TPG Mortgage Investment Trust, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report on Form 10-Q, or this "report," we refer to AG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, AG REIT Management, LLC, as our "Manager," and we refer to the direct parent company of our Manager, Angelo, Gordon & Co., L.P., as "Angelo Gordon." The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2020, and any subsequent filings. Forward-Looking Statements We make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including the Federal Reserve, and the potential effects of actual and proposed legislation on us, and our views on certain macroeconomic trends, and the impact of the novel coronavirus ("COVID-19"). When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation: • the uncertainty and economic impact of the COVID-19 pandemic (including the impact of any significant variants) and of responsive measures implemented by various governmental authorities, businesses and other third parties, and the potential impact of COVID-19 on our personnel; • changes in our business and investment strategy; • our ability to predict and control costs; • changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; • changes in the yield curve; • changes in prepayment rates on the loans we own or that underlie our investment securities; • regulatory and structural changes in the residential loan market and its impact on non-agency mortgage markets; • increased rates of default or delinquencies and/or decreased recovery rates on our assets; • our ability to obtain and maintain financing arrangements on terms favorable to us or at all; • changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets; • conditions in the market for Residential Investments and Agency RMBS; • legislative and regulatory actions by the U.S. Congress, U.S. Department of the Treasury, the Federal Reserve and other agencies and instrumentalities in response to the economic effects of the COVID-19 pandemic; • the forbearance program included in the Coronavirus Aid, Relief, and Economic Security Act; • our ability to make distributions to our stockholders in the future; • our ability to maintain our qualification as a REIT for federal tax purposes; and • our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended. We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "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, 2020 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible 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. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. 47 Special Note Regarding COVID-19 Pandemic In March 2020, the global pandemic associated with COVID-19 and the related economic conditions caused financial and mortgage-related asset markets to come under extreme duress, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. The illiquidity was exacerbated by inadequate demand for MBS among primary dealers due to balance sheet constraints. Refer to the "Financing activities–Forbearance and Reinstatement Agreements" section below for further details related to the impact these economic conditions had on us. Although market conditions have improved during 2021, the COVID-19 pandemic is ongoing with new variants emerging despite growing vaccination rates. As a result, the full impact of COVID-19 (including the impact of any significant variants) on the mortgage REIT industry, credit markets, and, consequently, on our financial condition and results of operations for future periods remains uncertain. Future developments with respect to the COVID-19 pandemic, including among others, the emergence of new variants, the effectiveness and durability of current vaccines and government stimulus measures, could materially and adversely affect our business, operations, operating results, financial condition, liquidity, or capital levels. Executive Summary During the third quarter of 2021, we continued to focus our efforts on growing our portfolio of Residential Credit Investments, including investing in residential mortgage loans with the intent to securitize these assets as market conditions permit. We completed one Non-QM securitization and continued to purchase Non-QM Loans. In addition, we also began purchasing GSE Non-Owner Occupied Loans. Our loan purchases have continued to be from both third-party originators as well as Arc Home. During the quarter, we sold our remaining CMBS portfolio and also received full repayment on our remaining two Commercial Loans, completely exiting our Commercial Investments. We also opportunistically repurchased shares of our common stock under our existing Repurchase Program. The information presented below provides a summary of investment and capital activity during the third quarter. Investment and Capital Activity • Purchased $396.9 million of Non-QM Loans, $176.6 million of which were purchased from Arc Home, a licensed mortgage originator we invest in alongside other Angelo Gordon funds; ◦ Amended certain financing arrangements to increase the maximum uncommitted borrowing capacity to $1.1 billion to finance the acquisition of Non-QM Loans, of which $641.3 million of the maximum uncommitted borrowing capacity remains available as of September 30, 2021; ◦ Subsequent to quarter end, purchased an additional $281.3 million of Non-QM Loans, inclusive of $80.8 million purchased from Arc Home; • Purchased $213.4 million of GSE Non-Owner Occupied Loans, $66.1 million of which were purchased from Arc Home; ◦ Entered into a financing arrangement with a maximum uncommitted borrowing capacity of $500 million to finance the acquisition of GSE Non-Owner Occupied Loans, of which $302.6 million of the maximum uncommitted borrowing capacity remains available as of September 30, 2021; ◦ Subsequent to quarter end, purchased an additional $105.1 million of GSE Non-Owner Occupied Loans, inclusive of $50.1 million purchased from Arc Home; • Participated in a rated securitization in which Non-QM Loans with a fair value of $282.5 million were securitized, converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; • Exited remaining commercial investments ◦ Received total proceeds of $74.1 million from the full repayment of our Commercial Loans, inclusive of all accrued or deferred interest outstanding; ◦ Sold our remaining CMBS portfolio for gross proceeds of $33.7 million; • Sold remaining directly held Agency Excess MSR portfolio to Arc Home for proceeds of $2.7 million; and • Accretive repurchase of 258,755 shares of common stock for $2.8 million, representing a weighted average cost of $11.00 per share. ◦ Subsequent to quarter end, repurchased 61,104 shares of common stock for $0.7 million, representing a weighted average cost of $11.59 per share. Approximately $11.0 million of common stock remained authorized for future share repurchases under the Repurchase Program after these repurchases. 48 Our company We are a mortgage REIT that opportunistically invests in a diversified risk adjusted portfolio of Residential Investments and Agency RMBS. The Company has an approximate 44.6% interest in Arc Home, an affiliate that originates residential mortgage loans and retains the mortgage servicing rights associated with the loans that it originates. We are a Maryland corporation and are externally managed by our Manager, a wholly-owned subsidiary of Angelo Gordon, pursuant to a management agreement. Our Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust ("REIT"), for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT, with the exception of our domestic taxable REIT subsidiaries ("TRS"). We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. Our investment portfolio Credit - Residential Investments Our Residential Investments include: • Non-QM Loans, which include: ◦ Residential mortgage loans that do not qualify for the Consumer Finance Protection Bureau's (the "CFPB") safe harbor provision for "qualifying mortgages," or "QM." When held directly, these investments are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. ◦ Non-QM Loans held alongside other private funds under the management of Angelo Gordon are held in one of our unconsolidated subsidiaries, Mortgage Acquisition Trust I LLC ("MATT") (see the "Contractual obligations" section below for more detail). These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. ◦ Non-QM Loans in securitized form that are issued by MATT. The securitizations typically take the form of various classes of notes. These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. • GSE Non-Owner Occupied Loans include loans that are underwritten in accordance with U.S. government-sponsored entity ("GSE") guidelines and are secured by investment properties. These investments are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. • Re/Non-Performing Loans, which include: ◦ RPLs or NPLs in securitized form issued by an entity in which we own an equity interest and that we hold alongside other private funds under the management of Angelo Gordon. The securitizations typically take the form of equity and various classes of notes. These investments are included in the "RMBS" and "Investments in debt and equity of affiliates" line items on our consolidated balance sheets. ◦ RPLs or NPLs we hold through interests in certain consolidated trusts. These investments are secured by residential real property, including prime, Alt-A, and subprime mortgage loans, and are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. • Land Related Financing includes first mortgage loans we originate to third-party land developers and home builders for purposes of the acquisition and horizontal development of land. These loans may be held through our unconsolidated subsidiaries. These loans are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. The Residential Investments that we own also include residential mortgage-backed securities ("RMBS") that are not issued or guaranteed by Ginnie Mae or a GSE. We collectively refer to these investments as our Non-Agency RMBS. The mortgage loan collateral for residential Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by U.S. government agencies or U.S. government-sponsored entities. Our Non-Agency RMBS include investment grade and non-investment grade fixed and floating-rate securities. 49 Agency RMBS Our investment portfolio includes RMBS. Certain of the assets in our RMBS portfolio have a guarantee of principal and interest by a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or by a GSE such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac. We refer to these securities as Agency RMBS ("Agency RMBS"). Our Agency RMBS includes fixed rate securities held as mortgage pass-through securities. Investment classification Throughout this report, (1) we use the terms "credit portfolio" and "credit investments" to refer to our Residential Investments and Commercial Investments, inclusive of investments held within affiliated entities but exclusive of AG Arc (discussed below); (2) we refer to our Re/Non-Performing Loans (exclusive of our RPLs or NPLs in securitized form), Non-QM Loans (exclusive of those in securitized form), Land Related Financing, and commercial real estate loans, collectively, as our "loans"; (3) we use the term "credit securities" to refer to our credit portfolio, excluding loans; and (4) we use the term "real estate securities" or "securities" to refer to our Agency RMBS portfolio, exclusive of Excess MSRs, and our credit securities. Our "investment portfolio" refers to our combined Agency RMBS portfolio and credit portfolio and encompasses all of the investments described above. We also use the term "GAAP investment portfolio" which consists of (i) our Agency RMBS, exclusive of (x) to-be-announced securities ("TBAs"), if any, and (y) any investment classified as "Other assets" on our consolidated balance sheets (our "GAAP Agency RMBS portfolio"), and (ii) our credit portfolio, exclusive of (x) all investments held within affiliated entities and (y) any investments classified as "Other assets" on our consolidated balance sheets (our "GAAP credit portfolio"). See Note 2 to the "Notes to Consolidated Financial Statements" for a discussion of our investments held within affiliated entities. For a reconciliation of our investment portfolio to our GAAP investment portfolio, see the GAAP Investment Portfolio Reconciliation Table below. This presentation of our investment portfolio is consistent with how our management evaluates our business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. Arc Home LLC We, alongside private funds under the management of Angelo Gordon, through AG Arc LLC, one of our indirect subsidiaries ("AG Arc"), formed Arc Home LLC ("Arc Home"). Arc Home originates residential mortgage loans and retains the mortgage servicing rights associated with the loans that it originates. From time to time, Arc Home may sell originated loans to us or other private funds under the management of Angelo Gordon. See Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding transactions with affiliates. Market conditions The mortgage and housing markets remained well-supported during the third quarter of 2021 due to strong fundamentals, demand for risk assets and active new-issue markets. Delinquency and forbearance rates continued to decline and home prices reached a record high, nearing a 20% rise year-over-year. We expect that the mortgage and housing sectors will continue to benefit from these factors as well as in part to excess savings accrued from various federal stimulus disbursements. As various relief programs sunset, the term-driven expiration of mortgage payment forbearance may lead to some near-term headwinds in mortgage and other consumer debt investments. However we believe this risk should be offset by strong demand for labor, rising collateral prices and persistently tight new mortgage underwriting. Non-Agency Loans and Securitizations: Issuance continued to remain strong with almost $6 billion of Non-QM transactions pricing in the third quarter of 2021, on pace for well over $20 billion for 2021. Agency-eligible mortgage loans backed by investment properties and second homes were also issued into the Private Label Securities ("PLS") market with over $7 billion of transactions pricing, as originators looked for liquidity away from the GSE’s as a result of amendments made to the Preferred Stock Purchase Agreement earlier in the year. It is highly unlikely for that pace of issuance to continue, as the relevant amendments were subsequently suspended on September 14th allowing originators to sell their production directly to the GSE’s without limitation. However, given the strength of the PLS execution demonstrated over the course of the quarter, some originators may still look to private capital to diversify their funding sources, leading to issuance volume well above the 2019 and 2020 levels of approximately $2 billion per year. Appetite for securitized debt continued to remain strong, leading to loan pricing remaining relatively high throughout the quarter. 50 Agency RMBS: Nominal spreads on Agency RMBS widened in July as compared to benchmark rates, but stabilized throughout the remainder of the quarter. While the Federal Reserve has strongly suggested that it will officially initiate the tapering of asset purchases at their November meeting, continued strong bank buying has supported valuations. Payups on specified pools held up well as banks and money managers purchased specified pools over TBAs with dollar roll beginning to weaken as a result of the anticipated tapering from the Federal Reserve. Non-Agency RMBS: Spreads for securitized residential debt sectors were mixed during the third quarter, as most Credit Risk Transfer tranches tightened 10-20 basis points while other assets such as AAA Non-QM tranches and legacy mortgages were mostly unchanged. Despite relatively minimal spread movement, many of the same themes that have supported the sector persisted during the quarter, including favorable collateral fundamentals, record high home prices, demand for yield, and continued employment gains. Issuance of new RMBS fell approximately 15% to $46 billion in the third quarter and, for the first nine months of 2021, RMBS issuance totaled $140 billion, rising 66% from year-ago levels and 43% from the first nine months of 2019. Comparisons to 2020 are considerably skewed by the issuance lull immediately following the outbreak of the COVID-19 pandemic. In light of various market uncertainties, in particular the pervasive uncertainties of the COVID-19 pandemic for the U.S. and global economy, there can be no assurance that the trends and conditions described above will not change in a manner materially adverse to the mortgage REIT industry and/or our Company. Results of Operations Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our investments in residential mortgages in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income or loss available to common stockholders is our net interest income, less our cost of hedging, which represents the difference between the interest earned on our investment portfolio and the costs of financing and economic hedges in place on our investment portfolio, as well as any income or losses from our equity investments in affiliates. 51 Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020 The table below presents certain information from our consolidated statements of operations for the three months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 September 30, 2020 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 19,629 $ 9,717 $ 9,912 Interest expense 7,197 4,357 2,840 Total Net Interest Income 12,432 5,360 7,072 Other Income/(Loss) Net realized gain/(loss) (5,460) (14,431) 8,971 Net interest component of interest rate swaps (1,184) (13) (1,171) Unrealized gain/(loss), net 29,461 21,465 7,996 Other income/(loss), net — (10) 10 Total Other Income/(Loss) 22,817 7,011 15,806 Expenses Management fee to affiliate 1,693 1,698 (5) Other operating expenses 5,010 5,929 (919) Restructuring related expenses — 1,345 (1,345) Servicing fees 849 540 309 Total Expenses 7,552 9,512 (1,960) Income/(loss) before equity in earnings/(loss) from affiliates 27,697 2,859 24,838 Equity in earnings/(loss) from affiliates 6,882 17,187 (10,305) Net Income/(Loss) 34,579 20,046 14,533 Gain on Exchange Offers, net — 539 (539) Dividends on preferred stock (4,586) (5,563) 977 Net Income/(Loss) Available to Common Stockholders $ 29,993 $ 15,022 $ 14,971 Interest income Interest income is calculated using the effective interest method for our GAAP investment portfolio and calculated based on the actual coupon rate. Interest income increased from September 30, 2020 to September 30, 2021 primarily due to an increase in the size of our portfolio. The weighted average amortized cost of our GAAP investment portfolio increased by $1.3 billion from $0.7 billion for the three months ended September 30, 2020 to $2.0 billion for the three months ended September 30, 2021. The increase was primarily driven by purchases of Non-QM Loans, GSE Non-Owner Occupied Loans, and Agency RMBS during the period. This increase was offset by a decrease of 1.24% in the weighted average yield of our GAAP investment portfolio from 5.22% for the three months ended September 30, 2020 to 3.98% for the three months ended September 30, 2021. 52 Interest expense Interest expense is calculated based on the actual financing rate and the outstanding financing balance of our GAAP investment portfolio. Interest expense increased from September 30, 2020 to September 30, 2021 primarily due to an increase in the amount of financing on our GAAP investment portfolio during the period. The weighted average financing balance on our GAAP investment portfolio increased by $0.9 billion from $0.3 billion for the three months ended September 30, 2020 to $1.2 billion for the three months ended September 30, 2021. This was offset by a decrease of 4.49% in the weighted average financing rate on our GAAP investment portfolio from 6.83% for the three months ended September 30, 2020 to 2.34% for the three months ended September 30, 2021. Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the three months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 September 30, 2020 Sales of real estate securities $ (4,795) $ (8,477) Sales of loans and loans transferred to or sold from Other assets 640 (4,795) Settlement of derivatives and other instruments (1,305) (1,159) Total Net realized gain/(loss) $ (5,460) $ (14,431) Net interest component of interest rate swaps Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps. Net interest component of interest rate swaps decreased from September 30, 2020 to September 30, 2021 primarily due to an increase in the size of our interest rate swap portfolio. As of the September 30, 2021, we held an interest rate swap portfolio with a notional value of $720.0 million, a weighted average receive-variable rate of 0.13%, and a weighted average pay-fix rate of 0.73%. As of the September 30, 2020, we held an interest rate swap portfolio with a notional value of $180.0 million, a weighted average receive-variable rate of 0.13%, and a weighted average pay-fix rate of 0.42%. Unrealized gain/(loss), net The following table presents a summary of Unrealized gain/(loss), net for the three months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 September 30, 2020 Real estate securities $ 5,388 $ 9,281 Loans 20,662 10,214 Excess mortgage servicing rights 1,507 4,127 Derivatives 2,095 1,164 Securitized debt (191) (3,321) Total Unrealized gain/(loss), net $ 29,461 $ 21,465 Management fee to affiliate Our management fee is based upon a percentage of our Stockholders’ Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity. Management fees remained relatively flat from September 30, 2020 to September 30, 2021. 53 Other operating expenses This amount is primarily comprised of professional fees, directors’ and officers’ ("D&O") insurance and directors’ fees, as well as certain expenses reimbursable to the Manager. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence, and other services. Refer to the "Contractual obligations" section below for more detail on certain expenses reimbursable to the Manager. The following table presents a summary of expenses within Other operating expenses broken out between non-investment related expenses and investment related expenses for the three months ended September 30, 2021 and 2020 (in thousands): Three Months Ended September 30, 2021 September 30, 2020 Non Investment Related Expenses Affiliate expense reimbursement - Operating expenses (1) $ 1,125 $ 1,697 Professional fees 343 729 D&O insurance 349 321 Directors' compensation 169 138 Other 275 118 Total Non Investment Related Expenses 2,261 3,003 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 189 643 Affiliate expense reimbursement - Transaction related expenses 250 — Residential mortgage loan related expenses 479 597 Transaction related expenses and deal related performance fees 1,763 1,590 Other 68 96 Total Investment Expenses 2,749 2,926 Total Other operating expenses $ 5,010 $ 5,929 (1) For the year ended December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $0.8 million. For the three months ended September 30, 2021, $0.2 million of the reduction in reimbursable expenses is included within the "Affiliated expense reimbursement - Operating expenses" line item above. Restructuring related expenses During the three months ended September 30, 2020, restructuring related expenses relate to legal and consulting fees primarily incurred in connection with restructuring our debt and capital structure. Servicing fees We incur servicing fee expenses in connection with the servicing of our residential mortgage loans. As of September 30, 2021 and September 30, 2020, we owned residential mortgage loans with a fair value of $1.6 billion and $0.4 billion, respectively. The increase in the fair value of residential mortgage loans was a result of net purchases of Non-QM Loans and GSE Non-Owner Occupied Loans in 2021. As a result, servicing fees increased from the three months ended September 30, 2020 to the three months ended September 30, 2021. 54 Equity in earnings/(loss) from affiliates Equity in earnings/(loss) from affiliates represents our share of earnings and profits of investments held within affiliated entities. Substantially all of these investments are comprised of real estate securities, loans, and our investment in AG Arc. The below table reconciles the net income/(loss) to the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Three Months Ended September 30, 2021 September 30, 2020 Non-QM Loans $ (644) $ 1,828 AG Arc (1) 399 13,407 Land Related Financing 598 728 Other (2) 6,529 1,224 Equity in earnings/(loss) from affiliates $ 6,882 $ 17,187 (1) The earnings/(loss) at AG Arc during the three months ended September 30, 2021 were primarily the result of $1.0 million of net income related to Arc Home's lending and servicing operations, offset by $(0.7) million related to changes in the fair value of the MSR portfolio held by Arc Home. The earnings recognized by AG Arc do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the three months ended September 30, 2021, we eliminated $1.6 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. (2) The earnings for the three months ended September 30, 2021 were primarily the result of accelerated accretion as a result of paydowns on certain Re/Non-Performing Loans held at discounts. Gain on Exchange Offers, net We completed an exchange offer during the third quarter of 2020. As a result of the exchange offer, we exchanged a total of 42,820 shares of our 8.25% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), 31,085 shares of our 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock"), and 29,355 shares of our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") for a total of 172,100 shares of common stock. We recognized a gain of $0.5 million in connection with the exchange offer, which is net of related expenses. 55 Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020 The table below presents certain information from our consolidated statements of operations for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 September 30, 2020 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 45,976 $ 63,354 $ (17,378) Interest expense 16,552 32,941 (16,389) Total Net Interest Income 29,424 30,413 (989) Other Income/(Loss) Net realized gain/(loss) (5,124) (257,183) 252,059 Net interest component of interest rate swaps (3,498) 910 (4,408) Unrealized gain/(loss), net 58,995 (186,567) 245,562 Other income/(loss), net 37 1,487 (1,450) Total Other Income/(Loss) 50,410 (441,353) 491,763 Expenses Management fee to affiliate 5,014 5,525 (511) Other operating expenses 13,859 11,416 2,443 Restructuring related expenses — 9,949 (9,949) Excise tax — (815) 815 Servicing fees 2,136 1,685 451 Total Expenses 21,009 27,760 (6,751) Income/(loss) before equity in earnings/(loss) from affiliates 58,825 (438,700) 497,525 Equity in earnings/(loss) from affiliates 34,496 (23,571) 58,067 Net Income/(Loss) from Continuing Operations 93,321 (462,271) 555,592 Net Income/(Loss) from Discontinued Operations — 361 (361) Net Income/(Loss) 93,321 (461,910) 555,231 Gain on Exchange Offers, net 472 539 (67) Dividends on preferred stock (14,199) (16,897) 2,698 Net Income/(Loss) Available to Common Stockholders $ 79,594 $ (478,268) $ 557,862 Interest income Interest income decreased from September 30, 2020 to September 30, 2021 primarily due to a decrease in the weighted average yield of our portfolio. The weighted average yield of our GAAP investment portfolio decreased by 1.16% from 4.72% for the nine months ended September 30, 2020 to 3.56% for the nine months ended September 30, 2021. This decrease was coupled with a decrease of $0.1 billion in the weighted average amortized cost of our GAAP investment portfolio from $1.8 billion for the nine months ended September 30, 2020 to $1.7 billion for the nine months ended September 30, 2021. Interest expense Interest expense decreased from September 30, 2020 to September 30, 2021 primarily due to a decrease in the amount of financing on our GAAP investment portfolio during the period. The weighted average financing balance on our GAAP investment portfolio during the period decreased by $0.2 billion from $1.3 billion for the nine months ended September 30, 56 2020 to $1.1 billion for the nine months ended September 30, 2021. Additionally, the weighted average financing rate on our GAAP investment portfolio decreased by 1.41% from 3.45% for the nine months ended September 30, 2020 to 2.04% for the nine months ended September 30, 2021. Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 September 30, 2020 Sales/Seizures of real estate securities (1) $ (9,677) $ (131,070) Sales of loans and loans transferred to or sold from Other assets 5,126 (63,560) Settlement of derivatives and other instruments (573) (62,553) Total Net realized gain/(loss) $ (5,124) $ (257,183) (1) Certain realized losses on real estate securities during the nine months ended September 30, 2020 were a result of financing counterparty seizures. Net interest component of interest rate swaps We recognized losses on net interest component of interest rate swaps for the nine months ended September 30, 2021 compared with gains for the nine months September 30, 2020 primarily due to the difference in terms on the outstanding interest rate swaps during the periods coupled with exiting our interest rate swap portfolio in the first quarter of 2020. As of the September 30, 2021, we held an interest rate swap portfolio with a notional value of $720.0 million, a weighted average receive-variable rate of 0.13%, and a weighted average pay-fix rate of 0.73%. Unrealized gain/(loss), net The following table presents a summary of Unrealized gain/(loss), net for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 September 30, 2020 Real estate securities $ 1,122 $ (145,146) Loans 44,786 (39,624) Excess mortgage servicing rights 1,399 603 Derivatives 14,781 (10,915) Securitized debt (3,093) 8,515 Total Unrealized gain/(loss), net $ 58,995 $ (186,567) Other income/(loss), net Other income/(loss), net includes gains or losses on foreign currency pertaining to the effects of remeasuring the monetary assets and liabilities of our foreign investments into U.S. dollars using foreign currency exchange rates at the end of the reporting period. During the nine months ended September 30, 2020, the value of GBP relative to USD decreased, resulting in a gain on the liabilities held in foreign currencies. As of September 30, 2021, we did not hold any positions denominated in foreign currencies. Management fee to affiliate Management fees decreased from September 30, 2020 to September 30, 2021 primarily due to a decrease in our Stockholders' Equity as calculated pursuant to our Management Agreement. 57 Other operating expenses The following table presents a summary of expenses within Other operating expenses broken out between non-investment related expenses and investment related expenses for the nine months ended September 30, 2021 and 2020 (in thousands): Nine Months Ended September 30, 2021 September 30, 2020 Non Investment Related Expenses Affiliate expense reimbursement - Operating expenses (1) $ 3,375 $ 5,273 Professional fees 2,048 1,922 D&O insurance 1,137 669 Directors' compensation 504 529 Equity based compensation to affiliate — 163 Other 689 545 Total Non Investment Related Expenses 7,753 9,101 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 518 967 Affiliate expense reimbursement - Transaction related expenses 330 — Residential mortgage loan related expenses 1,729 2,176 Transaction related expenses and deal related performance fees (2) 3,401 (1,256) Other 128 428 Total Investment Expenses 6,106 2,315 Total Other operating expenses $ 13,859 $ 11,416 (1) For the year ended December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $0.8 million. For the nine months ended September 30, 2021, $0.6 million of the reduction in reimbursable expenses is included within the "Affiliated expense reimbursement - Operating expenses" line item above. (2) The increase in Transaction related expenses and deal related performance fees from the nine months ended September 30, 2020 to the nine months ended September 30, 2021 is the result of expenses incurred in 2021 in relation to securitizations of Non-QM Loans and the reversal of previously accrued deal related performance fees in the period ended March 31, 2020 due to a decline in the price of the related assets, as well as the seizure of such assets by financing counterparties. Restructuring related expenses Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement and subsequent Reinstatement Agreement in 2020. Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement and the Reinstatement Agreement. Excise tax During the nine months ended September 30, 2020, we reversed previously accrued excise taxes primarily as a result of losses associated with COVID-19. We did not record any excise taxes for the nine months ended September 30, 2021. Servicing fees Servicing fees increased from the nine months ended September 30, 2020 to the nine months ended September 30, 2021 as a result of net purchases of Non-QM Loans and GSE Non-Owner Occupied Loans during 2021. 58 Equity in earnings/(loss) from affiliates The below table reconciles the net income/(loss) to the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Nine Months Ended September 30, 2021 September 30, 2020 Non-QM Loans (1) $ 15,277 $ (33,016) AG Arc (2) 4,033 12,891 Land Related Financing 1,848 1,865 Other (3) 13,338 (5,311) Equity in earnings/(loss) from affiliates $ 34,496 $ (23,571) (1) The earnings within MATT for the nine months ended September 30, 2021 were primarily the result of mark-to-market gains on its Non-QM Loan portfolio and net interest income, offset by expenses. The losses generated within MATT for the nine months ended September 30, 2020 were primarily the result of mark-to-market losses on its Non-QM Loan portfolio and related financing, offset by net interest income. (2) The earnings/(loss) at AG Arc during the nine months ended September 30, 2021 were primarily the result of $5.4 million of net income related to Arc Home's lending and servicing operations, offset by $(1.9) million related to changes in the fair value of the MSR portfolio held by Arc Home. The earnings recognized by AG Arc also do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the nine months ended September 30, 2021, we eliminated $3.5 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. (3) The earnings for the nine months ended September 30, 2021 were primarily the result of accelerated accretion as a result of paydowns on certain Re/Non-Performing Loans held at discounts. Gain on Exchange Offers, net We completed two privately negotiated exchange offers during the nine months ended September 30, 2021. As a result of the exchange offers, we exchanged 153,325 shares of our Series A Preferred Stock, 437,087 shares of our Series B Preferred Stock, and 154,383 shares of our Series C Preferred Stock for a total of 1,367,264 shares of common stock. We recognized a gain of $0.5 million in connection with the offers. During the nine months ended September 30, 2020, we completed an exchange offer whereby a total of 42,820 shares of Series A Preferred Stock, 31,085 shares of Series B Preferred Stock, and 29,355 shares of Series C Preferred Stock were exchanged for a total of 172,100 shares of common stock. We recognized a gain of $0.5 million in connection with the exchange offer. Book value and Adjusted book value per share On July 12, 2021, we announced a one-for-three reverse stock split of our outstanding shares of common stock. The reverse stock split was effected following the close of business on July 22, 2021. All per share amounts and common shares outstanding for all periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split. Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP, including all vested shares issued to our Manager, and our independent directors under our equity incentive plans as of quarter-end. As of September 30, 2021, the net proceeds for the Series A Preferred Stock, Series B Preferred Stock, and our Series C Preferred Stock were $40.1 million, $90.2 million, and $90.2 million, respectively. As of September 30, 2021, the liquidation preference for the issued and outstanding Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock was $41.6 million, $93.2 million, and $93.2 million, respectively. As of September 30, 2021 and December 31, 2020, our book value per common share calculated using stockholders’ equity less net proceeds on our preferred stock as the numerator was $16.92 and $12.40, respectively. As of September 30, 2021 and December 31, 2020, our adjusted book value per common share calculated using stockholders’ equity less the liquidation preference of our preferred stock as the numerator was $16.45 and $11.81, respectively Presentation of investment, financing and hedging activities In the "Investment activities," "Financing activities," "Hedging activities," and "Liquidity and capital resources" sections of this Item 2, where we disclose our investment portfolio and the related financing arrangements, we have presented this information 59 inclusive of (i) unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method and (ii) TBAs, which are accounted for as derivatives under GAAP. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. Net interest margin and leverage ratio Net interest margin and leverage ratio are metrics that management believes should be considered when evaluating the performance of our investment portfolio. GAAP net interest margin and non-GAAP net interest margin, a non-GAAP financial measure, are calculated by subtracting the weighted average cost of funds from the weighted average yield for our GAAP investment portfolio and our investment portfolio, respectively, both of which exclude cash held by us and any net TBA position. The weighted average yield on our credit portfolio and our Agency RMBS portfolio represents an effective interest rate, which utilizes all estimates of future cash flows and adjusts for actual prepayment and cash flow activity as of quarter-end. The calculation of weighted average yield is weighted on fair value at quarter-end. The weighted average cost of funds is the sum of the weighted average funding costs on total financing arrangements outstanding at quarter-end, including all non-recourse financing arrangements, and our weighted average hedging cost, which is the weighted average of the net pay rate on our interest rate swaps. GAAP and non-GAAP cost of funds are weighted by the outstanding financing arrangements on our GAAP investment portfolio and our investment portfolio, respectively, and the fair value of securitized debt at quarter-end. Our leverage ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the availability and price of our financing, the available capacity to finance our assets, and anticipated regulatory developments. See the "Financing activities" section below for more detail on our leverage ratio. The table below sets forth the net interest margin and leverage ratio on our investment portfolio as of September 30, 2021 and September 30, 2020 and a reconciliation to the net interest margin and leverage ratio on our GAAP investment portfolio: September 30, 2021 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 3.60 % 18.69 % 4.30 % Cost of Funds (b) 1.92 % 3.16 % 1.96 % Net Interest Margin 1.68 % 15.53 % 2.34 % Leverage Ratio (c) 3.8x (d) 1.8x September 30, 2020 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 4.40 % 9.13 % 5.32 % Cost of Funds (b) 2.76 % 4.90 % 3.02 % Net Interest Margin 1.64 % 4.23 % 2.30 % Leverage Ratio (c) 1.8x (d) 0.9x (a) Excludes net TBA position, if any. (b) Includes cost of non-recourse financing arrangements. (c) The leverage ratio on our GAAP investment portfolio represents GAAP leverage. The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section. (d) Refer to the "Financing activities" section below for an aggregate breakout of leverage. Core Earnings One of our objectives is to generate net income from net interest margin on the portfolio, and management uses Core Earnings, as one of several metrics, to help measure our performance against this objective. Management believes that this non-GAAP measure, when considered with our GAAP financial statements, provides supplemental information useful for investors to help evaluate our financial performance. However, management also believes that our definition of Core Earnings has important 60 limitations as it does not include certain earnings or losses our management team considers in evaluating our financial performance. Our presentation of Core Earnings may not be comparable to similarly-titled measures of other companies, who may use different calculations. This non-GAAP measure should not be considered a substitute for, or superior to, Net Income/(loss) available to common stockholders or Net income/(loss) per diluted common share calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated. We define Core Earnings, a non-GAAP financial measure, as Net Income/(loss) available to common stockholders excluding (i) (a) unrealized gains/(losses) on real estate securities, loans, derivatives and other investments, inclusive of our investment in AG Arc, and (b) net realized gains/(losses) on the sale or termination of such instruments, (ii) any transaction related expenses incurred in connection with the acquisition or disposition of our investments, (iii) accrued deal-related performance fees payable to Arc Home and third party operators to the extent the primary component of the accrual relates to items that are excluded from Core Earnings, such as unrealized and realized gains/(losses), (iv) realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and the derivatives intended to offset changes in the fair value of those net mortgage servicing rights, (v) deferred taxes recognized at our taxable REIT subsidiaries, if any, (vi) any foreign currency gain/(loss) relating to monetary assets and liabilities, (vii) income from discontinued operations, and (viii) any gains/(losses) associated with exchange transactions on our common and preferred stock. Items (i) through (viii) above include any amount related to those items held in affiliated entities. Management considers the transaction related expenses referenced in (ii) above to be similar to realized losses incurred at the acquisition or disposition of an asset and does not view them as being part of its core operations. Management views the exclusion described in (iv) above to be consistent with how it calculates Core Earnings on the remainder of its portfolio. Management excludes all deferred taxes because it believes deferred taxes are not representative of current operations. Core Earnings include the net interest income and other income earned on our investments on a yield adjusted basis, including TBA dollar roll income/(loss) or any other investment activity that may earn or pay net interest or its economic equivalent. The below table includes Core Earnings for the three and nine months ended September 30, 2020. However, during those periods, we determined that Core Earnings did not appropriately capture our business, liquidity, results of operations, financial condition, or our ability to make distributions to our stockholders due to the impact of COVID-19 on our business. Refer to the "Results of Operations" section above for a detailed discussion of our GAAP financial results. A reconciliation of "Net Income/(loss) available to common stockholders" to Core Earnings for the three and nine months ended September 30, 2021 and 2020 is set forth below (in thousands, except per share data): Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Net Income/(loss) available to common stockholders $ 29,993 $ 15,022 $ 79,594 $ (478,268) Add (Deduct): Net realized (gain)/loss 5,460 14,431 5,124 257,183 Unrealized (gain)/loss, net (29,461) (21,465) (58,995) 186,567 Transaction related expenses and deal related performance fees (1) 2,484 2,167 4,496 (673) Equity in (earnings)/loss from affiliates (6,882) (17,187) (34,496) 23,571 Net interest income and expenses from equity method investments (2)(3) 15,000 14,148 24,861 26,614 Net (income)/loss from discontinued operations — — — (361) Other (income)/loss, net — 10 (14) (1,483) (Gains) from Exchange Offers, net — (539) (472) (539) Dollar roll income/(loss) (1,113) — (1,113) 322 Core Earnings $ 15,481 $ 6,587 $ 18,985 $ 12,933 Core Earnings, per Diluted Share (4) $ 0.96 $ 0.57 $ 1.24 $ 1.16 (1) For the three months ended September 30, 2021 and 2020, total transaction related expenses and deal related performance fees included $2.0 million and $1.6 million, respectively, recorded within the "Other operating expenses" line item and $0.5 million and $0.6 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. For the nine months ended September 30, 2021 and 2020, total transaction related expenses and deal related performance fees included $3.7 million and $(1.3) million, respectively, recorded within the "Other operating expenses" line item and $0.8 million and $0.6 million, respectively, recorded 61 within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2) For the three months ended September 30, 2021 and 2020, $0.2 million or $0.01 per share and $1.8 million or $0.16 per share, respectively; and for the nine months ended September 30, 2021 and 2020, $1.3 million or $0.08 per share and $(3.2) million or $(0.29) per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives net of taxes were excluded from Core Earnings per diluted share. (3) Core income or loss recognized by AG Arc does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the three and nine months ended September 30, 2021, we eliminated $1.6 million and $3.5 million of intra-entity profits recognized by Arc Home, respectively, and also decreased the cost basis of the underlying loans we purchased by the same amount. We did not eliminate any intra-entity profits for the three and nine months ended September 30, 2020. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. (4) All per share amounts for all periods presented have been adjusted to reflect the one-for-three reverse stock split. Investment activities We aim to allocate capital to investment opportunities with attractive risk/return profiles in our target asset classes. We recently have focused our efforts on growing our portfolio of Residential Credit Investments, investing in residential mortgage loans with the intent to securitize these assets as market conditions permit. We are also currently investing in 30 Year Fixed Rate Agency RMBS to utilize excess liquidity. Our investment and capital allocation decisions depend on prevailing market conditions and compliance with Investment Company Act and REIT tests, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. As a result, in reacting to market conditions and taking into account a variety of other factors, including liquidity, duration, and interest rate expectations, the mix of our assets changes over time as we opportunistically deploy capital. We actively evaluate our investments based on factors including, among others, the characteristics of the underlying collateral, geography, expected return, expected future prepayment trends, supply of and demand for our investments, costs of financing, costs of hedging, expected future interest rate volatility, and the overall shape of the U.S. Treasury and interest rate swap yield curves. The following table presents a detailed break-down of our investment portfolio as of September 30, 2021 and December 31, 2020 and a reconciliation to our GAAP Investment Portfolio ($ in thousands): Fair Value Percent of Investment Portfolio Fair Value Leverage Ratio (a) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Residential Investments $ 1,713,539 $ 691,478 77.2 % 49.5 % 1.1x 0.2x Commercial Investments — 182,296 — % 13.1 % — 0.9x Agency RMBS 506,526 521,843 22.8 % 37.4 % 4.1x 6.1x Total: Investment Portfolio $ 2,220,065 $ 1,395,617 100.0 % 100.0 % 1.8x 1.5x Investments in Debt and Equity of Affiliates (b) $ 102,949 $ 217,964 N/A N/A (c) (c) Total: GAAP Investment Portfolio $ 2,117,116 $ 1,177,653 N/A N/A 3.8x 2.4x (a) The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section and is calculated by dividing each investment type's total recourse financing arrangements by its allocated equity (described in the chart below). Cash posted as collateral has been allocated pro-rata by each respective asset class's Economic Leverage amount. The Economic Leverage Ratio excludes any fully non-recourse financing arrangements and includes any net receivables or payables on TBA. The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage. (b) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (c) Refer to the "Financing activities" section below for an aggregate breakout of leverage. We allocate our equity by investment type using the fair value of our investment portfolio, less any associated leverage, inclusive of any long TBA position (at cost). We allocate all non-investment portfolio related assets and liabilities to our investment portfolio based on the characteristics of such assets and liabilities in order to sum to stockholders' equity per the consolidated balance sheets. Our equity allocation method is a non-GAAP methodology and may not be comparable to the similarly titled measure or concepts of other companies, who may use different calculations and allocation methodologies. 62 The following table presents a summary of the allocated equity of our investment portfolio as of September 30, 2021 and December 31, 2020 ($ in thousands): Allocated Equity Percent of Equity September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 Residential Investments $ 380,817 $ 229,183 77.8 % 56.0 % Commercial Investments — 99,668 — % 24.3 % Agency RMBS 108,932 80,854 22.2 % 19.7 % Total $ 489,749 $ 409,705 100.0 % 100.0 % The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of September 30, 2021 and December 31, 2020 ($ in thousands): September 30, 2021 December 31, 2020 Instrument Current Face Amortized Cost Unrealized Mark- to-Market Fair Value (1) Weighted Average Coupon (2) Weighted Average Yield Weighted Average Life (Years) (3) Fair Value (1) Credit Investments: Residential Investments Non-QM Loans (4) $ 975,501 $ 1,014,231 $ 15,768 $ 1,029,999 5.02 % 3.64 % 4.10 $ — GSE Non-Owner Occupied Loans 207,801 212,445 2,188 214,633 3.63 % 3.11 % 6.15 — MATT Non-QM Loans (5) 921,459 72,606 576 73,182 0.80 % 11.13 % 0.67 153,200 Re/Non-Performing Loans 431,656 360,578 14,724 375,302 3.57 % 8.34 % 6.61 478,565 Land Related Financing 17,660 17,660 — 17,660 14.50 % 14.50 % 0.81 22,824 Prime 6,966 2,272 421 2,693 3.50 % 15.06 % 10.04 8,665 Alt-A/Subprime — — — — — % — % — 11,496 Credit Risk Transfer — — — — — % — % — 13,308 Non-U.S. RMBS — — — — — % — % — 3,100 Interest Only and Excess MSR 26,698 187 (117) 70 N/A 7.22 % 3.67 320 Total Residential Investments 2,587,741 1,679,979 33,560 1,713,539 3.70 % 5.05 % 3.45 691,478 Total Commercial Investments — — — — — % — % — 182,296 Total Credit Investments 2,587,741 1,679,979 33,560 1,713,539 3.70 % 5.05 % 3.45 873,774 Agency RMBS: 30 Year Fixed Rate 497,214 510,011 (3,485) 506,526 2.19 % 1.77 % 7.18 518,352 Excess MSR — — — — — % — % — 3,491 Total Agency RMBS 497,214 510,011 (3,485) 506,526 2.19 % 1.77 % 7.18 521,843 Total: Investment Portfolio $ 3,084,955 $ 2,189,990 $ 30,075 $ 2,220,065 3.41 % 4.30 % 4.05 $ 1,395,617 Investments in Debt and Equity of Affiliates $ 970,338 $ 101,626 $ 1,323 $ 102,949 1.40 % 18.69 % 0.69 $ 217,964 Total: GAAP Investment Portfolio $ 2,114,617 $ 2,088,364 $ 28,752 $ 2,117,116 3.92 % 3.60 % 5.59 $ 1,177,653 (1) Refer to Note 2 to the "Notes of the Consolidated Financial Statements (unaudited)" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. Our assets held through Investments in debt and equity of affiliates are included in the "MATT Non-QM Loans," "Re/Non-Performing Loans," "Land Related Financing," and "Excess MSR" line items above. (2) Equity residuals, principal only securities, and Excess MSRs with a zero coupon rate are excluded from this calculation. (3) Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. (4) Prior to 2021, we acquired Non-QM Loans through our equity method investment in MATT. This line item represents direct purchases of Non-QM Loans, which began in Q1 2021. (5) As of September 30, 2021, this line item primarily includes retained tranches from securitizations. 63 Credit Investments The following table presents the fair value of the securities and loans in our credit portfolio and a reconciliation to our GAAP credit portfolio (in thousands): Fair Value September 30, 2021 December 31, 2020 Residential loans (1) $ 1,637,165 $ 563,263 Commercial real estate loans — 125,508 Total loans 1,637,165 688,771 Non-Agency RMBS (2) $ 76,374 $ 128,215 CMBS (3) — 56,788 Total Credit securities 76,374 185,003 Total Credit Investments $ 1,713,539 $ 873,774 Less: Investments in Debt and Equity of Affiliates $ 102,949 $ 217,547 Total GAAP Credit Portfolio $ 1,610,590 $ 656,227 (1) Includes Re/Non-Performing Loans, Non-QM Loans,GSE Non-Owner Occupied Loans, and Land Related Financing not held in securitized form. (2) Includes Prime, Alt-A/Subprime, Credit Risk Transfer, Non-U.S RMBS, Interest-Only and Excess MSR, Re/Non-Performing Loans, and Non-QM Loans held in securitized form. (3) Includes Conduit, Single-Asset/Single-Borrower, Freddie Mac K-Series, and Interest-Only investments. Residential loans The following tables present certain information regarding credit quality for certain categories within our Residential loan portfolio ($ in thousands): September 30, 2021 December 31, 2020 Unpaid Principal Balance Weighted Average (1)(2) Aging by Unpaid Principal Balance (1)(2) Fair Value Current LTV Ratio Current FICO (3) Current 30-59 Days 60-89 Days 90+ Days Fair Value Non-QM Loans $ 975,501 $ 1,029,999 68.49 % 738 $ 966,612 $ 6,995 $ 1,192 $ 702 $ — GSE Non-Owner Occupied Loans 207,801 214,633 64.25 % 757 207,411 390 — — — MATT Non-QM Loans 11,626 12,245 58.45 % 680 5,715 809 — 5,102 100,264 Re/Non-Performing Loans 400,014 362,628 79.21 % 638 258,884 36,036 14,737 83,182 440,175 Land Related Financing 17,660 17,660 N/A N/A N/A N/A N/A N/A 22,824 Total Residential loans $ 1,612,602 $ 1,637,165 71.46 % 709 $ 1,438,622 $ 44,230 $ 15,929 $ 88,986 $ 563,263 Less: Investments in Debt and Equity of Affiliates 29,572 30,099 59.41 % 679 5,771 809 — 5,332 127,822 Total GAAP Residential Loans $ 1,583,030 $ 1,607,066 71.56 % 709 $ 1,432,851 $ 43,421 $ 15,929 $ 83,654 $ 435,441 (1) Weighted average and aging data excludes residual positions where we consolidate a securitization and the positions are recorded on our balance sheet as Re/Non-Performing Loans. There may be limited data available regarding the underlying collateral of the residual positions. (2) Weighted average and aging data excludes Land Related Financing. (3) Weighted average current FICO excludes borrowers where FICO scores were not available. See Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for a breakout of geographic concentration of credit risk within loans we include in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets. 64 Credit securities The following table presents the fair value of our credit securities portfolio by credit rating as of September 30, 2021 and December 31, 2020 (in thousands): Credit Rating - Credit Securities (1) September 30, 2021 (2)(3) December 31, 2020 (2)(3) AAA $ — $ 630 BB 5,706 9,037 B 18,394 25,318 Below B — 17,046 Not Rated 52,274 132,972 Total: Credit Securities $ 76,374 $ 185,003 Less: Investments in Debt and Equity of Affiliates $ 72,850 $ 89,725 Total: GAAP Basis $ 3,524 $ 95,278 (1) Represents the minimum rating for rated assets of S&P, Moody and Fitch credit ratings, stated in terms of the S&P equivalent. (2) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (3) As of September 30, 2021 and December 31, 2020, includes $0.1 million of credit Excess MSRs. The following tables present the geographic concentration of the underlying collateral for our Non-Agency RMBS portfolio ($ in thousands). September 30, 2021 December 31, 2020 State Fair Value (1) Percentage (1) State Fair Value (2) Percentage (2) California $ 33,279 43.6 % California $ 40,593 32.5 % New York 17,377 22.8 % New York 17,742 14.2 % Florida 4,350 5.7 % Florida 10,982 8.8 % New Jersey 2,188 2.9 % Texas 4,216 3.4 % Pennsylvania 1,672 2.2 % New Jersey 4,028 3.2 % Other 17,508 22.8 % Other 50,654 37.9 % Total $ 76,374 100.0 % Total $ 128,215 100.0 % (1) As of September 30, 2021, Non-Agency RMBS fair value includes $0.1 million of credit Excess MSRs. (2) As of December 31, 2020, Non-Agency RMBS fair value includes $3.2 million of investments where there was no data regarding the underlying collateral, including $0.1 million of credit Excess MSRs. These positions were excluded from the percent calculation. Agency RMBS The following table presents the fair value ($ in thousands) and the Constant Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the periods presented. Fair Value CPR (1) Agency RMBS September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 30 Year Fixed Rate $ 506,526 $ 518,352 5.1 % 2.7 % (1) Represents the weighted average monthly CPRs published during the period for our in-place portfolio. 65 Investments in debt and equity of affiliates The below table details our investments in debt and equity of affiliates as of September 30, 2021 and December 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Assets Liabilities Equity Assets Liabilities Equity MATT Non-QM Loans (1) $ 73,182 $ (45,686) $ 27,496 $ 153,200 $ (111,135) $ 42,065 Re/Non-Performing Loans (2) 12,107 (5,185) 6,922 41,523 (5,588) 35,935 Land Related Financing 17,660 — 17,660 22,824 — 22,824 Total Residential Investments 102,949 (50,871) 52,078 217,547 (116,723) 100,824 Excess MSR — — — 417 — 417 Total Investments excluding AG Arc 102,949 (50,871) 52,078 217,964 (116,723) 101,241 AG Arc, at fair value 51,949 — 51,949 45,341 — 45,341 Cash and Other assets/(liabilities) (3) 5,899 (803) 5,096 5,279 (1,194) 4,085 Investments in debt and equity of affiliates $ 160,797 $ (51,674) $ 109,123 $ 268,584 $ (117,917) $ 150,667 (1) As of September 30, 2021 and December 31, 2020, Non-QM Loans excluded loans with an unpaid principal balance of $8.2 million and $17.3 million, respectively, whereby an affiliate of MATT has the right, but not the obligation, to repurchase loans from a trust that are 90 days or more delinquent at its discretion. These loans, which are eligible to be repurchased, would be recorded on the balance sheet of MATT, an unconsolidated equity method investee of the Company, with a corresponding and offsetting liability. (2) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt. (3) Includes financing arrangements of $(9.4) thousand on real estate owned as of December 31, 2020. Financing activities We use leverage to finance the purchase of our investment portfolio. Our leverage has primarily been in the form of repurchase agreements, revolving facilities, and securitized debt. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date and typically have a term 30 to 90 days. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The size of the haircut reflects the perceived risk associated with the pledged asset. Haircuts may change as our financing arrangements mature or roll and are sensitive to governmental regulations. Interest rates on borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at which time we may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. We have also used revolving facilities, which are typically longer term in nature than repurchase agreements, to finance loans. Interest rates on these facilities are based on prevailing rates corresponding to the terms of the borrowings, and interest is paid on a monthly basis. Repurchase agreements and revolving facilities, which we refer to as our financing arrangements, are generally mark-to-market with respect to margin calls and recourse to us. We had outstanding financing arrangements with five counterparties as of September 30, 2021 and December 31, 2020. Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity and liquidity, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that we fail to comply with the covenants contained in these financing arrangements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the associated agreement. As of September 30, 2021, we are in compliance with all of our financial covenants. We also use securitized debt to finance our loan portfolio. Securitized debt is generally non-mark-to-market with respect to margins calls and non-recourse to us. 66 Forbearance and Reinstatement Agreements In connection with the market disruption created by the COVID-19 pandemic, in March 2020, we received notifications of alleged events of default and deficiency notices from several of our financing counterparties. We engaged in discussions with our financing counterparties and, as a result, entered into a series of forbearance agreements (collectively, the "Forbearance Agreement") with certain of our financing counterparties (the "Participating Counterparties") pursuant to which each Participating Counterparty agreed to forbear from exercising its rights and remedies with respect to events of default and any and all other defaults under the applicable financing arrangement (each, a "Bilateral Agreement") for the period ending June 15, 2020. On June 10, 2020, we and the Participating Counterparties entered into a reinstatement agreement (the "Reinstatement Agreement"), pursuant to which the Forbearance Agreement was terminated and each Participating Counterparty permanently waived all existing and prior events of default under the applicable Bilateral Agreements. Pursuant to the Reinstatement Agreement, the Bilateral Agreements were reinstated with certain amendments to reflect current market terms (i.e., increased haircuts and higher coupons), updated financial covenants, and various reporting requirements from us to the Participating Counterparties, releases, certain netting obligations and cross-default provisions. As a result of the Reinstatement Agreement, default interest on our outstanding borrowings under the Bilateral Agreements ceased to accrue as of June 10, 2020, all cash margin was applied to outstanding balances owed by us, and principal and interest payments on the underlying collateral were permitted to flow to and be used by us, just as it was prior to the Forbearance Agreements. In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the Forbearance Agreement have been terminated and released. We also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent. Concurrently, on June 10, 2020, we entered a separate reinstatement agreement with one of our financing counterparties on substantially the same terms as those set forth in the Reinstatement Agreement. Refer to Note 12 in the "Notes to Consolidated Financial Statements (unaudited)" for more information on deficiencies that are now settled. Recourse and non-recourse financing We utilize both recourse and non-recourse debt to finance our portfolio. Non-recourse financing includes securitized debt and other non-recourse financing. Recourse financing includes the secured debt from our Manager, as further described in the "Contractual obligations–Secured debt" section below, and other recourse financing. The below table provides detail on the breakout between recourse and non-recourse financing as of September 30, 2021 and December 31, 2020 (in thousands): September 30, 2021 December 31, 2020 Recourse financing - Financing arrangements $ 1,187,539 $ 569,644 Recourse financing - Secured debt — 10,393 Non-recourse financing - Securitized debt, at fair value 708,421 355,159 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates (1) 23,851 111,135 Total 1,919,811 1,046,331 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 27,020 5,597 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates (1) 23,851 111,135 Total Investments in Debt and Equity of Affiliates 50,871 116,732 Total: GAAP Basis $ 1,868,940 $ 929,599 (1) On January 29, 2021, we and private funds under the management of Angelo Gordon entered into an amendment with respect to our Restructured Financing Arrangement in MATT. The amendment serves to convert the existing financing to a mark-to-market facility with respect to margin calls that is recourse to us and the private funds managed by Angelo Gordon that invest in MATT up to our and each funds' allocation of the $50.0 million commitment to MATH, 67 which is further described in the "Contractual Obligations–MATT Financing Arrangement Restructuring" section below and Note 12 to the "Notes of the Consolidated Financial Statements (unaudited)." See Note 6 to the "Notes to Consolidated Financial Statements (unaudited)" for a breakout of the "Financing arrangements" line item on our consolidated balance sheets. See Note 2 and Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for more detail on securitized debt and our consolidated variable interest entities. Leverage We define GAAP leverage as the sum of (1) our GAAP financing arrangements, net of any restricted cash posted on such financing arrangements, (2) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled, and (3) securitized debt, at fair value. We define Economic Leverage, a non-GAAP metric, as the sum of: (i) our GAAP leverage, exclusive of any fully non-recourse financing arrangements, (ii) financing arrangements held through affiliated entities, net of any restricted cash posted on such financing arrangements, exclusive of any financing utilized through AG Arc, any adjustment related to unsettled trades as described in (2) in the previous sentence, and any non-recourse financing arrangements and (iii) our net TBA position (at cost), if any. The calculations in the tables below divide GAAP leverage and Economic Leverage by our GAAP stockholders’ equity to derive our leverage ratios. The following tables present a reconciliation of our Economic Leverage ratio back to GAAP ($ in thousands). September 30, 2021 Leverage Stockholders’ Equity Leverage Ratio GAAP Leverage $ 1,864,352 $ 489,749 3.8x Financing arrangements through affiliated entities 50,871 Non-recourse financing arrangements (1) (732,272) Net TBA (receivable)/payable adjustment (318,295) Economic Leverage $ 864,656 $ 489,749 1.8x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. December 31, 2020 Leverage Stockholders’ Equity Leverage Ratio GAAP Leverage $ 979,303 $ 409,705 2.4x Financing arrangements through affiliated entities 116,688 Non-recourse financing arrangements (1) (466,294) Economic Leverage $ 629,697 $ 409,705 1.5x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. Hedging activities Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, TBAs, and other financial instruments such as short positions in U.S. Treasury securities. In addition, we may utilize Eurodollar Futures, U.S. Treasury Futures, British Pound Futures, and Euro Futures (collectively, "Futures"). In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements (unaudited)" for more information. Dividends Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net 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 financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution 68 in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, (vi) methods of depreciation and (vii) differences between GAAP income or losses in our TRS’s and taxable income resulting from dividend distributions to the REIT from our TRS’s. Undistributed taxable income is based on current estimates and is not finalized until we file our annual tax return for that tax year, typically in October of the following year. We did not have any undistributed taxable income as of September 30, 2021. Refer to the "Results of operations" section above for more detail. On March 27, 2020, we announced that our Board of Directors approved a suspension of our quarterly dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, beginning with the preferred dividend that would have been declared in May 2020, as well as a suspension of the quarterly dividend on the common stock, beginning with the dividend that normally would have been declared in March 2020, in order to conserve capital and improve its liquidity position during the market volatility due to the COVID-19 pandemic. Under the terms of the Articles Supplementary governing our series of preferred stock, we cannot pay cash dividends with respect to our common stock if dividends on our preferred stock are in arrears. On December 17, 2020, we paid our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock dividends that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of $1.54689, $1.50 and $1.50 per share, respectively. On December 22, 2020, our Board of Directors declared a dividend of $0.09 per common share for the fourth quarter 2020 which was paid on January 29, 2021 to shareholders of record at the close of business on December 31, 2020. During the first through third quarters of 2021, we declared its preferred and common dividends in the ordinary course of business. On July 12, 2021, we announced a one-for-three reverse stock split of our outstanding shares of common stock. The reverse stock split was effected following the close of business on July 22, 2021. All per share amounts and common shares outstanding for all periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split. The following table details our common stock dividends declared during the nine months ended September 30, 2021: Declaration Date Record Date Payment Date Cash Dividend Per Share 3/22/2021 4/1/2021 4/30/2021 $ 0.18 6/15/2021 6/30/2021 7/30/2021 0.21 9/15/2021 9/30/2021 10/29/2021 0.21 Total $ 0.60 We did not declare any common stock dividends during the nine months ended September 30, 2020. The following tables detail our preferred stock dividends declared and paid during the nine months ended September 30, 2021 and 2020: 2021 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/16/2021 2/26/2021 3/17/2021 $ 0.51563 $ 0.50 $ 0.50 5/17/2021 5/28/2021 6/17/2021 0.51563 0.50 0.50 7/30/2021 8/31/2021 9/17/2021 0.51563 0.50 0.50 Total $ 1.54689 $ 1.50 $ 1.50 2020 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/14/2020 2/28/2020 3/17/2020 $ 0.51563 $ 0.50 $ 0.50 69 Liquidity and capital resources Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs. Our principal sources of cash as of September 30, 2021 consisted of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase real estate securities, loans and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations. At September 30, 2021, we had $143.6 million of liquidity, which consisted of $101.7 million of cash and $41.9 million of unencumbered assets available to support our liquidity needs. Refer to the "Contractual obligations" section of this Item 2 for additional obligations that could impact our liquidity. Margin requirements The fair value of our real estate securities and loans fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions 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 in the ordinary course of our business. In seeking to manage effectively the margin requirements established by our lenders, we maintain a position of cash and, when owned, unpledged Agency RMBS. 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. Typically, if interest rates increase or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will need 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. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in the residential mortgage market. 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 may force us to liquidate assets into potentially unfavorable market conditions and harm our results of operations and financial condition. Further, an unexpected rise in interest rates and a corresponding fall in the fair value of our securities may also force us to liquidate assets under difficult market conditions, thereby harming our results of operations and financial condition, in an effort to maintain sufficient liquidity to meet increased margin calls. Similar to the margin calls that we receive on our borrowing agreements, we may also receive margin calls on our derivative instruments when their fair value declines. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the terms of the derivatives involved. We may also receive margin calls on our derivatives based on the implied volatility of interest rates. Our posting of collateral with our counterparties can be done in cash or securities, and is generally bilateral, which means that if the fair value of our interest rate hedges increases, our counterparty will be required to post collateral with us. Refer to the "Liquidity risk – derivatives" section of Item 3 below for a further discussion on margin. Refer to the "Financing activities–Forbearance and Reinstatement Agreements" section above for information on the impact of COVID-19 on margin calls in 2020. 70 Cash Flows The below details changes to our cash, cash equivalents, and restricted cash for the nine months ended September 30, 2021 and 2020 (in thousands). Nine Months Ended September 30, 2021 September 30, 2020 Change Cash and cash equivalents and restricted cash, Beginning of Period $ 62,318 $ 125,369 $ (63,051) Net cash provided by (used in) operating activities (1) 19,765 (2,284) 22,049 Net cash provided by (used in) investing activities (2) (878,706) 2,491,879 (3,370,585) Net cash provided by (used in) financing activities (3) 925,449 (2,565,086) 3,490,535 Net change in cash and cash equivalents and restricted cash 66,508 (75,491) 141,999 Effect of exchange rate changes on cash 10 (178) 188 Cash and cash equivalents and restricted cash, End of Period $ 128,836 $ 49,700 $ 79,136 (1) Cash provided by or used in operating activities is primarily attributable to net interest income less operating expenses for the nine months ended September 30, 2021 and 2020, respectively. (2) Cash used in investing activities for the nine months ended September 30, 2021 was primarily attributable to purchases of investments less sales of investments and principal repayments of investments. Cash provided by investing activities for the nine months ended September 30, 2020 was primarily attributable to sales of investments and principal repayments of investments, offset by purchases of investments. The difference period over period is primarily due to significant sales in 2020 as a result of the global COVID-19 pandemic. (3) Cash provided by financing activities for the nine months ended September 30, 2021 was primarily attributable to borrowings under financing arrangements offset by repayments of financing arrangements and dividend payments. Cash used in financing activities for the nine months ended September 30, 2020 was primarily attributable to repayments of financing arrangements offset by borrowings under financing arrangements. The difference period over period is primarily due to a reduction in financing arrangements as a result of significant sales in 2020 due to the global COVID-19 pandemic. Stock repurchase programs On November 3, 2015, our Board of Directors authorized a stock repurchase program ("Repurchase Program") to repurchase up to $25.0 million of our outstanding common stock. Such authorization does not have an expiration date. As part of the Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. Subject to applicable securities laws, the timing, manner, price and amount of any repurchases of common stock under the Repurchase Program may be determined by our discretion, using available cash resources. Shares of common stock repurchased by us under the Repurchase Program, if any, will be cancelled and, until reissued, will be deemed to be authorized but unissued shares of common stock as required by Maryland law. The Repurchase Program may be suspended or discontinued by us at any time and without prior notice and the authorization does not obligate us to acquire any particular amount of common stock. The cost of the acquisition of shares of our own stock in excess of the aggregate par value of the shares first reduces additional paid-in capital, to the extent available, with any residual cost applied against retained earnings. We repurchased 0.3 million shares under the Repurchase Program during the three and nine months ended September 30, 2021. We did not repurchase shares under the Repurchase Program during the three and nine months ended September 30, 2020. Approximately $11.8 million of common stock remained authorized for future share repurchases under the Repurchase Program as of September 30, 2021. Equity distribution agreements On May 5, 2017, we entered into an equity distribution agreement with each of Credit Suisse Securities (USA) LLC and JMP Securities LLC (collectively, the "Sales Agents"), which we refer to as the "Equity Distribution Agreements," pursuant to which we may sell up to $100.0 million aggregate offering price of shares of our common stock from time to time through the Sales Agents, under the Securities Act of 1933. For the three months ended September 30, 2021, we did not issue any shares of common stock under the Equity Distribution Agreements. For the nine months ended September 30, 2021, we issued 1.0 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $13.1 million. 71 For the three and nine months ended September 30, 2020, we sold 0.1 million and 0.5 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $1.2 million and $4.7 million, respectively. Since inception of the program, we have issued approximately 2.2 million shares of common stock under the Equity Distribution Agreements for gross proceeds of $48.3 million. Exchange Offers The below details the privately negotiated exchange agreements with existing holders of our preferred shares exchanged for common shares during the nine months ended September 30, 2021. Subsequent to each transaction closed, the Preferred Stock exchanged pursuant to the exchange agreement was reclassified as authorized but unissued shares of preferred stock without designation as to class or series ($ in thousands). Preferred Shares Exchanged Date Shares of Series A Preferred Stock Shares of Series B Preferred Stock Shares of Series C Preferred Stock Total Preferred Stock Par Value Common Shares Exchanged March 17, 2021 153,325 350,609 — $ 12,598 937,462 June 14, 2021 — 86,478 154,383 6,022 429,802 As of September 30, 2021, we had outstanding 1,663,193 shares of Series A Preferred Stock, 3,727,641 shares of Series B Preferred Stock, and 3,728,795 shares of Series C Preferred Stock. Common stock issuance to the Manager Refer to "Contractual obligations–Management agreement" below for more detail related to the Second Management Agreement Amendment. Forward-looking statements regarding liquidity Based upon our current portfolio, leverage and available borrowing arrangements, we believe the net proceeds of our common equity offerings, preferred equity offerings, and private placements, combined with cash flow from operations and our available borrowing capacity will be sufficient to enable us to meet our anticipated liquidity requirements, including funding our investment activities, paying fees under our management agreement, funding our distributions to stockholders and paying general corporate expenses. Contractual obligations Management agreement On June 29, 2011, we entered into a management agreement with our Manager, pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders’ Equity, per annum. For purposes of calculating the management fee, "Stockholders’ Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on our financial statements. For the three and nine months ended September 30, 2021, we incurred management fees of approximately $1.7 million and $5.0 million, respectively. For the three and nine months ended September 30, 2020, we incurred management fees of approximately $1.7 million and $5.5 million, respectively. As of September 30, 2021 and December 31, 2020, we have recorded management fees payable of $1.7 million and $1.7 million, respectively. 72 Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager. Of the $5.0 million and $13.9 million of Other operating expenses for the three and nine months ended September 30, 2021, respectively, we have incurred $1.6 million and $4.2 million, respectively, representing a reimbursement of expenses. Of the $5.9 million and $11.4 million of Other operating expenses for the three and nine months ended September 30, 2020, respectively, we incurred $2.3 million and $6.2 million, respectively, representing a reimbursement of expenses. As of September 30, 2021 and December 31, 2020, we recorded a reimbursement payable to the Manager of $1.6 million and $1.8 million, respectively. For the year ended December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $0.8 million. On April 6, 2020, we executed an amendment to the management agreement, pursuant to which the Manager agreed to defer our payment of the management fee and reimbursement of expenses, effective the first quarter of 2020 through September 30, 2020. All deferred expense reimbursements were paid as of September 30, 2020. On September 24, 2020, we executed an amendment (the "Second Management Agreement Amendment") to the management agreement, pursuant to which the Manager agreed to receive a portion of the deferred base management fee in shares of common stock. Pursuant to the Second Management Agreement Amendment, the Manager agreed to purchase (i) 405,123 shares of common stock in full satisfaction of the deferred base management fee of $3.8 million payable by us in respect to the first and second quarters of 2020 and (ii) 51,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by us in respect to the third quarter of 2020. The shares of common stock issued to the Manager were valued at $9.45 per share based on the midpoint of the estimated range of our book value per share as of August 31, 2020. The remaining third quarter 2020 management fee was paid in the normal course of business. Secured debt On April 10, 2020, in connection with the first Forbearance Agreement, we issued a secured promissory note (the "Note") to the Manager evidencing a $10 million loan made by the Manager to us. Additionally, on April 27, 2020, in connection with the second Forbearance Agreement, we entered into an amendment to the Note to reflect an additional $10 million loan by the Manager to us. The $10 million loan made by the Manager on April 10, 2020 was repaid in full with interest when it matured on March 31, 2021, and the $10 million loan made on April 27, 2020 was repaid in full with interest when it matured on July 27, 2020. The unpaid balance of the Note accrued interest at a rate of 6.0% per annum. Interest on the Note was payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note. The Note and accrued interest on the Note, when outstanding, were included within the due to affiliates amount, which is included within the "Other Liabilities" line item in the consolidated balance sheets. Share-based compensation Effective on April 15, 2020 upon the approval of our stockholders at our 2020 annual meeting of stockholders, the 2020 Equity Incentive Plan provides for 666,666 shares of common stock to be issued. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during any fiscal year, shall not exceed $300,000 in total value (calculating the value of any such awards based on the grant date fair value). As of September 30, 2021, 606,372 shares of common stock were available to be awarded under the Equity Incentive Plan. Since our IPO, we have granted an aggregate of 35,264 and 60,294 shares of restricted common stock to our independent directors under our equity incentive plans, dated July 6, 2011 (the "2011 Equity Incentive Plans") and our 2020 Equity Incentive Plan, respectively. As of September 30, 2021, all shares of restricted common stock granted to our independent directors have vested. Following approval of our stockholders at our 2021 annual meeting of stockholders, the AG Mortgage Investment Trust, Inc. 2021 Manager Equity Incentive Plan (the "2021 Manager Plan") became effective on April 7, 2021 and provides for a maximum of 573,425 shares of common stock to be issued to our Manager. As of September 30, 2021, there were no shares or awards issued under the 2021 Manager Plan. 73 Further, since our IPO, we have issued 13,416 shares of restricted common stock and 40,000 restricted stock units to our Manager under our 2011 Equity Incentive Plans. As of July 1, 2020, all shares of restricted common stock and restricted stock units granted to our Manager have fully vested. Unfunded commitments See Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for detail on our commitments as of September 30, 2021. MATT Financing Arrangement Restructuring See Note 10 and Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for detail on the MATT Restructured Financing Arrangement and our commitments as of September 30, 2021. Off-balance sheet arrangements Our investments in debt and equity of affiliates primarily consist of real estate securities, loans, and our interest in AG Arc. Investments in debt and equity of affiliates are accounted for using the equity method of accounting. Certain of our investments in debt and equity of affiliates securitize residential mortgage loans and retain interests in the subordinated tranches of the transferred assets. These retained interests are included in the MATT Non-QM Loans and Re/Non-Performing Loans line items of our investment portfolio. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments i n debt and equity of affiliates. We have entered into TBA positions in connection with purchases of GSE Non-Owner Occupied Loans . We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. As of September 30, 2021, we had a net short TBA position with a net receivable amount of $318.3 million and fair market valu e of $316.9 million. We recorded $1.4 million in the "Other assets" line item on our consolidated balance sheets. In addition to our investments in debt and equity of affiliates and TBA positions described above, we also have commitments outstanding on certain loans. For additional information on our commitments as of September 30, 2021, refer to Note 12 of the "Notes to Consolidated Financial Statements (unaudited)." Exclusive of our investments in debt and equity of affiliates described above, we do not expect these commitments, taken as a whole, to be significant to, or to have a material impact on, our overall liquidity or capital resources or our operations. Critical accounting policies We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as of September 30, 2021 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in arriving at those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented. Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates that involve the exercise of judgment and the use of assumptions as to future uncertainties. A discussion of the critical accounting policies and the possible effects of changes in estimates on our consolidated financial statements is included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020 and in Note 2 to the "Notes to Consolidated Financial Statements (unaudited)." Our most critical accounting policies are believed to include (i) Valuation of financial instruments, (ii) Accounting for real estate securities, (iii) Accounting for loans, (iv) Interest income recognition, and (v) Financing arrangements. See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more detail on these critical accounting policies. These policies involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements 74 are based are reasonable at the time made and based upon information available to us at that time. We rely upon third-party pricing of our assets at each-quarter end to arrive at what we believe to be reasonable estimates of fair value, whenever available. For more information on our fair value measurements, see Note 5 to the "Notes to Consolidated Financial Statements (unaudited)." For a review of our significant accounting policies and the recent accounting pronouncements that may impact our results of operations, see Note 2 to the "Notes to Consolidated Financial Statements (unaudited)." Inflation Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Compliance with Investment Company Act and REIT tests We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes, of the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things, U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). As of December 31, 2020 and for the three months ended September 30, 2021, we determined that we maintained compliance with the 40% test requirements. If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this Report. Accordingly, in order to maintain our exempt status, we monitor our subsidiaries' compliance with Section 3(c)(5)(C) of the Investment Company Act, which exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The staff of the Securities and Exchange Commission, or the SEC, generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). As of December 31, 2020 and for the three months ended September 30, 2021, we determined that our subsidiaries maintained compliance with both the 55% Test and the 80% Test requirements. We calculate that at least 75% of our assets were real estate assets, cash and cash items and government securities for the year ended December 31, 2020. We also calculate that a sufficient portion of our revenue qualifies for the 75% gross income test and for the 95% gross income test rules for the year ended December 31, 2020. We believe we are currently in compliance with the REIT income and asset tests as well as all other REIT requirements including the ownership of our stock and the distribution of our taxable income. Therefore, for the year ended December 31, 2020, we believe that we qualified as a REIT under the Code. 75