TPG Mortgage Investment Trust, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in this report. Our company We are a residential mortgage REIT with a focus on investing in a diversified risk-adjusted portfolio of residential mortgage-related assets in the U.S. mortgage market. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and capital appreciation. We focus our investment activities primarily on acquiring and securitizing newly-originated residential mortgage loans within the non-agency segment of the housing market. We obtain our assets through Arc Home, LLC ("Arc Home"), our residential mortgage loan originator in which we own an approximate 44.6% interest, and through other third-party origination partners. We finance our acquired loans through various financing lines on a short-term basis and utilize Angelo, Gordon & Co., L.P.'s ("Angelo Gordon") proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit. Through our ownership in Arc Home, we also have exposure to mortgage banking activities. Arc Home is a multi-channel licensed mortgage originator and servicer primarily engaged in the business of originating and selling residential mortgage loans while retaining the mortgage servicing rights associated with certain loans that it originates. Our investment portfolio (which excludes our ownership in Arc Home) includes Residential Investments and Agency RMBS. Currently, our Residential Investments primarily consist of newly originated Non-Agency Loans and Agency-Eligible Loans, which we refer to as our target assets. In addition, we may also invest in other types of residential mortgage loans and other mortgage related assets. We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011. We conduct our operations to qualify and be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute 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 48 management agreement. Angelo Gordon is a leading privately-held alternative investment firm focusing on credit and real estate strategies. Executive summary 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 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; and • 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 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; and ◦ 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 • 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; and ◦ 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 In the "Investment activities," "Financing activities," "Hedging activities" and "Liquidity and capital resources" sections of this Part II, Item 7, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Notes 2 and 10 to the "Notes to Consolidated Financial 49 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 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. Market Conditions 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 50 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 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. 51 Year Ended December 31, 2022 compared to the Year Ended December 31, 2021 The table below presents certain information from our consolidated statements of operations for the years ended December 31, 2022 and 2021 (in thousands): Year Ended Increase/(Decrease) December 31, 2022 December 31, 2021 Statement of Operations Data: Net Interest Income Interest income $ 180,303 $ 70,662 $ 109,641 Interest expense 118,918 27,250 91,668 Total Net Interest Income 61,385 43,412 17,973 Other Income/(Loss) Net interest component of interest rate swaps (4,922) (4,862) (60) Net realized gain/(loss) 81,389 1,698 79,691 Net unrealized gain/(loss) (137,634) 62,699 (200,333) Other income/(loss), net — 37 (37) Total Other Income/(Loss) (61,167) 59,572 (120,739) Expenses Management fee to affiliate 8,096 6,814 1,282 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 Total Expenses 43,060 30,687 12,373 Income/(loss) before equity in earnings/(loss) from affiliates (42,842) 72,297 (115,139) Equity in earnings/(loss) from affiliates (10,258) 31,889 (42,147) Net Income/(Loss) (53,100) 104,186 (157,286) Gain on Exchange Offers, net — 472 (472) Dividends on preferred stock (18,344) (18,785) 441 Net Income/(Loss) Available to Common Stockholders $ (71,444) $ 85,873 $ (157,317) Interest income 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). Year Ended 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, inclusive of our financing arrangements and securitized debt, on our GAAP investment portfolio. 52 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). Year Ended 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. 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). Year Ended 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. Year Ended 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 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 53 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. Year Ended December 31, 2022 December 31, 2021 Residential mortgage loans $ (539,987) $ 25,018 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 Total Net unrealized gain/(loss) $ (137,634) $ 62,699 Management fee to affiliate Our management fee is based upon a percentage of our Stockholders’ Equity. 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 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. 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, and other services. Refer to the "Contractual obligations" section below for more detail on certain expenses reimbursable to the Manager. The following table presents a summary of our non-investment related expenses for the years ended December 31, 2022 and 2021 (in thousands). Year Ended December 31, 2022 December 31, 2021 Affiliate reimbursement (1) $ 4,646 $ 4,322 Professional Fees 1,993 2,409 D&O insurance 1,236 1,465 Directors' compensation 681 672 Other 736 877 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. 54 Investment related expenses 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). Year Ended 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 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 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 Equity in earnings/(loss) from affiliates represents our share of earnings and profits of investments held within affiliated entities. Substantially all of these investments are comprised of real estate securities, loans, and our investment in AG Arc which holds our investment in Arc Home. The below tables summarize the components of the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Year Ended December 31, 2022 December 31, 2021 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. (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. 55 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Year Ended 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. As a result of the exchange offers, we exchanged 153,325 shares of our 8.25% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), 437,087 shares of our 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock"), and 154,383 shares of our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") (collectively, "preferred stock") for a total of 1,367,264 shares of common stock. We recognized a gain of $0.5 million in connection with the offers. 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. 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 or receive rates on our 56 interest rate swaps. GAAP and non-GAAP cost of funds are weighted by the outstanding financing arrangements on our GAAP investment portfolio and our investment portfolio, respectively, and the fair value of securitized debt at quarter-end. Our leverage ratio is determined by our portfolio mix as well as many additional factors, including the liquidity of our portfolio, the availability and price of our financing, the available capacity to finance our assets, and anticipated regulatory developments. See the "Financing activities" section below for more detail on our leverage ratio. The table below sets forth the net interest margin and leverage ratio on our investment portfolio as of December 31, 2022 and 2021 and a reconciliation to the net interest margin and leverage ratio on our GAAP investment portfolio. December 31, 2022 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 4.99 % 18.05 % 5.14 % Cost of Funds (b)(c) 4.31 % 5.19 % 4.31 % Net Interest Margin 0.68 % 12.86 % 0.83 % 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 (a) Yield 3.72 % 9.21 % 3.84 % Cost of Funds (b)(c) 2.06 % 3.41 % 2.08 % Net Interest Margin 1.66 % 5.80 % 1.76 % Leverage Ratio (d) 4.9x (e) 2.4x (a) Excludes any net TBA positions. (b) Includes cost of non-recourse financing arrangements. (c) Cost of Funds includes the cost (interest expense) or benefit (interest income) from our interest rate hedges. 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. (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 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 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 57 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): Year Ended December 31, 2022 December 31, 2021 Net Income/(loss) available to common stockholders $ (71,444) $ 85,873 Add (Deduct): Net realized (gain)/loss (81,389) (1,698) Net unrealized (gain)/loss 137,634 (62,699) Transaction related expenses and deal related performance fees (1) 17,162 8,558 Equity in (earnings)/loss from affiliates 10,258 (31,889) EAD from equity method investments (2)(3) (12,320) 23,807 Other (income)/loss, net — (14) (Gains) from Exchange Offers, net — (472) Dollar roll income/(loss) 1,999 (3,377) 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) Per share amounts presented have been adjusted to reflect the one-for-three reverse stock split effected July 22, 2021, where applicable. Investment activities We aim to allocate capital to investment opportunities with attractive risk/return profiles in our target asset classes. Our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans. We finance our acquired loans through various financing lines on a short-term basis and securitize the loans to obtain long-term, non-recourse, non-mark-to-market financing as market conditions permit. We may also invest in Agency RMBS to utilize excess liquidity. Our investment and capital allocation decisions depend on prevailing market conditions and compliance with Investment Company Act and REIT tests, among other factors, and may change over time in response to opportunities available in different economic and capital market environments. As a result, in reacting to market conditions and taking into account a variety of other factors, including liquidity, duration, and interest rate expectations, the mix of our assets changes over time as we deploy capital. We actively evaluate our investments based on factors including, among others, the characteristics of the underlying collateral, geography, expected return, expected future prepayment trends, supply of and demand for our investments, costs of financing, costs of hedging, expected future interest rate volatility, and the overall shape of the U.S. Treasury and interest rate swap yield curves. We allocate our equity by investment type using the fair value of our investment portfolio, less any associated leverage, inclusive of any long TBA position (at cost). We allocate all non-investment portfolio related assets and liabilities to our investment portfolio based on the characteristics of such assets and liabilities in order to sum to stockholders' equity per the consolidated balance sheets. Our equity allocation method is a non-GAAP methodology and may not be comparable to the similarly titled measure or concepts of other companies, who may use different calculations and allocation methodologies. 58 The following table presents a summary of the allocated equity of our investment portfolio as of December 31, 2022 and 2021 ($ in thousands): Allocated Equity Percent of Equity December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Residential Investments $ 454,411 $ 459,058 98.2 % 80.5 % Agency RMBS 8,389 111,322 1.8 % 19.5 % Total $ 462,800 $ 570,380 100.0 % 100.0 % The following table presents a summary of our investment portfolio as of December 31, 2022 and 2021 and a reconciliation to our GAAP Investment Portfolio ($ in thousands): Fair Value Percent of Investment Portfolio Fair Value Leverage Ratio (a) December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Residential Investments $ 4,202,801 $ 2,725,889 99.5 % 84.6 % 1.3x 2.1x Agency RMBS 19,124 495,713 0.5 % 15.4 % 1.7x 3.7x Total: Investment Portfolio $ 4,221,925 $ 3,221,602 100.0 % 100.0 % 1.3x 2.4x Less: Investments in Debt and Equity of Affiliates $ 49,609 $ 72,026 N/A N/A (b) (b) Total: 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 above). Cash posted as collateral has been allocated pro-rata by each respective asset class's Economic Leverage amount. The Economic Leverage Ratio excludes any fully non-recourse financing arrangements and includes any net receivables or payables on TBAs. The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage. (b) Refer to the "Financing activities" section below for an aggregate breakout of leverage. 59 The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of December 31, 2022 and 2021 ($ in thousands): December 31, 2022 December 31, 2021 Instrument Current Face Amortized Cost Unrealized Mark-to-Market Fair Value (1) Weighted Average Coupon (2) Weighted Average Yield Weighted Average Life (Years) (3) Fair Value (1) Residential Investments 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 Land Related Financing 10,688 10,688 — 10,688 14.50 % 14.50 % 0.09 16,891 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 Agency RMBS: 30 Year Fixed Rate — — — — — % — % — 495,713 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 Total: Investment Portfolio $ 5,287,247 $ 4,739,605 $ (517,680) $ 4,221,925 4.56 % 5.14 % 8.90 $ 3,221,602 Less: 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 Total: 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," "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. (3) Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. (4) As of 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. 60 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 December 31, 2021 Unpaid Principal Balance Weighted Average (1)(2)(3) Aging by Unpaid Principal Balance (1)(2) Fair Value Original LTV Ratio Current FICO (4) Current 30-59 Days 60-89 Days 90+ Days Fair Value 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 Re/Non-Performing Loans 328,640 274,373 79.61 % 643 220,124 34,865 10,937 59,194 350,227 Land Related Financing 10,688 10,688 N/A N/A N/A N/A N/A N/A 16,891 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 Less: 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. There may be limited data available regarding the underlying collateral of the residual positions. (2) Weighted average and aging data excludes Land Related Financing. (3) Amounts are weighted based on unpaid principal balance. (4) Weighted average current FICO excludes borrowers where FICO scores were not available. 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 Not Rated 34,899 35,096 Total: Non-Agency RMBS $ 63,516 $ 61,897 Less: Investments in Debt and Equity of Affiliates $ 38,921 $ 43,140 Total: GAAP Basis $ 24,595 $ 18,757 (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. 61 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 State Fair Value Percentage State Fair Value Percentage California $ 29,972 47.2 % California $ 31,480 50.9 % New York 9,733 15.3 % New York 11,092 17.9 % Florida 3,955 6.2 % Florida 3,661 5.9 % 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 % Agency RMBS The following table presents the fair value and the Constant Prepayment Rate ("CPR") experienced on our GAAP Agency RMBS portfolio for the periods presented ($ in thousands). Fair Value CPR (1) Agency RMBS December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 30 Year Fixed Rate $ — $ 495,713 — % 6.1 % 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 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 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. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity and liquidity, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that we fail to comply with the covenants contained in these financing arrangements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the associated agreement. As of December 31, 2022, we are in compliance with all of our financial covenants. We also use securitized debt to finance our loan portfolio. Securitized debt is generally non-mark-to-market with respect to margin calls and non-recourse to us. 62 Recourse and non-recourse financing The below table provides detail on the breakout between recourse and non-recourse financing as of December 31, 2022 and 2021 (in thousands): December 31, 2022 December 31, 2021 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 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 16,409 22,156 Total Financing 3,904,354 2,812,967 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 4,406 13,853 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 16,409 22,156 Total Financing in Investments in Debt and Equity of Affiliates 20,815 36,009 Total GAAP Financing $ 3,883,539 $ 2,776,958 Leverage We define GAAP leverage as the sum of (1) GAAP Securitized debt, at fair value, (2) our GAAP Financing arrangements, net of any restricted cash posted on such financing arrangements, and (3) the amount payable on purchases that have not yet settled less the financing remaining on sales that have not yet settled. We define Economic Leverage, a non-GAAP metric, as the sum of: (i) our GAAP leverage, exclusive of any fully non-recourse financing arrangements, (ii) financing arrangements held through affiliated entities, net of any restricted cash posted on such financing arrangements, exclusive of any financing utilized through AG Arc, any adjustment related to unsettled trades as described in (2) in the previous sentence, and any non-recourse financing arrangements and (iii) our net TBA position (at cost), if any. The calculations in the tables below divide GAAP leverage and Economic Leverage by our GAAP stockholders’ equity to derive our leverage ratios. The following tables present a reconciliation of our Economic Leverage ratio to GAAP Leverage ($ in thousands). 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 Financing arrangements through affiliated entities 20,790 Non-recourse financing arrangements (1) (3,278,761) Net TBA receivable/(payable) adjustment (39,206) Economic Leverage $ 583,005 $ 462,800 1.3x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. 63 December 31, 2021 Leverage Stockholders’ Equity Leverage Ratio GAAP Securitized debt, at fair value $ 999,215 GAAP Financing arrangements 1,777,743 Restricted cash posted on Financing arrangements (4,951) Purchase price payable on loans 87 GAAP Leverage $ 2,772,094 $ 570,380 4.9x Financing arrangements through affiliated entities 35,744 Non-recourse financing arrangements (1) (1,021,371) Net TBA receivable/(payable) adjustment (394,212) Economic Leverage $ 1,392,255 $ 570,380 2.4x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. Hedging activities Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions in to-be-announced securities. In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements" for more information. Dividends Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, (vi) methods of depreciation and (vii) differences between GAAP income or losses in our TRSs’ and taxable income resulting from dividend distributions to the REIT from our TRSs'. Undistributed taxable income is based on current estimates and is not finalized until we file our annual tax return for that tax year, typically in October of the following year. We did not have any undistributed taxable income as of December 31, 2022. On July 12, 2021, we announced a one-for-three reverse stock split of our outstanding shares of common stock. The reverse stock split was effected following the close of business on July 22, 2021. All per share amounts and common shares outstanding for all applicable periods presented have been adjusted on a retroactive basis to reflect the one-for-three reverse stock split. 64 The following tables detail our common stock dividends declared during the years ended December 31, 2022 and 2021: 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 6/15/2022 6/30/2022 7/29/2022 0.21 6/15/2021 6/30/2021 7/30/2021 0.21 9/15/2022 9/30/2022 10/31/2022 0.21 9/15/2021 9/30/2021 10/29/2021 0.21 12/19/2022 12/30/2022 1/31/2023 0.18 12/15/2021 12/31/2021 1/31/2022 0.21 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: 2022 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/18/2022 2/28/2022 3/17/2022 $ 0.51563 $ 0.50 $ 0.50 5/2/2022 5/31/2022 6/17/2022 0.51563 0.50 0.50 8/3/2022 8/31/2022 9/19/2022 0.51563 0.50 0.50 11/3/2022 11/30/2022 12/19/2022 0.51563 0.50 0.50 Total $ 2.06252 $ 2.00 $ 2.00 2021 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/16/2021 2/26/2021 3/17/2021 $ 0.51563 $ 0.50 $ 0.50 5/17/2021 5/28/2021 6/17/2021 0.51563 0.50 0.50 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 Liquidity and capital resources Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs. Our principal sources of cash consist of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase loans, real estate securities, and other real estate related assets, to make dividend payments on our capital stock, to repurchase our capital stock, and to fund our operations. 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. Margin requirements The fair value of our loans and real estate securities fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool 65 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 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. Typically, if interest rates increase or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will need to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in the residential mortgage market. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which may force us to liquidate assets into potentially unfavorable market conditions and harm our results of operations and financial condition. Further, an unexpected rise in interest rates and a corresponding fall in the fair value of our securities may also force us to liquidate assets under difficult market conditions, thereby harming our results of operations and financial condition, in an effort to maintain sufficient liquidity to meet increased margin calls. Similar to the margin calls that we receive on our borrowing agreements, we may also receive margin calls on our derivative instruments when their fair value declines. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the terms of the derivatives involved. We may also receive margin calls on our derivatives based on the implied volatility of interest rates. Our posting of collateral with our counterparties can be done in cash or 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. Cash Flows The table below details changes to our cash, cash equivalents, and restricted cash for the years ended December 31, 2022 and 2021 (in thousands): Years Ended December 31, 2022 December 31, 2021 Change Cash, cash equivalents, and restricted cash, Beginning of Period $ 100,229 $ 62,318 $ 37,911 Net cash provided by (used in) operating activities (1) 22,520 26,298 (3,778) Net cash provided by (used in) investing activities (2) (1,490,351) (1,899,691) 409,340 Net cash provided by (used in) financing activities (3) 1,466,405 1,911,294 (444,889) Net change in cash, cash equivalents and restricted cash (1,426) 37,901 (39,327) Effect of exchange rate changes on cash — 10 (10) Cash, cash equivalents, and restricted cash, End of Period $ 98,803 $ 100,229 $ (1,426) (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. (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 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 66 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 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 On November 22, 2021, we completed a public offering of 7.0 million shares of our common stock and subsequently issued an additional 1.1 million shares pursuant to the underwriters' exercise of their over-allotment option at a price of $9.98 per share. Net proceeds to us from the offering were approximately $80.0 million, after deducting estimated offering expenses. Exchange Offers The below details privately negotiated exchange agreements with existing holders of the our preferred shares exchanged for common shares during 2021. We did not complete any exchange offers during 2022. Subsequent to each transaction, the Preferred Stock exchanged pursuant to the exchange agreement was reclassified as authorized but unissued shares of preferred stock without designation as to class or series ($ in thousands). Preferred Shares Exchanged Date Shares of Series A Preferred Stock Shares of Series B Preferred Stock Shares of Series C Preferred Stock Total Preferred Stock Par Value Common Shares Exchanged March 17, 2021 153,325 350,609 — $ 12,598 937,462 June 14, 2021 — 86,478 154,383 6,022 429,802 As of December 31, 2022, we had outstanding 1.7 million shares of Series A Preferred Stock, 3.7 million shares of Series B Preferred Stock, and 3.7 million shares of Series C Preferred Stock. Common Stock Issuance to the Manager Refer to "Contractual obligations–Management agreement" below for more detail related to the Second Management Agreement Amendment. 67 Forward-looking statements regarding liquidity Based upon our current portfolio, leverage and available borrowing arrangements, we believe the net proceeds of our common equity offerings, preferred equity offerings, and private placements, combined with cash flow from operations and our available borrowing capacity will be sufficient to enable us to meet our anticipated liquidity requirements, including funding our investment activities, paying fees under our management agreement, funding our distributions to stockholders and paying general corporate expenses. Contractual obligations Management agreement The management agreement, as amended, provides for payment to the Manager of a management fee, an incentive fee, and reimbursements of certain expenses incurred by the Manager or its affiliates on behalf of us. Management fee The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders’ Equity, per annum. For purposes of calculating the management fee, "Stockholders’ Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on our financial statements. The below table details the management fees incurred during the years ended December 31, 2022 and 2021 (in thousands). Year Ended 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 In connection with our common stock offering in November 2021, including the Manager's purchase of 700,000 shares in the offering, on November 22, 2021, we and the Manager executed an amendment (the "Third Amendment") to the management agreement, pursuant to which we will pay the Manager an annual incentive fee in addition to the base management fee. Pursuant to the Third Amendment, the Manager waived the annual incentive fee with respect to the fiscal years ending December 31, 2021 and December 31, 2022, and the annual incentive fee will first be payable with respect to the fiscal year ending December 31, 2023. The annual incentive fee with respect to each applicable fiscal year will be equal to 15% of the amount by which our cumulative adjusted net income from the date of the Third Amendment exceeds the cumulative hurdle amount, which represents an 8% return (cumulative, but not compounding) on an equity hurdle base consisting of the sum of (i) our adjusted book value (calculated in the manner described in our public filings) as of October 31, 2021, (ii) $80.0 million, and (iii) the gross proceeds of any subsequent public or private common stock offerings by us. The annual incentive fee will be payable in cash, or, at the option of our Board of Directors, shares of our common stock or a combination of cash and shares. In addition, pursuant to the Third Amendment, the term of the management agreement was extended until June 30, 2023, unless earlier terminated in accordance with its terms. Thereafter, the management agreement will continue to renew automatically 68 each year for an additional one-year period, unless the Company or the Manager exercise its respective termination rights. All other terms and conditions of the management agreement continued without change. Expense Reimbursement Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, reimbursements are subject to an annual budget process which combines guidelines from the Management Agreement with oversight by our Board of Directors and discussions with our Manager. The below table details the expense reimbursement incurred during the years ended December 31, 2022 and 2021 (in thousands). Year Ended Consolidated statements of operations line item: December 31, 2022 December 31, 2021 Non-investment related expenses (1) $ 4,646 $ 4,322 Investment related expenses 755 1,157 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 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 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. 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. 69 Off-balance sheet arrangements Our investments in debt and equity of affiliates primarily consist of loans, real estate securities, and our interest in AG Arc. Investments in debt and equity of affiliates are accounted for using the equity method of accounting. Certain of our investments in debt and equity of affiliates securitize residential mortgage loans and retain interests in the subordinated tranches of the transferred assets. These retained interests are included in the MATT Non-QM Loans and Re/Non-Performing Loans line items of our investment portfolio. See Notes 2 and 10 to the "Notes to Consolidated Financial Statements" for a discussion of investments i n debt and equity of affiliates. We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. Refer to Note 7 to the "Notes to Consolidated Financial Statements" 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 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, 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 70 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 71 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 We have elected to be taxed as a REIT for U.S. federal income tax purposes. Provided that we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income tax on our REIT taxable income that we distribute currently to our stockholders. Our qualification as a REIT depends upon our ability to meet, on a continuing basis, various complex requirements under the Code, relating to, among other things, the sources of our gross income and the composition and values of our assets (which, based on the types of assets we own, can fluctuate rapidly, significantly and unpredictably), our distribution levels and the diversity of ownership of our shares. We cannot assure you that we will be able to comply with such requirements. Failure to qualify as a REIT in any taxable year would cause us to be subject to U.S. federal income tax on our taxable income at regular corporate rates (and any applicable state and local taxes). Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state, local, and non-U.S. taxes on our income. For example, any income generated by our domestic TRSs will be subject to U.S. federal, state, and local income tax. Any taxes paid by a TRS will reduce the cash available for distribution to our stockholders. Exclusion From Regulation Under the Investment Company Act We conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes of, the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things, U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). We conduct our operations such that we will not be considered an investment company under Section 3(a)(1) of the Investment Company Act by complying with the 40% Test and not engaging primarily (or holding ourselves out as being engaged primarily) in the business of investing, reinvesting, or trading in securities. Rather, through wholly-owned or majority-owned subsidiaries, we are primarily engaged in the non-investment company businesses of these subsidiaries, namely the real estate finance business of purchasing or otherwise acquiring mortgage loans and other interests in real estate. We currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(7) of the Investment Company Act, each a "3(c)(7) subsidiary." In addition, we currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act, each a "3(c)(5)(C) subsidiary." While investments in 3(c)(7) subsidiaries are considered investment securities for the purposes of the 40% Test, investments in 3(c)(5)(C) subsidiaries are not considered investment securities for the purposes of the 40% Test, nor are investments in subsidiaries that rely on the exclusion provided by Section 3(a)(1)(C). Therefore, our investments in 3(c)(7) subsidiaries and other investment securities cannot exceed 40% of the value of our total assets (excluding U.S. government securities and cash) on an unconsolidated basis. 72 Section 3(c)(5)(C) of the Investment Company Act exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The SEC staff generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). Both the 40% Test and the requirements of the Section 3(c)(5)(C) exclusion limit the types of businesses in which we may engage and the types of assets we may hold, as well as the timing of sales and purchases of assets. The determination that we qualify for this exemption from being regulated as an investment company depends on various factual matters and circumstances. We closely monitor our holdings to ensure continuing and ongoing compliance with these tests. If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this report.