TPG Mortgage Investment Trust, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report on Form 10-Q, or this "report," we refer to AG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, AG REIT Management, LLC, as our "Manager," and we refer to the direct parent company of our Manager, Angelo, Gordon & Co., L.P., as "Angelo Gordon." The following discussion 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 Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2022, and any subsequent filings. 35 Forward-Looking Statements We make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including the Federal Reserve, and the potential effects of actual and proposed legislation on us, and our views on certain macroeconomic trends, and the impact of the novel coronavirus ("COVID-19"). When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements. These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation: • the impact of the COVID-19 pandemic, labor shortages, supply chain imbalances, the conflict between Russia and Ukraine, inflation, bank failures, and the potential for an economic recession; • the persistence of labor shortages, supply chain imbalances, Russia’s invasion of Ukraine, inflation, and the potential for an economic recession; • changes in our business and investment strategy; • our ability to predict and control costs; • changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; • changes in the yield curve; • changes in prepayment rates on the loans we own or that underlie our investment securities; • regulatory and structural changes in the residential loan market and its impact on non-agency mortgage markets; • increased rates of default or delinquencies and/or decreased recovery rates on our assets; • our ability to obtain and maintain financing arrangements on terms favorable to us or at all; • our ability to enter into, or refinance, securitization transactions on the terms and pace anticipated or at all; • the degree to which our hedging strategies may or may not protect us from interest rate and credit risk volatility; • changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets; • conditions in the market for Residential Investments and Agency RMBS; • legislative and regulatory actions by the U.S. Congress, U.S. Department of the Treasury, the Federal Reserve and other agencies and instrumentalities; • our ability to make distributions to our stockholders in the future; • our ability to maintain our qualification as a REIT for federal tax purposes; and • our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"). We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. Executive Summary Investment Activity • Purchased Non-Agency Loans with a fair value of $23.0 million; • Purchased RMBS collateralized by Non-Agency and Agency-Eligible Loans with a fair value of $10.9 million; • Purchased Agency RMBS with a fair value of $264.8 million; • Sold Non-Agency Loans for total proceeds of $46.9 million; and • Sold Agency-Eligible Loans for total proceeds of $18.5 million. 36 Financing Activity • Executed a rated securitization of Non-Agency Loans with a total unpaid principal balance of $271.2 million, converting financing from recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls. ◦ Loan portfolio financed through warehouse facilities declined to $127.6 million and our economic leverage ratio was 1.4x as of March 31, 2023. Capital Activity • As of the date of this filing, we have $1.7 million of capacity remaining under our repurchase program authorized in 2022 (the "2022 Repurchase Program"). ◦ Repurchased 923,261 shares of common stock for $5.2 million during the three months ended March 31, 2023, representing a weighted average cost of $5.68 per share. Repurchases resulted in approximately 2% accretion to December 31, 2022 book value per share. ◦ Subsequent to quarter end, repurchased 144,772 shares of common stock for $0.8 million, representing a weighted average cost of $5.85 per share. • Subsequent to quarter end, our Board of Directors authorized a new stock repurchase program (the "2023 Repurchase Program") to repurchase up to $15 million of our outstanding common stock. This authorization is in addition to the amount remaining under the 2022 Repurchase Program. 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's 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. 37 Our investment portfolio (which excludes our ownership in Arc Home) includes Residential Investments and Agency RMBS. Currently, our Residential Investments primarily consist of newly originated Non-Agency Loans and Agency-Eligible Loans, which we refer to as our target assets. In addition, we may also invest in other types of residential mortgage loans and other mortgage related assets. As of March 31, 2023, the Company's investment portfolio consisted of the following: Asset Class Description Residential Investments Non-Agency Loans (1) • Non-Agency Loans are loans that do not conform to the underwriting guidelines of a government-sponsored enterprise ("GSE"). Non-Agency Loans consist of Qualified mortgage loans ("QM Loans") and Non-Qualified mortgage loans ("Non-QM Loans"). QM Loans are residential mortgage loans that comply with the Ability-To-Repay rules and related guidelines of the Consumer Finance Protection Bureau. Agency-Eligible Loans (1) • Agency-Eligible Loans are loans that are underwritten in accordance with GSE guidelines and are primarily secured by investment properties, but are not guaranteed by a GSE. Although these loans are underwritten in accordance with GSE guidelines and can be delivered to Fannie Mae and Freddie Mac, we include these loans within our Non-Agency securitizations. Re- and Non-Performing Loans (1) • Performing, re-performing, and non-performing loans are residential mortgage loans collateralized by a first lien mortgaged property. Non-Agency Residential Mortgage-Backed Securities ("RMBS") (2) • Non-Agency RMBS represent fixed- and floating-rate RMBS issued by entities other than U.S. GSEs or agencies of the U.S. government. The mortgage loan collateral consists of either Non-Agency Loans or Agency-Eligible Loans. Agency RMBS (2) • Agency RMBS represent interests in pools of residential mortgage loans guaranteed by a GSE such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government such as Ginnie Mae. (1) These investments are included in the "Securitized residential mortgage loans, at fair value," "Residential mortgage loans, at fair value," and "Residential mortgage loans held for sale, at fair value" line items on the consolidated balance sheets. (2) These investments are included in the "Real estate securities, at fair value" line item on the consolidated balance sheets. Our primary sources of income are net interest income from our investment portfolio, changes in the fair value of our investments, and income from our investment in Arc Home. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and any costs related to hedging. Income from our investment in Arc Home is generated through its mortgage banking activities which represents the origination and subsequent sale of residential mortgage loans and servicing income sourced from its portfolio of mortgage servicing rights. We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011. We conduct our operations to qualify and be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute 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. 38 Our Manager and Angelo Gordon We are externally managed by our Manager, a subsidiary of Angelo Gordon. Pursuant to the terms of our management agreement, our Manager provides us with our management team, including our officers, along with appropriate support personnel. All of our officers are employees of Angelo Gordon or its affiliates. We do not have any employees. Our Manager is at all times subject to the supervision and oversight of our Board of Directors and has only such functions and authority as our Board of Directors delegates to it. Our Manager has delegated to Angelo Gordon the overall responsibility with respect to our Manager’s day-to-day duties and obligations arising under our management agreement. Through our relationship with our Manager, we benefit from the expertise and relationships that Angelo Gordon has established which provides us with resources to generate attractive risk-adjusted returns for our stockholders. Our management has significant experience in the mortgage industry and expertise in structured credit investments. We are able to leverage our Manager, along with our ownership interest in Arc Home, a vertically integrated origination platform, to access investment opportunities in the non-agency residential mortgage loan market. This strategic advantage has enabled us to grow our investment portfolio and remain active in the securitization markets, utilizing Angelo Gordon's proprietary securitization platform to deliver non-agency investments to a diverse mix of investors. Market Conditions During the first quarter of 2023, the economy and financial markets continued to experience volatility due to multiple factors including the impacts of inflation, the path of monetary policy and interest rates, market uncertainty from the ongoing conflict in Ukraine and other geopolitical risks, and the lingering impact of the COVID-19 pandemic. The broad macroeconomic outlook was already uncertain, and the recent regional bank failures, which included some of the largest bank failures in U.S. history, only served to further cloud the path forward for growth, inflation, and monetary policy. These bank failures, with the possibility of more to come, have highlighted the underlying asset liability management issue across the banking system in response to one of the most aggressive Federal Reserve tightening paths. This has accelerated a deposit flight from regional banks in search of both greater stability and higher interest rates. Reduced profitability and capital buffers, a smaller deposit base, and industry consolidation will likely constrict lending over time and weigh on economic activity. This has an impact on the economy like that of the monetary policy tightening by the Federal Reserve, however the potential magnitude is still quite uncertain. Although the Federal Deposit Insurance Corporation, U.S. Treasury and Federal Reserve responded quickly to address the immediate risks, volatility across the entire rates market was and continues to be elevated from a historical perspective as narratives transform and positioning shifts. After narrowing in January and February 2023, spreads for securitized residential debt sectors subsequently widened in March 2023 resulting in flat-to-tighter spreads during the first quarter as compared with the fourth quarter. 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 up to 60 basis points, led by the subordinate bonds of the structures. In addition, senior and mezzanine Non-QM mortgage spreads were volatile but ended the quarter roughly unchanged from the end of the fourth quarter and legacy RMBS spreads were approximately 30 basis points tighter. However, RMBS spreads are still considerably wider than compared to the first quarter of 2022, particularly subordinate tranches which were wider by as much as 200 basis points. During the first quarter of 2023, new RMBS issuance more than doubled to $15.9 billion from $7.1 billion in the fourth quarter of 2022, with issuances of CRT, Non-QM, and Jumbo contributing to the increase. On a year-over-year basis, however, issuance fell sharply from $54.6 billion in the first quarter 2022. Several factors have limited new-issue activity, including spreads that remain wide, higher mortgage rates, and overall muted housing activity. Various reports from bank research departments expect issuance to be between $60 to $110 billion for the full-year 2023, down from $127 billion in 2022 and $213 billion in 2021. Negative monthly home price readings continue to persist since reaching a peak in June of 2022. The January 2023 S&P/CoreLogic Case-Shiller Index fell -0.55% on a non-seasonally adjusted basis. The reading marked the seventh consecutive month of falling prices, bringing national home prices around 5% lower from their peak. Home prices are expected to continue falling based on reduced affordability and increasing supply in certain areas, though overall supply continues to be constrained. Mortgage rates ended the quarter at approximately 6.2%, down from the multi-decade high of 7.1% in October 2022, according to Freddie Mac. Housing activity modestly benefited from the decline in mortgage rates which dipped below 6% at times during the quarter. Existing home inventory increased in the second half of 2022 but has since stalled below 1 million for a third consecutive month in February. Furthermore, Realtor.com estimates new listings are 20% lower year-over year and are at the lowest level since 2017. While a shortage in home supply has supported national home prices, housing affordability remains at 39 a record low, according to the National Association of Realtors. This is largely due to the rise in prevailing mortgage rates coupled with the rise in home prices. 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. Presentation of investment, financing and hedging activities In the "Investment activities," "Financing activities," "Hedging activities," and "Liquidity and capital resources" sections of this Item 2, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Notes 2 and 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. See below for further terms used when describing our investment portfolio. • Our "Investment portfolio" includes our Residential Investments and Agency RMBS, inclusive of TBAs. • Our "Residential Investments" refer to our residential mortgage loans and Non-Agency RMBS. ◦ "Residential mortgage loans" or "Loans" refer to our Non-Agency Loans, Agency-Eligible Loans, and Re/Non-Performing Loans (exclusive of retained tranches from unconsolidated securitizations) and Land Related Financing. ◦ "Non-Agency RMBS" refer to the retained tranches from unconsolidated securitizations of Non-Agency Loans and Re/Non-Performing Loans, as well as RMBS collateralized by Non-Agency Loans and Agency-Eligible Loans. • "Real estate securities" refers to our Non-Agency RMBS and Agency RMBS, inclusive of TBAs. • Our "GAAP Residential Investments" refer to our Residential Investments excluding investments held within affiliated entities. • Our "GAAP Investment portfolio" includes our GAAP Residential Investments and Agency RMBS. For a reconciliation of our Investment portfolio to our GAAP Investment portfolio, see the GAAP Investment Portfolio Reconciliation Table below. 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. March 31, 2023 December 31, 2022 Book value per common share $ 11.85 $ 11.39 Net proceeds of preferred stock less liquidation preference of preferred stock per common share (1) (0.37) (0.36) Adjusted book value per common share $ 11.48 $ 11.03 (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. 40 Results of Operations Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our investments in residential mortgage loans in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose residential mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income or loss available to common stockholders is our net interest income, less our cost of hedging, which represents the difference between the interest earned on our investment portfolio and the costs of financing and economic hedges in place on our investment portfolio, as well as any income or losses from our equity investments in affiliates. Three Months Ended March 31, 2023 compared to the Three Months Ended March 31, 2022 The table below presents certain information from our consolidated statements of operations for the three months ended March 31, 2023 and 2022 (in thousands). Three Months Ended March 31, 2023 March 31, 2022 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 57,803 $ 33,417 $ 24,386 Interest expense 46,188 16,122 30,066 Total Net Interest Income 11,615 17,295 (5,680) Other Income/(Loss) Net interest component of interest rate swaps 1,020 (2,270) 3,290 Net realized gain/(loss) 100 8,783 (8,683) Net unrealized gain/(loss) 8,717 (22,420) 31,137 Total Other Income/(Loss) 9,837 (15,907) 25,744 Expenses Management fee to affiliate 2,075 1,962 113 Non-investment related expenses 2,820 2,674 146 Investment related expenses 2,326 2,021 305 Transaction related expenses 1,707 5,879 (4,172) Total Expenses 8,928 12,536 (3,608) Income/(loss) before equity in earnings/(loss) from affiliates 12,524 (11,148) 23,672 Equity in earnings/(loss) from affiliates 16 (2,054) 2,070 Net Income/(Loss) 12,540 (13,202) 25,742 Dividends on preferred stock (4,586) (4,586) — Net Income/(Loss) Available to Common Stockholders $ 7,954 $ (17,788) $ 25,742 Interest income Interest income is calculated using the effective interest method for our GAAP investment portfolio. Interest income increased from March 31, 2022 to March 31, 2023 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. This was coupled with an increase in the weighted average yield. The following table presents a summary of the weighted average amortized cost of and 41 the weighted average yield on our GAAP investment portfolio for the three months ended March 31, 2023 and 2022 ($ in millions). Three Months Ended March 31, 2023 March 31, 2022 Increase/(Decrease) Weighted average amortized cost of our GAAP investment portfolio $ 4,693 $ 3,360 $ 1,333 Weighted average yield on our GAAP investment portfolio 4.93 % 3.98 % 0.95 % 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. Interest expense increased from March 31, 2022 to March 31, 2023 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 and $234.8 million of securitized debt in the first quarter of 2023. Additionally, there was an increase in the weighted average financing rate during the period resulting from increased interest rates. The following table presents a summary of the weighted average financing balance of and the weighted average financing rate on our GAAP investment portfolio for the three months ended March 31, 2023 and 2022 ($ in millions). Three Months Ended March 31, 2023 March 31, 2022 Increase/(Decrease) Weighted average GAAP financing balance $ 4,288 $ 3,060 $ 1,228 Weighted average financing rate on our GAAP investment portfolio 4.31 % 2.11 % 2.20 % Net interest component of interest rate swaps Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps. We recorded income on the net interest component of interest rate swaps during the three months ended March 31, 2023, compared with an expense for the three months ended March 31, 2022. The Company's swap portfolio was in a net receive position during the three months ended March 31, 2023 compared with being in a net pay position during the three months ended March 31, 2022, which resulted in interest earned during the three months ended March 31, 2023 compared with interest expensed during three months ended March 31, 2022. The following table presents a summary of our interest rate swap portfolio as of March 31, 2023 and 2022 ($ in millions). March 31, 2023 March 31, 2022 Increase/(Decrease) Interest rate swap notional value $ 468 $ 1,419 $ (951) Weighted average receive-variable rate 4.87 % 0.30 % 4.57 % Weighted average pay-fix rate 3.69 % 1.27 % 2.42 % Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the three months ended March 31, 2023 and 2022 (in thousands). The realized gain during the three months ended March 31, 2023 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 residential mortgage loans. Three Months Ended March 31, 2023 March 31, 2022 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (9,902) $ (58) Sales of real estate securities — (16,840) Settlement of derivatives and other instruments 10,002 25,681 Total Net realized gain/(loss) $ 100 $ 8,783 42 Net unrealized gain/(loss) The following table presents a summary of net unrealized gain/(loss) for the three months ended March 31, 2023 and 2022 (in thousands). During the three months ended March 31, 2023, unrealized gains on residential mortgage loans and real estate securities and unrealized losses on securitized debt and derivatives were the result of lower interest rates during the period Three Months Ended March 31, 2023 March 31, 2022 Residential mortgage loans $ 97,201 $ (158,147) Real estate securities 4,127 (11,425) Securitized debt (72,642) 97,235 Derivatives (19,969) 49,917 Total Net unrealized gain/(loss) $ 8,717 $ (22,420) Management fee to affiliate Our management fee is based upon a percentage of our Stockholders’ Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity. Management fees increased from March 31, 2022 to March 31, 2023 primarily due to an increase in our Stockholder's Equity as calculated pursuant to our Management Agreement. 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 our Manager or its affiliates. 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 our Manager or its affiliates. The following table presents a summary of our non-investment related expenses for the three months ended March 31, 2023 and 2022 (in thousands). Three Months Ended March 31, 2023 March 31, 2022 Affiliate reimbursement $ 1,400 $ 1,405 Professional Fees 552 467 D&O insurance 272 327 Directors' compensation 176 168 Other 420 307 Total Non-investment related expenses $ 2,820 $ 2,674 43 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 three months ended March 31, 2023 and 2022 (in thousands). Three Months Ended March 31, 2023 March 31, 2022 Affiliate reimbursement $ 102 $ 135 Servicing fees 1,050 1,007 Residential mortgage loan asset management fees 635 544 Trustee and bank fees 375 142 Other 164 193 Total Investment related expenses $ 2,326 $ 2,021 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 decreased from the three months ended March 31, 2022 to the three months ended March 31, 2023 primarily due to upfront expenses associated with securitizations. During the first quarter of 2022, the Company completed three securitizations as compared to one in the first quarter of 2023. 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). Three Months Ended March 31, 2023 March 31, 2022 MATT Non-QM Securities $ 1,625 $ (889) Land Related Financing 339 502 Re/Non-Performing Securities 192 3 AG Arc (2,140) (1,670) Equity in earnings/(loss) from affiliates $ 16 $ (2,054) 44 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Three Months Ended March 31, 2023 March 31, 2022 Interest income $ 1,760 $ 1,449 Interest expense 264 292 Total Net Interest Income 1,496 1,157 Net realized gain/(loss) — (7) Net unrealized gain/(loss) 794 (1,422) Total Other Income/(Loss) 794 (1,429) After-tax earnings/(loss) at AG Arc (1) (2,315) 3,145 Net unrealized gain/(loss) on investment in AG Arc 175 (2,459) Elimination of gains on loans sold to MITT (2) — (2,356) Total AG Arc Earnings/(Loss) (2,140) (1,670) Other operating expenses 134 112 Equity in earnings/(loss) from affiliates $ 16 $ (2,054) (1) The earnings/(loss) at AG Arc during the three months ended March 31, 2023 were primarily the result of $(1.6) million of losses related to changes in the fair value of the MSR portfolio held by Arc Home, coupled with $(0.7) million of losses related to Arc Home's lending and servicing operations. The earnings/(loss) at AG Arc during the three months ended March 31, 2022 were primarily the result of $3.1 million related to changes in the fair value of the MSR portfolio held by Arc Home. (2) The earnings recognized by AG Arc do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. Refer to Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. 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 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. 45 The table below sets forth the net interest margin and leverage ratio on our investment portfolio as of March 31, 2023 and 2022 and a reconciliation to the net interest margin and leverage ratio on our GAAP investment portfolio. March 31, 2023 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 5.00 % 18.62 % 5.16 % Cost of Funds (b)(c) 4.34 % 5.24 % 4.35 % Net Interest Margin 0.66 % 13.38 % 0.81 % Leverage Ratio (d) 8.9x (e) 1.4x March 31, 2022 Weighted Average GAAP Investment Portfolio Investments in Debt and Equity of Affiliates Investment Portfolio (a) Yield 4.09 % 7.43 % 4.15 % Cost of Funds (b)(c) 2.72 % 3.21 % 2.73 % Net Interest Margin 1.37 % 4.22 % 1.42 % Leverage Ratio (d) 5.8x (e) 2.7x (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 March 31, 2023 was 0.13% and the cost of hedging as of March 31, 2022 was 0.42%. (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. 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 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. 46 A reconciliation of "Net Income/(loss) available to common stockholders" to EAD for the three months ended March 31, 2023 and 2022 is set forth below (in thousands, except per share data). Three Months Ended March 31, 2023 March 31, 2022 Net Income/(loss) available to common stockholders $ 7,954 $ (17,788) Add (Deduct): Net realized (gain)/loss (100) (8,783) Net unrealized (gain)/loss (8,717) 22,420 Transaction related expenses and deal related performance fees (1) 1,800 6,132 Equity in (earnings)/loss from affiliates (16) 2,054 EAD from equity method investments (2)(3) (339) (2,550) Dollar roll income/(loss) — (1,977) Earnings available for distribution $ 582 $ (492) Earnings available for distribution, per Diluted Share $ 0.03 $ (0.02) (1) For the three months ended March 31, 2023 and 2022, total transaction related expenses and deal related performance fees included $1.7 million and $5.9 million, respectively, recorded within the "Transaction related expenses" line item and $0.1 million and $0.2 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2) For the three months ended March 31, 2023 and 2022, $(0.6) million or $(0.03) per share and $4.4 million or $0.18 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives were excluded from EAD, net of deferred tax expense. Additionally, for the three months ended March 31, 2023 and 2022, $0.2 million or $0.01 per share and $(2.5) million or $(0.10) 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 three months ended March 31, 2023 we did not eliminate any intra-entity profits recognized by Arc Home as we did not purchase any loans from Arc during the quarter. For the three months ended March 31, 2022, we eliminated $2.4 million or $0.10 per share of intra-entity profits recognized by Arc Home, and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. 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. 47 The following table presents a summary of the allocated equity of our investment portfolio as of March 31, 2023 and December 31, 2022 ($ in thousands). Allocated Equity Percent of Equity March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Residential Investments $ 404,937 $ 454,411 87.7 % 98.2 % Agency RMBS 56,976 8,389 12.3 % 1.8 % Total $ 461,913 $ 462,800 100.0 % 100.0 % The following table presents a summary of our investment portfolio as of March 31, 2023 and December 31, 2022 and a reconciliation to our GAAP Investment Portfolio ($ in thousands). Fair Value Percent of Investment Portfolio Fair Value Leverage Ratio (a) March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Residential Investments $ 4,185,478 $ 4,202,801 93.6 % 99.5 % 0.9x 1.3x Agency RMBS 287,197 19,124 6.4 % 0.5 % 4.7x 1.7x Total: Investment Portfolio $ 4,472,675 $ 4,221,925 100.0 % 100.0 % 1.4x 1.3x Investments in Debt and Equity of Affiliates $ 50,180 $ 49,609 N/A N/A (b) (b) Total: GAAP Investment Portfolio $ 4,422,495 $ 4,172,316 N/A N/A 8.9x 8.4x (a) The leverage ratio on our investment portfolio represents Economic Leverage as defined below in the "Financing Activities" section and is calculated by dividing each investment type's total recourse financing arrangements by its allocated equity (described in the chart 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. 48 The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of March 31, 2023 and December 31, 2022 ($ in thousands). March 31, 2023 December 31, 2022 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 Securitized Non-Agency Loans (4) $ 4,049,191 $ 4,101,841 $ (405,098) $ 3,696,743 4.81 % 4.66 % 9.78 $ 3,436,201 Securitized Re- and Non-Performing Loans 319,949 284,879 (12,852) 272,027 3.76 % 6.57 % 6.37 270,945 Non-Agency Loans 121,885 121,843 805 122,648 7.23 % 6.86 % 3.56 371,161 Agency-Eligible Loans 5,084 5,168 (265) 4,903 5.44 % 5.01 % 4.75 46,862 Re- and Non-Performing Loans 3,291 1,446 1,744 3,190 N/A 79.62 % 1.90 3,428 Land Related Financing 10,814 10,814 — 10,814 14.50 % 14.50 % 0.33 10,688 Total Residential Mortgage Loans 4,510,214 4,525,991 (415,666) 4,110,325 4.82 % 4.93 % 9.34 4,139,285 Non-Agency RMBS Non-Agency Securities (5) 45,452 35,766 (4,597) 31,169 3.78 % 6.70 % 12.18 19,537 MATT Non-QM Securities 343,784 31,632 (51) 31,581 1.01 % 21.13 % 3.68 31,067 Re/Non-Performing Securities 32,918 7,923 (138) 7,785 4.60 % 14.13 % 1.42 7,854 Non-Agency RMBS Interest Only (6) 105,786 2,753 1,865 4,618 0.38 % 32.86 % 4.29 5,058 Total Non-Agency RMBS 527,940 78,074 (2,921) 75,153 1.68 % 15.14 % 4.40 63,516 Total Residential Investments 5,038,154 4,604,065 (418,587) 4,185,478 4.62 % 5.12 % 8.82 4,202,801 Agency RMBS: 30 Year Fixed Rate 263,445 264,822 3,694 268,516 5.74 % 5.62 % 6.46 — Interest Only 125,018 19,243 (562) 18,681 2.84 % 7.95 % 6.59 19,124 Total Agency RMBS 388,463 284,065 3,132 287,197 4.81 % 5.77 % 6.50 19,124 Total: Investment Portfolio $ 5,426,617 $ 4,888,130 $ (415,455) $ 4,472,675 4.63 % 5.16 % 8.65 $ 4,221,925 Less: Investments in Debt and Equity of Affiliates Residential Mortgage Loans $ 10,814 $ 10,814 $ — $ 10,814 14.50 % 14.50 % 0.33 $ 10,688 Non-Agency RMBS $ 376,702 $ 39,555 $ (189) $ 39,366 1.55 % 19.75 % 3.49 $ 38,921 Total: GAAP Investment Portfolio $ 5,039,101 $ 4,837,761 $ (415,266) $ 4,422,495 4.75 % 5.00 % 8.86 $ 4,172,316 (1) Refer to Note 10 to the "Notes of the Consolidated Financial Statements (unaudited)" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. Our assets held through Investments in debt and equity of affiliates are included in the "Land Related Financing," "MATT Non-QM Securities," 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) Securitized Non-Agency Loans include loans that were considered to be Agency-Eligible prior to our securitization. (5) Includes Non-Agency Securities collateralized by Non-QM loans and Agency-Eligible loans. (6) Includes Non-Agency RMBS Interest Only securities collateralized by Non-QM loans. 49 Residential mortgage loans The following tables present certain information regarding credit quality for certain categories within our Residential mortgage loan portfolio ($ in thousands). March 31, 2023 December 31, 2022 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 Securitized Non-Agency Loans $ 4,049,191 $ 3,696,743 68.57 % 737 $ 3,978,280 $ 43,019 $ 11,220 $ 16,672 $ 3,436,201 Securitized Re- and Non-Performing Loans 319,949 272,027 79.67 % 644 218,839 37,673 10,230 53,207 270,945 Non-Agency Loans 121,885 122,648 70.04 % 724 118,670 — 1,130 2,085 371,161 Agency-Eligible Loans 5,084 4,903 73.70 % 751 5,084 — — — 46,862 Re- and Non-Performing Loans (1) 3,291 3,190 N/A N/A N/A N/A N/A N/A 3,428 Land Related Financing (2) 10,814 10,814 N/A N/A N/A N/A N/A N/A 10,688 Total Residential mortgage loans $ 4,510,214 $ 4,110,325 69.41 % 730 $ 4,320,873 $ 80,692 $ 22,580 $ 71,964 $ 4,139,285 Less: Residential mortgage loans in Investments in Debt and Equity of Affiliates 10,814 10,814 N/A N/A N/A N/A N/A N/A 10,688 Total GAAP Residential mortgage Loans $ 4,499,400 $ 4,099,511 69.41 % 730 $ 4,320,873 $ 80,692 $ 22,580 $ 71,964 $ 4,128,597 (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- and 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 February 28, 2023. See Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for a breakout of geographic concentration of credit risk within loans we include in the "Securitized residential mortgage loans, at fair value" and "Residential mortgage loans, at fair value" line items on our consolidated balance sheets. Securitized Non-Agency Loans As noted above, our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans. These securitization trusts ("Non-Agency VIEs") are collateralized by Non-Agency and Agency-Eligible Loans. In each securitization transaction, we transfer a pool of loans to a wholly-owned subsidiary and the loans are deposited into a newly created securitization trust. The securitization trust issues various classes of mortgage pass-through certificates backed by the cash flows from the underlying residential mortgage loans (the "Certificates"). When we sponsor a residential mortgage loan securitization, we are generally required to retain at least 5% of the fair value of the Certificates issued in the securitization ("Risk Retention Rules"). We can retain either an "eligible vertical interest" (which consists of at least 5% of each class of securities issued in the securitization), an "eligible horizontal residual interest" (which is the most subordinate class of securities with a fair value of at least 5% of the aggregate credit risk) or a combination of both totaling 5% (the "Required Credit Risk") . In order to comply with the Risk Retention Rules in each securitization transaction, we generally purchase the most subordinated classes of Certificates and the excess cash flow Certificates. We also purchase the Certificates entitled to excess servicing fees and may purchase other Certificates issued by the securitization trust, while typically selling the senior classes of Certificates to unrelated third parties. If we are determined to be the primary beneficiary of these securitization transactions, we consolidate the respective VIE created to facilitate the transaction and record "Securitized residential mortgage loans" and "Securitized debt" on the consolidated balance sheets in accordance with U.S. GAAP. However, as noted above, our equity at risk represents certain Certificates from each securitization which we retain. 50 The following table summarizes our Securitized residential mortgage loans and Securitized debt, as well as the economic interest on retained Certificates related to our Non-Agency VIEs (in thousands). March 31, 2023 December 31, 2022 Unpaid Principal Balance Fair Value Unpaid Principal Balance Fair Value Securitized residential mortgage loans in Non-Agency VIEs $ 4,049,191 $ 3,696,743 $ 3,841,265 $ 3,436,201 Securitized debt in Non-Agency VIEs 3,858,691 3,323,861 3,671,561 3,078,593 Retained Certificates from Non-Agency VIEs (1)(2)(3) $ 372,882 $ 357,608 Retained interests in Non-Agency VIEs Current Face Fair Value Current Face Fair Value Mezzanine Bonds $ 23,348 $ 19,659 $ 17,382 $ 15,472 Subordinate Bonds 308,193 208,683 296,215 193,906 Interest Only / Excess Servicing Bonds (4) 8,401,138 144,540 8,049,995 148,230 Retained Certificates from Non-Agency VIEs (1)(2)(3) $ 372,882 $ 357,608 Financing arrangements on retained Certificates from Non-Agency VIEs 192,964 197,937 Retained Certificates from Non-Agency VIEs, net of financing arrangements $ 179,918 $ 159,671 (1) Maximum loss exposure from our involvement with VIEs pertains to the fair value of the Certificates retained from the VIEs. We have no obligation to provide any other explicit or implicit support to the securitization trusts. (2) As of March 31, 2023 and December 31, 2022, our equity at risk included bonds with a fair value of $227.3 million and $215.1 million, respectively, held in order to comply with Risk Retention Rules. We are generally required to hold the Required Credit Risk until the later of (i) the fifth anniversary of the securitization closing date and (ii) the date on which the aggregate unpaid principal balance of the mortgage loans has been reduced to 25% of the aggregate unpaid principal balance of the mortgage loans as of the securitization closing date, but no longer than the seventh anniversary of the closing date. (3) As of March 31, 2023 and December 31, 2022, a portion of our equity at risk included bonds exposed to the first loss of the securitization with a fair value of $82.0 million and $84.7 million, respectively. (4) As the sponsor and depositor of each securitization, we may purchase all of the outstanding Certificates (an "Optional Redemption") following the earlier of (1) an applicable anniversary date (typically two or three years) of the respective securitization or (2) the date at which the unpaid principal balance of the applicable collateral has declined below a certain percentage (typically 10% to 30%) of the principal balance originally contributed to the securitization. As of March 31, 2023 and December 31, 2022, there were no securitizations which met the criteria for an Optional Redemption. Non-Agency RMBS The following table presents the fair value of our Non-Agency RMBS by credit rating as of March 31, 2023 and December 31, 2022 (in thousands). Credit Rating - Non-Agency RMBS (1) March 31, 2023 December 31, 2022 A $ 4,238 $ — BBB 11,504 7,707 BB 9,766 8,096 B 13,487 12,814 Not Rated 36,158 34,899 Total: Non-Agency RMBS $ 75,153 $ 63,516 Less: Investments in Debt and Equity of Affiliates $ 39,366 $ 38,921 Total: GAAP Basis $ 35,787 $ 24,595 (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. 51 The following table presents the geographic concentration of the underlying collateral for our Non-Agency RMBS portfolio ($ in thousands). March 31, 2023 December 31, 2022 State Fair Value Percentage State Fair Value Percentage California $ 35,339 47.0 % California $ 29,972 47.2 % New York 10,604 14.1 % New York 9,733 15.3 % Florida 4,751 6.3 % Florida 3,955 6.2 % Texas 2,786 3.7 % Texas 2,248 3.5 % New Jersey 2,339 3.1 % New Jersey 1,912 3.0 % Other 19,334 25.8 % Other 15,696 24.8 % Total $ 75,153 100.0 % Total $ 63,516 100.0 % Agency RMBS Although our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans, from time to time we invest excess liquidity into 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 March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 30 Year Fixed Rate $ 268,516 $ — 0.6 % — % Interest Only 18,681 19,124 4.7 % 11.0 % Total/Weighted Average $ 287,197 $ 19,124 1.3 % 11.0 % (1) Represents the weighted average monthly CPRs published during the period 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 counterparties as of March 31, 2023 and December 31, 2022. 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 March 31, 2023, 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. 52 Recourse and non-recourse financing The below table provides detail on the breakout between recourse and non-recourse financing as of March 31, 2023 and December 31, 2022 (in thousands). March 31, 2023 December 31, 2022 Recourse financing - Financing arrangements, including those in Investments in Debt and Equity of Affiliates $ 632,979 $ 625,593 Non-recourse financing - Securitized debt, at fair value 3,505,529 3,262,352 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 15,210 16,409 Total Financing 4,153,718 3,904,354 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 3,521 4,406 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 15,210 16,409 Total Financing in Investments in Debt and Equity of Affiliates 18,731 20,815 Total Financing: GAAP Basis $ 4,134,987 $ 3,883,539 Leverage We use leverage to increase potential returns to our stockholders and to fund the acquisition of our investment portfolio. Our financing strategy is designed to increase the size of our investment portfolio by borrowing against the fair value of the assets in our portfolio. When acquiring residential mortgage loans and other assets, we finance our investments using repurchase agreements or similar financing arrangements, which we refer to collectively as "financing arrangements." Upon accumulating a targeted amount of residential mortgage loans, we finance these assets utilizing long-term, non-recourse, non-mark-to-market securitizations as market conditions permit. Financing arrangements are generally recourse to the Company whereas securitized debt used to finance our Residential Mortgage Loan VIEs is generally non-recourse to the Company. In addition to disclosing GAAP leverage, we also disclose Economic Leverage, which excludes non-recourse financing. Management believes that this non-GAAP measure, when considered with our GAAP financial statements, provides supplemental information useful for investors to help evaluate our use of leverage and the related risk associated with our leverage profile. Our presentation of Economic Leverage 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, GAAP leverage calculated in accordance with GAAP. Our GAAP financial results and the reconciliations from these results should be carefully evaluated. 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. 53 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). March 31, 2023 Leverage Stockholders’ Equity Leverage Ratio GAAP Securitized debt, at fair value $ 3,505,529 GAAP Financing arrangements 629,458 Restricted cash posted on Financing arrangements (1,081) GAAP Leverage $ 4,133,906 $ 461,913 8.9x Financing arrangements through affiliated entities 18,731 Non-recourse financing arrangements (1) (3,520,739) Net TBA (receivable)/payable adjustment 244 Economic Leverage $ 632,142 $ 461,913 1.4x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing held within MATT. 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. Hedging activities Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions in to-be-announced securities. In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements (unaudited)" for more information. Dividends Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, (vi) methods of depreciation and (vii) differences between GAAP income or losses in our TRSs’ and taxable income resulting from dividend distributions to the 54 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 March 31, 2023. The following table details our common stock dividends declared during the three months ended March 31, 2023 and 2022. Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 Declaration Date Record Date Payment Date Cash Dividend Per Share Declaration Date Record Date Payment Date Cash Dividend Per Share 3/15/2023 3/31/2023 4/28/2023 $ 0.18 3/18/2022 3/31/2022 4/29/2022 $ 0.21 The following tables detail the dividends declared and paid on our 8.25% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"), 8.00% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred Stock"), and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Series C Preferred Stock") (collectively, "preferred stock") during the three months ended March 31, 2023 and 2022. 2023 Cash Dividend Per Share Declaration Date Record Date Payment Date 8.25% Series A 8.00% Series B 8.000% Series C 2/16/2023 2/28/2023 3/17/2023 $ 0.51563 $ 0.50 $ 0.50 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 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 March 31, 2023, we had $87.9 million of liquidity, all of which was cash and cash equivalents. Refer to the "Contractual obligations" section of this Item 2 for additional obligations that could impact our liquidity. Margin requirements The fair value of our loans and real estate securities fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls in the ordinary course of our business. In seeking to 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 55 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 Item 3 below for a further discussion on margin. Cash flows The below details changes to our cash, cash equivalents, and restricted cash for the three months ended March 31, 2023 and 2022 ($ in thousands). Three Months Ended March 31, 2023 March 31, 2022 Change Cash and cash equivalents and restricted cash, Beginning of Period $ 98,803 $ 100,229 $ (1,426) Net cash provided by (used in) operating activities (1) 6,529 4,528 2,001 Net cash provided by (used in) investing activities (2) (157,222) (624,197) 466,975 Net cash provided by (used in) financing activities (3) 154,312 615,611 (461,299) Net change in cash and cash equivalents and restricted cash 3,619 (4,058) 7,677 Cash and cash equivalents and restricted cash, End of Period $ 102,422 $ 96,171 $ 6,251 (1) Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the three months ended March 31, 2023. (2) Cash used in investing activities for the three months ended March 31, 2023 was primarily attributable to purchases of investments and the settlement of derivatives, offset by sales of investments and principal repayments on investments. (3) Cash provided by financing activities for the three months ended March 31, 2023 was primarily attributable to the issuance of securitized debt and net borrowings under financing arrangements, offset by principal repayments on securitized debt, dividend payments, and common share repurchases. Stock repurchase programs On November 3, 2015, our Board of Directors authorized a stock repurchase program (the "2015 Repurchase Program") to repurchase up to $25.0 million of our outstanding common stock. As of June 30, 2022, the $25.0 million maximum repurchase amount authorized under the 2015 Repurchase Program was fully utilized. On August 3, 2022, our Board of Directors authorized the 2022 Repurchase Program to repurchase up to $15.0 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 our shares through various methods, including open market repurchases, privately negotiated block transactions and Rule 10b5-1 plans. We may repurchase shares of our common stock from time to time in compliance with SEC regulations and other legal requirements. The extent to which we 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 the date of this filing, approximately $1.7 million of common stock remained authorized for future share repurchases under the 2022 Repurchase Program. See Note 11 56 and 13 in the "Notes to Consolidated Financial Statements (unaudited)" for additional details on the shares repurchased under the 2022 Repurchase Program during the three months ended March 31, 2023 and subsequent to quarter end. On May 4, 2023, our Board of Directors authorized the 2023 Repurchase Program to repurchase up to $15 million of our outstanding common stock on substantially the same terms as the 2022 Repurchase Program. As of the date of this filing, the full $15 million authorized amount remains available for repurchase under the 2023 Repurchase Program. This authorization is in addition to the amount remaining under the 2022 Repurchase Program. On February 22, 2021, our Board of Directors authorized a stock repurchase program (the "Preferred Repurchase Program") pursuant to which our Board of Directors granted a repurchase authorization to acquire shares of our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock having an aggregate value of up to $20.0 million. No share repurchases under the Preferred Repurchase Program have been made since its authorization. Shares of stock repurchased by us under any repurchase program, if any, will be cancelled and, until reissued by us, will be deemed to be authorized but unissued shares of its stock as required by Maryland law. The cost of the acquisition by us of shares of our own stock in excess of the aggregate par value of the shares first reduces additional paid-in capital, to the extent available, with any residual cost applied against retained earnings. Equity distribution agreements On May 5, 2017, we entered into an equity distribution agreement with each of Credit Suisse Securities (USA) LLC and JMP Securities LLC (collectively, the "Sales Agents"), which we refer to as the "Equity Distribution Agreements," pursuant to which we may sell up to $100.0 million aggregate offering price of shares of our common stock from time to time through the Sales Agents, under the Securities Act of 1933. For the three months ended March 31, 2023 and 2022, we did not issue any shares of common stock under the Equity Distribution Agreements. 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. 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 operating activities, financing activities, 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. 57 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 three months ended March 31, 2023 and 2022 (in thousands). Three Months Ended Consolidated statements of operations line item: March 31, 2023 March 31, 2022 Management fee to affiliate $ 2,075 $ 1,962 As of March 31, 2023 and December 31, 2022, we have recorded management fees payable of $2.1 million and $2.1 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. During the three months ended March 31, 2023, we did not incur any incentive fee expense. 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) $341.5 million and (ii) 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. 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. 58 The below table details the expense reimbursement incurred during the three months ended March 31, 2023 and 2022 (in thousands). Three Months Ended Consolidated statements of operations line item: March 31, 2023 March 31, 2022 Non-investment related expenses $ 1,400 $ 1,405 Investment related expenses 102 135 Transaction related expenses 63 971 Expense reimbursements to Manager or its affiliates $ 1,565 $ 2,511 As of March 31, 2023 and December 31, 2022, we recorded a reimbursement payable to our Manager or its affiliates of $1.4 million and $1.3 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 March 31, 2023, 535,530 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 March 31, 2023, we have granted an aggregate of 131,136 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 March 31, 2023, there were no shares or awards issued under the 2021 Manager Plan. Following the execution of the Third Amendment to our management agreement in November 2021 related to the incentive fee, our compensation committee no longer expects to continue its historical practice of making periodic equity grants to the Manager pursuant to the 2021 Manager Equity Incentive Plan. Unfunded commitments See Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for detail on our commitments as of March 31, 2023. Off-balance sheet arrangements Our investments in debt and equity of affiliates primarily consist of 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 Securities and Re/Non-Performing Securities line items of our investment portfolio. See Notes 2 and 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments i n debt and equity of affiliates. We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. Refer to Note 7 to the "Notes to Consolidated Financial Statements (unaudited)" for additional detail on TBAs as of March 31, 2023, if applicable. For additional information on our commitments as of March 31, 2023 , refer to Note 12 of the "Notes to Consolidated Financial Statements (unaudited)." 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. 59 Critical accounting policies and estimates 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 March 31, 2023 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 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. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain and include (i), (iv), and (vi) above. A discussion of critical accounting policies and estimates is included in our Form 10-K. Our critical accounting policies and estimates have not materially changed since December 31, 2022. REIT Qualification We have elected to be treated as a REIT under Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Code"). Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares. We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our manner of operation enables us to meet the requirements for qualification and taxation as a REIT. We generally need to distribute at least 90% of our ordinary taxable income each year (subject to certain adjustments) to our stockholders in order to qualify as a REIT under the Code. Our ability to make distributions to our stockholders depends, in part, upon the performance of our investment portfolio. As a REIT, we generally are not subject to U.S. federal income tax on our REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and our ability to pay distributions, if any, to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to some U.S. federal, state and local taxes on our income or property. In addition, any income earned by a domestic taxable REIT subsidiary, or TRS, will be subject to corporate income taxation. Investment Company Act Exemption We conduct our operations so that we are not considered an investment company under Section 3(a)(1)(C) of the Investment Company Act. 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. Conducting our operations so as not to be considered an investment company under the Investment Company Act and the rules and regulations promulgated under the Investment Company Act and SEC staff interpretive guidance limits our ability to make certain investments. For example, these restrictions limit our and our subsidiaries’ ability to invest directly in Agency RMBS mortgage-related securities that represent less than the entire ownership in a pool of mortgage loans or debt and equity tranches of Non-Agency RMBS (in each case to the extent such interest are not retained interest in securitizations consisting of mortgage 60 loans that were owned by us and such securitizations were not sponsored by us in order to obtain financing to acquire additional mortgage loans), certain real estate companies and assets not related to real estate. 61