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, 2021, and any subsequent filings. 43 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; • the persistence of labor shortages, supply chain imbalances, Russia’s invasion of Ukraine, inflation, and the potential for an economic recession; • 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; • our ability to enter into, or refinance, securitization transactions on the terms and pace anticipated or at all; • the degree to which our hedging strategies may or may not protect us from interest rate and credit risk volatility; • 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; • the forbearance program included in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES 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 (the "Investment Company Act"). 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, 2021 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. 44 Executive Summary During the second quarter of 2022, we continued to grow our portfolio of newly-originated residential mortgage loans and completed two securitizations in order to obtain long-term, non-recourse financing without mark-to-market margin calls. We also repurchased shares of our common stock under our repurchase program authorized in 2015 (the "2015 Repurchase Program"). See below for detail on these activities during the second quarter 2022. Investment Activity • Purchased Non-Agency Loans with a fair value of $336.0 million, $255.8 million of which were purchased from Arc Home, our residential mortgage loan originator in which we own an approximate 44.6% interest; • Purchased Agency-Eligible Loans with a fair value of $262.1 million, $50.1 million of which were purchased from Arc Home; and • Sold our remaining 30 Year Fixed Rate Agency RMBS for proceeds of $209.2 million. Financing Activity • Executed two rated securitizations converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; ◦ Securitized Non-Agency Loans with a total unpaid principal balance of $524.8 million; and ◦ Securitized Agency-Eligible Loans with a total unpaid principal balance of $425.5 million. Capital Activity • Utilized the remaining capacity under our 2015 Repurchase Program to repurchase 1.4 million shares of common stock for $11.0 million, representing a weighted average cost of $7.70 per share; and • Subsequent to quarter end, our Board of Directors authorized a new stock repurchase program (the "2022 Repurchase Program") to repurchase up to $15 million of our outstanding common stock. Our company We are a residential mortgage REIT with a focus on investing in a diversified risk-adjusted portfolio of residential mortgage-related assets in the U.S. mortgage market. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and capital appreciation. We focus our investment activities primarily on acquiring and securitizing newly-originated residential mortgage loans within the non-agency segment of the housing market. We obtain our assets through Arc Home, LLC ("Arc Home"), our residential mortgage loan originator in which we own an approximate 44.6% interest, and through other third-party origination partners. We finance our acquired loans through various financing lines on a short-term basis and utilize Angelo, Gordon & Co., L.P.'s ("Angelo Gordon") proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit. Through our ownership in Arc Home, we also have exposure to mortgage banking activities. Arc Home is a multi-channel licensed mortgage originator and servicer primarily engaged in the business of originating and selling residential mortgage loans while retaining the mortgage servicing rights associated with certain loans that it originates. 45 Our investment portfolio (which excludes our ownership in Arc Home) includes Residential Investments and Agency RMBS. Currently, our Residential Investments primarily consist of newly originated Non-Agency Loans and Agency-Eligible Loans, which we refer to as our target assets. In addition, we may also invest in other types of residential mortgage loans and other mortgage related assets. As of June 30, 2022, the Company's investment portfolio consisted of the following: Asset Class Description Target Assets Non-Agency Loans (1)(2)(3) • Non-Agency Loans are loans that do not conform to the underwriting guidelines of a government-sponsored enterprise ("GSE"). Non-Agency Loans consist of Qualified mortgage loans ("QM Loans") and Non-Qualified mortgage loans ("Non-QM Loans"). QM Loans are residential mortgage loans that comply with the Ability-To-Repay rules and related guidelines of the Consumer Finance Protection Bureau ("CFPB"). Agency-Eligible Loans (1)(2) • Agency-Eligible Loans are loans that are underwritten in accordance with GSE guidelines and are primarily secured by investment properties. Other Residential Mortgage Related Assets Re/Non-Performing Loans (1)(3) • Performing, re-performing, and non-performing loans are residential mortgage loans collateralized by a first lien mortgaged property. Land Related Financing (3) • First mortgage loans originated to third-party land developers and home builders for purposes of the acquisition and horizontal development of land. Agency RMBS (2) • Agency RMBS represent interests in pools of residential mortgage loans guaranteed by a GSE such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government such as Ginnie Mae. (1) Loans held directly are included in the "Securitized residential mortgage loans, at fair value" or the "Residential mortgage loans, at fair value" line items on our consolidated balance sheets. (2) Non-Agency Loans and Agency-Eligible Loans held in securitized form, as well as Agency RMBS, are included in the "Real estate securities, at fair value" line item on our consolidated balance sheets. (3) Investments held through our unconsolidated affiliates are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. This includes Non-Agency Loans held indirectly through our investment in Mortgage Acquisition Trust I LLC ("MATT"), certain retained tranches from unconsolidated Re/Non-Performing Loan securitizations which we hold alongside other private funds under the management of Angelo Gordon, and Land Related Financing. Our primary sources of income are net interest income from our investment portfolio, changes in the fair value of our investments, and income from our investment in Arc Home. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and any costs related to hedging. Income from our investment in Arc Home is generated through its mortgage banking activities which represents the origination and subsequent sale of residential mortgage loans and servicing income sourced from its portfolio of mortgage servicing rights. We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011. We conduct our operations to qualify and be taxed as a 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 business conducted in our domestic taxable REIT subsidiaries ("TRS") which are subject to corporate income tax. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act. Our Manager and Angelo Gordon We are externally managed by AG REIT Management, LLC (our "Manager"), a subsidiary of Angelo, Gordon & Co., L.P. ("Angelo Gordon"), pursuant to a management agreement. Pursuant to the terms of our management agreement, our Manager provides us with our management team, including our officers, along with appropriate support personnel. All of our officers are employees of Angelo Gordon or its affiliates. We do not have any employees. Our Manager is at all times subject to the supervision and oversight of our Board of Directors and has only such functions and authority as our Board of Directors delegates to it. Our Manager has delegated to Angelo Gordon the overall responsibility with respect to our Manager’s day-to-day duties and obligations arising under our management agreement. Through our relationship with our Manager, we benefit from the expertise and relationships that Angelo Gordon has established which provides us with resources to generate attractive risk-adjusted returns for our stockholders. Our management has significant experience in the mortgage industry and expertise in structured credit investments. We are able to leverage our 46 Manager, along with our ownership interest in Arc Home, a vertically integrated origination platform, to access investment opportunities in the non-agency residential mortgage loan market. This strategic advantage has enabled us to grow our investment portfolio and remain active in the securitization markets, utilizing Angelo Gordon's proprietary securitization platform to deliver non-agency investments to a diverse mix of investors. Market Conditions During the second quarter 2022, the financial markets were generally weaker due to the impact of and market perceptions about sustained inflation, Federal Reserve rate hikes, and recession, all of which helped to create volatile conditions. As a result, market liquidity decreased and credit spreads widened across structured credit products driving asset prices down. As mortgage rates continued to increase, borrower demand and origination volumes began to fall and prepayment rates for pre-pandemic securities continued to decline. Home price appreciation remained strong during the second quarter as the latest reading from the S&P/CoreLogic Case-Shiller Index showed home prices increased 20.4% year-over-year in April 2022. The persistently limited availability of homes against fundamentally strong housing demand continued to be a driving factor for these elevated readings, but the present conditions created by 5% and 6% prevailing 30-year fixed mortgage rates may not be reflected in the data until later in the year. Non-Agency Loans and Securitizations : Market conditions weakened throughout the second quarter with Non-QM AAA credit spreads widening from around 170 basis points over comparable maturity benchmark rates at the end of March 2022 to 220-250 basis points at the end of the second quarter. This compares with credit spreads of around 100 basis points in December 2021. Some of this spread widening can be attributed to issuers securitizing loans that are well below the prevailing market rate for comparable products as mortgage rates continue to rise. Freddie Mac’s Primary Mortgage Market Survey ended the first quarter at 4.67% compared with 5.70% at the end of the second quarter, indicative of how quickly rates have risen as the Federal Reserve continues with its monetary tightening in an effort to slow inflation. Originators faced considerable margin pressure with the significant reduction in non-cash out refinance activity, resulting in layoffs across the industry. Reports of closures of mortgage originators in weaker financial positions have begun to surface as well. Conversely, the increase in mortgage rates on new production should provide for attractive reinvestment opportunities into higher yielding assets for market participants with capital available to deploy. Non-Agency RMBS : Spreads for securitized residential debt sectors also continued to widen during the second quarter, reflecting the broader-market sentiment and the sharp rise in prevailing mortgage rates. The sharp rise in mortgage rates removed the option for nearly all active borrowers to refinance existing mortgages and extended durations across mortgage sub-sectors. Credit risk transfer tranches were as much as 100-250 basis points wider to end the second quarter with the most pronounced widening occurring at the bottom of the capital structure. An abundance of new issuance against declining refinance activity weighed on market participants over concerns that higher prevailing mortgage rates, and ultimately less refinancing activity, would extend durations of recently originated collateral pools. Quarterly new issuance of RMBS fell to $37 billion, down approximately 28% from the first quarter and 33% from a year ago. Prime jumbo and Agency-eligible investor loan issuance were each lower by around 60% quarter-over-quarter, falling to $4.7 billion and $2.4 billion, respectively. Despite the quarterly decline, year-to-date primary RMBS volume fell only around 8% against 2021, the most active year since the great financial crisis, and is up 67% compared to the first half of 2019. Agency RMBS : Nominal spreads on Agency mortgage-backed securities continued to widen in the second quarter alongside the Federal Reserve’s pivot to fighting inflation with a 75 basis point increase in policy rates. While supply slowed materially in response to the sharp rise in borrowing rates, elevated interest rate volatility, low levels of macroeconomic conviction, and fixed income mutual fund outflows all combined to keep buyers sidelined. The spread between current coupon and a blend of 5-year and 10-year U.S. Treasury yields widened by an additional 25 basis points during the quarter to levels not seen except during March 2020, since the great financial crisis. Despite attractive asset valuations, uncertainty in the macroeconomic landscape and interest rate volatility continue to pose headwinds to a recovery near-term. In light of various market uncertainties, such as uncertainties of the COVID-19 pandemic for the U.S. and global economy, geopolitical risks and interest rate volatility, 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. 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, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. 47 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 Notes 2 and 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. See below for further terms used when describing our investment portfolio. • Our "Investment portfolio" includes our Residential Investments and Agency RMBS, inclusive of TBAs. • Our "Residential Investments" refer to our residential mortgage loans and Non-Agency RMBS. ◦ "Residential mortgage loans" or "Loans" refer to our Non-Agency Loans, Agency-Eligible Loans, and Re/Non-Performing Loans (exclusive of retained tranches from unconsolidated securitizations) and Land Related Financing. ◦ "Non-Agency RMBS" refer to the retained tranches from unconsolidated securitizations of Non-Agency Loans and Re/Non-Performing Loans, as well as Agency-Eligible Loans held in securitized form. • "Real estate securities" refers to our Non-Agency RMBS and Agency RMBS, inclusive of TBAs. • Our "GAAP Investment portfolio" includes our GAAP Residential Investments and Agency RMBS. • Our "GAAP Residential Investments" refer to our Residential Investments excluding 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. 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. Although market conditions have improved, 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. 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 mortgage loans in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose residential 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. 48 Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021 The table below presents certain information from our consolidated statements of operations for the three months ended June 30, 2022 and 2021 (in thousands). Three Months Ended June 30, 2022 June 30, 2021 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 39,410 $ 14,228 $ 25,182 Interest expense 23,173 5,294 17,879 Total Net Interest Income 16,237 8,934 7,303 Other Income/(Loss) Net interest component of interest rate swaps (2,583) (1,573) (1,010) Net realized gain/(loss) 308 4,374 (4,066) Net unrealized gain/(loss) (46,351) 9,685 (56,036) Total Other Income/(Loss) (48,626) 12,486 (61,112) Expenses Management fee to affiliate 1,958 1,667 291 Other operating expenses 3,823 2,981 842 Transaction related expenses 3,735 1,885 1,850 Servicing fees 1,012 672 340 Total Expenses 10,528 7,205 3,323 Income/(loss) before equity in earnings/(loss) from affiliates (42,917) 14,215 (57,132) Equity in earnings/(loss) from affiliates (5,806) 1,278 (7,084) Net Income/(Loss) (48,723) 15,493 (64,216) Gain on Exchange Offers, net — 114 (114) Dividends on preferred stock (4,586) (4,689) 103 Net Income/(Loss) Available to Common Stockholders $ (53,309) $ 10,918 $ (64,227) Interest income Interest income is calculated using the effective interest method for our GAAP investment portfolio. Interest income increased from June 30, 2021 to June 30, 2022 primarily due to an increase in the size of our portfolio. The weighted average amortized cost of our GAAP investment portfolio increased by $1.9 billion from $1.7 billion for the three months ended June 30, 2021 to $3.6 billion for the three months ended June 30, 2022. The increase was primarily driven by purchases of Non-Agency Loans and Agency-Eligible Loans during the period. This increase was coupled with an increase of 1.03% in the weighted average yield of our GAAP investment portfolio from 3.32% for the three months ended June 30, 2021 to 4.35% for the three months ended June 30, 2022. 49 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 June 30, 2021 to June 30, 2022 primarily due to an increase in the amount of financing on our GAAP investment portfolio, inclusive of securitized debt, during the period. The weighted average financing balance on our GAAP investment portfolio, inclusive of securitized debt, increased by $1.8 billion from $1.5 billion for the three months ended June 30, 2021 to $3.3 billion for the three months ended June 30, 2022. The increase was driven by the issuance of securitized debt as well as financing added on purchases of Non-Agency Loans and Agency-Eligible Loans during the period. This was coupled with an increase of 1.41% in the weighted average financing rate on our GAAP investment portfolio, inclusive of securitized debt, from 1.41% for the three months ended June 30, 2021 to 2.82% for the three months ended June 30, 2022. 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. The net interest component of interest rate swap expense increased from June 30, 2021 to June 30, 2022 primarily due to an increase in the size of our interest rate swap portfolio as well as an increase in the net pay rate. As of June 30, 2022, we held an interest rate swap portfolio with a notional value of $1.4 billion, a weighted average receive-variable rate of 1.42%, and a weighted average pay-fix rate of 1.84%. As of June 30, 2021, we held an interest rate swap portfolio with a notional value of $0.8 billion, a weighted average receive-variable rate of 0.17%, and a weighted average pay-fix rate of 0.74%. Net realized gain/(loss) The following table presents a summary of net realized gain/(loss) for the three months ended June 30, 2022 and 2021 (in thousands). Three Months Ended June 30, 2022 June 30, 2021 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ 23 $ 7,859 Sales of real estate securities (17,832) (4,382) Settlement of derivatives and other instruments 18,117 897 Total Net realized gain/(loss) $ 308 $ 4,374 Net unrealized gain/(loss) The following table presents a summary of net unrealized gain/(loss) for the three months ended June 30, 2022 and 2021 (in thousands). Three Months Ended June 30, 2022 June 30, 2021 Residential mortgage loans $ (138,822) $ 4,341 Real estate securities 17,517 19,693 Securitized debt 84,461 (857) Derivatives (9,507) (15,798) Commercial loans — 2,482 Excess mortgage servicing rights — (176) Total Net unrealized gain/(loss) $ (46,351) $ 9,685 50 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 increased from June 30, 2021 to June 30, 2022 primarily due to an increase in our Stockholder's Equity as calculated pursuant to our Management Agreement resulting from our November 2021 common stock offering. Other operating expenses Other operating expenses is primarily comprised of professional fees, directors’ and officers’ ("D&O") insurance, directors’ compensation, and certain non-investment related and investment related 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 compensation 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 Other operating expenses broken out between non-investment related expenses and investment related expenses for the three months ended June 30, 2022 and 2021 (in thousands). Three Months Ended June 30, 2022 June 30, 2021 Non Investment Related Expenses Affiliate expense reimbursement - Operating expenses (1) $ 1,405 $ 1,000 Professional fees 470 480 D&O insurance 327 394 Directors' compensation 169 167 Other 164 258 Total Non Investment Related Expenses 2,535 2,299 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 241 48 Residential mortgage loan asset management fees 638 345 Other 409 289 Total Investment Related Expenses 1,288 682 Total Other operating expenses $ 3,823 $ 2,981 (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 June 30, 2021, $0.2 million of the waived reimbursable expenses is included within the "Affiliated expense reimbursement - Operating expenses" line item above. Transaction related expenses Transaction related expenses are expenses associated with purchasing and securitizing residential mortgage loans as well as certain other transaction and performance related fees associated with assets we invest in. These fees increased from the three months ended June 30, 2021 to the three months ended June 30, 2022 primarily as a result of the upfront expenses on the two securitizations completed in the second quarter of 2022, as compared with one completed in the second quarter of 2021. Servicing fees We incur servicing fee expenses in connection with the servicing of our residential mortgage loans. Servicing fees increased from the three months ended June 30, 2021 to the three months ended June 30, 2022 primarily due to an increase in the weighted average cost of our GAAP residential mortgage loan portfolio. The weighted average cost of our GAAP residential mortgage loan portfolio increased by $2.8 billion from $0.8 billion for the three months ended June 30, 2021 to $3.6 billion for the three months ended June 30, 2022 resulting from purchases of Non-Agency Loans and Agency-Eligible Loans. 51 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 which holds our investment in Arc Home. 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 June 30, 2022 June 30, 2021 MATT Non-QM Loans $ (370) $ 1,275 Land Related Financing 446 540 Re/Non-Performing Loans (172) 2,194 AG Arc (5,710) (2,706) Other — (25) Equity in earnings/(loss) from affiliates $ (5,806) $ 1,278 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Three Months Ended June 30, 2022 June 30, 2021 Interest income $ 1,702 $ 4,643 Interest expense 282 607 Total Net Interest Income 1,420 4,036 Net realized gain/(loss) — 1,501 Net unrealized gain/(loss) (1,398) (1,052) Total Other Income/(Loss) (1,398) 449 After-tax earnings/(loss) at AG Arc (1) (1,253) (1,133) Net unrealized gain/(loss) on investment in AG Arc (2,699) (143) Elimination of gains on loans sold to MITT (2) (1,758) (1,430) Total AG Arc Earnings/(Loss) (5,710) (2,706) Other operating expenses 118 501 Equity in earnings/(loss) from affiliates $ (5,806) $ 1,278 (1) The earnings/(loss) at AG Arc during the three months ended June 30, 2022 were primarily the result of $(1.6) million of losses related to Arc Home's lending and servicing operations, offset by $0.4 million related to changes in the fair value of the MSR portfolio held by Arc Home. The earnings/(loss) at AG Arc during the three months ended June 30, 2021 were primarily the result of $(2.8) million related to changes in the fair value of the MSR portfolio held by Arc Home, offset by $1.7 million of net income related to Arc Home's lending and servicing operations. (2) 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. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. Gain on Exchange Offers, net We completed a privately negotiated exchange offer during the three months ended June 30, 2021. As a result of the exchange offer, we exchanged 86,478 shares of our 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock") and 154,383 shares of our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") for a total of 429,802 shares of common stock. We recognized a gain of $0.1 million in connection with the offer. There were no exchange offers completed during the three months ended June 30, 2022. 52 Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021 The table below presents certain information from our consolidated statements of operations for the six months ended June 30, 2022 and 2021 (in thousands). Six Months Ended June 30, 2022 June 30, 2021 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 72,827 $ 26,347 $ 46,480 Interest expense 39,295 9,355 29,940 Total Net Interest Income 33,532 16,992 16,540 Other Income/(Loss) Net interest component of interest rate swaps (4,853) (2,314) (2,539) Net realized gain/(loss) 9,091 336 8,755 Net unrealized gain/(loss) (68,771) 29,534 (98,305) Other income/(loss), net — 37 (37) Total Other Income/(Loss) (64,533) 27,593 (92,126) Expenses Management fee to affiliate 3,920 3,321 599 Other operating expenses 7,511 7,131 380 Transaction related expenses 9,614 1,718 7,896 Servicing fees 2,019 1,287 732 Total Expenses 23,064 13,457 9,607 Income/(loss) before equity in earnings/(loss) from affiliates (54,065) 31,128 (85,193) Equity in earnings/(loss) from affiliates (7,860) 27,614 (35,474) Net Income/(Loss) (61,925) 58,742 (120,667) Gain on Exchange Offers, net — 472 (472) Dividends on preferred stock (9,172) (9,613) 441 Net Income/(Loss) Available to Common Stockholders $ (71,097) $ 49,601 $ (120,698) Interest income Interest income increased from the six months ended June 30, 2021 to the six months ended June 30, 2022 primarily due to an increase in the size of our portfolio. The weighted average amortized cost of our GAAP investment portfolio increased by $1.9 billion from $1.6 billion for the six months ended June 30, 2021 to $3.5 billion for the six months ended June 30, 2022. The increase was primarily driven by purchases of Non-Agency Loans and Agency-Eligible Loans during the period. This increase was coupled with an increase of 0.82% in the weighted average yield of our GAAP investment portfolio from 3.35% for the six months ended June 30, 2021 to 4.17% for the six months ended June 30, 2022. Interest expense Interest expense increased from the six months ended June 30, 2021 to the six months ended June 30, 2022 primarily due to an increase in the amount of financing on our GAAP investment portfolio, inclusive of securitized debt, during the period. The weighted average financing balance on our GAAP investment portfolio, inclusive of securitized debt, increased by $1.9 billion from $1.3 billion for the six months ended June 30, 2021 to $3.2 billion for the six months ended June 30, 2022. The increase was driven by the issuance of securitized debt as well as financing added on purchases of Non-Agency Loans and Agency- 53 Eligible Loans during the period. This was coupled with an increase of 1.09% in the weighted average financing rate on our GAAP investment portfolio, inclusive of securitized debt, from 1.39% for the six months ended June 30, 2021 to 2.48% for the six months ended June 30, 2022. Net interest component of interest rate swaps The net interest component of interest rate swap expense increased from June 30, 2021 to June 30, 2022 primarily due to an increase in the size of our interest rate swap portfolio as well as an increase in the net pay rate. As of June 30, 2022, we held an interest rate swap portfolio with a notional value of $1.4 billion, a weighted average receive-variable rate of 1.42%, and a weighted average pay-fix rate of 1.84%. As of June 30, 2021, we held an interest rate swap portfolio with a notional value of $0.8 billion, a weighted average receive-variable rate of 0.17%, and a weighted average pay-fix rate of 0.74%. Net realized gain/(loss) The following table presents a summary of net realized gain/(loss) for the six months ended June 30, 2022 and 2021 (in thousands). Six Months Ended June 30, 2022 June 30, 2021 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (35) $ 7,390 Sales of real estate securities (34,672) (4,882) Settlement of derivatives and other instruments 43,798 732 Sales of commercial loans — (2,904) Total Net realized gain/(loss) $ 9,091 $ 336 Net unrealized gain/(loss) The following table presents a summary of net unrealized gain/(loss) for the six months ended June 30, 2022 and 2021 (in thousands). Six Months Ended June 30, 2022 June 30, 2021 Residential mortgage loans $ (296,969) $ 15,170 Real estate securities 6,092 (4,266) Securitized debt 181,696 (2,902) Derivatives 40,410 12,686 Commercial loans — 8,954 Excess mortgage servicing rights — (108) Total Net unrealized gain/(loss) $ (68,771) $ 29,534 Management fee to affiliate Management fees increased from June 30, 2021 to June 30, 2022 primarily due to an increase in our Stockholder's Equity as calculated pursuant to our Management Agreement resulting from our November 2021 common stock offering. 54 Other operating expenses The following table presents a summary of Other operating expenses broken out between non-investment related expenses and investment related expenses for the six months ended June 30, 2022 and 2021 (in thousands). Six Months Ended June 30, 2022 June 30, 2021 Non Investment Related Expenses Affiliate expense reimbursement - Operating expenses (1) $ 2,810 $ 2,250 Professional fees 937 1,705 D&O insurance 654 788 Directors' compensation 337 335 Other 471 414 Total Non Investment Related Expenses 5,209 5,492 Investment Related Expenses Affiliate expense reimbursement - Deal related expenses 376 329 Residential mortgage loan asset management fees 1,182 772 Other 744 538 Total Investment Related Expenses 2,302 1,639 Total Other operating expenses $ 7,511 $ 7,131 (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 six months ended June 30, 2021, $0.4 million of the waived reimbursable expenses is included within the "Affiliated expense reimbursement - Operating expenses" line item above. Transaction related expenses Transaction related expenses increased from the six months ended June 30, 2021 to the six months ended June 30, 2022 primarily as a result of the upfront expenses on the five securitizations completed during the six months ended June 30, 2022, as compared with one completed during the six months ended June 30, 2021. Servicing fees Servicing fees increased from the six months ended June 30, 2021 to the six months ended June 30, 2022 primarily due to an increase in the weighted average cost of our GAAP residential mortgage loan portfolio. The weighted average cost of our GAAP residential mortgage loan portfolio increased by $2.7 billion from $0.6 billion for the six months ended June 30, 2021 to $3.3 billion for the six months ended June 30, 2022 resulting from purchases of Non-Agency Loans and Agency-Eligible Loans. 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). Six Months Ended June 30, 2022 June 30, 2021 MATT Non-QM Loans $ (1,259) $ 15,921 Land Related Financing 948 1,250 Re/Non-Performing Loans (169) 6,817 AG Arc (7,380) 3,634 Other — (8) Equity in earnings/(loss) from affiliates $ (7,860) $ 27,614 55 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Six Months Ended June 30, 2022 June 30, 2021 Interest income $ 3,151 $ 9,873 Interest expense 574 1,383 Total Net Interest Income 2,577 8,490 Net realized gain/(loss) (7) 1,496 Net unrealized gain/(loss) (2,820) 14,897 Total Other Income/(Loss) (2,827) 16,393 After-tax earnings/(loss) at AG Arc (1) 1,892 5,078 Net unrealized gain/(loss) on investment in AG Arc (5,158) 443 Elimination of gains on loans sold to MITT (2) (4,114) (1,887) Total AG Arc Earnings/(Loss) (7,380) 3,634 Other operating expenses 230 903 Equity in earnings/(loss) from affiliates $ (7,860) $ 27,614 (1) The earnings/(loss) at AG Arc during the six months ended June 30, 2022 were primarily the result of $3.5 million related to changes in the fair value of the MSR portfolio held by Arc Home, offset by $(1.6) million of losses related to Arc Home's lending and servicing operations. The earnings/(loss) at AG Arc during the six months ended June 30, 2021 were primarily the result of $6.3 million of net income related to Arc Home's lending and servicing operations, offset by $(1.2) million related to changes in the fair value of the MSR portfolio held by Arc Home. (2) 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. Refer to Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. Gain on Exchange Offers, net We completed two privately negotiated exchange offers during the six months ended June 30, 2021. As a result of the exchange offers, we exchanged 153,325 shares of our 8.25% Series A Cumulative Redeemable Preferred Stock ("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. There were no exchange offers completed during the six months ended June 30, 2022. Book value and Adjusted book value per share The below table details book value and adjusted book value per common share. 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. June 30, 2022 December 31, 2021 Book value per common share (1) $ 11.48 $ 14.64 Adjusted book value per common share (2) 11.15 14.32 (1) Calculated using stockholders’ equity less net proceeds of $220.5 million on our issued and outstanding preferred stock as the numerator. (2) Calculated using stockholders’ equity less the liquidation preference of $228.0 million on our issued and outstanding preferred stock as the numerator. 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. 56 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. The weighted average yield 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 June 30, 2022 and June 30, 2021 and a reconciliation to the net interest margin and leverage ratio on our GAAP investment portfolio. June 30, 2022 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 4.49 % 12.10 % 4.61 % Cost of Funds (b) 3.53 % 3.70 % 3.52 % Net Interest Margin 0.96 % 8.40 % 1.09 % Leverage Ratio (c) 7.0x (d) 2.7x June 30, 2021 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 3.43 % 16.55 % 4.36 % Cost of Funds (b) 1.66 % 3.11 % 1.70 % Net Interest Margin 1.77 % 13.44 % 2.66 % Leverage Ratio (c) 3.4x (d) 2.2x (a) Excludes any net TBA positions. (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 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 loans, real estate securities, 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, disposition, or securitization of our investments, (iii) accrued deal-related performance fees payable to 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 57 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, and (vi) any gains/(losses) associated with exchange transactions on our common and preferred stock. Items (i) through (vi) 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, disposition, or securitization 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. A reconciliation of "Net Income/(loss) available to common stockholders" to Core Earnings for the three and six months ended June 30, 2022 and 2021 is set forth below (in thousands, except per share data). Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net Income/(loss) available to common stockholders $ (53,309) $ 10,918 $ (71,097) $ 49,601 Add (Deduct): Net realized (gain)/loss (308) (4,374) (9,091) (336) Net unrealized (gain)/loss 46,351 (9,685) 68,771 (29,534) Transaction related expenses and deal related performance fees (1) 3,957 2,024 10,089 2,012 Equity in (earnings)/loss from affiliates 5,806 (1,278) 7,860 (27,614) Net interest income and expenses from equity method investments (2)(3) (4,035) 2,539 (6,585) 9,861 Other (income)/loss, net — — — (14) (Gains) from Exchange Offers, net — (114) — (472) Dollar roll income/(loss) 3,343 — 1,366 — Core Earnings $ 1,805 $ 30 $ 1,313 $ 3,504 Core Earnings, per Diluted Share (4) $ 0.08 $ — $ 0.06 $ 0.24 (1) For the three months ended June 30, 2022 and 2021, total transaction related expenses and deal related performance fees included $3.8 million and $1.9 million, respectively, recorded within the "Transaction related expenses" line item and $0.2 million and $0.1 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. For the six months ended June 30, 2022 and 2021, total transaction related expenses and deal related performance fees included $9.6 million and $1.7 million, respectively, recorded within the "Transaction related expenses" line item and $0.5 million and $0.3 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2) For the three months ended June 30, 2022 and 2021, $2.3 million or $0.10 per share and $(1.5) million or $(0.10) per share, respectively; and for the six months ended June 30, 2022 and 2021, $6.8 million or $0.29 per share and $1.1 million or $0.07 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives were excluded from Core Earnings, net of deferred tax expense. Additionally, for the three months ended June 30, 2022 and 2021, $(2.7) million or $(0.12) per share and $(0.1) million or $(0.01) per share, respectively; and for the six months ended June 30, 2022 and 2021, $(5.2) million or $(0.22) per share and $0.4 million or $0.03 per share, respectively, of unrealized changes in the fair value of our investment in Arc Home were excluded from Core Earnings. (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 months ended June 30, 2022 and 2021, we eliminated $1.8 million or $0.07 per share and $1.4 million or $0.09 per share, and for the six months ended June 30, 2022 and 2021, we eliminated $4.1 million or $0.17 per share and $1.9 million or $0.13 per share 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. 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. Our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans. We finance our acquired loans through various financing lines on a short-term basis and securitize the loans to obtain long-term, non-recourse, non-mark-to-market financing as market conditions permit. We may also invest in Agency RMBS to utilize excess liquidity. Our investment and capital allocation decisions depend on prevailing market conditions and compliance with Investment 58 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 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. 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. The following table presents a summary of the allocated equity of our investment portfolio as of June 30, 2022 and December 31, 2021 ($ in thousands). Allocated Equity Percent of Equity June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Residential Investments $ 451,107 $ 459,058 94.2 % 80.5 % Agency RMBS 27,558 111,322 5.8 % 19.5 % Total $ 478,665 $ 570,380 100.0 % 100.0 % The following table presents a summary of our investment portfolio as of June 30, 2022 and December 31, 2021 and a reconciliation to our GAAP Investment Portfolio ($ in thousands). Fair Value Percent of Investment Portfolio Fair Value Leverage Ratio (a) June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 Residential Investments $ 3,669,980 $ 2,725,889 89.7 % 84.6 % 2.0x 2.1x Agency RMBS 420,933 495,713 10.3 % 15.4 % 15.0x 3.7x Total: Investment Portfolio $ 4,090,913 $ 3,221,602 100.0 % 100.0 % 2.7x 2.4x Investments in Debt and Equity of Affiliates $ 59,916 $ 72,026 N/A N/A (b) (b) TBAs $ 399,459 $ — N/A N/A (b) (b) Total: GAAP Investment Portfolio $ 3,631,538 $ 3,149,576 N/A N/A 7.0x 4.9x (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 above). 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 TBAs. The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage. (b) Refer to the "Financing activities" section below for an aggregate breakout of leverage. 59 The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of June 30, 2022 and December 31, 2021 ($ in thousands). June 30, 2022 December 31, 2021 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) Residential Investments Non-Agency Loans $ 2,480,775 $ 2,547,062 $ (185,935) $ 2,361,127 4.89 % 4.35 % 6.84 $ 1,858,798 Agency-Eligible Loans 1,026,407 1,021,413 (82,004) 939,409 3.74 % 3.78 % 8.63 440,837 MATT Non-QM Loans (4) 391,749 42,528 (3,057) 39,471 1.16 % 12.03 % 3.24 45,837 Re/Non-Performing Loans 388,475 317,078 (4,320) 312,758 3.47 % 7.24 % 5.75 360,131 Land Related Financing 12,901 12,901 — 12,901 14.50 % 14.50 % 0.30 16,891 Non-Agency RMBS Interest Only (5) 119,493 3,102 1,212 4,314 0.38 % 25.42 % 3.44 3,395 Total Residential Investments 4,419,800 3,944,084 (274,104) 3,669,980 4.25 % 4.59 % 6.73 2,725,889 Agency RMBS 30 Year Fixed Rate — — — — — % — % — 495,713 Interest Only 134,766 20,923 551 21,474 3.06 % 8.00 % 6.71 — Fixed Rate 30 Year TBA (6) 400,000 401,496 (2,037) 399,459 4.38 % N/A N/A — Total Agency RMBS 534,766 422,419 (1,486) 420,933 4.04 % 8.00 % 6.71 495,713 Total: Investment Portfolio $ 4,954,566 $ 4,366,503 $ (275,590) $ 4,090,913 4.23 % 4.61 % 6.73 $ 3,221,602 Investments in Debt and Equity of Affiliates $ 440,627 $ 63,431 $ (3,515) $ 59,916 2.11 % 12.10 % 3.03 $ 72,026 TBAs $ 400,000 $ 401,496 $ (2,037) $ 399,459 4.38 % N/A N/A $ — Total: GAAP Investment Portfolio $ 4,113,939 $ 3,901,576 $ (270,038) $ 3,631,538 4.35 % 4.49 % 6.54 $ 3,149,576 (1) Refer to Note 10 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," and "Land Related Financing," line items above. (2) Equity residuals 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) As of June 30, 2022 and December 31, 2021, this line item primarily includes retained tranches from securitizations. (5) As of June 30, 2022 and December 31, 2021, this line item includes Non-QM interest-only bonds. (6) Represents long positions in Fixed Rate 30 Year TBA. Residential Investments The following table presents the fair value of the loans and securities in our residential investments and a reconciliation to our GAAP residential portfolio (in thousands). Fair Value June 30, 2022 December 31, 2021 Residential mortgage loans (1) $ 3,592,367 $ 2,663,992 Non-Agency RMBS (2) 77,613 61,897 Total Residential Investments $ 3,669,980 $ 2,725,889 Less: Residential mortgage loans in Investments in Debt and Equity of Affiliates 21,966 28,886 Less: Non-Agency RMBS in Investments in Debt and Equity of Affiliates 37,950 43,140 Total GAAP Residential Investments $ 3,610,064 $ 2,653,863 (1) Includes Non-Agency Loans, Agency-Eligible Loans, Re/Non-Performing Loans, and Land Related Financing not held in securitized form. (2) Includes Non-Agency Loans, Agency-Eligible Loans, and Re/Non-Performing Loans held in securitized form. 60 Residential mortgage loans The following tables present certain information regarding credit quality for certain categories within our Residential mortgage loan portfolio ($ in thousands). June 30, 2022 December 31, 2021 Unpaid Principal Balance Weighted Average (1)(2) Aging by Unpaid Principal Balance (1)(2) Fair Value Original LTV Ratio Current FICO (3) Current 30-59 Days 60-89 Days 90+ Days Fair Value Non-Agency Loans $ 2,465,881 $ 2,349,910 69.03 % 733 $ 2,442,759 $ 6,400 $ 3,135 $ 13,587 $ 1,844,198 Agency-Eligible Loans 993,082 915,325 65.31 % 758 991,438 1,644 — — 440,837 MATT Non-QM Loans 9,198 9,065 61.26 % 675 7,238 59 — 1,901 11,839 Re/Non-Performing Loans 352,465 305,166 79.63 % 639 242,237 30,879 11,066 64,015 350,227 Land Related Financing 12,901 12,901 N/A N/A N/A N/A N/A N/A 16,891 Total Residential mortgage loans $ 3,833,527 $ 3,592,367 69.01 % 730 $ 3,683,672 $ 38,982 $ 14,201 $ 79,503 $ 2,663,992 Less: Residential mortgage loans in Investments in Debt and Equity of Affiliates 22,099 21,966 61.26 % 675 7,238 59 — 1,901 28,886 Total GAAP Residential mortgage Loans $ 3,811,428 $ 3,570,401 69.03 % 730 $ 3,676,434 $ 38,923 $ 14,201 $ 77,602 $ 2,635,106 (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 "Securitized residential mortgage loans, at fair value" and "Residential mortgage loans, at fair value" line items on our consolidated balance sheets. Non-Agency RMBS The following table presents the fair value of our Non-Agency RMBS by credit rating as of June 30, 2022 and December 31, 2021 (in thousands). Credit Rating - Non-Agency RMBS (1) June 30, 2022 December 31, 2021 A $ 4,663 $ — BBB 5,746 — BB 3,032 — B 10,207 10,528 Not Rated 53,965 51,369 Total: Non-Agency RMBS $ 77,613 $ 61,897 Less: Non-Agency RMBS in Investments in Debt and Equity of Affiliates 37,950 43,140 Total: GAAP Basis $ 39,663 $ 18,757 (1) Represents the minimum rating for rated assets of S&P, Moody and Fitch credit ratings, stated in terms of the S&P equivalent. 61 The following table presents the geographic concentration of the underlying collateral for our Non-Agency RMBS portfolio ($ in thousands). June 30, 2022 December 31, 2021 State Fair Value Percentage State Fair Value Percentage California $ 34,285 44.2 % California $ 31,480 50.9 % New York 10,331 13.3 % New York 11,092 17.9 % Florida 5,202 6.7 % Florida 3,661 5.9 % Washington 3,214 4.1 % New Jersey 1,684 2.7 % Texas 3,149 4.1 % Texas 1,511 2.4 % Other 21,432 27.6 % Other 12,469 20.2 % Total $ 77,613 100.0 % Total $ 61,897 100.0 % Agency RMBS The following table presents the fair value and the Constant Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the periods presented ($ in thousands). Fair Value CPR (1) Agency RMBS June 30, 2022 December 31, 2021 June 30, 2022 December 31, 2021 30 Year Fixed Rate $ — $ 495,713 — % 6.1 % Interest Only 21,474 — 14.4 % — % Total/Weighted Average $ 21,474 $ 495,713 14.4 % 6.1 % (1) Represents the weighted average monthly CPRs published during the year-to-date period for our in-place portfolio. Investments in debt and equity of affiliates See Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a breakout of the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. 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 of 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 six and five counterparties as of June 30, 2022 and December 31, 2021, respectively. 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 June 30, 2022, we are in compliance with all of our financial covenants. 62 We also use securitized debt to finance our loan portfolio. Securitized debt is generally non-mark-to-market with respect to margin calls and non-recourse to us. Recourse and non-recourse financing The below table provides detail on the breakout between recourse and non-recourse financing as of June 30, 2022 and December 31, 2021 (in thousands). June 30, 2022 December 31, 2021 Recourse financing - Financing arrangements $ 914,749 $ 1,791,596 Non-recourse financing - Securitized debt, at fair value 2,467,766 999,215 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 19,001 22,156 Total Financing 3,401,516 2,812,967 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 12,578 13,853 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 19,001 22,156 Total Financing in Investments in Debt and Equity of Affiliates 31,579 36,009 Total: GAAP Basis $ 3,369,937 $ 2,776,958 Leverage We define GAAP leverage as the sum of (1) GAAP Securitized debt, at fair value, (2) our GAAP Financing arrangements, net of any restricted cash posted on such financing arrangements, and (3) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled. 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 to GAAP Leverage ($ in thousands). June 30, 2022 Leverage Stockholders’ Equity Leverage Ratio GAAP Securitized debt, at fair value $ 2,467,766 GAAP Financing arrangements 902,171 Restricted cash posted on Financing arrangements (8,202) Purchase price payable on loans 794 GAAP Leverage $ 3,362,529 $ 478,665 7.0x Financing arrangements through affiliated entities 31,153 Non-recourse financing arrangements (1) (2,486,767) Net TBA (receivable)/payable adjustment 402,418 Economic Leverage $ 1,309,333 $ 478,665 2.7x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. 63 December 31, 2021 Leverage Stockholders’ Equity Leverage Ratio GAAP Securitized debt, at fair value $ 999,215 GAAP Financing arrangements 1,777,743 Restricted cash posted on Financing arrangements (4,951) Purchase price payable on loans 87 GAAP Leverage $ 2,772,094 $ 570,380 4.9x Financing arrangements through affiliated entities 35,744 Non-recourse financing arrangements (1) (1,021,371) Net TBA receivable/(payable) adjustment (394,212) Economic Leverage $ 1,392,255 $ 570,380 2.4x (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, and other financial instruments such as short positions in to-be-announced securities. 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 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 TRSs’ and taxable income resulting from dividend distributions to the REIT from our TRSs'. 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 June 30, 2022. 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. 64 The following table details our common stock dividends declared during the six months ended June 30, 2022 and 2021. 2022 Declaration Date Record Date Payment Date Cash Dividend Per Share 3/18/2022 3/31/2022 4/29/2022 $ 0.21 6/15/2022 6/30/2022 7/29/2022 0.21 Total $ 0.42 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 Total $ 0.39 The following tables detail our preferred stock dividends declared and paid during the six months ended June 30, 2022 and 2021. 2022 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/18/2022 2/28/2022 3/17/2022 $ 0.51563 $ 0.50 $ 0.50 5/2/2022 5/31/2022 6/17/2022 0.51563 0.50 0.50 Total $ 1.03126 $ 1.00 $ 1.00 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 Total $ 1.03126 $ 1.00 $ 1.00 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 consist 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 loans, real estate securities, and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations. At June 30, 2022, we had $94.2 million of liquidity, which consisted of $88.6 million of cash and $5.6 million of unencumbered Agency RMBS. 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 loans and real estate securities 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 assets. 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 65 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. Cash flows The below details changes to our cash, cash equivalents, and restricted cash for the six months ended June 30, 2022 and 2021 ($ in thousands). Six Months Ended June 30, 2022 June 30, 2021 Change Cash and cash equivalents and restricted cash, Beginning of Period $ 100,229 $ 62,318 $ 37,911 Net cash provided by (used in) operating activities (1) 12,898 9,876 3,022 Net cash provided by (used in) investing activities (2) (761,877) (742,636) (19,241) Net cash provided by (used in) financing activities (3) 789,400 758,147 31,253 Net change in cash and cash equivalents and restricted cash 40,421 25,387 15,034 Effect of exchange rate changes on cash — 10 (10) Cash and cash equivalents and restricted cash, End of Period $ 140,650 $ 87,715 $ 52,935 (1) Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the six months ended June 30, 2022. (2) Cash used in investing activities for the six months ended June 30, 2022 was primarily attributable to purchases of investments, offset by sales of investments and principal repayments on investments. (3) Cash provided by financing activities for the six months ended June 30, 2022 was primarily attributable to issuance of securitized debt, offset by net repayments of financing arrangements and dividend payments. Stock repurchase programs During the three and six months ended June 30, 2022, we repurchased 1.4 million shares for $11.0 million under the 2015 Repurchase Program. No shares were repurchased under the 2015 Repurchase Program during the three and six months ended June 30, 2021. As of June 30, 2022, the amount authorized under the 2015 Repurchase Program was fully utilized. On August 3, 2022, our Board of Directors authorized the 2022 Repurchase Program to repurchase up to $15 million of our outstanding common stock on substantially the same terms as the 2015 Repurchase Program. The 2022 Repurchase Program does not have an expiration date and permits us to repurchase our shares through various methods, including open market repurchases, privately negotiated block transactions and Rule 10b5-1 plans. We may repurchase shares of our common stock from time to time in compliance with SEC regulations and other legal requirements. The extent to which we repurchases our shares, and the timing, manner, price, and amount of any such repurchases, will depend upon a variety of factors including market conditions and other corporate considerations as determined by management, as well as the limits of the 2022 Repurchase Program and our liquidity and business strategy. The 2022 Repurchase Program does not obligate us to acquire any particular amount of shares and may be modified or discontinued at any time. As of the date of this report, the full $15 million 66 authorized amount remains available for repurchase under the 2022 Repurchase Program. On February 22, 2021, our Board of Directors authorized a stock repurchase program (the "Preferred Repurchase Program") pursuant to which our Board of Directors granted a repurchase authorization to acquire shares of our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock having an aggregate value of up to $20.0 million. No share repurchases under the Preferred Repurchase Program have been made since its authorization. Shares of stock repurchased by us under any repurchase program, if any, will be cancelled and, until reissued by us, will be deemed to be authorized but unissued shares of its stock as required by Maryland law. The cost of the acquisition by us 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. 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 and six months ended June 30, 2022, we did not issue any shares of common stock under the Equity Distribution Agreements. For the three months ended June 30, 2021, we issued 0.2 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $3.1 million. For the six months ended June 30, 2021, we issued 1.0 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $13.1 million. 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. Common stock offering On November 22, 2021, we completed a public offering of 7.0 million shares of our common stock and subsequently issued an additional 1.1 million shares pursuant to the underwriters' exercise of their over-allotment option at a price of $9.98 per share. Net proceeds to us from the offering were approximately $80.0 million, after deducting offering expenses. 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 The management agreement, as amended, provides for payment to the Manager of a management fee, an incentive fee, and reimbursements of certain expenses incurred by the Manager or its affiliates on behalf of us. Management fee 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. 67 For the three and six months ended June 30, 2022, we incurred management fees of $2.0 million and $3.9 million, respectively. For the three and six months ended June 30, 2021, we incurred management fees of $1.7 million and $3.3 million, respectively. As of June 30, 2022 and December 31, 2021, we have recorded management fees payable of $2.0 million and $1.8 million, respectively. Incentive fee In connection with our common stock offering in November 2021, including the Manager's purchase of 700,000 shares in the offering, on November 22, 2021, we and the Manager executed an amendment (the "Third Amendment") to the management agreement, pursuant to which we will pay the Manager an annual incentive fee in addition to the base management fee. Pursuant to the Third Amendment, the Manager waived the annual incentive fee with respect to the fiscal years ending December 31, 2021 and December 31, 2022, and the annual incentive fee will first be payable with respect to the fiscal year ending December 31, 2023. The annual incentive fee with respect to each applicable fiscal year will be equal to 15% of the amount by which our cumulative adjusted net income from the date of the Third Amendment exceeds the cumulative hurdle amount, which represents an 8% return (cumulative, but not compounding) on an equity hurdle base consisting of the sum of (i) our adjusted book value (calculated in the manner described in our public filings) as of October 31, 2021, (ii) $80.0 million, and (iii) the gross proceeds of any subsequent public or private common stock offerings by us. The annual incentive fee will be payable in cash, or, at the option of our Board of Directors, shares of our common stock or a combination of cash and shares. In addition, pursuant to the Third Amendment, the term of the management agreement was extended until June 30, 2023, unless earlier terminated in accordance with its terms. Thereafter, the management agreement will continue to renew automatically each year for an additional one-year period, unless the Company or the Manager exercise its respective termination rights. All other terms and conditions of the management agreement continued without change. Expense Reimbursement 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, reimbursements are 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. For the three and six months ended June 30, 2022, we incurred $2.4 million and $4.9 million, respectively, representing reimbursements of expenses which are recorded within the "Other operating expenses" and "Transaction related expenses" line items on the consolidated statements of operations. For the three and six months ended June 30, 2021, we incurred $1.1 million and $2.7 million, respectively, representing reimbursements of expenses which are recorded within the "Other operating expenses" and "Transaction related expenses" line items on the consolidated statements of operations. As of June 30, 2022 and December 31, 2021, we recorded reimbursements payable to our Manager or its affiliates of $2.0 million and $2.1 million, respectively. For the year ended December 31, 2021, our Manager agreed to waive its right to receive expense reimbursements of $0.8 million. For the three and six months ended June 30, 2021, we reduced our expense reimbursement amount by $0.2 million and $0.4 million, respectively. Share-based compensation The AG Mortgage Investment Trust, Inc. 2020 Equity Incentive Plan, which became effective on April 15, 2020 following the approval of our stockholders at our 2020 annual meeting of stockholders, provides for a maximum of 666,666 shares of common stock that may be issued under the plan. 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 June 30, 2022, 582,820 shares of common stock were available to be awarded under the Equity Incentive Plan. 68 Since inception of the 2020 Equity Incentive Plan and through June 30, 2022, we have granted an aggregate of 83,846 shares of restricted common stock to our independent directors under our 2020 Equity Incentive Plan, all of which have vested. The AG Mortgage Investment Trust, Inc. 2021 Manager Equity Incentive Plan (the "2021 Manager Plan"), which became effective on April 7, 2021 following the approval of our stockholders at our 2021 annual meeting of stockholders, provides for a maximum of 573,425 shares of common stock that may be subject to awards thereunder to our Manager. As of June 30, 2022, there were no shares or awards issued under the 2021 Manager Plan. Following the execution of the third amendment to our management agreement in November 2021 related to the incentive fee, our compensation committee no longer expects to continue its historical practice of making periodic equity grants to the Manager pursuant to the 2021 Manager Equity Incentive Plan. Unfunded commitments See Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for detail on our commitments as of June 30, 2022. Off-balance sheet arrangements Our investments in debt and equity of affiliates primarily consist of loans, real estate securities, 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 Notes 2 and 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments i n debt and equity of affiliates. 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. Refer to Note 7 to the "Notes to Consolidated Financial Statements (unaudited)" for additional detail on TBAs as of June 30, 2022. For additional information on our commitments as of June 30, 2022 , 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 June 30, 2022 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, 2021 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 loans, (iii) Accounting for real estate securities, (iv) Interest income recognition, (v) Financing arrangements, and (vi) Investment consolidation. 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 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 69 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)." Compliance with Investment Company Act and REIT Tests We 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). We closely monitor our holdings to ensure continuing and ongoing compliance with the 40% Test. As of December 31, 2021 and June 30, 2022, 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 closely monitor our subsidiaries' holdings to ensure continuing and ongoing 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" (the "55% Test") and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets) (the "80% Test"). As of December 31, 2021 and June 30, 2022, we determined that our subsidiaries maintained compliance with both the 55% Test and the 80% Test requirements. We intend to conduct our business so as to maintain our qualification as a REIT under the Code by satisfying the asset, income, distribution and other REIT 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, 2021. 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, 2021. 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, 2021, we believe that we qualified as a REIT under the Code. 70