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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-25 · 399 added, 388 removed, 381 unchanged (67% of the section changed)

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Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and capital appreciation.

Our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans within the growing non-agency segment of the housing market.

We obtain our assets through 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’s proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit.

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 the loans that it originates.

Our investment portfolio (which excludes our ownership in Arc Home) includes Residential Investments and Agency RMBS.

Currently, our Residential Investments primarily consist of Non-QM Loans and GSE Non-Owner Occupied Loans.

We may also invest in other types of residential mortgage loans and other mortgage related assets.

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.

We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011.

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federal income tax purposes.

Accordingly, we generally will not be subject to U.S.

federal income taxes on our taxable income that we distribute 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 ("TRSs") 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.

We are externally managed by our Manager, an affiliate of Angelo Gordon, pursuant to a management agreement.

Our Manager has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement.

Our Manager has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the

management agreement.

Angelo Gordon is a leading privately-held alternative investment firm focusing on credit and real estate strategies.

Executive summary

During the year ended 2021, we focused on executing our mission to become a pure-play residential mortgage REIT by simplifying our portfolio through exiting all of our commercial investments, growing our portfolio of newly-originated non-agency loans, and increasing our pace of securitization activity in order to obtain long-term, non-recourse financing without mark-to-market margin calls.

During 2021, we significantly increased the size of our investment portfolio and also completed five Non-QM securitizations through Angelo Gordon's proprietary securitization platform.

Further, we focused on strengthening our capital base by entering into various financing facilities and raising capital in order to provide for continued growth and execution of our business strategy.

Subsequent to year end, we continued to grow our portfolio of newly-originated non-agency loans and completed two additional securitizations.

See below for detail on these activities during 2021 and subsequent to year end.

During 2022, we continued to grow our portfolio of newly-originated residential mortgage loans and completed eight securitizations in order to obtain long-term, non-recourse financing without mark-to-market margin calls.

We also utilized excess liquidity to make accretive common stock repurchases throughout the year.

We ended 2022 with $86.7 million of liquidity to provide for continued growth and execution of our business strategy.

See below for additional detail related to these activities occurring during the year ended December 31, 2022.

Investment Activity

• Purchased $2.5 billion of Non-QM Loans and GSE Non-Owner Occupied Loans, $833.4 million of which were purchased from Arc Home;

• Participated in two rated securitizations alongside other Angelo Gordon funds in which Non-QM Loans with a fair value of $397.3 million were securitized.

Certain senior tranches in the securitization were sold to third parties with us and private funds under the management of Angelo Gordon retaining the subordinate tranches;

◦ $171.4 million were securitized through our unconsolidated ownership interest in MATT, in which we have an approximate 44.6% interest;

◦ $225.9 million were securitized alongside one private fund under the management of Angelo Gordon and we contributed approximately 41% of the underlying loans;

• Sold Non-Agency RMBS for gross proceeds of $44.6 million;

• Exited remaining commercial investments;

◦ Received gross proceeds of $148.4 million from the full repayment or sales of our Commercial Loans, inclusive of receiving all accrued or deferred interest outstanding;

◦ Sold our remaining CMBS portfolio for gross proceeds of $67.7 million.

• Purchased Non-Agency Loans with a fair value of $1.6 billion, $0.9 billion 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 $1.0 billion, $0.2 billion of which were purchased from Arc Home;

• Reduced the size of our Agency RMBS through net sales of $428.2 million;

• Sold certain Non-Agency Loans and Agency-Eligible Loans with a fair value of $53.8 million;

◦ As of December 31, 2022, $65.0 million of loans were classified as held for sale, and subsequently sold in January 2023 for gross proceeds from Non-Agency Loans of $46.9 million and gross proceeds of $18.5 million Agency-Eligible Loans.

Financing Activity

• Executed three rated securitizations in which Non-QM Loans with a fair value of $880.9 million were securitized, converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls;

• Entered into certain financing arrangements with a maximum uncommitted borrowing capacity of $2.3 billion to finance non-agency mortgage loans, of which approximately $1.0 billion of the maximum uncommitted borrowing capacity remains available as of December 31, 2021;

• Repaid $10 million secured note and accrued interest to our Manager upon maturity on March 31, 2021.

• Executed eight rated securitizations converting 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 $2.1 billion;

◦ Securitized Agency-Eligible Loans with a total unpaid principal balance of $1.3 billion;

• Subsequent to year end, executed a rated securitization of Non-Agency Loans with a total unpaid principal balance of $271.2 million.

Capital Activity

• Completed a public offering issuing 8.1 million shares of common stock for net proceeds of approximately $80.0 million after deducting estimated offering expenses;

• Utilized ATM program to issue 1.0 million shares of common stock, raising net proceeds of approximately $13.1 million;

• Repurchased 0.3 million shares of common stock for $3.6 million;

• Entered into two privately negotiated exchange offers with existing holders of our preferred stock, issuing 1.4 million shares of common stock in exchange for 0.7 million shares of preferred stock;

• Implemented a reverse stock split primarily to decrease volatility in trading for our common stock.

The reverse stock split was effective following the close of business on July 22, 2021 (the "Effective Time").

At the Effective Time, every three issued and outstanding shares of our common stock was converted into one share of common stock.

No fractional shares were issued in connection with the reverse stock split.

Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of our common stock on the date of the Effective Time.

Subsequent Event Activity

• Purchased $519.0 million of non-agency mortgage loans, inclusive Non-QM Loans, GSE Non-Owner Occupied Loans, and other qualifying mortgage loans.

$233.0 million of these non-agency mortgage loans were purchased from Arc Home;

• Participated in our first rated securitization of GSE Non-Owner Occupied Loans, in which loans with a fair value of $474.9 million were securitized;

• Participated in a rated securitization in which Non-QM Loans with a fair value of $301.7 million were securitized;

• Announced that on February 18, 2022 our Board of Directors declared first quarter 2022 preferred stock dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock in the amount of $0.51563, $0.50 and $0.50 per share, respectively.

The dividends will be paid on March 17, 2022 to holders of record on February 28, 2022.

• Utilized the remaining capacity under our 2015 Repurchase Program and our Board of Directors authorized a new stock repurchase program (the "2022 Repurchase Program") to repurchase up to $15.0 million of our outstanding common stock;

◦ Repurchased 2.7 million shares of common stock for $18.2 million, representing a weighted average cost of $6.82 per share;

◦ Subsequent to year end, repurchased 0.1 million shares of common stock for $0.5 million, representing a weighted average cost of $5.66 per share;

• As of February 17, 2023, the remaining amount authorized under our repurchase program is $7.3 million.

Presentation of investment, financing and hedging activities

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This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition.

See Note 2 to the "Notes to Consolidated Financial Statements" for a discussion of investments in debt and equity of affiliates.

See Notes 2 and 10 to the "Notes to Consolidated Financial

Statements" 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 Agency RMBS and our credit portfolio.

• Our "Credit portfolio" or "credit investments" refer to our residential investments, inclusive of loans and credit securities.

◦ "Loans" refer to our Non-QM Loans and Re/Non-Performing Loans, exclusive of retained tranches from unconsolidated securitizations, GSE Non-Owner Occupied Loans, and Land Related Financing.

◦ "Credit securities" refer to the retained tranches from unconsolidated securitizations of Non-QM Loans and Re/Non-Performing Loans.

• "Real estate securities" refers to our Agency RMBS and our credit securities.

• Our "GAAP Investment portfolio" includes Agency RMBS and our GAAP Credit portfolio.

• Our "GAAP Credit portfolio" refers to our credit portfolio exclusive of all investments held within affiliated entities.

• 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.

Refer to the "Financing activities–Forbearance and Reinstatement Agreements" section below for further details related to the impact these economic conditions had on us.

Although market conditions improved during 2021, the COVID-19 pandemic is ongoing with new variants emerging despite growing vaccination rates.

As a result, the full impact of COVID-19 (including the impact of any significant variants) on the mortgage REIT industry, credit markets, and, consequently, on our financial condition and results of operations for future periods remains uncertain.

Future developments with respect to the COVID-19 pandemic, including among others, the emergence of new variants, the effectiveness and durability of current vaccines and government stimulus measures, could materially and adversely affect our business, operations, operating results, financial condition, liquidity, or capital levels.

Market Conditions

During 2021, the financial markets generally continued their recovery from the unprecedented dislocation caused by the COVID-19 pandemic and the resulting economic shutdown across much of the U.S.

In addition, mortgage and housing fundamentals continued to be favorable throughout the year.

Delinquency and forbearance rates continued to decline and home prices reached another record high, rising 19.1% year-over-year.

Limited availability of homes against fundamentally strong housing demand has been a driving factor for persistent home price appreciation.

Other fundamentals continued to be favorable due to strong labor conditions and residual support from federal stimulus and payment accommodations, whose positive effects should persist into 2022.

Some near-term headwinds could be created by the term-driven expiration of mortgage payment forbearance, resumption of foreclosure activity and sunset of other relief programs.

However, we believe these risks should be offset by strong demand for labor, rising collateral prices and persistently tight new mortgage underwriting, the latter of which remains near 2014 levels, according to the Mortgage Bankers Association.

Non-Agency Loans and Securitizations :

Non-QM securitization issuance topped $10 billion in a record quarter for the sector driven by strong origination volume as well as older vintages exiting their respective non-call windows Annual issuance also hit a record at approximately $25 billion, which was in line with the market’s expectations for 2020 prior to the COVID-19 pandemic disruption.

Despite the amount of supply in the market during the fourth quarter, execution was orderly with spreads slightly widening.

The prospect of raising rates did bring about concerns on extension risk among buyers of the most senior bonds, causing issuers to transition from pro-rata capital structures to sequential capital structures.

Non-QM loan volumes remained elevated, with some originators doubling their monthly production over the course of 2021.

During the third quarter, an increased amount of agency-eligible mortgage loans backed by investment properties and second homes were being issued into the Private Label Securities ("PLS") market as originators looked for liquidity away from the GSE’s as a result of amendments made to the Preferred Stock Purchase Agreement between Treasury and the GSEs earlier in the year.

However these volumes declined during the fourth quarter as originators returned to delivering most, if not all, of their production back to the GSEs due to the September 14, 2020 suspension of certain amendments made to the Preferred Stock Purchase Agreement.

Agency RMBS :

Despite the Federal Reserve’s commencement of tapering its monthly bond purchases during the fourth quarter, spreads on Agency RMBS modestly tightened.

Valuations continued to be supported by bank demand, moderating supply, and strong carry due to persistent specialness of TBA dollar roll income.

Payups on specified pools have also held steady as holders of TBA rotate into specified pools in anticipation of a shrinking Federal Reserve presence and subsequent weakening of TBA dollar roll income.

Post year-end however, spreads have begun to widen in response to the Federal Reserve communicating its desire to begin winding down their balance sheet earlier than the market had anticipated.

Non-Agency RMBS :

Spreads for securitized residential debt sectors were mixed during the fourth quarter.

Most Credit Risk Transfer tranches generally widened 10-20 basis points while other new-issue senior tranches widened 10-15 basis points.

Legacy mortgages were mostly unchanged during the quarter.

Many of the same themes that have supported the sector persisted during the quarter, including favorable collateral fundamentals, record high home prices, demand for yield, and continued employment gains.

Issuance of new RMBS rose approximately 14% to $55 billion in the fourth quarter, and for the full year 2021, RMBS issuance totaled $200 billion, surpassing the post-Great Financial Crisis peak of $137 billion in 2019, though some of this year’s issuance was delayed from 2020.

The rise was mostly due to issuance of Jumbo 2.0 and Agency-eligible securities, which collectively comprised over half of the annual growth.

Non-QM, Single-Family Rental, and Non-Performing Loans also saw meaningful annual increases in 2021.

In light of various market uncertainties, in particular the pervasive uncertainties of the COVID-19 pandemic for the U.S.

and global economy, there can be no assurance that the trends and conditions described above will not change in a manner materially adverse to the mortgage REIT industry and/or our Company.

During 2022, the financial markets experienced significant volatility in managing the impacts of inflation, elevated interest rate volatility, market uncertainty from geopolitical risks, and the lingering impact of the COVID-19 pandemic.

Market participants saw benchmark rates continue to rise throughout the year coupled with the widening of credit spreads across various asset classes.

According to Freddie Mac’s Primary Mortgage Market Survey, the 30-year fixed-rate mortgage ended the fourth quarter at 6.42%, declining slightly from its multi-decade high in the third quarter but up over 300 basis points from a year ago.

This has driven home ownership affordability and mortgage prepayments to historical lows.

As a result, housing and residential debt sectors remained challenged for most of 2022 with new issuance of RMBS falling and full-year origination volume expected to have nearly halved in 2022, according to the Mortgage Bankers Association.

While credit spreads continued to widen at the start of the fourth quarter, they began experiencing notable tightening in the latter half of the quarter and into January 2023, providing some relief to the securitization markets.

Trends in credit spreads on Credit risk transfer ("CRT") assets are generally utilized by market participants as a proxy for evaluating credit related assets given the observability of transactions.

CRT tranches tightened by 30 to 60 basis points during the quarter.

In addition, Senior Non-QM spreads, which impacts our securitization business, tightened 50 to 60 basis points.

Despite this tightening, CRT and Non-QM spreads ended the year materially wider than one year ago.

Tranches in the middle of the CRT structure were approximately 300 to 350 basis points wider, while lower tranches were as much as 500 to 600 basis points wider than at the end of 2021.

Senior Non-QM tranches were more than 100 basis points wider, and BB Non-QM tranches were approximately 370 basis points wider than a year ago.

Nominal spreads on Agency mortgage-backed securities tightened sharply during the fourth quarter.

The Federal Reserve began to signal a deceleration of its aggressive campaign to tighten policy rates, helping to moderate implied interest rate volatility off peak levels of the last decade that had been weighing on mortgage asset valuations.

When combined with subdued supply and an underweight investor base, the spread between current coupon and a blend of 5-year and 10-year U.S.

Treasury yields tightened by 27 basis points during the fourth quarter of 2022.

Despite the performance during the quarter, this spread remains roughly 77 basis point wider year-over-year as considerable uncertainty remains over the broad macroeconomic backdrop.

New RMBS issuance for the quarter fell sharply to $5.4 billion, down from $26 billion in the third quarter and $64 billion a year ago.

Non-QM, Jumbo/Agency-Eligible and CRT issuance was $127 billion for the full year, approximately 40% lower compared to 2021.

Issuances in 2021 were elevated due to $4.4 trillion of mortgage origination volume during the year resulting from a large refinance wave coupled with postponed issuances from 2020.

The decline in originations in 2022 contributed to less securitization activity, where it was most apparent in Jumbo/Agency-Eligible which was down approximately 66% in 2022 as compared to 2021.

Originators continue to face considerable margin pressure with the significant reduction in non-cash out refinance activity, resulting in right-sizing across the industry.

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.

The October reading of the S&P/CoreLogic Case-Shiller Index fell 0.53%, bringing national home prices to 7% higher this year through October 2022.

As negative monthly home price readings have persisted since July, this reading marked the fourth consecutive month of falling prices, totaling a decrease of approximately 3%, reversing some of the strong gains made in the

first half of 2022.

Housing activity declined in 2022 with fewer new listings and pending sales, and buyers were slower to transact as the year continued given home ownership affordability set a new low in June 2022.

However, homeowners are likely better positioned to weather a decrease in home prices compared to the mid-2000s given the significant appreciation recognized in recent years, leaving households with substantial equity.

In addition, most new mortgage debt has been originated under tighter underwriting guidelines to borrowers with prime credit scores.

In light of various market uncertainties 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.

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 as of quarter-end.

December 31, 2022

December 31, 2021

Book value per common share $ 11.39 $ 14.64

Net proceeds of preferred stock less liquidation preference of preferred stock per common share (1) (0.36) (0.32)

Adjusted book value per common share $ 11.03 $ 14.32

(1) Book value per common share is calculated using stockholders’ equity less net proceeds of $220.5 million on our issued and outstanding preferred stock as the numerator.

Adjusted book value per common share is calculated using stockholders’ equity less the liquidation preference of $228.0 million on our issued and outstanding preferred stock as the numerator.

Results of Operations for the Fiscal Year 2022 and 2021

Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our investments in residential mortgages in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose mortgage loans are included in our investment portfolio and other unanticipated events in our markets.

Our 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.

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Management fee to affiliate 8,096 6,814 1,282

Other operating expenses 13,357 15,911 (2,554)

Non-investment related expenses 9,292 9,745 (453)

Investment related expenses 9,198 6,800 2,398

Transaction related expenses 16,474 7,328 9,146

Restructuring related expenses — 10,200 (10,200)

Excise tax — (815) 815

Servicing fees 3,188 2,224 964

Total Expenses 43,060 30,687 12,373

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Equity in earnings/(loss) from affiliates (10,258) 31,889 (42,147)

Net Income/(Loss) from Continuing Operations 104,186 (421,585) 525,771

Net Income/(Loss) from Discontinued Operations — 666 (666)

Net Income/(Loss) (53,100) 104,186 (157,286)

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Interest income

Interest income is calculated using the effective interest method for our GAAP investment portfolio and calculated based on the actual coupon rate.

Interest income decreased from December 31, 2020 to December 31, 2021 primarily due to the decrease in the weighted average yield of our GAAP investment portfolio which decreased by 1.00% from 4.61% for the year ended December 31, 2020 to 3.61% for the year ended December 31, 2021.

This was offset by a $0.4 billion increase in the weighted average cost of our GAAP investment portfolio from $1.6 billion for the year ended December 31, 2020 to $2.0 billion for the year ended December 31, 2021.

Interest income is calculated using the effective interest method for our GAAP investment portfolio.

Interest income increased from December 31, 2021 to December 31, 2022 primarily due to an increase in the size of our portfolio resulting from purchases of Non-Agency Loans and Agency-Eligible Loans during the period.

The following table presents a summary of the weighted average amortized cost of and the weighted average yield on our GAAP investment portfolio for the years ended December 31, 2022 and 2021 ($ in millions).

December 31, 2022 December 31, 2021 Increase/(Decrease)

Weighted average amortized cost of our GAAP investment portfolio

$ 4,001 $ 1,955 $ 2,046

Weighted average yield on our GAAP investment portfolio 4.51 % 3.61 % 0.90 %

Interest expense

Interest expense is calculated based on the actual financing rate and the outstanding financing balance of our GAAP investment portfolio.

Interest expense decreased from December 31, 2020 to December 31, 2021 primarily due to a decrease in the weighted average financing rate on our GAAP investment portfolio, inclusive of securitized debt, which decreased by 1.20% from 2.79% for the year ended December 31, 2020 to 1.59% for the year ended December 31, 2021.

This was offset by an increase in the weighted average financing balance on our GAAP investment portfolio, inclusive of securitized debt, during the period which increased by $0.4 billion from $1.3 billion for the year ended December 31, 2020 to $1.7 billion for the year ended December 31, 2021.

Interest expense is calculated based on the actual financing rate and the outstanding financing balance, inclusive of our financing arrangements and securitized debt, on our GAAP investment portfolio.

Interest expense increased from December 31, 2021 to December 31, 2022 due to an increase in the amount of financing on our GAAP investment portfolio primarily resulting from the issuance of $3.0 billion of securitized debt in 2022.

Additionally, there was an increase in the weighted average financing rate during the period resulting from increased interest rates during 2022.

The following table presents a summary of the weighted average financing balance and the weighted average financing rate on our GAAP investment portfolio for the years ended December 31, 2022 and 2021 ($ in millions).

December 31, 2022 December 31, 2021 Increase/(Decrease)

Weighted average GAAP financing balance

$ 3,655 $ 1,712 $ 1,943

Weighted average financing rate on our GAAP investment portfolio 3.25 % 1.59 % 1.66 %

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.

We recognized losses on the net interest component of interest rate swaps for the year ended December 31, 2021 compared with gains for the year ended December 31, 2020 primarily due to the difference in terms on the outstanding interest rate swaps during the periods.

We also exited our entire interest rate swap portfolio in the first quarter of 2020 and began growing our interest rate swap portfolio in the fourth quarter of 2020 and throughout 2021 in connection with the growth of our GAAP investment portfolio.

As of the December 31, 2021, we held an interest rate swap portfolio with a notional value of $888.5 million, a weighted average receive-variable rate of 0.15%, and a weighted average pay-fix rate of 0.85%.

The net interest component of interest rate swap expense increased from December 31, 2021 to December 31, 2022 primarily due to an increase in the weighted average swap notional value, which was offset by a reduction in the net pay rate as interest rates rose throughout 2022.

The following table presents a summary of the weighted average swap notional value for the years ended December 31, 2022 and 2021 ($ in millions).

December 31, 2022 December 31, 2021 Increase/(Decrease)

Weighted average swap notional

$ 934 $ 848 $ 86

The following table presents a summary of our interest rate swap portfolio as of December 31, 2022 and 2021 ($ in millions).

December 31, 2022 December 31, 2021 Increase/(Decrease)

Interest rate swap notional value

$ 335.0 $ 888.5 $ (553.5)

Weighted average receive-variable rate

4.30 % 0.15 % 4.15 %

Weighted average pay-fix rate

2.77 % 0.85 % 1.92 %

Net realized gain/(loss)

The following table presents a summary of Net realized gain/(loss) for the years ended December 31, 2022 and 2021 (in thousands).

The realized gain during the year ended December 31, 2022 was driven by unwinding pay-fix, receive-variable interest rate swaps which were previously held at unrealized gains as a result of rising interest rates.

This was offset by realized losses on sales of Agency RMBS and residential mortgage loans.

December 31, 2022 December 31, 2021

Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (2,958) $ 6,374

Sales/Seizures of real estate securities (1) (6,088) (130,567)

Sales of Commercial loans (2,518) (6,470)

Sales of real estate securities (34,504) (6,088)

Settlement of derivatives and other instruments 118,851 3,930

Sales of commercial loans — (2,518)

Total Net realized gain/(loss) $ 81,389 $ 1,698

(1) Certain realized losses on real estate securities during the year ended December 31, 2020 were a result of financing counterparty seizures.

There were no financing counterparty seizures during the year ended December 31, 2021.

Net unrealized gain/(loss)

The following table presents a summary of Net unrealized gain/(loss) for the years ended December 31, 2022 and 2021 (in thousands).

During the year ended December 31, 2022, unrealized losses on residential mortgage loans and unrealized gains on securitized debt were the result of rising interest rates and credit spread widening during the period.

December 31, 2022

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Real estate securities 3,010 (2,648)

Securitized debt 401,467 3,529

Derivatives (2,124) 19,137

Commercial loans — 16,148

Excess mortgage servicing rights — 1,515

Derivatives 19,137 (9,864)

Securitized debt 3,529 (940)

Total Net unrealized gain/(loss) $ (137,634) $ 62,699

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See the "Contractual obligations" section of this Part II, Item 7 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity.

Management fees decreased from December 31, 2020 to December 31, 2021 primarily due to a decrease in our Stockholders’ Equity as calculated pursuant to our Management Agreement.

Other operating expenses

Other operating expenses is primarily comprised of professional fees, directors’ and officers’ ("D&O") insurance, directors’ fees, 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.

Management fees increased from December 31, 2021 to December 31, 2022 primarily due to an increase in our Stockholders’ Equity as calculated pursuant to our Management Agreement resulting from our November 2021 common stock offering.

Non-investment related expenses

Non-investment related expenses is primarily comprised of professional fees, directors’ and officers’ ("D&O") insurance, directors’ compensation, and certain non-investment related expenses reimbursable to the Manager.

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 years ended December 31, 2021 and 2020 (in thousands):

The following table presents a summary of our non-investment related expenses for the years ended December 31, 2022 and 2021 (in thousands).

December 31, 2022 December 31, 2021

Non-Investment Related Expenses

Affiliate reimbursement - Operating expenses (1) $ 4,322 $ 6,320

Affiliate reimbursement (1) $ 4,646 $ 4,322

Professional Fees 1,993 2,409

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Directors' compensation 681 672

Equity based compensation to affiliate — 163

Other 736 877

Total Corporate Expenses 9,745 11,409

Total Non-investment related expenses $ 9,292 $ 9,745

(1) For the years ended December 31, 2022 and December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $1.5 million and $0.8 million, respectively.

Investment related expenses

Affiliate expense reimbursement - Deal related expenses 1,157 1,116

Residential mortgage loan related expenses 2,218 3,064

Investment related expenses is primarily comprised of servicing fees, asset management fees, and certain 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 associated with our investment portfolio.

The following table presents a summary of our investment related expenses for the years ended December 31, 2022 and 2021 (in thousands).

December 31, 2022 December 31, 2021

Affiliate reimbursement $ 755 $ 1,157

Servicing fees (1) 4,030 3,188

Residential mortgage loan asset management fees (1) 2,595 1,549

Trustee and bank fees 998 250

Other 820 656

Total Investment Expenses 3,612 4,502

Total Other operating expenses $ 13,357 $ 15,911

(1) For the year ended December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $0.8 million.

Total Investment related expenses $ 9,198 $ 6,800

(1) We incur servicing fees and asset management fees in connection with our residential mortgage loans.

These expenses increased from the year ended December 31, 2021 to the year ended December 31, 2022 primarily due to an increase in our GAAP residential mortgage loan portfolio.

The weighted average cost of our GAAP residential mortgage loan portfolio increased by $2.7 billion from $1.2 billion for the year ended December 31, 2021 to $3.9 billion for the year ended December 31, 2022 resulting from purchases of Non-Agency Loans and Agency-Eligible Loans.

Transaction related expenses

Transaction related expenses are expenses associated with 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 year ended December 31, 2020 to December 31, 2021 primarily as a result of the various securitizations of Non-QM Loans transacted in 2021.

Additionally, in the period ended March 31, 2020, the Company reversed previously accrued deal related performance fees due to a decline in the price of the related assets and the seizure of such assets by financing counterparties.

Restructuring related expenses

Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with executing the Forbearance Agreement and subsequent Reinstatement Agreement during 2020.

Refer to the "Financing activities" section below for more information regarding the Forbearance Agreement and the Reinstatement Agreement.

Excise tax represents a four percent tax on the required amount of any ordinary income and net capital gains not distributed during the year.

The expense is calculated in accordance with applicable tax regulations.

During the year ended December 31, 2020, we reversed previously accrued excise taxes primarily as a result of losses associated with COVID-19.

We did not record any excise taxes for the year ended December 31, 2021.

Servicing fees

We incur servicing fee expenses in connection with the servicing of our Residential mortgage loans.

The weighted average cost of our GAAP Residential mortgage loan portfolio increased by $0.6 billion from $0.6 billion for the year ended December 31, 2020 to $1.2 billion for the year ended December 31, 2021.

This increase was primarily the result of purchases of Non-QM

Loans and GSE Non-Owner Occupied Loans in 2021.

As a result, servicing fees increased from the year ended December 31, 2020 to the year ended December 31, 2021.

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 year ended December 31, 2021 to December 31, 2022 primarily as a result of the upfront expenses on the eight securitizations completed during the year ended December 31, 2022, as compared with upfront expenses on three securitizations completed during the year ended December 31, 2021.

Equity in earnings/(loss) from affiliates

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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):

The below tables summarize the components of the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands).

December 31, 2022

December 31, 2021

Non-QM Loans (1) $ 12,594 $ (26,511)

AG Arc (2) 3,681 23,260

MATT Non-QM Loans (1) $ 1,261 $ 12,594

Land Related Financing 1,621 2,455

Other (2) 594 13,159

AG Arc (3) (13,734) 3,681

Equity in earnings/(loss) from affiliates

$ (10,258) $ 31,889

(1) The earnings within MATT for the year ended December 31, 2022 were primarily the result of net interest income offset by realized losses on its Non-QM Loan portfolio.

The earnings within MATT for the year ended December 31, 2021 were primarily the result of mark-to-market gains on its Non-QM Loan portfolio and net interest income, offset by expenses.

The losses generated within MATT for the year ended December 31, 2020 were primarily the result of mark-to-market losses on its Non-QM Loan portfolio and related financing, offset by net interest income.

(2) The earnings/(loss) at AG Arc during the year ended December 31, 2021 were primarily the result of $5.4 million of net income related to Arc Home's lending and servicing operations, offset by $(2.3) million related to changes in the fair value of the MSR portfolio held by Arc Home.

Earnings/(loss) recognized by AG Arc do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us.

For the year ended December 31, 2021, we eliminated $5.3 million of intra-entity profits recognized by Arc Home and also decreased the cost basis of the underlying loans we purchased by the same amount.

(2) The earnings for the year ended December 31, 2021 were primarily the result of accelerated accretion as a result of paydowns on certain Re/Non-Performing Loans held at discounts.

(3) Refer to the table below for a breakout of changes in earnings from AG Arc.

The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands).

December 31, 2022

December 31, 2021

Interest income (1) $ 6,670 $ 26,963

Interest expense 1,232 2,200

Total Net Interest Income 5,438 24,763

Net realized gain/(loss) (1,191) 1,938

Net unrealized gain/(loss) (293) 3,298

Total Other Income/(Loss) (1,484) 5,236

After-tax earnings/(loss) at AG Arc (2) (2,135) 8,370

Net unrealized gain/(loss) on investment in AG Arc (3) (5,567) 617

Elimination of gains on loans sold to MITT (4) (6,032) (5,306)

Total AG Arc Earnings/(Loss) (13,734) 3,681

Other operating expenses 478 1,791

Equity in earnings/(loss) from affiliates

$ (10,258) $ 31,889

(1) Interest income decreased from the year ended December 31, 2021 to the year ended December 31, 2022 as a result of a smaller portfolio held through our investments in debt and equity of affiliates during 2022.

Additionally, interest income for the year ended December 31, 2021 includes accelerated accretion resulting from paydowns on certain Re/Non-Performing Loans held at discounts.

(2) The earnings/(loss) at AG Arc during the year ended December 31, 2022 were primarily the result of $(5.5) million of losses related to Arc Home's lending and servicing operations, offset by $3.4 million related to changes in the fair value of the MSR portfolio held by Arc Home.

The earnings/(loss) at AG Arc during the year ended December 31, 2021 were primarily the result of $10.7 million of net income related to Arc Home's lending and servicing operations, offset by $(2.3) million related to changes in the fair value of the MSR portfolio held by Arc Home.

(3) Our investment in AG Arc was valued at 0.94x book value as of December 31, 2022 compared with 1.06x book value as of December 31, 2021.

This resulted in unrealized losses during the year ended December 31, 2022.

(4) 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" for more information on this accounting policy.

Gain on Exchange Offers, net

We did not complete any exchange offers during the year ended December 31, 2022.

We completed two privately negotiated exchange offers during the year ended December 31, 2021.

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We recognized a gain of $0.5 million in connection with the offers.

We completed a public exchange offer and two privately negotiated exchange offers during the year ended December 31, 2020.

As a result of the exchange offers, we exchanged a total of 253,482 shares of our Series A Preferred Stock, 435,272 shares of our Series B Preferred Stock, and 716,822 shares of our Series C Preferred Stock for a total of 1,698,645 shares of common stock and cash consideration of $8.0 million.

We recognized a gain of $10.6 million in connection with the exchange offers.

Book value and Adjusted book value per share

On July 12, 2021, we announced a one-for-three reverse stock split of our outstanding shares of common stock.

The reverse stock split was effected following the close of business on July 22, 2021.

All per share amounts and common shares outstanding for all periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split.

Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP, including all vested shares issued to our Manager and our independent directors under our equity incentive plans as of quarter-end.

As of December 31, 2021, the net proceeds on our preferred stock were $220.5 million.

As of December 31, 2021, the liquidation preference for our issued and outstanding preferred stock was $228.0 million.

As of December 31, 2021 and 2020, our book value per common share calculated using stockholders’ equity less net proceeds on our preferred stock as the numerator was $14.64 and $12.40, respectively.

As of December 31, 2021 and 2020, our adjusted book value per common share calculated using stockholders’ equity less the liquidation preference of our preferred stock as the numerator was $14.32 and $11.81, respectively.

Net interest margin and leverage ratio

Net interest margin and leverage ratio are metrics that management believes should be considered when evaluating the performance of our investment portfolio.

GAAP net interest margin and non-GAAP net interest margin, a non-GAAP financial measure, are calculated by subtracting the weighted average cost of funds from the weighted average yield for our GAAP investment portfolio and our investment portfolio, respectively, both of which exclude cash held by us.

The weighted average yield on our investment portfolio represents an effective interest rate, which utilizes all estimates of future cash flows and adjusts for actual prepayment and cash flow activity as of quarter-end.

The weighted average yield represents an effective interest rate on our cost basis, 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.

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.

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Weighted Average GAAP Investment

Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio

Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a)

Yield 4.99 % 18.05 % 5.14 %

Cost of Funds (a) 2.06 % 3.41 % 2.08 %

Cost of Funds (b)(c) 4.31 % 5.19 % 4.31 %

Net Interest Margin 0.68 % 12.86 % 0.83 %

Leverage Ratio (b) 4.9x (c) 2.4x

Leverage Ratio (d) 8.4x (e) 1.3x

December 31, 2021

Weighted Average GAAP Investment

Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio

Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a)

Yield 3.72 % 9.21 % 3.84 %

Cost of Funds (a) 1.82 % 4.87 % 2.09 %

Cost of Funds (b)(c) 2.06 % 3.41 % 2.08 %

Net Interest Margin 1.66 % 5.80 % 1.76 %

Leverage Ratio (b) 2.4x (c) 1.5x

(a) Includes cost of non-recourse financing arrangements.

(b) The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage.

Leverage Ratio (d) 4.9x (e) 2.4x

(a) Excludes any net TBA positions.

(b) Includes cost of non-recourse financing arrangements.

The benefit of hedging as of December 31, 2022 was 0.13% and the cost of hedging as of December 31, 2021 was 0.22%.

(d) 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.

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.

(e) Refer to the "Financing activities" section below for an aggregate breakout of leverage.

Earnings Available for Distribution

One of our objectives is to generate net income from net interest margin on the portfolio, and management uses Earnings Available for Distribution ("EAD"), as one of several metrics, to help measure our performance against this objective.

EAD replaces our prior presentation of Core Earnings with no changes to the definition.

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.

However, management also believes that our definition of EAD has important limitations as it does not include certain earnings or losses our management team considers in evaluating our financial performance.

Our presentation of EAD may not be comparable to similarly-titled measures of other companies, who may use different calculations.

This non-GAAP measure should not be considered a substitute for, or superior to, Net Income/(loss) available to common stockholders or Net income/(loss) per diluted common share calculated in accordance with GAAP.

Our GAAP financial results and the reconciliations from these results should be carefully evaluated.

We define Core Earnings, a non-GAAP financial measure, as Net Income/(loss) available to common stockholders excluding (i) (a) unrealized gains/(losses) on real estate securities, loans, derivatives and other investments, inclusive of our investment in

AG Arc, and (b) net realized gains/(losses) on the sale or termination of such instruments, (ii) any transaction related expenses incurred in connection with the acquisition or disposition of our investments, (iii) accrued deal-related performance fees payable to Arc Home and third party operators to the extent the primary component of the accrual relates to items that are excluded from Core Earnings, such as unrealized and realized gains/(losses), (iv) realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and the derivatives intended to offset changes in the fair value of those net mortgage servicing rights, (v) deferred taxes recognized at our taxable REIT subsidiaries, if any, (vi) any foreign currency gain/(loss) relating to monetary assets and liabilities, (vii) income from discontinued operations, and (viii) any gains/(losses) associated with exchange transactions on our common and preferred stock.

Items (i) through (viii) above include any amount related to those items held in affiliated entities.

Management considers the transaction related expenses referenced in (ii) above to be similar to realized losses incurred at the acquisition or disposition of an asset and does not view them as being part of its core operations.

Management views the exclusion described in (iv) above to be consistent with how it calculates Core Earnings on the remainder of its portfolio.

Management excludes all deferred taxes because it believes deferred taxes are not representative of current operations.

Core Earnings include the net interest income and other income earned on our investments on a yield adjusted basis, including TBA dollar roll income/(loss) or any other investment activity that may earn or pay net interest or its economic equivalent.

A reconciliation of "Net Income/(loss) available to common stockholders" to Core Earnings for the years ended December 31, 2021 and 2020 is set forth below (in thousands, except per share data):

We define EAD, 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 EAD, such as unrealized and realized gains/(losses), (iv) realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and the derivatives intended to offset changes in the fair value of those net mortgage servicing rights, (v) deferred taxes recognized at our taxable REIT subsidiaries, if any, 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 EAD on the remainder of its portfolio.

Management excludes all deferred taxes because it believes deferred taxes are not

representative of current operations.

EAD 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 EAD for the years ended December 31, 2022 and 2021 is set forth below (in thousands, except per share data):

December 31, 2022 December 31, 2021

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Equity in (earnings)/loss from affiliates 10,258 (31,889)

Net interest income and expenses from equity method investments (2)(3) 23,807 38,025

Net (income)/loss from discontinued operations — (666)

EAD from equity method investments (2)(3) (12,320) 23,807

Other (income)/loss, net — (14)

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Dollar roll income/(loss) 1,999 (3,377)

Core Earnings $ 18,089 $ 22,036

Core Earnings, per Diluted Share (4) $ 1.11 $ 1.88

(1) For the years ended December 31, 2021 and 2020, total transaction related expenses and deal related performance fees included $7.3 million and $(1.2 million), respectively, recorded within the "Transaction related expenses" line item and $1.2 million and $0.6 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs.

(2) For the years ended December 31, 2021 and 2020, $2.5 million or $0.15 per share and $(3.9 million) or $(0.33) 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 per diluted share.

(3) Core income or loss recognized by AG Arc does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us.

We did not eliminate any intra-entity profits for the year ended December 31, 2020.

Earnings available for distribution $ 1,900 $ 18,089

Earnings available for distribution, per Diluted Share (4) $ 0.08 $ 1.11

(1) For the year ended December 31, 2022 and 2021, total transaction related expenses and deal related performance fees included $16.5 million and $7.3 million, respectively, recorded within the "Transaction related expenses" line item and $0.7 million and $1.2 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs.

(2) For the year ended December 31, 2022 and 2021, $9.2 million or $0.40 per share and $2.5 million or $0.15 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights, changes in the fair value of corresponding derivatives, and other asset impairments were excluded from EAD, net of deferred tax expense.

Additionally, for the year ended December 31, 2022 and 2021, $(5.6) million or $(0.24) per share and $0.6 million or $0.04 per share, respectively, of unrealized changes in the fair value of our investment in Arc Home were excluded from EAD.

(3) EAD 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 year ended December 31, 2022 and 2021, we eliminated $6.0 million or $0.26 per share and $5.3 million or $0.33 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" 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.

(4) Per share amounts presented have been adjusted to reflect the one-for-three reverse stock split effected July 22, 2021, where applicable.

Investment activities

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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 are also currently investing in 30 Year Fixed Rate Agency RMBS to utilize excess liquidity.

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 Company Act and REIT tests, among other factors, and may change over time in response to opportunities available in different economic and capital market environments.

As a result, in reacting to market conditions and

taking into account a variety of other factors, including liquidity, duration, and interest rate expectations, the mix of our assets changes over time as we opportunistically deploy capital.

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.

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Residential Investments $ 454,411 $ 459,058 98.2 % 80.5 %

Commercial Investments — 99,668 — % 24.3 %

Agency RMBS 8,389 111,322 1.8 % 19.5 %

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Residential Investments $ 4,202,801 $ 2,725,889 99.5 % 84.6 % 1.3x 2.1x

Commercial Investments — 182,296 — % 13.1 % — 0.9x

Agency RMBS 19,124 495,713 0.5 % 15.4 % 1.7x 3.7x

Investment Portfolio $ 4,221,925 $ 3,221,602 100.0 % 100.0 % 1.3x 2.4x

Investments in Debt and Equity of Affiliates (b) $ 72,026 $ 217,964 N/A N/A (c) (c)

Investments in Debt and Equity of Affiliates $ 49,609 $ 72,026 N/A N/A (b) (b)

GAAP Investment Portfolio $ 4,172,316 $ 3,149,576 N/A N/A 8.4x 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 below).

Cash posted as collateral has been allocated pro-rata by each respective asset class's Economic Leverage amount.

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The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage.

(b) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt.

(b) Refer to the "Financing activities" section below for an aggregate breakout of leverage.

The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of December 31, 2022 and 2021 ($ in thousands):

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Life (Years) (3) Fair Value (1)

Credit Investments:

Residential Investments

Non-QM Loans (4) $ 1,780,012 $ 1,846,162 $ 12,636 $ 1,858,798 4.91 % 3.85 % 4.78 $ —

GSE Non-Owner Occupied Loans

429,424 439,463 1,374 440,837 3.64 % 3.19 % 6.84 —

Residential Mortgage Loans

Non-Agency Loans $ 3,003,137 $ 3,059,975 $ (334,066) $ 2,725,909 5.21 % 5.00 % 9.71 $ 1,844,198

Agency-Eligible Loans 1,293,079 1,291,933 (163,618) 1,128,315 4.11 % 4.15 % 9.88 440,837

Re- and Non-Performing Loans 328,640 289,658 (15,285) 274,373 3.68 % 7.49 % 6.28 350,227

MATT Non-QM Loans — — — — — % — % — 11,839

Re/Non-Performing Loans 428,472 345,650 14,481 360,131 3.55 % 6.82 % 6.57 478,565

Land Related Financing 10,688 10,688 — 10,688 14.50 % 14.50 % 0.09 16,891

Interest Only (6) 160,154 3,507 (112) 3,395 0.38 % 10.12 % 1.81 320

Total Residential Mortgage Loans 4,635,544 4,652,254 (512,969) 4,139,285 4.82 % 4.96 % 9.49 2,663,992

Non-Agency RMBS

Non-Agency Securities 14,894 14,693 (4,834) 9,859 4.34 % 4.60 % 12.21 14,600

Agency-Eligible Securities 16,819 10,145 (467) 9,678 3.22 % 8.47 % 14.06 —

MATT Non-QM Bonds (4) 350,361 31,933 (866) 31,067 0.99 % 20.30 % 3.63 33,998

Re/Non-Performing Securities 33,809 7,971 (117) 7,854 3.11 % 14.00 % 1.68 9,904

Non-Agency RMBS Interest Only (5) 108,464 2,838 2,220 5,058 0.38 % 34.42 % 4.68 3,395

Total Non-Agency RMBS 524,347 67,580 (4,064) 63,516 1.17 % 16.41 % 4.30 61,897

Total Residential Investments 5,159,891 4,719,834 (517,033) 4,202,801 4.61 % 5.13 % 8.96 2,725,889

Total Commercial Investments — — — — — % — % — 182,296

Total Credit Investments 3,303,317 2,698,468 27,421 2,725,889 4.12 % 4.21 % 4.52 873,774

30 Year Fixed Rate — — — — — % — % — 495,713

Excess MSR — — — — — — % — 3,491

Interest Only 127,356 19,771 (647) 19,124 2.87 % 7.54 % 6.63 —

Total Agency RMBS 127,356 19,771 (647) 19,124 2.87 % 7.54 % 6.63 495,713

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Investments in Debt and Equity of Affiliates

Residential Mortgage Loans $ 10,688 $ 10,688 $ — $ 10,688 14.50 % 14.50 % 0.09 $ 28,886

Non-Agency RMBS $ 384,170 $ 39,904 $ (983) $ 38,921 1.31 % 19.03 % 3.45 $ 43,140

GAAP Investment Portfolio $ 4,892,389 $ 4,689,013 $ (516,697) $ 4,172,316 4.69 % 4.99 % 9.34 $ 3,149,576

(1) Refer to Note 10 to the "Notes of the Consolidated Financial Statements" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets.

Our assets held through Investments in debt and equity of affiliates are included in the "MATT Non-QM Loans," "Re/Non-Performing Loans," "Land Related Financing," and "Excess MSR" line items above.

Our assets held through Investments in debt and equity of affiliates are included in the "MATT Non-QM Loans," "Land Related Financing," "MATT Non-QM Bonds," and "Re/Non-Performing Securities" line items above.

(2) Equity residuals with a zero coupon rate are excluded from this calculation.

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Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal.

(4) Prior to 2021, we acquired Non-QM Loans through our equity method investment in MATT.

This line item represents direct purchases of Non-QM Loans, which began in Q1 2021, and retained tranches of certain Non-QM securitizations.

(5) As of December 31, 2021, this line item primarily includes retained tranches from past securitizations.

(6) As of December 31, 2021, this line item includes Non-QM interest-only bonds.

Credit Investments

The following table presents the fair value of the securities and loans in our credit portfolio and a reconciliation to our GAAP credit portfolio (in thousands):

December 31, 2021 December 31, 2020

Residential loans (1) $ 2,663,992 $ 563,263

Commercial real estate loans — 125,508

Total loans 2,663,992 688,771

Non-Agency RMBS (2) 61,897 128,215

CMBS (3) — 56,788

Total Credit securities 61,897 185,003

Total Credit Investments $ 2,725,889 $ 873,774

Investments in Debt and Equity of Affiliates $ 72,026 $ 217,547

Total GAAP Credit Portfolio $ 2,653,863 $ 656,227

(1) Includes Non-QM Loans, GSE Non-Owner Occupied Loans, Re/Non-Performing Loans, and Land Related Financing not held in securitized form.

(2) Includes Non-QM Loans and Re/Non-Performing Loans held in securitized form, as well as Prime, Alt-A/Subprime, Credit Risk Transfer, Non-U.S RMBS, and Interest-Only Securities.

(3) Includes Conduit, Single-Asset/Single-Borrower, Freddie Mac K-Series, and Interest-Only investments.

Residential loans

The following table presents information regarding credit quality for certain categories within our Residential loan portfolio ($ in thousands):

(4) As of December 31, 2022, this line item only includes retained tranches from securitizations.

(5) As of December 31, 2022 and 2021, this line item includes Non-QM interest-only bonds.

Residential mortgage loans

The following tables present certain information regarding credit quality for certain categories within our Residential mortgage loan portfolio ($ in thousands).

December 31, 2022

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Fair Value Original LTV Ratio Current FICO (4) Current 30-59 Days 60-89 Days 90+ Days Fair Value

Non-QM Loans $ 1,765,118 $ 1,844,198 68.19 % 742 $ 1,735,644 $ 15,596 $ 2,666 $ 11,212 $ —

GSE Non-Owner Occupied Loans 429,424 440,837 65.44 % 754 425,594 3,830 — — —

Non-Agency Loans $ 3,003,137 $ 2,725,909 69.41 % 730 $ 2,949,670 $ 31,177 $ 9,819 $ 12,471 $ 1,844,198

Agency-Eligible Loans 1,293,079 1,128,315 66.43 % 756 1,287,032 5,801 246 — 440,837

MATT Non-QM Loans — — — % — — — — — 11,839

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Land Related Financing 10,688 10,688 N/A N/A N/A N/A N/A N/A 16,891

Total Residential loans $ 2,607,342 $ 2,663,992 69.71 % 723 $ 2,423,892 $ 55,975 $ 14,990 $ 89,065 $ 563,263

Investments in Debt and Equity of Affiliates 28,349 28,886 58.42 % 677 6,560 575 — 4,322 127,822

Total GAAP Residential Loans $ 2,578,993 $ 2,635,106 69.76 % 723 $ 2,417,332 $ 55,400 $ 14,990 $ 84,743 $ 435,441

Total Residential mortgage loans $ 4,635,544 $ 4,139,285 69.29 % 731 $ 4,456,826 $ 71,843 $ 21,002 $ 71,665 $ 2,663,992

Residential mortgage loans in Investments in Debt and Equity of Affiliates 10,688 10,688 N/A N/A N/A N/A N/A N/A 28,886

Total GAAP Residential mortgage Loans $ 4,624,856 $ 4,128,597 69.29 % 731 $ 4,456,826 $ 71,843 $ 21,002 $ 71,665 $ 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.

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(2) Weighted average and aging data excludes Land Related Financing.

(3) Amounts are weighted based on unpaid principal balance.

(4) Weighted average current FICO excludes borrowers where FICO scores were not available.

See Note 3 to the "Notes to Consolidated Financial Statements" for a breakout of geographic concentration of credit risk within loans we include in the "Residential mortgage loans, at fair value" and "Securitized residential mortgage loans, at fair value" line items on our consolidated balance sheets.

Credit securities

The following table presents the fair value of our credit securities portfolio by credit rating as of December 31, 2021 and 2020 (in thousands):

Credit Rating - Credit Securities (1)(2) December 31, 2021 December 31, 2020

AAA $ — $ 630

Data is as of November 30, 2022.

See Note 3 to the "Notes to Consolidated Financial Statements" 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 December 31, 2022 and 2021 (in thousands):

Credit Rating - Non-Agency RMBS (1) December 31, 2022

December 31, 2021

BBB $ 7,707 $ 4,074

BB 8,096 7,709

B 12,814 15,018

Below B — 17,046

Not Rated 34,899 35,096

Credit Securities $ 61,897 $ 185,003

Non-Agency RMBS $ 63,516 $ 61,897

Investments in Debt and Equity of Affiliates $ 38,921 $ 43,140

GAAP Basis $ 24,595 $ 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.

(2) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt.

(1) Represents the minimum rating for rated assets of S&P, Moody, Morningstar, and Fitch credit ratings, stated in terms of the S&P equivalent.

The following table presents the geographic concentration of the underlying collateral for our Non-Agency RMBS portfolio ($ in thousands).

December 31, 2022 December 31, 2021

Non-Agency RMBS Non-Agency RMBS

State Fair Value Percentage State Fair Value Percentage

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Florida 3,955 6.2 % Florida 3,661 5.9 %

New Jersey 1,684 2.7 % Texas 4,216 3.4 %

Texas 2,248 3.5 % New Jersey 1,684 2.7 %

New Jersey 1,912 3.0 % Texas 1,511 2.4 %

Other 15,696 24.8 % Other 12,469 20.2 %

Total $ 63,516 100.0 % Total $ 61,897 100.0 %

(1) As of December 31, 2020 Non-Agency RMBS fair value includes $3.2 million of investments where there was no data regarding the underlying collateral.

These positions were excluded from the percent calculation.

The following table presents the fair value ($ in thousands) and the Constant Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the periods presented:

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)

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30 Year Fixed Rate $ — $ 495,713 — % 6.1 %

(1) Represents the weighted average monthly CPRs published during the period for our in-place portfolio.

Investments in debt and equity of affiliates

The below table details our investments in debt and equity of affiliates as of December 31, 2021 and December 31, 2020 (in thousands):

December 31, 2021

December 31, 2020

Assets Liabilities Equity Net Income/(Loss) Assets Liabilities Equity Net Income/(Loss)

MATT Non-QM Loans (1) $ 45,837 $ (30,471) $ 15,366 $ 12,594 $ 153,200 $ (111,135) $ 42,065 $ (26,511)

Re/Non-Performing Loans (2) 9,298 (5,538) 3,760 13,191 41,523 (5,588) 35,935 2,483

Land Related Financing (3) 16,891 — 16,891 2,455 22,824 — 22,824 2,620

Residential Investments - Fair Value / Net income/(loss) 72,026 (36,009) 36,017 28,240 217,547 (116,723) 100,824 (21,408)

Other — — — (32) 417 — 417 (3,481)

Total Investments excluding AG Arc - Fair value / Net income/(Loss) 72,026 (36,009) 36,017 28,208 217,964 (116,723) 101,241 (24,889)

AG Arc - Fair value / Net income/(loss) 53,435 — 53,435 3,681 45,341 — 45,341 23,260

Cash and Other assets/(liabilities) 3,698 (1,127) 2,571 — 5,279 (1,194) 4,085 —

Investments in debt and equity of affiliates / Equity in earnings/(loss) from affiliates $ 129,159 $ (37,136) $ 92,023 $ 31,889 $ 268,584 $ (117,917) $ 150,667 $ (1,629)

(1) As of December 31, 2021, MATT primarily holds retained tranches from past securitizations which continue to reduce in size due to ongoing principal repayments and we do not expect to acquire additional investments within this equity method investment.

(2) Certain Re/Non-Performing Loans held in securitized form are presented net of non-recourse securitized debt.

(3) Land Related Financing continues to reduce in size due to ongoing principal repayments and we do not expect to originate new loans within this equity method investment.

Interest Only 19,124 — 11.0 % — %

Total/Weighted Average $ 19,124 $ 495,713 11.0 % 6.1 %

(1) Represents the weighted average monthly CPRs published during the year for our in-place portfolio.

Financing activities

We use leverage to finance the purchase of our investment portfolio.

Our leverage has primarily been in the form of repurchase agreements, revolving facilities, and securitized debt.

Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date and typically have a term 30 to 90 days.

Our leverage has primarily been in the form of repurchase agreements and similar financing arrangements (which we refer to collectively as financing arrangements), and securitized debt.

Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date.

The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The size of the haircut reflects the perceived risk associated with the pledged asset.

Haircuts may change as our financing arrangements mature or roll and are sensitive to governmental regulations.

Interest rates on borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at which time we may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty.

We have also used revolving facilities, which are typically longer term in nature than repurchase agreements, to finance loans.

Interest rates on these facilities are based on prevailing rates corresponding to the terms of the borrowings, and interest is paid on a monthly basis.

Repurchase agreements and revolving facilities, which we refer to as our financing arrangements, are generally mark-to-market with respect to margin calls and recourse to us.

We had outstanding financing arrangements with five counterparties as of December 31, 2021 and December 31, 2020.

Interest rates for our financing arrangements are determined based on prevailing rates (typically a spread over a base rate) corresponding to the terms of the borrowings, and interest is paid on a monthly basis or, for shorter term arrangements, at the end of the term.

Repurchase agreements typically have a term of up to one year for loans and a term of 30 to 90 days for securities.

Repurchase agreements 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 December 31, 2022 and 2021, respectively.

Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions.

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We also use securitized debt to finance our loan portfolio.

Securitized debt is generally non-mark-to-market with respect to margins calls and non-recourse to us.

Forbearance and Reinstatement Agreements

In connection with the market disruption created by the COVID-19 pandemic, in March 2020, we received notifications of alleged events of default and deficiency notices from several of our financing counterparties.

We engaged in discussions with our financing counterparties and, as a result, entered into a series of forbearance agreements (collectively, the "Forbearance Agreement") with certain of our financing counterparties (the "Participating Counterparties") pursuant to which each Participating Counterparty agreed to forbear from exercising its rights and remedies with respect to events of default and any and all other defaults under the applicable financing arrangement (each, a "Bilateral Agreement") for the period ending June 15, 2020.

On June 10, 2020, we and the Participating Counterparties entered into a reinstatement agreement (the "Reinstatement Agreement"), pursuant to which the Forbearance Agreement was terminated and each Participating Counterparty permanently waived all existing and prior events of default under the applicable Bilateral Agreements.

Pursuant to the Reinstatement Agreement, the Bilateral Agreements were reinstated with certain amendments to reflect current market terms (i.e., increased haircuts and higher coupons), updated financial covenants, and various reporting requirements from us to the Participating Counterparties, releases, certain netting obligations and cross-default provisions.

As a result of the Reinstatement Agreement, default interest on our outstanding borrowings under the Bilateral Agreements ceased to accrue as of June 10, 2020, all cash margin was applied to outstanding balances owed by us, and principal and interest payments on the underlying collateral were permitted to flow to and be used by us, just as it was prior to the Forbearance Agreements.

In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the Forbearance Agreement have been terminated and released.

We also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent.

Concurrently, on June 10, 2020, we entered a separate reinstatement agreement with one of our financing counterparties on substantially the same terms as those set forth in the Reinstatement Agreement.

Refer to Note 12 in the "Notes to Consolidated Financial Statements" for more information on deficiencies that are now settled.

Securitized debt is generally non-mark-to-market with respect to margin calls and non-recourse to us.

Recourse and non-recourse financing

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December 31, 2022 December 31, 2021

Recourse financing - Financing arrangements $ 1,791,596 $ 569,644

Recourse financing - Secured debt (1) — 10,393

Recourse financing - Financing arrangements, including those in Investments in Debt and Equity of Affiliates $ 625,593 $ 1,791,596

Non-recourse financing - Securitized debt, at fair value 3,262,352 999,215

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Total GAAP Financing $ 3,883,539 $ 2,776,958

(1) See the "Contractual obligations–Secured debt" section below for more detail on Secured debt from our Manager.

(2) On January 29, 2021, we and private funds under the management of Angelo Gordon entered into an amendment with respect to our Restructured Financing Arrangement in MATT.

The amendment converted the existing financing to a mark-to-market facility with respect to margin calls that is recourse to us and the private funds managed by Angelo Gordon that invest in MATT up to our and each funds' allocation of the $50.0 million commitment to MATH, which is further described in the "Contractual Obligations–MATT Financing Arrangement Restructuring" section below and Note 12 to the "Notes of the Consolidated Financial Statements."

See Note 6 to the "Notes to Consolidated Financial Statements" for a breakout of the "Financing arrangements" line item on our consolidated balance sheets.

See Note 2 and Note 3 to the "Notes to Consolidated Financial Statements" for more detail on securitized debt and our consolidated variable interest entities.

We define GAAP leverage as the sum of (1) our GAAP financing arrangements, net of any restricted cash posted on such financing arrangements, (2) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled, and (3) securitized debt, at fair value.

We define 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:

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December 31, 2022 Leverage Stockholders' Equity Leverage Ratio

GAAP Securitized debt, at fair value $ 3,262,352

GAAP Financing arrangements 621,187

Restricted cash posted on Financing arrangements (3,357)

GAAP Leverage $ 3,880,182 $ 462,800 8.4x

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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

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Non-recourse financing arrangements (1) (1,021,371)

Net TBA receivable/(payable) adjustment (394,212)

Economic Leverage $ 1,392,255 $ 570,380 2.4x

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As described above, our distribution requirements are based on taxable income rather than GAAP net 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.

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 December 31, 2022.

On March 27, 2020, we announced that our Board of Directors approved a suspension of our quarterly dividends on our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock, beginning with the preferred dividend that would have been declared in May 2020, as well as a suspension of the quarterly dividend on the common stock, beginning with the dividend that normally would have been declared in March 2020, in order to conserve capital and improve our liquidity position during the market volatility due to the COVID-19 pandemic.

Under the terms of the Articles Supplementary governing our series of preferred stock, we cannot pay cash dividends with respect to our common stock if dividends on our preferred stock are in arrears.

On December 17, 2020, we paid our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock dividends that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of $1.54689, $1.50 and $1.50 per share, respectively.

On December 22, 2020, our Board of Directors declared a dividend of $0.09 per common share for the fourth quarter 2020 which was paid on January 29, 2021 to shareholders of record at the close of business on December 31, 2020.

During 2021, we declared our preferred and common dividends in the ordinary course of business.

On July 12, 2021, we announced a one-for-three reverse stock split of our outstanding shares of common stock.

The reverse stock split was effected following the close of business on July 22, 2021.

All per share amounts and common shares outstanding for all periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split.

All per share amounts and common shares outstanding for all applicable periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split.

The following tables detail our common stock dividends declared during the years ended December 31, 2022 and 2021:

Declaration Date Record Date Payment Date Dividend Per Share

3/22/2021 4/1/2021 4/30/2021 $ 0.18

Year Ended December 31, 2022

Year Ended December 31, 2021

Declaration Date Record Date Payment Date Cash Dividend Per Share Declaration Date Record Date Payment Date Cash Dividend Per Share

3/18/2022 3/31/2022 4/29/2022 $ 0.21 3/22/2021 4/1/2021 4/30/2021 $ 0.18

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9/15/2022 9/30/2022 10/31/2022 0.21 9/15/2021 9/30/2021 10/29/2021 0.21

Declaration Date Record Date Payment Date Dividend Per Share

12/19/2022 12/30/2022 1/31/2023 0.18 12/15/2021 12/31/2021 1/31/2022 0.21

The following tables detail our preferred stock dividends declared during the years ended December 31, 2021 and 2020:

Total $ 0.81 Total $ 0.81

The following tables detail our preferred stock dividends declared and paid during the years ended December 31, 2022 and 2021:

Cash Dividend Per Share

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5/17/2021 5/28/2021 6/17/2021 0.51563 0.50 0.50

7/30/2021 8/31/2021 9/17/2021 0.51563 0.50 0.50

11/5/2021 11/30/2021 12/17/2021 0.51563 0.50 0.50

Total $ 2.06252 $ 2.00 $ 2.00

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Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs.

Our principal sources of cash as of December 31, 2021 consisted of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions.

We typically use cash to repay principal and interest on our financing arrangements, to purchase loans, real estate securities, and other real estate related assets, to make dividend payments on our capital stock, and to fund our operations.

At December 31, 2021, we had $137.3 million of liquidity, which consisted of $68.1 million of cash and $69.2 million of unencumbered assets available to support our liquidity needs.

At January 31, 2022, we had $134.3 million of liquidity, which consisted of $67.8 million of cash and $66.5 million of unencumbered assets available to support our liquidity 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 may also generate liquidity when restricted cash that was pledged as collateral for clearing and executing trades, derivatives, and financing arrangements becomes unrestricted when the related collateral requirements are exceeded or at the maturity of the derivative or financing arrangement.

Refer to "—Margin requirements" below discussing instances where we may use liquidity to meet margin requirements.

At December 31, 2022, we had $86.7 million of liquidity, which consisted of $84.6 million of cash and $2.1 million of unencumbered Agency RMBS available to support our liquidity needs.

Refer to the "Contractual obligations" section of this Part II, Item 7 for additional obligations that could impact our liquidity.

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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.

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.

In seeking to effectively manage 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.

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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 7A below for a further discussion on margin.

Refer to the "Financing activities–Forbearance and Reinstatement Agreements" section above for information on the impact of COVID-19 on margin calls in 2020.

The below details changes to our cash, cash equivalents, and restricted cash for the years ended December 31, 2021 and 2020 (in thousands):

Our posting of collateral with our counterparties can be done in cash or assets, 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 Part II, Item 7A below for a further discussion on margin.

The table below details changes to our cash, cash equivalents, and restricted cash for the years ended December 31, 2022 and 2021 (in thousands):

December 31, 2022 December 31, 2021 Change

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(1) Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the years ended December 31, 2022 and 2021, respectively.

Our investment portfolio grew in 2021 following a significant reduction in our investment portfolio size in 2020 as a result of the COVID-19 pandemic.

In addition, distributions received from our equity method investments increased period over period.

(2) Cash used in investing activities for the year ended December 31, 2021 was primarily attributable to purchases of investments less sales of investments and principal repayments of investments.

Cash used by investing activities for the year ended December 31, 2020 was primarily attributable to sales of investments and principal repayments of investments less purchases of investments.

The difference period over period is primarily due to the increased level of investment activity during 2021 as we focused on growing our investment portfolio as compared to significant sales in 2020 as a result of the COVID-19 pandemic.

(3) Cash provided by financing activities for the year ended December 31, 2021 was primarily attributable to borrowing of financing arrangements, proceeds from the issuance of securitized debt, and net proceeds from the issuance of common stock offset by offset by repayment of borrowings under financing arrangements, principal repayments of securitized debt, and dividend payments.

Cash used in financing activities for the year ended December 31, 2020 was primarily attributable to repayments of financing arrangements and dividend payments offset by borrowings under financing arrangements.

The difference period over period is primarily due to financing added to support the increased level of investment and securitization activity during 2021 as compared to a reduction in financing arrangements as a result of significant sales in 2020 due to the COVID-19 pandemic.

(2) Cash used in investing activities for the year ended December 31, 2022 was primarily attributable to purchases of investments, offset by sales of investments, principal repayments on investments, and the settlement of derivatives.

(3) Cash provided by financing activities for the year ended December 31, 2022 was primarily attributable to issuance of securitized debt, offset by net repayments of financing arrangements, dividend payments, and common share repurchases.

Stock repurchase programs

On November 3, 2015, our Board of Directors authorized a stock repurchase program ("Repurchase Program") to repurchase up to $25.0 million of our outstanding common stock.

Such authorization does not have an expiration date.

As part of the Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act.

Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases.

Subject to applicable securities laws, the timing, manner, price and amount of any repurchases of common stock under the Repurchase Program may be determined by our discretion, using available cash resources.

Shares of common stock repurchased by us under the Repurchase Program, if any, will be cancelled and, until reissued, will be deemed to be authorized but unissued shares of common stock as required by Maryland law.

The Repurchase Program may be suspended or discontinued by us at any time and without prior notice and the authorization does not obligate us to acquire any particular amount of common stock.

The cost of the acquisition of shares of our own stock in excess of the aggregate par value of the shares first reduces additional paid-in capital, to the extent available, with any residual cost applied against retained earnings.

We repurchased 0.3 million shares under the Repurchase Program during the year ended December 31, 2021.

We did not repurchase shares under the Repurchase Program during the year ended December 31, 2020.

Approximately $11.0 million of common stock remained authorized for future share repurchases under the Repurchase Program as of December 31, 2021.

On November 3, 2015, our Board of Directors authorized a stock repurchase program to repurchase up to $25.0 million of our outstanding common stock (the "2015 Repurchase Program").

As of June 30, 2022, the $25.0 million maximum repurchase amount authorized under the 2015 Repurchase Program was fully utilized.

See Note 11 in the "Notes to Consolidated Financial Statements" for additional details on the shares repurchased under the 2015 Repurchase Program during the year ended December 31, 2022.

On August 3, 2022, our Board of Directors authorized a stock repurchase program (the "2022 Repurchase Program") to repurchase up to $15.0 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 its 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 repurchase 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 December 31, 2022, approximately $7.8 million of common stock remained authorized for future share repurchases under the 2022 Repurchase Program.

See Note 11 in the "Notes to Consolidated Financial Statements" for additional details on the shares repurchased under the 2022 Repurchase Program during the year ended December 31, 2022.

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 year ended December 31, 2021, we sold 1.0 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $13.1 million.

For the year ended December 31, 2020, we sold 0.7 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $7.1 million.

Since inception of the program, the Company has sold approximately 2.2 million shares of common stock under the Equity Distribution Agreements for gross proceeds of $48.3 million.

We have 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 year ended December 31, 2022, we did not issue any shares of common stock under the Equity Distribution Agreements.

For the year ended December 31, 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

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Exchange Offers

The below details the privately negotiated exchange agreements with existing holders of our preferred shares exchanged for common shares during the year ended December 31, 2021.

Subsequent to each transaction closed, the Preferred Stock exchanged pursuant to the exchange agreement was reclassified as authorized but unissued shares of preferred stock without designation as to class or series ($ in thousands).

The below details privately negotiated exchange agreements with existing holders of the our preferred shares exchanged for common shares during 2021.

We did not complete any exchange offers during 2022.

Subsequent to each transaction, the Preferred Stock exchanged pursuant to the exchange agreement was reclassified as authorized but unissued shares of preferred stock without designation as to class or series ($ in thousands).

Preferred Shares Exchanged

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Management agreement

On June 29, 2011, we entered into a management agreement with our Manager, pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses.

The management 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.

For the years ended December 31, 2021 and 2020, we have incurred management fees of $6.8 million and $7.2 million, respectively.

As of December 31, 2021 and 2020, we have recorded management fees payable of $1.8 million and $1.7 million, respectively.

Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us.

We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services.

Our reimbursement obligation is not subject to any dollar limitation;

however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager.

For the years ended December 31, 2021 and 2020, we have accrued $6.3 million and $7.4 million, respectively, representing a reimbursement of expenses which are recorded within the "Other operating expenses" and "Transaction related expenses" line items on the consolidated statements of operations.

As of December 31, 2021 and 2020, we recorded a reimbursement payable to the Manager of $2.1 million and $1.8 million, respectively.

For the year ended December 31, 2021, the Manager agreed to waive its right to receive expense reimbursements of $0.8 million.

On April 6, 2020, we executed an amendment to the management agreement, pursuant to which the Manager agreed to defer our payment of the management fee and reimbursement of expenses, effective the first quarter of 2020 through September 30, 2020.

All deferred expense reimbursements were paid as of September 30, 2020.

On September 24, 2020, we executed an amendment (the "Second Management Agreement Amendment") to the management agreement, pursuant to which the Manager agreed to receive a portion of the deferred base management fee in shares of common stock.

Pursuant to the Second Management Agreement Amendment, the Manager agreed to purchase (i) 405,123 shares of common stock in full satisfaction of the deferred base management fee of $3.8 million payable by us in respect to the first and second quarters of 2020 and (ii) 51,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by us in respect to the third quarter of 2020.

The shares of common stock issued to the Manager were valued at $9.45 per share based on the midpoint of the estimated range of our book value per share as of August 31, 2020.

The remaining third quarter 2020 management fee was paid in the normal course of business.

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.

The below table details the management fees incurred during the years ended December 31, 2022 and 2021 (in thousands).

December 31, 2022

December 31, 2021

Management fee to affiliate $ 8,096 $ 6,814

As of December 31, 2022 and 2021, we recorded management fees payable of $2.1 million and $1.8 million, respectively.

The management fee payable is included within the "Due to affiliates" item within the "Other liabilities" line item on the consolidated balance sheets.

Incentive fee

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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.

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.

On April 10, 2020, in connection with the first Forbearance Agreement, we issued a secured promissory note (the "Note") to the Manager evidencing a $10 million loan made by the Manager to us.

Additionally, on April 27, 2020, in connection with the second Forbearance Agreement, we entered into an amendment to the Note to reflect an additional $10 million loan by the Manager to us.

The $10 million loan made by the Manager on April 10, 2020 was repaid in full with interest when it matured on March 31, 2021, and the $10 million loan made on April 27, 2020 was repaid in full with interest when it matured on July

The unpaid balance of the Note accrued interest at a rate of 6.0% per annum.

Interest on the Note was payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note.

The Note and accrued interest on the Note, when outstanding, were included within the due to affiliates amount, which is included within the "Other Liabilities" line item in the consolidated balance sheets.

Expense Reimbursement

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.

The below table details the expense reimbursement incurred during the years ended December 31, 2022 and 2021 (in thousands).

Consolidated statements of operations line item:

December 31, 2022 December 31, 2021

Non-investment related expenses (1)

$ 4,646 $ 4,322

Investment related expenses

Transaction related expenses 2,757 841

Expense reimbursements to Manager or its affiliates $ 8,158 $ 6,320

(1) For the years ended December 31, 2022 and December 31, 2021, our Manager agreed to waive its right to receive expense reimbursements of $1.5 million and $0.8 million, respectively.

As of December 31, 2022 and 2021, we recorded a reimbursement payable to our Manager or its affiliates of $1.3 million and $2.1 million, respectively.

The reimbursement payable to the Manager or its affiliates is included within the "Due to affiliates" item within the "Other liabilities" line item on the consolidated balance sheets.

Share-based compensation

Effective on April 15, 2020 upon the approval of our stockholders at our Annual Meeting, the 2020 Equity Incentive Plan provides for 666,666 shares of common stock to be issued.

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 December 31, 2022, 551,945 shares of common stock were available to be awarded under the 2020 Equity Incentive Plan.

Since our IPO, we have granted an aggregate of 35,264 and 67,354 shares of restricted common stock to our independent directors under our equity incentive plans, dated July 6, 2011 (the "2011 Equity Incentive Plans") and our 2020 Equity Incentive Plan, respectively.

As of December 31, 2021, all the shares of restricted common stock granted to our independent directors have vested.

Following approval of our stockholders at our 2021 annual meeting of stockholders, the AG Mortgage Investment Trust, Inc.

2021 Manager Equity Incentive Plan (the "2021 Manager Plan") became effective on April 7, 2021 and provides for a maximum of 573,425 shares of common stock that may be subject to awards thereunder to our Manager.

Since inception of the 2020 Equity Incentive Plan and through December 31, 2022, we have granted an aggregate of 114,721 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 December 31, 2022, there were no shares or awards issued under the 2021 Manager Plan.

Further, since our IPO, we have issued 13,416 shares of restricted common stock and 40,000 restricted stock units to our Manager under our 2011 Equity Incentive Plans.

As of July 1, 2020, all shares of restricted common stock and restricted stock units granted to our Manager have fully vested.

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" for details on our commitments as of December 31, 2022.

MATT Financing Arrangement Restructuring

See Note 10 and Note 12 of the "Notes to Consolidated Financial Statements" for detail on the MATT Restructured Financing Arrangement and our commitments as of December 31, 2021.

Off-balance sheet arrangements

Our investments in debt and equity of affiliates primarily consist of real estate securities, loans, and our interest in AG Arc.

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.

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These retained interests are included in the MATT Non-QM Loans and Re/Non-Performing Loans line items of our investment portfolio.

See Note 2 to the "Notes to Consolidated Financial Statements" for a discussion of investments i n debt and equity of affiliates.

We have entered into TBA positions in connection with purchases of GSE Non-Owner Occupied Loans .

See Notes 2 and 10 to the "Notes to Consolidated Financial Statements" 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.

As of December 31, 2021 , we had a net short TBA position with a net receivable amount and fair market valu e of $394.2 million and recorded $13 thousand in the "Other liabilities" line item on our consolidated balance sheets.

In addition to our investments in debt and equity of affiliates and TBA positions described above, we also have commitments outstanding on certain loans.

For additional information on our commitments as of December 31, 2021, refer to Note 12 of the "Notes to Consolidated Financial Statements." 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.

Refer to Note 7 to the "Notes to Consolidated Financial Statements" for additional detail on TBAs as of December 31, 2022 , if applicable.

For additional information on our commitments as of December 31, 2022, refer to Note 12 of the "Notes to Consolidated Financial Statements." 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.

Our most critical accounting policies 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.

For additional information related to 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."

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 amounts of income 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 December 31, 2021 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in arriving at those estimates, which could materially affect reported amounts of assets, liabilities and accumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and other comprehensive income during the periods presented.

Moreover, the uncertainty over the ultimate impact that that the COVID-19 pandemic will have on the global economy generally, and on our business in particular, makes any estimate and assumption inherently less certain than would be the case absent the current and potential impacts of the COVID-19 pandemic.

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 available.

For more information on our fair value measurements, see Note 5 to the "Notes to Consolidated Financial Statements." 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."

Although our estimates contemplate conditions as of December 31, 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 and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented.

Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain.

The following is a description of our critical accounting estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations:

Valuation of financial instruments

We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825").

For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price.

However, many of our financial instruments are not traded in an active market.

Therefore, our Manger generally uses third-party valuations when available.

If third-party valuations are not available, our Manager uses other valuation techniques, such as the discounted cash flow methodology.

Summary descriptions, for various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 5 to the "Notes to Consolidated Financial Statements." Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements.

The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both asset level characteristics and macroeconomic assumptions and/or inputs, which are generally based on current market and economic conditions.

Changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized to be different than the valuations currently estimated.

The significant unobservable inputs used in the fair value measurement of our financial instruments are yields, prepayment rates, probability of default, and loss severity in the event of default.

Significant increases (decreases) in any of those inputs in

isolation would result in a significantly lower (higher) fair value measurement.

Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.

The significant unobservable input used in the fair value measurement of our investment in Arc Home is the book value multiple.

Significant increases (decreases) in the multiple applied would result in a significantly higher (lower) fair value measurement.

Our valuations are sensitive to changes in interest rates.

Refer to the interest rate sensitivity analysis included in Item 7A.

Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K for further information.

Refer to Note 5 to the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our assets and liabilities accounted for at fair value at December 31, 2022, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations.

Interest income recognition

Interest income on our loan and securities portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such loans or securities.

We have elected to record interest in accordance with ASC 835-30-35-2, "Imputation of Interest," using the effective interest method for all loans and securities accounted for under the fair value option in accordance with ASC 825, "Financial Instruments." As such, premiums and discounts are amortized or accreted into interest income over the lives of the loans or securities.

To record interest income using the effective interest method, we reassess the cash flows on our investments on at least a quarterly basis.

In estimating these cash flows, there are a number of assumptions made that are uncertain and subject to judgments and assumptions based on subjective and objective factors and contingencies.

These include the rate and timing of principal and interest receipts (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations.

In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be estimated.

An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the yield or interest income earned on such assets.

An increase in the prepayment rate will similarly accelerate the accretion of purchase discounts, conversely increasing the yield or interest income earned on such assets.

A decrease in the prepayment rate will have a directionally opposite impact on the yield or interest income.

As further discussed in Note 2 of the "Notes to Consolidated Financial Statements," differences between previously estimated cash flows and current actual and anticipated cash flows caused by changes to prepayment or other assumptions are adjusted retrospectively through a "catch up" adjustment for the impact of the cumulative change in the effective yield through the reporting date for securities accounted for under ASC 320-10 (generally, Agency RMBS) or adjusted prospectively through an adjustment of the yield over the remaining life of the investment for investments accounted for under ASC 325-40 (generally, Non-Agency RMBS and interest-only securities) and mortgage loans accounted for under ASC 310-10.

Investment Consolidation

An entity is a variable interest entity ("VIE") if the equity investors (i) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, (ii) are unable to direct the entity’s activities or (iii) are not exposed to the entity’s losses or entitled to its residual returns.

VIEs within the scope of ASC 810-10, "Consolidation" are required to be consolidated by their primary beneficiary.

The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Determining the primary beneficiary of a VIE requires judgment.

We determined that for the securitizations we consolidate, our ownership provides us with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE.

In addition, we have the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause.

The securitization trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders.

The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity.

Our risks associated with our involvement with these VIEs are limited to

our risks and rights as a holder of the security we have retained as well as certain risks which may occur when we act as either the sponsor and/or depositor of and the seller to the securitization entities.

Our interest in the assets held by consolidated securitization vehicles, which are consolidated on our consolidated balance sheets, is restricted by the structural provisions of these trusts, and a recovery of our investment in the vehicles will be limited by each entity’s distribution provisions.

The liabilities of the securitization vehicles, which are also consolidated on our consolidated balance sheets, are non-recourse to us, and can only be satisfied using proceeds from each securitization vehicle’s respective assets.

The assets of securitization entities are comprised of residential mortgage loans.

We perform ongoing reassessments of whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion to change.

REIT Qualification

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

What changed 10-K

Item 7. Management’s Discussion and Analysis