30, 2024 we recorded equity in losses of unconsolidated ventures of $193,000 (three and nine months ended September 30, 2023:

equity in earnings of $2,000 and $4,000, respectively).

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.

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$ in thousands

Three months ended June 30, 2024

Three months ended September 30, 2024

not designated as

1 unchanged sentence

Interest Rate Swaps (160,472) 40,883 517 (119,072)

Futures Contracts (12,419) — 2,527 (9,892)

TBAs 94 — 1,525 1,619

1 unchanged sentence

$ in thousands

Three months ended June 30, 2023

Three months ended September 30, 2023

not designated as

1 unchanged sentence

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

Currency Forward Contracts (18) — (18)

TBAs (929) — 929 —

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

$ in thousands

Six months ended June 30, 2024

Nine months ended September 30, 2024

not designated as

1 unchanged sentence

Interest Rate Swaps (134,661) 129,441 8,569 3,349

Futures Contracts (12,419) — 2,527 (9,892)

TBAs 621 — — 621

1 unchanged sentence

$ in thousands

Six months ended June 30, 2023

Nine months ended September 30, 2023

not designated as

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Total 19,611 190,027 (6,220) 203,418

We recorded net gains of $29.3 million and $122.4 million on interest rate swaps for the three and six months ended June 30, 2024, respectively, (June 30, 2023:

We recorded net losses of $119.1 million and net gains of $3.3 million on interest rate swaps for the three and nine months ended September 30, 2024, respectively, (September 30, 2023:

net gains of $151.7 million and $203.9 million) primarily due to changes in forward interest rate expectations.

As of June 30, 2024, we had $4.3 billion of repurchase agreement borrowings with a weighted average remaining maturity of 19 days.

We typically refinance each repurchase agreement at market interest rates upon maturity.

We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.

As of June 30, 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 June 30, 2024 As of December 31, 2023

As of September 30, 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 September 30, 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 3,790,000 1.37 % 4.96 % 5.4 4,065,000 1.10 % 5.38 % 6.6

As of September 30, 2024, we had $5.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 32 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 third quarter of 2024, we began using futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance.

During the three and nine months ended September 30, 2024, we entered into futures contracts with a notional amount of $750.0 million and terminated existing futures contracts with a notional amount of $260.0 million.

We recognized net losses of $9.9 million on futures contracts during the three and nine months ended September 30, 2024 due to changes in forward interest rate expectations.

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.

We recorded net realized and unrealized losses of $998,000 on TBAs during the three and six months ended June 30, 2024 (six months ended June 30, 2023:

We recorded net gains of $1.6 million and $621,000 on TBAs during the three and nine months ended September 30, 2024, respectively (nine months ended September 30, 2023:

net losses of $442,000).

Other Investment Income (Loss), net

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

Other investment income (loss) for the six months ended June 30, 2023 also included the reclassification of our foreign currency translation adjustment that was previously recorded in accumulated other comprehensive income related to an unconsolidated venture that was liquidated during the first quarter of 2023.

We incurred management fees of $2.9 million and $5.8 million for the three and six months ended June 30, 2024, respectively (June 30, 2023:

Our other investment income (loss), net during the nine months ended September 30, 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.

We incurred management fees of $2.9 million and $8.7 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023:

$3.1 million and $9.2 million).

Management fees decreased for the three and six months ended June 30, 2024 compared to the same period in 2023 due to a lower stockholders' equity management fee base.

Management fees decreased for the three and nine months ended September 30, 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 $1.9 million and $3.7 million for the three and six months ended June 30, 2024, respectively (June 30, 2023:

Our general and administrative expenses not covered under our management agreement amounted to $1.8 million and $5.5 million for the three and nine months ended September 30, 2024, respectively (September 30, 2023:

$1.7 million and $5.7 million).

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

During the three and six months ended June 30, 2024, we repurchased and retired 44,661 shares and 138,008 shares of Series B Preferred Stock, respectively, and 105,492 and 201,409 shares of Series C Preferred Stock, respectively.

During the three and six months ended June 30, 2023, we repurchased and retired 37,788 shares of Series B Preferred Stock and 42,696 shares of Series C Preferred Stock.

Gains on repurchases and retirements of preferred stock represent the difference between the consideration transferred and the carrying value of the preferred stock.

Net Income (Loss) attributable to Common Stockholders

For the three months ended June 30, 2024, our net loss attributable to common stockholders was $18.8 million (June 30, 2023:

$1.4 million) or $0.38 basic and diluted net loss per average share available to common stockholders (June 30, 2023:

The change in net loss attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $28.3 million in the 2024 period compared to $96.6 million in the 2023 period;

(ii) net losses on investments of $45.2 million in the 2024 period compared to $99.7 million in the 2023 period;

For the three months ended September 30, 2024, our net income attributable to common stockholders was $35.3 million (September 30, 2023:

net loss of $74.0 million) or $0.63 basic and diluted net income per average share available to common stockholders (September 30, 2023:

$1.62 net loss per share).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on investments of $165.2 million in the 2024 period compared to net losses on investments of $224.9 million in the 2023 period;

(ii) net losses on derivative instruments of $127.3 million in the 2024 period compared to net gains on derivatives of $151.7 million in the 2023 period;

and (iii) a $1.9 million decrease in net interest income.

For the six months ended June 30, 2024, our net income attributable to common stockholders was $5.0 million (June 30, 2023:

$14.2 million) or $0.10 basic and diluted net income per average share available to common stockholders (June 30, 2023:

The change in net income attributable to common stockholders was primarily due to (i) net losses on investments of $111.4 million in the 2024 period compared to $47.7 million in the 2023 period;

(ii) net gains on derivative instruments of $121.4 million in the 2024 period compared to $51.7 million in the 2023 period;

For the nine months ended September 30, 2024, our net income attributable to common stockholders was $40.2 million (September 30, 2023:

net loss of $59.8 million) or $0.78 basic and diluted net income per average share available to common stockholders (September 30, 2023:

$1.40 net loss per share).

The change in net income (loss) attributable to common stockholders was primarily due to (i) net gains on investments of $53.8 million in the 2024 period compared to net losses on investments of $272.6 million in the 2023 period;

(ii) net losses on derivative instruments of $5.9 million in the 2024 period compared to net gains on derivative instruments of $203.4 million in the 2023 period;

and (iii) a $18.3 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”.

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 Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”.

Non-GAAP Financial Measures

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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.

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.

In addition, certain gains and losses represent one-time events.

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

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

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

$ in thousands, except per share data 2024 2023 2024 2023

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

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

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

$ in thousands 2024 2023 2024 2023

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GAAP interest expense on the condensed consolidated statements of operations includes the following components.

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

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

$ in thousands 2024 2023 2024 2023

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

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

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

$ in thousands 2024 2023 2024 2023

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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 decreased during the three and six months ended June 30, 2024 compared to the same periods in 2023 due to lower effective net interest income.

Earnings available for distribution decreased during the three and nine months ended September 30, 2024 compared to the same periods in 2023 due to lower effective net interest income.

See below for details on the change in effective net interest income.

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

Three Months Ended June 30,

Three Months Ended September 30,

$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds

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Effective interest expense 25,432 2.03 % (4,615) (0.37) %

Six Months Ended June 30,

Nine Months Ended September 30,

$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds

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Effective interest expense 57,847 1.70 % (6,073) (0.18) %

Our effective interest expense and effective cost of funds increased in the three and six months ended June 30, 2024 compared to the same periods in 2023 due to decreases in contractual net interest income on interest rate swaps and increases in the Federal Funds target rate, which were partially offset by lower average borrowings.

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 June 30, 2024 and December 31, 2023.

Our effective interest expense and effective cost of funds increased in the three and nine months ended September 30, 2024 compared to the same periods in 2023 due to 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 rate swaps that we recognize has changed based on changes in the size and composition of our interest rate swap portfolio.

During the third quarter of 2024, we also began using futures contracts, which do not earn or incur contractual interest, in lieu of certain interest rate swaps as an alternative way to help mitigate the potential impact of changing interest rates on our performance.

See preceding discussion under “Gain (Loss) on Derivative Instruments, net” for details of our interest rate swap portfolio as of September 30, 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 June 30,

Three Months Ended September 30,

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

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Effective net interest income 48,393 3.28 % 79,747 5.84 %

Six Months Ended June 30,

Nine Months Ended September 30,

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

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Effective net interest income 152,589 3.77 % 221,920 5.57 %

Our effective net interest income and effective interest rate margin decreased in the three and six months ended June 30, 2024 compared to the same periods in 2023 due to decreases in contractual net interest income on interest rate swaps, increases in the Federal Funds target rate and lower average earning assets, which were partially offset by lower average borrowings and our rotation into higher yielding Agency RMBS.

Our effective net interest income and effective interest rate margin decreased in the three months ended September 30, 2024 compared to the same period in 2023 due to decreases in contractual net interest income on interest rate swaps.

Our effective net interest income and effective interest rate margin decreased in the nine months ended September 30, 2024 compared to the same period in 2023 due to decreases in contractual net interest income on interest rate swaps and increases in the Federal Funds target rate.

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of June 30, 2024 and December 31, 2023.

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of September 30, 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 June 30, 2024, approximately 86% of our equity is allocated to Agency RMBS.

As of September 30, 2024, approximately 94% 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.

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GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

As of June 30, 2024

As of September 30, 2024

$ in thousands Agency

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Repurchase agreements 4,535,956 648,929 — 5,184,885

Derivative liabilities, at fair value (3)

1,525 — — 1,525

Other liabilities 37,289 2,360 693 40,342

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(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 ($199.9 million as of June 30, 2024) to total stockholders' equity.

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis to total stockholders' equity.

We did not have any TBAs outstanding as of September 30, 2024.

As of December 31, 2023

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

We held cash, cash equivalents and restricted cash of $183.4 million as of June 30, 2024 (June 30, 2023:

We held cash, cash equivalents and restricted cash of $168.5 million as of September 30, 2024 (September 30, 2023:

$359.7 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 $90.5 million for the six months ended June 30, 2024 (June 30, 2023:

Our operating activities provided net cash of approximately $121.3 million for the nine months ended September 30, 2024 (September 30, 2023:

$206.1 million).

Our investing activities provided net cash of $133.0 million in the six months ended June 30, 2024 compared to net cash used by investing activities of $830.0 million in the six months ended June 30, 2023.

Our primary source of cash from investing activities for the six months ended June 30, 2024 was proceeds from sales of MBS of $568.3 million and proceeds from sales of U.S.

Treasury securities of $10.8 million (June 30, 2023:

Our investing activities used net cash of $898.8 million in the nine months ended September 30, 2024 compared to net cash used by investing activities of $899.8 million in the nine months ended September 30, 2023.

Our primary source of cash from investing activities for the nine months ended September 30, 2024 was proceeds from sales of MBS of $887.2 million and proceeds from sales of U.S.

Treasury securities of $10.8 million (September 30, 2023:

$3.3 billion from the sales of MBS).

We also generated $153.0 million from principal payments of MBS during the six months ended June 30, 2024 (June 30, 2023:

$144.5 million) and received cash of $26.3 million to settle derivative contracts in the six months ended June 30, 2024 (June 30, 2023:

net cash used of $65.0 million).

We used cash of $624.4 million to purchase MBS during the six months ended June 30, 2024 (June 30, 2023:

We also generated $261.9 million from principal payments of MBS during the nine months ended September 30, 2024 (September 30, 2023:

$260.9 million) and used cash of $146.5 million to settle derivative contracts in the nine months ended September 30, 2024 (September 30, 2023:

net cash provided of $19.6 million).

We used cash of $1.9 billion to purchase MBS during the nine months ended September 30, 2024 (September 30, 2023:

$4.5 billion to purchase MBS).

Our financing activities used net cash of $238.7 million for the six months ended June 30, 2024 compared to net cash provided by financing activities of $731.2 million in the six months ended June 30, 2023.

During the six months ended June 30, 2024, we used cash for net repayments on our repurchase agreements of $197.8 million (June 30, 2023:

net cash provided of

Our financing activities provided net cash of $747.3 million for the nine months ended September 30, 2024 compared to net cash provided by financing activities of $774.6 million in the nine months ended September 30, 2023.

During the nine months ended September 30, 2024, we received net cash from proceeds on our repurchase agreements of $726.6 million

(September 30, 2023:

$752.2 million).

We also used cash of $50.0 million for the six months ended June 30, 2024 to pay dividends (June 30, 2023:

We used cash of $75.7 million for the nine months ended September 30, 2024 to pay dividends (September 30, 2023:

$77.1 million).

Proceeds from issuance of common stock provided $19.4 million for the six months ended June 30, 2024 (June 30, 2023:

Proceeds from issuance of common stock provided $108.1 million for the nine months ended September 30, 2024 (September 30, 2023:

$109.1 million).

As of June 30, 2024, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.5% for Agency RMBS and 5.0% for Agency CMBS.

As of September 30, 2024, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.3% for Agency RMBS and 4.5% for Agency CMBS.

The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS and a low of 3% to a high of 5% for Agency CMBS.

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Forward-Looking Statements Regarding Liquidity

As of June 30, 2024, we held $4.5 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $386.8 million of unencumbered investments and unrestricted cash of $58.8 million as of June 30, 2024.

As of June 30, 2024, our known contractual obligations primarily consisted of $4.3 billion of repurchase agreement borrowings with a weighted average remaining maturity of 19 days.

As of September 30, 2024, we held $5.4 billion of Agency securities that are financed by repurchase agreements.

We also had approximately $472.3 million of unencumbered investments and unrestricted cash of $48.3 million as of September 30, 2024.

As of September 30, 2024, our known contractual obligations primarily consisted of $5.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 32 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.

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, fund our announced redemption of Series B Preferred Stock, 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.

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If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.

As of June 30, 2024, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $38.1 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of June 30, 2024.

As of September 30, 2024, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $42.9 million, or 5% of our stockholders' equity.

The following table summarizes our exposure to counterparties by geographic concentration as of September 30, 2024.

The information is based on the geographic headquarters of the counterparty or counterparty's parent company.

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Other Matters

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

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

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.

Because we are a holding company that

conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S.

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

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

We calculate that as of June 30, 2024, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

We calculate that as of September 30, 2024, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis