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 annual report on 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” in our Annual Report on Form 10-K for the year ended December 31, 2025 and this Report, which may be updated by subsequently filed quarterly reports on Form 10-Q or current reports on Form 8-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 June 30, 2026, 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 Fannie Mae or Freddie Mac (collectively “Agency CMBS”); and
• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS.
During the periods presented in these condensed consolidated financial statements, we also invested in CMBS and RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS” and “non-Agency RMBS”, respectively).
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 “Investment Company” definition under the 1940 Act.
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Market Conditions and Impacts
Macroeconomic factors that affect our business include inflation, economic growth, employment conditions, public policy, fiscal and monetary policy, interest rates, interest rate volatility, financial conditions, spread premiums, residential and commercial real estate prices, credit availability, the health of the banking system, consumer spending, personal income and corporate earnings. Of these macroeconomic factors, financial conditions, inflation, employment conditions, monetary policy, interest rates and interest rate volatility had the most direct impact on our performance and financial condition during the second quarter of 2026.
Financial conditions improved during the second quarter of 2026 despite periodic bouts of volatility driven by geopolitical developments in the Middle East, elevated energy prices and shifting expectations for monetary policy. Strong labor market conditions, resilient economic growth and moderating interest rate volatility supported risk assets, while investors navigated uncertainty surrounding inflation and energy prices. Against this backdrop, equity markets generated strong returns during the quarter, with broad market indices recovering from periods of volatility and ending the quarter at or near record highs. Credit markets also performed well, as risk premiums across investment grade, high yield and securitized bonds generally tightened amid improving investor confidence and continued demand for income-oriented assets.
Inflation remained notably above the Federal Reserve’s 2% target throughout the quarter. The year-over-year increase in the headline consumer price index (“CPI”) increased during the quarter, rising from approximately 3.3% in March to 3.5% by quarter end, reflecting the impact of higher energy prices and broader inflationary pressures. The year-over-year increase in core CPI, which excludes food and energy, was unchanged from the beginning of the quarter at 2.6%. Despite uncertainty around energy prices, investors revised their inflation expectations lower, most clearly reflected in Treasury inflation-protected securities breakeven rates. The two-year breakeven declined sharply to 2.00% at quarter end from 3.25% at the end of the first quarter, while the five-year breakeven decreased to 2.27% from 2.60%.
The Federal Open Market Committee (“FOMC”) maintained its target range for the Federal Funds rate at 3.50% to 3.75% throughout the second quarter, citing continued economic resilience, a strong labor market and inflation that remained above its long term objective. Expectations for future monetary policy shifted meaningfully during the quarter. Investors entered the period anticipating that moderating inflation and slowing economic growth would eventually lead to policy easing. However, stronger than expected economic data, elevated energy prices and a modest reacceleration in inflation prompted market participants to reassess this outlook. By quarter end, Federal Funds futures reflected growing expectations that the FOMC's next move would be a hike rather than a cut.
Interest rates increased across the U.S. Treasury yield curve during the quarter as investors reassessed the outlook for inflation and monetary policy amid resilient economic growth, a strong labor market and elevated energy prices. The two-year U.S. Treasury yield increased by 37 basis points to 4.17%, the five-year yield rose by 29 basis points to 4.23% and the ten-year yield rose by 16 basis points to 4.47%. Interest rate volatility remained relatively well contained during the quarter despite periodic bouts of market uncertainty driven by geopolitical developments in the Middle East and evolving policy expectations.
Against this macroeconomic backdrop, Agency RMBS performance relative to interest rate hedges was mixed across the coupon stack. Higher coupon securities, which benefitted from improving risk sentiment, declining interest rate volatility and favorable market technicals, generally outperformed lower coupon securities. Demand from banks, asset managers, mortgage REITs and other institutional investors remained robust throughout the quarter, while net supply was readily absorbed despite elevated gross issuance activity, underscoring the sector's resilience amid elevated inflation and evolving monetary policy expectations. Attractive carry, strong investor demand and favorable relative valuations versus other high-quality fixed-income sectors continued to support investor interest in Agency RMBS throughout the period.
During the quarter, Agency CMBS risk premiums remained relatively unchanged as supply was readily absorbed by continued institutional demand from banks, insurance companies and asset managers seeking high-quality spread assets. Supported by stable cash flows and attractive risk-adjusted yields relative to other spread sectors, Agency CMBS remained well positioned within the fixed income market.
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Market Rates
As of
June 30, 2026 March 31, 2026 December 31, 2025 September 30, 2025 June 30, 2025 One Quarter Change One Year Change
Interest Rates
Effective federal funds rate 3.62 % 3.64 % 3.64 % 4.09 % 4.33 % (0.02) % (0.71) %
One-month SOFR 3.65 % 3.66 % 3.69 % 4.13 % 4.34 % (0.01) % (0.69) %
2 Year U.S. Treasury 4.17 % 3.80 % 3.47 % 3.60 % 3.72 % 0.37 % 0.45 %
5 Year U.S. Treasury 4.23 % 3.94 % 3.71 % 3.73 % 3.79 % 0.29 % 0.44 %
10 Year U.S. Treasury 4.47 % 4.31 % 4.15 % 4.15 % 4.23 % 0.16 % 0.24 %
30 Year U.S. Treasury 4.95 % 4.89 % 4.83 % 4.73 % 4.77 % 0.06 % 0.18 %
As of
(in basis points) June 30, 2026 March 31, 2026 December 31, 2025 September 30, 2025 June 30, 2025 One Quarter Change One Year Change
Swap Spreads (1)
2 year (15) (17) (16) (22) (23) 2 8
5 year (29) (33) (26) (35) (37) 4 8
10 year (42) (46) (37) (49) (54) 4 12
30 year (74) (78) (68) (80) (87) 4 13
30 Year Mortgage Spreads vs. 5/10 Year U.S. Treasury Securities Blend (2)
FNMA 2.0% 64 72 83 82 90 (8) (26)
FNMA 2.5% 66 75 87 88 95 (9) (29)
FNMA 3.0% 62 70 81 88 96 (8) (34)
FNMA 3.5% 59 65 70 87 98 (6) (39)
FNMA 4.0% 65 71 80 89 100 (6) (35)
FNMA 4.5% 78 90 92 100 114 (12) (36)
FNMA 5.0% 95 110 110 119 130 (15) (35)
FNMA 5.5% 110 125 111 135 149 (15) (39)
FNMA 6.0% 106 122 93 124 161 (16) (55)
FNMA 6.5% 104 101 47 100 127 3 (23)
10 Year Agency CMBS Spreads vs. U.S. Treasury Securities (3)
FNMA DUS 34 38 46 44 47 (4) (13)
(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 Fannie Mae Delegated Underwriting and Servicing MBS (“DUS”) and a U.S. Treasury security with a similar maturity.
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Outlook
Our outlook for Agency RMBS and Agency CMBS remains constructive. While uncertainty surrounding monetary policy and geopolitical developments persists, we believe valuations remain compelling as interest rate volatility and inflation expectations have moderated from their first quarter peaks. Supply and demand dynamics remain favorable, as net issuance is expected to be contained, and broad-based investor demand remains supportive. Agency CMBS is also well positioned, supported by its attractive risk-adjusted yields, relatively low sensitivity to interest rate fluctuations, and diversification benefits. Taken together, these macroeconomic and market technical factors create a favorable backdrop for our investment strategy as we enter the second half of 2026.
Investment Activities
The table below shows the composition of our investment portfolio including TBAs as of June 30, 2026, December 31, 2025 and June 30, 2025.
$ in thousands As of
June 30, 2026 December 31, 2025 June 30, 2025
Agency RMBS:
30 year fixed-rate pass-through, at fair value 5,983,629 5,309,160 4,222,203
Agency CMO, at fair value 64,386 69,320 71,835
Agency CMBS, at fair value 901,894 898,129 891,521
Subtotal 6,949,909 6,276,609 5,185,559
TBAs, at implied market value (1)
1,201,022 — —
Total investment portfolio including TBAs 8,150,931 6,276,609 5,185,559
(1) Our presentation of TBAs in the table above represents management's view of our investment portfolio and does not reflect how we record TBAs on our condensed consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs that we do not intend to settle on the contractual settlement date as derivative financial instruments. We value TBAs on our condensed consolidated balance sheets at net carrying value, which represents the difference between the implied market value and the implied cost basis of the TBAs. For further details of our U.S. GAAP accounting for TBAs, refer to Note 6 “Derivatives and Hedging Activities” in Part I. Item 1 of this report on Form 10-Q. Our TBA dollar roll transactions are a form of off-balance sheet financing. For further information on how management evaluates our at-risk leverage, see Non-GAAP Financial Measures below.
As o f June 30, 2026, our holdings of 30 year fixed-rate Agency RMBS represented approximately 73% of our total investment portfolio including TBAs, compared to 85% as of December 31, 2025 and 81% as of June 30, 2025. Our 30 year fixed-rate Agency RMBS holdings as of June 30, 2026, December 31, 2025 and June 30, 2025 consisted of specified pools with coupon distributions as shown in the table below.
As of
June 30, 2026 December 31, 2025 June 30, 2025
$ 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
4.5% 1,257,214 21.0 % 4.87 % 785,584 14.8 % 4.89 % 640,423 15.2 % 4.95 %
5.0% 1,590,480 26.6 % 5.18 % 1,486,801 28.0 % 5.20 % 967,373 22.9 % 5.32 %
5.5% 1,901,626 31.8 % 5.47 % 1,534,654 28.9 % 5.51 % 1,035,347 24.5 % 5.58 %
6.0% 1,234,309 20.6 % 5.91 % 1,283,242 24.2 % 5.93 % 1,259,271 29.8 % 5.95 %
6.5% — — % — % 218,879 4.1 % 6.14 % 319,789 7.6 % 6.16 %
Total 30 year fixed-rate Agency RMBS 5,983,629 100.0 % 5.36 % 5,309,160 100.0 % 5.46 % 4,222,203 100.0 % 5.58 %
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Our holdings of 30 year fixed-rate Agency RMBS are focused in 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 June 30, 2026, December 31, 2025 and June 30, 2025.
As of
June 30, 2026 December 31, 2025 June 30, 2025
$ in thousands Fair Value Percentage Fair Value Percentage Fair Value Percentage
Specified pool characteristic:
Geographic location 1,202,162 20.1 % 942,347 17.7 % 740,231 17.5 %
Loan balance 2,060,978 34.5 % 2,111,999 39.8 % 1,754,563 41.6 %
High loan-to-value ratio
1,234,554 20.6 % 870,125 16.4 % 282,633 6.7 %
Low credit score 1,485,935 24.8 % 1,384,689 26.1 % 1,386,976 32.8 %
Investment property — — % — — % 57,800 1.4 %
Total 30 year fixed-rate Agency RMBS 5,983,629 100.0 % 5,309,160 100.0 % 4,222,203 100.0 %
As of June 30, 2026, our holdings of TBAs represented approximately 15% of our total investment portfolio. We increased our allocation to TBAs during the first half of 2026 given attractive implied financing rates in the Agency RMBS TBA dollar roll market. As of June 30, 2026, our holdings of TBAs consisted of 5.0% to 6.0% coupon securities.
As of June 30, 2026, our holdings of Agency CMBS represented approximately 11% of our total investment portfolio including TBAs, compared to 14% as of December 31, 2025 and 17% as of June 30, 2025. These securities offer attractive risk-adjusted yields and diversification benefits. Further, the hedging costs associated with these holdings are economical as Agency CMBS is less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of June 30, 2026, approximately 81% of our Agency CMBS holdings were Fannie Mae DUS and 19% were Freddie Mac Multifamily Participation Certificates.
Financing
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”). Additionally, we view our TBAs that are accounted for as derivative financial instruments under U.S. GAAP as a form of off-balance sheet financing. Refer to Non-GAAP Financial Measures below for information on how we evaluate our at-risk leverage.
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)
June 30, 2025 4,635,881 4,577,566 4,635,881
September 30, 2025 5,150,081 4,889,782 5,150,081
December 31, 2025 5,619,255 5,393,719 5,619,255
March 31, 2026 5,339,373 5,367,463 5,404,619
June 30, 2026 6,210,403 5,927,725 6,210,403
(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.
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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 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 six months ended June 30, 2026, we entered into interest rate swaps with a notional amount of $1.9 billion and terminated or settled interest rate swaps with a notional amount of $930.0 million.
We also use U.S. Treasury futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the six months ended June 30, 2026, we entered into U.S. Treasury futures contracts with a notional amount of $2.7 billion and terminated or settled U.S. Treasury futures contracts with a notional amount of $2.5 billion.
Daily variation margin for interest rate swaps and U.S. Treasury 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 statements of comprehensive income (loss).
Additionally, we have used and may in the future use short positions in TBAs to manage risk and economically hedge a portion of our exposure to changes in Agency RMBS valuations.
Capital Activities
As of June 30, 2026, we had 21,992,905 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 issuances of our common stock under equity distribution agreements during the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
Shares in ones, $ in thousands 2026 2025 2026 2025
Shares sold 14,847,506 282,750 30,542,095 4,494,807
Fees paid to placement agents 1,495 27 3,187 484
Cash proceeds, net of fees paid to placement agents (1)
118,109 2,163 251,741 38,231
(1) During the three and six months ended June 30, 2026, we also paid other costs of $139,000 related to issuances of common stock.
For information on dividends declared during the three and six months ended June 30, 2026 and 2025, see Note 10 - “Stockholders' Equity” of our condensed consolidated financial statements in Part I. Item 1 of this quarterly report on Form 10-Q.
During the six months ended June 30, 2026, 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 C Preferred Stock. During the three and six months ended June 30, 2026, we repurchased and retired 47,222 and 111,910 of Series C Preferred Stock, respectively (three and six months ended June 30, 2025: 96,803 and 186,949 shares). As of June 30, 2026, we had authority to repurchase 242,221 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.
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Book Value per Common Share
We calculate book value per common share as follows:
As of
In thousands except per share amounts June 30, 2026 December 31, 2025
Numerator (adjusted equity):
Total equity 990,321 797,544
Less: Liquidation preference of Series C Preferred Stock (168,556) (171,353)
Total adjusted equity 821,765 626,191
Denominator (number of shares):
Common stock outstanding 102,386 71,791
Book value per common share 8.03 8.72
Our book value per common share decreased 7.9% as of June 30, 2026 compared to December 31, 2025. The decrease in our book value per common share was primarily due to unrealized losses on investments, dividends declared and expenses, which were partially offset by net interest income and gains on derivative instruments.
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, 2025.
Recent Accounting Standards
None.
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Results of Operations
The table below presents information from our condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands, except share data 2026 2025 2026 2025
Interest income 85,408 70,624 165,049 144,470
Interest expense 55,308 52,895 107,901 107,920
Net interest income 30,100 17,729 57,148 36,550
Other income (loss)
Gain (loss) on investments, net (21,226) (5,268) (76,166) 76,890
Gain (loss) on derivative instruments, net 31,584 (30,916) 44,463 (107,595)
Total other income (loss) 10,358 (36,184) (31,703) (30,705)
Expenses
Management fee – related party 3,329 2,831 6,303 5,827
General and administrative 2,125 2,041 4,042 3,704
Total expenses 5,454 4,872 10,345 9,531
Net income (loss) 35,004 (23,327) 15,100 (3,686)
Dividends to preferred stockholders (3,165) (3,297) (6,355) (6,638)
Gain (loss) on repurchase and retirement of preferred stock 3 57 (24) 46
Net income (loss) attributable to common stockholders 31,842 (26,567) 8,721 (10,278)
Other comprehensive income (loss)
Unrealized gain (loss) on mortgage-backed securities, net — (271) — 229
Reclassification of unrealized (gain) loss on sale of mortgage-backed securities to gain (loss) on investments, net — (518) — (402)
Total other comprehensive income (loss) — (789) — (173)
Comprehensive income (loss) attributable to common stockholders 31,842 (27,356) 8,721 (10,451)
Earnings (loss) per share
Net income (loss) attributable to common stockholders
Basic 0.34 (0.40) 0.10 (0.16)
Diluted 0.34 (0.40) 0.10 (0.16)
Weighted average number of shares of common stock
Basic 94,904,498 66,006,135 88,424,545 64,433,710
Diluted 94,904,498 66,006,135 88,424,545 64,433,710
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Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and earning asset yields for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Average earning assets (1)
6,631,046 5,078,921 6,290,647 5,249,787
Average earning asset yields (2)
5.15 % 5.56 % 5.25 % 5.50 %
(1) Average balances for each period are based on weighted month-end balances. Average earning assets do not include TBAs that are treated as derivative instruments under U.S. GAAP.
(2) Average earning asset yields for the period are 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.
Average earning assets increased $1.6 billion and $1.0 billion for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. Changes in our average earning assets are a factor of our total stockholders' equity, our desired leverage levels and our allocation to TBAs.
Average earning asset yields decreased 41 and 25 basis points for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. 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 June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Interest income
Coupon interest 86,288 70,980 166,527 144,614
Net (premium amortization) discount accretion (880) (356) (1,478) (144)
Total interest income 85,408 70,624 165,049 144,470
Our interest income increased $14.8 million and $20.6 million for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025 due to an increase in average earning assets, which was partially offset by lower average earning asset yields.
Prepayment Speeds
Our Agency 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 Agency RMBS purchased at a substantial premium relative to par value, expected future prepayment speeds are estimated on at least a quarterly basis.
Faster prepayment rates on securities purchased at a premium relative to par value result in higher premium amortization and a decrease in interest income. Conversely, faster prepayment rates on securities purchased at a discount relative to par value result in higher discount accretion and an increase in interest income.
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The following table presents net (premium amortization) discount accretion recognized for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Agency RMBS (983) (521) (2,310) (341)
Agency CMBS 103 114 832 209
Non-Agency RMBS — 51 — (12)
Net (premium amortization) discount accretion (880) (356) (1,478) (144)
The increase in net premium amortization for the three and six months ended June 30, 2026 compared to the same periods in 2025 was due to changes in the size and composition of our investment portfolio, including the purchase price of the securities relative to par value, and faster prepayment speeds on higher-coupon securities. Net premium amortization for the three and six months ended June 30, 2026 was partially offset by our rotation out of 6.5% coupon Agency RMBS and, solely with respect to the six months ended June 30, 2026, the acceleration of discount accretion on Agency CMBS that fully repaid during the first quarter of 2026.
Interest Expense and Cost of Funds
The table below presents information related to our borrowings and cost of funds for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Average borrowings (1)
5,927,725 4,577,566 5,649,142 4,752,927
Maximum borrowings during the period (2)
6,210,403 4,635,881 6,210,403 5,354,561
Cost of funds (3)
3.73 % 4.62 % 3.82 % 4.54 %
(1) Average borrowings for each period are based on weighted month-end balances. Average borrowings do not include the off-balance sheet financing component of TBAs that are treated as derivative instruments under U.S. GAAP.
(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.
Average borrowings increased $1.4 billion and $896.2 million for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. Changes in our average borrowings are a factor of our total stockholders' equity, our desired leverage levels and our allocation to TBAs.
Cost of funds decreased 89 and 72 basis points for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025. Changes in our cost of funds are substantially driven by the Federal Funds target rate, which was set at a range of 3.50% to 3.75% during the six months ended June 30, 2026 and a range of 4.25% to 4.50% during the six months ended June 30, 2025 .
The table below presents the components of interest expense for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Interest Expense
Interest expense on repurchase agreement borrowings 55,308 52,895 107,901 107,920
Our interest expense increased $2.4 million for three months ended June 30, 2026 compared to the same period in 2025 due to an increase in average borrowings, which was partially offset by a lower cost of funds. Our interest expense was relatively unchanged for the six months ended June 30, 2026 compared to the same period in 2025 as a lower cost of funds was 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 and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Interest income 85,408 70,624 165,049 144,470
Interest expense 55,308 52,895 107,901 107,920
Net interest income 30,100 17,729 57,148 36,550
Net interest rate margin 1.42 % 0.94 % 1.43 % 0.96 %
Our net interest income, which equals total interest income less total interest expense, increased for the three and six months ended June 30, 2026 compared to the same periods in 2025 due to higher average earning assets and a lower cost of funds, which were partially offset by higher average borrowings and lower 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, increased for the three and six months ended June 30, 2026 compared to the same periods in 2025 due to a lower cost of funds, which was partially offset by lower 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.
Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the three and six months ended June 30, 2026 and 2025.
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Net realized gains (losses) on sale of MBS — 1,827 443 (3,639)
Net unrealized gains (losses) on MBS accounted for under the fair value option (21,226) (7,095) (76,609) 80,529
Total gain (loss) on investments, net (21,226) (5,268) (76,166) 76,890
During the six months ended June 30, 2026, we sold our holdings of 6.5% coupon Agency RMBS and realized net gains of $443,000. During the three and six months ended June 30, 2025 we realized net gains of $1.8 million and net losses of $3.6 million, respectively. Net realized gains during the three months ended June 30, 2025 primarily reflect sales of Agency RMBS during the period of heightened market volatility experienced early in the second quarter. Net realized losses during the six months ended June 30, 2025 primarily reflect sales of lower-coupon Agency RMBS during the first quarter.
Under the fair value option, changes in fair value are recognized in income on the condensed consolidated statements of comprehensive income (loss). As of June 30, 2026 and December 31, 2025, all of our MBS were accounted for under the fair value option. We recorded net unrealized losses of $21.2 million and $76.6 million during the three and six months ended June 30, 2026, respectively, due to an increase in interest rates. We recorded net unrealized losses on our MBS portfolio accounted for under the fair value option of $7.1 million in the three months ended June 30, 2025 as the heightened market volatility that negatively impacted valuations in April 2025 largely subsided prior to quarter end. We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $80.5 million in the six months ended June 30, 2025 primarily due to a sharp decline in interest rates during the first quarter.
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 comprehensive income (loss). 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 comprehensive income (loss).
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The tables below summarize the components of our gain (loss) on derivative instruments, net for the following periods:
$ in thousands
Three months ended June 30, 2026
Derivative Instruments 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 (3,623) 20,757 12,928 30,062
U.S. Treasury futures contracts (4,900) — 8,231 3,331
TBAs (23,889) — 22,080 (1,809)
Total (32,412) 20,757 43,239 31,584
$ in thousands
Three months ended June 30, 2025
Derivative Instruments 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 (36,316) 28,631 (8,485) (16,170)
U.S. Treasury futures contracts (9,834) — (3,672) (13,506)
TBAs (1,458) — 218 (1,240)
Total (47,608) 28,631 (11,939) (30,916)
$ in thousands
Six months ended June 30, 2026
Derivative Instruments 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 (1,412) 42,335 6,680 47,603
U.S. Treasury futures contracts 4,581 — 3,071 7,652
TBAs (12,257) — 1,465 (10,792)
Total (9,088) 42,335 11,216 44,463
$ in thousands
Six months ended June 30, 2025
Derivative Instruments 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 (112,575) 56,710 (7,943) (63,808)
U.S. Treasury futures contracts (38,516) — (7,844) (46,360)
TBAs 1,967 — 606 2,573
Total (149,124) 56,710 (15,181) (107,595)
As of June 30, 2026 and December 31, 2025, we held the following interest rate swaps whereby we pay fixed interest rates and receive floating interest rates based on SOFR:
$ in thousands As of June 30, 2026 As of December 31, 2025
Derivative Instruments Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity Notional Amount Weighted Average Fixed Pay Rate Weighted Average Floating Receive Rate Weighted Average Years to Maturity
Interest rate swaps 4,765,000 1.99 % 3.68 % 6.0 3,820,000 1.34 % 3.87 % 4.6
We use interest rate swaps to manage our exposure to changing interest rates and add stability to our borrowing costs. During the six months ended June 30, 2026, we entered into interest rate swaps with a notional amount of $1.9 billion and terminated or settled existing interest rate swaps with a notional amount of $930.0 million. We recorded net gains of $30.1 million and $47.6 million on interest rate swaps for the three and six months ended June 30, 2026, respectively (three and six months ended June 30, 2025: net losses of $16.2 million and $63.8 million). Net gains during the three and six months ended June 30, 2026 were due to an increase in swap rates.
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As of June 30, 2026 and December 31, 2025, we held the following U.S. Treasury futures contracts:
As of
June 30, 2026 December 31, 2025
$ in thousands Notional Amount - Short Notional Amount - Short
10 year U.S. Treasury futures 600,000 420,000
Ultra 10 year U.S. Treasury futures 375,000 455,000
30 year U.S. Treasury futures 305,000 215,000
Total 1,280,000 1,090,000
We use U.S. Treasury futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the six months ended June 30, 2026, we entered into U.S. Treasury futures contracts with a notional amount of $2.7 billion and terminated or settled existing U.S. Treasury futures contracts with a notional amount of $2.5 billion. We recognized net gains of $3.3 million and $7.7 million on U.S. Treasury futures contracts during the three and six months ended June 30, 2026, respectively (three and six months ended June 30, 2025: net losses of $13.5 million and $46.4 million). Net gains during the three and six months ended June 30, 2026 were due to an increase in interest rates.
We primarily use long positions in TBAs as an alternative means of investing in and financing Agency RMBS. Additionally, during the second quarter of 2025, we used short positions in TBAs in response to heightened market volatility to manage risk and economically hedge a portion of our exposure to changes in Agency RMBS valuations. We recorded net losses of $1.8 million and $10.8 million on TBAs during the three and six months ended June 30, 2026, respectively (three and six months ended June 30, 2025: net losses of $1.2 million and net gains of $2.6 million). Net losses on TBAs during the three and six months ended June 30, 2026 were due to an increase in interest rates.
Expenses
We incurred management fees of $3.3 million and $6.3 million for the three and six months ended June 30, 2026, respectively (three and six months ended June 30, 2025: $2.8 million and $5.8 million). Our management fees are determined by our 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 $2.1 million and $4.0 million for the three and six months ended June 30, 2026, respectively (three and six months ended June 30, 2025: $2.0 million and $3.7 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 C Preferred Stock. During the three and six months ended June 30, 2026, we repurchased and retired 47,222 and 111,910 shares of Series C Preferred Stock, respectively (three and six months ended June 30, 2025: 96,803 and 186,949 shares). 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.
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Net Income (Loss) Attributable to Common Stockholders
For the three months ended June 30, 2026, our net income attributable to common stockholders was $31.8 million (three months ended June 30, 2025: net loss of $26.6 million) or $0.34 basic and diluted net income per average share available to common stockholders (three months ended June 30, 2025: $0.40 net loss per share). The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $21.2 million in the 2026 period compared to net losses on investments of $5.3 million in the 2025 period; (ii) net gains on derivative instruments of $31.6 million in the 2026 period compared to net losses on derivatives of $30.9 million in the 2025 period; and (iii) a $12.4 million increase in net interest income.
For the six months ended June 30, 2026, our net income attributable to common stockholders was $8.7 million (six months ended June 30, 2025: net loss of $10.3 million) or $0.10 basic and diluted net income per average share available to common stockholders (six months ended June 30, 2025: $0.16 net loss per share). The change in net income (loss) attributable to common stockholders was primarily due to (i) net losses on investments of $76.2 million in the 2026 period compared to net gains on investments of $76.9 million in the 2025 period; (ii) net gains on derivative instruments of $44.5 million in the 2026 period compared to net losses on derivatives of $107.6 million in the 2025 period; and (iii) a $20.6 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 and (gain) loss on repurchase and retirement of preferred stock. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate.
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 when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity. In addition, certain gains and losses represent one-time events.
Furthermore, gains and losses have not been accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses may be reflected in net income whereas other gains and losses may be reflected in other comprehensive income. For example, a portion of our mortgage-backed securities were historically classified as available-for-sale securities, and changes in the valuation of these securities were recorded 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 comprehensive income (loss).
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. 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 is used to determine the amount, if any, 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 June 30, Six Months Ended June 30,
$ in thousands, except per share data 2026 2025 2026 2025
Net income (loss) attributable to common stockholders 31,842 (26,567) 8,721 (10,278)
Adjustments:
(Gain) loss on investments, net 21,226 5,268 76,166 (76,890)
Realized (gain) loss on derivative instruments, net (1)
32,412 47,608 9,088 149,124
Unrealized (gain) loss on derivative instruments, net (1)
(43,239) 11,939 (11,216) 15,181
TBA dollar roll income (2)
4,857 — 9,023 1,147
(Gain) loss on repurchase and retirement of preferred stock (3) (57) 24 (46)
Subtotal 15,253 64,758 83,085 88,516
Earnings available for distribution 47,095 38,191 91,806 78,238
Basic earnings (loss) per common share 0.34 (0.40) 0.10 (0.16)
Earnings available for distribution per common share (3)
0.50 0.58 1.04 1.21
(1) U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of comprehensive income (loss) includes the following components:
Three Months Ended June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Realized gain (loss) on derivative instruments, net (32,412) (47,608) (9,088) (149,124)
Unrealized gain (loss) on derivative instruments, net 43,239 (11,939) 11,216 (15,181)
Contractual net interest income (expense) on interest rate swaps 20,757 28,631 42,335 56,710
Gain (loss) on derivative instruments, net 31,584 (30,916) 44,463 (107,595)
(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 compared to 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 comprehensive income (loss).
(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 June 30, Six Months Ended June 30,
$ in thousands 2026 2025 2026 2025
Effective net interest income (1)
50,857 46,360 99,483 93,260
TBA dollar roll income 4,857 — 9,023 1,147
Total expenses (5,454) (4,872) (10,345) (9,531)
Subtotal 50,260 41,488 98,161 84,876
Dividends to preferred stockholders (3,165) (3,297) (6,355) (6,638)
Earnings available for distribution 47,095 38,191 91,806 78,238
(1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
Earnings available for distribution increased during the three and six months ended June 30, 2026 compared to the same periods in 2025 due to higher effective net interest income and an increase in our allocation to TBAs. See below for details on the change in effective net interest income.
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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. 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 tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:
Three Months Ended June 30,
2026 2025
$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds
Total interest expense 55,308 3.73 % 52,895 4.62 %
Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (20,757) (1.40) % (28,631) (2.50) %
Effective interest expense 34,551 2.33 % 24,264 2.12 %
Six Months Ended June 30,
2026 2025
$ in thousands Reconciliation Cost of Funds / Effective Cost of Funds Reconciliation Cost of Funds / Effective Cost of Funds
Total interest expense 107,901 3.82 % 107,920 4.54 %
Less: Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net (42,335) (1.50) % (56,710) (2.39) %
Effective interest expense 65,566 2.32 % 51,210 2.15 %
Our effective interest expense increased in the three and six months ended June 30, 2026 compared to the same periods in 2025 due to a decrease in contractual net interest income on interest rate swaps and an increase in average borrowings, which were partially offset by a lower cost of funds.
Our effective cost of funds increased in the three and six months ended June 30, 2026 compared to the same periods in 2025 due to a decrease in contractual net interest income on interest rate swaps, which was partially offset by a lower cost of funds.
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. We also use U.S. Treasury 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 June 30, 2026 and December 31, 2025.
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The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:
Three Months Ended June 30,
2026 2025
$ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income 30,100 1.42 % 17,729 0.94 %
Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 20,757 1.40 % 28,631 2.50 %
Effective net interest income 50,857 2.82 % 46,360 3.44 %
Six Months Ended June 30,
2026 2025
$ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income 57,148 1.43 % 36,550 0.96 %
Add: Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 42,335 1.50 % 56,710 2.39 %
Effective net interest income 99,483 2.93 % 93,260 3.35 %
Our effective net interest income increased in the three and six months ended June 30, 2026 compared to the same periods in 2025 due to higher average earning assets and a lower cost of funds, which were partially offset by a decrease in contractual net interest income on interest rate swaps, higher average borrowings and lower average earning asset yields.
Our effective net interest rate margin decreased in the three and six months ended June 30, 2026 compared to the same periods in 2025 due to a decrease in contractual net interest income on interest rate swaps and lower average earning asset yields, which were partially offset by a lower cost of funds.
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Economic Debt-to-Equity Ratio
The table below shows our debt-to-equity ratio and our economic debt-to-equity ratio as of June 30, 2026 and December 31, 2025. 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 these types of 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 June 30,
2026 December 31,
2025
Repurchase agreements 6,210,403 5,619,255
Total stockholders' equity 990,321 797,544
Debt-to-equity ratio (1)
6.3 7.0
Economic debt-to-equity ratio (2)
7.5 7.0
(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 ($1.2 billion as of June 30, 2026; none as of December 31, 2025) to total stockholders' equity.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, purchase investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net cash 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 financing arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our condensed consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.
We held cash, cash equivalents and restricted cash of $240.5 million as of June 30, 2026 (June 30, 2025: $190.5 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 $68.9 million for the six months ended June 30, 2026 (June 30, 2025: $60.0 million).
Our investing activities used net cash of $752.5 million for the six months ended June 30, 2026 (June 30, 2025: provided net cash of $191.5 million). We used cash of $1.4 billion to purchase MBS for the six months ended June 30, 2026 (June 30, 2025: $1.1 billion). Principal payments on MBS provided cash of $420.1 million (June 30, 2025: $234.0 million).We also generated $211.5 million in proceeds from sales of MBS for the six months ended June 30, 2026 (June 30, 2025: $1.2 billion) and used net cash of $9.1 million to settle derivative contracts for the six months ended June 30, 2026 (June 30, 2025: $149.1 million).
Our financing activities provided net cash of $757.7 million for the six months ended June 30, 2026 (June 30, 2025: used net cash of $271.8 million). During the six months ended June 30, 2026, we received net cash proceeds on our repurchase agreements of $591.1 million (June 30, 2025: used net cash for repayments on our repurchase agreements of $258.1 million). Net proceeds from issuance of common stock provided $251.6 million for the six months ended June 30, 2026 (June 30, 2025: $38.2 million).We also paid dividends of $85.0 million for the six months ended June 30, 2026 (June 30, 2025: $53.8 million).
As of June 30, 2026, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.3% for Agency RMBS and 4.9% for Agency CMBS. The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS and a low of 4% to a high of 5% for Agency CMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately.
Effects of Margin Requirements, Leverage and 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 value 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 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.
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Our interest rate swaps and U.S. Treasury 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. Our TBAs also include provisions for the posting or receipt of variation margin based on changes in fair value.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.
We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner that 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 June 30, 2026, we held $6.5 billion of Agency securities that are financed by repurchase agreements. We also had approximately $474.9 million of unencumbered investments and unrestricted cash of $73.4 million as of June 30, 2026. As of June 30, 2026, our known contractual obligations primarily consisted of $6.2 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. Additionally, we had TBAs with an implied cost basis of $1.2 billion as of June 30, 2026. Under certain market conditions, it may be uneconomical for us to roll our TBA long positions into future months. This may result in us being required to take delivery of the underlying securities and fund those securities using cash or other financing sources, potentially reducing our liquidity.
Based on 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 ongoing debt financing. In addition, 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.
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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 additional 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 June 30, 2026, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than 5% of our stockholders' equity.
The following table summarizes our exposure to counterparties by geographic concentration as of June 30, 2026. 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 16 4,255,710 183,696
Asia 3 783,743 37,751
Europe (excluding United Kingdom) 2 581,937 26,706
United Kingdom 1 589,013 22,772
Total 22 6,210,403 270,925
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.
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 June 30, 2026, 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, 2026.
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
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of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of “investment company” under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of June 30, 2026, 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.