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Item 7. Management’s Discussion and Analysis

2025-02-20 compared with 2024-02-22 · 232 added, 285 removed, 525 unchanged (50% of the section changed)

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

Contributing factors included:

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

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

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

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

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

Treasury yields ended the year relatively unchanged.

The 2-year U.S.

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

Treasury yield increased 1 basis point to 3.88%.

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

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

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

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

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

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

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

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

Financial conditions were predominantly accommodative throughout 2024, buoyed by strong equity market performance, tightening spreads across investment grade, high yield and emerging market bonds, declining interest rate volatility and the start of the Federal Open Market Committee’s (“FOMC”) easing cycle.

The fourth quarter saw these trends continue following the resolution of the US elections, despite sharply higher interest rates in the intermediate and long end of the yield curve.

Inflation readings trended lower during 2024.

The headline consumer price index (“CPI”) ended the year at 2.9%, down from 3.4% in December of 2023, while CPI (ex.

food and energy) declined from 3.9% to 3.2%.

The disinflationary trend stalled during the fourth quarter, however, as headline CPI increased from 2.4% to 2.9% and CPI (ex.

food and energy) declined modestly from 3.3% to 3.2%.

Investors responded to the stalled progress, along with fresh uncertainty regarding the potential impacts of future fiscal and trade policies, by adjusting expectations for future inflation sharply higher.

This was reflected most directly in Treasury inflation-protected securities breakeven rates.

The two-year breakeven ended the year at 2.54% (up from 1.77% at the end of September, and up from 2.02% in December of 2023) and the five-year breakeven ended at 2.39% (up from 2.09% in September and 2.15% last December).

The employment picture was strong throughout 2024, with the economy adding a total of over 2.2 million jobs.

This trend continued during the fourth quarter, as the economy added an average of 170,000 jobs per month.

Strong labor markets, inflation persistently higher than the FOMC’s target of 2% and uncertainty about the impact of future policy action led to a re-pricing of the market’s expectations of future monetary policy.

Following the 100 basis point reduction in the Federal Funds target rate over the course of the third and fourth quarters, Federal Funds futures market expectations as of year-end 2024 reflected only one to two additional cuts in the target rate through the end of 2025.

This compares to an expectation of ten cuts through the end of 2025 priced in as recently as mid-September 2024.

Quantitative tightening continued in the fourth 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CMBS loan delinquencies finished the year higher.

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

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

• Non-Agency RMBS credit spreads tightened across subsectors during the year, as profiles with superior liquidity and favorable technicals outperformed those with greater interest rate sensitivity and persistent supply.

The resilience of home prices in the face of higher mortgage rates and historically low affordability supported investor risk appetite.

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

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

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

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

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

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

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

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

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

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

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

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

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

plus dividends declared of $1.60 per common share;

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

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

See Non-GAAP Financial Measures below for additional information.

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

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

Paydowns of Agency RMBS from the balance sheet added approximately $16 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 over the next several quarters, runoff of the Agency RMBS portion of the balance sheet is expected to continue, with proceeds redeployed into Treasuries.

Interest rates were quite volatile during 2024, with rates falling for the first three quarters of the year on expectations of future policy action by the FOMC before sharply reversing during the fourth quarter as the market priced the majority of those cuts out.

Over the year, the yield on the two-year Treasury was flat at 4.25%, the yield on the five-year Treasury increased 56 basis points to 4.39% and the yield on the ten-year Treasury finished at 4.58%, up 72 basis points on the year.

During the fourth quarter interest rates were higher across the board, with the two-year, five-year and ten-year Treasury yields up 60 basis points, 81 basis points and 78 basis points, respectively.

Short-dated interest rate volatility reflected the market’s shifting expectations of both monetary and potential fiscal policy, increasing ahead of the U.S.

elections and FOMC meeting in November before settling in December to end the year slightly lower.

Against this macroeconomic backdrop, Agency RMBS underperformed Treasuries during the fourth quarter while still ending the year with modest outperformance.

Underperformance during the quarter primarily took place in lower coupons, as the sharp move higher in interest rates limited demand for deep discount securities.

Although interest rate volatility moved higher during the quarter, supply and demand technicals for higher coupon Agency RMBS were supportive as supply was limited while bank and overseas demand improved.

Prepayment speeds largely remained at low levels given limited housing activity and elevated mortgage rates, but recently originated loans did display significant responsiveness to the short-lived notable decline in mortgage rates in the third quarter.

Premiums on higher coupon specified pool collateral declined modestly given the increase in interest rates but remain relatively well-supported as implied financing via the dollar roll market for TBA investments remained largely unattractive throughout the quarter.

Agency CMBS risk premiums contracted notably during the fourth quarter and throughout 2024 given increased optimism regarding eventual monetary policy normalization, money manager inflows, renewed bank demand for stable cash flow profiles amidst elevated interest rate volatility and relatively modest new issuance.

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

Interest Rates

Effective Federal Funds Rate 4.33 % 4.83 % 5.33 % 5.33 % 5.33 % (0.50) % (1.00) %

One-month SOFR 4.33 % 4.86 % 5.34 % 5.33 % 5.35 % (0.53) % (1.02) %

2 Year Treasury 4.25 % 3.65 % 4.72 % 4.62 % 4.25 % 0.60 % — %

5 Year Treasury 4.39 % 3.58 % 4.33 % 4.20 % 3.83 % 0.81 % 0.56 %

10 Year Treasury 4.58 % 3.80 % 4.34 % 4.19 % 3.86 % 0.78 % 0.72 %

30 Year Treasury 4.78 % 4.13 % 4.50 % 4.34 % 4.02 % 0.65 % 0.76 %

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

Swap Spreads (1)

2 Year (16) (20) (15) (8) (18) 4 2

5 Year (34) (31) (28) (23) (32) (3) (2)

10 Year (50) (47) (42) (37) (40) (3) (10)

30 Year (85) (82) (80) (73) (71) (3) (14)

30 Year Mortgage Spreads vs.

5/10 Year Treasury Blend (2)

FNMA 2.0% 65 72 61 58 55 (7) 10

FNMA 2.5% 74 82 73 70 65 (8) 9

FNMA 3.0% 77 85 79 77 73 (8) 4

FNMA 3.5% 78 87 83 82 81 (9) (3)

FNMA 4.0% 76 95 93 91 95 (19) (19)

FNMA 4.5% 91 109 100 101 110 (18) (19)

FNMA 5.0% 108 132 116 117 131 (24) (23)

FNMA 5.5% 126 143 138 137 154 (17) (28)

FNMA 6.0% 140 129 158 156 165 11 (25)

10 Year Agency CMBS Spreads vs.

Treasuries (3)

FHLMC K 45 48 49 54 60 (3) (15)

FNMA DUS 47 58 54 58 67 (11) (20)

(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.

In the near-term, we remain cautious on Agency RMBS as shifting expectations for monetary and fiscal policy may result in elevated interest rate volatility, reducing investor demand.

Our long-term outlook for Agency RMBS is favorable, however, as we expect demand to improve in higher coupons given attractive valuations, an eventual decline in interest rate volatility, and a steeper yield curve.

Lastly, we expect a gradual increase in Agency CMBS new issuance to be met with robust investor

demand, as the sector continues to offer value relative to other fixed income investments due to its prepayment protection and attractive risk-adjusted return profiles.

Investment Activities

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$ in thousands As of December 31,

30 year fixed-rate, at fair value 4,952,474 4,661,737

30 year fixed-rate pass-through, at fair value 4,541,525 4,952,474

Agency CMO, at fair value 70,776 74,758

Agency CMBS, at fair value 816,147 —

Non-Agency CMBS, at fair value 9,836 9,935

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Treasury securities, at fair value — 11,214

Investments in unconsolidated ventures 500 552

Subtotal 5,057,020 4,792,445

TBAs, at implied cost basis (1)

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

(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 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 consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs.

For further details of our U.S GAAP accounting for TBAs, refer to Note 8 “Derivatives and Hedging Activities” in Part IV, Item 15 of this Report.

Our TBA dollar roll transactions are a form of off-balance sheet financing.

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

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

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

Investment in unconsolidated venture — 500

Total investment portfolio 5,445,508 5,057,020

As of December 31, 2024 and 2023, our holdings of 30 year fixed-rate Agency RMBS represented 83% and 98% of our total investment portfolio, respectively.

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

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Loan balance 1,961,771 43.2 % 2,193,876 44.3 %

Generic — — % 158,230 3.4 %

High loan-to-value (“LTV”) ratio 509,459 11.2 % 574,246 11.6 %

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Total 30 year fixed-rate Agency RMBS 4,541,525 100.0 % 4,952,474 100.0 %

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

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

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

Our joint venture whose net assets were denominated in euros was dissolved during the first quarter of 2023.

Our remaining unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible.

Until the venture completes its liquidation, we are committed to fund $2.9 million in additional capital to cover future expenses should they occur.

We resumed investing 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 December 31, 2024, our holdings of Agency CMBS represented approximately 15% of our total investment portfolio.

Approximately 79% of our Agency CMBS were Fannie Mae DUS and 21% were Freddie Mac Multifamily Participation Certificates.

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

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

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• our counterparty in the hedging transaction may default on its obligation to pay;

• the credit quality of our counterparty on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

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

• the values of derivatives used for hedging are adjusted in accordance with accounting rules to reflect changes in fair value.

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

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

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

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

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

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

We have historically entered into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies.

We did not have any currency forward contracts outstanding as of December 31, 2023 or December 31, 2022.

During the year ended December 31, 2024, we entered into new interest rate swaps with a notional amount of $2.6 billion and terminated or settled existing interest rate swaps with a notional amount of $3.4 billion.

During the third quarter of 2024, we began entering into futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance.

During the year ended December 31, 2024, we entered into futures contracts with a notional amount of $2.8 billion and terminated or settled existing futures contracts with a notional amount of $1.4 billion.

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 consolidated statement of operations.

Capital Activities

As of December 31, 2024, we may sell up to 11,095,561 shares of our common stock from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents.

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

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

The table below shows sales of our common stock under equity distribution agreements during the years ended December 31, 2024 and 2023.

Years ended December 31,

Shares in ones, $ in thousands 2024 2023

Shares sold 13,204,968 9,699,471

Net proceeds 116,215 109,104

Commissions and other costs 1,720 1,478

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

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

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

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

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

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

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

During the year ended December 31, 2024, we repurchased and retired 138,008 shares of Series B Preferred Stock (prior to the redemption discussed below) and 338,780 shares of Series C Preferred Stock.

During the year ended December 31, 2023, we repurchased and retired 151,637 shares of Series B Preferred Stock and 271,031 shares of Series C Preferred Stock.

As of December 31, 2024, we had authority to repurchase 706,659 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.

On December 27, 2024, we redeemed all issued and outstanding shares of our Series B Preferred Stock for $106.2 million.

The cash redemption price for each share of Series B Preferred Stock was $25.00.

The excess of the consideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $3.5 million in net income attributable to common stockholders during the year ended December 31, 2024.

For information on dividends declared and paid during the years ended December 31, 2024 and 2023, see Note 11 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.

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Book value per common share 8.92 10.00 12.79

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

Our book value per common share decreased 10.8% as of December 31, 2024 compared to December 31, 2023 primarily due to losses recognized on investments and dividends declared, which were partially offset by net interest income and gains recognized on derivative instruments.

Refer to Item 7A.

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If the fair value of a security is not available from a third-party pricing service, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors.

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

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

It is possible that changes in these inputs could change the valuation estimate.

Refer to the preceding discussion under “Market Conditions and Impacts” for information on how conditions in 2024 impacted valuations of our Agency securities, which constituted substantially all of our investment portfolio during 2024.

Additionally, refer to Item 7A.

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

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

on these estimated cash flows and our purchase price.

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

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

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

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

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

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

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

Prepayment rates on our mortgage-backed securities increased modestly in 2024 compared to 2023 but remained relatively low given elevated interest rates.

Refer to Item 7A.

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

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

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

Refer to Note 2 - “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report for a description of how we determine the fair value of our futures contracts, interest rate swaps and TBAs.

As of December 31, 2024, all of our futures contracts were exchange-traded and all of our interest rate swaps were centrally cleared by a registered clearing organization.

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

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

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

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

Valuations of interest rate swaps and futures contracts are most significantly impacted by changing interest rate expectations.

We recognized net gains on our interest rate swaps and futures contracts in 2024 primarily due to shifting expectations that interest rates would stay higher for longer.

Results of Operations

7 unchanged sentences

Interest expense 249,719 228,229 51,560

Repurchase agreements (1)

228,229 51,560 (11,290)

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

Net interest income 36,827 49,700 142,953

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Diluted 53,775,143 44,073,815 34,160,080

(1) Negative interest expense on repurchase agreements in 2021 is due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements.

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

Interest Income and Average Earning Asset Yields

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All yields are annualized.

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

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

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

Total average earning assets increased $101.7 million for the year ended December 31, 2024 compared to 2023.

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

Average earning asset yields increased 6 basis points for the year ended December 31, 2024 compared to 2023.

Changes in our average earning asset yields are driven by the composition of our investments, book prices of our securities and prepayment rates.

We earned total interest income of $286.5 million during 2024 (2023:

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Total interest income 286,546 277,929 194,513

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

Our commercial loan investment was fully repaid in October 2022 .

Our interest income increased $8.6 million for the year ended December 31, 2024 compared to 2023 due to higher average earning assets and average earning asset yields.

Prepayment Speeds

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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.

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

If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized.

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Agency RMBS 4,948 5,160 (6,755)

Agency CMBS 433 — —

Non-Agency CMBS 496 1,101 1,624

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Net (premium amortization) discount accretion 5,466 6,073 (5,724)

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

Net discount accretion decreased slightly for the year ended December 31, 2024 compared to 2023 as the impact of repositioning into securities with higher book prices was largely offset by modestly faster prepayment rates.

Our interest income is subject to interest rate risk.

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

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

Our average cost of funds increased 388 basis points in 2023 compared to 2022 as the FOMC has raised the Federal Funds target rate from a range of 0.0% to 0.25% as of January 1, 2022 to a range of 5.25% to 5.50% as of December 31, 2023.

Total average borrowings increased $96.8 million for the year ended December 31, 2024 compared to 2023.

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

Our average cost of funds increased 36 basis points for the year ended December 31, 2024 compared to 2023 as the FOMC raised the Federal Funds target rate 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 in the second half of 2024.

Our cost of funds for the year ended December 31, 2024 was also significantly impacted by the completion of amortization of net deferred gains on de-designated interest rate swaps in December 2023.

The amortization of these net deferred gains previously offset a portion of our current period interest expense on repurchase agreement borrowings.

The table below presents the components of interest expense for the years ended December 31, 2024, 2023 and 2022.

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

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

Total interest expense 249,719 228,229 51,560

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

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

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

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

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

Our interest expense increased $21.5 million for the year ended December 31, 2024 compared to 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and increases in total average borrowings and borrowing rates.

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 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.

Net Interest Income

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

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

Total interest expense 249,719 228,229 51,560

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Net interest rate margin 0.11 % 0.41 % 2.64 %

Our net interest income, which equals total interest income less total interest expense, totaled $49.7 million for the year ended December 31, 2023 (2022:

$143.0 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 the year ended December 31, 2023 compared to 2022 was due to higher interest expense related to increases in the Federal Funds target rate, which was partially offset by our rotation into higher yielding Agency RMBS.

Our net interest income, which equals total interest income less total interest expense, decreased $12.9 million for the year ended December 31, 2024 compared to 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps, a higher average Federal Funds target rate and higher average borrowings, which were partially offset by higher average earning assets and average earning asset yields.

Our net interest rate margin, which equals the yield on our average earning assets for the period less the average cost of funds, decreased 30 basis points for the year ended December 31, 2024 compared to 2023 due to a decrease in amortization of net deferred gains on de-designated interest rate swaps and a higher average Federal Funds target rate, which were partially offset by higher average earning asset yields.

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.

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Total gain (loss) on investments, net (133,911)

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

MBS of $27.3 billion;

and realized net losses of $158.0 million (2022:

net losses of $1.2 billion).

Realized net losses during the year ended December 31, 2023 and 2022 primarily reflect the repositioning of Agency RMBS coupon allocations and sales of lower yielding Agency RMBS to purchase higher yielding Agency RMBS in an effort to improve the earnings power of the portfolio.

(107,280) (1,079,339)

During the year ended December 31, 2024, we sold MBS and realized net losses of $9.1 million (2023:

net losses of $158.0 million).

Net realized losses during the year ended December 31, 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 year ended December 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.

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As of December 31, 2024, $5.4 billion or 99.7% (December 31, 2023:

$4.7 billion or 99.1%) of our MBS are accounted for under the fair value option.

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

$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 $124.3 million in 2024 (2023:

net unrealized gains of $50.4 million).

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

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

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

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

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

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

Net unrealized losses in the year ended December 31, 2024 were due to lower valuations on Agency RMBS and Agency CMBS given an increase in interest rates.

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

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

Treasury security during the year ended December 31, 2024.

We sold the security during the first quarter of 2024.

We recorded net realized and unrealized gains of $384,000 on U.S.

Treasury securities during the year ended December 31, 2023.

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

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

(Increase) Decrease in Provision for Credit Losses

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

We recorded a provision for credit losses of $320,000 on a single non-Agency CMBS for the year ended December 31, 2023 based on a comparison of the security's amortized cost basis to discounted expected cash flows.

We did not record any provisions for credit losses during the year ended December 31, 2022.

As of December 31, 2024, $15.0 million of our $5.4 billion of MBS are classified as available-for-sale and subject to evaluation for credit losses.

We recorded a provision for credit losses of $458,000 on a single non-Agency CMBS for the year ended December 31, 2024 (2023:

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

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equity in losses of $1,000).

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

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

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Interest Rate Swaps (47,581) 161,762 610 114,791

Currency Forward Contracts (18) — — (18)

Futures Contracts 58,000 — 3,463 61,463

TBAs 986 — (606) 380

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

Interest Rate Swaptions (553) — — (553)

Currency Forward Contracts 919 — (271) 648

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Total 459,466 86,872 12,669 559,007

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

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

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

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

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

$4.2 billion and 28 days).

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

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

As of December 31, 2024 and 2023, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR.

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Interest Rate Swaps 3,265,000 0.97 % 4.49 % 5.3 4,065,000 1.10 % 5.38 % 6.6

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

(1) As of December 31, 2022, we held $975.0 million notional amount of SOFR-based pay fixed and receive floating interest rate swaps with forward start dates that had a weighted average maturity of 16.5 years and a weighted average fixed pay rate of 0.89% that are excluded from the table above.

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

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

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

$ in thousands As of December 31, 2022

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

Interest Rate Swaps (1)

2,350,000 4.30 % 2.78 % 9.3

(1) As of December 31, 2022, we held $275.0 million notional amount of SOFR-based pay floating and receive fixed interest rate swaps with forward start dates that had a weighted average maturity of 16.0 years and a weighted average fixed receive rate of 2.63% that are excluded from that table above.

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

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

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

During the year ended December 31, 2024, we entered into interest rate swaps with a notional amount of $2.6 billion and terminated or settled existing interest rate swaps with a notional amount of $3.4 billion (December 31, 2023:

$3.5 billion of additions and $7.6 billion of terminations or settlements).

We recorded net gains of $114.8 million and $62.3 million on interest rate swaps during the years ended December 31, 2024 and 2023, respectively, primarily due to changes in interest rate expectations.

As of December 31, 2024, we had $4.9 billion of repurchase agreement borrowings with a weighted average remaining maturity of 29 days (December 31, 2023:

$4.5 billion and 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.

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.

The table below presents certain details of our futures contracts as of December 31, 2024.

We did not hold any futures contracts as of December 31, 2023.

As of December 31, 2024

$ in thousands Notional Amount - Short

Treasury futures 136,000

Ultra 10 year U.S.

Treasury futures 1,057,000

Treasury futures 209,000

Total 1,402,000

We recognized net gains of $61.5 million on futures contracts for the year ended December 31, 2024 due to changes in 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.

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

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

Net realized and unrealized losses on TBAs for the year ended December 31, 2022 primarily reflect rising interest rates, in addition to wider interest rate spreads on Agency RMBS.

We recorded net gains of $380,000 on TBAs during the year ended December 31, 2024 (December 31, 2023:

net losses of $442,000).

Other Investment Income (Loss), net

Our other investment income, net for the years ended December 31, 2023 and 2022 consisted of foreign currency transaction gains and losses.

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

Our other investment income (loss), net for the year ended December 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.

For the year ended December 31, 2024, we incurred management fees of $11.9 million (2023:

$12.3 million) that are payable to our Manager under our management agreement.

Management fees decreased for the year ended December 31, 2023 compared to 2022 due to a lower stockholders' equity management fee base in 2023.

Management fees decreased for the year ended December 31, 2024 compared to 2023 due to lower average stockholders' equity.

Our management fees are calculated quarterly in arrears.

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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.

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

Issuance and Redemption Costs of Redeemed Preferred Stock

On December 27, 2024, we redeemed all issued and outstanding shares of our Series B Preferred Stock for $106.2 million.

The cash redemption price for each share of Series B Preferred Stock was $25.00.

Net Income (Loss) attributable to Common Stockholders

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

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

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

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

For the year ended December 31, 2024, our net income attributable to common stockholders was $34.8 million (2023:

net loss of $37.5 million) or $0.65 basic and diluted net income per average share available to common stockholders (2023:

$0.85 net loss per share).

For the year ended December 31, 2024, the change in net income (loss) attributable to common stockholders compared to 2023 was primarily due to:

(i) net losses on investments of $133.9 million versus $107.3 million in the 2023 period;

(ii) net gains on derivative instruments of $176.6 million versus $61.8 million in the 2023 period and (iii) a $12.9 million decrease in net interest income.

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We have historically distributed at least 100% of our REIT taxable income.

Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common

stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock.

Because we view earnings available for

distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock.

However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs.

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(3) Foreign currency gains (losses), net includes foreign currency transaction gains and losses and the reclassification of currency translation adjustments that were previously recorded in accumulated other comprehensive income and is included in other investment income (loss), net on the consolidated statements of operations.

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

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

Years Ended December 31,

$ in thousands 2024 2023 2022

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

Interest expense on repurchase agreement borrowings 249,719 238,634 71,268

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

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

Total interest expense 249,719 228,229 51,560

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

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

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

The components of earnings available for distribution for the years ended December 31, 2024, 2023 and 2022 were as follows.

Years Ended December 31,

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

Earnings available for distribution increased for the year ended December 31, 2023 compared to 2022 due to an increase in effective net interest income, which was partially offset by a reduction in our TBA notional amount and related TBA dollar roll activity.

Earnings available for distribution decreased for the year ended December 31, 2024 compared to 2023 primarily 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 repurchase agreements interest expense.

We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings.

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We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S.

GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense.

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

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Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (161,762) (3.49) % (239,008) (5.26) % (86,872) (1.93) %

(239,008) (5.26) % (86,872) (1.93) % 15,803 0.20 %

Effective interest expense

87,957 1.90 % (374) — % (15,604) (0.34) %

Our effective interest expense and effective cost of funds increased modestly for the year ended December 31, 2023 compared to 2022 as significant increases in U.S.

GAAP interest expense, which were driven by increases in the Federal Funds target rate, were largely offset by increases in contractual net interest income on interest rate swaps.

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

Our effective interest expense and effective cost of funds increased for the year ended December 31, 2024 compared to 2023 primarily due to a decrease 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 December 31, 2024 and December 31, 2023.

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Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 161,762 3.49 % 239,008 5.26 % 86,872 1.93 %

239,008 5.26 % 86,872 1.93 % (15,803) (0.20) %

Effective net interest income

198,589 3.60 % 278,303 5.44 % 210,117 4.13 %

Our effective net interest income and effective interest rate margin increased for the year ended December 31, 2023 compared to 2022 due to higher interest income resulting from our rotation into higher yielding Agency RMBS.

Effective interest expense and effective cost of funds had a less significant impact on effective net interest income and effective interest rate margin as higher U.S.

GAAP interest expense was largely offset by an increase in contractual net interest income on interest rate swaps.

Our effective net interest income and effective interest rate margin decreased for the year ended December 31, 2024 compared to 2023 primarily due to a decrease in contractual net interest income on interest rate swaps.

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and our economic debt-to-equity ratio as of December 31, 2023 and December 31, 2022.

Our debt-to-equity ratio is calculated in

accordance with U.S.

The table below shows our debt-to-equity ratio and our economic debt-to-equity ratio as of December 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 December 31, 2023, approximately 98% 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.

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.

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.

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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 December 31, 2023

$ in thousands Agency RMBS Credit Portfolio (1)

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

Treasury securities 11,214 — 11,214

Cash and cash equivalents (2)

76,967 — 76,967

Restricted cash (3)

121,670 — 121,670

Derivative assets, at fair value (3)

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)

Economic debt-to-equity ratio (5)

(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.

As of December 31, 2022

$ in thousands Agency RMBS Credit Portfolio (1)

Mortgage-backed securities 4,746,693 45,200 4,791,893

Cash and cash equivalents (2)

175,535 — 175,535

Restricted cash (3)

103,246 — 103,246

Derivative assets, at fair value (3)

Other assets 25,252 807 26,059

Total assets 5,051,388 46,007 5,097,395

$ in thousands December 31, 2024 December 31, 2023

Repurchase agreements 4,893,958 4,458,695

Derivative liabilities, at fair value (3)

2,079 — 2,079

Other liabilities 53,980 2,438 56,418

Total liabilities 4,290,882 2,438 4,293,320

Total stockholders' equity (allocated) 760,506 43,569 804,075

Total stockholders' equity 730,729 782,665

Debt-to-equity ratio (1)

Economic debt-to-equity ratio (2)

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

(2) Cash and cash equivalents is allocated based on our financing strategy for each asset class.

(3) Restricted cash and derivative assets and liabilities are allocated based on our hedging strategy for each asset class.

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

(5) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.4 million as of December 31, 2022) to total stockholders' equity.

(2) Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($606,000 as of December 31, 2024;

none as of December 31, 2023) to total stockholders' equity.

Liquidity and Capital Resources

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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.

We generally maintain liquidity to pay down borrowings under repurchase agreements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital.

Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments.

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Our investing activities used net cash of $497.4 million for the year ended December 31, 2024 (2023:

provided net cash of $2.4 billion).

$536.8 million).

Our primary use of cash from investing activities during the year ended December 31, 2024 was $2.2 billion to purchase MBS.

We received proceeds from the sale of MBS of $1.3 billion and proceeds from the sale of U.S.

Treasury securities of $10.8 million during the year ended December 31, 2024.

We generated $389.5 million from principal payments of MBS during the year ended December 31, 2024.

We also received $11.4 million to settle derivative contracts during the year ended December 31, 2024.

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

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

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

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

Treasury securities of $468.1 million.

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

year ended December 31, 2022.

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

Treasury securities during the year ended December 31, 2022.

Our financing activities provided net cash of $326.5 million for the year ended December 31, 2024 (2023:

used net cash of $2.9 billion).

$218.9 million).

Our primary source of cash from financing activities during the year ended December 31, 2024 was net proceeds on our repurchase agreements of $435.7 million and proceeds from issuance of common stock of $116.5 million.

We redeemed all outstanding shares of our Series B Preferred Stock for $106.2 million during the year ended December 31, 2024.

We also paid dividends of $105.5 million and used $11.1 million to repurchase Series B (prior to redemption) and Series C Preferred Stock during the year ended December 31, 2024.

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

Our primary source of cash from financing activities during the year ended December 31, 2023 was net proceeds on our repurchase agreements of

$223.5 million and proceeds from issuance of common stock of $109.1 million.

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

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

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

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

As of December 31, 2023, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.6% for Agency RMBS.

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

As of December 31, 2024, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.4% for Agency RMBS and 4.7% for Agency CMBS.

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

Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements.

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Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities.

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

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

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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 December 31, 2024, one counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $36.5 million, or 5% of our stockholders’ equity.

The following table summarizes our exposure under repurchase agreements to counterparties by geographic concentration as of December 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.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 13 3,038,272 (143,033)

Europe (excluding United Kingdom) 2 593,975 (25,686)

Asia 4 793,380 (36,562)

United Kingdom 1 468,331 (20,135)

Total 20 4,893,958 (225,416)

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

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We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.

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.

As of December 31, 2023, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $39.1 million, or 5% of our stockholders’ equity.

The following table summarizes our exposure under repurchase agreements to counterparties by geographic concentration as of December 31, 2023.

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.

$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure

North America 12 2,547,621 130,143

Europe (excluding United Kingdom) 3 700,633 29,364

Asia 4 790,393 39,728

United Kingdom 1 420,048 16,769

Total 20 4,458,695 216,004

Other Matters

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If we were required to register as an investment company, then our use of leverage would be substantially reduced.

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

government securities and cash items) on an unconsolidated basis.

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis