TPG Mortgage Investment Trust, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in this report. Our company We are a residential mortgage REIT with a focus on investing in a diversified risk-adjusted portfolio of residential mortgage-related assets in the U.S. mortgage market. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term, primarily through dividends and capital appreciation. We focus our investment activities primarily on acquiring and securitizing newly-originated residential mortgage loans within the non-agency segment of the housing market. We obtain our assets through Arc Home, LLC ("Arc Home"), our residential mortgage loan originator in which we own an approximate 44.6% interest, and through other third-party origination partners. We finance our acquired loans through various financing lines on a short-term basis and utilize Angelo, Gordon & Co., L.P.'s ("TPG Angelo Gordon") proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit. Through our ownership in Arc Home, we also have exposure to mortgage banking activities. Arc Home is a multi-channel licensed mortgage originator and servicer primarily engaged in the business of originating and selling residential mortgage loans while retaining the mortgage servicing rights associated with certain loans that it originates. Our investment portfolio (which excludes our ownership in Arc Home) primarily 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. Our investment portfolio also includes commercial loans, commercial-mortgage backed securities ("CMBS") and other securities (collectively, the "Legacy WMC Commercial Investments") that were acquired in the WMC acquisition. We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011. We conduct our operations to qualify and be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute to our stockholders as long as we maintain our intended qualification as a REIT, with the exception of business conducted in our domestic taxable REIT subsidiaries ("TRSs") which are subject to corporate income tax. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act. We are externally managed by our Manager, an affiliate of TPG Angelo Gordon, pursuant to a management agreement. Our Manager has delegated to TPG Angelo Gordon, a diversified credit and real estate investing platform within TPG Inc. ("TPG"), the overall responsibility of its day-to-day duties and obligations arising under the management agreement. TPG (Nasdaq: TPG) is a leading global alternative asset management firm. WMC Acquisition On December 6, 2023 (the "Closing Date"), we completed the acquisition of Western Asset Mortgage Capital Corporation ("WMC"), a Delaware corporation and externally managed mortgage REIT that focused on investing in, financing and managing a portfolio of residential mortgage loans, real estate related securities, and commercial real estate loans. On the Closing Date, WMC merged with and into AGMIT Merger Sub, LLC, a Delaware limited liability company and our wholly owned subsidiary ("Merger Sub"), with Merger Sub continuing as the surviving company (the "Merger"). Refer to "Item 1—WMC Acquisition" and the section entitled "WMC Acquisition" in Note 1 to the "Notes to Consolidated Financial Statements" for further information related to the Merger. 53 2023 Executive summary Financial Highlights • $10.46 Book Value per share and $10.20 Adjusted Book Value per share; • $1.68 of Net Income/(Loss) Available to Common Stockholders per diluted common share and $0.39 of Earnings Available for Distribution ("EAD") per diluted common share; ◦ Refer to the "Earnings Available for Distribution" section below for further details related to our reconciliation of Net Income/(Loss) Available to Common Stockholders to EAD; • 10.5x GAAP Leverage Ratio and 1.5x Economic Leverage Ratio; and • $0.72 dividend per common share declared during the year. Strategic Acquisition • Completed the WMC acquisition on December 6, 2023, providing meaningful growth in our investment portfolio and scale to support our return profile; • Issued approximately 9.2 million shares of MITT's common stock to former WMC common stockholders as consideration, increasing our market capitalization by approximately 46%; • Acquired $1.2 billion of assets consisting primarily of securitized residential mortgage loans, increasing our investment portfolio by approximately 25%; • Assumed $1.1 billion of liabilities inclusive of securitized debt, financing arrangements, and convertible senior unsecured notes ("Legacy WMC Convertible Notes"); • Increased our equity by $81.4 million and recorded a bargain purchase gain of $30.2 million; and • Added two independent board members from the WMC board of directors. Investment Activity • The table below summarizes the fair value of purchases and proceeds from sales of investments, as well as the fair value of assets acquired through the WMC acquisition, during the year ended December 31, 2023 (in thousands). Investment Purchases Sales Assets acquired from WMC Non-Agency Loans $ 587,643 $ 330,742 $ 977,827 Agency-Eligible Loans 642,010 18,474 — Re/Non-Performing Loans — 68,693 — Agency RMBS 277,989 266,298 745 Non-Agency RMBS 15,729 20,058 48,200 CMBS — — 56,301 Other Securities — — 1,159 Commercial Loans — — 78,459 Financing Activity • Executed three rated securitizations converting recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; ◦ Securitized Non-Agency Loans with a total unpaid principal balance of $677.5 million; and ◦ Securitized Agency-Eligible Loans with a total unpaid principal balance of $318.3 million; • Assumed liabilities of $1.1 billion from the WMC acquisition, which included: ◦ Securitized debt with a fair value of $837.3 million; ◦ Financing arrangements of $171.2 million; and ◦ Legacy WMC Convertible Notes with a fair value of $85.2 million; • Subsequent to December 31, 2023: ◦ Executed a rated securitization of Agency-Eligible Loans with a total unpaid principal balance of $377.5 million; ◦ Completed the issuance of $34.5 million aggregate principal amount of 9.500% senior notes due in 2029 for net proceeds of approximately $32.8 million; and ◦ Repurchased $7.1 million aggregate principal amount of the outstanding Legacy WMC Convertible Notes. 54 Capital Activity • As of December 31, 2023, we have approximately $16.5 million of capacity remaining under our authorized common stock repurchase programs; ◦ Repurchased 1.1 million shares of common stock for $6.4 million during the year ended December 31, 2023, representing a weighted average cost of $5.72 per share. Repurchases resulted in approximately 2.7% accretion to December 31, 2022 adjusted book value per share. Market Conditions Financial markets experienced volatility throughout 2023 due to multiple factors including the impacts of inflation, the path of monetary policy and interest rates, the U.S. debt ceiling, market uncertainty from the ongoing conflicts in Ukraine and Israel and other geopolitical risks. The Federal Reserve continued executing on its monetary policy tightening cycle during 2023. The Federal Reserve raised the short-term federal funds target rate eleven times between March 2022 and July 2023 and has since held rates steady. Year-to-date through October 2023, the 10-year U.S. treasury yield increased by approximately 100 basis points to 4.88% and the 30-year fixed rate mortgage increased by 137 basis points peaking at 7.8%. In November, the Federal Reserve left rates unchanged for the fourth consecutive meeting, spoke increasingly of a more balanced approach to setting policy, and suggested that the recent rise in longer-term interest rates could displace the need to tighten policy rates further. Although the Federal Reserve cautioned that it was premature to discuss cutting rates, financial markets took this as a dovish shift in sentiment. At the December meeting, the Federal Reserve confirmed its dovish pivot with an updated Summary of Economic Projections that showed no further rate increases and a faster pace of rate normalization, further driving interest rates lower. By the end of the year, the 10-year U.S. treasury yield retraced to 3.88%, where it started the year, and the 30-year fixed rate mortgage declined to 6.6%. Although market participants began pricing in rate cuts as soon as March 2024, it is not clear when the Federal Reserve will initiate rate cuts and it is possible longer-term rates may remain elevated for longer than anticipated. The second quarter ended with the spread between the 2-year and 10-year U.S. treasury yields peaking at approximately 106 basis points inverted. At the end of the fourth quarter, the curve inversion was only 37 basis points providing some relief. While the Federal Reserve’s policy tightening has slowed the U.S economy, growth in GDP, low unemployment and strength in consumer spending persist, leaving the Federal Reserve seeking economic data that will provide greater confidence that inflation is moving sustainably toward the target rate of 2%. RMBS spreads mostly tightened during the fourth quarter of 2023. 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 were tighter by up to 50 basis points, with tranches at or near investment grade tightening the most during the quarter. For the full year 2023, CRT experienced impressive gains, particularly for lower credit tranches which were as much as 500 basis points tighter while tranches in the middle part of the capital structure tightened by approximately 300 basis points. Senior Non-QM spreads tightened by approximately 20 basis points during the quarter while strong demand for BBB-rated Non-QM securities drove spreads in by approximately 50 basis points during the quarter and an additional 25 basis points in the month of January. The Non-QM sector finished the year with spreads tighter overall however still remaining wide of February 2022 levels, which suggests ample runway for additional upside potential. RMBS issuance during the fourth quarter was in-line with the prior two quarters at $16 billion. However, issuance for the full year 2023 totaled only $65 billion, roughly half of the $137 billion of issuance recorded in 2022, and was the slowest year since 2016. Issuance of nearly every type of RMBS fell, in most cases sharply, except for the second lien and home equity line of credit sector which is still in its infancy. Issuance of benchmark CRT fell 60% to $8.3 billion amid lighter origination volumes and a shift away from high-cost subordinate tranches by the issuers. Non-QM was the most active sector with issuance of $28 billion resulting in a relatively modest 25% year-over-year decline. Various reports from bank research departments estimate 2024 issuance will be $65 to $90 billion, higher than 2023 but still down from $127 billion in 2022 and $213 billion in 2021. Home prices continued to rise with the S&P CoreLogic Case-Shiller U.S. National Home Price Index up 5.5% for the full year 2023 which exceeds the prior peak in June 2022 by 0.8%. A survey of third-party research illustrates varied home price expectations for 2024 ranging from a decline of 5% to an increase of 4%. Prevailing mortgage rates were considerably lower over the final two months of the year, falling to 6.6% after reaching 7.8% at the end of October 2023, the highest level since 2000. Nationally, the average effective mortgage rate was 3.7% as of September 2023. Current interest rates thus leave the well-publicized “lock-in effect,” or disincentive for existing homeowners to sell their homes because their current mortgage rate is well below current market rates, in force, albeit modestly weaker. 55 According to the National Association of Realtors, total existing home listings amounted to 1 million in December 2023, in line with most of 2023 but down significantly from pre-pandemic years. New listings, which offer a timelier view of current supply, have totaled 4.13 million year-to-date through December 2023, which was almost 1.8 million units less than the same period in 2021. Despite prevailing mortgage rates at multi-decade highs, sufficient demand continues to exist to support the housing market. 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 In the "Investment activities," "Financing activities," "Hedging activities" and "Liquidity and capital resources" sections of this Part II, Item 7, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. Our investment portfolio and the related financing arrangements are presented along with a reconciliation to GAAP. This presentation of our investment portfolio is consistent with how our management team evaluates the business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition. See Notes 2 and 10 to the "Notes to Consolidated Financial Statements" for a discussion of investments in debt and equity of affiliates. See below for further terms used when describing our investment portfolio. • Our "Investment portfolio" includes our Residential Investments, Agency RMBS, inclusive of TBAs, and Legacy WMC Commercial Investments. • 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 issued under the GCAT shelf, as well as Non-Agency RMBS issued by third-parties. • "Real estate securities" refers to our Non-Agency RMBS and Agency RMBS, inclusive of TBAs, as well as Legacy WMC CMBS and Other Securities that were acquired in the WMC acquisition. • Our "Legacy WMC Commercial Investments" refer to the commercial loans and CMBS that we acquired in the WMC acquisition. We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. • Our "GAAP Residential Investments" refer to our Residential Investments excluding investments held within affiliated entities. • Our "GAAP Investment portfolio" includes our GAAP Residential Investments, Agency RMBS, and Legacy WMC Commercial Investments and Other Securities. 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 year-end. December 31, 2023 December 31, 2022 Book value per common share $ 10.46 $ 11.39 Net proceeds of preferred stock less liquidation preference of preferred stock per common share (1) (0.26) (0.36) Adjusted book value per common share $ 10.20 $ 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. 56 Results of Operations for the Fiscal Year 2023 and 2022 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, 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. Year Ended December 31, 2023 compared to the Year Ended December 31, 2022 The table below presents certain information from our consolidated statements of operations for the years ended December 31, 2023 and 2022 (in thousands): Year Ended Increase/(Decrease) December 31, 2023 December 31, 2022 Statement of Operations Data: Net Interest Income Interest income $ 260,329 $ 180,303 $ 80,026 Interest expense 212,500 118,918 93,582 Total Net Interest Income 47,829 61,385 (13,556) Other Income/(Loss) Net interest component of interest rate swaps 6,680 (4,922) 11,602 Net realized gain/(loss) 7,697 81,389 (73,692) Net unrealized gain/(loss) 1,450 (137,634) 139,084 Bargain purchase gain 30,190 — 30,190 Total Other Income/(Loss) 46,017 (61,167) 107,184 Expenses Management fee to affiliate 7,711 8,096 (385) Non-investment related expenses 10,077 9,292 785 Investment related expenses 9,808 9,198 610 Transaction related expenses 11,076 16,474 (5,398) Total Expenses 38,672 43,060 (4,388) Income/(loss) before equity in earnings/(loss) from affiliates 55,174 (42,842) 98,016 Equity in earnings/(loss) from affiliates (1,390) (10,258) 8,868 Net Income/(Loss) 53,784 (53,100) 106,884 Dividends on preferred stock (18,344) (18,344) — Net Income/(Loss) Available to Common Stockholders $ 35,440 $ (71,444) $ 106,884 Interest income Interest income is calculated using the effective interest method for our GAAP investment portfolio. Interest income increased from December 31, 2022 to December 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 of our investment portfolio resulting from purchasing higher yielding assets as interest rates increased during the period. The following table presents a summary of the weighted average amortized cost of and the weighted average yield on our GAAP investment portfolio for the years ended December 31, 2023 and 2022 ($ in millions). 57 Year Ended December 31, 2023 December 31, 2022 Increase/(Decrease) Weighted average amortized cost of our GAAP investment portfolio $ 5,018 $ 4,001 $ 1,017 Weighted average yield on our GAAP investment portfolio 5.19 % 4.51 % 0.68 % Interest expense Interest expense is inclusive of our financing cost related to our financing arrangements on our GAAP investment portfolio, securitized debt, and Legacy WMC Convertible Notes. Interest expense increased from December 31, 2022 to December 31, 2023 due to an increase in the weighted average financing rate resulting from rising interest rates during the period, coupled with 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 for the years ended December 31, 2023 and 2022 ($ in millions). Year Ended December 31, 2023 December 31, 2022 Increase/(Decrease) Weighted average GAAP financing balance $ 4,635 $ 3,655 $ 980 Weighted average financing rate 4.58 % 3.25 % 1.33 % 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 year ended December 31, 2023 as a result of our swap portfolio being in a net receive position during the entire period, compared with an expense for the year ended December 31, 2022 as a result of our swap portfolio being in a net pay position during part of the period. The following table presents a summary of our interest rate swap portfolio as of December 31, 2023 and 2022 ($ in millions). December 31, 2023 December 31, 2022 Increase/(Decrease) Interest rate swap notional value $ 503 $ 335 $ 168 Weighted average receive-variable rate 5.38 % 4.30 % 1.08 % Weighted average pay-fix rate 3.65 % 2.77 % 0.88 % Net weighted average (pay)/receive rate 1.73 % 1.53 % 0.20 % Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the years ended December 31, 2023 and 2022 (in thousands). The realized gain during the year ended December 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 and real estate securities. Year Ended December 31, 2023 December 31, 2022 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ (12,079) $ (2,958) Sales of real estate securities (1,558) (34,504) Settlement of derivatives and other instruments 21,334 118,851 Total Net realized gain/(loss) $ 7,697 $ 81,389 58 Net unrealized gain/(loss) The following table presents a summary of net unrealized gain/(loss) for the years ended December 31, 2023 and 2022 (in thousands). During the year ended December 31, 2023, unrealized gains on real estate securities, residential mortgage loans, and commercial loans and unrealized losses on securitized debt and derivatives were primarily driven by a decrease in interest rates during the fourth quarter of 2023. Year Ended December 31, 2023 December 31, 2022 Residential mortgage loans $ 111,714 $ (539,987) Commercial loans 95 — Real estate securities 3,475 3,010 Securitized debt (89,369) 401,467 Derivatives (24,465) (2,124) Total Net unrealized gain/(loss) $ 1,450 $ (137,634) Bargain purchase gain Per ASC 805, "Business Combinations," a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred is less than the fair value of the identifiable net asset acquired. In connection with the WMC acquisition, we recorded a bargain purchase gain of $30.2 million, which represents the difference between our consideration transferred of $51.2 million and the fair value of the net assets we acquired of $81.4 million. As a result of macroeconomic factors and interest rate volatility, the price per share of common stock of certain companies within the mortgage REIT industry have traded at discounts to book values per share in recent periods, which contributed to the bargain purchase gain recorded on the WMC acquisition. Management fee to affiliate Our management fee is based upon a percentage of our Stockholders’ Equity. See the "Contractual obligations" section of this Part II, Item 7 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity. In connection with the WMC acquisition, we and our Manager entered into the MITT Management Agreement Amendment pursuant to which the base management fee will be reduced by $0.6 million for the first four quarters following the transaction closing, beginning with the fiscal quarter in which the transaction closing occurs (i.e., resulting in an aggregate $2.4 million waiver of base management fees). As a result of the transaction closing on December 6, 2023, the base management fee was reduced by $0.6 million during the year ended December 31, 2023. This was offset by an increase in stockholders' equity as calculated pursuant to the management agreement as a result of the WMC acquisition. Non-investment related expenses 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 years ended December 31, 2023 and 2022 (in thousands). Year Ended December 31, 2023 December 31, 2022 Affiliate reimbursement (1) $ 5,095 $ 4,646 Professional Fees 2,191 1,993 D&O insurance 1,086 1,236 Directors' compensation 745 681 Other 960 736 Total Non-investment related expenses $ 10,077 $ 9,292 (1) For the years ended December 31, 2023 and 2022, the Manager agreed to waive its right to receive expense reimbursements of $1.7 million and $1.5 million, respectively. 59 Investment related expenses Investment related expenses are primarily comprised of servicing fees, asset management fees, and certain investment related expenses reimbursable to the 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 associated with our investment portfolio. The following table presents a summary of our investment related expenses for the years ended December 31, 2023 and 2022 (in thousands). Year Ended December 31, 2023 December 31, 2022 Affiliate reimbursement $ 467 $ 755 Servicing fees (1) 4,437 4,030 Residential mortgage loan asset management fees (1) 2,655 2,595 Trustee and bank fees (1) 1,644 998 Other 605 820 Total Investment related expenses $ 9,808 $ 9,198 (1) We incur servicing fees, asset management fees, and trustee and bank fees in connection with our residential mortgage loans. These expenses increased from the year ended December 31, 2022 to the year ended December 31, 2023 primarily due to an increase in our GAAP residential mortgage loan portfolio. The weighted average cost of our GAAP residential mortgage loan portfolio increased by $0.9 billion from $3.9 billion for the year ended December 31, 2022 to $4.8 billion for the year ended December 31, 2023 resulting from purchases of Non-Agency Loans and Agency-Eligible Loans. Transaction related expenses Historically, transaction related expenses have included expenses primarily associated with purchasing and securitizing residential mortgage loans as well as certain other transaction and performance related fees associated with assets we invest in. However, in 2023, we also recorded transaction related expenses in connection with the WMC acquisition. Transaction related expenses decreased from the prior period as we completed three securitizations during the year ended December 31, 2023, as compared to eight securitizations during the year ended December 31, 2022. This decrease was partially offset by $6.0 million of transaction related expenses incurred in connection with the WMC acquisition. Equity in earnings/(loss) from affiliates Equity in earnings/(loss) from affiliates represents our share of earnings and profits of investments held within affiliated entities. Substantially all of these investments are comprised of real estate securities, loans, and our investment in AG Arc which holds our investment in Arc Home. The below tables summarize the components of the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Year Ended December 31, 2023 December 31, 2022 MATT Non-QM Securities (1) $ 3,992 $ 1,261 Land Related Financing (2) 758 1,621 Re/Non-Performing Securities 782 594 AG Arc (3) (6,922) (13,734) Equity in earnings/(loss) from affiliates $ (1,390) $ (10,258) (1) The earnings within MATT for the year ended December 31, 2023 were primarily the result of net interest income of $3.5 million and unrealized gains of $0.7 million offset by expenses of $(0.2) million. The earnings within MATT for the year ended December 31, 2022 were primarily the result of net interest income of $2.7 million and unrealized gains of $0.1 million offset by realized losses of $(1.2) million and other expenses of $(0.3) million. (2) Throughout the year ended December 31, 2023, Land Related Financing continued to pay down and paid off in full during the fourth quarter 2023, contributing to the decrease in earnings from the year ended December 31, 2022 to the year ended December 31, 2023. (3) Refer to the table below for additional detail on the earnings/(loss) generated from our investment in AG Arc. 60 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Year Ended December 31, 2023 December 31, 2022 Interest income $ 6,098 $ 6,670 Interest expense 908 1,232 Total Net Interest Income 5,190 5,438 Net realized gain/(loss) — (1,191) Net unrealized gain/(loss) 852 (293) Total Other Income/(Loss) 852 (1,484) After-tax earnings/(loss) at AG Arc (1) (4,021) (2,135) Net unrealized gain/(loss) on investment in AG Arc (2) (1,459) (5,567) Elimination of gains on loans sold to MITT (3) (1,442) (6,032) Total AG Arc Earnings/(Loss) (6,922) (13,734) Other operating expenses 510 478 Equity in earnings/(loss) from affiliates $ (1,390) $ (10,258) (1) The earnings/(loss) at AG Arc during the year ended December 31, 2023 were primarily the result of $(3.8) million related to changes in the fair value of the MSR portfolio held by Arc Home coupled with $(0.2) million of losses related to Arc Home's lending and servicing operations. The earnings/(loss) at AG Arc during the year ended December 31, 2022 were primarily the result of $(5.5) million of losses related to Arc Home's lending and servicing operations, offset by $3.4 million related to changes in the fair value of the MSR portfolio held by Arc Home. (2) During the years ended December 31, 2023 and December 31, 2022, we recorded unrealized losses on our investment in AG Arc as a result of the valuation decreasing from 0.94x book value as of December 31, 2022 to 0.89x book value as of December 31, 2023 and from 1.06x book value as of December 31, 2021 to 0.94x book value as of December 31, 2022, respectively. (3) The earnings recognized by AG Arc do not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. Refer to Note 2 and Note 10 to the "Notes to Consolidated Financial Statements" for more information on this accounting policy. Earnings Available for Distribution One of our objectives is to generate net income from net interest margin on the portfolio, and management uses 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 as well as transaction related expenses incurred in connection with the WMC acquisition, (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, (vi) any gains/(losses) associated with exchange transactions on our common and preferred stock, and (vii) any bargain purchase gains recognized. Items (i) through (vii) above include any amount related to those items held in affiliated entities. Management considers the transaction related expenses referenced in (ii) above 61 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 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 years ended December 31, 2023 and 2022 is set forth below (in thousands, except per share data). Year Ended December 31, 2023 December 31, 2022 Net Income/(loss) available to common stockholders $ 35,440 $ (71,444) Add (Deduct): Net realized (gain)/loss (7,697) (81,389) Net unrealized (gain)/loss (1,450) 137,634 Transaction related expenses and deal related performance fees (1) 11,233 17,162 Equity in (earnings)/loss from affiliates 1,390 10,258 EAD from equity method investments (2)(3) (452) (12,320) Dollar roll income/(loss) — 1,999 Bargain purchase gain (30,190) — Earnings available for distribution $ 8,274 $ 1,900 Earnings available for distribution, per Diluted Share $ 0.39 $ 0.08 (1) For the years ended December 31, 2023 and 2022, total transaction related expenses and deal related performance fees included $11.1 million and $16.5 million, respectively, recorded within the "Transaction related expenses" line item and $0.1 million and $0.7 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2) For the years ended December 31, 2023 and 2022, $(0.3) million or $(0.01) per share and $9.2 million or $0.40 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights, changes in the fair value of corresponding derivatives, and other asset impairments were excluded from EAD, net of deferred tax expense. Additionally, for the years ended December 31, 2023 and 2022, $(1.5) million or $(0.07) per share and $(5.6) million or $(0.24) 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 years ended December 31, 2023 and 2022, we eliminated $1.4 million or $0.07 per share and $6.0 million or $0.26 per share of intra-entity profits recognized by Arc Home, respectively, and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 2 to the "Notes to Consolidated Financial Statements" for more information on this accounting policy. Investment activities 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. In December 2023, through our acquisition of WMC, we increased our investment portfolio by $1.2 billion, which primarily consisted of Securitized Non-Agency Loans. For more information on the WMC acquisition, refer to "Item 1—WMC Acquisition" and the section entitled "WMC Acquisition" in Note 1 to the "Notes to Consolidated Financial Statements." 62 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 or benefit, 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. 63 Investment portfolio The following tables present a summary of our investment portfolio, inclusive of net interest margin and leverage ratios, as of December 31, 2023 and a reconciliation of these metrics on our Investment Portfolio to their respective metrics on our GAAP Investment Portfolio ($ in thousands). December 31, 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 Ratio (d) Residential Investments: Securitized Non-Agency Loans $ 5,567,710 $ 5,175,169 5.51 % $ 4,904,017 $ 4,597,490 $ 301,205 4.99 % $ 276,474 0.52 % 0.9x Securitized Re/Non-Performing Loans 199,633 183,112 6.30 % 122,714 114,133 44,928 4.39 % 24,051 1.91 % 1.9x Non-Agency Loans 92,868 94,516 7.29 % — — 77,345 5.65 % 17,171 1.64 % 4.5x Agency-Eligible Loans 215,885 220,709 7.28 % — — 200,617 6.31 % 20,092 0.97 % 10.0x Residential Whole Loans 974 2,406 112.97 % — — — — % 2,406 112.97 % N/A Non-Agency RMBS 111,612 112,448 14.08 % — — 54,856 6.63 % 57,592 7.45 % 0.9x Total Residential Investments $ 6,188,682 $ 5,788,360 5.84 % $ 5,026,731 $ 4,711,623 $ 678,951 5.05 % $ 397,786 0.79 % 1.5x Agency RMBS $ 16,714 $ 15,694 10.20 % $ — $ — $ 12,594 6.23 % $ 3,100 3.97 % 3.0x Legacy WMC Commercial Investments (e) Commercial Loans $ 66,208 $ 66,303 9.50 % $ — $ — $ 48,032 7.86 % $ 18,271 1.64 % 2.6x CMBS 56,533 56,349 21.90 % — — 31,620 7.81 % 24,729 14.09 % 1.2x Total Legacy WMC Commercial Investments $ 122,741 $ 122,652 15.20 % $ — $ — $ 79,652 7.84 % $ 43,000 7.36 % 1.9x Other Securities $ 1,174 $ 1,156 18.16 % $ — $ — $ — — % $ 1,156 18.16 % N/A Total Investment Portfolio $ 6,329,311 $ 5,927,862 6.05 % $ 5,026,731 $ 4,711,623 $ 771,197 5.09 % $ 445,042 0.96 % 1.6x Cash and Cash Equivalents (f) 111,534 5.25 % Interest Rate Swaps (g) 12,146 1.73 % Arc Home 33,574 Convertible senior unsecured notes (85,266) (8.42) % Non-Interest Earning Assets, net 11,338 Total Stockholders' Equity $ 528,368 1.5x 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 Ratio (d) Total Investment Portfolio $ 6,329,311 $ 5,927,862 6.05 % $ 5,026,731 $ 4,711,623 $ 771,197 5.09 % $ 445,042 0.96 % 1.6x Investments in Debt and Equity of Affiliates 17,451 22,826 31.44 % — — 3,605 8.02 % 19,221 23.42 % (h) GAAP Investment Portfolio $ 6,311,860 $ 5,905,036 5.95 % $ 5,026,731 $ 4,711,623 $ 767,592 5.09 % $ 425,821 0.86 % 10.5x (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, 2023 was 0.16%. (c) Allocated equity represents the investment fair value less the associated securitized debt at fair value 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 as defined below in the "Financing Activities" section. (e) We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. (f) 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. (g) 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. (h) Refer to the "Financing activities" section below for an aggregate breakout of leverage. 64 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 Ratio (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 RMBS 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 Ratio (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%. (c) Allocated equity represents the investment fair value less the associated securitized debt at fair value 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 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. 65 The following table presents a reconciliation of our Investment Portfolio to our GAAP Investment Portfolio as of December 31, 2023 and 2022 ($ in thousands). December 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) $ 5,599,960 $ 5,567,710 $ (392,541) $ 5,175,169 5.19 % 5.51 % 10.37 $ 3,436,201 Securitized Re- and Non-Performing Loans 217,098 199,633 (16,521) 183,112 3.88 % 6.30 % 6.10 270,945 Non-Agency Loans 92,033 92,868 1,648 94,516 8.10 % 7.29 % 3.14 371,161 Agency-Eligible Loans 212,350 215,885 4,824 220,709 7.94 % 7.28 % 3.37 46,862 Re- and Non-Performing Loans 2,604 974 1,432 2,406 N/A 112.97 % 1.69 3,428 Land Related Financing — — — — — % — % — 10,688 Total Residential Mortgage Loans 6,124,045 6,077,070 (401,158) 5,675,912 5.28 % 5.68 % 9.86 4,139,285 Non-Agency RMBS GCAT Non-Agency RMBS (5) GCAT Non-Agency Securities 43,794 41,513 (8,971) 32,542 4.67 % 5.99 % 10.08 9,859 GCAT Non-Agency RMBS Interest Only (6) N/A 2,541 2,450 4,991 — % 37.74 % 5.21 5,058 MATT Non-QM Securities (6) 4,497 9,906 5,351 15,257 0.34 % 39.76 % 3.64 31,067 Re/Non-Performing Securities (6) 5,516 7,545 24 7,569 0.92 % 14.68 % 1.70 7,854 Total GCAT Non-Agency RMBS 53,807 61,505 (1,146) 60,359 1.01 % 18.24 % 4.42 53,838 Non-Agency Securities 82,390 48,991 2,015 51,006 4.99 % 9.11 % 16.21 9,678 Non-Agency RMBS Interest Only (6) N/A 1,116 (33) 1,083 0.35 % 16.04 % 2.61 — Total Non-Agency RMBS 136,197 111,612 836 112,448 1.50 % 14.08 % 5.48 63,516 Total Residential Investments 6,260,242 6,188,682 (400,322) 5,788,360 5.08 % 5.84 % 9.41 4,202,801 Agency RMBS Interest Only (6) N/A 16,714 (1,020) 15,694 3.74 % 10.20 % 6.54 19,124 Legacy WMC Commercial Investments (7) Commercial Loans 67,204 66,208 95 66,303 9.27 % 9.50 % 1.52 — CMBS 103,458 56,533 (184) 56,349 7.39 % 21.90 % 2.62 — Total Legacy WMC Commercial Investments 170,662 122,741 (89) 122,652 8.13 % 15.20 % 2.18 — Other Securities (8) N/A 1,174 (18) 1,156 N/A 18.16 % 7.33 — Total: Investment Portfolio $ 6,430,904 $ 6,329,311 $ (401,449) $ 5,927,862 5.06 % 6.05 % 9.20 $ 4,221,925 Less: Investments in Debt and Equity of Affiliates Residential Mortgage Loans $ — $ — $ — $ — — % — % — $ 10,688 Non-Agency RMBS $ 10,013 $ 17,451 $ 5,375 $ 22,826 0.43 % 31.44 % 3.47 $ 38,921 Total: GAAP Investment Portfolio $ 6,420,891 $ 6,311,860 $ (406,824) $ 5,905,036 5.19 % 5.95 % 9.69 $ 4,172,316 (1) Refer to Note 10 to the "Notes of the Consolidated Financial Statements" for more detail on what is included in our "Investments in debt and equity of affiliates" line item on our consolidated balance sheets. Our assets held through Investments in debt and equity of affiliates are included in the "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) GCAT Non-Agency RMBS are securities issued under Gold Creek Asset Trust ("GCAT"), which is the TPG Angelo Gordon securitization shelf under which we or private funds under the management of TPG Angelo Gordon securitize loans. (6) Interest Only have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest only classes of securities. The GCAT Non-Agency RMBS Interest Only, MATT Non-QM Securities, Re/Non-Performing Securities, Non-Agency RMBS Interest Only and Agency RMBS Interest Only line items include interest only classes with notional balances of $98.3 million, $310.4 million, $24.3 million, $128.8 million and $92.2 million, respectively. (7) We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. (8) Other securities include residual interests in asset-backed securities which have no principal balance. 66 Residential mortgage loans See Note 3 to the "Notes to Consolidated Financial Statements" for information on credit quality and a breakout of geographic concentration of credit risk within loans we include 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 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. 67 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. 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). December 31, 2023 December 31, 2022 Unpaid Principal Balance Fair Value Unpaid Principal Balance Fair Value Securitized residential mortgage loans in Non-Agency VIEs $ 5,599,960 $ 5,175,169 $ 3,841,265 $ 3,436,201 Securitized debt in Non-Agency VIEs (1) 5,069,689 4,597,490 3,527,304 3,078,593 Other assets (2) N/A 1,150 N/A — Retained Certificates from Non-Agency VIEs (3)(4)(5)(6) $ 578,829 $ 357,608 Retained interests in Non-Agency VIEs Current Face Fair Value Current Face Fair Value Senior Bonds $ 14,243 $ 14,682 $ — $ — Mezzanine Bonds 35,946 33,460 17,382 15,472 Subordinate Bonds 480,764 335,860 296,215 193,906 Interest Only / Excess Servicing Bonds (1)(7) N/A 194,827 N/A 148,230 Retained Certificates from Non-Agency VIEs (3)(4)(5)(6) $ 578,829 $ 357,608 Financing arrangements on retained Certificates from Non-Agency VIEs 301,205 197,937 Retained Certificates from Non-Agency VIEs, net of financing arrangements $ 277,624 $ 159,671 (1) Interest Only have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest only classes of securities. As of December 31, 2023 and 2022, the Securitized debt in Non-Agency VIEs line item includes interest only classes with notional balances of $133.8 million and $144.3 million, respectively. As of December 31, 2023 and 2022 the notional balance on Interest Only / Excess Servicing Bonds was $11.1 billion and $8.0 billion, respectively. (2) Represents the fair value of real estate owned within Non-Agency VIEs. We record real estate owned at the lower of cost or fair value less estimated costs to sell. As of December 31, 2023, we recorded real estate owned within our Non-Agency VIEs at $0.9 million. (3) 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. (4) As of December 31, 2023 and 2022, our equity at risk included bonds with a fair value of $389.5 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. (5) As of December 31, 2023 and 2022, a portion of our equity at risk included bonds exposed to the first loss of the securitization with a fair value of $115.1 million and $84.7 million, respectively. (6) Excludes net other asset/(liabilities) held within the VIEs of $6.9 million and $4.4 million as of December 31, 2023 and 2022, respectively. (7) 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 December 31, 2023, there were three securitizations with an unpaid principal balance of $458.7 million that met the criteria for an Optional Redemption. As of December 31, 2022, there were no securitizations which met the criteria for an Optional Redemption. Legacy WMC Commercial loans See Note 3 to the "Notes to Consolidated Financial Statements" for information on the geographic concentration, collateral characteristics, LTV, and maturities of the loans we include in the "Commercial loans, at fair value," line item on our consolidated balance sheets. 68 Non-Agency RMBS and Legacy WMC CMBS & Other Securities The following table presents the fair value of our Non-Agency RMBS and Legacy WMC CMBS and Other Securities by credit rating as of December 31, 2023 (in thousands). Legacy WMC Credit Rating (1) Non-Agency RMBS CMBS Other Securities AAA $ 183 $ — $ — A 5,931 — — BBB 14,119 3,977 — BB 15,817 — — B 8,682 20,057 — Below B — 11,438 — Not Rated 67,716 20,877 1,156 Total $ 112,448 $ 56,349 $ 1,156 Less: Investments in Debt and Equity of Affiliates $ 22,826 $ — $ — Total: GAAP Basis $ 89,622 $ 56,349 $ 1,156 (1) Represents the minimum rating for rated assets of S&P, Moody, Morningstar, and Fitch credit ratings, stated in terms of the S&P equivalent. The following table presents certain characteristics of our Non-Agency RMBS and Legacy WMC CMBS portfolio as of December 31, 2023 ($ in thousands). Instrument Current Face Fair Value Weighted Average Life (Years) (1) Non-Agency RMBS Non-QM Loans (2) $ 54,013 $ 57,472 4.66 Re- and Non-Performing Loans (2) 43,770 24,727 6.21 Prime (2) 29,370 20,081 9.86 Credit Risk Transfer 9,044 10,168 4.73 Total Non-Agency RMBS $ 136,197 $ 112,448 5.48 Legacy WMC CMBS Single-Asset/Single-Borrower - Fixed Rate $ 53,900 $ 28,201 3.36 Single-Asset/Single-Borrower - Floating Rate 34,509 19,630 1.04 Conduit - Fixed Rate 15,049 8,518 3.58 Total Legacy WMC CMBS $ 103,458 $ 56,349 2.62 (1) 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. (2) The current face on our Non-Agency RMBS excludes interest only classes which have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest only classes of securities. As of December 31, 2023, the notional balance on interest only classes included in the Non-QM Loans, Re-and Non-Performing Loans and Prime line items was $408.7 million, $122.2 million and $30.9 million, respectively. The following table presents the geographic concentration of the underlying collateral for our Non-Agency RMBS and Legacy WMC CMBS portfolios as of December 31, 2023 ($ in thousands). Non-Agency RMBS Legacy WMC CMBS Geographic Location Concentration Fair Value Geographic Location Concentration Fair Value California 39.2 % $ 44,027 California 43.4 % $ 24,460 New York 13.3 % 14,957 Bahamas 26.6 % 15,015 Florida 7.0 % 7,822 Minnesota 10.4 % 5,859 New Jersey 3.5 % 3,970 Texas 4.6 % 2,571 Texas 3.4 % 3,853 New York 2.2 % 1,266 Other 33.6 % 37,819 Other 12.8 % 7,178 Total 100.0 % $ 112,448 Total 100.0 % $ 56,349 69 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 Agency RMBS portfolio as of December 31, 2023 ($ in thousands). Fair Value CPR (1) Agency RMBS Interest Only $ 15,694 5.7 % (1) Represents the weighted average monthly CPRs published during the year for our in-place portfolio. Financing activities In December 2023, through our acquisition of WMC, we assumed liabilities of $1.1 billion, which primarily consisted of securitized debt, financing arrangements, and convertible senior unsecured notes. For more information on the acquisition of WMC, refer to "Item 1—WMC Acquisition" and the section entitled "WMC Acquisition" in Note 1 to the "Notes to Consolidated Financial Statements." Financing Arrangements 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 seven and six counterparties as of December 31, 2023 and 2022, respectively. Our financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity and liquidity, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. To the extent that we fail to comply with the covenants contained in these financing arrangements or is otherwise found to be in default under the terms of such agreements, the counterparty has the right to accelerate amounts due under the associated agreement. As of December 31, 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. Legacy WMC Convertible Notes Through our acquisition of WMC, we assumed the Legacy WMC Convertible Notes. See Note 6 to the "Notes to Consolidated Financial Statements" for additional information on the Legacy WMC Convertible Notes. 70 Recourse and non-recourse financing The below table provides detail on the breakout between recourse and non-recourse financing as of December 31, 2023 and 2022 (in thousands). December 31, 2023 December 31, 2022 Recourse financing - Financing arrangements, including those in Investments in Debt and Equity of Affiliates $ 708,225 $ 625,593 Recourse Financing - Legacy WMC Convertible Notes 85,266 — Non-recourse financing - Securitized debt, at fair value 4,711,623 3,262,352 Non-recourse financing - Financing arrangements 62,972 — Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates — 16,409 Total Financing 5,568,086 3,904,354 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 3,605 4,406 Non-recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates — 16,409 Total Financing in Investments in Debt and Equity of Affiliates 3,605 20,815 Total GAAP Financing $ 5,564,481 $ 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 Non-Agency VIEs and RPL/NPL 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, (3) Convertible senior unsecured notes, and (4) 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 (4) in the previous sentence, and any non-recourse financing arrangements and (iii) our net TBA position (at cost), if any. 71 The calculations in the tables below divide GAAP leverage and Economic Leverage by our GAAP stockholders’ equity to derive our leverage ratios. The following tables present a reconciliation of our Economic Leverage ratio to GAAP Leverage ($ in thousands). December 31, 2023 Leverage Stockholders' Equity Leverage Ratio Securitized debt, at fair value $ 4,711,623 GAAP Financing arrangements 767,592 Convertible senior unsecured notes 85,266 Restricted cash posted on Financing arrangements (1,696) GAAP Leverage $ 5,562,785 $ 528,368 10.5x Financing arrangements through affiliated entities 3,605 Non-recourse financing arrangements (1) (4,774,595) Net TBA (receivable)/payable adjustment (9,163) Economic Leverage $ 782,632 $ 528,368 1.5x (1) Non-recourse financing arrangements include securitized debt and other non-recourse financing arrangements. December 31, 2022 Leverage Stockholders’ Equity Leverage Ratio 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 arrangements. Hedging activities Subject to maintaining our qualification as a REIT and our Investment Company Act exemption, to the extent leverage is deployed, we may utilize derivative instruments in an effort to hedge the interest rate risk associated with the financing of our portfolio. Specifically, we may seek to hedge our exposure to potential interest rate mismatches between the interest we earn on our investments and our borrowing costs caused by fluctuations in short-term interest rates. We may utilize interest rate swaps, swaption agreements, and other financial instruments such as short positions in to-be-announced securities. In utilizing leverage and interest rate derivatives, our objectives are to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a spread between the yield on our assets and the costs of our financing and hedging. Derivatives have not been designated as hedging instruments for GAAP. See Note 7 in the "Notes to Consolidated Financial Statements" for more information. Dividends Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, (vi) methods of depreciation and (vii) differences between GAAP income or losses in our TRSs’ and taxable income resulting from dividend distributions to the REIT from our TRSs'. Undistributed taxable income is based on current estimates and is not finalized until we file our annual 72 tax return for that tax year, typically in October of the following year. We did not have any undistributed taxable income as of December 31, 2023. During the twelve months ended December 31, 2023, the Company declared common stock dividends of $0.72 per share. During the same period, the Company declared preferred stock dividends on its 8.25% Series A, 8.00% Series B, and 8.000% Series C of $2.06252, $2.00, and $2.00, respectively. Liquidity and capital resources Our liquidity determines our ability to meet our cash obligations, including distributions to our stockholders, payment of our expenses, financing our investments and satisfying other general business needs. Our principal sources of cash consist of borrowings under financing arrangements, principal and interest payments we receive on our investment portfolio, cash generated from our operating results, and proceeds from capital market transactions. We typically use cash to repay principal and interest on our financing arrangements, to purchase loans, real estate securities, and other real estate related assets, to make dividend payments on our capital stock, to repurchase our capital stock, and to fund our operations. We may also generate liquidity when restricted cash that was pledged as collateral for clearing and executing trades, derivatives, and financing arrangements becomes unrestricted when the related collateral requirements are exceeded or at the maturity of the derivative or financing arrangement. Refer to "—Margin requirements" below discussing instances where we may use liquidity to meet margin requirements. At December 31, 2023, we had $112.3 million of liquidity, which consisted of $111.5 million of cash and $0.8 million of unencumbered Agency RMBS available to support our liquidity needs. Refer to the "Contractual obligations" section of this Part II, Item 7 for additional obligations that could impact our liquidity. Margin requirements The fair value of our loans and real estate securities fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and, when owned, unpledged Agency RMBS. We refer to this position as our "liquidity." The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our assets. Typically, if interest rates increase or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will need to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in the residential mortgage market. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which may force us to liquidate assets into potentially unfavorable market conditions and harm our results of operations and financial condition. Further, an unexpected rise in interest rates and a corresponding fall in the fair value of our securities may also force us to liquidate assets under difficult market conditions, thereby harming our results of operations and financial condition, in an effort to maintain sufficient liquidity to meet increased margin calls. Similar to the margin calls that we receive on our borrowing agreements, we may also receive margin calls on our derivative instruments when their fair value declines. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the terms of the derivatives involved. We may also receive margin calls on our derivatives based on the implied volatility of interest rates. Our posting of collateral with our counterparties can be done in cash or assets, and is generally bilateral, which means that if the fair value of our interest rate hedges increases, our counterparty will be required to post collateral with us. Refer to the "Liquidity risk – derivatives" section of Item 3 below for a further discussion on margin. 73 Cash Flows The table below details changes to our cash, cash equivalents, and restricted cash for the years ended December 31, 2023 and 2022 (in thousands). Years Ended December 31, 2023 December 31, 2022 Change Cash, cash equivalents, and restricted cash, Beginning of Period $ 98,803 $ 100,229 $ (1,426) Net cash provided by (used in) operating activities (1) 28,134 22,520 5,614 Net cash provided by (used in) investing activities (2) (433,505) (1,490,351) 1,056,846 Net cash provided by (used in) financing activities (3) 432,141 1,466,405 (1,034,264) Net change in cash, cash equivalents and restricted cash 26,770 (1,426) 28,196 Cash, cash equivalents, and restricted cash, End of Period $ 125,573 $ 98,803 $ 26,770 (1) Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the years ended December 31, 2023 and 2022. (2) Cash used in investing activities for the year ended December 31, 2023 was primarily attributable to purchases of investments, offset by sales of investments and principal repayments on investments. (3) Cash provided by financing activities for the year ended December 31, 2023 was primarily attributable to the issuance of securitized debt, offset by principal repayments on securitized debt, net repayments of repurchase agreements, dividend payments, and common share repurchases. Stock repurchase programs On August 3, 2022, our Board of Directors authorized a stock repurchase program (the "2022 Repurchase Program") to repurchase up to $15.0 million of our outstanding common stock on substantially the same terms as the 2015 Repurchase Program. The 2022 Repurchase Program does not have an expiration date and permits us to repurchase 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 $1.5 million of common stock remained authorized for future share repurchases under the 2022 Repurchase Program. See Note 11 in the "Notes to Consolidated Financial Statements" for additional details on the shares repurchased under the 2022 Repurchase Program during the year ended December 31, 2023. On May 4, 2023, our Board of Directors authorized a stock repurchase program (the "2023 Repurchase Program") to repurchase up to $15.0 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 $15.0 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 year ended December 31, 2023, we did not issue any shares of common stock 74 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. Pursuant to our management agreement, the closing of the TPG Transaction resulted in an assignment of the management agreement. Our independent directors unanimously consented to such assignment on July 31, 2023 in advance of the TPG Transaction closing. There were no changes to the management agreement in connection with the TPG Transaction and the assignment of the management agreement became effective upon the closing of the TPG Transaction. In connection with the Merger with WMC, which was completed on December 6, 2023, and contemporaneously with the execution of the Merger Agreement, on August 8, 2023, we and our Manager entered into the MITT Management Agreement Amendment, pursuant to which (i) our Manager’s base management fee will be reduced by $0.6 million for the first four quarters following the Effective Time, beginning with the fiscal quarter in which the Effective Time occurs (i.e., resulting in an aggregate $2.4 million waiver of base management fees), and (ii) our Manager will waive its right to seek reimbursement from us for any expenses otherwise reimbursable by us under the management agreement in an amount equal to approximately $1.3 million, which is the excess of $7.0 million over the aggregate Per Share Additional Merger Consideration paid by our Manager to the holders of WMC Common Stock under the Merger Agreement. The MITT Management Agreement Amendment became effective automatically upon the closing of the Merger. Management fee The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders’ Equity, per annum. For purposes of calculating the management fee, "Stockholders’ Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on our financial statements. The below table details the management fees incurred during the years ended December 31, 2023 and 2022 (in thousands). Year Ended December 31, 2023 December 31, 2022 Management fee to affiliate (1) $ 7,711 $ 8,096 (1) For the year ended December 31, 2023, the Manager agreed to waive its right to receive management fees of $0.6 million pursuant to the MITT Management Agreement Amendment executed in connection with the Merger. As of December 31, 2023 and 2022, we recorded management fees payable of $1.5 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. 75 Incentive fee The Manager is entitled to an annual incentive fee with respect to each applicable fiscal year, which will be equal to 15% of the amount by which our cumulative adjusted net income from November 22, 2021 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 common stock or a combination of cash and shares. 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 would first be payable with respect to the fiscal year ending December 31, 2023. During the year ended December 31, 2023, we did not incur any incentive fee expense. Termination fee Upon the occurrence of (i) our termination of the management agreement without cause or (ii) the Manager’s termination of the management agreement upon a breach by the Company of any material term of the management agreement, the Manager will be entitled to a termination fee equal to three times the average annual management fee during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter. As of December 31, 2023 and December 31, 2022, no event of termination of the management agreement had occurred. Expense Reimbursement Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel, who, notwithstanding that certain of them also are our officers, receive no compensation directly from us. We are required to reimburse our Manager or its affiliates for operating expenses incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation; however, reimbursements are subject to an annual budget process which combines guidelines from the management agreement with oversight by our Board of Directors and discussions with our Manager. The below table details the expense reimbursement incurred during the years ended December 31, 2023 and 2022 (in thousands). Year Ended Consolidated statements of operations line item: December 31, 2023 December 31, 2022 Non-investment related expenses (1) $ 5,095 $ 4,646 Investment related expenses 467 755 Transaction related expenses 896 2,757 Expense reimbursements to Manager or its affiliates $ 6,458 $ 8,158 (1) For the years ended December 31, 2023 and December 31, 2022, our Manager agreed to waive its right to receive expense reimbursements of $1.7 million million and $1.5 million, respectively. As of December 31, 2023 and 2022, we recorded a reimbursement payable to our Manager or its affiliates of $1.5 million and $1.3 million, respectively. The reimbursement payable to the Manager or its affiliates is included within the "Due to affiliates" line item within the "Other liabilities" line item on the consolidated balance sheets. Share-based compensation The AG Mortgage Investment Trust, Inc. 2020 Equity Incentive Plan, which became effective on April 15, 2020 following the approval of our stockholders at our 2020 annual meeting of stockholders, provides for a maximum of 666,666 shares of common stock that may be issued under the plan. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during any fiscal year, shall not exceed $300,000 in total value (calculating the value of any such awards based on the grant date fair value). As of December 31, 2023, 464,234 shares of common stock were available to be awarded under the 2020 Equity Incentive Plan. 76 Since inception of the 2020 Equity Incentive Plan and through December 31, 2023, we have granted an aggregate of 176,470 shares of restricted common stock to our independent directors under our 2020 Equity Incentive Plan, all of which have vested. The AG Mortgage Investment Trust, Inc. 2021 Manager Equity Incentive Plan (the "2021 Manager Plan"), which became effective on April 7, 2021 following the approval of our stockholders at our 2021 annual meeting of stockholders, provides for a maximum of 573,425 shares of common stock that may be subject to awards thereunder to our Manager. As of December 31, 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. On December 6, 2023, in connection with the WMC acquisition, we granted an aggregate 25,962 restricted stock units to the two independent directors added to our Board of Directors who previously served on WMC's board of directors. These restricted stock units and associated dividend equivalent units will vest in full on June 23, 2024, and will be settled in shares of our common stock upon each of the independent director's separation from service with our Board of Directors. Unfunded commitments See Note 12 of the "Notes to Consolidated Financial Statements" for details on our commitments as of December 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 Note 10 to the "Notes to Consolidated Financial Statements" for a discussion of investments i n debt and equity of affiliates. We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. Refer to Note 7 to the "Notes to Consolidated Financial Statements" for additional detail on TBAs as of December 31, 2023 , if applicable. For additional information on our commitments as of December 31, 2023, refer to Note 12 of the "Notes to Consolidated Financial Statements." We do not expect these commitments, taken as a whole, to be significant to, or to have a material impact on, our overall liquidity or capital resources or our operations. Critical accounting policies and estimates 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, (vi) Investment consolidation, and (vii) Accounting for business combinations. For additional information related to our significant accounting policies, see Note 2 to the "Notes to Consolidated Financial Statements." We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as of December 31, 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 critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. The following is a description of our critical accounting estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations: 77 Valuation of financial instruments We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825"). For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of our financial instruments are not traded in an active market. Therefore, our Manger generally uses third-party valuations when available. If third-party valuations are not available, our Manager uses other valuation techniques, such as the discounted cash flow methodology. Summary descriptions, for various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 5 to the "Notes to Consolidated Financial Statements." Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements. The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both asset level characteristics and macroeconomic assumptions and/or inputs, which are generally based on current market and economic conditions. Changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized to be different than the valuations currently estimated. The significant unobservable inputs used in the fair value measurement of our financial instruments are yields, prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. The significant unobservable input used in the fair value measurement of our investment in Arc Home is the book value multiple. Significant increases (decreases) in the multiple applied would result in a significantly higher (lower) fair value measurement. Our valuations are sensitive to changes in interest rates. Refer to the interest rate sensitivity analysis included in Item 7A. Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K for further information. Refer to Note 5 to the "Notes to Consolidated Financial Statements" in Part II, Item 8 of this Annual Report on Form 10-K, for additional information on our assets and liabilities accounted for at fair value at December 31, 2023, including the significant inputs used to estimate their fair values and the impact the changes in their fair values had to our financial condition and results of operations. Interest income recognition Interest income on our loan and securities portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such loans or securities. We have elected to record interest in accordance with ASC 835-30-35-2, "Imputation of Interest," using the effective interest method for all loans and securities accounted for under the fair value option in accordance with ASC 825, "Financial Instruments." As such, premiums and discounts are amortized or accreted into interest income over the lives of the loans or securities. To record interest income using the effective interest method, we reassess the cash flows on our investments on at least a quarterly basis. In estimating these cash flows, there are a number of assumptions made that are uncertain and subject to judgments and assumptions based on subjective and objective factors and contingencies. These include the rate and timing of principal and interest receipts (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be estimated. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the yield or interest income earned on such assets. An increase in the prepayment rate will similarly accelerate the accretion of purchase discounts, conversely increasing the yield or interest income earned on such assets. A decrease in the prepayment rate will have a directionally opposite impact on the yield or interest income. As further discussed in Note 2 of the "Notes to Consolidated Financial Statements," differences between previously estimated cash flows and current actual and anticipated cash flows caused by changes to prepayment or other assumptions are adjusted retrospectively through a "catch up" adjustment for the impact of the cumulative change in the effective yield through the reporting date for securities accounted for under ASC 320-10 (generally, Agency RMBS) or adjusted prospectively through an 78 adjustment of the yield over the remaining life of the investment for securities accounted for under ASC 325-40 and mortgage loans accounted for under ASC 310-10. Investment consolidation An entity is a variable interest entity ("VIE") if the equity investors (i) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, (ii) are unable to direct the entity’s activities or (iii) are not exposed to the entity’s losses or entitled to its residual returns. VIEs within the scope of ASC 810-10, "Consolidation" are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Determining the primary beneficiary of a VIE requires judgment. We determined that for the securitizations we consolidate, our ownership provides us with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, we have the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause. The securitization trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. Our risks associated with our involvement with these VIEs are limited to our risks and rights as a holder of the security we have retained as well as certain risks which may occur when we act as either the sponsor and/or depositor of and the seller to the securitization entities. Our interest in the assets held by consolidated securitization vehicles, which are consolidated on our consolidated balance sheets, is restricted by the structural provisions of these trusts, and a recovery of our investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on our consolidated balance sheets, are non-recourse to us, and can only be satisfied using proceeds from each securitization vehicle’s respective assets. The assets of securitization entities are comprised of residential mortgage loans. We perform ongoing reassessments of whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion to change. Accounting for business combinations When the assets acquired and liabilities assumed constitute a business, the acquisition is a business combination. Business combinations are accounted for under ASC 805, "Business Combinations" using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. Goodwill is calculated as the excess of the consideration transferred over the net assets acquired that meet the criteria for separate recognition and represents the estimated future economic benefits arising from these and other assets acquired that could not be individually identified or do not qualify for recognition as a separate asset. Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred is less than the fair value of the identifiable net assets acquired. Acquisition related costs recognized in connection with a business combination are expensed as incurred. The results of operations of acquired businesses are included from the date of acquisition. In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (up to one year from the acquisition date). If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, a measurement-period adjustment will be recognized during the period in which the amount of the adjustment is determined, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. Recent accounting pronouncements Recent accounting pronouncements impacting us include (i) Reference rate reform and (ii) Debt with conversion and other options. For additional information related to these recent accounting pronouncements and their impact on our consolidated financial statements, see Note 2 to the "Notes to Consolidated Financial Statements." 79 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 business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes of, the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things, U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions). We conduct our operations such that we will not be considered an investment company under Section 3(a)(1) of the Investment Company Act by complying with the 40% Test and not engaging primarily (or holding ourselves out as being engaged primarily) in the business of investing, reinvesting, or trading in securities. Rather, through wholly-owned or majority-owned subsidiaries, we are primarily engaged in the non-investment company businesses of these subsidiaries, namely the real estate finance business of purchasing or otherwise acquiring mortgage loans and other interests in real estate. We currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(7) of the Investment Company Act, each a "3(c)(7) subsidiary." In addition, we currently have several subsidiaries that rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act, each a "3(c)(5)(C) subsidiary." While investments in 3(c)(7) subsidiaries are considered investment securities for the purposes of the 40% Test, investments in 3(c)(5)(C) subsidiaries are not considered investment securities for the purposes of the 40% Test, nor are investments in subsidiaries that rely on the exclusion provided by Section 3(a)(1)(C). Therefore, our investments in 3(c)(7) subsidiaries and other investment securities cannot exceed 40% of the value of our total assets (excluding U.S. government securities and cash) on an unconsolidated basis. Section 3(c)(5)(C) of the Investment Company Act exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The SEC staff generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). Both the 40% Test and the requirements of the Section 3(c)(5)(C) exclusion limit the types of businesses 80 in which we may engage and the types of assets we may hold, as well as the timing of sales and purchases of assets. 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 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. The determination that we qualify for this exemption from being regulated as an investment company depends on various factual matters and circumstances. We closely monitor our holdings to ensure continuing and ongoing compliance with these tests. If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this report.