Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us," "our Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our "Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as "Invesco."
The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Quarterly Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
Forward-Looking Statements
We make forward-looking statements in this Quarterly Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans, objectives and our views on domestic and global market conditions (including the Agency RMBS, Agency CMBS and residential and commercial real estate markets). When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “project,” “forecast” or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements, although not all forward-looking statements may contain such words.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. We caution you not to rely unduly on any forward-looking statements and urge you to carefully consider the factors described under the headings "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Report and our Annual Report on Form 10-K. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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Executive Summary
We are a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation.
As of March 31, 2025, we were invested in:
• residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”) (collectively “Agency RMBS”);
• commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively “Agency CMBS”); and
• RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”).
During the periods presented in this Quarterly Report, we also invested in:
• CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”);
• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;
• U.S. Treasury securities; and
• a real estate-related financing arrangement in the form of an unconsolidated venture.
We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification.
We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P. (the “Operating Partnership”). We are externally managed and advised by our Manager, an indirect wholly-owned subsidiary of Invesco.
We have elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of “Investment Company” under the 1940 Act.
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Market Conditions and Impacts
Macroeconomic factors that affect our business include inflation, economic growth, employment conditions, interest rates, interest rate volatility, fiscal and monetary policy, public 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, financial conditions, inflation, employment conditions, monetary policy, public policy, interest rates and interest rate volatility had the most direct impacts on our performance and financial condition during the first quarter of 2025.
Financial conditions tightened during the first quarter, shifting from a largely accommodative position to more balanced as equity markets, credit spreads and volatility measures all reacted negatively to the potential impacts of significant changes to U.S. fiscal and trade policies. Equity markets repriced lower during the first quarter, with the S&P 500 declining 4.6% while the NASDAQ fell 10.4%. The CBOE SPX Volatility Index (“VIX”) reflected the uncertainty brought on by these policy changes, increasing by over 28% during the quarter. Credit spreads reacted similarly, with investment grade credit, high yield and emerging markets spreads all materially wider.
While inflation readings trended lower during the quarter, they remained above the Federal Reserve’s 2% inflation target. The headline consumer price index (“CPI”) ended the quarter 2.4% higher on a year-over-year basis, down from a rate of 2.9% at year end, while the year-over-year change in CPI (excluding food and energy) fell to 2.8% from 3.2%. Despite the improvement in CPI reports, investors increased expectations for future inflation given concerns about the potential impact of shifting trade policy. Treasury inflation-protected securities breakeven rates increased during the quarter, with the two-year breakeven ending the quarter at 3.3% (up from 2.5% at year-end) and the five-year breakeven ending at 2.6% (up from 2.4%). Meanwhile, employment data released during the quarter reflected a slowing labor market, as the economy added an average of 152,000 jobs per month during the first quarter after adding an average of 209,000 jobs during the fourth quarter.
Even as inflation expectations were increasing, softer employment data and fears that the combination of potential trade wars and fiscal austerity would contribute to an economic slowdown led to a re-pricing of the market’s expectations of future monetary policy. Federal Funds futures market expectations as of March 31, 2025 reflected a further 75 basis point reduction of the target rate through the end of the year. Quantitative tightening continued in the first quarter of 2025, as the Federal Reserve passively reduced the size of its balance sheet through maturities of U.S. Treasuries and paydowns of Agency RMBS. At their March meeting, the Federal Reserve announced that they would begin slowing the pace of quantitative tightening by lowering the cap on the amount of Treasuries allowed to mature per month without being reinvested to $5 billion from $25 billion, while leaving the cap on mortgage-backed securities unchanged at $35 billion per month.
Interest rates dropped across the maturity spectrum during the first quarter. The yield on the two-year Treasury decreased 34 basis points to 3.91%, the yield on the five-year Treasury decreased 41 basis points to 3.98% and the yield on the ten-year Treasury decreased 34 basis points to 4.24%. Short-dated interest rate volatility increased over the quarter, reflecting the market’s shifting expectations of monetary and trade policy, while longer-dated volatility declined modestly.
Against this macroeconomic backdrop, Agency RMBS performance was relatively consistent with Treasuries during the first quarter, with higher coupons modestly outperforming. Supply and demand technicals for higher coupon Agency RMBS were supportive as originations remained subdued given slower housing seasonals and elevated mortgage rates, while banks, money managers and mortgage REITs net added exposure during the quarter. Prepayment speeds remained at low levels given limited purchase and refinancing activity. However, a notable decline in mortgage rates in the latter half of the quarter should result in faster prepayment speeds in the coming months, as the decline coincided with the seasonal increase in housing activity. Premiums on specified pool collateral were largely unchanged during the quarter as the move lower in mortgage rates led to support for prepayment protection. Additionally, Agency CMBS risk premiums increased during the first quarter, reflecting weakness in broader fixed income markets.
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Market Rates
As of
March 31, 2025 December 31, 2024 September 30, 2024 June 30,
2024 March 31, 2024 One Quarter Change One Year
Change
Interest Rates
Effective Federal Funds Rate 4.33 % 4.33 % 4.83 % 5.33 % 5.33 % — % (1.00) %
One-month SOFR 4.32 % 4.33 % 4.86 % 5.34 % 5.33 % (0.01) % (1.01) %
2 Year Treasury 3.91 % 4.25 % 3.65 % 4.72 % 4.62 % (0.34) % (0.71) %
5 Year Treasury 3.98 % 4.39 % 3.58 % 4.33 % 4.20 % (0.41) % (0.22) %
10 Year Treasury 4.24 % 4.58 % 3.80 % 4.34 % 4.19 % (0.34) % 0.05 %
30 Year Treasury 4.61 % 4.78 % 4.13 % 4.50 % 4.34 % (0.17) % 0.27 %
As of
(in basis points) March 31, 2025 December 31, 2024 September 30, 2024 June 30,
2024 March 31, 2024 One Quarter Change One Year
Change
Swap Spreads (1)
2 Year (17) (16) (20) (15) (8) (1) (9)
5 Year (31) (34) (31) (28) (23) 3 (8)
10 Year (45) (50) (47) (42) (37) 5 (8)
30 Year (79) (85) (82) (80) (73) 6 (6)
30 Year Mortgage Spreads vs. 5/10 Year Treasury Blend (2)
FNMA 2.0% 76 65 72 61 58 11 18
FNMA 2.5% 86 74 82 73 70 12 16
FNMA 3.0% 88 77 85 79 77 11 11
FNMA 3.5% 89 78 87 83 82 11 7
FNMA 4.0% 87 76 95 93 91 11 (4)
FNMA 4.5% 105 91 109 100 101 14 4
FNMA 5.0% 122 108 132 116 117 14 5
FNMA 5.5% 142 126 143 138 137 16 5
FNMA 6.0% 146 140 129 158 156 6 (10)
FNMA 6.5% 118 135 109 164 160 (17) (42)
10 Year Agency CMBS Spreads vs. Treasuries (3)
FHLMC K 45 45 48 49 54 — (9)
FNMA DUS 49 47 58 54 58 2 (9)
(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.
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Outlook
Recently proposed changes to U.S. fiscal and trade policy have negatively impacted financial markets and could result in slower economic growth, higher inflation and further market volatility. As such, we remain cautious on the near-term outlook for Agency RMBS. However, our long-term outlook for Agency RMBS is favorable, 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, while Agency CMBS risk premiums may remain elevated until sentiment in the broader fixed income market improves, limited issuance, strong fundamental performance and stable cash flow profiles should provide favorable support for this sector.
Investment Activities
The table below shows the composition of our investment portfolio as of March 31, 2025, December 31, 2024 and March 31, 2024.
As of
$ in thousands March 31, 2025 December 31, 2024 March 31, 2024
Agency RMBS:
30 year fixed-rate pass-through, at fair value 4,974,663 4,541,525 4,649,052
Agency CMO, at fair value 73,539 70,776 74,701
Agency CMBS, at fair value 890,372 816,147 265,512
Non-Agency CMBS, at fair value — 9,836 10,188
Non-Agency RMBS, at fair value 7,215 7,224 7,651
Total investment portfolio 5,945,789 5,445,508 5,007,104
As of March 31, 2025, our holdings of 30 year fixed-rate Agency RMBS represented approximately 84% of our total investment portfolio versus 83% as of December 31, 2024 and 93% as of March 31, 2024. Our 30 year fixed-rate Agency RMBS holdings as of March 31, 2025, December 31, 2024 and March 31, 2024 consisted of specified pools with coupon distributions as shown in the table below.
As of
March 31, 2025 December 31, 2024 March 31, 2024
$ in thousands Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield Fair Value Percentage Period-end Weighted Average Yield
4.0% — — % — % 369,321 8.1 % 4.67 % 764,780 16.5 % 4.64 %
4.5% 657,554 13.2 % 4.95 % 658,218 14.5 % 4.95 % 892,872 19.2 % 4.95 %
5.0% 993,414 20.0 % 5.32 % 836,197 18.4 % 5.35 % 1,001,505 21.5 % 5.34 %
5.5% 1,414,961 28.4 % 5.58 % 1,196,335 26.3 % 5.59 % 992,970 21.4 % 5.59 %
6.0% 1,471,826 29.6 % 5.97 % 1,481,454 32.7 % 5.97 % 996,925 21.4 % 6.03 %
6.5% 436,908 8.8 % 6.16 % — — % — % — — — %
Total 30 year fixed-rate Agency RMBS 4,974,663 100.0 % 5.61 % 4,541,525 100.0 % 5.50 % 4,649,052 100.0 % 5.35 %
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Our purchases of Agency RMBS have been primarily focused on specified pools with attractive prepayment profiles. We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments. The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of March 31, 2025, December 31, 2024 and March 31, 2024.
As of
March 31, 2025 December 31, 2024 March 31, 2024
$ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage
Specified pool characteristic:
Geographic location 982,726 19.8 % 741,428 16.3 % 968,689 20.9 %
Loan balance 1,808,302 36.3 % 1,961,771 43.2 % 2,130,283 45.8 %
High loan-to-value ratio
550,053 11.1 % 509,459 11.2 % 470,621 10.1 %
Low credit score 1,633,582 32.8 % 1,328,867 29.3 % 1,079,459 23.2 %
Total 30 year fixed-rate Agency RMBS 4,974,663 100.0 % 4,541,525 100.0 % 4,649,052 100.0 %
As of March 31, 2025, our holdings of Agency CMBS represented approximately 15% of our total investment portfolio versus 15% as of December 31, 2024 and 5% as of March 31, 2024. Our Agency CMBS benefit from prepayment protection characteristics and have an attractive return profile. Further, the hedging costs related to these holdings are economical as they are less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of March 31, 2025, approximately 81% of our Agency CMBS were Fannie Mae DUS and 19% were Freddie Mac Multifamily Participation Certificates.
As of March 31, 2025, December 31, 2024 and March 31, 2024, our holdings of non-Agency securities represented less than 1% of our total investment portfolio. In the first quarter of 2025, we sold our remaining non-Agency CMBS investment.
Financing and Other Liabilities
We finance the majority of our investment portfolio through repurchase agreements. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to the secured overnight financing rate (“SOFR”).
The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter.
$ in thousands Collateralized borrowings under repurchase agreements
Quarter Ended Quarter-end balance Average quarterly balance (1)
Maximum balance (2)
March 31, 2024 4,393,908 4,419,757 4,531,261
June 30, 2024 4,260,475 4,251,953 4,269,254
September 30, 2024 5,184,885 5,004,504 5,184,885
December 31, 2024 4,893,958 4,865,582 4,943,054
March 31, 2025 5,354,561 4,930,237 5,354,561
(1) Average quarterly balance for each period is based on month-end balances.
(2) Amount represents the maximum borrowings at month-end during each of the respective periods.
Hedging Instruments
We enter into interest rate swap agreements that are designed to mitigate the effects of changes in interest rates for a portion of our borrowings. Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR.
We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the three months ended March 31, 2025, we entered into interest rate swaps with a notional amount of $725.0 million and terminated existing interest rate swaps with a notional amount of $350.0 million.
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We also use futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the three months ended March 31, 2025, we entered into futures contracts with a notional amount of $1.4 billion and terminated existing futures contracts with a notional amount of $1.9 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 condensed consolidated statement of operations.
Capital Activities
As of March 31, 2025, we had 6,883,504 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 months ended March 31, 2025 and 2024.
Three Months Ended March 31,
Shares in ones, $ in thousands 2025 2024
Shares sold 4,212,057 365,838
Net proceeds 35,956 3,318
Commissions and other costs 569 43
For information on dividends declared during the three months ended March 31, 2025 and 2024, see Note 10 - "Stockholders' Equity" of our condensed consolidated financial statements in Part I. Item 1 of this report on Form 10-Q.
During the three months ended March 31, 2025, we did not repurchase any shares of our common stock.
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three months ended March 31, 2025, we repurchased and retired 90,146 shares of Series C Preferred Stock. During the three months ended March 31, 2024, we repurchased and retired 93,347 shares of Series B Preferred Stock and 95,917 shares of Series C Preferred Stock. We redeemed all outstanding shares of our Series B Preferred Stock in December 2024. As of March 31, 2025, we had authority to repurchase 616,513 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.
Book Value per Common Share
We calculate book value per common share as follows.
As of
In thousands except per share amounts March 31, 2025 December 31, 2024
Numerator (adjusted equity):
Total equity 759,166 730,729
Less: Liquidation preference of Series C Preferred Stock (177,913) (180,166)
Total adjusted equity 581,253 550,563
Denominator (number of shares):
Common stock outstanding 65,942 61,730
Book value per common share 8.81 8.92
Our book value per common share decreased 1.2% as of March 31, 2025 compared to December 31, 2024. The decrease in our book value per common share was primarily due to losses on derivative instruments, dividends declared and expenses, which were partially offset by net interest income and gains on investments. Refer to Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.
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Critical Accounting Policies and Estimates
There have been no significant changes to our critical accounting policies and estimates that are disclosed in our most recent Form 10-K for the year ended December 31, 2024.
Recent Accounting Standards
None.
Results of Operations
The table below presents information from our condensed consolidated statements of operations for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands, except share data 2025 2024
Interest income 73,846 68,583
Interest expense 55,025 61,580
Net interest income 18,821 7,003
Other income (loss)
Gain (loss) on investments, net 82,158 (66,153)
(Increase) decrease in provision for credit losses — (39)
Equity in earnings (losses) of unconsolidated ventures — (193)
Gain (loss) on derivative instruments, net (76,679) 93,161
Total other income (loss) 5,479 26,776
Expenses
Management fee – related party 2,996 2,861
General and administrative 1,663 1,796
Total expenses 4,659 4,657
Net income (loss) 19,641 29,122
Dividends to preferred stockholders (3,341) (5,585)
Gain (loss) on repurchase and retirement of preferred stock (11) 193
Net income (loss) attributable to common stockholders 16,289 23,730
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Basic 0.26 0.49
Diluted 0.26 0.49
Weighted average number of shares of common stock:
Basic 62,843,814 48,499,863
Diluted 62,844,859 48,500,476
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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 months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Average earning assets (1)
5,422,552 4,972,242
Average earning asset yields (2)
5.45 % 5.52 %
(1) Average balances for each period are based on weighted month-end balances.
(2) Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized.
Total average earning assets increased $450.3 million for the three months ended March 31, 2025 compared to the same period in 2024. Changes in our average earning assets are a factor of our total stockholders' equity and our desired leverage levels.
Average earning asset yields decreased 7 basis points for the three months ended March 31, 2025 compared to the same period in 2024. Changes in our average earning asset yields are driven by the composition of our investments, amortized cost of our securities and prepayment rates.
Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below.
Three Months Ended March 31,
$ in thousands 2025 2024
Interest Income
Coupon interest 73,636 67,442
Net (premium amortization) discount accretion 210 1,141
Total interest income 73,846 68,583
Our interest income increased for the three months ended March 31, 2025 compared to the same period in 2024 due to an increase in average earning assets.
Prepayment Speeds
Our RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance. For Agency RMBS where we do not estimate prepayments, premium amortization and discount accretion are not impacted by prepayments until actual prepayments occur. For those securities on which we do estimate prepayments, expected future prepayment speeds are estimated on 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. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected.
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The following table presents net (premium amortization) discount accretion recognized for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Agency RMBS 179 1,136
Agency CMBS 95 5
Non-Agency CMBS — 127
Non-Agency RMBS (64) (126)
U.S. Treasury Securities — (1)
Net (premium amortization) discount accretion 210 1,141
Net discount accretion decreased for three months ended March 31, 2025 compared to the same period in 2024 as we have repositioned a portion of our investment portfolio into higher coupon securities that have higher amortized costs relative to principal value.
Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results.
Interest Expense and Cost of Funds
The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Total average borrowings (1)
4,930,237 4,419,757
Maximum borrowings during the period (2)
5,354,561 4,531,261
Cost of funds (3)
4.46 % 5.57 %
(1) Average borrowings for each period are based on weighted month-end balances.
(2) Amount represents the maximum borrowings at month-end during each of the respective periods.
(3) Average cost of funds is calculated by dividing annualized interest expense by our average borrowings.
Total average borrowings increased $510.5 million for the three months ended March 31, 2025 compared to the same period in 2024. Changes in our average borrowings are a factor of our total stockholders' equity and our desired leverage levels.
Our average cost of funds decreased 111 basis points for the three months ended March 31, 2025 compared to the same period in 2024. Changes in our costs of funds are substantially driven by the Federal Funds target rate, which the FOMC lowered from a range of 5.25% to 5.50% as of January 1, 2024 to 4.25% to 4.50% as of March 31, 2025.
The table below presents the components of interest expense for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Interest Expense
Interest expense on repurchase agreement borrowings 55,025 61,580
Total interest expense 55,025 61,580
Our interest expense decreased for the three months ended March 31, 2025 compared to the same period in 2024 due to a lower cost of funds, which was partially offset by an increase in average borrowings.
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Net Interest Income
The table below presents the components of net interest income for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Interest income 73,846 68,583
Interest expense 55,025 61,580
Net interest income 18,821 7,003
Net interest rate margin 0.99 % (0.05) %
Our net interest income, which equals total interest income less total interest expense, and our net interest rate margin, which equals the yield on our average earning assets for the period less the average cost of funds, increased for the three months ended March 31, 2025 compared to the same period in 2024 due to a lower cost of funds. Our cost of funds is generally more sensitive to changes in interest rates than the yield on our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.
Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2025 and 2024.
Three Months Ended March 31,
$ in thousands 2025 2024
Net realized gains (losses) on sale of MBS (5,466) (3,222)
Net unrealized gains (losses) on MBS accounted for under the fair value option 87,624 (62,473)
Net unrealized gains (losses) on U.S. Treasury securities — (372)
Net realized gains (losses) on U.S. Treasury securities — (86)
Total gain (loss) on investments, net 82,158 (66,153)
During the three months ended March 31, 2025, we sold MBS and realized net losses of $5.5 million (March 31, 2024: $3.2 million). Net realized losses during the three months ended March 31, 2025 reflect sales of 4.0% coupon Agency RMBS. Net realized losses during the three months ended March 31, 2024 reflect sales of lower coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS.
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations. As of March 31, 2025, $5.9 billion (December 31, 2024: $5.4 billion) or 99.9% (December 31, 2024: 99.7%) of our MBS were accounted for under the fair value option.
We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $87.6 million in the three months ended March 31, 2025 compared to net unrealized losses of $62.5 million in the three months ended March 31, 2024. Net unrealized gains in the three months ended March 31, 2025 resulted from a sharp decline in interest rates during the quarter, as valuations on fixed-rate securities increased as interest rates fell. Net unrealized losses in the three months ended March 31, 2024 resulted from higher interest rates during the quarter, as valuations on fixed-rate securities declined as interest rates rose.
We recorded net realized and unrealized losses of $458,000 on U.S. Treasury securities in the three months ended March 31, 2024. We did not hold any U.S. Treasury securities during the three months ended March 31, 2025.
(Increase) Decrease in Provision for Credit Losses
As of March 31, 2025, $5.1 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2024: $15.0 million). During the three months ended March 31, 2025, we sold the only security for which we had recorded an allowance for credit losses. We recorded a $39,000 increase in the provision for credit losses during the three months ended March 31, 2024 on the same security based on a comparison of the security's amortized cost basis to discounted expected cash flows.
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Equity in Earnings (Losses) of Unconsolidated Ventures
For the three months ended March 31, 2024, we recorded equity in losses of $193,000. We received a final distribution from our sole remaining unconsolidated venture during the first quarter of 2024, and the venture was dissolved in April 2024.
Gain (Loss) on Derivative Instruments, net
We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.
The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods.
$ in thousands
Three months ended March 31, 2025
Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net
Interest Rate Swaps (76,259) 28,079 542 (47,638)
Futures Contracts (28,682) — (4,172) (32,854)
TBAs 3,425 — 388 3,813
Total (101,516) 28,079 (3,242) (76,679)
$ in thousands
Three months ended March 31, 2024
Derivative
not designated as
hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net
Interest Rate Swaps 48,682 45,287 (808) 93,161
Total 48,682 45,287 (808) 93,161
As of March 31, 2025 and December 31, 2024, we held the following interest rate swaps whereby we pay fixed rate interest and receive floating rate interest based upon SOFR.
$ in thousands As of March 31, 2025 As of December 31, 2024
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 3,640,000 1.29 % 4.41 % 6.4 3,265,000 0.97 % 4.49 % 5.3
During the three months ended March 31, 2025, we entered into interest rate swaps with a notional amount of $725.0 million and terminated existing interest rate swaps with a notional amount of $350.0 million. We recorded net losses of $47.6 million on interest rate swaps for the three months ended March 31, 2025 (March 31, 2024: net gains of $93.2 million) primarily due to changes in interest rate expectations.
As of March 31, 2025, we had $5.4 billion of repurchase agreement borrowings with a weighted average remaining maturity of 25 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.
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As of March 31, 2025 and December 31, 2024, we held the following futures contracts.
As of
March 31, 2025 December 31, 2024
$ in thousands Notional Amount - Short Notional Amount - Short
10 year U.S. Treasury futures 400,000 136,000
Ultra 10 year U.S. Treasury futures 315,000 1,057,000
30 year U.S. Treasury futures 187,500 209,000
Total 902,500 1,402,000
We use futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the three months ended March 31, 2025, we entered into futures contracts with a notional amount of $1.4 billion and terminated existing futures contracts with a notional amount of $1.9 billion. We recognized net losses of $32.9 million on futures contracts during the three months ended March 31, 2025 due to changes in interest rate expectations. We did not hold any futures contracts during the three months ended March 31, 2024.
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 gains of $3.8 million on TBAs during the three months ended March 31, 2025 due to a sharp decline in interest rates. We did not hold any TBAs during the three months ended March 31, 2024.
Expenses
We incurred management fees of $3.0 million for the three months ended March 31, 2025 (March 31, 2024: $2.9 million). Management fees increased for the three months ended March 31, 2025 compared to the same period in 2024 due to higher average stockholders' equity. Refer to Note 9 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.
Our general and administrative expenses not covered under our management agreement amounted to $1.7 million for the three months ended March 31, 2025 (March 31, 2024: $1.8 million). General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs.
Gain (Loss) on Repurchase and Retirement of Preferred Stock
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the three months ended March 31, 2025, we repurchased and retired 90,146 shares of Series C Preferred Stock. During the three months ended March 31, 2024, we repurchased and retired 93,347 shares of Series B Preferred Stock and 95,917 shares of Series C Preferred Stock. Gains and losses on repurchases and retirements of preferred stock represent the difference between the consideration transferred and the carrying value of the preferred stock.
Net Income (Loss) Attributable to Common Stockholders
For the three months ended March 31, 2025, our net income attributable to common stockholders was $16.3 million (March 31, 2024: $23.7 million) or $0.26 basic and diluted net income per average share available to common stockholders (March 31, 2024: $0.49). The change in net income attributable to common stockholders was primarily due to (i) net gains on investments of $82.2 million in the 2025 period compared to net losses on investments of $66.2 million in the 2024 period; (ii) net losses on derivative instruments of $76.7 million in the 2025 period compared to net gains on derivatives of $93.2 million in the 2024 period; and (iii) an $11.8 million increase in net interest income.
For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments and changes in net interest income, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”.
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Non-GAAP Financial Measures
The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S. GAAP measures. We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below.
Non-GAAP Financial Measure Most Directly Comparable U.S. GAAP Measure
Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share)
Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds)
Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin)
Economic debt-to-equity ratio Debt-to-equity ratio
The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.
Earnings Available for Distribution
Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; (gain) loss on repurchase and retirement of preferred stock and foreign currency (gains) losses, net.
By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies. However, because not all of our peer companies use identical operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by our peer companies. We exclude the impact of gains and losses when calculating earnings available for distribution because (i) when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity and (ii) gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate.
To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We have historically distributed at least 100% of our REIT taxable income. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that our board of directors uses to determine the amount, if any, and the payment date of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs.
Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP) or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs.
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The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to earnings available for distribution for the following periods.
Three Months Ended March 31,
$ in thousands, except per share data 2025 2024
Net income (loss) attributable to common stockholders 16,289 23,730
Adjustments:
(Gain) loss on investments, net (82,158) 66,153
Realized (gain) loss on derivative instruments, net (1)
101,516 (48,682)
Unrealized (gain) loss on derivative instruments, net (1)
3,242 808
TBA dollar roll income (2)
1,147 —
(Gain) loss on repurchase and retirement of preferred stock 11 (193)
Subtotal 23,758 18,086
Earnings available for distribution 40,047 41,816
Basic income (loss) per common share 0.26 0.49
Earnings available for distribution per common share (3)
0.64 0.86
(1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components.
Three Months Ended March 31,
$ in thousands 2025 2024
Realized gain (loss) on derivative instruments, net (101,516) 48,682
Unrealized gain (loss) on derivative instruments, net (3,242) (808)
Contractual net interest income (expense) on interest rate swaps 28,079 45,287
Gain (loss) on derivative instruments, net (76,679) 93,161
(2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations.
(3) 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.
The table below shows the components of earnings available for distribution for the following periods.
Three Months Ended March 31,
$ in thousands 2025 2024
Effective net interest income (1)
46,900 52,290
TBA dollar roll income 1,147 —
Equity in earnings (losses) of unconsolidated ventures — (193)
(Increase) decrease in provision for credit losses — (39)
Total expenses (4,659) (4,657)
Subtotal 43,388 47,401
Dividends to preferred stockholders (3,341) (5,585)
Earnings available for distribution 40,047 41,816
(1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
Earnings available for distribution decreased during the three months ended March 31, 2025 compared to the same period in 2024 due to lower effective net interest income, which was partially offset by an increase in TBA dollar roll income and
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lower preferred dividends due to the redemption of our Series B Preferred Stock in December 2024. 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. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings. We add back the net payments or receipts on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense.
We 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.
We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance.
The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods.
Three Months Ended March 31,
2025 2024
$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds
Total interest expense 55,025 4.46 % 61,580 5.57 %
Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (28,079) (2.28) % (45,287) (4.10) %
Effective interest expense 26,946 2.18 % 16,293 1.47 %
Our effective interest expense increased in the three months ended March 31, 2025 compared to the same period in 2024 due to a decrease in contractual net interest income on interest rate swaps and higher average borrowings, which were partially offset by a lower Federal Funds target rate.
Our effective cost of funds increased in the three months ended March 31, 2025 compared to the same period in 2024 due to a decrease in contractual net interest income on interest rate swaps, which was partially offset by a lower Federal Funds target rate.
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 March 31, 2025 and December 31, 2024.
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The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.
Three Months Ended March 31,
2025 2024
$ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income 18,821 0.99 % 7,003 (0.05) %
Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 28,079 2.28 % 45,287 4.10 %
Effective net interest income 46,900 3.27 % 52,290 4.05 %
Our effective net interest income and effective net interest rate margin decreased in the three months ended March 31, 2025 compared to the same period in 2024 due to a decrease in contractual net interest income on interest rate swaps, which was partially offset by a lower Federal Funds target rate.
Economic Debt-to-Equity Ratio
The table below shows our debt-to-equity ratio and our economic debt-to-equity ratio as of March 31, 2025 and December 31, 2024. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity.
We present an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.
As of
$ in thousands March 31,
2025 December 31,
2024
Repurchase agreements 5,354,561 4,893,958
Total stockholders' equity 759,166 730,729
Debt-to-equity ratio (1)
7.1 6.7
Economic debt-to-equity ratio (2)
7.1 6.7
(1) Debt-to-equity ratio is calculated as the ratio of total repurchase agreements 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 ($219,000 as of March 31, 2025; $606,000 as of December 31, 2024) to total stockholders' equity.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our condensed consolidated balance sheets is
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significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.
We held cash, cash equivalents and restricted cash of $181.5 million as of March 31, 2025 (March 31, 2024: $200.5 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 $19.3 million for the three months ended March 31, 2025 (March 31, 2024: $57.5 million).
Our investing activities used net cash of $516.5 million in the three months ended March 31, 2025 compared to net cash provided by investing activities of $37.1 million in the three months ended March 31, 2024. We used cash of $884.4 million to purchase MBS during the three months ended March 31, 2025 (March 31, 2024: $390.4 million). Our primary source of cash from investing activities for the three months ended March 31, 2025 was proceeds from sales of MBS of $373.6 million (March 31, 2024: $296.5 million from the sales of MBS and $10.8 million from the sale of U.S. Treasury securities). We also generated $95.3 million from principal payments of MBS during the three months ended March 31, 2025 (March 31, 2024: $71.2 million) and used cash of $101.5 million to settle derivative contracts in the three months ended March 31, 2025 (March 31, 2024: net cash received of $48.7 million).
Our financing activities provided net cash of $467.8 million for the three months ended March 31, 2025 compared to net cash used by financing activities of $92.7 million in the three months ended March 31, 2024. During the three months ended March 31, 2025, we received net cash from proceeds on our repurchase agreements of $460.6 million (March 31, 2024: $64.4 million cash used for net repayments). We used cash of $28.0 million for the three months ended March 31, 2025 to pay dividends (March 31, 2024: $25.0 million). Proceeds from issuance of common stock provided $36.1 million for the three months ended March 31, 2025 (March 31, 2024: $3.3 million).
As of March 31, 2025, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.5% for Agency RMBS and 4.8% 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. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately.
Effects of Margin Requirements, Leverage and Spreads
Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a “margin call”, which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.
We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase or if spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.
Our interest rate swaps and futures contracts require us to post initial margin and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.
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We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.
Forward-Looking Statements Regarding Liquidity
As of March 31, 2025, we held $5.6 billion of Agency securities that are financed by repurchase agreements. We also had approximately $328.9 million of unencumbered investments and unrestricted cash of $42.9 million as of March 31, 2025. As of March 31, 2025, our known contractual obligations primarily consisted of $5.4 billion of repurchase agreement borrowings with a weighted average remaining maturity of 25 days. We generally intend to refinance the majority of our repurchase agreement borrowings at market rates upon maturity. Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities.
Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.
Exposure to Financial Counterparties
We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.
As of March 31, 2025, one counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $38.0 million, or 5% of our stockholders' equity. The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2025. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are denominated in U.S. dollars.
$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure
North America 14 3,228,487 (164,043)
Asia 4 962,929 (47,579)
Europe (excluding United Kingdom) 2 679,084 (33,408)
United Kingdom 1 484,061 (20,853)
Total 21 5,354,561 (265,883)
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Dividends
To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
As discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 11 – "Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, 2024.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.
Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2025, 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, 2025.
At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of March 31, 2025, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.