What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-05 · 404 added, 233 removed, 539 unchanged (54% of the section changed)

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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;

• the persistence of labor shortages, supply chain imbalances, Russia’s invasion of Ukraine, inflation, lingering impact of the COVID-19 pandemic, and the potential for an economic recession;

• changes in our business and investment strategy;

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• 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;

• our ability to close anticipated loan sale transactions on the terms and timing anticipated or at all;

• on the 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;

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• our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act");

• our ability to successfully complete our proposed merger with Western Asset Mortgage Capital Corporation and/or realize all of the expected benefits or that such benefits may take longer to realize than expected (including because we incur significant costs associated with such merger).

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.

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All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice.

Executive Summary

Second Quarter 2023 Executive Summary

Investment Activity

• Purchased Non-Agency Loans with a fair value of $162.5 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;

• Sold Agency-Eligible Loans for total proceeds of $18.5 million.

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.

• Purchased Agency-Eligible Loans with a fair value of $56.7 million;

• Sold Non-Agency Loans for gross proceeds of $99.9 million.

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.

• As of June 30, 2023, we have $16.5 million of capacity remaining under our authorized common stock repurchase programs.

◦ Repurchased 187,020 shares of common stock for $1.1 million during the three months ended June 30, 2023, representing a weighted average cost of $5.93 per share.

Repurchases resulted in approximately 0.4% accretion to March 31, 2023 adjusted book value per share.

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.

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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:

As of June 30, 2023, the Company's investment portfolio consisted of the following:

Asset Class Description

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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.

(1) These investments are included in the "Securitized residential mortgage loans, at fair value," "Securitized residential mortgage loans held for sale, 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.

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We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act.

Proposed Western Asset Mortgage Capital Corporation Merger

As previously announced, on August 8, 2023, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Western Asset Mortgage Capital Corporation, a Delaware corporation ("WMC"), AGMIT Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company ("Merger Sub"), and, solely for the purposes set forth in the Merger Agreement, our Manager.

Pursuant to, and subject to the terms and conditions set forth in the Merger Agreement, WMC will merge with and into Merger Sub, with Merger Sub surviving (the "Merger").

The execution by the Company, Merger Sub, WMC and our Manager of the Merger Agreement was concurrent with the termination by WMC of the Agreement and Plan of Merger, dated as of June 27, 2023, by and among WMC, Maverick Merger Sub, LLC and Terra Property Trust, Inc.

(the "TPT Merger Agreement"), on August 8, 2023, in accordance with its terms.

On August 8, 2023, concurrently with the termination by WMC of the TPT Merger Agreement, we, on behalf of WMC, paid to Terra Property Trust, Inc.

a termination fee of $3.0 million as required by the TPT Merger Agreement (the "TPT Termination Fee").

Under the terms of the Merger Agreement, at the effective time of the Merger (the "Effective Time"), each outstanding share of WMC common stock will be converted into the right to receive the following (the "Per Share Merger Consideration"):

(i) 1.50 shares, or 9.2 million shares in aggregate, of the Company's common stock pursuant to a fixed exchange ratio (subject to adjustment for transaction expenses);

and (ii) the per share portion of a cash payment from our Manager equal to the lesser of $7.0 million or approximately 9.9% of the aggregate Per Share Merger Consideration (any difference between $7.0 million and the approximately 9.9% cap will be used to benefit the combined company post-closing by offsetting reimbursable expenses that would otherwise be payable to our Manager).

Additionally, our Manager, which will be the manager of the combined company, will waive $2.4 million of management fees owed to it in the first year post-closing.

Cash will be paid in lieu of any fractional shares of the Company's common stock that would otherwise have been received as a result of the Merger.

For purposes of the transaction expenses adjustment, WMC's transaction expenses exclude (i) a $7.0 million termination fee payable by WMC to its existing manager in connection with the termination of the existing WMC management agreement, (ii) accrued but unpaid management fees and unreimbursed expenses owed to WMC's manager, (iii) transfer taxes, (iv) the costs of a D&O tail policy and (v) the TPT Termination Fee.

Additionally, at the Effective Time, M.

Christian Mitchell and Lisa G.

Quateman (together, the "WMC Director Designees"), each an independent director currently serving on WMC's board of directors, will be appointed to our Board of Directors.

We have further agreed to nominate the WMC Director Designees to our Board of Directors at the next annual stockholder meeting following the Effective Time.

The Merger is expected to close in the fourth quarter of 2023, subject to the respective approvals by our stockholders and WMC's stockholders and other customary closing conditions set forth in the Merger Agreement.

Our Manager and Angelo Gordon

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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.

On May 15, 2023, Angelo Gordon announced that it and certain of its affiliated entities entered into a transaction agreement (the "Transaction Agreement") with TPG Inc.

("TPG") and certain of its affiliated entities pursuant to which TPG has agreed to acquire Angelo Gordon on the terms and subject to the conditions set forth in the Transaction Agreement (the "TPG Transaction").

Following the TPG Transaction, Angelo Gordon, including our Manager, will be indirect subsidiaries of TPG.

Our investment strategy and team remains unchanged, and the TPG Transaction is not expected to have a material impact on our operations.

The TPG Transaction is expected to close in the fourth quarter of 2023, subject to customary closing conditions, including Hart-Scott-Rodino Act filings, international regulatory approvals, and other client and third-party consents.

Pursuant to the management agreement with our Manager, the closing of the TPG Transaction will result in an assignment of the management agreement.

On July 31, 2023, our independent directors unanimously consented to such assignment.

There will be no changes to the management agreement in connection with the TPG Transaction and the assignment of the management agreement will become effective upon the closing of the TPG Transaction.

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.

Financial markets continued to manage volatility during the second quarter of 2023 due to multiple factors including the impacts of inflation, the path of monetary policy and interest rates, the regional banking crisis, the U.S.

debt ceiling, market uncertainty from the ongoing conflict in Ukraine and other geopolitical risks, and the lingering impact of the COVID-19 pandemic.

While the regional banking crisis appears to have been contained, banks that failed were taken over by the FDIC and their assets continue to be liquidated into the third quarter of 2023.

In early June 2023, Congress approved legislation that suspended the U.S.

debt ceiling until 2025, and risk sentiment in the markets began to improve.

However, benchmark interest rates continued to increase during the second quarter further exacerbating the inverted yield curve as the Federal Reserve increased the Fed Funds rate by 25 basis point in May and again in July in an effort to slow inflation.

Credit spreads for the securitized residential debt sector tightened during the quarter, having benefited from fixed income fund inflows and an improvement in the risk sentiment of the broader market.

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

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.

CRT spreads showed significant improvement during the second quarter 2023, with subordinate credit tranches tightening anywhere from 50 to 350 basis points depending on positioning in the capital structure.

In addition, senior Non-QM mortgage spreads tightened by approximately 15 basis points, and legacy RMBS spreads were 30 to 40 basis points tighter during the second quarter 2023.

As spreads remain wider than February 2022 levels, a material amount of capacity for additional tightening exists for RMBS.

RMBS issuance fell by approximately 19% to $15 billion in the second quarter 2023, compared to $18.6 billion in the first quarter 2023, with Non-QM comprising a large share of the decline.

Issuance fell sharply amid limited origination activity and higher securitization coupons.

Year to date issuance in 2023 was $33.5 billion, decreasing approximately 66% from 2022 levels.

Various reports from bank research departments expect issuance for the full year 2023 to be between $60 billion and $90 billion, down from $127 billion in 2022 and $213 billion in 2021.

After posting seven consecutive months of declines through February 2023, national home prices rose by 1.3% in each of March and April 2023, the latest data available.

With these increases through April 2023, home prices are over 2% higher year to date 2023 and only 2.4% below their June 2022 peak.

Mortgage rates ended the quarter at approximately 6.7%, which was less than the Q4 2022 peaks of over 7% and slightly higher than rates of 6.2% as of Q1 2023.

Amid persistently higher prevailing mortgage rates, home prices and activity have exceeded expectations with new home sales being a driving force, rising from 636 thousand in December 2022 to 763 thousand in May 2023.

On the other hand, existing home sales were hampered by persistently limited listings.

Total listings were 1.08 million in May 2023, which compares to 1.15 million in May 2022 and 1.91 million in 2019.

While homeownership affordability is near all-time lows, housing supply continues to be constrained and demand for housing remains evident as borrowers reset in a higher-rate environment.

Presentation of investment, financing and hedging activities

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

See Notes 2 and 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates.

See Note 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.

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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

June 30, 2023 December 31, 2022

Book value per common share $ 11.89 $ 11.39

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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).

Our primary source of net income or loss available to common stockholders is our net interest income, inclusive of our cost or benefit 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 June 30, 2023 compared to the Three Months Ended June 30, 2022

The table below presents certain information from our consolidated statements of operations for the three months ended June 30, 2023 and 2022 (in thousands).

Three Months Ended

March 31, 2023 March 31, 2022 Increase/(Decrease)

June 30, 2023 June 30, 2022 Increase/(Decrease)

Statement of Operations Data:

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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

the weighted average yield on our GAAP investment portfolio for the three months ended March 31, 2023 and 2022 ($ in millions).

Interest income increased from the three months ended June 30, 2022 to the three months ended June 30, 2023 due to an increase in the size of our portfolio resulting from purchases of Non-Agency Loans and Agency-Eligible Loans during the period, as well as an increase in the weighted average yield.

The following table presents a summary of the weighted average amortized cost and the weighted average yield on our GAAP investment portfolio for the three months ended June 30, 2023 and 2022 ($ in millions).

Three Months Ended

March 31, 2023 March 31, 2022 Increase/(Decrease)

June 30, 2023 June 30, 2022 Increase/(Decrease)

Weighted average amortized cost of our GAAP investment portfolio

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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).

Interest expense increased from the three months ended June 30, 2022 to the three months ended June 30, 2023 due to an increase in the weighted average financing rate during the period resulting from increased interest rates and an increase in the amount of financing on our GAAP investment portfolio primarily resulting from the issuance of securitized debt.

The following table presents a summary of the weighted average financing balance and the weighted average financing rate on our GAAP investment portfolio for the three months ended June 30, 2023 and 2022 ($ in millions).

Three Months Ended

March 31, 2023 March 31, 2022 Increase/(Decrease)

June 30, 2023 June 30, 2022 Increase/(Decrease)

Weighted average GAAP financing balance

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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)

We recorded income on the net interest component of interest rate swaps during the three months ended June 30, 2023 as a result of our swap portfolio being in a net receive position during the period, compared with an expense for the three months ended June 30, 2022 as a result of our swap portfolio being in a net pay position during the period.

The following table presents a summary of our interest rate swap portfolio as of June 30, 2023 and 2022 ($ in millions).

June 30, 2023 June 30, 2022 Increase/(Decrease)

Interest rate swap notional value

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Weighted average pay-fix rate 3.75 % 1.84 % 1.91 %

Net weighted average (pay)/receive rate

1.34 % (0.42) % 1.76 %

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.

The following table presents a summary of Net realized gain/(loss) for the three months ended June 30, 2023 and 2022 (in thousands).

The realized gain during the three months ended June 30, 2023 was driven by gains on the settlement of loans that were previously recorded as forward purchase commitments.

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (446) $ 23

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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

The following table presents a summary of net unrealized gain/(loss) for the three months ended June 30, 2023 and 2022 (in thousands).

During the three months ended June 30, 2023, unrealized losses on residential mortgage loans and real estate securities and unrealized gains on securitized debt and derivatives were primarily the result of rising interest rates during the period.

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Residential mortgage loans $ (18,096) $ (138,822)

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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.

Management fees increased from the three months ended June 30, 2022 to the three months ended June 30, 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.

Non-investment related expenses are 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).

The following table presents a summary of our non-investment related expenses for the three months ended June 30, 2023 and 2022 (in thousands).

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Affiliate reimbursement $ 1,400 $ 1,405

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Investment related expenses

Investment related expenses is primarily comprised of servicing fees, asset management fees, and certain investment related expenses reimbursable to the Manager.

Investment related expenses are 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).

The following table presents a summary of our investment related expenses for the three months ended June 30, 2023 and 2022 (in thousands).

Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Affiliate reimbursement $ 110 $ 241

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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.

These fees decreased from the three months ended June 30, 2022 to the three months ended June 30, 2023 primarily due to less upfront expenses associated with securitizations.

We completed two securitizations during the three months ended June 30, 2022 and no securitizations during the three months ended June 30, 2023.

Equity in earnings/(loss) from affiliates

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Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

MATT Non-QM Securities $ 349 $ (370)

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Three Months Ended

March 31, 2023 March 31, 2022

June 30, 2023 June 30, 2022

Interest income $ 1,753 $ 1,702

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Total Net Interest Income 1,504 1,420

Net unrealized gain/(loss) (879) (1,398)

After-tax earnings/(loss) at AG Arc (1) 309 (1,253)

Net unrealized gain/(loss) on investment in AG Arc — (2,699)

Elimination of gains on loans sold to MITT (2) (341) (1,758)

Total AG Arc Earnings/(Loss) (32) (5,710)

Other operating expenses 155 118

Equity in earnings/(loss) from affiliates

$ 438 $ (5,806)

(1) The earnings/(loss) at AG Arc during the three months ended June 30, 2023 were primarily the result of $0.4 million related to changes in the fair value of the MSR portfolio held by Arc Home, offset by $(0.1) million of losses related to Arc Home's lending and servicing operation.

The earnings/(loss) at AG Arc during the three months ended June 30, 2022 were primarily the of $(1.6) million of losses related to Arc Home's lending and servicing operations, offset by $0.4 million related to changes in the fair value of the MSR portfolio held by Arc Home.

(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.

Six Months Ended June 30, 2023 compared to the Six Months Ended June 30, 2022

The table below presents certain information from our consolidated statements of operations for the six months ended June 30, 2023 and 2022 (in thousands).

Six Months Ended

June 30, 2023 June 30, 2022 Increase/(Decrease)

Statement of Operations Data:

Net Interest Income

Interest income $ 118,591 $ 72,827 $ 45,764

Interest expense 95,617 39,295 56,322

Total Net Interest Income 22,974 33,532 (10,558)

Other Income/(Loss)

Net interest component of interest rate swaps 2,804 (4,853) 7,657

Net realized gain/(loss) 2,044 9,091 (7,047)

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Total Other Income/(Loss) 13,359 (64,533) 77,892

Management fee to affiliate 4,136 3,920 216

Non-investment related expenses 5,394 5,209 185

Investment related expenses 4,558 4,321 237

Transaction related expenses 2,103 9,614 (7,511)

Total Expenses 16,191 23,064 (6,873)

Income/(loss) before equity in earnings/(loss) from affiliates 20,142 (54,065) 74,207

Equity in earnings/(loss) from affiliates 454 (7,860) 8,314

Net Income/(Loss) 20,596 (61,925) 82,521

Dividends on preferred stock (9,172) (9,172) —

Net Income/(Loss) Available to Common Stockholders $ 11,424 $ (71,097) $ 82,521

Interest income

Interest income increased from the six months ended June 30, 2022 to the six months ended June 30, 2023 due to an increase in the size of our portfolio resulting from purchases of Non-Agency Loans and Agency-Eligible Loans during the period, as well as an increase in the weighted average yield.

The following table presents a summary of the weighted average amortized cost and the weighted average yield on our GAAP investment portfolio for the six months ended June 30, 2023 and 2022 ($ in millions).

Six Months Ended

June 30, 2023 June 30, 2022 Increase/(Decrease)

Weighted average amortized cost of our GAAP investment portfolio

$ 4,770 $ 3,491 $ 1,279

Weighted average yield on our GAAP investment portfolio 4.97 % 4.17 % 0.80 %

Interest expense

Interest expense increased from the six months ended June 30, 2022 to the six months ended June 30, 2023 due to an increase in the weighted average financing rate during the period resulting from increased interest rates and an increase in the amount of financing on our GAAP investment portfolio primarily resulting from the issuance of securitized debt.

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 six months ended June 30, 2023 and 2022 ($ in millions).

Six Months Ended

June 30, 2023 June 30, 2022 Increase/(Decrease)

Weighted average GAAP financing balance

$ 4,379 $ 3,172 $ 1,207

Weighted average financing rate on our GAAP investment portfolio 4.37 % 2.48 % 1.89 %

Net interest component of interest rate swaps

We recorded income on the net interest component of interest rate swaps during the six months ended June 30, 2023 as a result of our swap portfolio being in a net receive position during the period compared with an expense for the six months ended June 30, 2022 as a result of our swap portfolio being in a net pay position during the period.

The following table presents a summary of our interest rate swap portfolio as of June 30, 2023 and 2022 ($ in millions).

June 30, 2023 June 30, 2022 Increase/(Decrease)

Interest rate swap notional value

$ 607 $ 1,414 $ (807)

Weighted average receive-variable rate

5.09 % 1.42 % 3.67 %

Weighted average pay-fix rate

3.75 % 1.84 % 1.91 %

Net weighted average (pay)/receive rate

1.34 % (0.42) % 1.76 %

Net realized gain/(loss)

The following table presents a summary of Net realized gain/(loss) for the six months ended June 30, 2023 and 2022 (in thousands).

The realized gain during the six months ended June 30, 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.

Six Months Ended

June 30, 2023 June 30, 2022

Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (10,348) $ (35)

Sales of real estate securities — (34,672)

Settlement of derivatives and other instruments 12,392 43,798

Total Net realized gain/(loss) $ 2,044 $ 9,091

Net unrealized gain/(loss)

The following table presents a summary of net unrealized gain/(loss) for the six months ended June 30, 2023 and 2022 (in thousands).

Six Months Ended

June 30, 2023 June 30, 2022

Residential mortgage loans $ 79,105 $ (296,969)

Real estate securities 302 6,092

Securitized debt (60,447) 181,696

Derivatives (10,449) 40,410

Total Net unrealized gain/(loss) $ 8,511 $ (68,771)

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 the six months ended June 30, 2022 to the six months ended June 30, 2023 primarily due to an increase in our Stockholder's Equity as calculated pursuant to our Management Agreement.

Non-investment related expenses

The following table presents a summary of our non-investment related expenses for the six months ended June 30, 2023 and 2022 (in thousands).

Six Months Ended

June 30, 2023 June 30, 2022

Affiliate reimbursement $ 2,800 $ 2,810

Professional Fees 1,062 937

D&O insurance 545 654

Directors' compensation 353 337

Other 634 471

Total Non-investment related expenses $ 5,394 $ 5,209

Investment related expenses

The following table presents a summary of our investment related expenses for the six months ended June 30, 2023 and 2022 (in thousands).

Six Months Ended

June 30, 2023 June 30, 2022

Affiliate reimbursement $ 212 $ 376

Servicing fees 2,045 2,019

Residential mortgage loan asset management fees 1,289 1,182

Trustee and bank fees 742 357

Other 270 387

Total Investment related expenses $ 4,558 $ 4,321

Transaction related expenses

Transaction related expenses decreased from the six months ended June 30, 2022 to the six months ended June 30, 2023 primarily due to less upfront expenses associated with securitizations.

We completed five securitizations during the six months ended June 30, 2022 and one securitization during the six months ended June 30, 2023.

Equity in earnings/(loss) from affiliates

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

Six Months Ended

June 30, 2023 June 30, 2022

MATT Non-QM Securities $ 1,974 $ (1,259)

Land Related Financing 741 948

Re/Non-Performing Securities (89) (169)

AG Arc (2,172) (7,380)

Equity in earnings/(loss) from affiliates

$ 454 $ (7,860)

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

Six Months Ended

June 30, 2023 June 30, 2022

Interest income $ 3,513 $ 3,151

Interest expense 513 574

Total Net Interest Income 3,000 2,577

Net realized gain/(loss) — (7)

Net unrealized gain/(loss) (85) (2,820)

Total Other Income/(Loss) (85) (2,827)

After-tax earnings/(loss) at AG Arc (1) (2,006) 1,892

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$ 454 $ (7,860)

(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.

(1) The earnings/(loss) at AG Arc during the six months ended June 30, 2023 were primarily the result of $(1.2) million related to changes in the fair value of the MSR portfolio held by Arc Home coupled with $(0.8) million of losses related to Arc Home's lending and servicing operations.

The earnings/(loss) at AG Arc during the six months ended June 30, 2022 were primarily the result of $3.5 million of gains related to changes in the fair value of the MSR portfolio held by Arc Home, offset by $(1.6) million of losses related to Arc Home's lending and servicing operations.

(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.

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.

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

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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.

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.

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

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

A reconciliation of "Net Income/(loss) available to common stockholders" to EAD for the three months ended March 31, 2023 and 2022 is set forth below (in thousands, except per share data).

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

A reconciliation of "Net Income/(loss) available to common stockholders" to EAD for the three and six months ended June 30, 2023 and 2022 is set forth below (in thousands, except per share data).

Three Months Ended

March 31, 2023

March 31, 2022

Six Months Ended

June 30, 2023

June 30, 2022

June 30, 2023 June 30, 2022

Net Income/(loss) available to common stockholders $ 3,470 $ (53,309) $ 11,424 $ (71,097)

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Earnings available for distribution, per Diluted Share $ 0.08 $ 0.08 $ 0.11 $ 0.06

(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.

(1) For the three months ended June 30, 2023 and 2022, total transaction related expenses and deal related performance fees included $0.4 million and $3.8 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.

For the six months ended June 30, 2023 and 2022, total transaction related expenses and deal related performance fees included $2.1 million and $9.6 million, respectively, recorded within the "Transaction related expenses" line item and $0.2 million and $0.5 million, respectively, recorded within the "Interest expense" lie item, which relates to the amortization of deferred financing costs.

(2) For the three months ended June 30, 2023 and 2022, $1.4 million or $0.07 per share and $2.3 million or $0.10 per share, respectively;

and for the six months ended June 30, 2023 and 2022, $0.8 million or $0.04 per share and $6.8 million or $0.29 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives were excluded from EAD, net of deferred tax expense.

Additionally, for the three months ended June 30, 2023 and 2022, $0.0 million or $0.00 per share and $(2.7) million or $(0.12) per share, respectively;

and for the six months ended June 30, 2023 and 2022, $0.2 million or $0.01 per share and $(5.2) million or $(0.22) 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.

For the three months ended June 30, 2023 and 2022, we eliminated $0.3 million or $0.02 per share and $1.8 million or $0.07 per share, respectively.

For the six months ended June 30, 2023 and 2022, we eliminated $0.3 million or $0.02 per share and $4.1 million or $0.17 per share, respectively, 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.

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Treasury and interest rate swap yield curves.

We allocate our equity by investment type using the fair value of our investment portfolio, less any associated leverage, inclusive of any long TBA position (at cost).

We allocate all non-investment portfolio related assets and liabilities to our investment portfolio based on the characteristics of such assets and liabilities in order to sum to stockholders' equity per the consolidated balance sheets.

Our equity allocation method is a non-GAAP methodology and may not be comparable to the similarly titled measure or concepts of other companies, who may use different calculations and allocation methodologies.

The following table presents a summary of the allocated equity of our investment portfolio as of 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

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.

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 or benefit, which is the weighted average of the net pay or receive rates on our interest rate swaps.

See the "Financing activities" section below for more detail on our leverage ratio.

Investment portfolio

The following tables present a summary of our investment portfolio, inclusive of net interest margin and leverage ratios, as of June 30, 2023 and a reconciliation of these metrics on our Investment Portfolio to their respective metrics on our GAAP Investment Portfolio ($ in thousands).

June 30, 2023

Investment Securitized Debt Cost of Funds (b) Allocated Equity (c) Net Interest Margin

Instrument Amortized Cost Fair Value Yield (a) Amortized Cost Fair Value Financing Arrangements Leverage (d)

Residential Investments:

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

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)

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.

Securitized Non-Agency Loans $ 4,016,376 $ 3,602,201 4.64 % $ 3,564,320 $ 3,232,488 $ 192,228 4.40 % $ 177,485 0.24 % 1.1x

Securitized Re/Non-Performing Loans 278,493 259,089 6.62 % 181,771 169,572 37,731 3.97 % 51,786 2.65 % 0.7x

Non-Agency Loans 180,146 179,510 7.01 % — — 148,098 5.12 % 31,412 1.89 % 4.7x

Agency-Eligible Loans 61,837 60,696 6.43 % — — 56,874 3.09 % 3,822 3.34 % 14.9x

Residential Whole Loans 1,274 2,870 90.06 % — — — — % 2,870 90.06 % N/A

Land Related Financing 9,581 9,581 14.50 % — — — — % 9,581 14.50 % N/A

Non-Agency 77,667 74,088 13.51 % — — 40,452 5.31 % 33,636 8.20 % 0.8x

Total Residential Investments $ 4,625,374 $ 4,188,035 5.13 % $ 3,746,091 $ 3,402,060 $ 475,383 4.39 % $ 310,592 0.74 % 1.5x

Agency RMBS $ 279,411 $ 278,497 5.80 % $ — $ — $ 269,360 4.68 % $ 9,137 1.12 % 17.2x

Total Investment Portfolio $ 4,904,785 $ 4,466,532 5.17 % $ 3,746,091 $ 3,402,060 $ 744,743 4.41 % $ 319,729 0.76 % 2.2x

Cash and Cash Equivalents (e) 80,308 5.01 %

Interest Rate Swaps (f) 15,552 1.34 %

Arc Home 37,447

Non-Interest earning assets, net 7,689

Total Stockholders' Equity $ 460,725 1.6x

Investment Securitized Debt Cost of Funds (b) Allocated Equity (c) Net Interest Margin

Amortized Cost Fair Value Yield (a) Amortized Cost Fair Value Financing Arrangements Leverage (d)

Total Investment Portfolio $ 4,904,785 $ 4,466,532 5.17 % $ 3,746,091 $ 3,402,060 $ 744,743 4.41 % $ 319,729 0.76 % 2.2x

Investments in Debt and Equity of Affiliates 48,749 47,682 17.36 % — — 17,732 5.42 % 29,950 11.94 % (g)

GAAP Investment Portfolio $ 4,856,036 $ 4,418,850 5.04 % $ 3,746,091 $ 3,402,060 $ 727,011 4.40 % $ 289,779 0.64 % 8.9x

(a) Excludes any net TBA positions.

(b) Includes the cost (interest expense) or benefit (interest income) from our interest rate swap hedges.

The benefit of hedging as of June 30, 2023 was 0.20%.

(c) Allocated equity represents the investment fair value less the associated securitized debt and financing arrangements, where applicable.

(d) The leverage ratio on each asset class and 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 less any cash posted as collateral by its equity invested inclusive of any cash collateral posted on financing arrangements.

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.

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

The leverage ratio on our GAAP Investment Portfolio represents GAAP leverage as defined below in the "Financing Activities" section.

(e) Cash and cash equivalents may include a portion of cash invested in money market funds.

The yield represents the interest earned on money market funds as of period end.

(f) Interest rate swaps represents the sum of the net fair value of interest rate swaps and the margin posted on interest rate swaps as of period end.

Yield on interest rate swaps represents the weighted average net receive/(pay) rate as of period end.

The impact of the net interest component of interest rate swaps on the cost of funds is included within the respective investment portfolio asset line items.

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

The following tables present a summary of our investment portfolio, inclusive of net interest margin and leverage ratios, as of December 31, 2022 and a reconciliation of these metrics on our Investment Portfolio to their respective metrics on our GAAP Investment Portfolio ($ in thousands).

December 31, 2022

Investment Securitized Debt Cost of Funds (b) Allocated Equity (c) Net Interest Margin

Instrument Amortized Cost Fair Value Yield (a) Amortized Cost Fair Value Financing Arrangements Leverage (d)

Residential Investments:

Securitized Non-Agency Loans $ 3,904,841 $ 3,436,201 4.65 % $ 3,470,695 $ 3,078,593 $ 197,937 4.28 % $ 159,671 0.37 % 1.2x

Securitized Re/Non-Performing Loans 288,138 270,945 6.66 % 196,134 183,759 34,151 3.68 % 53,035 2.98 % 0.6x

Non-Agency Loans 398,392 371,161 5.54 % — — 315,915 4.81 % 55,246 0.73 % 5.7x

Agency-Eligible Loans 48,675 46,862 5.99 % — — 44,326 5.08 % 2,536 0.91 % 17.5x

Residential Whole Loans 1,520 3,428 72.78 % — — — — % 3,428 72.78 % N/A

Land Related Financing 10,688 10,688 14.50 % — — — — % 10,688 14.50 % N/A

Non-Agency 67,580 63,516 16.41 % — — 35,510 5.42 % 28,006 10.99 % 0.7x

Total Residential Investments $ 4,719,834 $ 4,202,801 5.13 % $ 3,666,829 $ 3,262,352 $ 627,839 4.31 % $ 312,610 0.82 % 1.9x

Agency RMBS $ 19,771 $ 19,124 7.54 % $ — $ — $ 14,163 4.54 % $ 4,961 3.00 % 2.3x

Total Investment Portfolio $ 4,739,605 $ 4,221,925 5.14 % $ 3,666,829 $ 3,262,352 $ 642,002 4.31 % $ 317,571 0.83 % 1.9x

Cash and Cash Equivalents (e) 84,621 4.11 %

Interest Rate Swaps (f) 8,727 1.53 %

Arc Home 39,680

Non-Interest earning assets, net 12,201

Total Stockholders' Equity $ 462,800 1.3x

Investment Securitized Debt Cost of Funds (b) Allocated Equity (c) Net Interest Margin

Amortized Cost Fair Value Yield (a) Amortized Cost Fair Value Financing Arrangements Leverage (d)

Total Investment Portfolio $ 4,739,605 $ 4,221,925 5.14 % $ 3,666,829 $ 3,262,352 $ 642,002 4.31 % $ 317,571 0.83 % 1.9x

Investments in Debt and Equity of Affiliates 50,592 49,609 18.05 % — — 20,815 5.19 % 28,794 12.86 % (g)

GAAP Investment Portfolio $ 4,689,013 $ 4,172,316 4.99 % $ 3,666,829 $ 3,262,352 $ 621,187 4.31 % $ 288,777 0.68 % 8.4x

(a) Excludes any net TBA positions.

(b) Includes the cost (interest expense) or benefit (interest income) from our interest rate swap hedges.

The benefit of hedging as of December 31, 2022 was 0.13%.