TPG Mortgage Investment Trust, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In this quarterly report on Form 10-Q, or this "report," we refer to AG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, AG REIT Management, LLC, as our "Manager," and we refer to the direct parent company of our Manager, Angelo, Gordon & Co., L.P., as "TPG Angelo Gordon." The following discussion contains forward looking statements and should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2023, and any subsequent filings. 47 Forward-Looking Statements We make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including the Federal Reserve, and the potential effects of actual and proposed legislation on us, and our views on certain macroeconomic trends. When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "remain," "intend," "should," "could," "will," "may" or similar expressions, we intend to identify forward-looking statements. These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation: • the persistence of labor shortages, supply chain imbalances, the Israel-Hamas conflict, Russia’s invasion of Ukraine, inflation, and the potential for an economic recession; • changes in our business and investment strategy; • our ability to predict and control costs; • changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets; • changes in the yield curve; • changes in prepayment rates on the loans we own or that underlie our investment securities; • regulatory and structural changes in the residential loan market and its impact on non-agency mortgage markets; • increased rates of default or delinquencies and/or decreased recovery rates on our assets; • our ability to obtain and maintain financing arrangements on terms favorable to us or at all; • our ability to enter into, or refinance, securitization transactions on the terms and pace anticipated or at all; • the degree to which our hedging strategies may or may not protect us from interest rate and credit risk volatility; • our ability to realize all of the expected benefits of the acquisition of Western Asset Mortgage Capital Corporation ("WMC") or that such benefits may take longer to realize than expected (including because we incurred significant costs associated with such acquisition); • changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets; • conditions in the market for Residential Investments and Agency RMBS; • conditions in the market for commercial investments, including the Company's ability to successfully realize the commercial investments acquired from WMC within the timeframe anticipated or at all; • legislative and regulatory actions by the U.S. Congress, U.S. Department of the Treasury, the Federal Reserve and other agencies and instrumentalities; • our ability to make distributions to our stockholders in the future; • our ability to maintain our qualification as a REIT for federal tax purposes; and • our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"). We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. 48 Third Quarter 2024 Executive Summary Financial Highlights • $10.58 Book Value per share; ◦ 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 divided by all outstanding common shares as of quarter-end; • $0.40 of Net Income/(Loss) Available to Common Stockholders per diluted common share and $0.17 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; • 11.8x GAAP Leverage Ratio and 1.5x Economic Leverage Ratio; and • $0.19 dividend per common share declared. Investment Activity • The table below summarizes the fair value of purchases and proceeds from sales of investments during the quarter ended September 30, 2024 (in thousands). Investment Purchases Sales Agency-Eligible Loans $ 388,733 $ 73,614 Home Equity Loans 136,206 — Non-Agency Loans — 86,349 Agency RMBS — 543,172 Non-Agency RMBS (1) (2) 51,047 2,215 CMBS (1) — 1,531 Total $ 575,986 $ 706,881 (1) Includes sales of $2.2 million and $1.5 million of Non-Agency RMBS and CMBS, respectively, sold from the legacy portfolio acquired in the WMC acquisition. (2) During the third quarter, we co-sponsored a rated securitization collateralized by $360.7 million of Agency-Eligible Loans. As the co-sponsor, the Company retained an "eligible vertical interest" to comply with risk retention rules which consists of at least 5% of each class of securities issued in the securitization. Upon evaluating our retained interest in the securitization trust, we determined we were not the primary beneficiary and, as a result, did not consolidate the securitization trust and recorded an investment of $51.0 million of Non-Agency RMBS. • Subsequent to quarter end: ◦ On October 25, 2024, sold Home Equity Loans with an unpaid principal balance of $48.9 million. These loans were recorded within the "Residential mortgage loans, at fair value" line item on the consolidated balance sheets as of September 30, 2024. Financing Activity • Executed a rated securitization of Agency-Eligible Loans with a total unpaid principal balance of $390.8 million, converting recourse financing with mark-to-market margin calls to non-recourse financing without mark-to-market margin calls; and • The Company paid off the remaining $79.1 million principal amount outstanding of 6.75% convertible notes ("Legacy WMC Convertible Notes") at maturity in September 2024. 49 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 TPG Angelo Gordon's proprietary securitization platform to secure long-term, non-recourse, non-mark-to-market financing as market conditions permit. Through our ownership in Arc Home, we also have exposure to mortgage banking activities. Arc Home is a multi-channel licensed mortgage originator and servicer primarily engaged in the business of originating and selling residential mortgage loans. On December 6, 2023, we acquired Western Asset Mortgage Capital Corporation, an 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. Through this acquisition, we increased our investment portfolio by $1.2 billion, which primarily consisted of Securitized Non-Agency Loans. For more information, refer to the "WMC Acquisition" section below. 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, Agency-Eligible Loans, and Home Equity Loans, which we refer to as our target assets. In addition, we may also invest in other types of residential mortgage loans and other mortgage related assets. As of September 30, 2024, our investment portfolio consisted of the following Residential Investments and Agency RMBS: Asset Class Description Residential Investments Non-Agency Loans (1) • Non-Agency Loans are loans that do not conform to the underwriting guidelines of a government-sponsored enterprise ("GSE"). Non-Agency Loans consist of Qualified mortgage loans ("QM Loans") and Non-Qualified mortgage loans ("Non-QM Loans"). QM Loans are residential mortgage loans that comply with the Ability-To-Repay rules and related guidelines of the Consumer Finance Protection Bureau. Agency-Eligible Loans (1) • Agency-Eligible Loans are loans that are underwritten in accordance with GSE guidelines and are primarily secured by investment properties, but are not guaranteed by a GSE. Although these loans are underwritten in accordance with GSE guidelines and can be delivered to Fannie Mae and Freddie Mac, we include these loans within our Non-Agency securitizations. Home Equity Loans (1) • Home Equity Loans are revolving lines of credit or closed-end loans secured primarily by a second lien on a residential mortgaged property which provide borrowers access to the equity in their home without the need to pay off their existing mortgage. Home Equity Loans that are structured as revolving lines of credit generally have an initial draw period of 3 to 5 years, and after the initial draw period ends, the loans generally convert to 15- or 25-year amortizing loans. Re- and Non-Performing Loans (1) • Performing, re-performing, and non-performing loans are residential mortgage loans collateralized by a first lien mortgaged property. Non-Agency RMBS (2) • Non-Agency Residential Mortgage-Backed Securities ("RMBS") represent fixed- and floating- rate RMBS issued by entities other than U.S. GSEs or agencies of the U.S. government. Agency RMBS (2) • Agency RMBS represent interests in pools of residential mortgage loans guaranteed by a GSE such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government such as Ginnie Mae. (1) These investments are included in the "Securitized residential mortgage loans, at fair value" or "Residential mortgage loans, at fair value" line items on the consolidated balance sheets. (2) These investments are included in the "Real estate securities, at fair value" line item on the consolidated balance sheets. 50 In addition, our investment portfolio includes commercial loans, commercial-mortgage backed securities ("CMBS") and other securities (collectively, the "Legacy WMC Commercial Investments") that were acquired in the WMC acquisition. The Legacy WMC commercial loans primarily include first lien commercial mortgage loan participations and are included in the "Commercial loans, at fair value" line item on the consolidated balance sheets. The Legacy WMC CMBS primarily include fixed-rate and floating-rate CMBS, secured by, or evidencing an ownership interest in, a single commercial mortgage loan or a pool of commercial mortgage loans, and are included in the "Real estate securities, at fair value" line item on the consolidated balance sheets. We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. Our primary sources of income are net interest income from our investment portfolio, changes in the fair value of our investments, and income from our investment in Arc Home. Net interest income consists of the interest income we earn on investments less the interest expense we incur on borrowed funds and any costs or benefits related to hedging. Income from our investment in Arc Home is generated through its mortgage banking activities which represents the origination and subsequent sale of residential mortgage loans and servicing income sourced from its portfolio of mortgage servicing rights. We were incorporated in Maryland on March 1, 2011 and commenced operations in July 2011. We conduct our operations to qualify and be taxed as a REIT for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute to our stockholders as long as we maintain our intended qualification as a REIT, with the exception of business conducted in our domestic taxable REIT subsidiaries ("TRSs") which are subject to corporate income tax. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act. WMC Acquisition On December 6, 2023, (the "Closing Date") we completed our acquisition of WMC. 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"). As contemplated by the Agreement and Plan of Merger, dated as of August 8, 2023 (the “Merger Agreement”), the certificate of merger was filed with the Secretary of State of the State of Delaware, and the Merger was effective at 8:15 a.m., Eastern Time, on the Closing Date (the "Effective Time"). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the Effective Time, each outstanding share of WMC common stock, par value $0.01 per share (“WMC Common Stock”), was converted into the right to receive the following (the “Per Share Merger Consideration”): (i) from us, 1.498 shares of our common stock; and (ii) from our Manager, a cash amount equal to $0.92 (the “Per Share Additional Manager Consideration”). No fractional shares of our common stock were issued in the Merger, and the value of any fractional interests to which a former holder of WMC Common Stock was otherwise entitled was paid in cash. In addition, on August 8, 2023, we and our Manager entered into an amendment (the “MITT Management Agreement Amendment”) to our existing management agreement, pursuant to which (i) the 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 Manager Consideration paid by our Manager to the holders of WMC Common Stock under the Merger Agreement. Additionally, each outstanding share of WMC’s restricted common stock and each WMC restricted stock unit (each, a “WMC Equity Award”) vested in full immediately prior to the Effective Time and, as of the Effective Time, was considered outstanding for all purposes of the Merger Agreement, including the right to receive the Per Share Merger Consideration, except that WMC Equity Awards granted to certain members of the WMC board of directors at WMC’s 2023 annual stockholders’ meeting (collectively, the “2023 WMC Director Awards”) were treated as follows: (i) for M. Christian Mitchell and Lisa G. Quateman, who were appointed to our Board of Directors as of the Effective Time, the 2023 WMC Director Awards were equitably adjusted effective as of the Effective Time into awards relating to shares of our common stock that have the same value, vesting terms and other terms and conditions as applied to the corresponding WMC restricted stock units immediately prior to the Effective Time and (ii) for the other members of the WMC board of directors, the 2023 WMC Director Awards accelerated and vested pro-rata effective as of immediately prior to the Effective Time based on a fraction, the numerator of which was 166 (the number of days between the grant date and the Closing Date) and the denominator of which was 365, and the remaining unvested portion of such 2023 WMC Director Awards was cancelled without any consideration. 51 The issuance of shares of our common stock to the former stockholders of WMC was registered under the Securities Act, pursuant to a registration statement on Form S-4 (File No. 333-274319), as amended, filed by MITT with the Securities and Exchange Commission (the “SEC”) and declared effective on September 29, 2023 (the “Registration Statement”). The joint proxy statement/prospectus included in the Registration Statement contains additional information about the Merger, the Merger Agreement and the transactions contemplated thereby. Pursuant to the Merger Agreement, approximately 9.2 million shares of our common stock were issued in connection with the Merger to former WMC common stockholders, and former WMC common stockholders owned approximately 31% of the common equity of MITT as the combined company following the consummation of the Merger. Our Manager and TPG Angelo Gordon We are externally managed by AG REIT Management, LLC, a Delaware limited liability company (the "Manager"), a wholly-owned subsidiary of TPG Angelo Gordon, a diversified credit and real estate investing platform within TPG Inc. ("TPG"). TPG (Nasdaq: TPG) is a leading global alternative asset management firm. On November 1, 2023, TPG completed the previously announced acquisition of TPG Angelo Gordon (the "TPG Transaction"), pursuant to which TPG Angelo Gordon, including our Manager, became indirect subsidiaries of TPG. Pursuant to the management agreement with our Manager, the closing of the TPG Transaction resulted in an assignment of the management agreement. The independent directors of our Board of 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. Pursuant to the terms of our management agreement, our Manager provides us with our management team, including our officers, along with appropriate support personnel. All of our officers are employees of TPG Angelo Gordon or its affiliates. We do not have any employees. Our Manager is at all times subject to the supervision and oversight of our Board of Directors and has only such functions and authority as our Board of Directors delegates to it. Our Manager has delegated to TPG Angelo Gordon the overall responsibility with respect to our Manager’s day-to-day duties and obligations arising under our management agreement. TPG Angelo Gordon is a registered investment adviser under the Investment Advisers Act of 1940, as amended. Through our relationship with our Manager, we benefit from the expertise and relationships that TPG Angelo Gordon has established which provides us with resources to generate attractive risk-adjusted returns for our stockholders. Our management has significant experience in the mortgage industry and expertise in structured credit investments. We are able to leverage our Manager, along with our ownership interest in Arc Home, a vertically integrated origination platform, to access investment opportunities in the non-agency residential mortgage loan market. This strategic advantage has enabled us to grow our investment portfolio and remain active in the securitization markets, utilizing TPG Angelo Gordon's proprietary securitization platform to deliver non-agency investments to a diverse mix of investors. Market Conditions The financial markets have been, and will likely continue to remain, volatile given the overall market uncertainty related to inflation, the U.S. presidential election, and the path of monetary policy and interest rates. Throughout 2024, markets have displayed a high level of sensitivity to the Federal Reserve’s interest rate decisions. On September 18, 2024, the Federal Reserve lowered the target range for the Federal Funds Rate by 50 basis points to 4.75% to 5.00%, the first decline in four years. The Federal Reserve noted that the decrease was supported by greater confidence that inflation is moving sustainably toward 2% with the risks to achieving its employment and inflation goals being roughly in balance. As of September 2024, the Consumer Price Index report indicated inflation was 2.4% year over year with the unemployment rate remaining at 4.1%. During the third quarter, the 10-year U.S. treasury yield decreased by approximately 62 basis points to 3.79% and the 30-year mortgage rate decreased by approximately 78 basis points to 6.1%. The quarter ended with the spread between the 2-year and 10-year U.S. treasury yields at approximately 14 basis points positive sloping, re-establishing a normal yield curve. Despite the decline in benchmark and mortgage rates during the third quarter, this momentum reversed in the months of October and November. Upon the Republican party winning the U.S. presidential election, stock markets experienced notable increases, the U.S. dollar strengthened, and benchmark rates increased continuing the themes of market uncertainty and volatility which could impact our industry. The latest Federal Open Market Committee member median projection for the path of the Federal Funds Rate indicates 50 basis points of further rate cuts across the remaining two Federal Open Market Committee meetings this year followed by 100 basis points of rate cuts in 2025. Overall, the Federal Reserve continues to monitor available economic data to determine if they will continue rate cuts and to what extent rates will decline. 52 RMBS spreads continued to tighten during the third quarter, and credit curves remained relatively flat. Pricing dynamics have been supported by strong investor interest for mortgage credit assets given high quality underwriting, rising home values and low housing supply. Trends in credit spreads on credit risk transfer ("CRT") assets can serve as a proxy for market participants evaluating credit related assets given the observability of transactions. CRT tranches tightened by 10 to 35 basis points. Senior and mezzanine (BBB) Non-QM tranches tightened by 5 basis points, while the subordinate BB rated tranches tightened by 20 basis points. Primary RMBS market activity increased during the third quarter, totaling approximately $36 billion, an increase of 7% quarter-over-quarter and 88% against year-ago activity. The Non-QM sector ($11 billion) and Prime Jumbo sector ($8 billion) collectively comprised over half of the quarter’s new issuance. Additionally, issuance of RMBS backed by second liens and Home Equity Loans held steady, totaling over $3 billion, or 9% of the quarter’s activity, as focus has shifted to this rapidly expanding sector. Residential Transition Loan RMBS totaled over $1.9 billion or 5% of third quarter issuance as well. Year-to-date, primary RMBS activity is just below $100 billion, surpassing all of 2023. The rise in the S&P CoreLogic Case-Shiller U.S. National Home Price Index persisted through July 2024. The Index was higher by 5% both year-to-date and year-over-year, but regionally, home price performance has been somewhat varied. Amid the rise in actual home prices, national home price expectations from third party research has generally reset higher with the average of the 2024 forecasts now approximating +3.5% and an average forecast for 2025 of +3%. Prevailing mortgage rates fell sharply in the third quarter near 6% before rebounding to 6.4% in mid-October. Rates rose back above 7% during the second quarter of 2024 but descended quickly in August and September, according to Freddie Mac Primary Mortgage Market Survey. The effective mortgage rate outstanding was 3.92% as of June 2024, the latest data available, and remains well below prevailing rates. However, the “lock-in effect,” or disincentive for existing homeowners to sell their homes because their current mortgage rate is well below current market rates, is starting to show signs of decay as the effective mortgage rate has risen approximately 60 basis points since March 2022. Total existing home listings continued to rise to 1.35 million in August, the highest reading since the fourth quarter of 2020. However, new listings are trending short of annual activity in 2015 through 2019, as well as the pandemic-affected years of 2020 through 2022. From January 1, 2024 through August of 2024, approximately 3.1 million new listings came to market, almost 900 thousand fewer new listings than the same periods in 2015 through 2022. Presentation of investment, financing and hedging activities In the "Investment activities," "Financing activities," "Hedging activities," and "Liquidity and capital resources" sections of this Item 2, we present information on our investment portfolio and the related financing arrangements inclusive of unconsolidated ownership interests in affiliates that are accounted for under GAAP using the equity method. Our investment portfolio excludes our investment in Arc Home. 53 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 Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of investments in debt and equity of affiliates. See below for further terms used when describing our investment portfolio. • 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, Home Equity Loans, and Re/Non-Performing Loans (exclusive of retained tranches from unconsolidated securitizations). ◦ "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 Investment Portfolio section below. Book value per share The below table details book value per common share. Book value is calculated using stockholders’ equity less the liquidation preference of $228.0 million on our issued and outstanding preferred stock. Per share amounts for book value are calculated using all outstanding common shares in accordance with GAAP as of quarter-end. September 30, 2024 December 31, 2023 Book value per common share $ 10.58 $ 10.20 Results of Operations Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our investments in residential mortgage loans in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose residential mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income or loss available to common stockholders is our net interest income, 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. 54 Three Months Ended September 30, 2024 compared to the Three Months Ended September 30, 2023 The table below presents certain information from our consolidated statements of operations for the three months ended September 30, 2024 and 2023 (in thousands). Three Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 107,456 $ 64,211 $ 43,245 Interest expense 92,506 52,692 39,814 Total Net Interest Income 14,950 11,519 3,431 Other Income/(Loss) Net interest component of interest rate swaps 2,180 2,221 (41) Net realized gain/(loss) (10,788) 7,127 (17,915) Net unrealized gain/(loss) 19,700 (8,768) 28,468 Total Other Income/(Loss) 11,092 580 10,512 Expenses Management fee to affiliate 1,708 2,054 (346) Non-investment related expenses 2,750 2,454 296 Investment related expenses 3,411 2,347 1,064 Transaction related expenses 684 7,597 (6,913) Total Expenses 8,553 14,452 (5,899) Income/(loss) before equity in earnings/(loss) from affiliates 17,489 (2,353) 19,842 Equity in earnings/(loss) from affiliates (849) 188 (1,037) Net Income/(Loss) 16,640 (2,165) 18,805 Dividends on preferred stock (4,716) (4,586) (130) Net Income/(Loss) Available to Common Stockholders $ 11,924 $ (6,751) $ 18,675 Interest income Interest income is calculated using the effective interest method for our GAAP investment portfolio. Interest income increased from the three months ended September 30, 2023 to the three months ended September 30, 2024 primarily as a result of an increased investment portfolio resulting from the WMC acquisition in December 2023 along with purchases of residential mortgage loans during the period and an increase in the weighted average yield of our investment portfolio. The following table presents a summary of the weighted average amortized cost of and the weighted average yield on our GAAP investment portfolio ($ in millions). Three Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Weighted average amortized cost of our GAAP investment portfolio $ 7,244 $ 4,932 $ 2,312 Weighted average yield on our GAAP investment portfolio 5.93 % 5.21 % 0.72 % 55 Interest expense Interest expense is inclusive of our financing cost related to our financing arrangements on our GAAP investment portfolio, securitized debt, Legacy WMC Convertible Notes, and Senior Unsecured Notes. Interest expense increased from the three months ended September 30, 2023 to the three months ended September 30, 2024 due to an increase in the GAAP financing balance outstanding resulting from the assumption of financing through the WMC acquisition in December 2023 along with the issuance of securitized debt and Senior Unsecured Notes during the period. Additionally, there was an increase in the weighted average financing rate. The following table presents a summary of the weighted average financing balance and the weighted average financing rate on our GAAP investment portfolio ($ in millions). Three Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Weighted average GAAP financing balance $ 6,965 $ 4,575 $ 2,390 Weighted average financing rate on our GAAP investment portfolio 5.31 % 4.61 % 0.70 % Net interest component of interest rate swaps Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps. We recorded income on the net interest component of interest rate swaps during the three months ended September 30, 2024 and 2023 as a result of our swap portfolio being in a net receive position. The following table presents a summary of our interest rate swap portfolio as of September 30, 2024 and 2023 ($ in millions). September 30, 2024 September 30, 2023 Increase/(Decrease) Interest rate swap notional value $ 305 $ 405 $ (100) Weighted average receive-variable rate 4.96 % 5.31 % (0.35) % Weighted average pay-fix rate 3.28 % 3.99 % (0.71) % Net weighted average (pay)/receive rate 1.68 % 1.32 % 0.36 % Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the three months ended September 30, 2024 and 2023 (in thousands). The realized loss during the three months ended September 30, 2024 was primarily driven by losses on unwinding pay-fix, receive-variable interest rate swaps which were held at unrealized losses, offset by gains on the sales of Agency RMBS. Three Months Ended September 30, 2024 September 30, 2023 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ 124 $ (1,061) Sales of real estate securities 10,297 (38) Settlement of derivatives and other instruments (21,209) 8,226 Total Net realized gain/(loss) $ (10,788) $ 7,127 56 Net unrealized gain/(loss) The following table presents a summary of Net unrealized gain/(loss) for the three months ended September 30, 2024 and 2023 (in thousands). During the three months ended September 30, 2024, there were unrealized gains on our residential mortgage loans and Non-Agency RMBS which were offset by unrealized losses on securitized debt and interest rate swaps. Three Months Ended September 30, 2024 September 30, 2023 Residential mortgage loans $ 192,918 $ (92,322) Commercial loans 72 — Real estate securities 4,108 (2,584) Securitized debt (172,421) 85,793 Derivatives (4,977) 345 Total Net unrealized gain/(loss) $ 19,700 $ (8,768) Management fee to affiliate Our management fee is based upon a percentage of our Stockholders’ Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity. 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). During the three months ended September 30, 2024, the base management fee was reduced by $0.6 million. 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 (in thousands). Three Months Ended September 30, 2024 September 30, 2023 Affiliate reimbursement (1) $ 1,636 $ 1,400 Professional Fees 341 443 D&O insurance 335 272 Directors' compensation 259 176 Other 179 163 Total Non-investment related expenses $ 2,750 $ 2,454 (1) For the three months ended September 30, 2024, the Manager agreed to waive its right to receive expense reimbursements of $0.3 million pursuant to the MITT Management Agreement Amendment executed in connection with the Merger. Of the $1.3 million expense reimbursement waiver agreed upon in connection with the Merger, $0.2 million remains outstanding as of September 30, 2024. 57 Investment related expenses Investment related expenses are primarily comprised of servicing fees, asset management fees, trustee 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 WMC acquisition in December 2023 resulted in an increase in our residential mortgage loan portfolio of $1.1 billion of unpaid principal balance, which contributed to an increase in investment related expenses. The following table presents a summary of our investment related expenses (in thousands). Three Months Ended September 30, 2024 September 30, 2023 Affiliate reimbursement $ 194 $ 148 Servicing fees 1,827 999 Residential mortgage loan asset management fees 660 692 Trustee and bank fees 548 364 Other 182 144 Total Investment related expenses $ 3,411 $ 2,347 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. Transaction related expenses decreased from the three months ended September 30, 2023 to the three months ended September 30, 2024 primarily due to less expenses associated with securitizations and, for the three months ended September 30, 2023, we incurred $4.9 million of transaction expenses attributable to 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). Three Months Ended September 30, 2024 September 30, 2023 MATT Non-QM Securities (1) $ (1,070) $ 2,606 Land Related Financing — 64 Re/Non-Performing Securities 6 338 AG Arc (2) 215 (2,820) Equity in earnings/(loss) from affiliates $ (849) $ 188 (1) For the three months ended September 30, 2024, the earnings/(loss) generated from our investment in MATT Non-QM Securities consisted of interest income of $0.6 million and net unrealized losses of $(1.7) million. For the three months ended September 30, 2023, the earnings/(loss) generated from our investment in MATT Non-QM Securities consisted of net interest income of $1.1 million, interest expense of $(0.2) million, and net unrealized gains of $1.7 million. (2) Refer to the table below for additional detail on the earnings/(loss) generated from our investment in AG Arc. 58 The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Three Months Ended September 30, 2024 September 30, 2023 Interest income $ 924 $ 1,410 Interest expense 72 239 Total Net Interest Income 852 1,171 Net unrealized gain/(loss) (1,883) 1,946 After-tax earnings/(loss) at AG Arc (1) (186) (109) Net unrealized gain/(loss) on investment in AG Arc (2) 760 (1,911) Elimination of gains on loans sold to MITT (3) (359) (800) Total AG Arc Earnings/(Loss) 215 (2,820) Other operating expenses 33 109 Equity in earnings/(loss) from affiliates $ (849) $ 188 (1) The earnings/(loss) at AG Arc during the three months ended September 30, 2024 were the result of $(0.1) million related to changes in the fair value of the MSR portfolio held by Arc Home and $(0.1) million of losses related to Arc Home's lending and servicing operations. The earnings/(loss) at AG Arc during the three months ended September 30, 2023 were primarily the result of $(0.4) million of losses related to changes in the fair value of the MSR portfolio held by Arc Home, offset by $0.3 million of income related to Arc Home's lending and servicing operations. (2) As of September 30, 2024, the fair value of our investment in Arc Home was calculated using a valuation multiple of 0.95x of book value, which was increased from 0.94x of book value as of June 30, 2024. As of September 30, 2023, the fair value of our investment in Arc Home was calculated using a valuation multiple of 0.89x of book value, which was reduced from 0.94x of book value as of June 30, 2023. (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 10 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. Dividends on Preferred Stock Holders of our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock are entitled to receive cumulative cash dividends at their respective rates per annum on the $25.00 per share liquidation preference for each series. Our Series A Preferred Stock and Series B Preferred Stock have fixed rates of 8.25% and 8.00%, respectively. The initial dividend rate for our Series C Preferred Stock, from issuance through September 16, 2024, was 8.000%. On and after September 17, 2024, dividends on the Series C Preferred Stock accumulate at an annual floating rate of three-month CME Term SOFR (plus a tenor spread adjustment of 0.26161%) plus a spread of 6.476%. 59 Nine Months Ended September 30, 2024 compared to the Nine Months Ended September 30, 2023 The table below presents certain information from our consolidated statements of operations for the nine months ended September 30, 2024 and 2023 (in thousands). Nine Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Statement of Operations Data: Net Interest Income Interest income $ 302,843 $ 182,802 $ 120,041 Interest expense 254,333 148,309 106,024 Total Net Interest Income 48,510 34,493 14,017 Other Income/(Loss) Net interest component of interest rate swaps 6,447 5,025 1,422 Net realized gain/(loss) (9,928) 9,171 (19,099) Net unrealized gain/(loss) 20,488 (257) 20,745 Total Other Income/(Loss) 17,007 13,939 3,068 Expenses Management fee to affiliate 5,202 6,190 (988) Non-investment related expenses 8,610 7,848 762 Investment related expenses 10,185 6,905 3,280 Transaction related expenses 2,164 9,700 (7,536) Total Expenses 26,161 30,643 (4,482) Income/(loss) before equity in earnings/(loss) from affiliates 39,356 17,789 21,567 Equity in earnings/(loss) from affiliates 2,099 642 1,457 Net Income/(Loss) 41,455 18,431 23,024 Dividends on preferred stock (13,888) (13,758) (130) Net Income/(Loss) Available to Common Stockholders $ 27,567 $ 4,673 $ 22,894 Interest income Interest income increased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 primarily as a result of an increased investment portfolio resulting from the WMC acquisition in December 2023 along with purchases of residential mortgage loans during the period and an increase in the weighted average yield of our investment portfolio. The following table presents a summary of the weighted average amortized cost of and the weighted average yield on our GAAP investment portfolio ($ in millions). Nine Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Weighted average amortized cost of our GAAP investment portfolio $ 6,837 $ 4,825 $ 2,012 Weighted average yield on our GAAP investment portfolio 5.91 % 5.05 % 0.86 % 60 Interest expense Interest expense increased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 due to an increase in the GAAP financing balance outstanding resulting from the assumption of financing through the WMC acquisition in December 2023 along with the issuance of securitized debt and Senior Unsecured Notes during the period. Additionally, there was an increase in the weighted average financing rate. The following table presents a summary of the weighted average financing balance and the weighted average financing rate on our GAAP investment portfolio ($ in millions). Nine Months Ended September 30, 2024 September 30, 2023 Increase/(Decrease) Weighted average GAAP financing balance $ 6,470 $ 4,445 $ 2,025 Weighted average financing rate on our GAAP investment portfolio 5.24 % 4.45 % 0.79 % Net interest component of interest rate swaps We recorded income on the net interest component of interest rate swaps during the nine months ended September 30, 2024 and 2023 as a result of our swap portfolio being in a net receive position. Interest income increased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 as a result of an increase in the net weighted average notional balance along with an increase in the net weighted average receive rate during the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023. The following table presents a summary of our interest rate swap portfolio as of September 30, 2024 and 2023 ($ in millions). September 30, 2024 September 30, 2023 Increase/(Decrease) Interest rate swap notional value $ 305 $ 405 $ (100) Weighted average receive-variable rate 4.96 % 5.31 % (0.35) % Weighted average pay-fix rate 3.28 % 3.99 % (0.71) % Net weighted average (pay)/receive rate 1.68 % 1.32 % 0.36 % Net realized gain/(loss) The following table presents a summary of Net realized gain/(loss) for the nine months ended September 30, 2024 and 2023 (in thousands). The realized loss during the nine months ended September 30, 2024 was primarily driven by losses from unwinding pay-fix, receive-variable interest rate swaps which were held at unrealized losses, offset by gains on the sales of Agency RMBS and Non-Agency RMBS. Nine Months Ended September 30, 2024 September 30, 2023 Sales of residential mortgage loans and loans transferred to or sold from Other assets $ 323 $ (11,409) Sales of real estate securities 13,024 (38) Settlement of derivatives and other instruments (23,275) 20,618 Total Net realized gain/(loss) $ (9,928) $ 9,171 61 Net unrealized gain/(loss) The following table presents a summary of Net unrealized gain/(loss) for the nine months ended September 30, 2024 and 2023 (in thousands). During the nine months ended September 30, 2024, there were unrealized gains on residential mortgage loans and interest rate swaps offset by unrealized losses on our securitized debt. Nine Months Ended September 30, 2024 September 30, 2023 Residential mortgage loans $ 207,250 $ (13,217) Commercial loans 322 — Real estate securities (706) (2,282) Securitized debt (188,779) 25,346 Derivatives 2,401 (10,104) Total Net unrealized gain/(loss) $ 20,488 $ (257) Management fee to affiliate During the nine months ended September 30, 2024, the base management fee was reduced by $1.8 million in connection with the WMC acquisition. 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 The following table presents a summary of our non-investment related expenses (in thousands). Nine Months Ended September 30, 2024 September 30, 2023 Affiliate reimbursement (1) $ 4,936 $ 4,200 Professional Fees 1,113 1,505 D&O insurance 1,003 817 Directors' compensation 903 529 Other 655 797 Total Non-investment related expenses $ 8,610 $ 7,848 (1) For the nine months ended September 30, 2024, the Manager agreed to waive its right to receive expense reimbursements of $0.9 million pursuant to the MITT Management Agreement Amendment executed in connection with the Merger. Of the $1.3 million expense reimbursement waiver agreed upon in connection with the Merger, $0.2 million remains outstanding as of September 30, 2024. Investment related expenses The following table presents a summary of our investment related expenses (in thousands). The WMC acquisition in December 2023 resulted in an increase in our residential mortgage loan portfolio of $1.1 billion of unpaid principal balance, which contributed to an increase in investment related expenses. Nine Months Ended September 30, 2024 September 30, 2023 Affiliate reimbursement $ 395 $ 360 Servicing fees 5,601 3,044 Residential mortgage loan asset management fees 1,994 1,981 Trustee and bank fees 1,594 1,106 Other 601 414 Total Investment related expenses $ 10,185 $ 6,905 Transaction related expenses Transaction related expenses decreased from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 primarily due to less expenses associated with securitizations and, for the nine months ended September 30, 2023, we incurred $4.9 million of transaction expenses attributable to the WMC acquisition. 62 Equity in earnings/(loss) from affiliates The below tables summarize the components of the "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Nine Months Ended September 30, 2024 September 30, 2023 MATT Non-QM Securities (1) $ 307 $ 4,580 Land Related Financing (2) — 805 Re/Non-Performing Securities 322 249 AG Arc (3) 1,470 (4,992) Equity in earnings/(loss) from affiliates $ 2,099 $ 642 (1) For the nine months ended September 30, 2024, the earnings/(loss) generated from our investment in MATT Non-QM Securities consisted of interest income of $2.2 million, net unrealized losses of $(1.8) million, and other expenses of $(0.1) million. For the nine months ended September 30, 2023, the earnings/(loss) generated from our investment in MATT Non-QM Securities consisted of net interest income of $3.2 million, interest expenses of $(0.5) million, net unrealized gains of $2.1 million, and other expenses of $(0.2) million. (2) Decrease in Land Related Financing as assets held within LOTS paid off in full during 2023. (3) Refer to the table below for additional detail on the earnings/(loss) generated from our investment in AG Arc. The below table further disaggregates our "Equity in earnings/(loss) from affiliates" line item on our consolidated statements of operations (in thousands). Nine Months Ended September 30, 2024 September 30, 2023 Interest income $ 3,055 $ 4,923 Interest expense 216 752 Total Net Interest Income 2,839 4,171 Net unrealized gain/(loss) (2,061) 1,861 After-tax earnings/(loss) at AG Arc (1) (24) (2,115) Net unrealized gain/(loss) on investment in AG Arc (2) 2,459 (1,736) Elimination of gains on loans sold to MITT (3) (965) (1,141) Total AG Arc Earnings/(Loss) 1,470 (4,992) Other operating expenses 149 398 Equity in earnings/(loss) from affiliates $ 2,099 $ 642 (1) The earnings/(loss) at AG Arc during the nine months ended September 30, 2024 were primarily the result of $(0.6) million of losses related to Arc Home's lending and servicing operations, offset by $0.6 million related to changes in the fair value of the MSR portfolio held by Arc Home. The earnings/(loss) at AG Arc during the nine months ended September 30, 2023 were primarily the result of $(1.6) million related to changes in the fair value of the MSR portfolio held by Arc Home, along with $(0.5) million of losses related to Arc Home's lending and servicing operations. (2) As of September 30, 2024, the fair value of our investment in Arc Home was calculated using a valuation multiple of 0.95x of book value, which was increased from 0.89x of book value as of December 31, 2023. As of September 30, 2023, the fair value of our investment in Arc Home was calculated using a valuation multiple of 0.89x of book value, which was reduced from 0.94x of book value as of December 31, 2022. (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 10 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. 63 Dividends on Preferred Stock Holders of our Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock are entitled to receive cumulative cash dividends at their respective rates per annum on the $25.00 per share liquidation preference for each series. Our Series A Preferred Stock and Series B Preferred Stock have fixed rates of 8.25% and 8.00%, respectively. The initial dividend rate for our Series C Preferred Stock, from issuance through September 16, 2024, was 8.000%. On and after September 17, 2024, dividends on the Series C Preferred Stock accumulate at an annual floating rate of three-month CME Term SOFR (plus a tenor spread adjustment of 0.26161%) plus a spread of 6.476%. 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 bargain purchase gains recognized, and (vii) certain other nonrecurring gains or losses. Items (i) through (vii) above include any amount related to those items held in affiliated entities. Transaction related expenses referenced in (ii) above are primarily comprised of costs incurred prior to or at the time of executing our securitizations and acquiring or disposing of residential mortgage loans. These costs are nonrecurring and may include underwriting fees, legal fees, diligence fees, and other similar transaction related expenses. Recurring expenses, such as servicing fees, custodial fees, trustee fees and other similar ongoing fees are not excluded from earnings available for distribution. Management considers the transaction related expenses 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. 64 A reconciliation of "Net Income/(loss) available to common stockholders" to EAD for the three and nine months ended September 30, 2024 and 2023 is set forth below (in thousands, except per share data). Three Months Ended Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Net Income/(loss) available to common stockholders $ 11,924 $ (6,751) $ 27,567 $ 4,673 Add (Deduct): Net realized (gain)/loss 10,788 (7,127) 9,928 (9,171) Net unrealized (gain)/loss (19,700) 8,768 (20,488) 257 Transaction related expenses and deal related performance fees (1) 709 7,605 2,235 9,857 Equity in (earnings)/loss from affiliates 849 (188) (2,099) (642) EAD from equity method investments (2)(3) 306 (215) 134 (648) Earnings available for distribution $ 4,876 $ 2,092 $ 17,277 $ 4,326 Earnings available for distribution, per Diluted Share $ 0.17 $ 0.10 $ 0.59 $ 0.21 (1) For the three months ended September 30, 2024 and 2023, total transaction related expenses and deal related performance fees included $0.7 million and $7.6 million, respectively, recorded within the "Transaction related expenses" line item and $25 thousand and $9 thousand, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. For the nine months ended September 30, 2024 and 2023, total transaction related expenses and deal related performance fees included $2.2 million and $9.7 million, respectively, recorded within the "Transaction related expenses" line item and $0.1 million and $0.2 million, respectively, recorded within the "Interest expense" line item, which relates to the amortization of deferred financing costs. (2) For the three months ended September 30, 2024 and 2023, $32 thousand or $0.00 per share and $0.4 million or $0.02 per share, respectively; and for the nine months ended September 30, 2024 and 2023, $1.6 million or $0.05 per share and $1.2 million or $0.06 per share, respectively, of realized and unrealized changes in the fair value of Arc Home's net mortgage servicing rights and corresponding derivatives, and other asset impairments were excluded from EAD, net of deferred tax expense or benefit. Additionally, for the three months ended September 30, 2024 and 2023, $0.8 million or $0.03 per share and $(1.9) million or $(0.09) per share, respectively; and for the nine months ended September 30, 2024 and 2023, $2.5 million or $0.08 per share and $(1.7) million or $(0.08) per share, respectively, of unrealized changes in the fair value of our investment in Arc Home were excluded from EAD. (3) EAD recognized by AG Arc does not include our portion of gains recorded by Arc Home in connection with the sale of residential mortgage loans to us. For the three months ended September 30, 2024 and 2023, we eliminated $0.4 million or $0.01 per share and $0.8 million or $0.04 per share, respectively, of intra-entity profits recognized by Arc Home, and also decreased the cost basis of the underlying loans we purchased by the same amount. For the nine months ended September 30, 2024 and 2023, we eliminated $1.0 million or $0.03 per share and $1.1 million or $0.06 per share, respectively, of intra-entity profits recognized by Arc Home, and also decreased the cost basis of the underlying loans we purchased by the same amount. Refer to Note 10 to the "Notes to Consolidated Financial Statements (unaudited)" for more information on this accounting policy. Investment activities 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 "WMC Acquisition" above and the section entitled "WMC Acquisition" in Note 1 to the "Notes to Consolidated Financial Statements (unaudited)." 65 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. Net interest margin provides investors visibility into our profitability of interest income versus interest expense including the net effect of our interest rate swaps for insight into earnings available for distribution. 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 cost 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 cost 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. 66 Investment portfolio The following tables present a summary of our Investment Portfolio, inclusive of net interest margin and leverage ratios, as of September 30, 2024 and a reconciliation of these metrics on our Investment Portfolio to their respective metrics on our GAAP Investment Portfolio ($ in thousands). Investment Securitized Debt Cost of Funds (c) Allocated Equity (d) Net Interest Margin Instrument Amortized Cost Fair Value Yield (a)(b) Amortized Cost Fair Value Financing Arrangements Leverage Ratio (e) Residential Investments Securitized Non-Agency Loans $ 6,235,950 $ 6,052,165 5.60 % $ 5,511,198 $ 5,391,483 $ 364,626 5.21 % $ 296,056 0.39 % 1.0x Securitized Re/Non-Performing Loans 188,142 174,533 6.10 % 112,682 106,069 42,688 4.33 % 25,776 1.77 % 1.6x Agency-Eligible Loans 111,667 112,821 6.76 % — — 103,745 6.57 % 9,076 0.19 % 11.4x Home Equity Loans 135,272 136,854 9.62 % — — 114,475 5.93 % 22,379 3.69 % 5.1x Non-Agency Loans 13,770 13,405 4.52 % — — 7,674 5.04 % 5,731 (0.52) % 1.3x Residential Whole Loans 860 1,967 111.21 % — — — — % 1,967 111.21 % N/A Non-Agency RMBS 140,693 143,699 8.89 % — — 90,155 5.69 % 53,544 3.20 % 1.7x Total Residential Investments 6,826,354 6,635,444 5.79 % 5,623,880 5,497,552 723,363 5.23 % 414,529 0.56 % 1.6x Agency RMBS 21,068 20,237 7.95 % — — 2,141 5.56 % 18,096 2.39 % 0.1x Legacy WMC Commercial Investments (f) Commercial Loans 66,458 66,875 9.63 % — — 47,222 8.13 % 19,653 1.50 % 2.4x CMBS (g) 57,987 52,685 16.93 % — — 20,313 6.88 % 32,372 10.05 % 0.6x Total Legacy WMC Commercial Investments 124,445 119,560 13.03 % — — 67,535 7.75 % 52,025 5.28 % 1.3x Other Securities 1,026 998 12.45 % — — — — % 998 12.45 % N/A Total Investment Portfolio $ 6,972,893 $ 6,776,239 5.93 % $ 5,623,880 $ 5,497,552 $ 793,039 5.25 % $ 485,648 0.68 % 1.5x Cash and Cash Equivalents (h) 102,532 4.82 % Interest Rate Swaps (i) 7,956 1.68 % Arc Home 30,967 Senior Unsecured Notes (95,548) 10.61 % Non-Interest Earning Assets, net 8,530 Total Stockholders' Equity $ 540,085 1.5x Investment Securitized Debt Cost of Funds (c) Allocated Equity (d) Net Interest Margin Amortized Cost Fair Value Yield (a)(b) Amortized Cost Fair Value Financing Arrangements Leverage Ratio (e) Total Investment Portfolio $ 6,972,893 $ 6,776,239 5.93 % $ 5,623,880 $ 5,497,552 $ 793,039 5.25 % $ 485,648 0.68 % 1.5x Investments in Debt and Equity of Affiliates 16,745 20,061 20.59 % — — 3,540 7.66 % 16,521 12.93 % (j) GAAP Investment Portfolio $ 6,956,148 $ 6,756,178 5.90 % $ 5,623,880 $ 5,497,552 $ 789,499 5.25 % $ 469,127 0.65 % 11.8x (a) Excludes any net TBA positions. (b) As of September 30, 2024, the weighted average yields are presented based on the amortized cost of the underlying loans and securities. The weighted average yield of the Company's investment portfolio based on the fair value of the underlying loans and securities as of September 30, 2024 was 6.00%. (c) The cost of funds related to the financing on our investment portfolio inclusive of the benefit of 0.08% from our interest rate hedges was 5.25%. When including our Senior Unsecured Notes, the total cost of funds was 5.33%. (d) Allocated equity represents the investment fair value less the associated securitized debt at fair value and financing arrangements, where applicable. (e) 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. (f) We expect to either hold the Legacy WMC Commercial Investments until maturity or opportunistically exit these investments. (g) As of September 30, 2024, there are Legacy WMC CMBS with an unpaid principal balance of $23.5 million and a fair value of $6.3 million which are on non-accrual or cost recovery status. (h) 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. (i) 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. (j) Refer to the "Financing activities" section below for an aggregate breakout of leverage. 67 Securitized Non-Agency Loans As noted above, our investment activities primarily include acquiring and securitizing newly-originated residential mortgage loans. These securitization trusts ("Non-Agency VIEs") are collateralized by Non-Agency and Agency-Eligible Loans. In each securitization transaction, we transfer a pool of loans to a wholly-owned subsidiary and the loans are deposited into a newly created securitization trust. The securitization trust issues various classes of mortgage pass-through certificates backed by the cash flows from the underlying residential mortgage loans (the "Certificates"). When we sponsor a residential mortgage loan securitization, we are generally required to retain at least 5% of the fair value of the Certificates issued in the securitization ("Risk Retention Rules"). We can retain either an "eligible vertical interest" (which consists of at least 5% of each class of securities issued in the securitization), an "eligible horizontal residual interest" (which is the most subordinate class of securities with a fair value of at least 5% of the aggregate credit risk) or a combination of both totaling 5% (the "Required Credit Risk") . In order to comply with the Risk Retention Rules in each securitization transaction, we generally purchase the most subordinated classes of Certificates and the excess cash flow Certificates. We also purchase the Certificates entitled to excess servicing fees and may purchase other Certificates issued by the securitization trust, while typically selling the senior classes of Certificates to unrelated third parties. If we are determined to be the primary beneficiary of these securitization transactions, we consolidate the respective VIE created to facilitate the transaction and record "Securitized residential mortgage loans" and "Securitized debt" on the consolidated balance sheets in accordance with U.S. GAAP. However, as noted above, our equity at risk represents certain Certificates from each securitization which we retain. 68 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 as of September 30, 2024 (in thousands). Unpaid Principal Balance Fair Value Securitized residential mortgage loans in Non-Agency VIEs $ 6,242,559 $ 6,052,165 Securitized debt in Non-Agency VIEs (1) 5,634,967 5,391,483 Other assets (2) N/A 774 Retained Certificates from Non-Agency VIEs (3)(4)(5)(6) $ 661,456 Retained interests in Non-Agency VIEs Current Face Fair Value Senior Bonds $ 59,516 $ 60,164 Mezzanine Bonds 23,348 22,290 Subordinate Bonds 524,780 406,594 Interest Only / Excess Servicing Bonds (1)(7) N/A 172,408 Retained Certificates from Non-Agency VIEs (3)(4)(5)(6) $ 661,456 Financing arrangements on retained Certificates from Non-Agency VIEs 364,626 Retained Certificates from Non-Agency VIEs, net of financing arrangements $ 296,830 (1) Interest Only securities have no principal balances and bear interest based on a notional value. The notional value is used solely to determine interest distributions on the interest only classes of securities. As of September 30, 2024, the Securitized debt in Non-Agency VIEs line item includes interest only classes with a notional value of $1.3 billion. As of September 30, 2024, the notional value of Interest Only / Excess Servicing Bonds was $11.6 billion. (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 September 30, 2024, we recorded real estate owned within our Non-Agency VIEs at $0.7 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 September 30, 2024, our equity at risk included bonds with a fair value of $438.6 million 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 September 30, 2024, a portion of our equity at risk included bonds exposed to the first loss of the securitization with a fair value of $112.6 million. (6) Excludes net other asset/(liabilities) held within the VIEs of $7.8 million as of September 30, 2024. (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 September 30, 2024, there were four securitizations with an unpaid principal balance of $0.6 billion that met the criteria for an Optional Redemption. 69 Securitized residential mortgage loans and Residential mortgage loans The following table presents information regarding collateral characteristics of our residential mortgage loans as of September 30, 2024 ($ in thousands). Unpaid Principal Balance Weighted Average (1)(2) Loan Count (1) Original LTV Ratio (3) Current FICO (4) Coupon Life (Years) (5) Securitized residential mortgage loans Non-Agency Loans $ 6,242,559 15,494 67.74 % 762 5.60 % 8.77 Re- and Non-Performing Loans 202,824 1,374 79.82 % 656 3.95 % 5.71 Total Securitized residential mortgage loans $ 6,445,383 16,868 68.13 % 758 5.55 % 8.67 Residential mortgage loans Agency-Eligible Loans $ 109,219 235 72.93 % 778 7.58 % 3.73 Home Equity Loans 130,652 1,725 65.33 % 742 10.72 % 4.25 Non-Agency Loans 14,018 25 65.88 % 644 7.57 % 3.61 Re- and Non-Performing Loans (1) 2,094 N/A N/A N/A N/A 1.46 Total Residential mortgage loans $ 255,983 1,985 68.63 % 749 9.19 % 3.97 Total as of September 30, 2024 $ 6,701,366 18,853 68.14 % 758 5.69 % 8.49 (1) Loan count and weighted average excludes the Re- and Non-Performing Loans subcategory of Residential mortgage loans above as there may be limited data available regarding the underlying collateral of these residual positions. (2) Amounts are weighted based on unpaid principal balance. (3) Represents the original LTV or, for Re- and Non-Performing Loans and Non-Agency Loans acquired from WMC, the LTV at acquisition. For Home Equity Loans, represents the combined LTV, which considers the loan balances on a borrower’s first mortgage and related Home Equity Loan. (4) Weighted average current FICO excludes borrowers where FICO scores were not available. Data is based on the latest available information. (5) 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. See Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for additional 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" and "Residential mortgage loans, at fair value" line items on our consolidated balance sheets. Legacy WMC Commercial loans See Note 3 to the "Notes to Consolidated Financial Statements (unaudited)" for information on the coupons, weighted average life, 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. 70 Non-Agency RMBS and Legacy WMC CMBS & Other Securities The following table presents the fair value, coupon, and weighted average life of our Non-Agency RMBS and Legacy WMC CMBS and Other Securities portfolios as of September 30, 2024 ($ in thousands). Weighted Average Instrument Current Face Fair Value Coupon (1) Life (Years) (2) GCAT Non-Agency RMBS GCAT Non-Agency Securities $ 43,794 $ 37,424 4.82 % 6.93 GCAT Non-Agency RMBS Interest Only (3) N/A 3,469 0.81 % 3.10 MATT Non-QM Securities (3) 4,497 13,050 0.45 % 3.11 Re/Non-Performing Securities (3) 5,516 7,011 1.01 % 0.15 Total GCAT Non-Agency RMBS 53,807 60,954 1.32 % 3.31 Non-Agency Securities 84,641 81,797 6.16 % 11.18 Non-Agency RMBS Interest Only (3) N/A 948 0.50 % 6.28 Total Non-Agency RMBS $ 138,448 $ 143,699 2.13 % 4.81 CMBS 100,896 52,685 5.37 % 2.14 Other Securities N/A 998 N/A 7.80 Total Non-Agency RMBS, CMBS, and Other Securities $ 239,344 $ 197,382 2.76 % 4.43 Less: Investments in Debt and Equity of Affiliates $ 10,013 $ 20,061 0.54 % 2.85 Total GAAP Non-Agency RMBS and CMBS $ 229,331 $ 177,321 3.81 % 5.65 (1) Equity residual investments with a zero coupon rate are excluded from this calculation. (2) Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. (3) Interest Only securities have no principal balances and bear interest based on a notional value. The notional value is used solely to determine interest distributions on the interest only classes of securities. As of September 30, 2024, the notional value of interest only classes included in t he GCAT Non-Agency RMBS Interest Only, MATT Non-QM Securities, Re/Non-Performing Securities, and Non-Agency RMBS Interest Only line items was $87.3 million, $274.8 million, $21.5 million, and $81.4 million, respectively. The following table presents the fair value of our Non-Agency RMBS and Legacy WMC CMBS and Other Securities by credit rating as of September 30, 2024 (in thousands). Legacy WMC Credit Rating (1) Non-Agency RMBS CMBS Other Securities AAA $ 30,886 $ — $ — AA 18,426 — — A 12,893 — — BBB 19,653 4,889 — BB 13,324 — — B 7,234 1,182 — Below B — 31,364 — Not Rated 41,283 15,250 998 Total: Non-Agency RMBS $ 143,699 $ 52,685 $ 998 Less: Investments in Debt and Equity of Affiliates $ 20,061 $ — $ — Total: GAAP Basis $ 123,638 $ 52,685 $ 998 (1) Represents the minimum rating for rated assets of S&P, Moody's, Morningstar, and Fitch credit ratings, stated in terms of the S&P equivalent. 71 The following table presents the collateral type of our Non-Agency RMBS and Legacy WMC CMBS portfolio as of September 30, 2024 (in thousands). Instrument Current Face Fair Value Non-Agency RMBS Non-QM Loans (1) $ 54,014 $ 58,946 Re- and Non-Performing Loans (1) 5,516 7,011 Prime (1) 78,918 77,742 Total Non-Agency RMBS $ 138,448 $ 143,699 Legacy WMC CMBS Single-Asset/Single-Borrower - Fixed Rate $ 51,400 $ 23,032 Single-Asset/Single-Borrower - Floating Rate 34,450 19,061 Conduit - Fixed Rate 15,046 10,592 Total Legacy WMC CMBS $ 100,896 $ 52,685 (1) The current face on our Non-Agency RMBS excludes interest only classes which have no principal balances and bear interest based on a notional value. The notional value is used solely to determine interest distributions on the interest only classes of securities. As of September 30, 2024, the notional value of interest only classes included in the Non-QM Loans, Re-and Non-Performing Loans, and Prime line items was $362.1 million, $21.5 million, and $81.4 million, respectively. The following table presents the geographic concentration of the underlying collateral for our Non-Agency RMBS and Legacy WMC CMBS portfolios as of September 30, 2024 ($ in thousands). Non-Agency RMBS Legacy WMC CMBS Geographic Location Concentration Fair Value Geographic Location Concentration Fair Value California 31.0 % $ 44,490 California 37.2 % $ 19,592 New York 10.4 % 15,003 Bahamas 27.6 % 14,559 Florida 9.4 % 13,459 Minnesota 11.1 % 5,854 Texas 5.4 % 7,801 Texas 5.5 % 2,911 North Carolina 3.4 % 4,836 New York 3.0 % 1,600 Other 40.4 % 58,110 Other 15.6 % 8,169 Total 100.0 % $ 143,699 Total 100.0 % $ 52,685 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 certain characteristics of our Agency RMBS portfolio as of September 30, 2024 ($ in thousands). Weighted Average Fair Value CPR (1) Coupon Life (2) Agency RMBS Interest Only $ 20,237 4.6 % 4.06 % 5.70 (1) Represents the weighted average monthly Constant Prepayment Rates ("CPR") published during the period for our in-place portfolio. (2) Weighted average life is based on projected life. Typically, actual maturities are shorter than stated contractual maturities. . 72 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 "WMC Acquisition" above and the section entitled "WMC Acquisition" in Note 1 to the "Notes to Consolidated Financial Statements (unaudited)." 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 six and seven counterparties as of September 30, 2024 and December 31, 2023, 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 are 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 September 30, 2024, 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. In September 2024, we paid off the remaining principal amount outstanding of the Legacy WMC Convertible Notes at maturity. See Note 6 to the "Notes to Consolidated Financial Statements (unaudited)" for additional information on the Legacy WMC Convertible Notes. Senior Unsecured Notes On January 26, 2024, we issued $34.5 million principal amount of 9.500% senior notes due 2029. On May 15, 2024, we issued $65.0 million principal amount of 9.500% senior notes due 2029. See Note 6 to the "Notes to Consolidated Financial Statements (unaudited)" for additional information on the Senior Unsecured Notes. 73 Recourse and non-recourse financing The below table provides detail on the breakout between recourse and non-recourse financing as of September 30, 2024 (in thousands). September 30, 2024 Recourse financing - Financing arrangements, including those in Investments in Debt and Equity of Affiliates $ 739,704 Recourse Financing - Senior Unsecured Notes 95,548 Non-recourse financing - Securitized debt, at fair value 5,497,552 Non-recourse financing - Financing arrangements 53,335 Total Financing 6,386,139 Less: Recourse financing - Financing arrangements included in Investments in Debt and Equity of Affiliates 3,540 Total Financing in Investments in Debt and Equity of Affiliates 3,540 Total Financing: GAAP Basis $ 6,382,599 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) GAAP Financing arrangements, net of any restricted cash posted on such financing arrangements, (3) 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, inclusive of any adjustment related to unsettled trades as described in (4) in the previous sentence, and exclusive of any non-recourse financing arrangements and (iii) our net TBA position (at cost), if any. 74 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). September 30, 2024 Leverage Stockholders’ Equity Leverage Ratio Securitized debt, at fair value $ 5,497,552 GAAP Financing arrangements 789,499 Senior Unsecured Notes 95,548 Restricted cash posted on financing arrangements (3,283) GAAP Leverage $ 6,379,316 $ 540,085 11.8x Financing arrangements through affiliated entities 3,540 Non-recourse financing arrangements (1) (5,550,887) Economic Leverage $ 831,969 $ 540,085 1.5x (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 (unaudited)" for more information. Dividends Federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT ordinary taxable income, without regard to the deduction for dividends paid and excluding net capital gains and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our financing arrangements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make required cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. As described above, our distribution requirements are based on taxable income rather than GAAP net income. Differences between taxable income and GAAP net income include (i) unrealized gains and losses associated with investment and derivative portfolios which are marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to amortization of premiums and discounts paid on investments, (iii) the timing and amount of deductions related to stock-based compensation, (iv) temporary differences related to the recognition of realized gains and losses on sold investments and certain terminated derivatives, (v) taxes, and (vi) differences between GAAP income or losses in our TRSs and taxable income resulting from dividend distributions to the REIT from our TRSs. During the nine months ended September 30, 2024, the Company declared common stock dividends of $0.56. During the same period, the Company declared and paid preferred stock dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock of $1.54689, $1.50, and $1.50, 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 75 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 September 30, 2024, we had $119.7 million of liquidity, which consisted of $102.5 million of cash and cash equivalents and $17.2 million of unencumbered Agency RMBS available to support our liquidity needs. Refer to the "Contractual obligations" section of this Item 2 for additional obligations that could impact our liquidity. Margin requirements The fair value of our loans and real estate securities fluctuate according to market conditions. When the fair value of the assets pledged as collateral to secure a financing arrangement decreases to the point where the difference between the collateral fair value and the financing arrangement amount is less than the haircut, our lenders may issue a "margin call," which requires us to post additional collateral to the lender in the form of additional assets or cash. Under our repurchase facilities, our lenders have full discretion to determine the fair value of the securities we pledge to them. Our lenders typically value assets based on recent transactions in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly. We experience margin calls in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and, when owned, unpledged Agency RMBS. We refer to this position as our "liquidity." The level of liquidity we maintain 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 Agency RMBS that constitute a portion of 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 on existing financing arrangements increase, our liquidity will proportionately decrease. We intend to maintain a level of liquidity in relation to our borrowings 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. 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. 76 Cash flows The below details changes to our cash, cash equivalents, and restricted cash for the nine months ended September 30, 2024 and 2023 ($ in thousands). Nine Months Ended September 30, 2024 September 30, 2023 Change Cash and cash equivalents and restricted cash, Beginning of Period $ 125,573 $ 98,803 $ 26,770 Net cash provided by (used in) operating activities (1) 40,184 18,120 22,064 Net cash provided by (used in) investing activities (2) (637,889) (471,590) (166,299) Net cash provided by (used in) financing activities (3) 586,350 493,929 92,421 Net change in cash and cash equivalents and restricted cash (11,355) 40,459 (51,814) Cash and cash equivalents and restricted cash, End of Period $ 114,218 $ 139,262 $ (25,044) (1) Cash provided by operating activities is primarily attributable to net interest income less operating expenses for the nine months ended September 30, 2024. (2) Cash used in investing activities for the nine months ended September 30, 2024 was primarily attributable to purchases of investments, offset by principal repayments on investments and sales of investments. (3) Cash provided by financing activities for the nine months ended September 30, 2024 was primarily attributable to proceeds from the issuance of securitized debt and our Senior Unsecured Notes and net borrowings under financing agreements, offset by principal repayments on securitized debt, repurchases of the Legacy WMC Convertible Senior Unsecured Notes and the subsequent payoff of the Legacy WMC Convertible Senior Unsecured Notes at maturity, and dividend payments. 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. 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 (unaudited)" for additional details on the shares repurchased under the 2022 Repurchase Program during the three and nine months ended September 30, 2024 and 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 77 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. We did not issue any shares of common stock under the Equity Distribution Agreements during the three and nine months ended September 30, 2024. 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. Effective November 6, 2024, the Company terminated the Equity Distribution Agreements and entered into new equity distribution agreements (the "2024 Equity Distribution Agreements") with each of BTIG, LLC, JonesTrading Institutional Services LLC, Keefe, Bruyette & Woods, Inc. and Piper Sandler & Co. (collectively, the "2024 Sales Agents"). Pursuant to the 2024 Equity Distribution Agreements, the Company may sell up to $75.0 million aggregate offering price of shares of its common stock from time to time through an "at the market" equity offering program under which the 2024 Sales Agents will act as sales agent and/or principal. 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, senior unsecured note issuances, 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, funding financing maturities, 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. 78 Management fee The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our Stockholders’ Equity, per annum. For purposes of calculating the management fee, "Stockholders’ Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus our retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that we pay for repurchases of our common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP, and certain other non-cash charges after discussions between the Manager and our independent directors and after approval by a majority of our independent directors. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on our financial statements. The below table details the management fees incurred during the three and nine months ended September 30, 2024 and 2023 (in thousands). Three Months Ended Nine Months Ended Consolidated statements of operations line item: September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Management fee to affiliate (1) $ 1,708 $ 2,054 $ 5,202 $ 6,190 (1) For the three and nine months ended September 30, 2024, the Manager agreed to waive its right to receive management fees of $0.6 million and $1.8 million, respectively, pursuant to the MITT Management Agreement Amendment executed in connection with the Merger. As of September 30, 2024, all of the $2.4 million management fee waiver agreed upon in connection with the Merger has been utilized. As of September 30, 2024 and December 31, 2023, we have recorded management fees payable of $1.7 million and $1.5 million, respectively. The management fee payable is included within the "Due to affiliates" line item within the "Other liabilities" line item on the consolidated balance sheets. 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. During the three and nine months ended September 30, 2024 and 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 September 30, 2024 and December 31, 2023, 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. 79 The below table details the expense reimbursement incurred during the three and nine months ended September 30, 2024 and 2023 (in thousands). Three Months Ended Nine Months Ended Consolidated statements of operations line item: September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Non-investment related expenses (1) $ 1,636 $ 1,400 $ 4,936 $ 4,200 Investment related expenses 194 148 395 360 Transaction related expenses 22 326 396 707 Expense reimbursements to Manager or its affiliates $ 1,852 $ 1,874 $ 5,727 $ 5,267 (1) For the three and nine months ended September 30, 2024, the Manager agreed to waive its right to receive expense reimbursements of $0.3 million and $0.9 million, respectively, pursuant to the MITT Management Agreement Amendment executed in connection with the Merger. Of the $1.3 million expense reimbursement waiver agreed upon in connection with the Merger, $0.2 million remains outstanding as of September 30, 2024. As of September 30, 2024 and December 31, 2023, we recorded a reimbursement payable to our Manager or its affiliates of $2.9 million and $1.5 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 September 30, 2024, 406,539 shares of common stock remained available to be awarded under the 2020 Equity Incentive Plan. Since inception of the 2020 Equity Incentive Plan and through September 30, 2024, we have granted an aggregate of 232,467 shares of restricted common stock to our independent directors under our 2020 Equity Incentive Plan, all of which have vested. 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. Through September 30, 2024, the two independent directors have also been granted an aggregate of 1,698 dividend equivalent units. These restricted stock units and associated dividend equivalent units vested in full on June 23, 2024, and will be settled in shares of our common stock upon each independent director's separation from service with our Board of Directors. 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 September 30, 2024, 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 Plan. Unfunded commitments See Note 12 of the "Notes to Consolidated Financial Statements (unaudited)" for detail on our commitments as of September 30, 2024. 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 (unaudited)" for a discussion of investments i n debt and equity of affiliates. 80 We record TBA purchases and sales on the trade date and present the purchase or receipt net of the corresponding payable or receivable until the settlement date of the transaction. Refer to Note 7 to the "Notes to Consolidated Financial Statements (unaudited)" for additional detail on TBAs as of September 30, 2024, if applicable. For additional information on our commitments as of September 30, 2024 , refer to Note 12 of the "Notes to Consolidated Financial Statements (unaudited)." We do not expect these commitments, taken as a whole, to be significant to, or to have a material impact on, our overall liquidity or capital resources or our operations. Critical accounting policies and estimates We prepare our consolidated financial statements in conformity with GAAP, which requires the use of estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe are reasonable based on facts and circumstances existing at the time of reporting. We believe that the estimates, judgments and assumptions utilized in the preparation of our consolidated financial statements are prudent and reasonable. Although our estimates contemplate conditions as of September 30, 2024 and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in arriving at those estimates, which could materially affect reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the periods presented. Our most critical accounting policies include (i) Valuation of financial instruments, (ii) Accounting for loans, (iii) Accounting for real estate securities, (iv) Interest income recognition, (v) Financing arrangements, (vi) Investment consolidation, and (vii) Accounting for business combinations. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain and include (i), (iv), and (vi) above. A discussion of critical accounting policies and estimates is included in our Form 10-K. Our critical accounting policies and estimates have not materially changed since December 31, 2023. REIT Qualification We have elected to be treated as a REIT under Sections 856 through 859 of the Internal Revenue Code of 1986, as amended (the "Code"). Our qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares. We believe that we are organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and that our manner of operation enables us to meet the requirements for qualification and taxation as a REIT. We generally need to distribute at least 90% of our ordinary taxable income each year (subject to certain adjustments) to our stockholders in order to qualify as a REIT under the Code. Our ability to make distributions to our stockholders depends, in part, upon the performance of our investment portfolio. As a REIT, we generally are not subject to U.S. federal income tax on our REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and our ability to pay distributions, if any, to our stockholders. Even if we qualify for taxation as a REIT, we may be subject to some U.S. federal, state and local taxes on our income or property. In addition, any income earned by a domestic taxable REIT subsidiary, or TRS, will be subject to corporate income taxation. Investment Company Act Exemption We conduct our operations so that we are not considered an investment company under Section 3(a)(1)(C) of the Investment Company Act. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the "40% test"). "Investment securities" do not include, among other things, U.S. government securities and securities issued by majority-owned subsidiaries that (i) are not investment 81 companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Conducting our operations so as not to be considered an investment company under the Investment Company Act and the rules and regulations promulgated under the Investment Company Act and SEC staff interpretive guidance limits our ability to make certain investments. For example, these restrictions limit our and our subsidiaries’ ability to invest directly in Agency RMBS mortgage-related securities that represent less than the entire ownership in a pool of mortgage loans or debt and equity tranches of Non-Agency RMBS (in each case to the extent such interest are not retained interest in securitizations consisting of mortgage 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. 82